recession measure, and the bills before this committee which would implement that proposal. The NAM is a voluntary membership organization made up of approximately 17,000 business concerns of all types and sizes throughout the United States. More than 80 percent of our membership is small business. In fact, 28 percent of the membership employ 50 or fewer persons, 41.5 percent employ 100 or less, and 83 percent have 500 or fewer employees. The association thus speaks for a broad, diversified, and substantial segment of the country's productive-and taxpaying enterprises. The National Association of Manufacturers oppose H.R. 10317 and similar bills for reasons that will be explained in this statement. Before entering upon this discussion, however, we shall suggest for consideration of this committee and of the Congress an aspect of the matter which involves the basic relationship between the legislative and the executive branches. CONGRESSIONAL RESPONSIBILITY SHOULD NOT BE DELEGATED Decision regarding the extent to which a delegation of congressional authority and responsibility is involved, and the wisdom of granting such powers to the President, is prerequisite to consideration of the proposed legislation. In the message of February 19, 1962, the President referred to the delay caused by "normal legislative processes" as a reason for requesting authority to inaugurate a public works spending program under specified conditions. We submit that this is not an adequate reason for suspending the normal legislative processes. It is not only the right, but the duty, of Congress to debate and deliberate before deciding to spend. There can be no guarantee that emergency public works spending is always the proper action to take under any and all circumstances, assuming that Government action of any sort would be justifiable. By enacting this bill the Congress would abdicate its own responsibility and foreclose its opportunity to consider other possible lines of action which, in particular circumstances, might be more appropriate. Furthermore, the President's action, if it were to be authorized as proposed in this bill, would not avoid the result attributed to the normal legislative processes; namely, that of being "too late to achieve an ameliorating effect on the recession sufficient to justify the increase in budget expenditures." What he means is that if public works spending, as an antirecession measure, must wait for congressional sanction, the bulk of it is likely to occur in the recovery which begins after the bottom has been reached. But according to the timetable set out in the Economic Report of January 1962, the same result is likely to happen under the proposed plan. In that report it is indicated that the spending could be initiated within 2 months after the unemployment situation had given the signal and that the impact would begin to be felt within 1 or 2 months after the spending had started. These time limits seem optimistic, particularly as regards the time to get underway. The letting of contracts, the assembly by contractors of men, equipment, and materials at specific sites, and various other matters could take more than 2 months. However, accepting the Council's estimates, the following table from the Economic Report (p. 74), with our interpretative interpolations in parentheses, applies the plan to the last four recessions. TABLE 1.—Hypothetical timing of proposed capital improvements program in 4 postwar business cycles It appears that the recession of 1954 would have been the only one in the list in which there would have been enough time between spending impact and the bottom of the recession for any considerable part of the public works spending to be made before recovery began. In the last two recessions, virtually all of the spending would have occurred after recovery had started. Thus the implied reason for the proposed legislation-that Congress cannot act fast enough-is irrelevant, since the triggering mechanics of the proposal itself will apparently cause enough delay to nullify the supposed speed of executive, as opposed to legislative, action. MATCHING REQUIREMENTS ARE A LOGICAL IMPEDIMENT The President's message states: "Virtually every community in the Nation has a backlog of needed capital improvements." The important question in this connection is not the existence of a backlog of projects for which plans and specifications have been prepared and sites acquired, but how many States, cities, and other units would be able and willing, on short notice, to provide the money to match the $750 million which is to be allocated as matching grants. Experience has shown that although States and cities do not plan public work to be countercyclical, practical considerations sometimes create that effect. Those that are needed, are financed when needed, regardless of boom or recession. Postponable projects, on the other hand, usually await lower interest rates, which often coincide with recession-therefore producing a contracyclical effect. Thus, Federal funds, available at such times, would be apt to substitute for State or local funds. And that, according to the standards laid down by the President for eligible emergency undertakings, would render such projects ineligible: "All of these projects must meet essential public needs, must be capable of early initiation and of completion within 12 months, must contribute significantly to reducing unemployment, and must not merely replace existing expenditures." [Emphasis added.] There is inconsistency between the criterion of "essential public need" and holding a project in a planned backlog of antirecession spending. If need is genuine and sufficiently great, project priority would preclude delay. But if the essentiality of a project is low enough to render it postponable, the coincident existence of recession will not change its character as essential or postponable. To give it unwarranted priority as essential just because of a recession would amount to providing "made work." The expectation that any large number of States and cities could suddenly develop plans and financing for new projects which would comply with the above standards appears to be quite unrealistic. This is recognized in the bill, which earmarks $250 million for loans to States and cities otherwise unable to finance their share of the matching costs. This loan fund may very well set the limit to State and local participation. Local reluctance to borrow could keep the participation even below this level. The legal restrictions on State and local debt increase without popular approval in referendum votes would be a further practical obstacle to large scale Statelocal participation on short notice. And finally, the requirement in the bill that all employment on projects or programs assisted by grants to State or local units shall be paid wages at rates not less than those prevailing on similar construction in the locality (the DavisBacon Act) is not likely to increase local enthusiasm. This requirement is completely out of step with the basic purpose. To whatever extent persons are unemployed because there is insufficient demand for their services at the wage which the law or a union contract requires to be paid, the Davis-Bacon rule negates the whole purpose of the proposed program. No contractor on projects launched under H.R. 10317 will hire presently unemployed persons at a wage above the value of their services unless he is operating on a cost-plus basis. Rather, he would be more likely to divert competent workers from other jobs in order to execute the new contract. Thus, despite the language and the intent of the bill, the public works authorized under it could be, to some extent at least, a substitution of jobs, not a provision of new jobs. SUBSTITUTING A DEBT LADDER FOR THE DEBT CEILING The possibility of adding up to $2 billion to the public debt every time the public works authorization would be utilized is not a deterrent to the proponents, since large deficit spending is regarded as not only a proper, but an infallible cure for recession in the compensatory or cyclical budget balance doctrine. This debt is never fully retired in the postrecession recovery with the result that the total debt steadily increases. The debt ceiling was already raised once this year, and further extension has been requested by the President. This legislation would require a moving debt escalator rather than a debt ceiling. It would make a complete misnomer of the term itself, and void the very purpose of a debt limitation. TEMPORARY, CRASH PROGRAMS DEAL INADEQUATELY WITH Public works spending is a wholly inadequate solution of the unemployment problem as it exists today. The real cause for concern regarding unemployment is not so much the occasional cyclical peaks as it is the high level of unemployment which has persisted in recent years through all phases of the business cycle. This was pointed up by Representative John A. Blatnik in a statement issued on March 26, 1962, in connection with both the $2 billion standby proposal and the later suggestion of the President for $600 million of new public works money for distressed areas. Mr. Blatnik said: "With each recurring recession in the postwar period, an ominous tendency has become noticeable. As a rule, each recession tends to start at an unemployment trough that is higher than that of the preceding recession, while the peaks of unemployment are reaching gradually increasing heights." He documents the chronic nature of unemployment further by noting the slow rate at which unemployment falls after reaching a recession peak, and the shortening span of time between unemployment peaks. However, the two proposals involved deal with unemployment as if it were strictly a cyclical phenomenon supporting public works acceleration as a primary countercyclical tool. "Triggered" by a specified rise on unemployment, the standby program would be limited to 12 months and, once instituted, could not be resorted to again until 6 months had elapsed. Thus, the scheme immediately involves one or more shortterm crash programs to deal with a chronic condition. However, it would seem to anticipate a very different thing-a permanent program run by a new high-level Federal office. FULL EMPLOYMENT AND CAPITAL IMPROVEMENT BY FEDERAL FIAT In his statement on "The Growing Problem of Unemployment," Representative Blatnik says: "To maintain our people's capitalism *** we must maintain plentiful job opportunities." And he adds that a public works program is "the most economical road to full employment." He later mentions that it would provide "a very important byproduct, a residual of public capital improvements** *." The limitless avenue for full employment-federally provided employment—which would thus be opened up, is indicated as follows: "Prof. Alvin H. Hanson has estimated that we need to allocate one-fourth of GNP, or roughly $125 billion a year to the public sector. A lower estimate made by Gen. John S. Bragdon, a special assistant to President Eisenhower, would be required just to take care of the backlog of needs and existing facilities." The statement admits that the program now being proposed would not satisfy all those needs, but it contends that it would "go a long way in meeting" them. The next aim in the plan is evidently a spearheading Federal agency "to foster overall acceleration planning *** to assess employment possibilities, to analyze capital investment opportunities * * *." Thus the entire outlook for handling unemployment through public works is simply a grandiose expansion of public employment-a "people's capitalism" by Government management. Is this what the people of our country want? Will this mean economic growth? Will this strengthen the U.S. position among the free nations? It would simply be accepting, not correcting, the situation. SYMPTOMS VERSUS CAUSES The specific economic issue involved in proposals for accelerated public works is whether recession can be checked or avoided, unemployment materially reduced, and the rate of economic growth materially elevated, by increased public works spending. The phenomena of unemployment, recession, and growth are too complex to be dealt with by one simple act of government. The statement of findings and purpose in the bill is superficial because it deals with symptoms rather than basic causes. It assumes that Government spending is the infallible cure for recession, but Table 1 above shows that in three out of the last four recessions virtually all of the spending would have occurred after the recession corner had been turned, if legislation such as H.R. 10317 had then been in effect. It is apparently assumed also that the unemployed comprise a homogeneous unit which can be sorted out and put to work by a standard procedure such as public works spending. On the other hand, the bill reveals no recognition of a most important cause of unemployment, which is the wage and fringe benefit cost of labor in relation to the value of the worker's services in production. There are wide differences in the incidence of unemployment according to age, sex, race, education, occupation, degree of previously acquired skill, and geography. There are differences, also, in the value of the services which the several unemployed persons can render. To the extent that the minimum wage, or a union scale of wages plus fringe benefits, would involve a production cost higher than can be recovered in the price of the product, unemployment will result. If the employer is to stay in business and is to be motivated to hire people he must realize more than his out-of-pocket or break-even costs. He must earn a profit which represents at least an adequate return on his capital. The impact of wage cost-price squeeze on profits has been, especially in recent years, a most important cause contributing to periodic recession and unemployment. In three successive 4-year periods the relation of corporation profits after tax to gross national product has been as follows: TABLE 2.-After-tax corporation profits as a percentage of gross national product In absolute amounts, profits after tax were $22.8 billion in 1950, $23.5 billion in the prosperous year 1956, and $23.3 billion in 1961. Over this period gross national product rose from $284.6 billion in 1950 to $521.2 billion in 1961. While total employment rose from 59,957,000 in 1950 to 66,796,000 in 1961, total unemployment increased from 3,142,000 to 4,806,000 in the same time. The increase of unemployment may be said to provide a rough measure of the extent to which workers have been priced out of the market by the protective measures of unions and Government alike. CAPITAL IS A PRIME REQUISITE FOR EMPLOYMENT Capital, in the sense of tools and equipment for production, is indispensable to employment. In form and quality it may range from the primitive hand tools of an undeveloped country to the immense array of high quality equipment that we have here in the United States. Whatever may be the situation, from the lowest to the highest ranking of the quality of a country's capital equipment, there will be employment to the extent that the worker output is sufficient to justify the wages paid, and there will be unemployment for those whose output is not sufficient to cover the wages demanded, or paid under legal compulsion. In a free labor market the wage level will vary with the productivity of labor. Since this productivity is increased with improvements in the quality of the capital used, technological advance is an important factor in wage determination, and also in the volume of employment. On-the-spot displacement of workers as new machine or new methods are introduced is much more than offset by the additional job opportunities opened up by the improvements. The unions clink stubbornly to the "lump of labor" doctrine, which is that only so much work is available and restrictions on hours and output are necessary to provide jobs for new workers and the unemployed. This thesis has been disproved by every advance since tools were first invented. Sharing the work means sharing the capital, and dilution of the capital per worker means lower output and lower real income per worker. In any fundamental approach to the problem of unemployment, the need for more capital is obvious, first to avoid capital dilution as the labor force increases and second, to increase productivity per worker through the improvement of the quality of capital which comes about with invention and increased capital funds to provide the new forms of capital goods. Increasing productivity per worker is the basis for economically justifiable wage increases. Longrange economic statemanship indicates that wage increases should be held somewhat below this potential in the interest of all consumers, and also in order to keep the prices of our export products effectively competitive with foreign goods. The flow of new capital and the combination of labor and capital in productive operations are alike dependent on the prospect of profit. This brings us again to the inescapable requisite of a relationship between value of output and labor cost that will keep the mainspring of the private enterprise wound up. The sources of new capital are (1) internal business financing and (2) external financing through investment of the savings of individuals. Both methods are appropriate. The imbalance that would be created by the "investment tax credit" now supported so strongly by the administration would defeat the purpose urged in its support, which is the provision of more capital. It would do this by a tax subsidy to existing business and a penalty on saving for investment by individuals. This is like "saving at the spigot and wasting at the bung." Dr. William Fellner has written about the investment tax credit as follows:1 "It is undesirable to promote mainly those acts of investment which are internally financed out of the undistributed earnings of enterprise that is already highly profitable. Lopsided stimulation of these particular investments may well lead to further concentration of economic power. *** To be sure, there exists no general case against internal financing; this method of obtaining investable funds has some economic advantages as well as drawbacks. But pressing self-financing too far would have several undesirable consequences, and hence a balanced program should give additional inducements to accumulate savings out of personal income. These individual or personal savings are the funds which are channeled into investment through the capital market. Misgivings seem justified against the proposal that additional inducements to invest should become coupled with measures such as reduce the personal savings of individual income recipients out of any given national income." The frequent references to excess plant capacity in recent discussions have often been taken to imply that there is no present need for more capital since we are not making full use of what we have. Unused capital and unused labor have at times been linked together, the idea being, apparently, that both excess capacity and unemployment would disappear if the unemployed were moved into the excess capacity plants and put to work. This is not even good wishful thinking. Many of the unemployed are in that situation because the value of their product would not cover the wages demanded, whether by reason of Federal law or union wage scales. While this imbalance persists, they could not get jobs even if there were idle plants. Moreover, the concept of excess capacity is hazy and indefinite. It is never clear, in the references to it, what standard of measurement is being used. It can vary according as it relates to one, two, or three shifts, or to comparatively obsolete plant and equipment that could be put into service if needed, or to give plant and equipment in a declining industry. Even if a definition of excess capacity could be framed that would command general acceptance, its existence would not necessarily indicate a defective allocation of resources. On the contrary, the economy needs some margin of capacity to meet variable, or emergency, needs and to permit flexible adaptation of output to the market. If there were absolutely no excess capacity in the economy, it would not be possible to meet a sudden increased demand for defense material. It would not even be possible to supply additional quantities of the materials that would be required for the sudden implementation of the proposed public works program without diverting them from existing construction projects. The emphasis on excess capacity has diverted attention from capital formation by creating the impression that we already have enough, or more than enough, capital and that the way to reduce unemployment is to make fuller use of existing capital. This notion has been carried over from the "mature economy" doctrine of the 1930's. In that doctrine the alleged lack of investment opportunities was deemed to be evidence that no more capital was needed. 1 See "Employment in the American Economy," a compilation of reprints from the Congressional Record, 87th Cong., 1st sess., p. 97. |