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1976/06/30 - Economic Policy Board
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1976/06/30 - Economic Policy Board
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James M. Cannon Files (Ford Administration)
James Cannon's Meetings Files
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Inflation (Finance)
Investments, Foreign
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The original documents are located in Box 60, folder "1976/06/30 - Economic Policy Board"
of the James M. Cannon Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 60 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
June 26, 1976
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE
Proposed Agenda
Monday, June 28, 1976
No EPB Executive Committee meeting
Tuesday, June 29, 1976
1. Status of Tax Reform Legislation
Treasury
2. Report on Puerto Rico International Summit
Simon
3. Report on East European Trip
Simon
Wednesday, June 30, 1976 PRINCIPALS ONLY
1. New York City Update
Treasury
2. Report on H.R. 12323
Seidman
3. Economic Analysis of the Public Works Bill
OMB
Thursday, July 1, 1976
1. Expropriation Policy
Parsky
2. Outlook for the CPI
MacAvoy
Friday, July 2, 1976
No EPB Executive Committee meeting
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEETING
AGENDA
8:30 a.m.
Roosevelt Room
Wednesday, June 30, 1976
1. Economic Analysis of the Public Works Bill
OMB
2. Report on H.R. 12323
Seidman
3. Outlook for the CPI
MacAvoy
see 5.3192
94TH CONGRESS
2D SESSION
H. R. 12323
IN THE HOUSE OF REPRESENTATIVES
MARCH 4, 1976
Mr. RONCALIO introduced the following bill; which was referred to the Com-
mittee on Interstate and Foreign Commerce
II
A
BILL
21
To reaffirm the intent of Congress with respect to the structure
of the common carrier telecommunications industry ren-
dering services in interstate and foreign commerce; to grant
additional authority to the Federal Communications Com-
mission to authorize mergers of carriers when deemed to
be in the public interest; to reaffirm the authority of the
States to regulate terminal and station equipment used for
telephone exchange service; to require the Federal Com-
munications Commission to make certain findings in con-
nection with Commission actions authorizing specialized
carriers; and for other purposes.
1
Be it enacted by the Senate and House of Representa-
2 tives of the United States of America in Congress assembled,
3 That this Act may be cited as the "Consumer Communica-
4 tions Reform Act of 1976".
LIGHTS GERALD ? FORD
I
2
1
CONGRESSIONAL FINDINGS AND DECLARATION OF PURPOSE
2
SEC. 2. The Congress finds and declares that-
3
(a) The revenues from integrated interstate and foreign
4 common carrier telecommunications services, based on
5 charges reflecting both costs and value of service, have con-
6 tributed toward meeting the costs of facilities used in com-
7 mon for providing such interstate and foreign services and
8 local telephone exchange service throughout the United
9 States, and thereby helped maintain a level of charges for
10 telephone exchange service which is lower than otherwise
11 would be required.
12
(b) The technical integrity of the nationwide telecom-
13 munications system, its coordinated planning, design, instal-
14 lation, improvement, management, operation and mainte-
15 nance are indispensable elements in the interstate telecom-
16 munications network, necessary both to the reasonableness of
17 charges and to the high quality and universality of common
18 carrier telecommunications service, and accordingly Con-
19 gress hereby reaffirms its policy that the integrated inter-
20 state telecommunications network shall be structured SO as
21 to assure widely available, high quality telecommunications
22 services to all of the Nation's telecommunications users.
FORD i LIBRARY GERALD
23
(c) The authorization of lines, facilities, or services of
24 specialized carriers which duplicate the lines, facilities, or
25 services of other telecommunications common carriers—
3
1
(1) involves higher charges for users of telephone
2
exchange service by decreasing the interstate revenues
3
that otherwise would be available for contribution to the
4
common costs of providing telephone services through-
5
out the United States;
6
(2) fosters inefficiencies in the utilization of na-
7
tional telecommunications resources through the creation
8
of unnecessary and wasteful duplication of telecommuni-
9
cations lines and facilities and wasteful use of the radio
10
spectrum;
11
(3) significantly impairs the technical integrity, the
12
coordinated planning, design, installation, improvement,
13
management, operation and maintenance of the inte-
14
grated nationwide telecommunications network; and
15
(4) has an adverse impact on the national objec-
16
tives of maintaining stability of consumer price levels,
17
conserving national economic resources, improving pro-
18
ductivity, and fostering an economy that will maintain
19
adequate sources and reasonable costs of capital;
20 and is, therefore, contrary to the public interest.
21
(d) The Congress reaffirms its intent that the com-
22 plete authority to regulate terminal and station equip-
23 ment used for telephone exchange service shall rest with
24 the States even though such terminal and station equipment
25 also may be used in connection with interstate services.
FORD is LIBRARY 07V839
4
1
(e) The congressional findings and declarations of
2 policy set forth herein are necessary to achieve the purposes
3 of the Communications Act of 1934 as specified in section 1
4 of that Act; and the Federal Communications Commission
5 shall take no action inconsistent with the findings and
-6 declarations in this Act.
7
CHARGES FOR SERVICE
8
SEC. 3. Section 201 (b) of the Communications Act of
9 1934, as amended (47 U.S.C. 201) is amended by adding
10 the following at the end of the first sentence: "No compen-
11 satory charges for or in connection with such communica-
12 tion service may be found to be unjust or unreasonable on
13 the ground that it is too low. The Commission may not
14 hold the charge of a carrier up to a particular level to protect
15 the traffic or revenues from a communication service offered
16 or provided by another carrier if such charge proposed by
17 the carrier is compensatory. As used in this subsection, a
18 charge is compensatory SO long as it equals or exceeds the
19 incremental cost of providing the communications service.
20 Such incremental cost is the additional cost caused by the
21 provision of the service including, where appropriate, the
22 capital costs of whatever additional facilities are required to
23 provide the service."
QERALE FORD LIBRARY
5
1 ACQUISITIONS BY AND OF CERTAIN COMMON CARRIERS
2
SEC. 4. The Communications Act of 1934, as amended;
3 is further amended by adding the following new section 224:
4
"SEC. 224. Upon application of any common carrier or
5 other person involved in the transaction, the Commission
6 shall have jurisdiction (i) to approve the acquisition of
7 control by a domestic common carrier of any other domestic
8 common carrier or the acquisition of the whole or any part
9 of the property of a domestic common carrier by any other
10 domestic common carrier, or (ii) to approve the acquisition
11 by a person which is not a common carrier of control of any
12 domestic common carrier or the acquisition of the whole or
13 any part of the property of a domestic common carrier,
14 whenever the Commission determines, after full opportunity
15 for hearing on an evidentiary record, that such approval is
16 in the public interest. The Commission shall give reasonable
17 notice in writing concerning any such proposed action to
18 the Governor of each of the States in which the physical
19 property affected, or any part thereof, is situated, and to
20 each State commission that may also have jurisdiction over
21 any of the common carriers involved, and to such other per-
22 sons as it may deem advisable, and shall afford such parties
23 a reasonable opportunity to participate in any hearings re-
H.R. 12323-2
FORD is 01RALD LIBRARY
6
1 lated to such action. If the Commission approves the pro-
2 posed acquisition, it shall certify to that effect; and thereupon
3 any Act or Acts of Congress making the proposed acquisi-
4 tion unlawful shall not apply. As used in this section 224,
5 'domestic common carrier' shall mean a common carrier, the
6 major portion of whose traffic and revenues is derived from
7 communications services other than foreign communications.
8 This section 224 shall not apply where either section 221 (a)
9 or 222 of this Act is applicable or to the acquisition by any
10 person of a telephone common carrier as defined in section
11 225 (a) (1)
12
SEC. 5. Section 2 (b) of the Communications Act of
13 1934, as amended, (47 U.S.C. 152 (b)) is further amended
14 by striking the clause beginning with the words "except
15 that" following the semicolon and inserting the following
16 "except that sections 201 through 205 of this Act, both in-
17 clusive, and section 224 of this Act shall, except as other-
18 wise provided therein, apply to carriers described in clauses
19 (2), (3), and (4)
20 REAFFIRMATION OF STATE JURISDICTION OVER LOCAL
21
TERMINAL AND STATION EQUIPMENT
22
SEC. 6. Section 2 (b) of the Communications Act of
23 1934, as amended (47 U.S.C. 152 (b)) is further amended
FORD is LIBRARY 03RALD
24 by striking "or" at the end of the phrase following "(1)"
25 and substituting therefor the following: "including but not
26 limited to, the charges, classifications, practices, services,
7
1 facilities, or regulations for or in connection with the use or
2 connection of any station equipment, terminating facilities,
3 exchange plant, and other like instrumentalities and appara-
4 tus used in common for both intrastate communication service
5 and interstate or foreign communication service, whether
6 provided by a common carrier or any other person, or".
7
SEC. 7. Section 3 of the Communications Act of 1934,
8 as amended (47 U.S.C. 153), is further amended by adding
9 the following new subsection:
10
"(gg) 'Intrastate communication' means communica-
11 tion or transmission between points in the same State, ter-
12 ritory, or possession of the United States, or in the District
13 of Columbia, including among other things, all station equip-
14 ment, terminating facilities, exchange plant, and other like
15 instrumentalities and apparatus used. for or in connection
16 with telephone exchange service or interexchange service,
17 even though such equipment, facilities, plant, instrumentali-
18 ties or apparatus are or may be used in connection with-
19 interstate or foreign communications service. Intrastate com-
4
20 munication service' means any service which provides
21 intrastate communication.".
22
FINDINGS TO BE INCLUDED IN COMMISSION
23
AUTHORIZATIONS OF SPECIALIZED CARRIERS
24
SEC. 8. The following new section is added in title II
25 of the Communications Act of 1934, as amended:
FORD is OFRALD LIBRARY
8
1
"SEC. 225. (a) As used in this section-
2
(1) The term 'telephone common carrier' means any
3 common carrier, the major portion of whose traffic and
4 revenues, in interstate and foreign communication and in
5 intrastate communication, is derived from message telephone
6 services, telephone exchange services, radio-telephone ex-
7 change services, or a combination thereof.
8
(2) The term 'telegraph common carrier' means any
9 common carrier which provides a public message telegram
10 service in interstate communications.
11
(3) The term 'specialized carrier' means any com-
12 mon carrier other than a telephone or telegraph common
13 carrier.
SI
14
(4) The term 'message telephone service' means tele-
15 phone service between stations in different exchange areas
16 on a message-by-message basis, contemplating a separate
17 connection for each occasion of use.
18
(5) The term 'public message telegram service' means
19 a substantially nationwide telegraph service for the trans-
20 mission and reception of record matter where the transmis-
21 sion is not directly controlled by the sender and for which
22 a charge is collected on the basis of number of words trans-
23 mitted and which is available to the public.
GERALD TORD
9
1
(b) The Commission shall not grant or authorize any
2 construction permit, station license, or certificate, for the
3. .construction, acquisition, or operation of any communica-
4 tion or transmission line or facility, or extension thereof, or
5 any modification or renewal thereof, that otherwise might
6. be granted or authorized pursuant to any provision of this
7 Act, to any specialized carrier that furnishes or proposes
8 to furnish interstate communication service unless the Com-
9 mission shall find, after full opportunity for evidentiary hear-
10 ing on the record, that such permit, license, or certificate,
11 will not result in increased charges for telephone exchange
12 service or in wasteful or unnecessary duplication of com-
13 munication lines, facilities, equipment and instrumentalities
14 of any telephone or telegraph common carrier, and will not
15 significantly impair the technical integrity and capacity for
16 unified and coordinated planning, management, design, and
17 operation of the nationwide telephone network. In finding
18 that such grant or authorization will not result in wasteful
19 or unnecessary duplication, the Commission shall deter-
20 mine, among other things, that the proposed service or serv-
21 ices of the specialized carrier, which are the subject of the
22 requested grant or authorization, (i) are not like or similar
23 to any service or services provided by a telephone or tele-
FORD is LIBRARY 078470
10
1 graph common carrier and (ii) cannot be provided by avail-
2 able communications lines, facilities, equipment, or instru-
3 mentalities of a telephone or telegraph common carrier. At
4 any hearing involving a matter under this subsection, the
5 burden of proof to support the requisite findings by the
6 Commission shall be on the applicant for such permit, license,
7 or certificate."
94TH CONGRESS
2D SESSION
H. R. 12323
or
LIBRARY
A BILL
FORD
To reaflirm the intent of Congress with respect
is
to the structure of the common carrier tele-
917870
communications industry rendering services
in interstate and foreign commerce; to grant
additional authority to the Federal Com-
munications Commission to authorize mer-
gers of carriers when deemed to be in the
public interest; to reaffirm the authority of
the States to regulate terminal and station
equipment used for telephone exchange
service; to require the Federal Communica-
tions Commission to make certain findings in
connection with Commission actions author-
izing specialized carriers; and for other pur-
poses.
By Mr. RONCALIO
MARCH 4, 1976
Referred to the Committee on Interstate and Foreign
Commerce
EYES ONLY
MINUTES OF THE
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEETING
June 29, 1976
ATTENDEES:
Messrs. Seidman, Greenspan, Lynn, Richardson,
Dixon, Cannon, MacAvoy, Gorog, Katz, Malkiel,
Darman, Porter, Penner, Jones, Goldstein,
Segall, Duval
1. Tax Reform Legislation
The Executive Committee reviewed a memorandum, prepared
by the Treasury, on tax reform legislation and the 45-
day extension of withholding rates which the Congress
is anticipated to transmit to the President tomorrow.
The discussion focused on whether the extension would
terminate on August 15, 1976 or September 1, 1976, the
current prospects of tax reform legislation during this
session of Congress, the proliferation of amendments to
the tax reform bill, what the Administration position
should be on provisions for Employee Stock Ownership
Plans (ESOPS) in the absence of provisions for Broadened
Stock Ownership Plans (BSOPS), and whether a statement
should be issued regarding congressional action on tax
reform legislation. The Committee also discussed
briefly a proposed draft statement.
Decision
The Executive Committee requested Treasury to prepare a
proposed position on provisions in the tax bill relating
to ESOPS in the absence of provisions providing for
BSOPS for review by the Executive Committee and consid-
eration by the President.
Executive Committee members were requested to provide
their comments on tax legislation to Mr. Gorog no later
than noon today.
2. Report on International Puerto Rican Summit
Mr. Greenspan reported on the recently concluded Inter-
national Summit Conference in Puerto Rico, noting that
the participants were pleased at how well the meetings
EYES ONLY
EYES ONLY
2
went and that the level of discussion was very much like
a seminar with regard to discussion of differences on
tactics and strategy in dealing with the problems con-
fronting the industrialized nations.
EYES ONLY
RBP
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEETING
AGENDA
8:30 a.m.
Roosevelt Room
Wednesday, June 30, 1976
PRINCIPALS ONLY
1. Economic Analysis of the Public Works Bill
OMB
2. Report on H.R. 12323
Seidman
3. Outlook for the CPI
MacAvoy
PRESIDENT
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE
UNITED
OFFICE OF MANAGEMENT AND BUDGET
SECURITY
STATES
WASHINGTON, D.C. 20503
June 29, 1976
MEMORANDUM FOR: EXECUTIVE COMMITTEE OF THE ECONOMIC POLICY
BOARD
RP.A.R
FROM:
DANIEL P. KEARNEY/BURTON MALKIEL
BM
SUBJECT:
Public Works Jobs Bill, S. 3201
This memorandum describes and comments on provisions of
S. 3201, now awaiting the President's action. Attached is
a recent CEA paper on "Policies to Increase Employment." "
STATUS
The last day for Presidential action is July 7.
The conference report on the enrolled bill was passed by the
Senate 69 to 25 and by the House, 328 to 83.
SUMMARY OF BILL (Relation to vetoed H.R. 5247)
The previous public works jobs bill, H.R. 5247, was enrolled
on January 29 and vetoed by the President on February 13, 1976.
The House voted 319 to 98 to override the President's veto.
The veto was sustained in the Senate by three votes, 63 to 35.
H.R. 5247 would have authorized $6.2 billion for essentially
the same purposes as the current bill, S. 3201. S. 3201, like
H.R. 5247, would authorize appropriations through September
30, 1977.
Title I authorizes $2 billion for accelerated public works.
It is identical to the public works title of the vetoed bill
except that it authorizes $.5 billion less than did H.R. 5247.
Title II authorizes and directs the Secretary of the Treasury
to make revenue sharing payments to State and local governments.
This Title is similar to the anti-recessionary title of the
vetoed H.R. 5247. H.R. 5247 included a complex distribution
formula based on State and local tax revenues and the degree
to which unemployment rates exceeded a specified base period.
The formula in the current bill has been changed and it is
now based on the general revenue sharing distribution and
the degree to which unemployment rates exceed 4.5%. These
changes result in a more even distribution of funds. The
authorization has been reduced from $1.5 billion to $1.25
billion, for five quarters.
2
Title III authorizes an additional $700 million for EPA
wastewater treatment grants. A similar provision in
H.R. 5247 would have authorized $1.4 billion.
Several other provisions which were included in H.R. 5247
are not included in this bill: authorizations for the EDA
Job Opportunities program, an EDA interest subsidy program,
an EDA Urban Economic Development program and other mis-
cellaneous amendments to the EDA statute. With the exception
of the authorization for the Job Opportunities program, these
provisions have been included in the EDA extension bill,
H.R. 9398.
ANALYSIS OF THE THREE TITLES
Title I
Description
Secretary of Commerce is authorized to make grants
to any State or local government for construction,
renovation or repair of local public works. The
Federal share shall be 100% of the cost.
May also make grants to cover the State or local
share of the cost of any other Federally assisted
project; such grants shall make the Federal share
100%.
At least 70% of the funds are to go to areas having
unemployment rates in excess of the national unemploy-
ment rate, but not less than one-half of 1% or more
than 12.5% shall go to any one State. Priority shall
be given to projects of local governments.
The Secretary must make a final determination on each
application for assistance within 60 days of receipt,
or the request is automatically approved.
The authorization of $2.0 billion is for the period
ending September 30, 1977.
Comments
The primary arguments against this Title are:
Outlays from the program would increase the 1977
deficit by an estimated $400 million. Estimated
outlays in 1978 and 1979 are $800 million and
$600 million respectively.
3
Sponsors estimate that this Title would result in
200,000 new jobs. A more realistic estimate would
be 120,000 jobs over a four or five year period.
Thus, the probable per job cost would be over
$16,000 for this Title alone.
The peak job impact would not occur until late in
fiscal year 1977 or early 1978.
The requirement for a 100% Federal share reduces or
removes State and local government incentives to
conduct a careful project review or to consider the
priority of a proposed project against other local
priorities. The 60 day limit on Federal review also
would minimize the Federal ability to screen proposals.
Title II
Description
Provides countercyclical aid to State and local govern-
ments when the national rate of unemployment exceeds
6% during any quarter for the 5-quarter period be-
ginning January 1976.
Authorizes appropriation of $125 million for each of
the five quarters in which unemployment reaches the
6% level--plus $62.5 million per quarter for each
half percentage point by which unemployment exceeds
6%. For example, if the national rate of unemployment
remained at 7% for a full year, an appropriation of
$1 billion would be authorized for that year.
One-third of the funds reserved for States and two-
thirds for local governments. Distribution to a
jurisdiction based on the relative excess of unemploy-
ment (over 4 1/2%), multiplied by the Revenue Sharing
amount received by that jurisdiction. Distribution
to a particular jurisdiction terminates when the rate
of unemployment falls below 4 1/2%.
Use of grants restricted to maintenance of basic
services. Applications, reports, and assurances
of nondiscrimination, conformance with Davis-Bacon
and economization required.
4
Comments
The Administration has consistently opposed this type
of aid. That opposition has been based on a preference
for taking specific Federal actions directed toward
achieving economic recovery and mitigating the effects
of unemployment (including extension of unemployment
compensation and tax reductions). Other reasons for
the opposition are:
The estimated outlays under this Title would be
$250 million in the transition quarter and $1
billion during 1977.
Due to the lag in unemployment statistics, their
use in the formula could extend economic stimulation
well into full recovery and thus generate new in-
flationary pressures.
Sponsors have estimated that this Title would result
in establishing 97,000 jobs. Studies of Revenue
Sharing indicate that less than 20% of such funds
are used to create new jobs. Thus, substantially
fewer jobs than estimated would be created.
Countercyclical aid would not encourage State and
local fiscal responsibility. Rather, it would make
unnecessary the accumulation of budgetary reserves
in good years to carry through bad years.
If unemployment were to remain above 6% at the end
of 1977, there would be substantial pressure to
continue such a program, further compounding problems
of uncontrollable budget items.
Title III
Description
Authorizes an additional $700 million for EPA's waste-
water treatment grants. The purpose of the increase
is to provide "hold harmless" funding to allow a
change in the formula for distributing funds under
this program.
Comments
Sponsors estimate that this provision would create
28 to 56 thousand new jobs. A more reasonable
estimate would be 15 to 30 thousand.
5
The job impact of this Title would be more than
two years away due to the long lead time required
in constructing these facilities.
The real effect of this Title is simply to add
authorization for wastewater treatment grants, rather
than create jobs.
SUMMARY
In summary the primary arguments against the bill are:
Realistically the number of new jobs created would
be less than 160,000--rather than the sponsors'
claims of over 325,000.
Based on this more realistic estimate of new jobs, the
cost for each new job created would exceed $25,000
(for all three titles).
The major job creation impact would not be until
1978 and would have an inflationary effect.
If appropriations equaled authorizations, outlays
for 1977 would be increased by about $1.5 billion.
If the countercyclical revenue sharing were extended
into 1978 and 1979, outlays would be increased
approximately $2 billion in each year.
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
ALAN GREENSPAN, CHAIRMAN
PAUL W MACAVOY
BURTON G. MALKIEL
June 29, 1976
MEMORANDUM FOR: EXECUTIVE COMMITTEE - ECONOMIC POLICY BOARD
FROM:
Paul W. MacAvoy pm
SUBJECT: The June-December Outlook for the CPI
The May increase of 0.6 percent in the CPI has caused
some concern as to renewed price inflation at the retail
level. This memorandum examines the CPI outlook for the
remainder of the Calendar Year. The view taken here is
that changes in supply or demand conditions in certain
basic markets over the past several months will largely
determine the changes in the CPI for the rest of the year.
Our assessment of the most recent information is that the
basic picture has not changed. The CPI should be expected
to rise by about 3.9 percent through yearend - an annual
rate of 6.8 percent from the end of May through December,
compared with the 4.2 percent annual rate during the first
five months of this year.
1.
The June to December CPI Forecast
CPI month-to-month forecasts are made based on CEA
staff projections of food and energy wholesale prices and
of wage settlements, as well as on linear extrapolations
of past industrial price changes. The forecasting procedure
begins with assumptions as to wholesale prices for energy
and food in future months. Applying estimated markups and
weights to these assumptions generate CPI forecasts. Energy
price forecasts are based on the assumption that the maximum
increases allowed under oil and gas price controls will occur.
Food price forecasts are based on futures prices as quoted
in organized markets. Industrial price forecasts are based
in good part on markups of forecast labor costs which, in
turn, are based on analyses and judgments as to future wage
REVOLUTION
settlements. The WPI projections not based on futures prices,
AMERICAN
BICENTENNIAL
1776-1976
©
-2-
energy or wage assumptions are linear extrapolations of past
price changes.
The procedures are tentative, highly judgmental and
probably subject to fairly high degrees of error. Nonetheless,
they are based upon a systematic effort to draw out the impli-
cations of recent detailed price forecasts and cost changes
for the pattern of overall price changes over the next six
months or SO. As new data are received the forecast index
levels are revised. The forecast CPI increase for May
using this procedure was 0.65 percent, and the forecast
for June is 0.47 percent.
The projection of the passenger cars and iron and
steel components of the WPI take into account special
factors particular to these industries. Passenger car
prices are assumed to rise at a 2 percent annual rate
through August, then at monthly rates of 1-1/2, 2, and
1/2 percent in September through November, respectively,
to reflect the phasing in of new model year cars. The
iron and steel component reflects the steel price increases
in June and July, and is assumed to rise at a 5 percent
annual rate thereafter. Lastly, the CPI services index
is forecast based on linear extrapolations of past price
changes in the component indexes and reflects forecast
wage settlements in the latter part of the year.
The forecast pattern of change in the CPI through
December is as follows:
Consumer Price Index Percentage Change - 1976
(Seasonally adjusted)
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
All Items
0.47
0.35
0.59
0.47
0.68
0.76
0.49
Food
0.64
-0.59
0.55
0.23
1.03
1.33
0.23
Nondurables
less food
0.13
0.79
0.87
0.55
0.57
0.52
0.44
Durables
0.36
0.32
0.28
0.42
0.46
0.37
0.37
Services
0.61
0.66
0.60
0.59
0.62
0.70
0.74
-3-
Between the beginning of June and the end of December,
the CPI is expected to rise by 3.9 percent, an annual rate
of increase of 6.8 percent. This will mean a 5.7 percent
increase in the CPI from last December to yearend 1976.
2.
Risks in the Forecast
Food Prices. The grain futures prices, upon which the
food price forecasts are based, have been subject to con-
siderable gyrations in the past couple of months. Crops
and growing conditions have progressed quite satisfactorily,
yet the grain markets have not yet given full credence to
the likelihood of a very large U.S. grain harvest and a
considerable recovery in the USSR harvest as well.
On the supply side, the main risk of price increases is
weather-induced shortfalls in one or more crops. On the
demand side, the level of upcoming export sales is uncertain.
Foreign demand will depend on crops abroad in both importing
and exporting countries. A rough estimate is that any
combination of U.S. grain crop shortfall or increased export
demand that amounts to 1 million metric tons will increase
the food at home CPI by 0.08 percent. Thus, a 10 million
ton U.S. feed grain shortfall coupled with an unanticipated
5 million ton increase in grain exports would increase the
food at home CPI by about 1 to 1-1/2 percent. The principal
uncertainty concerns feed grain prices. If marketing of
cattle slows up more than currently expected this summer,
an even which could result from lower feed prices causing
farmers to retain more cattle for feeding, beef prices
could rise more than anticipated. An increase in demand
for beef, which so far in the recovery has lagged somewhat,
could have the same effect.
Energy Prices. Stabilization in fuel prices has
persisted through the first half of 1976. There is now
reason to believe that this stability may last through
the end of the year. Seasonal price increases for gasoline
and changes in pricing differentials in world oil markets
may complicate the picture somewhat, but the situation looks
less worrisome today than three months ago.
The price of domestically produced crude oil is now
expected to remain relatively steady through the end of
the year due to problems encountered in the initial
determination of prices under EPCA. To offset the errors
-4-
of the first months, lower prices than otherwise would have
prevailed will be required through the end of the year.
Decontrol of petroleum product prices is also expected to
have little or no effect on consumer prices. The present
surplus of refining capacity for production of distillate
and residual fuel oils provides a substantial guarantee
that refiner margins will not become excessive after
decontrol.
The inflationary risks that might have resulted from
adverse actions by OPEC nations have also been reduced,
but not removed. Contrary to widely circulated stories,
OPEC did not freeze the prices of all oil at Bali. Instead,
the OPEC nations gave approval to a pricing system where
crude values are determined by product prices in principal
export markets. As a result, differences between heavy
Arabian oils and lighter low sulphur West African oils
will increase. This will increase U.S. prices because our
imports have shifted towards the West African crudes and
away from heavy Persian Gulf crudes.
The new issue in the energy price area is gasoline
prices. Gasoline prices have experienced very substantial
seasonal swings during 1974 and 1975, which are only
partially offset by BLS seasonal adjustments. In 1974
they increased by 4.6¢ per gallon from April to their August
peak while in 1975 they increased by 5.4¢ per gallon.
Seasonal adjustments reduce the savings by about 1¢ per
gallon.
In 1976 it appears that the same pattern will be
repeated. Gasoline prices began increasing in April
when rapid increases in demand forced unanticipated
reductions in stocks. As a result, prices have already
increased by 2 to 3¢. Further increases are expected over
the next two months for two reasons. First, most refiners
have substantial sums of unrecouped costs which they can and
presumably will try to capture during the period of peak
gasoline demand. Second, small independent refiners whose
low prices until recently prevented most refiners from
establishing prices at maximum levels have had their costs
boosted substantially by FEA's adjustment in the EPCA man-
dated small refiner entitlement bias. The impact of the
increase will be felt primarily during the summer months
-5-
and should be gone by October or November. The effect of
such an increase would be to add as much as a .3 percent
increase in the CPI. In the worst case, a very tight
summer gasoline market might cause the CPI to increase
by .4 percent at the peak.
Wages. During the first quarter of 1976, first year
increases under major collective bargaining agreements were
about 10 percent overall. Compensation per man-hour for
private employees increased at an annual rate of 7.5 to
8.0 percent. The adjusted hourly earnings index increased
at a 7.7 percent annual rate during the first five months of
1976. These increases are 1.0 to 2.0 percentage points
below the CEA forecasts made in December 1975.
Thus far this year strike activity has been at a
relatively low level. The one important lengthy strike
has been among rubber workers who did not have, and now
seek, a COLA clause in their contract. Most of the
important contracts that terminate later this year have
COLA provisions. The lack of union militancy supports
the view that collective bargaining settlements will be
moderate this year.
With a rate of inflation of 5 to 6 percent, compensation
per man-hour is not likely to exceed our forecast for 1976
(9.5 percent) and there is a strong likelihood that it will
be one or two percentage points below this earlier forecast.
Because of the large number of major collective bargaining
agreements yet to come and the strength of the recovery,
we prefer at this time not to lower our estimated range
published in January. However, if current developments
continue for another month or two, a downward revision
would be warranted.
Summary. The combination of risks of further price
changes than predicted are as follows. Food prices are
as likely to fall short as to exceed the forecast based
on futures markets prices. Energy prices are more likely
to exceed, and wages to fall short, of the forecasts. Thus
the "upside risk" cannot much exceed another 0.5 percent
increase in the CPI beyond the 5 percent forecast.
THE WHITE HOUSE
WASHINGTON
June 29, 1976
MEMORANDUM FOR ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEMBERS
FROM:
L. WILLIAM SEIDMAN has
SUBJECT:
Redirecting USG Expropriation Policy
A paper, prepared by the Department of the Treasury, on expro-
priation policy is attached. It will be discussed at the
Thursday, July 1 Executive Committee meeting.
Attachment
(1)
THE DI THE DEPARTMENT
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
1789
ASSISTANT SECRETARY
JUN 15 1976
MEMORANDUM FOR THE HONORABLE L. WILLIAM SEIDMAN
ASSISTANT TO THE PRESIDENT FOR
ECONOMIC AFFAIRS
From
:
Gerald L. Parsky
Assistant Secretary
for International Affairs
Subject: Redirecting USG Expropriation Policy
I am enclosing the paper I promised on expropriation
policy. The paper describes the weaknesses of present pol-
icy, in particular, the failure of present policy to focus
adequately on the broad USG economic interests affected by
expropriations. I believe the paper should be distributed
to the EPB for discussion at a regular meeting, which
State should attend. I trust we will have a chance to
talk about the date and agenda for discussion.
REDIRECTING USG EXPROPRIATION POLICY
A CIEP Working Group has just finished a review of U.S.
expropriation policy, and interagency agreement has been
reached on a few measures which will help to implement exist-
ing policy. The CIEP Working Group, however, has failed to
examine USG expropriation policy in a context which takes
account of fundamental long-range USG economic interests.
The basic goal of present expropriation policy is to
protect U.S. investors by helping them to obtain fair com-
pensation after an expropriation has occurred. USG economic
interests, however, go far beyond this admittedly important
goal, because expropriations can affect the allocation of
resources world-wide through their impacts on investment
flows in general, and on the development of the public -- as
opposed to the private -- sector in LDC economies.
Expropriations invariably worsen the investment climate
in the expropriating country, and dissuade other investors
(both domestic and foreign) from investing or reinvesting
further in the country. Expropriations in one country also
have spillover effects in other countries. Those countries
may follow suit, as they have in the petroleum sector, or
investors in those countries may be so concerned about this
possibility that they limit their investment or reinvestment.
In all these cases "political" intervention in the mar-
ket by one government leads generally to a misallocation of
resources investors back off from what otherwise could
be productive investments. Development is slowed, and de-
mands for foreign assistance tend to increase. Resources
are not developed as efficiently as should be the case, and
commodity prices are higher than necessary. These results
are clearly not in the interests of the USG.
Expropriations also mean increased government interven-
tion into the private sector of LDCs, and a slower develop-
ment of the private sector. This also is not in the interests
of the USG. Expropriated -- i.e., public sector --- enter-
prises are likely to "politicize" business and economic
decisions and to distort the market's allocation of resources.
Widespread government intervention in particular sectors
could increase the opportunities (such as they are) for con-
certed intergovernment controls over price or production,
and, perhaps, for cartelization.
FORD is GERALD LIBRARY
- 2 -
Development of the private sector free from expropria-
tion, in contrast, permits investment to flow to the most
productive projects. It can provide the basis for better
economic cooperation and integration, as U.S. firms can
generally work better with private firms abroad than with
"political" entities. A strong private sector in LDCs will
attract foreign investment for development, and reduce both
the demands and the needs for increasing development assis-
tance. An improved investment climate will also reduce the
long-term need for USG programs (such as the proposed Inter-
national ResourcesBank) which accept the LDC investment
climate "as is," with a high degree of government involve-
ment.
An effective expropriation policy must serve long-range
economic goals, improving the climate for foreign (and domes-
tic) investment in LDCs, and stemming the trend toward gov-
ernment intervention in LDC economies. In addition to
protecting the interests of the investor, it must also aim
at safeguarding the interests of consumers and taxpayers,
who should not be allowed to bear the costs of an expropria-
tion through higher prices and (because of lost tax revenues)
higher taxes.
Weaknesses of Present Expropriation Policy
Our present expropriation policy is not broadly enough
focused to serve long-range USG economic goals in a balanced
manner:
-- The policy aims more at getting governments to pay
after an expropriation than it does at deterring government
intervention in the first place, or at resolving disputes
at an early stage so that governments are not as impelled
to enter the private sector.
-- In many cases U.S. political interests often more
importantly affect USG action than do U.S. economic interests.
Broader USG interests --- supporting the development of the
private sector in LDCs, assuring access to important raw
materials at prices determined by the market, and helping
the development process -- seldom affect decision.
DERALD FORD LIBRARY
- 3 -
-- In very important cases the USG often only margin-
ally influences outcomes. The traditional USG policy is
not to take positions on the merits of particular cases,
but rather to encourage the companies to work out problems
with the countries concerned, e.g., the Aramco settlement.
The USG seldom has sufficient information to make an in-
formed judgment on the merits of particular cases or claims.
(Often U.S. companies do not want USG involvement.)
-- There is no focal point in the USG for redirecting
and strengthening USG expropriation policy. A CIEP Working
Group is responsible for coordinating USG policy on expropri-
ations, but the bulk of the work is done by country desk
officers at State, who often attach more importance to smooth-
ing over bilateral relations than to solving investment dis-
putes. The CIEP group focuses mainly on monitoring events,
and is often unable to deal with the real political and
economic tradeoffs in the difficult cases, or to assure that
broad USG interests are adequately taken account of in indi-
vidual cases. It works too often only to avoid confronta-
tion between the USG and expropriating countries.
Expropriation Policy in Practice
The gradual takeover of the U.S. bauxite-producing com-
panies in Jamaica is an excellent example of the weaknesses
of the U expropriation policy, Jamaica began by imposing
a substantial tax levy in violation of existing concession
agreements. At that time the main USG efforts were to avoid
expropriation and to encourage a negotiated solution of the
tax issue. The result was unilateral imposition of the tax.
Since that date the GOJ has implemented its policy of grad-
ually taking over the companies, and is in the process of
negotiating final settlements. (These settlements may have
been slowed by the world recession.)
The USG, however, has not exerted any real influence
over the settlement process, even though (a) the companies
appear to have passed on some of the costs of the tax and
possibly the settlement to the U.S. consumers, and (b) the
companies may eventually obligate themselves to purchase
higher cost Jamaican bauxite in long-term supply contracts.
FORD & GENALD LIBRARY
- 4 -
To the best of our knowledge there has been no systematic
analysis of USG interests in preserving even a modest degree
of competition in the bauxite/alumina market, or in bringing
USG influence to bear to protect these interests. The USG
acceded to the wishes of both the U.S. companies and the
Jamaican Government, and has not chosen to exert its influ-
ence directly to affect the outcomes.
Saskatchewan Takeover of the Potash
Industry: An Immediate Problem
USG policy toward the Saskatchewan takeover of the potash
industry is following the pattern of the Jamaican case:
-- There has been no full-scale and coordinated exam-
ination of the entire range of USG economic interests that
can be affected by the pending takeovers. U.S. interests
go beyond protecting the approximately 0.5 - 1.0 billion
dollars of U.S. investment in Saskatchewan potash. A take-
over would put a substantial portion of world potash produc-
tion in government hands, and this, together with the
oligopolistic nature of the industry, could tend to pricing
well above marginal cost.
-- The CIEP staff group has focused mainly on whether
"fair market value" will be paid. In fact, Saskatchewan
was not willing to take the loss in revenues if it lost
a
court challenge to a 1974 tax law, and, though its legisla-
tion promises "fair market value," it assures that assets
will be valued as if the contested taxes were imposed.
-- There has been no systematic study of what the USG
might do to dissuade the takeovers, or to moderate their
impacts on USG interests. The USG delivered an aide-memoire
to the Federal Government, and Agriculture is heading a
task force to develop contingency plans after an expropria-
tion has occurred. Other policy instruments, such as high-
level representations to the provincial government, have
yet to be fully examined by the CIEP group.
GERALD ? FORD
- 5 -
Sector Nationalizations in Ethiopia
Broad USG interests in the healthy development of the
private sector in LDCs apparently have been put to the side
in the face of large-scale nationalizations of particular
sectors in LDC economies. When Ethiopia threatened and
then nationalized several economic sectors, USG influence
was properly brought to bear to obtain adequate compensa-
tion for U.S. investors. No real attempt was made, however,
to persuade Ethiopia that it was in its interest to refrain
from nationalizations and to maintain a sound investment
climate. On the compensation issue, Ethiopia has dragged
its heels, and has yet to get a compensation commission
going, some 15 months after the nationalizations.
Redirecting USG Policy
One technique for redirecting USG expropriation policy
so that it better serves economic goals is to have the USG
bring its influence to bear in selected cases at the "invest-
ment dispute" stage before a dispute becomes an expropriation.
The USG would aim at assuring that these disputes are set-
tled in a fair manner so that (where appropriate) the investor
can remain in operation, and at persuading the government
concerned that its interests lie in strengthening the private
sector, rather than in intervening to put more of the private
sector in government hands The results may be less govern-
ment intervention in LDC economies, and a better investment
climate leading to more efficient resource allocation.
The USG would bring its influence to bear in this manner
only in selected cases where major USG economic interests
could be significantly affected by the outcome of the dis-
putes. While keeping track of all such disputes, the USG
would in all probability only become involved in a few impor-
tant ones. The manner in which the USG would proceed could
be tailored to the circumstances of the particular case, so
that for some disputes the USG might recommend third-party
dispute settlement, while in others the USG might take a
position on the merits of certain issues.
LIBERA GERALD ? FORD
- 6 -
Experience with the Marcona Case
USG involvement in the Marcona case suggests specific
techniques for redirecting USG expropriation policy. In
that case a prestigious and high-level policy official
(Under Secretary Maw), who enjoyed the confidence of both
Marcona and the Government of Peru, was able to use his
influence to move the parties toward a satisfactory settle-
ment. By focusing attention on the relevant business and
economic facts, and avoiding polemical argument, the USG
team was able to move both the Peruvians and Marcona toward
an equitable settlement consistent with U.S. principles on
valuing expropriated property.
The U.S. team was also able to seek independent and
expert advice from an outside consultant. The consultant
brought industry experience to bear in valuing the national-
ized properties, provided expert information valuable in the
actual negotiations, and helped set a reasonable negotiating
goal for the U.S. team.
USG economic interests appear well-served in this case.
The USG, by taking firm positions on the merits of particular
issues, was able to protect a U.S. investor. This will be an
important precedent for future disputes. Marcona was not
turned over to the Peruvians "on the cheap." The fact that
the Peruvians had to pay a fair price could not only deter
future expropriations in Peru, but in other LDCs as well.
The techniques used in this case moreover, could stand the
USG in good stead even before an expropriation occurred.
Representations by high-level officials could lead to an
orderly settlement of an investment dispute that was not yet
an expropriation, and fact finding by impartial industry
experts could provide the necessary back-up for these repre-
sentations.
Recommendation
In view of the need to redirect USG expropriation pol-
icy to better take account of the overall USG economic
interests, we recommend that the EPB direct the CIEP Expro-
priations Group to:
-- identify and analyze the USG economic interests
affected by actual or potential expropriation disputes in
important areas, i.e., petroleum, potash, bauxite, etc.
GERALD FORD LIBRARY
- 7 PM
(Political and other interests could, of course, be de-
scribed.)
-- examine possible changes or improvements in poli-
cies or operations to assure that these USG economic inter-
ests are adequately taken into account. Improvement of the
existing "early warning system," better formal coordination
of key decisions at a policy level, and other techniques
should be examined.
-- formulate guidelines so that the USG can play a
more effective role to protect its own economic and other
interests in particular cases.
Particular attention should be paid to whether the USG
can take practical and effective action to forestall or
moderate the impacts that proposed takeovers like Saskatch-
ewan may have.
The CIEP group should submit a preliminary report on
the general issues and a detailed report by August 15th.
A final report should be submitted by September 15th.
FOR IMMEDIATE RELEASE
JUNE 28, 1976
Office of the White House Fress Secretary
(Dorado Beach, Puerto Rico)
THE WHITE HOUSE
JOINT DECLARATION
INTERNATIONAL CONFERENCE
The heads of state and government of Canada, France, the Federal Republic
of Germany, Italy, Japan, the United Kingdom of Great Britian and Northern
Ireland and the United States of America met at Dorado Beach, Puerto Rico,
on the 27th and 28th of June, 1976, and agreed to the following declaration:
The interdependence of our destinies makes it necessary for us to approach
common economic problems with a sense of common purpose and to work
toward mutually consistent economic strategies through better cooperation.
We consider it essential to take into account the interests of other nati ens.
And this is most particularly true with respect to the developing countries
of the world.
It was for these purposes that we held a broad and productive exchange
of views on a wide range of issues. This meeting provided a welcome
opportunity to improve our mutual understanding and to intensify our CO-
operation in a number of areas. Those among us whose countries are members
of the European Economic Community intend to make their efforts within
its framework.
At Rambouillet, economic recovery was established as a primary goal and
it was agreed that the desired stability depends upon the underlying economic
and financial conditions in each of our countries.
Significant progress has been achieved since Rambouillet. During the
recession there was widespread concern regarding the longer-run vitality of
our economies. These concerns have proved to be unwarranted. Renewed
confidence in the future has replaced doubts about the economic and financial
outlook. Economic recovery is well under way and in many of our countries
there has been substantial progress in combatting inflationand reducing un-
employment. This has improved the situation in those countries where economic
recovery is still relatively weak,
Cur determination in recent months to avoid excessive stimulation of our
economies and new impediments to trade and capital movements has
contributed to the soundness and breadth of this recovery. As a result,
restoration of balanced growth is within our grasp. We do not intend to lose
this opportunity.
Cur objective now is to manage effectively a transition to expansion which
will be sustainable, which will reduce the high level of unemployment which
persists in many countries and will not jeopardize our common aim of
avoiding a new wave of inflation. That will call for an increase in productive
investment and for partnership among all groups within our societies. This
will involve acceptance, in accordance with our individual needs and
circumstances, of a restoration of better balance in public finance, as well
as of disciplined measures in the fiscal area and in the field of monetary policy
(M)PE)
(over)
-2-
and in some cases supplementary policies, including incomes policy. The
formulation of such policies, in the context of growing interdependence,
is not possible without taking into account the course of economic activity
in other countries. With the right combination of policies we believe
that we can achieve our objectives of orderly and sustained expansion,
reducing unemployment and renewed progress toward our common goal of
eliminating the problem of inflation. Sustained economic expansion and the
resultant increase in individual well-being cannot be achieved in the
context of high rates of inflation.
The meeting last November, we resolved differences on structural
reform of the international monetary system and agreed to promote a
stable system of exchange rates which emphasized the prerequisite of
developing stable underlying economic financial conditions.
With those objectives in mind, we reached specific understandings, which
made a substantial contribution to the IMF meeting in Jamaica. Early
legislative ratification of these agreements by all concerned is
desirable. We agreed to improve cooperation in order to further our ability
to counter disorderly market conditions and increase our understanding
of economic problems and the corrective policies that are needed. We will
continue to build on this structure of consultations.
-3-
Since November, the relationship between the dollar and mo st of the
main currencies has been remarkably stable. However, some currencies
have suffered substantial fluctuations.
The needed stability in underlying economic and financial conditions clearly
has not yet been restored. Cur commitment to deliberate, orderly and
sustained expansion, and to the indispensable companion goal of defeating
inflation provides the basis for increased stability.
Cur objective of monetary stability must not be undermined by the strains
of financing international payments inbalances. We thus recognize the
importance of each nation managing its economy and its international monetary
affairs so as to correct or avoid persistent or structural international
payments imbalances. Accordingly, each of us affirms his intention to work
toward a more stable and durable payments structure through the application
of appropriate inte rnal and external policies.
Imbalances in world payments may continue in the period ahead. We recognize
that problems may arise for a few developed countries which have special
needs, which have not yet restored domestic economic stability, and which
face major payments deficits. We agree to continue to cooperate with
others in the appropriate bodies on further analysis of these problems with
a view to their resoution. If assistance in financing transitory balance of
payments deficits is necessary to avoid general disruptions in economic
growth, then it can best be provided by multilateral means coupled with
a firm program for restoring underlying equilibrium.
(MC RE)
- 4 -
In the trade area, despite the recent recession, we have been generally
successful in maintaining an open trading system. At the OECD we
reaffirmed our pledge to avoid the imposition of new trade barriers.
Countries yielding to the temptation to resort to commercial protectionism
would leave themselves open to a 'subsequent deterioration in their compe-
titive standing; the vigor of their economies would be affected while at the
same time chain reactions would be set in motion and the volume of world
trade would shrink, hurting all countries. Wherever departures from the
policy set forth in the recently renewed OECD trade pledge occur,
elimination of the restrictions involved is essential and urgent. Also, it
is important to avoid deliberate exchange rate policies which would create
severe distortions in trade and lead to a resurgence of protectionism.
We have all set ourselves the objective of completing the Multilateral Trade
Negotiations by the end of 1977. We hereby reaffirm that objective and
commit ourselves to make every effort through the appropriate bodies to
achieve it in accordance with the Tokyo Declaration.
Beyond the conclusion of the trade negotiations we recognize the desirability
of intensifying and strengthening relationships among the major trading areas
with a view to the long-term goal of a maximum expansion of trade.
We discussed East/West economic relations. We welcomed in this context
the steady growth of East/West trade, and expressed the hope that economic
relations between East and West would develop their full potential on a sound
financial and reciprocal commercial basis. We agreed that this process
warrants our careful examination, as well as efforts on our part to ensure
that these economic ties enhance overall East/West relationships.
We welcome the adoption, by the participating countries, of converging
guidelines with regard to export credits. We hope that these guidelines will
be adopted as soon as possible by as many countries as possible.
In the pursuit of our goal of sustained expansion, the flow of capital
facilitates the efficient allocation of resources and thereby enhances our
economic well-being. We, therefore, agree on the importance of a
liberal climate for international investment flows. In this regard, we
view as a constructive development the declaration which was announced
last week when the OECD Council met at the Ministerial level.
(More)
-5-
In the field of energy, we intend to make efforts to develop, conserve
and use rationally the various energy resources and to assist the energy
development objectives of developing countries.
We support the aspirations of the developing nations to improve the lives
of their peoples. The role of the industrialized democracies is crucial to the
success of their efforts. Cooperation between the two groups must be based
on mutual respect, take into consideration the interests of all parties and
reject unproductive confrontation in favor of sustained and concerted efforts
to find constructive solutions to the problems of development.
The industrialized democracies can be most successful in helping the
developing countries meet their aspirations by agreeing on, and cooperating
to implement, sound solutions to their problems which enhance the efficient
operation of the international economy. Close collaboration and better
coordination are necessary among the industrialized democracies. Cur
efforts must be mutually supportive, not competitive. Cur efforts for
international economic cooperation must be considered as complementary to
the policies of the developing countries themselves to achieve sustainable growth
and rising standards of living.
At Rambouillet, the importance of a cooperative relationship between the
developed and developing nations was affirmed; particular attention was
directed to following up the results of the Seventh Special Session of the
UN General Assembly, and especially to addressing the balance of payments
problems of some developing countri es. Since then, substantial progress
has been made. We welcome the constructive spirit which prevails in the
work carried out in the framework of the Conference on International
Economic Cooperation, and also by the positive results achieve in some
areas at UNCTAD IV in Nairobi. New measures taken in the IMF have ,
made a substantial contribution to stabilizing the export earnings of the
developing countries and to helping them finance their deficits.
We attach the greatest importance to the dialogue between developed and
developing nations in the expectation tha it will achieve concrete results
in areas of mutual interest. And we reaffirm our countries' determination
to participate in this process in the competent bodies, with a political
will to succeed, looking toward negotiations, in appropriate cases. Cur
common goal is to find practical solutions which contribute to an
equitable and productive relationship among all peoples.
# # #
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
ALAN GREENSPAN, CHAIRMAN
PAUL W. MACAVOY
BURTON G. MALKIEL
June 23, 1976
MEMORANDUM TO EXECUTIVE COMMITTEE - ECONOMIC POLICY BOARD
FROM:
Paul W. MacAvoy pm
SUBJECT:
The Economics of the Democratic Party Platform
The June 17 New York Times published excerpts from
the Platform to be submitted to the Democratic National
Convention next month. Assuming that this version
contains the major items, CEA staff has analyzed the
horn of plenty as follows:
I. Full Employment, Price Stability and Balanced Growth
Target
"Make every responsible effort to reduce adult
unemployment to 3 percent within four years. "
Comment
To achieve the 3 percent goal, public service employ-
ment programs and public works projects would have
to be instituted in addition to countercyclical
revenue sharing. Federal resources would have to
be targeted to communities and areas that lag behind
in the economic recovery. Public service jobs would
have to be created to the extent that "people who
will be especially difficult to employ" cannot find
private sector jobs.
The Federal budget cost of attaining and maintaining
such a goal would be in the tens of billions of dollars.
Much unemployment in the United States arises from
REVOLUTION
voluntary job changing and from new entrants and
reentrants to the labor force looking for work.
(0#
AMERICAN
BICENTENNIAL
1776-1976
®
-2-
This unemployment reflects both the existence of
job opportunities and the freedom of workers to
change jobs or drop out and then reenter the labor
force. Because of this, to attain the 3 percent
unemployment goal a large-scale public service
employment program would have to be created. Yet,
if these jobs pay the prevailing wage or the
"living wage" for a family, they will attract to
the labor force large numbers who would otherwise
not seek employment. The Federal budget cost of
attaining and maintaining such a goal would be in
the tens of billions of dollars. In addition, the
availability of attractive PSE jobs would make it
more difficult for private sector employers to hire
workers, thereby setting into motion pressures for
wage inflation.
The platform expresses naive optimism that the PSE
jobs that are funded will actually represent net
increases in productive employment. Our experience
to date with PSE programs suggests that this would
not occur. Under moderate sized PSE programs, for
example, after two to three years about 90 percent
of the jobs federally funded would have otherwise
been funded from State and local sources.
It is politically appealing to assert that useful
public service jobs are far superior to welfare
and unemployment compensation. Unfortunately,
the assertion lacks substance. Most of the adults
who are on welfare (AFDC, Food Stamps, Supplemental
Security Income) are aged, disabled or women who
head households with young children. Very few could
be usefully employed in a PSE job. Also, most persons
on unemployment compensation are unemployed for a
short period of time while on a temporary layoff or
between jobs. To encourage productive private sector
employment it is better for these persons to engage
in compensated job search. PSE jobs reduce the
time for job search, and the incentives for a long-term
private sector adjustment. A PSE program is, therefore,
counterproductive in promoting private sector employ-
ment compared to a tax reduction of a similar dollar
magnitude.
-3-
II.
Government and Human Needs
Target
"We need a comprehensive national health insurance
system with universal and mandatory coverage."
Comment
Interest in national health insurance in the past
had centered on (1) providing adequate coverage
for the aged and the poor and (2) providing a
measure of protection for the middle class against
the devastating financial effects of a catastrophic
illness. Although there are problems, by and large
Medicare and Medicaid do provide access to medical
services for the aged and poor. A national health
insurance program along the lines proposed cannot
be justified on grounds of dealing with the catastropic
illness problem. National insurance, in fact, would
extend insurance coverage to expenditures that most
families now finance on a routine basis.
Target
"Fundamental welfare reform is necessary."
Comment
The reform of the welfare system proposed here calls
for (a) treating intact and female headed families
equally, (b) the same income floor for the working
poor as for those from whom substantial work effort
cannot be expected (the aged, disabled and female
headed households with young children), and (c) a
simple schedule of benefit reduction with earnings
so as to guarantee "equitable levels of assistance
to the working poor. "
For those from whom we cannot expect substantial
work effort, the welfare system must provide a
sufficient income or basic benefit to assure an
adequate consumption of goods and services. If
this same program were available to all intact
-4-
families, the number of program participants and program
costs would easily increase to twice present levels.
Setting the same basic benefit available to all would
imply that the welfare program would reach quite far
up into the income distribution. A much larger program
and substantially more benefits per recipient would result
in program costs at least twice as great as present levels
for this reason as well. Reform might well mean the
development of a program four times the present size.
III. Natural Resources and Environmental Quality
Target
"We should narrow the gap between oil and natural
gas prices with new natural gas ceiling prices
that maximize production and investment while
protecting the economy and the consumer."
Comment
This calls for Congress to set regulated gas prices
or to require the FPC to use prices based on BTU-
equivalent prices for oil. Neither would relate
closely to market supply and demand conditions.
Either would have the effect of reducing investment
incentives because of new uncertainties as to the non-
market or "political" price determinants.
Target
"United States coal production can and must be
increased
strip mining legislation designed
to protect and restore the environment while
ending the uncertainty over the rules governing
future coal mining must be enacted."
Comment
Since the reserves for increased coal production are
located primarily in areas where strip mining offers
the only means of recovery, strip mining must be
increased. However, in many areas present technology
would not permit restoration of the land at reasonable
costs. Thus, the price of coal will have to be
substantially increased to meet these goals. Whether
coal companies will be willing to invest with such
high costs or whether consumers will find the resulting
higher prices of electricity acceptable is problematical.
-5-
Target
"When competition inadequate to insure free markets
exists, we support effective restrictions on the
right of major companies to own all phases of the
oil industry."
Comment
This wording is no more than a restatement of
the present mandate of the Antitrust Division
to enforce the Sherman Act. However, this could
be extended to call for divestiture in the oil
industry - an action that would significantly
reduce the efficiency of the domestic industry
in the next five years. Such would reduce our
capacity to become independent of foreign sources
of oil and to develop further domestic refinery
capacity while not providing significantly greater
competition in the industry.
Target
"We must continue and intensify efforts to expand
agriculture as long term markets abroad, but at the
same time we must prevent irresponsible and inflationary
sales from the American grainery to foreign purchasers. If
Comment
In general, the platform statement suggests, but does
not promise explicitly, a move towards more governmental
management of exports -- attempting to push exports
when farm prices fall and restricting exports when
farm prices rise.
Other agricultural planks not quoted in the New York
Times excerpts are: (1) Support of the Capper-Volstead
Act in its present form, i.e., continue certain anti-
trust exemptions for coops, and general support of
coops and farm bargaining associations, (2) curb the
influence of nonfarm corporations in agriculture, (3)
insure that imported foods meet the same quality
standards imposed on domestic producers. Although
vague, these proposals would generally require
-6-
increased governmental regulation of agriculture and
would most likely lead to economically inadvisable
activity. Under (3), if "quality" includes such
things as size of imported tomatoes and specifications
for shipping containers, the plank plays right into
the hands of the domestic industry which has been
trying for years to get restrictions on fruit and
vegetable imports.
IV. International Relations
Target
"We will support reform of the international monetary
system to strengthen institutional means of co-
ordinating national economic policies."
Comment
The reform of the international monetary system over
the past few years has not included a strengthening
of the institutional means of coordinating national
economic policies. It certainly included an intensi-
fication of the consultative arrangements among
governments whereby finance ministries and central
banks discuss on a regular basis their domestic economic
and financial conditions and the impact of demand-
management policies on these conditions, but not the
coordination of national economic policies. It has
been CEA's view that the choice and implementation
of policies should be done on a national level, and
although the effects on international stability should
clearly be taken into account, there is no need to
coordinate policies across into across borders.
THE WHITE HOUSE
WASHINGTON
FOR EPB EXECUTIVE COMMITTEE MEMBERS
The attached materials are for your
information.
EYES ONLY
MINUTES OF THE
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEETING
June 17, 1976
ws
ATTENDEES: Messrs. Seidman, Usery, Greenspan, Dixon, Cannon,
O'Neill, Gorog, Malkiel, MacAvoy, Jones, Penner,
Porter
1. Administration Position on Minimum Wage
Mr. Seidman reported that the President has reviewed the
memorandum submitted to him on mimimum wage legislation
and determined that he would like to meet with his advisers
before making a decision on the issue.
2. Savings and Loan Monitoring
The Executive Committee briefly discussed developments in
Mississippi and other states with regard to savings and loan
institutions.
Decision
The Executive Committee approved the establishment of a
group, chaired by the Department of the Treasury, to monitor
developments in savings and loan institutions. The monitor-
ing group was requested to provide a summary of recent
developments in Mississippi and other states for the Executive
Committee's consideration next week.
3. Economic Assumptions for the Mid-Year Budget Review
The Executive Committee reviewed in detail the economic
assumptions for the mid-year budget review developed by
Troika II. The discussions focused on the GNP, unemployment
and inflation figures.
Decision
The Executive Committee approved the Troika II economic
assumptions with minor modifications. The Execuitve Com-
mittee requested that a memorandum be prepared for the
President outlining the proposed economic assumptions.
EYES ONLY
EYES ONLY
2
4.
Report on Task Forces to Improve Government Regulation
Mr. MacAvoy reported on the work of the task forces that
included government regulations. The discussions focused
on the work of the OSHA, FEA, and Export Administration
Task Forces.
EYES ONLY
RBP
OF
THE
THE TREASURY
THE DEPUTY SECRETARY OF THE TREASURY
WASHINGTON, D.C. 20220
1789
June 19, 1976
MEMORANDUM . FOR: Roger Porter
SUBJECT: Withholding Tax Schedule
This is the memorandum for the EPB about
the prospects for extension of the present
withholding tax schedule beyond June 30 --
which Bill Seidman requested at the EPB
meeting last Thursday.
George Grox Dixon
Date: JUN 18 1976
MEMORANDUM FOR: ACTING SECRETARY DIXON
d
From: Dale S. Collinson DC
Tax Legislative Counsel
Subject: Withholding taxes
You have requested our appraisal of the prospects
for an increase in withholding taxes this July. The
problem arises because the Congress, in the Revenue
Adjustment Act of 1975, provided individual income tax
reductions (changes in tax liabilities) in half the
amount that was necessary to maintain through all of
1976 the 1975 withholding tax rates. (The 1975 rates
reflected the tax cuts enacted in April 1975 by the Tax
Reduction Act of 1975 and, on an annual basis, are about
$12 billion below the 1974 rates.) Under present law,
the Internal Revenue Service would be required on July 1,
1976, to reinstitute the higher 1974 withholding tax
rates.
We have been generally proceeding on the assumption
that, one way or another, the present withholding tax
rates will be extended beyond the July 1 deadline. In
order to avoid unnecessary costs the Internal Revenue
Service has undertaken only minimal contingency planning
for the possibility of an increase in withholding rates.
The extension of the present withholding tax rates
might be achieved in any of the following ways:
The Senate might complete action on the Tax Re-
form Act, including the individual tax cut extension,
the Conference Committee might complete its work, and the
bill might be enacted prior to the July 1 deadline. We
regard this as very unlikely, given the pace at which
the Senate is moving and the great number of controversial
issues to be thrashed out. Moreover, the Senate bill is a
technical mess, and Congressional and Treasury staff
would like several weeks in which to clean up the bill
even after the Senate and the Conference Committee complete
their action.
Initiator
Reviewer
Reviewer
Reviewer
Reviewer
Ex. Sec.
Surname
Collinson
nitials / Date
950
14/18
Form 0S-3129
Department of Treasury
- 2 -
--The Senate might complete action, the Conference
Committee might fully consider the bill and announce it
had reached agreement but that additional time was needed
for technical drafting work by the staff. A short ex-
tension of the present withholding tax rates, for perhaps
30 days, might then be quickly enacted, leaving final
action on the Conference Committee tax reform bill until
after the Democratic Convention. There is a substantial
question whether Congress can proceed even this quickly.
--The Congress might still have the tax reform bill
under consideration (either in the Senate or the Con-
ference Committee) but enact an extension of the with-
holding tax rates prior to the recess for the Democratic
Convention. We would expect liberals to seek a short ex-
tension (e.g., 30 rather than 90 days) in order to main-
tain pressure for action on tax reform.
In general, it should be noted that:
The Congress need not enact a further tax liability
change for 1976; it could simply direct Treasury to continue
in force the present withholding tax rates for 30, 60, or
90 days.
--An extension of the withholding tax rates could be
enacted very quickly (perhaps in one day). The Senate
could simply attach such a provision to a minor tariff
or tax bill (Senator Long has a substantial inventory
of such bills).
--Since Congress could make an extension of the
present withholding tax rates retroactive, as a practical
matter the deadline for action is the July recess rather
than June 30.
It is too early to say which of the described scenarios
is most likely to occur. Much will depend on the progress
of the Senate debate on the tax reform bill. We are fairly
confident that the Democratic majority in Congress will take
whatever action is necessary to avoid accompanying the
opening of the Democratic Convention with an increase in
withholding taxes.
THE WHITE HOUSE
WASHINGTON
June 21, 1976
MEMORANDUM FOR
THE EXECUTIVE COMMITTEE
ECONOMIC POLICY BOARD
FROM:
WILLIAM F. GOROG WFE,
SUBJECT: Update of Selected Economic Statistics
1.
Money Stock Measures
M1 (%Change) M₂
Change in May from:
February 1976
8.9
10.9
November 1975
5.1
10.5
May
1975
5.4
10.0
2.
Total Industrial Production (Real terms, seasonally adj.)
(Index: 1967 = 100)
Index
% Change
May
1976
123.2
+0.7
April
1976
122.3
+0.5
March
1976
121.7
+0.7
February 1976
120.8
+1.1
January 1976
119.5
+0.9
December 1975
118.4
+0.7
( May 1975 - May 1976)
+11.9
3. Retail Sales (Current dollars, seasonally adj.)
Total:
$ Billions
% Change
May
1976
52.64
-1.2
April
1976
53.30
-0.1
March
1976
53.34
+1:4
February 1976
52.60
+1.9
January 1976
51.59
-0.8
( May 1975 - May 1976)
+9.3
-2-
4.
Housing Starts and Building Permits (Seasonally adj.)
Starts (annual rates) :
Millions of Units
% Change
May
1976
1,415,000
+2.5
April
1976
1,381,000
-2.5
March
1976
1,417,000
-8.4
February 1976
1,547,000
+25.2
January 1976
1,236,000
-3.7
December 1975
1,283,000
-7.1
Permits (annual rates) :
May
1976
1,158,000
+5.7
April
1976
1,095,000
-3.4
March
1976
1,134,000
I
February 1976
1,134,000
+1.3
January 1976
1,120,000
+8.9
December 1975
1,028,000
-5.3
5.
Employment and Unemployment (Seasonally adj.)
Civilian Labor Force (CLF) :
Millions of Persons - 16 yrs.+
May
1976
94.55
April
1976
94.44
March
1976
93.72
December 1975
93.13
March
1975
91.88
December 1974
91.64
Employment:
May
1976
87.70
April
1976
87.40
March
1976
86.69
December 1975
85.39
March
1975 (low)
84.11
December 1974
85.05
Unemployment:
Millions of Persons
% of CLF
May
1976
6.86
7.3
April
1976
7.04
7.5
March
.1976
7.03
7.5
December 1975
7.73
8.3
May
1975 (peak)
8.25
8.9
December 1974
6.58
7.2
-3-
Unemployment:
(% of Group)
Heads of Households:
May
1976
4.8
April
1976
-
4.8
March
1976
-
5.0
December 1975
-
5.7
May
1975
-
6.1
December 1974
-
4.6
6.
Manufacturers' Shipments and Orders (current dollars, seasonally adj . )
Total Shipments:
$ Billions
% Change
April
1976
94.12
+1.1
March
1976
93.05
+2.3
February 1976
90.91
+1.8
January 1976
89.28
+1.9
December 1975
87.62
+1.3
Total Inventories:
April
1976
148.22
-
March
1976
148.15
+0.6
February 1976
147.32
+0.2
January 1976
147.03
+0.3
December 1975
146.57
-0.1
Total New Orders:
April
1976
94.41
+1.1
March
1976
93.39
+3.5
February 1976
90.20
+2.4
January 1976
88.08
+1.5
December 1975
86.75
+0.5
7.
Consumer Price Index
All Items - 12 mos. previous to:
% Change
April
1976 (+0.4% for month)
+6.1
March
1976 (+0.2% for month)
+6.1
February 1976 (+0.1% for month)
+6.3
January 1976
+6.8
December 1975
+7.0
September 1975
+7.8
June
1975
+9.3
March
1975
+10.3
December 1974
+12.2
-4-
8.
Wholesale Price Index
All Commodities - 12 mos. previous to:
% Change
May
1976 (+0.3 for month)
+5.0
April
1976 (+0.8 for month)
+5.3
March
1976 (+0.2 for month)
+5.5
September 1975
+6.3
June
1975
+11.6
March
1975
+12.5
9.
Gross National Product (constant 1972 dollars)
Change from previous Quarter:
% Change
First Quarter 1976
+8.5
Fourth Quarter 1975
+5.0
Third Quarter 1975
+12.0
Second Quarter 1975
+3.3
First Quarter 1975
-9.2
10. Real Spendable Earnings
12 Months previous to:
% Change
April
1976
+3.8
March
1976
+4.5
December
1975
+3.8
September 1975
+1.6
June
1975
+0.2
March
1975
-4.6
January
1975
-5.1
11. Personal Income (current dollars, seasonally adj.)
Annual Rate:
$ Billions
% Change
May
1976
1,357.2
+0.8
April
1976
1,346.2
+0.8
March
1976
1,336.0
+0.8
February
1976
1,325.9
+0.9
Janaury
1976
1,313.6
+1.0
December
1975
1,300.2
+8.3
December 1974
1,200.4
-
-5-
12. Composite Index of Leading Indicators
Change from previous month:
% Change
March
1976
-0.4
February
1976
+0.7
Janaury
1976
+1.2
December
1975
+0.9
November
1975
+0.2
October
1975
-0.5
September
1975
-
August
1975
+1.6
July
1975
+2.7
June
1975
+3.0
May
1975
+1.9
April
1975
+2.9
March
1975
+0.9
February
1975
-0.8
January
1975
-3.4
December
1974
-2.2
November
1974
-3.1
October
1974
-3.9
THE WHITE HOUSE
WASHINGTON
FOR EPB EXECUTIVE COMMITTEE MEMBERS
The attached materials are for your
information.