ECONOMIC

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A number of factors may have prevented the restoration of business confidenceand hence restrained investment growth. Wage and price controlsare still a recent memory, and fears of a reacceleration of inflation have notbeen completely dispelled. Recollections of the severe 1974-75 recession mayalso restrain business confidence. Because fears of a renewed inflationrecessioncycle may encourage businesses to increase liquidity rather thaninvest in plant and equipment, confidence must be rebuilt before salesgrowth will be translated into higher capital outlays.Laws and regulations to provide necessary protection for the environmentalso create costs and uncertainties. Not only does the spread of regulationsraise production costs, but long-run cost and profit calculations are made lesscertain because of the possibility of future changes in regulations. For instance,if' a change in environmental laws may affect the operations of a newplant, then the risk associated with building this plant is correspondinglyincreased. The impact is more severe on longer-lived investments whichrequire longer commitments with less flexibility once they are made.It is of course very difficult to prove that a decline in business confidenceor an increase in risk premiums is responsible for the failure of investmentto rise as much as might have been expected during the current recovery.This difficulty results partly from our inability to directly measure the uncertaintyor accurately assess the expectational factors and the environmentwithin which long-term investment decisions are made. Most evidence forthe view that business confidence remains poor is qualitative and involvesa degree of casual empiricism. One quantitative indicator of the expectationsaffecting business investment is the market value of a corporation'sstocks and of net interest-bearing debt relative to the replacement cost ofits assets. If, for example, assets are valued in the market significantly abovetheir replacement cost, corporations will be encouraged to invest in newequipment and thereby create capital gains for the owners of their securities.On the other hand, if assets are valued below their replacement cost/corporations which sell new securities to buy new capital goods may becreating capital losses for their security holders. In the latter case we caninfer that the cost of capital has risen relative to the average profitabilityof past investment projects and that new investment will be discouraged.Of course, at the margin the expected rate of return on a significant numberof potential new investments will remain above the cost of capital, eventhough existing assets on average are valued below their replacement cost.Thus even if the market value of a firm fell below the replacement cost ofits assets this would not mean the end of investment incentives. It would beespecially inappropriate to draw such conclusions from estimated aggregatescomposed of heterogeneous corporations.Nevertheless it is probably safe to infer that the almost continuous declinein the ratio of the market value of nonfmancial corporations to the replacementcost of their assets during the last few years (Table 1 and Chart 2) is anindication that investment incentives are much lower currently than in the28
TABLE 1.—The market value and the replacement cost of net assets of nonfinancialcorporations, 1960-76YearTotalMarket valueInterestbearingdebt*Equity 2Replacement cost of net assetsTotalNet noninterestbearingfinancialassets 3Net stockof depreciablefixedassets andinventories3Ratio ofmarketvalue toreplacementcostof netassetsRatio ofrealbusinessfixedinvestmenttoreal GNPBillions of dollarsI960..1961..1962..1963..1964..435.6507.9503.9581.0656.6103.8114.8126.0136.7147.9331.8393.1378.0444.2508.7427.0442.9460.9482.2507.261.467.373.378.583.0365.6375.6387.6403.7424.20201470932052950.090.087.089.088.0931965..1966..1967..1968..1969..737.5712.9789.8893.0881.9162.9180.4200.0217.8243.1574.7532.4589.9675.3638.8541.7590.8649.9711.0782.987.291.8100.7109.3117.0454.5499.0549.2601.7665.9361207215256126.103.108.103.103.1061970..1971..1972..1973..1974..787.1934.2093.1166.1106.5267.7296.8330.3386.1428.2519.4637.4762.8780.0678.3858.1925.31,002.51,126.41,319.8126.4135.9149.6166.3181.8731.7789.4852.9960.11,138.0917010090034.838.102.098.100.106.1061975...1976«_.,113.1, 326.2439.4470.0673.8856.21, 494.51,601.4198.3212.31, 296.21,389.1.745.828.093.091i Market value of net interest-bearing debt of nonfinancial corporations (NFCs) adjusted from face value by assuminga maturity of 5 years and discounting a stream of coupon payments equal to the net interest paid by NFCs. The discountrate is assumed to equal Moody's Baa corporate bond yield.* Dividends of NFCs divided by the dividend/price ratio of Standard & Poor's composite index of 500 common stocks.3 Average of year-end values.* Preliminary.Note.—Detail may not add to totals because of rounding.Source: Council of Economic Advisers (based on data from various sources).second half of the 1960s. Even allowing for the possibility that the highvalues of the ratio in the 1960s reflected some temporary overconfidence inthe evaluation of future returns, the significant downward trend is an indicatorthat a lack of confidence may be a factor holding back long-terminvestment commitments now. One inference from this evidence is that adirect stimulus to investment, such as a corporate tax reduction wouldprovide, could hasten the restoration of business confidence and be useful tosupplement the normal accelerator mechanism. Another is that measureswhich would help reduce the risks of substantial changes in the regulatoryclimate over the normal life of fixed assets would also raise investment.Such measures would help to offset the uncertainties which are still restraininginvestment and would make up for the slow growth of productivecapital in the past few years.4. Policy should aim at a steady expansion with balance among the componentsof aggregate demand. An important policy decision in the yearsahead concerns the appropriate amount of fiscal and monetary stimulus tosustain the recovery. In the effort to achieve continued progress towardfull employment we must not create inherently unstable and ultimately29224-250 O - 77 - 3
Page 1: ECONOMICTRANSMITTEDTO THE CONGRESSJ
Page 5: CONTENTSPageECONOMIC REPORT OF THE
Page 9 and 10: ECONOMIC REPORT OF THE PRESIDENTTo
Page 11 and 12: manent tax rate reductions. My prop
Page 13 and 14: will help shield us from disruption
Page 15 and 16: executive branch must undertake a c
Page 17: lasting implications of the changes
Page 21: THE PRESIDENT:LETTER OF TRANSMITTAL
Page 24 and 25: CHAPTER 2. ECONOMIC REVIEW OF 1976
Page 26 and 27: List of Tables and Charts—Continu
Page 29 and 30: CHAPTER 1Economic Policy and Outloo
Page 31 and 32: GENERAL POLICY PRINCIPLESTo assure
Page 33: 3. Economic initiatives should be b
Page 37 and 38: on investment would increase with i
Page 39 and 40: MONETARY POLICYThe Federal Reserve
Page 41 and 42: like the latter part of 1976. The 4
Page 43 and 44: PRIVATE CONSUMPTIONThe growth of re
Page 45 and 46: NET EXPORTSIn real terms net export
Page 47 and 48: LABOR FORGE AND UNEMPLOYMENTIt is e
Page 49 and 50: led to large first-year catchup inc
Page 51 and 52: Consumer prices of fuels during 197
Page 53 and 54: other workers. Productivity is meas
Page 55 and 56: Since the mid-1950s a dramatic chan
Page 57 and 58: women's labor force participation;
Page 59 and 60: The full-employment benchmark has b
Page 61 and 62: Chart 4Gross National Product, Actu
Page 63 and 64: groups can be a useful supplement t
Page 65 and 66: TABLE 7.—Changes in gross nationa
Page 67 and 68: Relative price movements were appar
Page 69 and 70: August was followed by a 20 percent
Page 71 and 72: main price indexes were significant
Page 73 and 74: A broader measure of labor costs, c
Page 75 and 76: TABLE 13.—Output, profits, net in
Page 77 and 78: TABLE 15.—Federal Government rece
Page 79 and 80: In the unified budget the total sho
Page 81 and 82: The permanent changes in the Tax Re
Page 83 and 84: tial output and the full-employment
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For this reason, although the rate
Page 87 and 88:
quarter a year later. The actual gr
Page 89 and 90:
Partly as a result of the desire of
Page 91 and 92:
widespread among demographic groups
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of longer-term trends. Over the pas
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ment and earnings show little cycli
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production or real GNP, and this al
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percent from 1973. The cost of petr
Page 101 and 102:
COMMODITY MARKETS AND FOOD PRICESWo
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TABLE 25.—Real income per farm an
Page 105 and 106:
While circumstances have enabled a
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The policy actions taken in 1975 an
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TABLE 27.—Changes in industrial p
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States some underspending by public
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continued strong domestically gener
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GENERAL DEMAND TRENDSEconomic devel
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PUBLIC SECTOR DEFICITSThe economic
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insurance funds. The requirement th
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TABLE 29.—Export shares in trade
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Chart 7—ContinuedINDEX, 1973=100
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widened and the possibility of borr
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Chart 8—ContinuedInterest Rates i
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Where stabilization policies are pe
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Germany grew more in line with outp
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TABLE 32.—Estimated disposition o
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ates, and tax changes that facilita
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facility is designed to help countr
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is necessary that the strongest eco
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A freezing of relative prices, eith
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implicit and explicit subsidies bui
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qualitative conclusions. For exampl
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For some youths unemployment is inv
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may be as low as 10 percent. Thus t
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large subsidies through the tax cre
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in the transportation and public ut
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trust exemption permits motor carri
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purchase less expensive air travel.
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produced with higher-cost energy so
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of establishing efficient methods o
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in the future. Consequently current
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demand and supply at support prices
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with stringent controls on peanut a
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aspects of the tax system which imp
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TABLE 35—Change in aUer-tax inter
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and raise the return to capital inc
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come, social security encourages pe
Page 179:
LETTER OF TRANSMITTALCOUNCIL OF ECO
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RESPONSIBILITIES OF THE COUNCILThe
Page 184 and 185:
the Administration's economic polic
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member of the senior staff, and Rob
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CONTENTSNATIONAL INCOME OR EXPENDIT
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PageB-76. Estimated ownership of pu
Page 194 and 195:
TABLE B-2.—Gross national product
Page 196 and 197:
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
Page 202 and 203:
Page 204 and 205:
Page 206 and 207:
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
Page 228 and 229:
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
Page 242 and 243:
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
Page 264 and 265:
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
Page 292 and 293:
TABLE B-85.—Current assets and li
Page 294 and 295:
TABLE B-87.—Common stock prices a
Page 296 and 297:
192919331939Year orquarter19401941
Page 298 and 299:
TABLE B-91.—Farm population, empl
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TABLI. B-93.—Selected measures of
Page 302 and 303:
INTERNATIONAL STATISTICSTABLE B-95.
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TABLE B-96.—U.S. merchandise expo
Page 306 and 307:
TABLE B-98.—U.S. overseas loans a
Page 308 and 309:
TABLE B-100.—U.S. reserve assets,
Page 310 and 311:
TABLE B-102.—Price changes in int
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ECONOMIC

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