Economic Report of the President

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At the end of each inflationary episode the economy entered a recession—in1970-71, in 1974-75, and in 1980. Unemployment rosesteeply, and substantial amounts of idle capacity appeared (Table 3).The failure of inflation to fall back to earlier levels is therefore notattributable to excess demand. On the other hand, there clearlywould have been some level of demand low enough to have causedbusiness and labor to moderate the increase in wages and prices substantiallyso as to return to the earlier level of inflation. But for reasonsdiscussed later, the rate of wage and price increase has becomerelatively insensitive to a moderate degree of economic slack. As aconsequence, the cost of the necessary restraint—in terms of additionalunemployment, idle capacity, and lost income, production, andinvestment—would have been extremely high.Federal Budget Deficits as a Cause of InflationThe Federal budget balance at any given time is an importantfactor in determining the level of current aggregate demand in theeconomy. If the Federal budget is in deficit, total spending—privateand public—will be higher than it would be if taxes had been raisedor spending had been cut to produce a balanced Federal budget. Anytax or spending measure that turned a budget deficit into a balancedbudget would tend to reduce demand relative to supply and putdownward pressure on the inflation rate. Furthermore, since businessesmake wage and price decisions at least partly in the light ofwhat they expect market conditions to be, announcements of futurebudget policies have a strong effect on current economic conditionsand on the rate of inflation. Thus budget deficits can contribute toinflation both by being a part of current aggregate demand and byContributing to expectations about future aggregate demand.The existence of important relationships between Federal budgetpolicy and aggregate demand that in turn affect inflation does not,however, support the simple view that budget deficits cause inflationand that inflation could be eliminated if Federal deficits were eliminated.Federal deficits are not the sole—or even the primary—determinantof aggregate demand. The Federal deficit is likely to be largestwhen private demand is weak, incomes are low, and inflationarypressures from the private demand side are absent. That is the situationin a recession. In the second column in Table 4, which showsthe Federal budget deficit as a percentage of GNP, the effects of recessionin 1958, 1970-71, 1974-75, and 1980 show up as large increasesin the deficit in the fiscal years during and immediately afterthe recession. Conversely, a truly inflationary budget may exhibit asmall deficit, or even a surplus, as a result of an inflation-caused increasein Federal revenues. In 1969, as inflation was surging, the40
Federal budget achieved a surplus. In 1974, when another inflationarysurge occurred, the deficit was quite small.TABLE 4.—Governmental surplus or deficit and gross national product, 1958-80[Amounts in billions of dollars]YearFiscal years—unifiedbudgetFederal surplus ordeficit (-) 1AmountAs percentof GNPCalendar years—government sector, national income andproduct accountsFederal surplus ordeficit (-)AmountAs percentof GNPFederal and State and localsurplus or deficit (-)AmountAs percentof GNP19581959-2.9-12.9-0.7-2.7-10.3-1.1-2.3-.2-12.6-1.6-2.8-.3I960....196119621963...1964...1965...1966....1967....1968 Z1969«..3-3.4-7.1-4.8-5.9-1.6-3.8-8.7-25.23.2.1-.7-1.3-.8-1.0-.2-.5-1.1-3.0.43.0-3.9-4.2.3-3.3.5-1.8-13.2-6.08.4.6-.7-.7.1-.5.1-.2-1.7-.7.93.1-4.3-3 8.7-2.3.5-1.3-14.2-6.09.9.6-.8-.7.1-.4.1-.2-1.8_J 1.019701971....1972.... •••"1973....1974....•••••-2.8-23.0-23.4-14.9-6.1-.3-2.2-2.1-1.2-.4-12.4-22.0-16.8-5.6-11.5-1.2-2.0-1.4-.4-.8-10.6"-19.4-3.37.8-4.7-1.1-1.8-.3.6-.3197519761977...1978..1979-53.2-73.7-53.6-59.2-40.2-3.6-4.5-2.9-2.8-1.7-69.3-53.1-46.4-29.2-14.8-4.5-.3.1-2.4-1.4-.6-63.8-36.5-18.3-.2-11.9-4.1-2.1-1.0.0.51980 \-73.8-2.9-62.3-2.4-34.8-1.3' Includes off-budget outlays.2 A 10-percent income tax surcharge was introduced in July 1968—thus entering calendar year 1968 but fiscal year 1969.3 Preliminary.Sources: Department of Commerce (Bureau of Economic Analysis), Department of the Treasury, and Office of Management andBudget.If government budget deficits are the cause of inflation, it shouldmake no difference whether the deficit occurs at the Federal, State,or local level. For example, the Federal revenue-sharing program,which grants Federal tax revenues to State and local governments,has the effect of reducing State and local deficits (or increasing theirsurpluses) by increasing the Federal deficit. If the program wereeliminated, but both levels of government continued to tax the sameamount and maintain the same level of services, the Federal deficitwould be reduced—but the total deficit, and its inflationary consequences,would be unchanged. In fact, principally because the Stateand local governments accumulate funds to pay employee pensioncosts, their budgets usually show a surplus. As the figures in the finalcolumn in Table 4 show, the combined budgets of Federal, State,and local governments have either showed a surplus or a very smalldeficit during the past two decades, except during recessions and for2 years when Federal spending on the Vietnam war was at its peak.41
Page 3: Economic Reportof the PresidentTran
Page 7: ECONOMIC REPORTOF THE PRESIDENT
Page 10 and 11: We have heard much about American i
Page 12 and 13: at an approach that took account of
Page 14 and 15: een due to overall demand in the ec
Page 16 and 17: to $27.5 billion in the new budget
Page 18 and 19: ductions would amount to over $27 b
Page 20 and 21: 10 percent inflation rate, keeping
Page 22 and 23: tutes for petroleum. The Synthetic
Page 24 and 25: esponse can be so large as to wipe
Page 27: THE ANNUAL REPORTOF THECOUNCIL OF E
Page 31 and 32: CONTENTSCHAPTER 1. INFLATION AND GR
Page 33 and 34: PageChallenges to the International
Page 35 and 36: CHAPTER 1Inflation and Growth in th
Page 37 and 38: needed to control inflation by resi
Page 39 and 40: decline in productivity growth may
Page 41 and 42: Chart 1Standard Unit Labor CostsPER
Page 43 and 44: end of 1974 the world price of oil
Page 45: price decisions cannot easily be re
Page 49 and 50: As an abrupt increase in the price
Page 51 and 52: policies but are based on the wides
Page 53 and 54: tion, and can policies be designed
Page 55 and 56: duction and employment to grow only
Page 57 and 58: Moreover, their actions must indica
Page 59 and 60: Starting with its 1975 targets as a
Page 61 and 62: well after the fact whether the mon
Page 63 and 64: Reserve provides some flexibility i
Page 65 and 66: in response to circumstances in par
Page 67 and 68: Although the flexibility of TIPs ma
Page 69 and 70: ard or that thought the administrat
Page 71 and 72: given standard, as the reward and t
Page 73 and 74: large firms. Even among large firms
Page 75 and 76: cause declining productivity growth
Page 77 and 78: vanced technology and will therefor
Page 79 and 80: ather than restoring the growth of
Page 81 and 82: correct some of the distortions in
Page 83 and 84: higher than it would otherwise be b
Page 85 and 86: EXPECTED PRODUCTIVITY GAINSAlthough
Page 87 and 88: supply of adult men in the work for
Page 89 and 90: increase demand pressures, especial
Page 91 and 92: time hours also has drawbacks. For
Page 93 and 94: eintroduce the problem of changing
Page 95 and 96: CHAPTER 2Improving the Adaptability
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use less and produce more energy in
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expectation of price controls or fu
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dependence on foreign oil mean that
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While the market solution might pro
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High energy prices and excessive de
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part, the interests of these partie
Page 109 and 110:
Federal regulations designed to pro
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Agency (EPA) from considering prosp
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other things, that federally assist
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ing services. Money-market mutual f
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holdings of consumer and business l
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they once had and thus cannot conti
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finding ways around outdated regula
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proportion of the existing farms pr
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prices for years in the future, reg
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derground water resources once thou
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comprehensive, actuarial crop insur
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duced a decline in the median age o
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elude government investments in loc
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some of the firms in the chosen sec
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CHAPTER 3The Economy: Review and Pr
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uild up oil inventories and maintai
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Chart 7Selected Interest Ratesand B
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had risen just 2 months earlier. By
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Chart 8Personal Saving RatePERCENT1
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chief cyclical determinant of housi
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ment were sharply diminished by the
Page 151 and 152:
dropped even faster, in large part
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ployment grew more vigorously after
Page 155 and 156:
terials fell for a full third of th
Page 157 and 158:
1979, slowed to a 19 percent annual
Page 159 and 160:
costs of production. The evidence s
Page 161 and 162:
sharp decline in output in the seco
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ecord high interest rates during th
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automatic transfer services (ATS) n
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plunged in March, although the only
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(FHLB) System increased their borro
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THE PROSPECTS FOR 1981 AND 1982In 1
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expectations. Of course, if the eco
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The uncertainty of developments in
Page 177 and 178:
produce a slight decline in the sav
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more rapid growth thereafter. Durin
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eemergence of modest but sustained
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hike would depend on many factors,
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major revision of the NIPA occurred
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per year. This modest acceleration
Page 189 and 190:
THE INDUSTRIAL ECONOMIES: TRENDS AN
Page 191 and 192:
Chart 10Labor Costs, Value-Added De
Page 193 and 194:
Rather, the German current account
Page 195 and 196:
TABLE 30.—Inflation in major indu
Page 197 and 198:
THE GLOBAL OIL MARKETTable 31 summa
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may be preserved. Stocks are in fac
Page 201 and 202:
straint on growth. Finally, policie
Page 203 and 204:
outside government, both at home an
Page 205 and 206:
ates are high, differences in polic
Page 207 and 208:
Japanese trade performance in volum
Page 209 and 210:
No "Say's Law" operates in internat
Page 211 and 212:
the cost of the loans, and they may
Page 213 and 214:
At the same time, access to the IMF
Page 215 and 216:
to closer cooperation is to risk a
Page 217 and 218:
While all countries, in attempting
Page 219:
threats of disruption, market-shari
Page 223:
LETTER OF TRANSMITTALCOUNCIL OF ECO
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Past Council Members and their date
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1977 to review selected analyses of
Page 230 and 231:
The Chairman and the Council Member
Page 232 and 233:
University). Kate Stith Pressman, s
Page 235 and 236:
CONTENTSNATIONAL INCOME OR EXPENDIT
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GOVERNMENT FINANCE'—ContinuedB-72
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NATIONAL INCOME OR EXPENDITURETABLE
Page 241 and 242:
TABLE B-2.—Gross national product
Page 243 and 244:
TABLE B-3.—Implicit price deflato
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TABLE B-5.—Implicit price deflato
Page 247 and 248:
Page 249 and 250:
Page 251 and 252:
TABLE B-10.—Gross national produc
Page 253 and 254:
TABLE B-12.—Output, costs, and pr
Page 255 and 256:
TABLE B-14.—Gross private domesti
Page 257 and 258:
TABLE B-16.—Inventories and final
Page 259 and 260:
TABLE B-18.—Relation of national
Page 261 and 262:
TABLE B-19-—National income by ty
Page 263 and 264:
Year orquarter192919331939194019411
Page 265 and 266:
TABLE B-22.—Total and per capita
Page 267 and 268:
Year orquarterTotalTotalCurrencyand
Page 269 and 270:
TABLE B-26.—Population by age gro
Page 271 and 272:
TABLE B-27.—Noninstitutional popu
Page 273 and 274:
Year or monthTABLE B-29.—Selected
Page 275 and 276:
TABLE B-31.—Unemployment rate by
Page 277 and 278:
TABLE B-33.—Unemployment by reaso
Page 279 and 280:
TABLE B-35.—Wage and salary worke
Page 281 and 282:
TABLE B-37.—Average weekly earnin
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TABLE B-39.—Changes in productivi
Page 286 and 287:
TABLE B-42.—Industrial production
Page 288 and 289:
TABLE B-44;—New construction acti
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TABLE B-45.—New housing units sta
Page 292 and 293:
TABLE B-47.—Sales and inventories
Page 294 and 295:
TABLE B-49.—Manufacturers' new an
Page 296 and 297:
TABLE B-51.—Consumer price indexe
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19391940194119421943194419451946194
Page 300 and 301:
TABLE B-54.—Changes in special co
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TABLE B-55.—Producer price indexe
Page 304 and 305:
TABLE B-57.—Producer price indexe
Page 306 and 307:
TABLE B-58.—Changes in producer p
Page 308 and 309:
TABLE B-60.—Components of money s
Page 310 and 311:
TABLE B-62.— Total funds raised i
Page 312 and 313:
TABLE B-63.—Federal Reserve Bank
Page 314 and 315:
TABLE B-65.—Bond yields and inter
Page 316 and 317:
TABLE B-66—Consumer credit outsta
Page 318 and 319:
TABLE B-68.—Mortgage debt outstan
Page 320 and 321:
GOVERNMENT FINANCETABLE B-70.—Fed
Page 322 and 323:
TABLE B-l\.—Federal budget receip
Page 324 and 325:
TABLE B-73.—Government receipts a
Page 326 and 327:
TABLE B-75.—State and local gover
Page 328 and 329:
TABLE B-77,—Interest-bearing publ
Page 330 and 331:
TABLE B-79-—Maturity distribution
Page 332 and 333:
TABLE B-81.—Corporate profits by
Page 334 and 335:
TABLE B-83.—Sales, profits, and s
Page 336 and 337:
TABLE B-85.—Relation of profits a
Page 338 and 339:
TABLE B-87.—Sources and uses of f
Page 340 and 341:
TABLE B-89-—State and municipal a
Page 342 and 343:
TABLE B-91.—Business formation an
Page 344 and 345:
TABLE B-93.—Farm output ami produ
Page 346 and 347:
Year or month1940194119421943194419
Page 348 and 349:
TABLE B-97.—Balance sheet of the
Page 350 and 351:
TABLE B-99— U.S. international tr
Page 352 and 353:
TABLE B-100.—U.S. merchandise exp
Page 354 and 355:
TABLE B-102.—U.S. merchandise exp
Page 356 and 357:
TABLE B-104.— World trade: Export
Page 358 and 359:
TABLE B-106.—International reserv
Page 360 and 361:
• • ' •TABLE B-108.—Industr
Page 362 and 363:
TABLE B-110.—Summary of major U.S
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