Tuesday,. September 1.4, 1971
THE MICHIGAN DAILY
Page Seven
Tuesday, September 14, 1971 YHL MICHIGAN DAILY Page Seven
Reviewing
prospects
for the
Nixon economic plan
(Continued from Page 1)
means that foreign c e n t r a l
banks which have accumulated
dollars are no longer free to
turn them in to the U.S. Treas-
ury in exchange for gold at a
price of $35 an ounce as they
were permitted to do before
Aug. 15. In addition, a tempor-
ary 10 per cent surtax has been
applied to nearly all dutiable
imports into the United States.
" The President proposed a
number of budgetary adjust-
ments, the net effect of which
is supposed to be to stimulate
economic expansion and job
creation.
Tax measures proposed in-
clude repeal of the seven per
cent exise tax on automobiles,
the enactment of a 10 per cent
tax credit-to be reduced to five
per cent after one year-for
business expenditures on ma-
chinery and equipment, and the
moving up to Jan. 1, 1972, of
certain reductions in the per-
sonal income tax which are now
scheduled to 'go into effect on
Jan. 1, 1973.
On the expenditure side of the
budget, reductions were proposed
which would amount to $4.7
billion during the current fiscal
year. These include a post-
ponement of federal government
pay increases, a ten per cent
cut in Federal employment, a
ten per cent cut -in foreign eco-
nomic aid, and postponement of
the President's proposals for
federal revenue sharing with
state and local governments and
for welfare reform.
In appraising the President's
program, let me begin with the
breaking of the link between the
dollar and gold, because I be-
lieve this is the most clearly
desirable element in the pro-
gram. It has been said that by
discontinuing gold purchases,
the President has established a
system of flexible exchange
rates between the dollar and
other currencies.
Strictly speaking, that is not
the case, since other countries
can, if they choose, continue to
maintain fixed rates by buying
and selling dollars in exchange
for their own currencies just as
they did before the President
took his Aug. 15 action.
However the objective of the
administration's a c t i o n was
clearly to induce other countries
to permit their currencies to
float against the dollar.
Indeed, the temporary import
surcharge ,seems to have been
designed to encourage other
countries to float their curren-
cies, with the understanding
that when this process was well
under way, the surcharge would
be removed. (The surcharge is a
dangerous measure, because it
invites retaliation and risks the
setting off of an escalating
round of trade restrictions.)
Most major currencies are in
fact now floating and have
risen in value relative to the
dollar. The real question is what
happens next. The President in
his Aug. 15 speech referred to
the severence of the tie between
the dollar and gold as "tempor-
ary.".
This' suggests the possibility
that when the free market has
produced sufficient adjustments
in exchange rates to correct the
U.S. balance of payments, the
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link to gold will be restored
either at the old gold price of
$35 an ounce or at a somewhat
higher price.
This would be a great misfor-
tune, because it would simply
reinstate the old system which
has been the source of a se-
quence of international financial
crises in the last few years.
The present situation offers a
great opportunity for the United
States to take the initiative in
negotiating fundamental re-
forms to strengthen the system
by introducing a greater degree
of flexibility of exchange rates
on a continuing basis.
The wage-price freeze should
be viewed as a measure designed
to hold the line while the Cost
of Living Council works out a
more permanent and more flex-
ible procedure for exerting re-
straint over wages and prices.
In the absence of a freeze,
there would be a serious danger
of price and wage hikes in an-
ticipation of the restraints while
they were being worked out.
4'T h e possibilities for post-
freeze machinery range all the
way from a mild system of
wage-price guideposts, such as
was employed with some appar-
ent success by the Kennedy and
Johnson administrations before
the pressures generated by the
V i e t n a m military build-up
caused them to collapse, to for-
mal compulsory wage and price
controls of the kind employed
during World War II and the
Korean War.
Something between these ex-
tremes seems likely, however-
,perhaps a wage-price review
board of the kind advocated by
Federal Reserve Board Chair-
man Arthur Burns (who is a
consultant to the Cost of Living
Council) to focus on wage and
price developments in key in-
dustries,- combined with some
more informal set of guidelines
applicable to the rest of the
economy.
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It seems generally agreed that
if the program is to stand much
chance of success, it must have
the support-or at least the
acquiescence - of key business
and labor leaders.
One of the major issues is
likely to be the control of prof-
its. Corporate profits b e f o r e
taxes are currently less than
eight per cent of GNP, a very
low ratio by historical standards,
If the economy expands in line
with the administration's hope,
both profits and rates of re-
turn on investment are likely to
rise substantially.
This would simply be due to
the expanded volume of produc-
tion and sales even though prof-
it margins do not increase. Such
a rise from present depressed
profit levels seems justified; the
focus should be on trying to
prevent sharp increases in profit
margins.
However, there is a danger
that such a distinction will not
be accepted by organized labor,
especially because, as explained
below, it feels that an excessive
share of the tax reduction pro-
posed by the Nixon administra-
tion would go to business.
An excess profits tax has been
proposed in some quarters as a
means of siphoning off "un-
justifiable" profit increases, but
I believe most economists would
oppose this because it would be
likely to lead to waste, ineffic-
iency, and evasion.
A good deal of evidence has
accumulated to suggest that it
is not possible by monetary and
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fiscal policies alone to achieve
a combination of reasonable
price stability and high employ-
ment that the American public
is willing to accept.
Accordingly, many economists,
including myself, welcome the
efforts of the Nixon administra-
tion to develop a program of
wage-price r e s t r a i n t (often
called "incomes policy" in other
countries).
It should be recognized, how-
ever, that it is a very difficult
task-one that is not rendered
any easier by the many past
statements by the President and
his advisers branding wage-price
policies of the kind now being
espoused as either ineffective or
stifling and intolerable.
The President's fiscal propos-
als are the most questionable
element of the new program. In
part, the problem is one of
rhetoric. The statement in the
President's speech that "Tax
cuts to stimulate employment
must be matched by spending
cuts to restrain inflation" im-
plies that private spending cre-
ates jobs while public spending
merely causes prices to rise.
The fact is that both fiscal
theory and empirical evidence
strongly suggest that a dollar
of public spending is no more
and no less potent in creating
jobs than is a dollar of private
spending, whether on consump-
tion or on investment in ma-
chinery and equipment.
Indeed, on paper, the Presi-
dent's program matches expen-
diture cuts against tax reduc-
tions so precisely as to raise
doubts that it would create any
additional jobs at all.
In fact, however, the Presi-
dent's proposed fiscal program
does seem to provide some mod-
est stimulus to the economy,
This is because some of the ex-
penditure cuts he proposed for
the current fiscal year involve
expenditures for programs__
notably revenue sharing and
welfare reform - that Congress
was unlikely to have enacted in
any case.
Moreover, the other parts of
his program have some poten-
tial expansionary effects, Many
government programs provide
for the expenditure of a speci-
fied number of dollars without
regard to prices.
To the extent that the wage-
price freeze and the post-freeze
wage-price restraint program do
hold down prices, these govern-
ment expenditures will repre-
sent a larger real demand for
goods and services and will
therefore have a greater stimu-
lative effect on production and
employment.
The import surtax will raise
the price of imports and lead
some Americans to buy domesti-
cally-produced goods -such as
automobiles -- rather than im-
ports.
Likewise to the extent that
the freeing of foreign exchange
rates causes the dollar prices of
some foreign currencies-for ex-
ample the Japanese yen-to rise,
there will be both reductions in
U.S. imports and increases in
U.S. exports, both of which will
help to stimulate domestic pro-
duction and employment.
According to most economic
forecasts, the economy was ex-
pected to grow rapidly enough
to reduce the unemployment
rate slightly from the current
level even without the Presi-
dent's proposed New Economic
Policy. Tentative forecasts that
have been made incorporating
the President's program suggest
that it will further accelerate
growth and reduce unemploy-
ment.
Finally, even if the President's
fiscal program does i m p a r t
enough stimulus to the economy
to get it moving vigorously back
toward full employment, some
-- - -- -
observers nevertheless find the
program objectionable.
There are two reasons for this.
One is that in the eyes of some
the tax reductions proposed are
slanted too much toward busi-
ness. The investment tax credit,
when combined with earlier ac-
tion by the Treasury Depart-
ment to liberalize the tax treat-
ment of depreciation, w o u I d
provide about $82 billion of
tax relief for business.
This is much greater than the
tax relief for individuals under
the program. This imbalance in
the proposed tax program seems
not only inequitable but politi-
cally unwise, because it reduces
the chances of achieving or-
ganiszed labor's acceptance of
the new wage-price p o 1i c y,
which is absolutely vital to the
success of the program,
Apart from the alleged im-
balance in the tax program,
some find the whole idea of the
new tax cuts objectionable since
they sacrifice some $10 billion
a year of the long-term revenue
capacity of the Federal tax sys-
tem, which will be badly needed
to finance vital social and en-
vironmental programs in the
years ahead.
According to this view, which
I share, our national priorities
would have been better served
if the President had proposed
increases in federal expenditures
rather than tax cuts.
Dollar devaluation suggested
(Continued from Page 3)
In Washington, President Nix-
on's deputy press secretary Ger-
ald L. Warren had no comment
on the action of the European
finance ministers. He said
Treasury Secretary John B.
Connally "is going over there
and I am sure he will adequate-
ly describe the administration's
view."
71
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