Source: OECD, Statistical Bulletin, General Statistics, November 1962.

The most significant changes were: capital formation expanded in the EEC countries but shrank in the United States. The share of private consumption declined somewhat in the United States but fell very substantially in the EEC countries. Government expanded slightly in the EEC countries, very substantially in the United States. Exports slightly better than held their own in the United States but expanded substantially in the EEC countries.

In 1961 private consumption and Government consumption accounted for a greater share of GNP in the United States than in

the EEC countries-a reverse of the relative position in 1950. Capital formation equaled a greater share of GNP in the European countries, both in 1950 and in 1961, but the difference between them and the United States widened. Investment in machinery and equipment in the EEC countries accounted in 1961 for more than twice as large

a share of GNP as in the United States.

Simon Kuznets demonstrated in a major historical-analytical study, "Capital in the American Economy," that in the long run capital formation has been the prime determinant of growth in the American economy, and that investment has been in a sustained relative decline due to a general preference for consumption and to the effects of taxation. The remarkable growth of the Soviet economy may be attributed to the high rate of capital investment (by the Government) and not to expansion of consumption which remains at a comparatively low level.

What stimulates investment?

Some observers hold that we could stimulate investment by making consumption rise faster. But this avoids the real issue. If a nation wants its economy to expand at a more rapid rate then it must put a greater share of its resources into capital formation and less into consumption. To favor consumption is to start at the wrong end.

That industrial managers are reluctant to expand the plants while much of their present capacity lies idle is an oversimplification. It is undoubtedly true that some of our industrial capacity has not been fully used in recent years. McGraw-Hill reported last July an 87-percent utilization in manufacturing although companies prefer to operate at a ratio about 5 points higher. But industrial capacity and its relationship to output is an elusive concept as several studies have shown. A great deal of machinery dates back many years and is more or less obsolete. It is counted as active, kept in reserve, and utilized when unusually heavy orders justify this. But in normal operation only more up-to-date equipment is used. Also, only about one-third of plant and equipment investment is intended to add to capacity while two-thirds are for modernization and replacement. European and Japanese companies have been changing to

* National Bureau of Economic Research, Princeton University Press, 1961.

more advanced technological methods at a more rapid rate than our industries and now have, on the average, plants which are of more recent origin and, presumably, more up to date.

What stimulates investment is high profits and what deters it is low profits. In his just-published book, "Capital and Rates of Return in Manufacturing Industries," 10 George J. Stigler, economics professor at the University of Chicago, shows that a close correlation exists between longrun rates of return and rates of capital investment in manufacturing. The fact is that for some years now rates of return have been falling in the United States. The First National City Bank of New York reported return on net assets of leading corporations at a high of 13.3 percent in 1950, which declined to 11.3 percent by 1956 and has been below 10 percent ever since 1958. It stood at 9.1 percent in 1962.11

As a percentage of gross national product, corporate profits before taxes declined from 14.3 percent in 1950, to 10.7 percent in 1956, and to 8.6 percent in 1963 (first half, seasonally adjusted). Treasury Secretary Dillon recently expressed hope that corporate profIts would again rise to at least 10 percent of gross national product but this may not soon happen without major changes in Government policy.

Relaxation of depreciation rules and investment credits enacted in 1962 have been of help. But depreciation provisions still are more restrictive in the United States than in many other industrial nations.

percent is a deterrent to expansion.

Moreover, a corporation tax rate of 52

It means that $2.08 is required in gross earnings for every $1 of needed net return. This eliminates many potential new projects from further consideration.

Corporate tax relief

The corporate profits tax was scheduled in 1954 to drop from its (Korean) wartime high of 52 to 47 percent. Personal income tax rates were permitted to fall to their preKorean levels but corporate tax relief has been postponed every year since 1954.

In recent years a growing number of economists have come to recognize the ill effects of our high corporation tax rate. But the proposals of the President, implemented in H.R. 8363, would reduce the rate only to 50 percent and eventually to 48 percent. By advancing payment dates they would defer a reduction in corporate tax payments until the late 1960's. Whatever slight benefit might be derived from lower corporate rates would be more than offset by the suggested repeal of the 4 percent dividend credit.

The present proposals are a bitter disappointment to those who had hoped that the promised tax reduction would be so designed as to be effective in stimulating industrial growth.

Personal income tax relief

While the proposed reductions in the rates of the individual income tax will give effective and long-needed relief to many persons, they are not likely to produce as powerful a stimulative effect on economic growth as is hoped for and needed. The income tax structure has for the past 20 years been characterized by an excessively step degree of progression which has stifled initiative and ventures and dried up investment funds. This will not be sufficiently mitigated by the proposed new scale.

10 National Bureau of Economic Research, Princeton University Press, 1963.

11 First National City Bank of New York, "Monthly Economic Letter," April of each year.

The income tax acts somewhat like a schedule of speeding fines which are intended to discourage speeding; they rise by the number of miles by which the driver exceeds the speed limit. Speeding fines succeed in keeping most drivers within the bounds of permitted maximum limits. Likewise, our exorbitant graduated rates effectively restrain the natural dynamism of our economy.

While tax relief is needed and should be granted across the board to all income classes, it ought to be most substantial in the medium and upper brackets-not to help wealthy people but to help everybody by economic expansion. One example of such a plan is the Herlong-Baker bills (H.R. 348 and H.R. 265-88th Congress) which would reduce the rate scale of personal income taxes to a range from 15 percent to 42 percent and the corporate rate from 52 percent to 42 percent over a 5-year period. The bills have long been waiting for action in the House Ways and Means Committee.

It appears unwise at this time to free 1.5 million taxpayers from all tax liability by establishing a minimum standard deduction. Particularly in a country in which economic well-being is at a high level and widely diffused, and which is the only industrial country without a broad-based national consumption tax, there is little justification for increasing the incidence of "representation without taxation."

Income distribution

There has been much misunderstanding of trends in our income distribution and many wrong conclusions have been drawn. At hearings of the House Ways and Means Committee earlier this year President George Meany of the AFL-CIO stated that "the basic reason why the American economy has grown so slowly, why our national output is so far behind our productive capacity *** is a shortage of customers with money to spend." He continued: "Income from property-dividends, interest, capital gains-has generally gone up at a rapid rate ***. But all this time * * * the wage earners and salary earners have been getting a smaller share of the pie." 12

In reviewing this charge it is apparent from table V that the share of wage and salary earners in the total personal income has substantially gone up for over 3 decades (which is as far as these statistics go back); it continued to increase even through the years of heavy unemployment since 1956. The share of business and professional income and dividends as well as other income has meanwhile just as steadily declined. TABLE V.-Distribution of shares in personal income (before taxes), selected years, 192963

workers. This was demonstrated in an analysis by Paul G. Keat of I.B.M., "LongRun Changes in Occupational Wage Structure 1900-56." 18

The Economic Almanac for 1962 showed that the earnings of members of skilled occupations as a percentage of earnings in unskilled occupations dropped from 205 to 138 over a 50-year period.

This suggests that the wages of less skilled and unskilled workers were not set in a free market but by nonmarket factors-largely union pressure with government supportwhich boosted contractual or legal minimum wages to a level that exceeded the productivity of many. A large number of unskilled jobs were not wiped out by automation nor by too slow an economic growth rate but by wage rates which left an employer only the choice between hiring a worker at a loss or not hiring him. With the steady rise in legal and contractual minimum wages we may expect the unemployment rate to continue its long-range upward climb. A tax cut and even rapid economic growth are likely to be of only limited benefit to unskilled workers.

The outlook is truly grave in the light of recent trends. During the past 7 years the civilian labor force increased by 5.6 million persons, of whom only 37 percent located in private employment, more than two-fifths were added to government payrolls, and almost one-fourth swelled the ranks of the jobless, as table VII shows:

TABLE VII.-Increase in the civilian labor

a reasonable chance to be hired at prevailing wage rates. It could turn out to be the most effective method of widening the ranks of the involuntarily idle.

Some regard it as a mere coincidence that in the United States, where workers enjoy by far the highest wages in the world, the incidence of unemployment also is much higher than in other industrial countries. The Council of Economic Advisers remarked in the Economic Report of the President, January 1962, that "the post-Korean years were marked by the coincidence of relatively large wage increases with declines in industry employment."

Further analysis could produce more cases of such "coincidence." It is likely that there is a causal relationship between wages that rise faster than productivity and an economy which is unable to employ all workers who are available at those rates.

Senator PAUL DOUGLAS once explained this relationship:

"As has been stated, the curve of the diminishing increments attributable to labor seems to be so elastic that if wages are pushed up above marginal productivity there is a tendency for the employed workers to be laid off at approximately three times the rate at which wages are increased. Labor under the capitalistic system, therefore, tends in the long run to lose appreciably more through diminished employment when it raises its wages above marginal productivity than it gains from the higher rate per hour enjoyed by those who are em

Source: Economic Indicators, October 1963, and 1962 supplement.

In the next 7 years the civilian labor force is estimated to expand by about 10 million, or twice as much as in the past 7 years. How will those millions of new entrants find jobs while the present imbalance between productivity and wage rates continues?

It has occasionally been suggested to cure unemployment (and accelerate economic growth) by sharply boosting wage rates and particularly minimum wages. This is like telling a merchant that he ought to double the price of goods which he has been unable to sell. Instead of not selling them at $1 he will then not sell them at $2. Are workers who cannot find a job at $1.50 likely to improve their chances by having their wage rate lifted to $2 or $2.50? This will push up prices and make more people unemployable. If raising wages were an effective method to stimulate rapid economic growth and employment, why don't we double them? Why don't some of the underdeveloped nations where wages are truly low-lift themselves by their bootstraps by boosting wage rates? To raise wages, in our present situation, to a substantially higher level would augment the purchasing power of workers able to keep their jobs and add to their effective consumer demand. But it would also make the competitive standing and profit picture of our industries more difficult, tend to channel orders and capital flow abroad, and further restrict the range of jobseekers with

18 The Journal of Political Economy, December 1960.

wages are thus above the margin, a reduction in the wage rate will help labor as a whole and increase the total amount paid out in wages by causing appreciably larger increases in the numbers employed and hence a decrease in the volume of unemployment." 19

An effective way to accelerate economic growth and combat unemployment would be not to raise wages in keeping with (or more than) advances in productivity but to keep wages stable and let prices fall. This would improve our international competitive standing and boost the purchasing power of persons whose income does not rise at the same rate as wages established by collective bargaining or minimum wages set by legislation.

American practice in the postwar period has favored continuous rounds of wage boosts. The 1962 Economic Report recorded the average annual increase in output per man-hour in private nonagricultural industries during the postwar period (1947 to 1961) at 2.9 percent, the corresponding boosts in hourly compensation at 5.1 percent. Much of the steeper increase in wage rates was, of course, expressed in and consumed by the resulting price rises. But part of it benefited some of the workers-those who were able to hold on to their jobs.

Another part of the wage increases came out of profits. Under the pressure of growing competition from home and abroad and under Government influence, companies were reluctant to raise prices and absorbed part of the higher costs. This explains the oftmentioned fact that prices have been rising at a slow rate, approximately 1.5 percent per annum, for the past 10 years. In fact wholesale prices have remained perfectly stable for the past 5 years. This found its expression in a shrinkage of profits. Corporate net profits declined as a percentage of sales from 5.3 percent in 1950 to 3.7 percent in 1956, and have ranged from 2.8 percent to 3 per

The profit squeeze made companies increasingly cost conscious. In an attempt to economize they kept hiring at a minimum and became more selective in regard to skills and qualifications of new workers. This is not likely to be changed until the wageprice structure and lower corporate tax rates enable companies again to earn adequate profits.

It may be well at this point to recall a pertinent statement by John Maynard Keynes:

"Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit." 20

Summary

The proposed cuts in personal income tax rates will be of material help to most taxpayers and spur the economy. They will ease some near-confiscatory rates to lower, if still exorbitant, levels, and effectively reduce the liability of persons in low-income brackets. But a tax cut which makes our tax structure more progressive by allocating the relatively greatest benefits at the lower end of the scale and gives little relief from the corporate income tax, is not likely to provide maximum stimulation to economic growth. It may lead to an increase in the number of jobs, but I doubt that tax reduction can make a major impact on our present type of unemployment which is caused by an imbalance between the type of available job openings, certain traits of part of the labor force, prevailing wage rates and profits.

The rate of economic growth could be more effectively stepped up by giving greater relief to the sectors which have lagged behind the rest of the economy, particularly behind private consumption and government spending, namely business profits, and capital formation, and by increasing incentives for effort and enterprise. Government should not hold a majority interest in anybody's income and the top rate of the personal income tax should not exceed 50 percent. The medium bracket rates would not be given sufficient relief under the provisions of H.R. 8363. I believe that they ought to be lowered by at least one-fourth from their present levels. The corporate tax rate should be gradually cut to about 40 percent and depreciation allowances further liberalized.

II. SHOULD RATE CUTS BE LINKED WITH TAX REFORM?

In the lively tax debates of recent years the term "tax reform" has acquired a specific and somewhat restricted meaning: a broadening of the tax base through a reduction of The principle of that type of tax reform is exclusions, exemptions, deductions, or credits. almost noncontroversial: everybody agrees that a broad tax base with low rates is preferable to a narrow base with high rates. But there is probably no more controversial subject in the tax field than the question which of the various provisions freeing certain

20 John Maynard Keynes, "Essays in Per

types of income from the tax ought to be narrowed or eliminated. As a result, very few of the much talked-about reforms have ever come close to enactment.

The most frequently heard assertion in this debate which reached its climax in the second half of the 1950's was that Congress by intent or oversight had permitted hundreds of "loopholes" to slip into our tax laws. Those escape hatches, it was said, enable the rich to avoid much or most of their tax liability while low-income persons, particularly wage earners who have their income taxes withheld, are subject to the full impact of the nominal rates of the law. One tax expert told the House Ways and Means Committee in 1959 that "our tax law is riddled by the benefits that are given to the wealthy, and for the most part the benefits that are given to the average man are negligible." 21 That charge has a strong emotional appeal but is contrary to the facts.

It is true that the personal income tax reaches less than half of all income. The percentage of personal income which appears as "taxable" on Federal income tax returns equaled only 43 percent in 1960, up from 37 percent in 1950 and 31 percent in 1945. Available statistics do not permit us to compare personal income with taxable income by income brackets. But we can relate adjusted gross income to taxable income. Such a comparison, as shown in table VIII, reveals a steeply progressive scale: 26 percent of the income of persons making less than $3,000 is taxable; then the percentage rises sharply, equals 58 percent in the $7,000 to $10,000 bracket and reaches 80 percent between $25,000 and $100,000 income. over it equals 78 percent. TABLE VIII.—Taxable income as a percentage of adjusted gross income, 1960 Income class, adjusted gross

All

income:

Under $3,000‒‒‒‒‒

$3,000 to $5,000——$5,000 to $7,000--$7,000 to $10,000---$10,000 to $15,000$15,000 to $25,000——.

$25,000 to $100,000----

$100,000 and over--

At $100,000 and

54

26 42 49

ence between personal income and taxable income-accrued to the benefit of persons in the lower brackets, as is evident from table IX.

Most of the demands to "close the loopholes" have ignored the big nontaxable items of personal income and focused attention on relatively small items. Had the proposals been enacted they would have broadened the

income in 1960

Source: Computed from "The Tax Base for Individual Incomes," Survey of Current Business, May 1963, and IRS Statistics of Income, 1960.

Personal exemptions, social welfare payPercent ments, standard deductions and imputed income account for close to three-fourths of the difference between personal income and taxable income. Unreported income is estimated at $33 billion (of which more than 58 $5 billion may be disclosed in the audit proc67 ess) and itemized deductions amounted to 74 $33 billion. Itemized deductions have figured prominently in the debate as a means of escape from income taxes for wealthy persons. However, table X shows that deductions were relatively larger in the low brackets.

80 78

Source: U.S. Treasury Department, Internal Revenue Service, "Statistics of Income, 1960; Individual Income Tax Returns for 1960, 1962."

A comparison by brackets between personal income according to concepts of the Department of Commerce, and taxable income according to tax returns, would, if it were statistically possible, undoubtedly reveal an even steeper progression than appears in table VIII.22 The fact is that most of the income in the higher brackets is subject to the Federal income tax and much or most of the income in the low brackets is not.

Most of the $228 billion personal income not subject to Federal taxation-the differ

21 "Tax Revision Compendium," Papers submitted to the Committee on Ways and Means, H.R. 1959, vol. 1, p. 538.

22 Most of the items which are counted as personal income by the Department of Commerce but not included in adjusted gross income accrue to low-income persons, e.g. social security, public assistance, unemployment compensation payments, income in kind, imputed income, etc. Capital gains, on the other hand, are included at 50 percent in adjusted gross income but not regarded as personal income and are wholly excluded by the Department of Commerce; see table IX.

Source: U.S. Treasury Department, Internal Revenue Service, "Statistics of Income, 1960; Individual Income Tax Returns for 1960, 1962."

It is of course true that much "adjusted gross income" in the top brackets is not taxed at the nominal rates of the personal income tax. If it were, our economy would have fallen into stagnation long ago. Capital gains are the major reason for the difference between nominal and actual tax rates at high income levels and account for close to twothirds of total realized income in the top brackets. An attempt to tax capital gains at regular rates would sharply restrict capital mobility, freeze investments with unrealized gains, and might result in less revenue.

sums to revenue. But those revisions would have made the income tax more progressive. To redistribute income more drastically, rather than to broaden the tax base, seems to have been the purpose of the "close the loopholes" drive.

The late Senator Robert S. Kerr wrote in an article in Look magazine, March 13, 1962: "One of our most persistent national myths is that U.S. tax laws include provisions that favor small groups of people and permit them to escape paying their fair share of taxes. The statement is frequently madeby some professors, editors, economists, authors, radio and TV commentators, and even a few politicians-that if Congress would close 'loopholes,' substantial reduction in income taxes could be made. After serving on the Finance Committee of the U.S. Senate for over 12 years, I have come to the conclusion that the word 'loophole' is loosely used to apply to some provision of the Internal Revenue Code that some industry, group of persons, or individual does not like, regardless of its merits."

Little revenue would be added by eliminating the most frequently mentioned loopholes. Several years ago, I concluded that "substantial reductions in tax rates through the closing of 'loopholes' is not a hope but a mirage." 23

Simplification of our tax laws is, of course, highly desirable. But it is unlikely to happen as long as taxes are as heavy as they now are. Theoretically, we could repeal all exclusions, exemptions, deductions, credits and other differentials and collect as much revenue from a comprehensive income tax with a flat rate of 10 percent as we do now with rates ranging from 20 percent to 91 percent. But this is politically impossible.

That a tax statute as intricate as our Internal Revenue Code contains some inequities is virtually inevitable. As they are found and recognized as flaws they should be corrected. This is why tax reform must be a continuous process rather than a one-shot proposition.

The President recommended certain revisions in his 1961 tax message and announced that he would place a comprehensive tax reform program before the succeeding session of Congress.

Most of the changes which the President recommended in his 1963 tax message were not of a major character except the plan to place a 5-percent floor under itemized deductions. This would have sharply curtailed the use of deductions and adversely affected donations to many worthy causes. When 103 out of 104 witnesses testified against it, the House Ways and Means Committee quickly killed the proposal.

The President subsequently explained why he refrained from advocating more extensive tax reform at this time. He felt that the cut in tax rates-which he called the most important domestic economic legislation in 15 years-should not be jeopardized or delayed by injecting highly controversial issues which faced a doubtful reception by Congress. Several major organizations, of labor and of management, also have suggested that pending desired structural changes were of secondary importance (and some of questionable merit), and should not be permitted to interfere with prompt action on rate reductions.

23 Roger A. Freeman, "Taxes for the Schools," Washington, the Institute for Social Science Research, 1960, p. 96.

A substantial majority of those who have participated in this debate expressed their belief that the most urgently needed tax reform is a lowering of our exorbitant income tax rates and that other desired changes should wait their turn. I agree with this proposition. While there are many provisions in the Internal Revenue Code which ought to be thoroughly scrutinized and amended, I can see no reason why this should be tied in with rate reduction. A structural revision which cannot find approval on its own merits without a "sweetener," may not necessarily be an improvement. I question whether it is good procedure to gain through simultaneous rate cuts the consent of a majority for the placing of heavier taxes on a vote-weak minority.

H.R. 8363 contains several structural changes with relatively small revenue consequences. Some of them, and I mention particularly the sick pay exclusion, casualty loss deduction, and moving expenses, are desirable.

Four changes in H.R. 8363 are more substantial. The elimination of gasoline, alcohol, tobacco and certain other minor State and local taxes as deductible items serves to broaden the tax base. It also makes it

somewhat harder for States and localities to finance their own highway construction and other activities, and establishes a questionable precedent.

To reduce from 50 to 40 the percentage of capital gains on items held more than 2 years which are includible in income as a desirable change. A reduction to 30 percent, as proposed by the President, would have been even better.

Is it good public policy to free 1.5 million taxpayers from all tax liability by the establishment of a minimum standard deduction? What effect will that have on their interest in the fiscal operations of the Government and on their attitude toward expansion of benefits in whose financing they do not share?

The purpose of permitting deductions from adjusted gross income is to give due consideration to relatively heavier burdens or to recognize donations to worthy causes. A modest standard deduction is justified for administrative convenience. But to expand that privilege, regardless of burdens actually borne, opens a loophole and narrows the tax base for no legitimate reason.

To repeal the dividend credit would prove detrimental to economic growth. The credit was established in 1954 to encourage equity investment and to give at least a token recognition to the fact that not all of the corporate profits tax is shifted to sumers, and that some part of it is borne by stockholders and taxed twice. The credit ought to be raised to 10 percent. The Treasury's argument in favor of repeal 24 can be reduced to the aim of making the tax structure more steeply progressive.

Summary

The most urgently needed tax reform is a reduction of personal and corporate income tax rates. Other tax revisions should be acted upon in due course and separately.

Some of the structural changes in H.R. 8363 are desirable improvements. I believe, however, that the creation of a minimum standard deduction and repeal of the dividend credit are detrimental and ought to be eliminated from the bill.

III. SHOULD A TAX CUT BE ACCOMPANIED BY RESTRAINTS ON SPENDING?

The House debate on H.R. 8363 turned almost exclusively on whether Congress was justified in cutting taxes at a time of rising expenditures and big deficits. There was, to be sure, concern over some of the substantive provisions of the bill, but lack of opportu

24 President's 1963 tax message, hearings, op. cit., pp. 246 ff.

nity to amend it under the closed rule focused most attention on the merits of an action which, at least initially, would substantially increase the size of budgetary deficits and of the national debt. This fairly reflected the uneasy feeling among broad sections of the American public which was well summed up in the New York Times of September 22, 1963, by John D. Morris:

"Despite the heaviest tax burden in history, the average voter today seems to be less interested in getting some relief from it than in balancing the Federal budget."

The results of several Gallup polls were confirmed by dozens of polls which Members of Congress conducted in their own constituencies: about three-fourths of the American people are opposed to a tax cut which would boost the deficit and the national debt. They may be less sophisticated than some of our governmental economists but are reluctant to believe that we can create lasting prosperity by spending beyond income and providing the necessary money by printing it.

Do budgetary deficits create lasting
prosperity?

A contracyclical policy of "leaning against the wind," and of balancing the budget not annually but over the business cycle, has become widely accepted, not only by economists but, as several polls have shown, also among the general public. But what is proposed here is something much more ambitious: to raise through planned sizable deficits the prevailing rate of economic growth.

The American economy is not now in a recession and has not been in one for some time. It is on the whole prosperous and gives no indication of an imminent or impending downturn. GNP is continuing to expand at least at its long-range historical rate.

Of course, everybody would be happy if national income grew more rapidly. Would a planned budget deficit in the next 2 fiscal years produce a lasting increase in the rate of economic progress and lead to rising Government revenues and balanced budgets several years hence, as the President promised? Or shall we be told 2 or 5 years hence that the rate of growth still is not high enough, or the rate of unemployment not low enough, to permit our budget makers to keep expenditures within revenues?

The President warned the Business Committee for Tax Reduction last September: "If this program isn't successful, then other means must be suggested." He and his advisers have left no doubt but that they regard a tax cut as an alternative to sharply increased Government spending. The private economy is to be given a chance to grow more rapidly with a reduced tax burden, before enlarged spending is resorted to.

The President and his economic advisers maintain that a restraint on spending would nullify the beneficial effect of the tax cut. The latter would boost aggregate demand but lower spending would reduce it. The assumption behind this belief is that the drag on the economy is not caused by our lopsided and excessive tax structure but by the fact that budgetary deficits have not been big enough. This was clearly indicated by John P. Lewis, a member of the Council of Economic Advisers, who told his audience at Notre Dame University on September 11, 1963, that taxes "had gotten too high relative to Government expenditures."

A statement supporting the administration's proposals, signed by about 400 economists, suggested that the economy might be spurred to faster growth "by reducing tax revenues, by increasing government expenditures, or by some combination of the two." 25

25 Daily CONGRESSIONAL RECORD, Sept. 30, 1963, p. A6118.

The proposition that what this country needs is bigger deficits now, if it is to have balanced budgets later on, suggests, as George J. Stigler of the University of Chicago remarked, that "the way to avoid a huge deficit is to seek a large one.”

The theory that large deficits raise the rate of economic growth or lift employment to sustained higher levels has never been proven. Federal outlays in the fiscal years 1933-34 through 1938-39 were twice as large as in the preceding 6 years with virtually all of the additional funds deficit-financed. But unemployment declined only from an average of 12.4 to 9.9 million, which still left 1 of every 6 workers unemployed. The Federal deficits of the mid-1930's were, in relation to the size of the economy, equivalent to a present annual deficit of $20 to $25 billion. If a red balance of that magnitude for several successive years does not bring back full employment and prosperity, how big an annual deficit would we need, and for how long, to have the desired impact?

Federal cash transactions in the dozen years 1946 through 1957 yielded an aggregate ment rate averaged 4.2 percent. In the surplus of $11 billion, and the unemploysucceeding 5 years, from 1958 through 1962,

the Federal Government ran a net cash deficit of $24 billion, and unemployment averaged 6 percent. The President proposed in January 1963 an aggregate cash deficit of $18.6 billion for the fiscal years 1963 and 1964, but this is unlikely to reduce unemployment to the level that prevailed prior to 1957.26

Last February, George Terborgh, research director of the Machinery and Allied Products Institute, presented to the Joint Economic Committee a quarterly analysis of Government deficits and economic growth rates in the postwar period.27 It showed a slightly positive correlation between budget surpluses and rising GNP (+0.39) when related to simultaneous economic data, and virtual zero correlation (-0.04) with a 6month lag between budget and GNP figures.

There has been much comment on a study by Andrew H. Gantt according to which the United States incurred fewer and smaller budget deficits in the 1950's than Great Britain, France, and Germany. Subsequent research by Michael E. Levy generally confirmed Gantt's findings but did "not indicate any systematic relationship between budget deficits and growth" in a comparison of the United States and six European countries. The study "does not support current arguments which imply that larger deficits-or low-saving budget structures-as such, are bound to result, almost automatically, in accelerated economic growth over the years." *9 Another comparative analytical study of the United States and several other countries by Beryl W. Sprinkel suggested that economic growth was more likely to be spurred by monetary expansion than by larger deficits.30 It is well known that some of the experts which the U.S. Government dispatched to

26 According to more recent estimates the deficit may actually be somewhat smaller; but this is immaterial to the basic argument over the growth-creating effect of deficits.

27 "January 1963 Economic Report of the President," hearings before the Joint Economic Committee, 88th Cong., 1st sess., 1963, pt. 2, p. 773 ff.

28 "Central Governments: Cash Deficits and Surpluses," the Review of Economics and Statistics, February 1963.

29 Michael E. Levy, "Fiscal Policy, Cycles and Growth," National Industrial Conference Board, 1963, pp. 51, 56.

30 "Relative Economic Growth Rates and Fiscal Monetary Policies," the Journal of Political Economy, April 1963.