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The original documents are located in Box 60, folder "1976/07/13 - 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States of America his copyrights in all of his unpublished writings in National Archives collections.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
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEETING
AGENDA
8:30 a.m.
July 13, 1976
Roosevelt Room
1. Report of Task Force on Small Business
Kobelinski
2. S. 2613
Kobelinski
3. Proposed Revision of the Mandatory Oil
Import Program
Zarb
THE WHITE HOUSE
WASHINGTON
July 9, 1976
MEMORANDUM FOR ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEMBERS
FROM:
L. WILLIAM SEIDMAN fews
SUBJECT:
S. 2613
A paper, prepared by the Small Business Administration, des-
cribing the principal provisions of S. 2613 and outlining the
advantages and disadvantages of the bill, is attached. It is
scheduled for discussion at the Tuesday, July 13 Executive
Committee meeting.
SMALL
RUSINESS
U.S. GOVERNMENT
THE 1953
SMALL BUSINESS ADMINISTRATION
WASHINGTON, D.C. 20416
OFFICE OF THE ADMINISTRATOR
July 9, 1976
Honorable William L. Seidman
Executive Director
Economic Policy Board
The White House
Washington, D.C. 20500
Dear Bill:
We are pleased to provide the enclosed information requested
by your memorandum of June 30, 1976, with respect to S. 2613, a bill
"to amend the Small Business Investment Act of 1958, to change the title
and duties of the Associate Administrator for Finance and Investment of
the Small Business Administration, and for other purposes."
The passage of S. 2498 and further studies of the situation
have affected the original Administration position on some elements of
this bill, as noted in the enclosure. If OMB gives us a position on
Monday I can report this to you when we meet Tuesday morning.
Sincerely,
with
Mitchell P. Kobelinski
Administrator
Enclosures
COMMENTS ON THE PROVISIONS OF S. 2613
I. SECTION 1(a)
Section 303 provides that "preferred securities" may be
purchased by SBA only from incorporated MESBICs, while
debentures of any MESBIC (presumably incorporated or
unincorporated) may be purchased or guaranteed. This is a
technical amendment and would be necessary only if legis-
lation is enacted authorizing the licensing of non-corporate
MESBICs. SBA would support such legislation.
II.
SECTION 1(a)
Section 303(c)(1)(ii) proposes that on liquidation or redemption
of the preferred stock, the MESBIC will pay par value plus
any unpaid dividends (3 percent cumulative preferred), to the
extent retained earnings shall permit. This would eliminate
SBA's discretionary right to require a MESBIC, before it
makes any distribution to private stockholders, to pay the
Government the difference between preferred dividends
actually paid and what would have been payable if the dividend
rate on the preferred stock would have equaled the interest
rate for debentures specified in Section 303(b) of the Act - t he
Government's own cost of money.
ADVANTAGES
The advantages of this amendment are as follows: This contingent
but legal requirement to pay SBA at some future date some
unknown amount has proven to be a detriment to potential and
existing investors in MESBICs and detracts, for some, from the
concept underlying SBA's role as a preferred shareholder in a
"specialized" SBIC. Further, this amendment would allow the
early years of MESBIC operations to be undertaken without the
drain of large fixed interest expense. It would enable MESBIC
managers to provide management assistance necessary for
2
disadvantaged entrepreneurs without charging fees which could
endanger feasible operations of the small business. Also,
the elimination of SBA's discretion in this area would relieve
the MESBIC of problems relative to the creation of a contingent
liability on its financial statements to reflect future payments
owed SBA.
DISADVANTAGES
However, the proposed amendment could enable shareholders
of MESBICs to make large distributions to themselves from
"winners" in their portfolios, while precluding the Government
from receiving the cost of money which made it possible.
Further, MESBICs were intended to operate as self sufficient
entities. If they cannot economically provide assistance without
a charge, then an appropriate charge should be billed the small
concern or the disadvantaged entrepreneur should be directed
to the applicable SBA office where such services are available.
SBA POSITION
SBA now supports the proposed amendment. OMB previously opposed
it. Our previous testimony before the Senate indicated we would
study the situation and provide a position. Our request to take a
support position is now before OMB.
III.
SECTION 1(a)
Section 303(c)(1)(iv)(A), (B), and (C) increase the amount of
preferred stock SBA may purchase from a MESBIC from
100 percent to 200 percent of its private capital, as follows:
(1) MESBICs licensed before October 31, 1971, which have
private capital of less than $300, 000 may be matched 2 X 1
for the additional injections of private capital after
October 31, 1971, (2) MESBICs having private capital
between $300,000, to $500,000 may be matched 2 X 1
for the private capital in excess of $300,000, and (3) MESBICs
having private capital of $500,000 or more may be matched
2 x 1 for its entire private capital.
3
ADVANTAGES
This additional leverage in the form of preferred stock rather
than debenture should attract additional private funds into the MESBIC
Industry and thus increase the potential source of much needed
venture financing for the "disadvantaged" small business community.
MESBICs would be given the ability and flexibility to provide
a greater share of its financing in the form of equity investments
since less cash flow would be required by the MESBICs for
repayment of indebtedness. Further, lower overhead resulting
from reduced cost of money would enable a MESBIC to provide
necessary management and technical assistance for disadvantaged
small concerns.
DISADVANTAGES
Low cost money for the MESBICs may, however, be a disincentive
toward investing the Government's funds in small business.
Allowable investments of such funds in riskless Government
obligations or CDs provide a considerably greater return to the
MESBIC than the cost of such funds received from sale of
preferred stock. Further, budgetary restraints may preclude
the rationale for providing yet another layer of financing to
MESBICs without at least a return to the Government of the
cost of money to it.
SBA POSITION
SBA supports these amendments in view of the enactment
into law of S. 2498, which provided for an additional layer of
leverage. Under direction of OMB, SBA had originally testified
against the leverage changes. Our request to take a support
position is now before OMB.
4
IV. SECTION 1(a)
Section 303(c)(4) provides that as a condition to obtaining more
than 300 percent leverage (Increased from 200 percent contained
in present Act), SBA may require that a MESBIC maintain
a reasonable and appropriate percentage of its total funds
available for investment in small concerns invested or legally
committed in Venture Capital.
This proposed change simply reflects the existing policy of
making the last layer of leverage available for licensees
involved in significant equity or equity-type financing.
SBA POSITION
SBA supports this amendment.
V. SECTION 1(b)
The amendment to Section 317 would eliminate the requirement
that a MESBIC reimburse SBA for the 3 percent interest
subsidy authorized by Section 317 on debentures purchased
by SBA, before any distributions to others are made.
ADVANTAGES
The benefits of this amendment are that the provision of
a true subsidy during the first five years of the term of the
debentures would be of invaluable assistance to a MESBIC
in its early years to enable it to cover some start-up costs
and to provide lower cost management advice and assistance
to disadvantaged small concerns. They also provide additional
incentives for formation of or an additional injection of private
capital in MESBICs and thus provide additional funds for
disadvantaged small concerns.
5
DISADVANTAGES
On the other hand, it would appear that MESBICs would dra W
down first on funds available from the sale of preferred stock
to SBA. Therefore, by the time the MESBIC has invested
its private capital, proceeds from preferred stock sales
and proceeds from the sale of its debenture, there should be
sufficient return on investments to cover overhead costs, as
well as any deferred interest differential on the debenture sold
to the Government. Again, the integrity of the program and
budgetary restraints may require that the Government recover
the cost of money expended in its lending programs.
SBA POSITION
Our testimony before the Senate indicated we would study the
situation and provide a position. After doing so, SBA has
determined that it opposes. the amendment for the reasons
stated above and as it would appear to create an unnecessary
additional cost to the Government. OMB has expressed its
opposition to this amendment.
July 9, 1976
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE
Proposed Agenda
Monday, July 12, 1976
No EPB Executive Committee Meeting
Tuesday, July 13, 1976
1. Report of Task Force on Small Business
Kobelinski
2. S. 2613
Kobelinski
3. Report on Status of Esch-Kemp Bill
Gorog
Wednesday, July 14, 1976 EPB/ERC Executive Committee
1. Report on Iran Invesment in Occidental
Parsky
2. Report on Clean Air Act Amendments
Gorog
3. Natural Gas Curtailments
Dunham
4. EPCA Implementation
Zarb
5. Presidential Energy Briefing
Zarb
Thursday, July 15, 1976
PRINCIPALS ONLY
1. CWPS Analysis of Recent Wage Settlements
CWPS
2. Expropriation Policy
Treasury
Friday, July 16, 1976
1. Strategy for Assessing the Cost of
Federal Regulation
MacAvoy
EYES ONLY
MINUTES OF THE
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEETING
JULY 9, 1976
ATTENDEES:
Messrs. Seidman, Greenspan, Richardson, Dixon
Cannon, Zarb, MacAvoy, Darman, Parsky, Katz,
Porter, Perritt, Penner, Arena, Hormats, Duval,
Reichley
1.
Report on Commodities Policy Coordinating Committee
CPCC reported on the tentative schedule of UNCTAD, OECD
and CIEC meetings relating to commodities issues. The
discussion focused on the need to prepare a completed
options paper on the Common Fund, a paper defining more
precisely the parameters of the proposed International
Resources Bank, and the need to prepare an assessment
of our performance in implementing our multilateral aid
commitments.
Decision
The Executive Committee requested the CPCC to prepare
an options paper on the U.S. position on the Common
Fund and a paper clarifying the parameters of the IRB
for consideration the week of August 2.
The Executive Committee requested the Department of State
to take the lead in preparing an assessment of our
performance in implementing our multilateral aid commit-
ments for consideration the week of August 2.
EYES ONLY
RBP
THE WHITE HOUSE
WASHINGTON
July 9, 1976
MEMORANDUM FOR ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEMBERS
FROM:
L. WILLIAM SEIDMAN sews
SUBJECT:
Report of Task Force on Small Business
The attached material was prepared by the EPB Task Force on
Small Business and will be discussed at the Tuesday, July 13,
1976 Executive Committee meeting.
Attachment
STUDY OF "MAKE-OR-BUY"
GOVERNMENT PROCUREMENT PRACTICES
"A-76"
JUNE 1976
*
FEDERAL GOVERNMENT "MAKE-OR-BUY" PROCUREMENT PRACTICES
I
PRESENT POLICY: EXECUTIVE BRANCH OMB CIRCULAR A-76, REVISED AUG 30, 1967 1 STATES;
GENERAL POLICY OF FEDERAL GOVERNMENT TO RELY ON THE PRIVATE ENTERPRISE
SYSTEM TO SUPPLY ITS NEEDS
A-76 COVERS ALL "NEW STARTS" OF GOVERNMENT COMMERCIAL OR INDUSTRIAL
ACTIVITY, WHERE CAPITAL INVESTMENT OF $25,000 OR MORE OR ADDITIONAL
ANNUAL COSTS OF PRODUCTION OF $50,000 OR MORE IS REQUIRED; OR, WHERE
REACTIVATION, EXPANSION OF PROJECTS OF $50,000 OR MORE CAPACITY INVEST-
MENT OR ADDITIONAL COSTS OF PRODUCTION OF $100,000 OR MORE ARE REQUIRED
-- GOVERNMENT COMMERCIAL OR INDUSTRIAL ACTIVITY: ONE OPERATED AND
MANAGED BY AN EXEC. AGENCY TO PROVIDE A PRODUCT OR SERVICE
OBTAINABLE FROM A PRIVATE SOURCE
SPECIFIED EXCEPTIONS TO POLICY
-- AVOID DISRUPTION OR SIGNIFICANT DELAY
-- AVAILABLE FROM ANOTHER FEDERAL AGENCY
-- COMMERCIAL PROCUREMENT HIGHER COST
-- NOT AVAILABLE OR CANNOT BE DEVELOPED IN TIME
Attachment 1
*
"Make"-Government retains activity in-house; or, "Buy"-Industry supplies government's
needs through procurement process
II.
CURRENT ISSUES
POLICY IS SILENT ON R&D (FY '77-$23.5B Budget)
2
-- 1967 - 60% INDUSTRY SHARE OF $14 BILLION FEDERAL R&D
2
-- 1974 - 47% INDUSTRY SHARE OF $17 BILLION FEDERAL R&D
-- 1975
3
- $3B R&D RETAINED IN-HOUSE FOR R&D OF PRIVATE SECTOR PRODUCTS
3
- TRANSPORTATION AND ENERGY R&D - 50% PERFORMED IN-HOUSE
*
POLICY IS SILENT ON "CAPTURED CONTRACTORS"
--- IS THEIR FUNDING A MAKE OR A BUY DECISION?
PROCEDURAL ISSUES RELATIVE TO DETERMINATION OF GOVERNMENT IN-HOUSE COSTS
VS. PRIVATE SECTOR PRICES
POLICY FOR COMMERCIAL/INDUSTRIAL GOODS AND SERVICES INEFFECTIVELY
IMPLEMENTED:
-- DOD-$6.3B ANNUAL EXPENDITURES (1975)
4
- 82% IN-HOUSE
-- OMB SURVEY (1971)
5
- 18,618 IN-HOUSE ACTIVITIES: ANNUAL COSTS, $7B; INVEST. COSTS, $10B
2. Government Competition with Industry; AIA/EIA, page 8
3. Bureau of Domestic Commerce Survey
4. Op Cit (2), page 9
5. Congressional Record, H 1929, Mar. 15, 1976, Congressman Kemp
*
Captured Contractors are Federally Funded R&D Centers (FFRDC's). Two major types-Gov't
Owned, Company Operated (GOCO); Federally Contracted Research Centers (FCRC's)
-3-
6
-- COMMISSION ON GOVERNMENT PROCUREMENT (1972)
- 2,899 ACTIVITIES HAD NOT BEEN REVIEWED
- 15,000 ACTIVITIES REVIEWED, 99 DISCONTINUED
- 55 NEW STARTS, 44 APPROVED
6. Summary, Comm. on Gov't Proc., page 22
-4-
III. PUBLISHED RECOMMENDATIONS
7
o
COMMISSION ON GOVERNMENT PROCUREMENT (1972)
--- "PROVIDE THROUGH LEGISLATION THAT IT IS NATIONAL POLICY TO RELY ON
PRIVATE ENTERPRISE... "
8
O.
CONGRESSMAN KEMP (R., N.Y.) HAS:
-- ANNOUNCED INTENTION TO DRAFT LEGISLATION
-- DISAGREED WITH STATUTE (PL 93-400)
ASSIGNING RESPONSIBILITY TO OFFICE OF FEDERAL PROCUREMENT POLICY (OFPP)
FOR REVISING MAKE-OR-BUY POLICY
o OFPP 9
-- NO LEGISLATION
-- THRUST IS ON EFFECTIVE IMPLEMENTATION OF CURRENT POLICY
10
INDUSTRY ASSOCIATIONS (AIA/EIA)
-- CONGRESS SHOULD ESTABLISH THROUGH LEGISLATION THAT IT IS NATIONAL
POLICY TO RELY ON THE PRIVATE SECTOR.
-- ENFORCEMENT MEASURES SHOULD BE PROVIDED
7.
Op Cit (6), page 32, Recommendation 22.
8.
Op Cit (5)
9.
Report to the Congress 1975, OFPP page 12
10.
Op Cit (2), page 16
-5-
-- RETURN TO BASIC POLICY OF BULLETIN 55-4 (JAN. 15, 1955)
AND REQUIRE FEDERAL AGENCIES TO RELY ON THE PRIVATE SECTOR
EXCEPT FOR THOSE CASES WHERE:
a. SUCH RELIANCE WOULD DEMONSTRABLY DISRUPT OR SIGNIFICANTLY
DELAY AN URGENT AGENCY PROGRAM
b. IN-HOUSE PERFORMANCE IS MANDATORY FOR THE NATIONAL SECURITY
C. THE PRODUCT OR SERVICE IS NOT AND CANNOT BE MADE AVAILABLE
FROM A FEDERAL SOURCE
-6-
IV.
RECENT ACTIVITIES:
DISCUSSIONS: OFPP WITH BDC SEEKING A-76 IMPLEMENTATION SUPPORT
BDC COMPLETED R&D SURVEY FOR TRANSPORTATION/ENERGY FEDERAL MISSIONS
DOT AND ERDA AND DETERMINED PRIVATE/PUBLIC R&D DOLLAR ALLOCATIONS
(EQUALLY SPLIT ON DOLLAR BASIS)
BDC HAS DEVELOPED MAKE-OR-BUY/ECONOMIC IMPACT ANALYTICAL FRAMEWORK
(REPORT TO BE ISSUED JULY 1976)
-7-
V.
SUGGESTED RECOMMENDATIONS TO EPB
A-76 BE MODIFIED TO SPECIFICALLY ENCOMPASS MAKE-OR-BUY POLICY FOR R&D
A-76 BE MODIFIED TO SPECIFY FFRDC FUNDING AS A "MAKE" DECISION
A-76 BE MODIFIED TO REQUIRE FFRDC'S INTERNAL MAKE-OR-BUY DECISION-MAKING
TO BE GOVERNED BY FEDERAL POLICY AS ESTABLISHED
DIRECT EACH AGENCY TO PUBLISH REGULATIONS IMPLEMENTING MAKE AND BUY
POLICIES CALLING FOR AT LEAST ASSISTANT SECRETARY LEVEL APPROVAL OF
"MAKE" DECISIONS
EPB SHOULD ENDORSE AND DIRECT DOC'S SUPPORT TO OFPP IN SURVEY OF
CURRENT POLICY IMPLEMENTATION
U.S. DEPARTMENT OF LABOR
OFFICE OF THE SECRETARY
WASHINGTON
JUL 8 1976
MEMORANDUM FOR THE EXECUTIVE COMMITTEE
OF THE ECONOMIC POLICY BOARD
FROM:
W. CHAIRMAN SUBCOMMITTEE J. USERY, JR. ON LABOR NEGOTIATIONS
SUBJECT: Tentative Contract Settlement Between the
General Electric Company and the IUE and the UE
On June 28, a tentative settlement was reached between GE
and the International Union of Electrical, Radio and Machine
Workers (IUE) covering roughly 70,000 workers and the United
Electrical, Radio and Machine Workers of America (UE)
covering roughly 16,000 workers.
Wage Adjustment
Workers will receive a wage increase of 60 cents an hour
effective June 28; 11 cents of that amount is a cost-of-
living adjustment for the previous year. The average hourly
wage of GE workers is currently approximately $5. In
addition, they will receive 4% increases in each of the next
two years.
Also, effective June 28 skilled workers will receive additional
increases of up to 6 cents per hour depending on job
classification.
Cost-of-Living Adjustment (COLA)
The COLA provides for an additional 1 cent an hour for each
0.3% increase in the Consumer Price Index. While there is no
ceiling on the increases, when the CPI rises between 7% and
9%, additional adjustments would not be made. Over 9%,
increases would continue at the same rate. Cost-of-living
increases would be effective at the end of November in each
year of the proposed contract. At 6% inflation, GE estimates
that the COLA will add 4.8 cents per hour to wages over the
life of the contract.
- 2 -
Vacation
The tentative agreement provided for a sixth week of
vacation after 30 years, compared with five weeks after
25 years in the former agreement.
Pension
Pension contributions will increase to $8 to $12 a month per
year of service depending on salary. The old contract paid
$6.50 to $9.50 a month per year of service.
Westinghouse has contracts with four unions, representing
about 53,500 workers, which will expire July 11. Tradi-
tionally, the company has settled on terms similar to those
reached at GE.
THE WHITE HOUSE
WASHINGTON
is
FOR EPB EXECUTIVE COMMITTEE MEMBERS
The attached materials are for your
information.
REPUBLICAN REPORT
U.S. SENATE REPUBLICAN POLICY COMMITTEE
John Tower, Chairman
WHERE ARE THE JOBS?
"We make these promises and then
we fail to keep them, and nobody
believes we will do anything that
we say."
----- Rep. Edward W. Pattison (D.-N.Y.)
after reconsidering the Humphrey-
Hawkins full employment bill.
Newsweek Magazine
May 31, 1976
FORD is 9ERVID LIBRARY
REPUBLICAN REPORT
U.S. SENATE REPUBLICAN POLICY COMMITTEE
John Tower, Chairman
WHERE ARE THE JOBS?
"We make these promises and then
we fail to keep them, and nobody
believes we will do anything that
we say. "
- Rep. Edward W. Pattison (D.-N.Y.)
after reconsidering the Humphrey-
Hawkins full employment bill.
Newsweek Magazine
May 31, 1976
FORD & LIBRARY GERALD
WHERE ARE THE JOBS?
As the economy confirmed President Ford's predicted recovery
in 1976 - production up, inflation down to levels approaching postwar
norms - unemployment declined to 7.3 percent (from an 8.9 percent high
in May 1975). Most economists, says the New York Times, anticipate it
will go down further, to around 6 percent, and stay at about that figure
for the rest of this year and - perhaps - for years to come (May 1976).
Yet, for a divided Democratic Party, the jobless rate is godsent.
At last, a blemish in a rosy economic picture.
Today some politicians. - among them Senator Hubert H. Humphrey
are insisting: "The whole crowd [Administration economists?] should be
fired. They have no answers to unemployment."
But the Senator adds: "I say, let's have full, maximum employ-
ment [defined as 3 percent or less unemployment] by 1980. "
Economists choke.
Be it jargon or no, in April of this year a striking 85 percent
of Americans ranked "finding jobs for the unemployed" a major Presidential
priority (Harris). And yet, despite this, a full 94 percent of those
interviewed felt "keeping inflation under control" to be the chief pri-
ority.
Indeed, 1976 is the year of the job gap ... and the year of policy
dilemmas, of economic juggling. But before further statistics, a brief
discussion of unemployment theory:
FORD & LIBRARY GERALD
- 2 -
The Nature of Joblessness
The classic theory of capitalism - or free enterprise - rests
on two venerable pillars: (1) private ownership of property, and (2) freedom
of an individual to contract with others and to engage in economic activities
of his choice for his own profit and well-being. Government, as most economic
historians explain, originally was meant to play a relatively minor role in
economic life: to maintain order, to prevent abuses, and to carry on
activities private enterprise couldn't pursue with reasonable assurance of
profit.
As with most systems, problems emerged. And as with most problems,
a panacea followed: government tackled the economy.
Thus a theory, actually two of them, has attempted to explain
persistently high unemployment and what government should do. The
so-called Structuralist theory, as described by Peter B. Doeringer in the
Public Interest (Winter 1975), cites the principal causes of unemployment
as technological displacement, shifting patterns of industrial production
foreign competition, and similar features which disrupt matching of jobs and
workers in the labor market. This theory argues for programs to adjust
labor imbalances through training, an approach which produced the manpower
legislation of the 1960's.
Then there are the Keynesians, who feel if government's (macro-
economic) policies stimulate expansion (and market demand), the economy will
absorb everyone. In other words, unemployment results when government.
monetary and fiscal policies fail to keep pace with labor-market situations.
FORD i GERALD LIBRARY
- 3 -
In recent years, efforts to reduce unemployment by either method to
anything near the 3 or 4 percent level have been, at best, misguided: And,
for certain, disappointing.
Now the question: "Is there another approach to understanding
unemployment?"
The Voluntary Poor: Another Theory
The popular picture of unemployment shows an army of six or so
million trudging from door to door seeking work. In fact, reports the Wall
Street Journal, this notion is foolish.
A recent Brookings study by Harvard economist Martin S. Feldstein
finds that of unemployed who have lost jobs, a large proportion (47 percent
in 1975) are not seeking new ones. These "non-seekers" usually are layoffs,
protected by State unewployment benefits, who expect to be called back when
business picks up. And of all unemployed, non-seekers account for at least
28 percent.
In the case of youth, where unemployment skyrocketed, Feldstein
argues since jobs often are unattractive because of low pay or other negative
characteristics, many youths backed by unemployment benefits -- choose
an "in and out" working pattern, rather than sticking to steady jobs. Jobs,
then, are available, but undesirable.
Thus, perhaps a large portion of the current jobless are voluntary;
Feldstein maintains more than half the unemployed are "job searchers," those
who have just entered the labor market or have quit to change jobs.
Long-Term Significance
The import of such findings, argues Peter Doeringer in the Public
Interest, is "that [they] challenge the interventionist thinking that guided
employment and training policy in the 1960's.
GERALD
LIBRARY
- 4 -
"From such data, it 1s but a short step to argue that responsibility
for unemployment should be shifted from the public sphere to individuals.
The failure of workers to take jobs, not inadequate aggregate demand or
ineffective manpower policies [Structuralist or Keynesian theory], becomes
the root of unemployment."
His argument concludes that past government policy erred by meddling
with employment incentives through welfare, unemployment compensation and
minimum wages.
The outcome of Feldstein's study, as reviewed by the Wall Street
Journal (March 1976), infers the quickest way to reduce unemployment is
through policies shortening jobless periods, The solution, then, would be
a political environment promoting creation of attractive jobs by private
managers and entrepreneurs. "This means no further government interference
with prices and no more nonsense about so-called 'excess' profits. These
'excess' profits are the natural signal for managers to make vital real-
locations of resources. And those reallocations preserve jobs and create
new ones by improving total economic efficiency
Thus, the new approach to unemployment means: (1) free flow of
capital into uses offering high returns; (2) wide latitude for management
in use of labor and resources; (3) reduced corporate taxation; and (4)
reduced government benefits for those choosing not to work.
Capital Formation: One Key to Improvement
Feldstein concentrates on a free flow of capital to increase
production. A capital good is any material economic good - other than
FORD is LIBRARY 938870
- 5 -
land - used to produce wealth. Wealth includes material objects, external
to man, inherently useful, and relatively scarce - the result of jobs and
production.
Thus a connection: less capital available for investment, less
production and, in turn, less jobs. We are told the next ten years will
require twice the capital investment of the past ten. That's a staggering
$4 1/2 trillion to be invested by the middle of the 1980's. An investment
vital to continued economic growth, to keeping unemployment down.
Yet government is the obstacle in the capital fund-raising process.
As the Federal Government borrows to cover its deficit, it competes with
private borrowers who need funds CO invest for future output ... for more
jobs.
This year, 1976, Federal borrowing alone will run at least $70
billion, or 28 percent of funds raised in U.S. financial markets. Last year,
the Federal Government became the largest single user of private credit for
the first time since World War II. In 1975, Federal credit demands alone
soared to $83 billion out of a total annual fund-raising of only $210 billion.
Rating Unemployment
Rating unemployment relative to size of the work force - is
tricky by any theory. For example, after a peak of 8.9 percent in May 1975,
the jobless rate moved steadily downward to 7.3 in May 1976, dropping below
the prediction of Alan Greenspan, Chairman of the President's Council of
Economic Advisers.
FORD & LIBRARY 038870
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Yet, during this reduction, the labor force ballooned at a phenomenal
growth rate: 2.1 million from April 1975 to April 1976, for a total of 94.4
million, the largest in America's history. And, perhaps most important:
teenagers and women have entered the labor force with staggering impact.
Since 1955, the number of women holding jobs has increased 74 percent,
teenagers 98 percent, but men only 19 percent.
Recent projections by the Labor Department (May 1976) indicate a
growth of more than 17 million American jobs from 1974 to 1985. The increase
will include 5.1 million clerical jobs, 3.6 million professional jobs, 1.9
million managerial positions and 900,000 sales jobs. Blue-collar positions
will account for two-of-every openings, with service jobs accounting
for about one in ten. The remaining seven? All white-collar.
In short, many unemployment theories and predictions, concludes
Seymour Wolfheim, formerly of the Bureau of Labor Statistics, take "slight
account of the fine print of employment statistics."
Beyond Theory: The Realities of Capitol Hill
But as a pdet once said: Throw theory into the fire; it only
spoils life." Unemployment's annoying presence has plagued legislators for
decades.
Political leaders have taken action; they've made mistakes. And
unemployment is still around.
What They've Done
Government programs to help jobless are of two types: (1) those
using Federal, State or local government as an employer to hire unemployed
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(public service-type programs), and (2) those utilizing Federal policy
as an incentive for private firms to increase hiring.
Public Service Jobs
Public service employment has tremendous drawbacks: the current
cost to the taxpayer to create one job totals about $8,400, not to mention
strong political patronage surrounding job assignment. Federal funds also
can become a substitute for State and local funding, rather than a true net
addition to the number of jobs.
Yet the 1970-71 recession brought on a public service program as
Congress passed the Emergency Employment Act (EEA) in 1971. Today, most
major public service job programs are authorized under the Comprehensive
Employment and Training Act (P.L. 93-203), as amended by Title I of the
Emergency Jobs and Unemployment Assistance Act of 1974 (P:L. 93-567):
At the beginning of fiscal year 1976, total enrollment in all pro-
grams was about 300,000. And about 7 percent of Title I - and almost all
of Title II funds were used for employment; the rest funded job training.
Further Ideas and Proposals
Today, the main issue concerning public service employment is size.
How many jobs should -- or can - government directly fund?
The House Budget Committee recommends 450,000 public service jobs
for next fiscal year.
The Senate Budget Committee recommends $500 million above the #
Administration budget. This would finance 360,000 jobs and a $600 million
program for railroad rehabilitation projects.
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The Joint Economic Committee recommends expansion to one million
jobs (with 500,000 additional jobs when unemployment reaches 8 percent and
another 500,000 for each percent of increase thereafter).
The Administration's budget proposes a $1.7 billion supplement for
fiscal year 1976, and provides a phase-out of all but 40,000 jobs by the
end of fiscal year 1977.
And the Emergency Employment Project Amendments of 1976 (H.R. 11453),
as passed by the House, raise the current level to about 600,000 by the end
of the fiscal year.
In any event, public service jobs are hardly a solution to 7.3
percent unemployment. Paul W. MacAvoy, a member of the President's Council
of Economic Advisers, described Federal financing of State and local jobs:
"You fill a 12-gallon can with money, and out of a small hole in
the other end drops a quarter. At least two of every three workers hired
under public service employment, argues MacAvoy, displace other workers in
the private sector, "and you will have to hire two Federal workers to watch
and see that they don't displacé the third one.
The Tax Incentive Route to More Jobs
The second approach to lessening unemployment utilizes Federal taxing
authority to encourage increased hiring by firms.
Most tax incentive bills offer a wage subsidy to the employer. That
is, for every worker hired under certain specifications, the employer is
allowed a portion of wages paid as a credit against his corporate or indi-
vidual income tax (the tax credit device, instead of a tax deduction, is
used since wages already represent a business deduction against income).
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The wage subsidy idea is now used in hiring welfare recipients.
Under the 1971 Revenue Act, employers hiring individuals receiving (1)
benefits under the AFDC program, and (2) training through the Work Incentive
Program (WIN) receive a tax credit of 20 percent of gross wages paid to the
worker.
In 1975 the Tax Reduction Act broadened requirements for the tax
credit to include employment of any Federal welfare recipient, provided the
employee works a minimum of 30 days.
Four other bills now (July 1976) before Congress - providing a tax
credit to stimulate hiring are summarized below:
The Bentsen Bill (S. 2629)
Provisions: Provides an employer's tax credit of 10 percent of
wages paid to qualifying workers (up to $800 a year). Limited to 1976 and
1977.
Qualifications: Worker must be unemployed at least six weeks prior
to being hired, and must remain hired 13 consecutive weeks or 30 weeks during
a year.
Restrictions: Total of qualifying employees cannot be more than the
net increase in employment over the level prevailing in the base year.
Total amount of credit claimed cannot be greater than the net new invest-
ments made by the employer.
Results: Would add 300,000-500,000 private sector jobs per year.
By the end of 1977, unemployment would theoretically be reduced by one percent.
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Cost: Would cost U.S. Treasury $500-600 million in revenues (much
of the cost would return to the Treasury as income and employment taxes,
and reduced unemployment insurance benefits).
Problems: Difficult to separate new workers hired because of tax
credit from those who would have been hired anyway.
The Brock Bill (S. 2382)
Provisions: Provides a tax credit of 11.7 or 14.9 percent (depending
on qualifications) for newly hired employees (up to seven per taxpayer).
Bill appeals to small businesses.
Qualifications: The higher tate applies to individuals never before
employed for more than three months on a substantially full-time basis: The
lower rate offsets the cost of training an inexperienced worker.
Results: Saves roughly $3.00 in unemployment and Federal social
welfare costs for every dollar lost to the Treasury.
The Esch Bill (H.R., 10160)
Provisions: (Section of bill providing tax credit.) Links a tax
credit with employer expenditures for träining Training includes wages and
expenses for organized training programs, including donations of services
and equipment. Credit amounts to 25 percent of training expenses (including
wages) up to $2,500 per employee.
Qualifications: Person must be unemployed for 15 weeks of the 52
weeks preceding his employment - or - individual's income for the preceding
52 weeks must be below the poverty standard used by the Bureau of Standards.
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Restrictions: No employee can participate in the program for
more than 18 months in any five-year period.
The Thurmond Bill (S. 2007)
Provisions: Focuses on aid to small businesses. Provides a
tax credit of 50 percent of wages paid to employees (maximum of two new
employees per employer.) Credit applies through December 31, 1976.
Restrictions: Limits credit per employer to $20,000. Provides
a "recapture" of the tax credit if an employee is terminated (except
for voluntary quit, disability, or discharge for cause).
Legacy of Federal Programs
Perhaps the problem of establishing any program, of deciding
alternatives - as a recent CRS study indicates - is not the process,
but negative side effects (more inflation, higher interest rates, reduced
investment, or lower productivity) In shorty is the cure as damaging
as the disease? Which introduces the biggest question today: can we
successfully legislate full employment?
Humphrey-Hawkins: Glad Tidings in November
In a year of split political parties and Presidential vetoes
toppling over-spending bills, America yearns for a bearer of glad
tidings. A special talisman.
And, as with Walt Whitman, "Behold, I do not give lectures or
a little charity, / When I give I give myself":
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Enter Senator Hubert Horatio Humphrey, who knows the plight
of seven to nine million Americans scrambling for jobs ... who has
seen the misery, and takes part credit for the brainchild of responsible
economizing: The Full Employment and Balanced Growth Act (H.R. 50 and
S. 50).
But, alas, foolish economists ridicule his efforts.
Arthur Okun, for instance, former Democratic chairman of the
Council of Economic Advisers, calls the Senator's bill "beautiful poetry."
When asked if he endorsed the bill, Harvard's Otto Eckstein, the
Democratic Council of Economic Advisers veteran, replied: "No. I don't
have to. I'm not running for President. "
And columnist Nicholas von Hoffman added:
"Impeachment or chaos surely lie in wait for the chief executive
unlucky enough to oversee the Humphrey-Hawkins Full Employment Act
[Senator Humphrey] doesn't understand that the Senate is a legislative
body. He thinks it's a wishing well."
Yet maybe the economists are biased. Consider the bill's provisions:
The Humphrey-Hawkins bill would establish "the right of all
Americans able, willing, and seeking work to opportunities for useful paid
employment at fair rates of compensation."
The 50-page bill seeks full adult employment at a 3-percent rate
by 1980. The Senate version defines "adult" as anyone 18 or over - different
from the "unemployment" definition of "adult" as anyone 16 or older -- which
changes the goal for overall jobless upward to between 3.5 and 3.8 percent.
Senator Humphrey estimates after 24 months the bill's net cost would total
$8-16 billion, or $23-24 billion gross cost to American taxpayers.
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Now the snag: If the 3-percent goal cannot be achieved through
traditional monetary and fiscal policies, the Federal Government would
sponsor job programs to establish this rate, with government acting as
an "employer of last resort" to maintain this rate. Wages for govern-
ment-sponsored jobs would reflect prevailing private sector wage rates.
The Problem With Inflation
Most economists agree an overall unemployment rate between 4.8
and 5 percent is a realistic full-employment goal. The H-H bill sets a
goal of 3 (or 3.8) percent, yet the U.S. has never achieved a 3.5 unem-
ployment rate over a sustained period except during wartime.
Senator Humphrey says such talk is foolish. "They have nothing
better to offer."
Sar Levitan of George Washington University says achievement of
the 3-percent rate would require phenomenal growth rates in GNP. "You'd
have to keep real GNP growing at least 7.5 percent a year through 1980,
and we've never grown so fast for so long a period."
Almost all economists agree on the outgrowth of full-employment
legislation: rapid, perhaps double-digit, inflation.
Charles Schultze of the Brookings Institute, and formerly Presi-
dent Johnson's Budget Director, pointed out to the Senate Committee on
Public Welfare that the way the bill defines "prevailing" wage, a person
could turn down a private sector job and still be eligible for a "last
resort" job paying a higher wage.
Schultze observes a $2.50 per hour unskilled laborer could quit his
private sector job and, a few weeks later, draw a "last resort" job paying
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$3.50 or $4.00 per hour. "Wage rates would rise sharply and prices would
follow," continues Schultze. "The size of the government's job programs
would grow rapidly.
...
The direct and indirect effects of this on the
inflationary problem would be very serious. "
Other Democrats also disagree.
Alice M. Rivlin, director of the Congressional Budget Office, adds:
"If unemployment were to be held at the 3.5 percent rate indefinitely, the
simulations show a growing inflationary impact."
Even John Kenneth Galbraith, expected to highly praise the bill,
insists on standby wage controls (today, a dirty word to most economists)
to blunt inflationary pressures before unemployment comes down.
Sponsors of S. 50 quickly point to the bill's anti-inflation section,
including provisions insuring (?) adequate supplies of scarce commodities
(food and energy), strengthened anti-trust laws, methods to increase private
sector productivity, and provisions for government action to promote price
stability (wage-price controls).
Yet Alice Rivlin of CBO responds: "There is much less focus in the
bill on these. anti-inflation suggestions than on the unemployment goal;
there is no target set for inflation as there is for unemployment."
Not surprising, then, that economists like Michael Wachter of the
University of Pennsylvania -- one of Governor Jimmy Carter's economic
advisers -- estimates the full-employment program could cause inflation of
15 percent or more. (Wachter fears Carter's support of the bill could become
"an albatross for Jimmy, assuming he's nominated.") Business Week: May 1976.
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So Why Full Employment?
Thus, the election approaches. Suddenly, jobs are an issue as
a party unifier.
President Ford denounced the Humphrey-Hawkins bill as a "vast
election-year boondoggle."
A top Majority Congressional staffer responded: "Let him veto it
and show how callous he is. That's its only purpose." And the "New Member
Caucus" of freshman Democrats adds: The H-H bill is "almost an ideal bill
to bolt on."
So this year, our election year, we decide our intermediate term
economic future. The full-employment bill came, boasting courageous goals,
and every month its proud provisions change as economists complain of idiocy.
Who knows what form the H-H bill will take by November? Perhaps as New York
freshman Congressman Edward Pattison (once for the bill; now voting nay)
said: "We make these promises and then we fail to keep them, and nobody
believes we will do anything that we say."
November will tell.