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ADVANCE FOR RELEASE: SUNDAY AMs APRIL 23, 1972

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IINIXONOMICS -- A RECORD OF ECONOMIC POLICY MISJUDGMENT AND MI SMANAGEMENT II , DEMOCRATIC,POLICY GROUP CHARGES

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WASHINGTON, April 22 -- In a report to the 1972 Democratic

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ti.,j,~': }l"t\ait~'orm 'committee, the Economic Affairs Committee of the Democratic CD

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Policy Council held the Nixon Administration's mismanaged economic

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policies responsible for lIaccelerated inflation, rising unemployment,

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the first recession in a decade, a staggering loss of production, the

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first international trade deficit in many decades, and a forced reducti n

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in the international value of the dollar.1I

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Prepared under the chairmanship of Gardner Ackley, and vice chairmanship of Walter W. Heller, both former CEA chairmen, the report is the fifth in a series of issue papers to be released by Democratic National Chairman Lawrence F. O'Brien, under a new convention procedure recommended by the O'Hara Commission.

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In reviewing the deterioration of the economy under Mr. Nixon, the report charges: liThe disastrous outcome of Nixonomics stems directly from the notorious 'game plan'. It was anchored in the stubbornly held belief that the only effective way to curb inflation :.:'1 ~~, to tighten the screws on the economy until rising unemployment "j'I:W:bll limit wage advances and dwindling markets will hold down prices. II ,, "lit I": ' ' ' . . Ii: :jt<,:": I . . " .' " Wh~le agree~ng that the New Econom~c Pol~cy II ~s at least I' a step in the right direction," the report notes that lithe delay was costly and we will pay the penalty for years to come. 1I The Democratic economists also question the traditional Republican IItrickle down" approach ot tax cuts for business, instead of raising consumer purchasing power, pointing out that the new policies cannot create the millions of new jobs needed to reduce the unemployment rate.

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The report further notes that the Phase II mechansims are not adequate to the job. The Price Commission's present resources and policies cannot m~et the Administration goal of 2 1/2 percent inflatio~ rate by year end.

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Democratic Program" "

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a Democ:atic program for "recovery and stab~l~zat~on, w~th part~cular emphas~s on attaining the 4 percent unemployment goal as a minimum objective. Key components of this program are:

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tH~. PEMOCRATIC POLICY COUNCIL of the Democratic National Committee 2600 Virginia Avenue, N.W., Washington, D.C. 20037 I (202) 333-8750 • night: 333-0161

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Fiscal flexibility. (1) Tax flexibility through a "0 routine surcharge -- positive, negative or zero ~- to ensure quick f response to changes in the economy. (2) Expenditureflexibilitl 8 to better coordinate appropriations and total expenditures. .~ (3) Automatic flexibilitl in-expenditures, such as unemployment insuran~, welfare programs, "cyclical" revenue sharing with states and ~ municipalities to cushion economic swingso g: :r CD

-- Size of total budget. While urging further development of budgetary evaluation to improve efficiency and eliminate waste, the report emphasizes that substantial new expenditure programs to solve urgent social problems will probably be necessary and must be examined in the light of the nation's needs and priorities. j',

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' " ' -- Tax reform. If more revenues are needed, the first 'should be tax reform. Reasoning that many present loopholes 'are outmoded and inequitable, the report states that the individual and corporate taxes "are badly in need of reform. 1I The report notes that, failing reform or if large revenue increases are needed, an increase in the federal tax rate is IIpreferable to a natiorial sales tax. II

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" -- waEe and Price Policy. The report recommends a ~ permanent, flexile and equitable system to IIcontrol creeping 'inflation[, at high employment. 1I Based on the consent and participation of those ~ whose wages and prices are controlled, such a system must have specifi~ legislative authority. ~ ()

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In releasing the report, O'Brien emphasized that the views and recommendations contained in the economic report are those of the members of the Committee on Economic Affairs.

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"We do not presume to speak for anyone in the Democratic Party other than those who directly had a role in the preparation of these reports. However, we are confident that these views will be ~fforded the most serious consideration by the Platform Committee membe,rs in writing the 1972 Democratic Platform,1I O'Brien said.

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Other reports to be released iriclude education, freedom of information, farm' income,', women's political power, housing, national regional development policy, the urban crisis, intelligence and security, the environment, consumers, and international.affairs., The full text of the report of the committee on economic affairs follows:

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ISSUES AND ALTERNATIVES IN ECONOMIC POLICY

Gardner"Ackiey, Chairman WcHterW .~':Heller,ViceChairman

NIXONOMICS The Economic Record of the Nixon Administration , Judged by any objective standard, the economic policies of the . present administration have beeila dismal failure , as even Mr. Nixon was forced to admit in his abrupt turnabout last August 15.

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The administration came into office with bright promises of assuring prosperity, halting inflation, and strengthening the international position of the dollar. Instead, it achieved a·ccelerating inflation, rising unemployment, the first recession in a decade, a staggering loss of production, the first international trade deficit in many decades, and a forced reduction in the international value of the doUar.

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Let's look at the sorry record ·of Nixonomigs-- a record of economic policy misjudgment and mismanagement so bad it must be seen to be believed:

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• lobs . From the preceding eight Republican years, the Kennedy Administration inherited a legacy of 5 million workers I or 7 per cent of our labor force, unable to find jobs. Eight Democratic years succeeded in reducing unemployment to 3.3 per cent -- the lowest level since the Korean War. Three Nixon years scuttled this achievement; all during 1971, five million or more were again jobless, and the unemployment rate had zoomed to 6 per cent. Unemployment exceeded lOper, cent among non-whites, and 17 per cent amonQ teen-agers. .. • Inflation. This increase in joblessness was the deliberate and purposeful Nixon prescription: for curbing inflation. But inflation, far from being restrained, accelerated. Consumer prices had risen 4.2 per cent in 1968, not a good record. Yet, a s unemployment rose, so did the rate of inflation. Prices increased 5.4 per cent in 1969, 5.9 per cent in 1970 and, despite the'~freeze" in August, 4.3 perCe1)t in 1971. .

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• Production. As Nixonomics took hold, our economy turned slack and sluggish. Between 1969 and 1971, total U. S.output (Gross National Product in constant prices) increased only 2 per cent.· Total industrial output in 1971 was actually 3.8 per cent lower than in 1969 .. In contrast, . between 1961 and 1968'total output had'increased atan average rate of 5.1 per cent a year, and industrial production at an average of 6.7 per cent per year.

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• In the last quarter of 1968, 87.2 per cent of our industrial capacity was being utilized. In the last quarter of 1971 use of capaci~y had ·plp.m.metegto 74. o per cent,alow unequalled . since the· Republican reces~ion in 195B~ • Operating the economy below full employment during 1970 and 1971 has already cost: us $128 billion loss of potential output. By election day, the loss will have reached $175 l billion. During 1973, itwil,l reach alld surpass $1,000 per capita. () o

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• Profits. Business' profits, declined sharply throughout the Nixon ;Administration. As a percentage return on stockholders'equity, corporate profits in 1970 were lower than in any year since the recession year 1961. And 1971 showed .only a modest recovery.

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• Take Home Pay. For those at work, even the sharp wage increases of recent years have barely kept up with rising prices , while lagging production has cut the average working week and held down workers' incomes. For afully .... employed factory worker with three dependents, average "real" take-home pay in 1971 was no higher than in 1968.

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.• Dollar Devaluation ~, The U .,S .b.alance of payments has steadily deteriorated. We experienced an adverse balance of merchandise trade in 1971 for the first time in many decades, nearly $3 billion. Our total foreign deficit in 1971 approached $30 billion .. Dollardevaluation and suspension of convertibility were the inevitable results.

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• Fiscal Blunders. The fiscal record of this' administration verges on the unbelievable. Because its fumbling policies retarded rather than stimulated recovery, the resulting loss of revenue has' produced by far the 'largest budget deficits .since World War II. In fact, the total deficit of the . four Nixon years will amount to about one ... third of the aggregate. deficits all the preceding years in our history. A rec.ord has also been set for mis- .' calculations; never before have revenue estimates been so far in error. Yet another record has been set in tl1e manipulatio~ 'ot'budget f~gures to make them look good and to justify policies thcin cannotbejustified.

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The Theory of the. Old "Game Plan" . . . . . • ". . ~. .. . . .g The disastrous outcome of Nixonomicsstems directly from the notorious 3 ... . -"game ·plan".· It was anchored in.the stqbborrilyheld belief that. the only J3 effective way to curb. inflation .is, to tJghten the. screws on the economy until e; o riSing unemployment w1l1limit wage advanc.es, and dWindling markets will . hold down prices.' As soon as he took office, the President sharply rejected any extension of, the efforts of the Kennedy and Johnson Administrations to o obtain the support of labor and business in moderating their wa9~and price .9.. objectives in the overriding public interest -- a virtual invitation for wage z and price increases. . . o .

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The Republican formula sought to check inflation solely by re tarding economic growth and Creating unemployment -- with the inevitable cost in terms of hu'man distress and social unrest. Retarded growth and rising, unemployment were achieved -- only too successfully -but the expected tradeoff failed to materialize; even in recession~ price increases did not siowdown, they sped up. Conceivably , if the screws were turned doWn long and ha'rd'enough to cause a real depression, inflation would be retarded: but even the Nixon Administration could not contemplate so high a price. As serious a mistake as it was to adopt this "game plan", much' less forgiveable was the protracted failure to recognize that it was not () o working. The February 1971 Economic Report proclalmed that the year ::> would be one of rapid recovery. It set a target for GNP that was almost ~ 0' universally recognized as wholly unrealistic (given the pOlicies,adopted), ::> £. even by some of Mr. Nixon's own economic advisers. When Bureau of CD Labor Statistics officials commented, as they had always been expected CD o to do, on the sig~ificance of the disappointing economic statistics the n o Bureau was releasing, the reaction was not to take a hard look at what was ::> Ul happening bllt rather to muzzle the officials whose interpretations were C honest but distasteful. When the Democratic Congress granted the President iD' the authority to control prices and wages directly, he condemned such controls, a'nd kept insisting that he would never use the authority -- up () to the final days before his abrupt confession of failure last August. o (0 II> II>

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The New Economic Policy

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Confession of error, though belated, is at least a step in the ~ right dire~tion. But thedelay was costly, and we willpay the penalty ~. , for years to come. Thebahkruptcourse of clamping down on t h e ' ~ ec'onomy,. while. letting inflation rage contributed .. . . unchecked, . largely to the 0Q.. swollen budget deficits of 1972 and 1973, and clearly aggravated the deterior~ . . . . . 0 ation of, our balance, of. .payments and the. collapse of the dollar. The fa ilure 5' ' . . . • . 3 to ta ke firm steps earlier to hold down rising prices led directly to the very ,0 large wage increases in key industties in 1970 and 1971, which Workers demanded and received to keep 'pace with soaring living costs. This failure ~ has already guaranteed higher costs and selling prices in the years a head, s= . further impairing the competitiveness of American p'roducts on international ~ markets.' '.' ~ j

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Even when Mr. Nixon'finally decided to use the price-wage authority ~ the Congress had given him, and took the drastic steps that had become 0 necessary. on dollar devaluation, his.fiscal poliCies retained the traditional Republican bias. Instead of concentrating on raiSing consumer purchasing ~

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pDwer,he persisted in the IItr~ckle d.D'ltVn II theDry. The tax package he propDsed in AUguStwDuld h~vegivep,business $5 billiDn in tax relief frDm an investment credit, .oIl tDpa! ,$3. l/ZbilliDn .of IIdepreciatiDn refDrmll granted ear lier the same year. Th,eDemDcratic CDngress managed tD bDDst the benefits tD CDnsumers a little, to pare the investment credit tD $3 1/2 billiDn, and tD makethedeprec#ation reform less generDus. But the entire $5 1/2 billiDn .of business:taxbenefits wDuld have prDvided a far mDre effective stimulus had it been made directly available tD the CDnsumer. SD wDuld the $2 1/2 billiDn cutin excise taxes .on autDmDbiles, if spread thrDughDut the cDmmunity rather than limited tD new car buyers. MDreDever, Mr. NixDn prDpDsed tD .cancel mDst .of the fiscal stimulus frDm tax cuts by a .$4 3/4 billiDn cut in federal spending.

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His policies were thus quite unable tD create the milliDnS .of new jDbs needed to absorb the annual growth of .our civilian labDr fDrce, plus the additiDnal milliDns of jDbs needed if we are to mDveback tDward full employment. Even under the New ECDnDmic PDlicy, job creatiDnhas barely kept pace with labDr fDrce grDwth,. and unemplDyment remains clDse tD the intDlerable 6 per cent. Only in 1972 has Mr. NixDn finally tried tD pump up expenditures, thrDugh the largestannual increase in federal spending since .WDrld War U, ina desperate but inadequate effDrt tD get the unemplDyment rate mDving dDwn byelectiDn day. He hDpes, .of cDurse, that the vDters will:npJ recall hDW many jDbspispDlicies CDst the natiDn.' .

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AlthDugh the patriDtic cOD~eratiDn .of nearly everYDnemade th~ wageprice freeze a 90'-day success, Phs'se II has been a disappDintment right ~ frDm the s ta tt. g'

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The Pay BDard, in particular, has been given nD clear pDlicy guidance and flDunders in a mDra ss .of incDnsistentrulings which run the gamut frDm ,~ c apparent inequity tD excessive generosity. The Price CDmmissiDn strives r .' '. f. earnestly tD carry .out its pDorly-defined mandate: but it has nDt been given ~ reSDurces adequate tD' dD a JDb acrDSS the bDard, and it has. nDt had the Q.. sense tD CDncentrate them intensively .on the areas that are mDst critical and g sensitive ~ It hasadDptedan unduly generDus pDlicy .of passing through CDSt increases with full markups, and isapprDving substantial price bDDstsby ,5 big business which a re clearly .incDnsistent with its gDal .of limiting price ~ increases tD 2 1/2 per cent by year end . . .~ ::l.

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The De pa rtment of Agriculture nDwe s tima te s .that· grDCery prices will rise 4 1/2 per cent in 1972. Coupled with cDnt1nuing sizeable illcreases . in the prices .of services, this alDne wDuld raise the CDnsUmer Price Index . by nearly 3 per cent even befDre tak~ing account of riSing prices .of nDn-fDDd cDmmDdit1esthat represent 40 percent .of tDtal cc)ns'umer expenditures.

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On the unemployment front, the Council of Economic ,Advisers hopes -g.. fora reduction to 5 per cent by year..,. end; but this too seems most unlikely ~ o given the rapid increase both of our labor -force and of labor productivity. ~ A drop of the unemployment rate even to 5 1/2 per cent may be difficult to ; achieve by a program that reli,es onl1.opes ra~her than action .. The most ~ urgent task confronting us 'is to' create more jobs'; yet the administration g: accepted the Public Services jobs program enacted by the Democratic Congress [ only reluctantly, and has scornfully rejected the Reuss proposal for really ; substantial jobCreation. ~

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So much for the sad record of three Nixon years. What is needed for the future, to lift us out of the present morass and, in PresIdent Kennedy's words, to get America moving again ?We cannot afford an administration dedicated to thepropositi0tl that 4 1/2 'million workers need noffind jobs in our economy. The earliest possible restoration of full employment must be our paramount goal, and a 4 per c'ent unemployment rate our 'minimum objective. What should be the Democratic program for recbverya.nd stabilization? Some answers seem very clear; others will need careful and continuing study, which will take account of the needs and aspirations of all of our people, of the opportunities now open to us, and of the best technical knowledge of economists and other experts ..

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In good- mea sure, the adoption and unswervin.g pursuit of a sound ~ and equitable fiscal pol1cyls the key to steady prosperity and growth. ~, , 'Unlike Republicans, Democrats have long been aware that budget deficits' .are essen.tial when the economy.isoperating below its potential (although Q... the huge Nixon deficits expected for 1972 ahd programmect' for 1973 would ~ have been unnecessary if more timely and more effective action had been ~ taken earlier to expand the economy). But now thata Republican administratio~ has finally embraced deficits -- and even "full-employment" deficits -~ when the economy is lagging seriously, there should remain no significant ~ political opposition to using taxes and the budget flexibly and constructively to sustain prosperity . . .

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Yet just as there need be no fear of deficits as such in times of economic slack so we must-recognize that soundfisdal policy may require substantial surpluses in tiinesof prosperity. Not "balancIng the budget" , but deciding when deficits or surpluses are rleeded, how big ,and how to achieve them constitute the real problems of fiscal policy.

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It is notour task to deal with the question of priorities within any

given total of btidgetaryexpenditures.· Here we address ourselves to three other questions related to fiscal policy.

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Obtaining nece-ssary fiscal flexibility ~ .

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." Tax flexibility. Manyeconomlsts believe that the President' s ~" Budget should each year routinely propose a uniform percentage surcharge -- Q.. CD positive, negative, or zero -- on all personal income and profits taxes ~ CD o The direction (plus or minus) and the size of the proposed surcharge would n ::r be adjusted to the proposed size of the expenditure budget, the net impact o 0.. of tax changes proposed for other reasons , and the expected state of the pri vate ,economy. :;0 CI>

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In ,almost every year-of the.pastdecade, some tax rate change has ~ ~ . been proposed for stabilization purposes .. Now it is clear that the rate () change must be considered a routlnequestion for every budget. And, unless ~ tax rate changes "proposed for other reasons happen to provide the right amoun~" of stimulus (given proposed expenditures and the state of the economy), this g annual propose~ change should take the form ofa positive or negative surcharge on income taxes. ~

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Some economists further propose that the President be delegated ~" )imited discretionary authority (subject, to Congressional veto) to impose a ::ipositive or negative surcharge in case unexpected changes occur in the rate Q... of budget expenditures or in the strength of the private economy after Congres~ has acted for that year on taxes and on the size of the budget .. It is probably gtoo early to conclude that this authority is necessary untU we have further Jl experience with the successofsy,stema:tic once-a-year adjustments. ~

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-Expenditure flexibility. ,Congress needs to develop some better means than it now has to consider each year and to dete,rmine whether the total size of the President's proposed budget is appropriate in view of what it may expecfto"enact in the ,way of tax rate changes. Thereafter, it needs to have some better means than now exists to see to it that the collection of separate appropriation bills it enacts will permit expenditures of the total size that it has previou~ly determined was appropriate.

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Failing such better means COl'19reSS must accept the exercise of Presidential discretion to withhold appropriated funds -- or to release funds previously withheld --whenever the .private economy appears to shift from a previously expected path and previously enacted tax rate or spending changes therefore become clearly inappropriate . The fact that the present in<;::umbent has used such discretion arbitrarily and unwisely does not , negate the principle. Perhaps some formal authority should to provided-authorizing (and limiting) the' President's power in these reppects.

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-Automatic flexibility. In addition to the expenditure flexibility that arises from discretionary changes in the budget, there is now an increasing degree of automatic flexibility in expenditures, lifting them when the economy is slack and curtailing them when it booms. . In addition to unemployment insurance and welfare programs, there is now ...,- on Democratic initiative -- a .program of public service employment which automatically . turns off as full employment is restored. This program needs to become a permanent feature of our stabilization policy. An even more powerful program of automatic stabilization would ar ise from Democratic proposals for a "cyclical" form of revenue sharing with cities and states, under which the federal government would rushion state and local governments from the revenue losses that arise from the fa! lure of the national economic policy to maintain , a prosp~rous,and steadily expanding economy.

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conse'rvatives perennially fear that federal budgets, even if soundly .financed, have. an inevitable tendency to expand without limit;' and that the budget is already -- or is always about to become -- ,"too big" for the health of the economy. The fact is that the federal budget canbe as big as it needs to be, so long as its financing is soundly adapted to the needs of the country . .

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Still, the total budget should be no bigger than it needs to be to achieve the nation' sobjectives . Thus, Democrats can be and areas interestedo ': . as are Republicans in curbing waste and inefficiency in government, in g: • ' . ' . . 0 pro~ptly abol1shing or altering old programs the need for which has changed, g and in making sure that new programs are so designed as to achieve their ~ objectives with the minimum necessary expenditure of public fu~ds. ~ .

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I~ recent years, new methods of budgetary eValuation have been Q.. introduced by. both Democrats and Republicans. These should be continued go ' . 3 _ and strengthened. Moreover ,government reorganizations to improve efficiency~ and eliminate waste need to be the constant concern of both the Executive ,'" 0Br~nch and the. Congress . ~

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For the future, it is quite probable that substantial new, expenditure programs to solve urgent social problems will emerge from the reexamina tion of the nation's needs and piiorities which Democrats seek. These may call for a permanent enlargement of federal revenues. If this is the case, we should not hesitate to undertake the necessary expenditure programs, up to the point at which the social value of public expenditures no longer exceeds '"-- at the margin -- the soCial value of the private expenditures which would be foregone through the enactment and collection of equitable taxes necessary to pay for those expenditures. Judgments of this kind are basically economic~ but they can only be made and must be made through our democratic political processes. '

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Tax reforms will obviously be resisted by groups now enjoying cE the benefits of the loopholes and inconsistencies in our tax structure; ~ 0' and a t least some of this resistance will stem from legitimate concerns. 9... Painless reform is not possible; the issues involve the. relative weights accorde4i to the claims of speCial groups and that of the broad public interest; often the two are closely interrelated. Most present tax concessIons were 'provided ~ ,not capriciously, but with significant social or economic objectives in mind. ~', L , ' , ~

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Butmany of these objectives have lost their force in today's world, and all merit careful ree xamination. It is certainly riot tolerable that some of the very wealthy pay no federal income ta:xes; that others of the rich pay much less than their appropriate share; that the poor and many with middle incomes have no comparable avenues of shelter; and that-- at arty income level .,;.- people with the same incomes but d,erived indifferent ways pay unequally the costs of government. The Nixon Administration has promised tax reform proposals, but they remain con'spicuous by their absence.

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, ' Recent testimony by experts before the JOiritEcortomic Committee has demonstrated that the individual and corp6ratetaxes-'" the nc~tion' S best and most progressive tax sources' -- are' badly in need of reform. At

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would given prese nt, 'rates and incom e level s, a comp rehen sive,r eform idual indiv the yield more than $70 billio n in addit ional reven ue from es Incom etax alone . SU,ch a reforr nwbu ld,'i.r i"effe ct, treat ell sburc state Of;l st lntere of incom e equal ly, inclu ding real1 ze'dc apita l gains 'and: t;and and local bonds ; wpuld limit ,depl etiori allow ances to actua l.cos tages advan would elimi nate most of th~ itemiZ ed deduc tions and the rate How of incom e-spl itting for 'married coupl es . This would obvio usly'a mass tve acros s"';th e-boa rd cuts in incom e tax rates , as well asa consi derab le eXpa nsion of spend ing.' Less drast ic propo sals migh t inclli de: Revis ion oLthe capit al ent of the gains tax; furthe r reduc tion of deple tion allow ances ; -improvem ionof the minimum tax;. elimi natio n of unnec essar y dedtictj.ons; and tevis ly-a~thorized tax treatm ent of the famil y. In addit ion, repea l of the.recent A comb inalibera lizati on of depre ciatio n allow ances seem s appro priate . r for new tion of sever al of these reforms could well remove any need eithe perio d. le derab tax sourc es of for the raisin g of tax rates for some consi I

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ed, • Newt ax sourc es. If signi fican t tax refoI:ITVl;' ca nnot be enact -:..: for or if extrem ely large incre ases in feder al reven ues are neede cf tion -educa exam ple, toinc rease the role of feder al finanCing In publi c . 'new federal~axes will inevi tebly beco nside red ~ yet The Nixon Admi nistra tion has floate d a trial baUo on -- b~t as ,' (VAT) no forma l propo sal -- for an acros s-the -boar d Velte Added Tax effec t, in is, ~.It e Europ simil ar to that now impos ed inmo st of Weste rn' cal jurisa natio nal sales tax. Its reven ues would be trans ferie dto·lo exces sive the ing dictio ns, prim~rily for educa tiona l purpo ses, thus reliev struc tured ; . :; b~rden nO'Y(botne mainl y by prope rty taxes ~. No mati:~r how brack ets, howe ver, s,u6h a tax wou,ld i>e,inhereritly regre ssive in the top exist s in furthe r erodi,i)g the reiati vely linlit~d progr essiv e eleme nt that Econo mists l.lre~ our prese nt co mlllned feder al, state , and ioea 1 tax strticf princ ipal differ as t(),.who bears the burde n of the prope rty tax~ now the what some sourc e of educa tion funds . But even if the prope rty taxis hardly the regre ssive , subst itutin g one regre ssive tax for anoth er seem s of our reform rate best way of .achie ving the desir ed objec tive . Even mode objec tives feder al incom e,tax struc turec ou1d achie ve the same. reven ue neede d __ were, ues much more equn ably. - And if. still furthe r fed~ral 'reven land corpo rate or if tax re~onriwere block ed -- a mode stinc rease lnper sona able to a incom e ta~rates, now well below 1963 level s, woul d'bep refer natiom H sale s tax.

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We regard,itimperaUve that monetary and' fiscal policies: be ' cl6selycoordina ted. Inappropriate monetary policy canfhistrateour objectives as re~dily as ill-concelv~Q. fiscal policy; the 'two must move hand in hand.,: The view --still helld by some Republican economists -that monetary policy should move independently,' arid merely 'aim, at a . constant rateoiincrease of money supply (however defined) has now been clearly discredited. Adequate growth of the money s,,!pply is important; but so are interest rates . Unduly high interest rates, such as those achieved during the first two years, of Nlxonomics, retard economic growth :and can havea.catastrophic .impact on major sectors 6f the economy, :especiallyconstruction. The rate of growth of money supply i however measured, cannot be governed by any simplistic formula, but must be constantly adjusted to the changing needs of our economy . And'interest . rates must not be allowed to rise to'levels inconsistent with those needs.

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Mandatory limitations on wages and prices, imposed under the, Phase I freeze and the Phase II controls ,were made necessary 'by the failure of the orlginalNixon gameplan~Phase II, however ,1s working . only imperfectly :and often inequitably ,and certainly. requires immediate andextensivec::hanges . However ,at best, 'mandatorYContrbls provide' no long-term solution to the problem of inflation. OureconomYcannot operate eltherefffciently or equitably for any extended periodundet rigid controls of thiS ,type. ' ,

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. Our owrrpost-war economic history, and that of other western , nations, shows clear evidence of an endemiC inflationary bias ,"with periods of creeping i,nflation followed by peri'ods of more rapid,price' rise, such as that since 1~68. This tendency always becomes st'rotigerasfull employment .:..is approached . "

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Bec8usethesystem that is needed to coIitrole:'reeplrig fnflation at high employment must be thought of as essentiallypermanent, it must be a flexible, system which will not distort economic development. And it must restoasicallyupon the consent and participatiOn ofth6se whose wages and . prices arecontr()lled, a consent which can only derive from a sense that the system oper~tes'equitably, yet can achie'{'e ·the reasohable over-all prlce \

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The agents of such a system must have specified authority that can only derive from legislation. The design of that legislation, and the creation and preservatfonof the necessary atmosphere of mutual trust and confiderice 'afuong the several economic interest groups necessary to the success of such a program must be considered a major responsibility of a Democratic President and Congress.

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Th~ recent currency revaluations had probably become inevitable, in gOOd part because of the failure of Nixoriomics. They should contribute substantially to the improvement of Americaric:ompetitiveness in international affairs.

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, By the same token, however, theteduced value of the dollar, along 0.. with the expected further reforms of the international monetary system, ~. should remove most of the pressures for quantitative import controls, ~ whether mand~tory or "voluntary". We must avoid, at all costs, the neo~ isolationism that seeks to insulate our marketsfr6m legitiinate foreign ~ competition; This '1s essential to protect the corisumingpublic from l/ excessive prices~It is essential, also, to fosle't the g,radual readjustment ~ of our economy to changing domestic andwbdd conditi()'rls', and to guide ~. each nation's productive' activities ihto tl1ose1inesofprpduction in which £. it has comparative advantage or, at least, equality.;' ,Only through this kind ~ of international division of labor can the economfc welfare of citizens of every country,-::--'." inciuding our own .-- be maximized, '. a'nd'the economic ~ . ::s I, development of 'poorer nations assured. We recognize that world competition--~'" :ifke domes'tic competition -- may have disruptive impact' on some industries, ~ but the ansWer should be found ill adequate programs of i'adjustment assis~ tance ", notln building arbitrary barriers that would only set off a' train of ~ reprisals toth~ ihjury of alL ' .' ~

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We must, at the same time, cohtinueour efforts to induce our trading partners to treat our exports equitably. The objective of maximizihg ~ world trade cannot be achieved by us alone; we must expect other countries to treat our international trade as fairly as we treat theirs . A major initiative ~ in the reciprocal reduction of trade barriers on a world-wide basis is long .~ -overdue, cqntinuing the constructive tradition followed by Presidents Rooseve1t,~ Truman I Kennedy and Johnson, interrupted only uhderthe Nixon Administration. 0. ' . . w "

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These objectives will be possible only if international monetary reform ~ succeeds in permitting increased flexibility of exchange rates. The Nixon ~. '0 Administration's efforts toward monetary reform have essentially continued along lines initiated under two Democratic Presidents; they need to be carried for:ward aggressively and pushed to fruition in the several years ahead. z

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