Transcript Yolanda Lee`s Slides: Economic Report of the President 1962

Economic Report of the President
1962
Authors
• Walter W Heller
– Advisor to President Kennedy
– Promoted tax cuts
– “War on Poverty”
• Kermit Gordon
– Budget director in Kennedy Administration
• James Tobin
– Advocated government intervention to stabilize the
economy
– “Tobin tax”-tax on foreign exchange transactions
– Tobin’s Q
Chapter 1 of ERP 1962
• Part I: Objectives, Progress, and Prospects
– The objective of maximum employment
• Reasons why involuntary unemployment is a concern:
– The human obligation to prevent and to relieve economic stress
– The basic principle of a free economy that an individual should be
able to choose freely how to use his time, whether to work for
pay or not
– The economic waste of leaving productive resources idle
– Full employment as the objective of stabilization
policy
• Served by the stability of the general price level
• Attempting zero unemployment would produce high
inflation
• Increase aggregate demand
– Full employment and structural unemployment
• Reduce frictional and structural unemployment by
improving the mobility of labor
• Displaced worker due to technological progress
• Increased number of young people in the labor force
• Full production
– Production potential
• Q1 of 1961-$50 billion gap between actual GNP and
output obtainable at full employment
• High output would come with lower unemployment
• 1961 - $40 billion below
potential
• Potential for 1962 $580
billion
• Unemployment target
rate of 4%
Progress in 1961
– 1961 began far below full employment
– Inventory investment declined
– Unemployment at 6.8% in February
– Automatic stabilizers contributed to stability in
personal incomes through transfer payments
– By the end of 1961
• Prices 7.5% higher
• GNP increase of $41 billion
• Personal income grew by $24 billion
– Key element: increased spending at all levels of
the government
Outlook for 1962
• Projected GNP at $570 billion
• Due to high demand at the end of 1961, record
levels expected in production, income, and
employment
• Higher consumption
• More government purchase of goods and
services
• Increased inventories
• Increased residential construction
• Part II: Policies for Maximum Employment and
Production
– President’s recommendations:
• Stand-by capital improvements authority
• Stand-by tax reduction authority
• Improvement in the unemployment compensation
system
– Budget policy
• National Income Accounts Budget
– Record and classification of the major flows of output and
income for the entire economy; trust funds,
– Full employment surplus
Federal Fiscal Activity in 1961-62
– Tax refunds expedited
– Changes in transfer programs
– Unemployment benefits extended
– Grants to state and localities for urban renewal
– Direct payments to farmers
– Large increase in expenditures in areas of defense
and space exploration (for reasons of national
security, not economic stabilization)
Money and Credit Policies and
Economic Stability
• Federal reserve control of the total volume of
bank reserves
– Purchases of government securities
– Provided banks reserves
– Banks expanded their loans and investments
• Federal credit programs to make credit readily
available
– Federal lending and Federal insurance guarantee
of private lending; FHA, FNMA
Improving the Mobility of Resources
• Labor market policies
– Changes in technology alters demand for labor
– Lack of knowledge of job openings
• Employment exchange
– Letting employers know of available workers
– Telling workers of available jobs
– Improving the US Employment Services
• Training
– On-the-job training
– Public service employment and training
– Educational opportunities through Youth Conservation Corps
• Resource use in agriculture
– Increased technology reduces demand for farmers