The
state
ofthe
economy
A s chairman of the
University of
Nebraska-IAncoln 's economics
department for the past six
years, author of several books
and many articles and past
president of the Midwest
t: c o n omics A ssociation,
Wallace C. Peterson is a
nationally recognized
economist. The 50-year-old
professor, a former newspaper
reporter who has been an NU
teacher off and on for the past
20 years, is a perceptive
observer and critic of the
nation 's economy. The Daily
Nebraskan asked Peterson to
write his analysis of the current
situation in America's
econo m y . Here is his
commentary.
by WALLACE C. PETERSON
As the first quarter statistics
rolled in they indicated that a
recovery from the recession is
underway, even though the
economy remains sluggish and
the pace of the revival may be
slower than in any earlier post
World War II slumps. The chief
reason for optimism was that
the gross national product rose
during the first three months
of 1971 at an annual rate of
11.5 per cent over fourth
quarter figures of 1970,
although almost half of this
increase was accounted for by
price increases rather than any
gain in output. How much of
the first quarter improvement
was a recovery from the
strike-depressed fourth quarter
of last year is difficult to
determine.
On the debit side, there has
not been any change in the
unemployment rate, which
remained stuck during April at
6.1 per cent of the civilian
labor force. Of special
significance are the
unemployment figures for
nonwhites and teenagers, both
of which continue to be much
higher than the average for the
entire labor force. During the
first quarter the nonwhite
unemployment rate averaged
9.5 per cent, up from the 8.2
per cent rate of 1970, while
the teenage rate (16-19 year
olds) was also up from last
year, averaging 15.7 per cent
for January through March in
contrast to an annual rate of
15.3 per cent last year.
By moving from a program
of restraint to mild
stimulus, the
Administration has clearly
decided that bringing
down the unemployment
rate is more important
than controlling inflation.
Unemployment among
nonwhite teenagers reached a
staggering 31.7 per cent during
the first quarter of this year!
Bringing these unemployment
rates down is a formidable
task, particularly in view of the
fact that the rate of growth in
the civilian labor force
accelerated in 1969 and 1970,
primarily because of the
winding down of the war in
Vietnam.
SOFTNESS IN the
economic recovery is also
reflected in the fact that
industrial production failed to
show any gain during the first
quarter; the Federal Reserve
Board index shows that
industrial output is still about
5 per cent below the peak
reached in mid-1969. The
Federal Reserve's index of
capacity utilization in
manufacturing averaged 73.1
per cent for the first quarter, a
figure slightly higher than the
fourth quarter of last year, but
still below the overall rate
during 1970 of 76.6 per cent.
For 1948-1970 the utilization
rate in manufacturing averaged
85.2 per cent.
Year's end in 1970 brought
an abrupt shift in economic
policy by the Nixon
Administration. The
much-heralded "game plan"
that dominated economic
policy during Nixon's first two
years was quietly dumped in
favor of a more activist stance
with the President openly
praising deficit financing as an
important tool for economic
management. Symbolically the
change dates from Nixon's
astonishing statement to
newsmen early in January that
he "is now a Keynesian."
Our present economic
difficulties are like the tip
of an iceberg because most
of the really serious
economic troubles and
distortions which beset the
economy remain
concealed from the public
consciousness.
Paul McCracken, Chairman
of the President's Council of
Economic Advisers, was the
architect of the "game plan" a
program which sought through
a delicate combination of
reduced government spending
and tight money to "cool"
down the economy enough to
slow inflation, but not so much
as to cause too much
unemployment. By last
December it was apparent the
plan had failed, for
unemployment rose during the
year bv more than 55 per cent
(from 3.9 per cent of the civilian
labor force in January to 6.2 at
the end of the year), without
any appreciable effect upon
the price level. Consumer
prices jumped during 1970 by
5.9 per cent.
IN HIS RECENT budget
message the President indicated
in two ways that a basic policy
shift was under way. First, he
pointed with a measure of
pride to an estimated budget
deficit of SI 1.6 billion for
fiscal 1972 as proof that his
administration is committed to
an "activist" role in managing
the economy. Second, he
accepted the concept of the
"full employment budget."
According to this view, what
really counts is not whether
the accounts of the Federal
government are in deficit or
surplus in any given year, but
whether they would be in
deficit or surplus if the
economy were at full
employment, usually defined
as no more than 4 per cent
unemployment. The President
expects the budgetary deficit
plus an expanding money
supply to generate enough
expansionary steam to boost
Federal tax revenues so that
the budget will really be in
balan-. f by July 1, 1972.
B vmg from a program
of restraint to mild stimulus,
the Administration has clearly
decided that bringing down the
unemployment rate is more
important than controlling
inflation, even though lip
service is still being paid to the
latter objective. By mid-1972
the Administration says the
unemployment rate will be
down to AVi per cent and
consumer prices, will be rising
at an annual rate of no more
than 3 per cent, a prognois that
finds few takers among
economists and financial experts
outside Administration circles.
Like the earlier "game plan",
the Nixon program for actually
reaching these objectives rests
on faith and hope that talking
about policy will do as much as
policy itself to get the job
done. This is especially true in
the crucial matter of getting
full employment without
re-kindling strong inflationary
pressures.
Even though the current
recovery is shaky and sluggish,
there is no reason to doubt
that the economy eventually
will respond to the stimulus of
expansionary monetary and
fiscal actions, even though it is
highly dubious that an
expansion can be managed
without more inflation. But
our present economic
difficulties are like the tip of
an iceberg because most of the
really serious economic
troubles and distortions which
beset the economy remain
concealed from the public
consciousness. Not only are we
unable three decades after the
"Keynesian Revolution" to
solve the essential problem of
how to get full employment
without an unacceptable rate
of price inflation, but it is
increasingly evident that the
American economy does not
operate in a way that
distributes jobs, income, and
reasonable affluence to all the
population. The blunt fact is
that roughly one-quarter to
one-third of American
households have incomes that
are substandard in terms of any
reasonable estimate of the
potential affluence of the
American economy. To
illustrate, more than 30 per
cent of American households
have incomes of less than
$6,000 per year, even though
the Bureau of Labor Statistics
says that it requires an income
of at least $10,000 for an
urban family of four to
maintain a modest but
adequate standard of living!
THE INABILITY of the
richest and most productive
economy in human history to
achieve a decent standard of
affluence for all its citizens is
a scandal, neither easily
explained or corrected, but at
least three serious distortions
of long-standing appear to be
at the root of the matter. The
first is the excessive
concentration of income and
wealth in the hands of a
relatively small segment of the
population; the second is the
distortions wrought by the
diversion of nearly 1 0 per cent
of our real putput to military
purposes for at least two
decades; and the third is our
failure to face head-on the
issues raised by the monoply
and the concentration of
economic power in key sectors
of the economy. These issues
are not really new, but few
political leaders in our national
life are willing to address
themselves to them. Space
limitations allow comment on
only the first of these,
although the latter two raise
equally serious questions of
public policy as subsequent
discussion.
According to the recent
date compiled by Herman P.
Miller of the U.S. Bureau of
the Census-author of Rich
Man, Poor Man- the wealthiest
20 per cent of families receive
48 per cent of total income,
whereas the poorest 20 per
cent receive but 3 per cent of
total income. At the top of the
scale, families with an annual
income of over $29,700
comprise but 5 per cent of the
population, but receive 22 per
cent of the income
OWNERSHIP is
more concentrated, for
according to recent research by
professor Robert Lampman of
the University of Wisconsin,
) si
; v L J.
the top 1.8 per cent of the
adult population holds 28 per
cent of the nation's wealth, but
the lower 50 per cent has only
8.3 per cent of the total.
Contrary to some beliefs
neither income nor the
ownership of wealth is
becoming more widely and
fairly distributed in the
American economy. On the
contrary, studies by Miller
show that there has been no
significant change in the
distribution of income since
World War II, and Lampman's
findings suggest that ownership
of wealth is becoming more
rather than less concentrated.
Contrary to some
beliefs neither income nor
the ownership of wealth is
becoming more widely and
fairly distributed in the
American economy.
What accounts for this?
There is no simple explanation,
but part of the answer lies in
the perverse way the total tax
system operates in the United
States. Popular belief
notwithstanding there is
precious little progression in
our tax structure. Even in the
Federal system the degree of
progression is probably far less
than many people imagine,
while state and local taxes are
extremely regressive in their
impact. For example, the
effective Federal tax rate-the
per cent of income actually
taxed- is practically identical
for families with incomes
ranging from $2,000 to
$2 5,000, although some
progression creeps into the rate
structure when income gets
above $25,000. For state and
local taxes the effective rate
actually decreases from an
average of 15.7 per cent for
families in the $2,000 - $4,000
bracket to an average of 6.7
per cent for families with an
income of more than $50,000!
If lower income families did
not get some help through
social security, unemployment
insurance, medicare, and
welfare, the situation would be
far worse.
Another part of the
explanation lies in the fact that
in both agriculture and
manufacturing gains in
productivity far outstrip the
-spendable income being
received by farmers and
workers. The situation is
especially acute in agriculture,
where, according to Bureau of
Labor Statistics, output per
man has increased by a
staggering 287 per cent since
1947, but real income per farm
(money income adjusted for
price changes) went up by only
38 per cent. It is little wonder
that rural America is in deep
economic trouble. In
manufacturing, a growing
gap between real hourly wages
and productivity developed
over the last decade, a gap that
cannot be accounted for
wholly by a growth in fringe
benefits, but probably reflects
the growing and
disproportionate burden that
payroll taxes play in the
American economy. The ethic
of a market economy says that
there ought to be a rough
relationship between the
incomes people actually receive
and their productivity, but
these developments clearly
suggest this is becoming less
true.
If we reach back through
history to the early years of this
century, we find that our basic
domestic problem today
remains what it was
then-excessive injustice in the
control of wealth,
income, political power, and
social privilege-only now it is
compounded by the inability
of the economy to generate
sufficient jobs at adequate
incomes to permit all American
citizens to participate in a
productive and creative way in
the economic life of the
nation. This issue transcends
the current economic
difficulties and it will not
disappear, even if the economic
policies of the Nixon
Administration get the
unemployment rate down by
the middle of next year.
rn -ninu- iMHmiminiiniuiimu.j.. ,
PAGE 8
THE DAILY NEBRASKAN
MONDAY, MAY 17, 1971