ECONOMIC

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CHAPTER 4Policies to Increase SupplyMACRO<strong>ECONOMIC</strong> POLICIES are designed to encourage growth inaggregate demand and to ensure full utilization of our resources withoutaccelerating inflation. However, there are limits to what demand managementpolicies by themselves can do in achieving these objectives. It is thereforenecessary to supplement such policies with programs that will promotethe efficient use of human and material resources and thereby increase productivecapacity. This microeconomic approach has received less emphasisthan monetary and fiscal policies in the past. Nevertheless more efficientmarkets and greater effective supply can complement increases in aggregatedemand to bring about larger gains in employment and real growth withless inflationary pressure.In Chapter 1 we discussed the sources of the recent productivity slowdownin the private sector. To some extent the lower rate of productivityincrease and the accompanying decline in the growth of potential outputare related to the impact of the Federal Government on various sectors ofthe economy. This chapter discusses some major issues and possible approachesto policy in several areas where Government is involved in economicactivity: labor markets, the regulation of business, agriculturalmarkets, and tax policy.STRUCTURAL AND INDUCED UNEMPLOYMENTOutput and employment can be increased by improving the efficiencywith which labor resources are utilized. Improvements can be accomplishedby a redesign of public programs to reduce involuntary unemployment andby lessening the incentives that induce unemployment. Unemploymentproblems and proposed policies have been discussed in some detail in recentEconomic Reports. This section summarizes some of the major issues regardingstructural and induced unemployment, focusing on policy measuresintended to generate a more efficient use of the Nation's labor resources.An examination of policies to reduce unemployment requires an understandingof the kinds of unemployment and their causes. Frictional unemploymentarises from the normal operation of the labor market; cyclicalunemployment is the result of a less than full utilization of productivecapacity due to a recession; induced unemployment is a consequence of136
implicit and explicit subsidies built into public programs; and long-term orstructural unemployment is caused by rigidities that create an imbalancebetween the skills and other characteristics possessed by workers and thosedemanded in the labor market.FRICTIONAL AND CYCLICAL UNEMPLOYMENTFrictional unemployment exists even in periods of very low overall unemployment.In a dynamic free-market economy layoffs occur as employersadjust their level of employment to such factors as changes in the relativedemand for goods and services, changes in the relative efficiency of firms,and seasonality in production or consumption. In addition, workers leavejobs to search for better employment opportunities, and they enter andleave the labor force at will. These layoffs and quits facilitate the process ofreallocating workers to more productive activities. Furthermore, whenworkers enter the labor force for the first time or reenter after having beenoutside the labor force for a time, they engage in a period of job search.There is usually a time lag in finding an acceptable job offer, in part becauseworkers, regardless of the cause of their unemployment, may not acceptthe first offer they receive. These lags result in periods of unemploymentthat are generally short and are required if labor resources are to be usedefficiently.Other types of unemployment are likely to be socially wasteful. Much attentionhas been given to the hardships and waste associated with cyclicalunemployment. Cyclical unemployment, the primary target of macroeconomicstabilization policy, will be eliminated when unemployment is reducedto a level where further increases in aggregate demand will affectprimarily the rate of inflation, with little impact on employment and output.Policies to reduce cyclical unemployment are discussed in Chapter 1.Yet even at what economists regard as full employment, some unemploymentmay exist in addition to that which is purely frictional. A part ofthis unemployment is a consequence of, or is induced by, public policy;and some is structural, the result of rigidities in the labor market that makeit difficult for some persons to find a job and remain employed for a longperiod.INDUCED UNEMPLOYMENT AND UNEMPLOYMENT COMPENSATIONInduced unemployment arises from incentives built into some public programs.One source of induced unemployment is the unemployment compensationsystem. Unemployment compensation has proved to be an extremelyuseful instrument for macroeconomic and income distributionpolicies. It serves as an important automatic stabilizer. Without the necessityfor new legislation, additional benefits are paid as unemployment fromjob layoffs increases, thereby helping to maintain the purchasing power ofthe unemployed. The system also serves as a means of distributing the costs ofa recession more equitably: it replaces part of the earnings lost as the result137
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ECONOMICTRANSMITTEDTO THE CONGRESSJ
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CONTENTSPageECONOMIC REPORT OF THE
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ECONOMIC REPORT OF THE PRESIDENTTo
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manent tax rate reductions. My prop
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will help shield us from disruption
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executive branch must undertake a c
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lasting implications of the changes
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THE PRESIDENT:LETTER OF TRANSMITTAL
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CHAPTER 2. ECONOMIC REVIEW OF 1976
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List of Tables and Charts—Continu
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CHAPTER 1Economic Policy and Outloo
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GENERAL POLICY PRINCIPLESTo assure
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3. Economic initiatives should be b
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TABLE 1.—The market value and the
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on investment would increase with i
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MONETARY POLICYThe Federal Reserve
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like the latter part of 1976. The 4
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PRIVATE CONSUMPTIONThe growth of re
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NET EXPORTSIn real terms net export
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LABOR FORGE AND UNEMPLOYMENTIt is e
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led to large first-year catchup inc
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Consumer prices of fuels during 197
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other workers. Productivity is meas
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Since the mid-1950s a dramatic chan
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women's labor force participation;
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The full-employment benchmark has b
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Chart 4Gross National Product, Actu
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groups can be a useful supplement t
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TABLE 7.—Changes in gross nationa
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Relative price movements were appar
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August was followed by a 20 percent
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main price indexes were significant
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A broader measure of labor costs, c
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TABLE 13.—Output, profits, net in
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TABLE 15.—Federal Government rece
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In the unified budget the total sho
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The permanent changes in the Tax Re
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tial output and the full-employment
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For this reason, although the rate
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quarter a year later. The actual gr
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Partly as a result of the desire of
Page 91 and 92: widespread among demographic groups
Page 93 and 94: of longer-term trends. Over the pas
Page 95 and 96: ment and earnings show little cycli
Page 97 and 98: production or real GNP, and this al
Page 99 and 100: percent from 1973. The cost of petr
Page 101 and 102: COMMODITY MARKETS AND FOOD PRICESWo
Page 103 and 104: TABLE 25.—Real income per farm an
Page 105 and 106: While circumstances have enabled a
Page 107 and 108: The policy actions taken in 1975 an
Page 109 and 110: TABLE 27.—Changes in industrial p
Page 111 and 112: States some underspending by public
Page 113 and 114: continued strong domestically gener
Page 115 and 116: GENERAL DEMAND TRENDSEconomic devel
Page 117 and 118: PUBLIC SECTOR DEFICITSThe economic
Page 119 and 120: insurance funds. The requirement th
Page 121 and 122: TABLE 29.—Export shares in trade
Page 123 and 124: Chart 7—ContinuedINDEX, 1973=100
Page 125 and 126: widened and the possibility of borr
Page 127 and 128: Chart 8—ContinuedInterest Rates i
Page 129 and 130: Where stabilization policies are pe
Page 131 and 132: Germany grew more in line with outp
Page 133 and 134: TABLE 32.—Estimated disposition o
Page 135 and 136: ates, and tax changes that facilita
Page 137 and 138: facility is designed to help countr
Page 139 and 140: is necessary that the strongest eco
Page 141: A freezing of relative prices, eith
Page 145 and 146: qualitative conclusions. For exampl
Page 147 and 148: For some youths unemployment is inv
Page 149 and 150: may be as low as 10 percent. Thus t
Page 151 and 152: large subsidies through the tax cre
Page 153 and 154: in the transportation and public ut
Page 155 and 156: trust exemption permits motor carri
Page 157 and 158: purchase less expensive air travel.
Page 159 and 160: produced with higher-cost energy so
Page 161 and 162: of establishing efficient methods o
Page 163 and 164: in the future. Consequently current
Page 165 and 166: demand and supply at support prices
Page 167 and 168: with stringent controls on peanut a
Page 169 and 170: aspects of the tax system which imp
Page 171 and 172: TABLE 35—Change in aUer-tax inter
Page 173 and 174: and raise the return to capital inc
Page 175: come, social security encourages pe
Page 179: LETTER OF TRANSMITTALCOUNCIL OF ECO
Page 182 and 183: RESPONSIBILITIES OF THE COUNCILThe
Page 184 and 185: the Administration's economic polic
Page 186 and 187: member of the senior staff, and Rob
Page 189 and 190: CONTENTSNATIONAL INCOME OR EXPENDIT
Page 191: PageB-76. Estimated ownership of pu
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TABLE B-2.—Gross national product
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TABLE B-3.—Implicit price deflato
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TABLE B-4.—Implicit price deflato
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TABLE B~6.—Gross national product
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TABLE B-ll.—Gross domestic produc
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TABLE B-13.—Personal consumption
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TABLE B-15.—Inventories and final
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TABLE B-17.—Relation of gross nat
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TABLE B-19.—National income by ty
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TABLE B-20.—Sources of personal i
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TABLE B-21.—Disposition of person
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19291933Year orquarter1939...194019
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TABLE B~25.- -Number and money inco
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TABLE B-27.—Noninstitutional popu
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TABLE B-28.—Civilian employment a
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TABLE B-30.— Unemployment by dura
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TABLE B-32.—Wage and salary worke
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TABLE B-33.—Average weekly hours
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TABLE B-35.—Productivity and rela
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PRODUCTION AND BUSINESS ACTIVITYTAB
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TABLE B-39.—Industrial production
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TABLE B-41.—New construction acti
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TABLE B-42.—New housing units sta
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TABLE B-44.—Sales and inventories
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TABLE B-46.'—Manufacturers 1 new
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TABLE B-48.—Consumer price indexe
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TABLE B—50.—Consumer price inde
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TABLE B-52.—Percent changes in co
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19291933193919401941194219431944194
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TABLE B-54.—Wholesale price index
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TABLE B-56.—Percent changes in wh
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TABLE B-58.—Commercial bank loans
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TABLE B-60.—Total funds raised in
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TABLE B-61.—Federal Reserve Bank
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TABLE B-63.—Bond yields and inter
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TABLE B-64,—Instalment credit ext
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TABLE B-66.— Mortgage debt outsta
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GOVERNMENT FINANCETABLE B-68.—Fed
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TABLE B-69.—Federal budget receip
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TABLE B-71.—Receipts and expendit
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TABLE B-73.—Receipts and expendit
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TABLE B-75.—Interest-bearing publ
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TABLE B-77.—Average length and ma
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TABLE B-79.—Corporate profits by
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TABLE B—80.—-Corporate profits
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TABLE B1-81.—Sales, profits, and
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TABLE B-83.—Relation of profits a
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TABLE B-85.—Current assets and li
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TABLE B-87.—Common stock prices a
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192919331939Year orquarter19401941
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TABLE B-91.—Farm population, empl
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TABLI. B-93.—Selected measures of
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INTERNATIONAL STATISTICSTABLE B-95.
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TABLE B-96.—U.S. merchandise expo
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TABLE B-98.—U.S. overseas loans a
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TABLE B-100.—U.S. reserve assets,
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TABLE B-102.—Price changes in int
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ECONOMIC

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