April 27, 1977
Page 12424
TIME LIMITATION AGREEMENT ON ROTH AMENDMENT
Mr. ROTH. Mr. President, I would be happy to agree to a consent agreement on my proposed permanent tax cut of 10 percent across the board based on a 2 hour period, 1 hour for my side of the proposition and 1 hour for the opposition, with the agreement that there would be an up and down vote at the end of 2 hours.
Mr. ROBERT C. BYRD. Reserving the right to object — and the Senator has not made a request — with the further provision that the Senator be recognized following the vote on the disposition of the Javits-Danforth amendment, that it be in order for him to call up his amendment and that it be in order. I make that request.
The VICE PRESIDENT. Is there objection? Without objection, it is so ordered.
Mr. ROTH. Just to make certain, it is clear that we will have an up and down vote on that amendment?
Mr. ROBERT C. BYRD. That was in the request.
Mr. LONG. Mr. President, I suggest the absence of a quorum.
The VICE PRESIDENT. The clerk will call the roll.
The second assistant legislative clerk proceeded to call the roll.
Mr. ROBERT C. BYRD. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.
The VICE PRESIDENT. Without objection, it is so ordered.
Mr. LONG. I yield to the Senator from Maine.
Mr. MUSKIE. It seems to me, Mr. President, and this will not take much time, this would be the appropriate occasion to report to the Senate the result of the Budget Committee's deliberations this morning on the third concurrent resolution for the 1977 fiscal year and the first concurrent resolution for fiscal year 1978.
The committee has not concluded its consideration of both resolutions. It has dealt only with the relative size, that being most relevant to the pending debate and the pending bill. We will consider the outlay side this afternoon. That, of course, will involve the rebate related to the $50 tax rebate.
On the revenue side, just to announce the results quickly, the committee voted to raise the revenue floor in the third concurrent budget resolution from $347.7 billion to $349.3 billion. That reflects reestimates of estate and gift taxes and also it reflects the delay in the standard deduction withholding changes. Those two together add $1.6 billion to the revenue estimates for fiscal year 1977 and account wholly for the change.
The committee voted not to raise the revenue floor for the purpose of reflecting the Senate's action on the $50 tax rebate.
It was the committee's view that it still believed that the stimulus that would have been provided by that rebate is still needed by the economy. It may still be needed by the economy. In any case, the committee believed that, since that was its position with respect to our economic needs, it ought to hold to that position by holding a revenue number.
That does not eliminate the budgetary discipline on the outlay side, because we are going to reduce those estimates in order to retain that discipline. But on the revenue side, the fiscal year 1977 number, as approved by the committee this morning, reflects our belief that stimulus is needed in the economy today, as it was earlier this winter.
With respect to fiscal year 1978, the committee, by a positive vote, retained the revenue numbers of the first concurrent resolution, $395.6 billion. That makes no room, in our judgment, for some of the amendments that have already been approved by the Senate, nor does it make room for any permanent tax reduction beyond those already contained in the tax bill.
Members of the committee, nevertheless, disagree about the need for a permanent tax reduction. It was the view of the committee that, with a tax bill pending on the floor, it is virtually impossible for the committee to come up with a floating number on revenues that would necessarily reflect what the Senate and the Congress as a whole do.
We would have preferred it, with the benefit of hindsight, if we could have had the budget resolution examined before action on the tax bill, but, as I have said before, that is history. We are in the middle of that debate and we ought to conclude it and conclude it as quickly as possible at the present time. If, when Congress finally acts on the tax bill, the result is inconsistent with the First Concurrent Budget Resolution in 1978, then, obviously, appropriate action will have to be taken on the floor and we shall have to deal with it at that time.
Mr. LONG. Mr. President, will the Senator yield?
Mr. MUSKIE. Yes.
Mr. LONG. Mr. President, I thank the Senator. I congratulate him for the action of the Committee on the Budget. It seems to the Senator from Louisiana that, with the revenue spending proposals that the President is proposing and which Members on both sides of the aisle will be offering at this point, there is absolutely no way to estimate precisely where we are going to be in fiscal year 1978. The President made some energy proposals which might raise us a great deal of revenue to offset the cost of certain tax incentives for people who save on energy. While we would like to be able to say that the President's program will pass, history reveals that it is easy for Congress to vote for tax cuts, but much more difficult to persuade it to vote for tax increases.
While we approach all this with good will and a spirit of cooperation, it is really impossible at this moment to predict just where we are going to wind up — if we are going to pass all spending proposals or if we are going to pass all tax reductions or tax increase proposals.
We still have not seen what the President's tax reform proposal is going to look like, and we have not seen what his welfare proposal is going to look like. If the Senator says we are in the dark on the cost of those big items, I do not see how the Senator can hope to give us any final judgment on where we are going to stand in fiscal 1978, other than to say that we are going to try to be fiscally responsible. I believe that is what the Senator is trying to do and I assure him that I want to cooperate with him on that point.
Mr. MUSKIE. I shall make one other point. I say to the Senator, then I shall yield to my good friend who represents the Republican minority on the committee (Mr. DOMENICI) .
This is a new administration, with its policy still in the development stage. As the distinguished floor manager said, we do not yet have a very precise or even a very rough estimate of the budgetary impact of the President's energy proposals. OMB has not been able to provide that kind of analysis. CBO has not had the time to develop that kind of analysis, and our own staffs have not. So that question is very much up in the air.
We do have the period between the first concurrent resolution and the second concurrent resolution to take into account developments in these as yet undefined policy areas. The first resolution represents targets and we try to hold to them as closely as possible in order to retain the discipline of the processes. We also recognize that in an area like energy, where policy has just been announced, we are just beginning to debate it; we are just beginning to discuss it; we are just beginning to understand it. Both the President and Congress need some leeway to form final positions before we try to freeze policy decisions into the first concurrent resolution. So, in an area like that, I think the Committee on the Budget has tried to be responsive to the need for flexibility between the two resolutions.
I hope that by September 15, we shall be in a position to set hard targets or hard ceilings. But that lies ahead of us and we have to have some flexibility in the meantime.
In addition, in all candor, I say to the Senator, it is necessary to accommodate the differences of opinion within the Budget Committee, as the Senator finds it necessary to do within the Committee on Finance.
Mr. DOMENICI. Will the Senator yield?
Mr. JAVITS. Mr. President, will the Senator yield so I may ask for the yeas and nays?
Mr. MUSKIE. Of course.
Mr. JAVITS. Mr. President, I ask for the yeas and nays on this amendment.
The VICE PRESIDENT. Is there a sufficient second? There is a sufficient second.
The yeas and nays were ordered.
Mr. MUSKIE. Would the Senator from New Mexico like the floor?
Mr. DOMENICI. No, I wish to talk with the Senator from Maine and I shall not take long. I wish to recap some of the statements of the Senator from Maine and see if he agrees and if my understanding is correct.
The revenue ceilings we have agreed on in the Committee on the Budget of $349.3 billion
Mr. MUSKIE. For fiscal year 1977.
Mr. DOMENICI (continuing). For fiscal year 1977, from the standpoint of policy, obviously would have to be construed to mean that the Committee on the Budget feels that there still is a need for stimulus by way of tax cuts. We agree with that, do we not?
Mr. MUSKIE. The Senator is correct.
Mr. DOMENICI. We also agree that the Danforth-Javits amendment—
Mr. MUSKIE. Will the Senator yield?
Mr. DOMENICI. Indeed.
Mr. MUSKIE. I think it would be helpful if we had printed in the RECORD a statement by the Director of the Congressional Budget Office, Alice Rivlin, yesterday before the committee which reflects that same view.
I ask unanimous consent, Mr. President, that the statement may be printed at this point in the RECORD.
There being no objection, the statement was ordered to be printed in the RECORD, as follows:
STATEMENT BY ALICE M. RIVLIN,
DIRECTOR, CONGRESSIONAL BUDGET OFFICE
Mr. Chairman and Members of the Committee: At the Committee's request, I am happy to share some brief observations on the economic outlook. I will address myself to three questions:
Has the economic news through early April provided reasons for altering the economic forecast that I presented to this committee on March 2, or the forecast contained in the Committee's report on the Third Concurrent Resolution for Fiscal Year 1977?
How will the outlook be affected by withdrawal of the $50 rebate assumed in the Third Concurrent Resolution for Fiscal Year 1977?
What is the effect of the shortfall in federal expenditures on the economic outlook?
RECENT ECONOMIC NEWS
The economic statistics of the last few weeks have contained bad news about prices, at least from the consumer's point of view and good news about economic activity. Before a drastic change in fiscal policy is made however, these statistics should be examined carefully. It seems to us at the CongressionalBudget Office that the recent speedup in the rate of price increase reflects mainly the continued effects of cold weather on food and energy prices, and it does not necessarily presage a permanent increase in the underlying rate of inflation. Recent favorable statistics on economic activity, moreover, probably reflect inventory rebuilding and a rapid rebound from the cold weather. There are reasons to think that this upsurge may be temporary and that it does not justify increased optimism about the level of activity in the second half of the year.
The rate of increase in consumer prices rose from 4.2 percent during the last quarterof 1976 to 10 percent in the three months ending in March, with the biggest single factor being a 15 percent rate of rise in food prices. This sort of increase is not expected to continue, and in fact the food price rise was already beginning to slow down in March.The rise in energy prices continues fairly high, but it has little or no relation to the balance of aggregate demand and supply in the economy. We have also seen some recent increase in the rate of change in prices other than food and energy from their relatively good performance last year. But wage rate changes have remained in the 7 to 8 percent range, and we do not interpret recent developments as evidence that the underlying rateof inflation has moved out of the 4.5 to 6.5 percent range.
OUTPUT GROWTH IN THE FIRST QUARTER
According to the preliminary estimate the rate of growth in national output in the quarter just ended was 5.2 percent — the highest it has been since the first quarter of last year and considerably better than most forecasters had expected. Furthermore, the quarter ended on a high note, with retail sales, industrial output, and employment expanding rapidly. These gains were not unexpected by CBO and other forecasters; the principal surprise since I last testified before you is that the cold weather disruptions were smaller, and the rebound earlier, than we had anticipated in early March. Good news though this was, we may want to look at it in a slightly longer perspective. Compared with a year earlier, real GNP was only 4 percent higher, and the unemployment rate only two-tenths of a percentage point lower.
While we may well see more good news in the immediate future, we have a number of reasons for expecting that growth rates in output will slow after midyear and that the unemployment rate at year end will be little improved from the current quarter. Much of the present strength in the economy results from temporary factors and high rates of growth are therefore not likely to be maintained through the end of the year.
The first temporary factor is, of course, the rebound from output disruptions caused by the cold weather. For example, the high level of housing starts reported for March probably included starts postponed from January or February. For the quarter as a whole, starts were hardly changed from the final quarter of last year, and we continue to anticipate that the housing sector will contribute less to growth during 1977 than it did during 1976.
Second, the acceleration in growth in the first quarter was entirely due to inventories — final sales growth slowed down in real terms — and the same is likely to be true in the current quarter. After the marked slowing of inventory investment during 1976, businesses apparently found their stocks a little low by the end of the year, and stock rebuilding is currently giving an upward boost to output. By the middle of the year the desired inventory-to-sales ratios are quite likely to be achieved, and output gains should then slow to the rate of growth of real final sales.
CONSUMER BEHAVIOR
Third, over the past two quarters we have seen a dramatic decline in the personal saving rate. This means that consumer spending increased faster than consumer incomes, providing stimulus to final sales. The rising rate of consumer spending was not associated with an increase in consumer confidence. Consumer confidence, as measured by the University of Michigan Survey Research Center in February, was a little better than in November but not quite as high as it had been in the late summer. Saving rate behavior is not perfectly understood, but our best judgment is that the decline in the saving rate has reflected special factors, namely the increased availability of autos this spring, after supply disruptions caused by the Ford Motor strike and the cold weather; and what I would call "involuntary consumption" — high heating requirements in those cold months last winter. In addition, there is the disquieting possibility that some consumers may have raised spending in anticipation of a rebate this spring.
What all this means is that if consumers paid their extra heating bills entirely out of savings, the savings rate is likely to rise from its first quarter level. If they attempt to rebuild their net money balances by cutting back on other consumption, it will rise even more. And this rise in the saving rate will mean that consumption will now grow more slowly than disposable income.
If consumer confidence is significantly reduced by dropping the rebate or by the prospective energy program, this may depress consumer spending still further. Sindlinger's telephone survey has reported a sharp decline in confidence following the announcement of the energy program, but it remains to be seen whether the decline will last. The energy program has introduced new uncertainties, not only about business conditions in general, but about markets for particular goods and services, and spending is likely to be somewhat unsettled until the uncertainties are resolved. We might expect, for instance, that sales of gas-guzzling cars would be strong but that sales of small cars, and perhaps other energy saving products as well, might languish until the proposed taxes and subsidies are either put into effect or voted down.
Forecasting aggregate consumer behavior is subject to as much uncertainty as forecasting the rest of the economy — or more — but the latest information we have suggests that in the absence of the rebate consumer spending will be slowing down economic growth rather than leading it over the rest of 1977. What early indications we have on the second quarter go along with this, although they are extremely tentative. New auto sales appear to have slipped a little in the first 20 days of April, though the decline may reflect distortions caused by sales contests. Retail sales excluding autos dropped in the third week of April, following gains earlier in the month.
BUSINESS INVESTMENT
Will the ending of the rebates have offsetting beneficial effects on interest rates, business confidence, and investment? We believe the answer is yes, but that these effects are relatively small.
One reason they are small is that the Federal Reserve was expected, as Chairman Burns testified before this Committee, to allow a temporary bulge in the money supply during the rebate period, which would keep interest rates from rising as much as they would without such an accommodative policy. With the rebates withdrawn, we now presume that there will be no bulge in the money supple either, hence a relatively small and temporary difference in forecast interest rates.
A second reason that the positive effects on investment are relatively small is that the reduced business sales to consumers in the absence of the rebate may offset some of the positive effect of easier credit on the demand for capital goods. Our latest information on demand for capital goods does not cover the period since the withdrawal of the debate. As of March, new orders for non-defense capital equipment were down for the second month in a row, after a very strong January.
On a quarterly average basis, orders were still well above the fourth quarter, and appeared consistent with the spending plans businesses reported to the Commerce Department, which we incorporate in our forecast.
As for business confidence, we have now been told by the Conference Board that assessments of economic conditions by businesses improved between October and February. We have no information later than February, and the rebate looked like a pretty sure thing in February. Right now, judging by the behavior of the stock market, any bolstering of business confidence that followed withdrawal of the rebate may well have been offset by the uncertainties inevitably introduced by the President's announced energy program.
REVISED FORECAST
These judgments by the Congressional Budget Office are summarized in Table I. Compared with the forecast I presented to you in my testimony of March 2, we have not changed the level of real GNP or unemployment at the end of 1978, but we are forecasting higher rates of unemployment and inflation during 1977. The forecast just released by the Administration is very similar to ours on inflation but near the optimistic end of our range for unemployment.
The withdrawal of the rebate adds 0.2 percent to the unemployment rate at the end of this year, representing the loss of 280,000 jobs. Since the rebate was to be a one-shot rather than a continuing stimulus, we estimated that it would have no effect on employment by the end of 1978.
Withdrawal of the rebate should not have a measurable effect on inflation either. The speedup in inflation that we are projecting during 1977 results from further effects of the cold weather on food and energy prices. This forecast does not include any effects of the President's energy program, which we are now in the process of evaluating. We are now estimating that the cold weather has added more than a point to the rate of change in the Consumer Price Index in 1977, but this has not been enough to raise the underlying inflation rate permanently; inflation reverts to an estimated 4.5 to 6.5 percent during 1978.
FEDERAL SPENDING
Still another potential problem for the economy arises from the continuing shortfall in federal spending. When I testified before this Committee in early March. we anticipated a 1977 spending shortfall of at least $5 billion from the third concurrent resolution outlay level. This shortfall was incorporated in our March economic projections. OMB's recent spending estimates include a net downward revision of outlays of $6.1 billion for 1977 due to the shortfall and other factors. Other observers of federal spending have estimated that the shortfall could be as much as $10 billion or more. We are now reviewing the recent OMB estimates and will adjust our scorekeeping tabulations where this appears to be appropriate.
About one-third of OMB's revision in estimated 1977 spending levels is in financial transactions, such as foreign military sales and HUD mortgage market activities, which do not have a significant effect on the "National Income and Product Accounts." The remaining downward adjustment falls mainly in grants to state and local governments (e.g., public service jobs, EPA construction, local public works, highway construction, education programs) and in federal purchases (e.g., defense spending, federal construction activities, and energy R & D and strategic petroleum reserves). Spending for farm price supports and social security benefits have been revised upward.
If OMB's estimate of a $6.1 billion shortfall holds, then federal spending trends do not imply any revision of the projections in Table 1. However, if the spending shortfall rises to $10 billion or more and is in federal purchases, grants, or transfers which are counted in the national income and product accounts, we would expect slightly less GNP and more unemployment in 1977 than is shown in the forecast in Table 1.
CHANGING FISCAL POLICY
The Budget Committees and the Congress as a whole assessed the economic situation in March. At that time, they were aware that inventory building and the recovery from cold weather would lead to some strong economic statistics in the spring. Weighing the economic forecast and the difficult choices involving unemployment and inflation, the Congress decided on an expansionary modification of the budget for fiscal year 1977. The possibility that this modification would lend to an overheated economy and an acceleration of inflation was judgedby the Congressional Budget Office and others to be quite small.
In our judgment, recent economic news does not provide any reason for changing this assessment. Favorable statistics on economic growth were expected and do not justify feeling that stimulus would overheat the economy. Nor do the weather related increases in prices indicate that a rebate would be more inflationary than was thought previously.
Suppose that the economy is clearly heading toward the pessimistic end of our forecast range by summer. Are there fiscal policy alternatives available to the Congress that could return the economy toward the levels of real GNP, employment. and unemployment in the March 2 forecast? Clearly one possibility is a revival of the rebate later in the fiscal year. This alternative would raise no conflict with the third concurrent resolution, as long as the margin created by withdrawal of the rebate is not used up for other tax or spending measures.
Most other tax and spending measures are not likely to have any noticeable effect this year. Permanent cuts in personal and business taxes have effects that build up rather slowly. Similarly, additional spending on countercyclical revenue sharing, public works or public service employment probably could not have a sizable effect by the end of 1977 — indeed, we may be having trouble getting existing authorizations for public service employment spent.
While we do not think it likely, we cannot rule out a more optimistic prospect in which the strong growth apparent in the March statistics will be sustained through the second half of the year. But I would remind you, Mr. Chairman, that we have been beguiled by month-to-month irregularities in economic news before. Last year many forecasters, including those at CBO, were misled by an inventory swing in late winter and spring, and failed to anticipate a return to a slower rate of recovery late in the year. I hope that we guard against the possibility of makinga similar error in the direction of over-optimism this year.
Mr. DOMENICI. May I take just one step further? I am not asking the chairman what his personal preference is with reference to how we should implement that stimulus. I am not asking for his personal views on that. I am asking just this very simple question: The impact of the permanent tax cut that Senator DANFORTH and Senator JAVITS have before the Senate would be accommodated within that new revenue ceiling. Is that not correct?
Mr. MUSKIE. I am sorry, I was diverted for a moment. I apologize, but I was trying to get a piece of information to anticipate the Senator's question.
Mr. DOMENICI. My question was so simple that the Senator did not have to ask the question.
Mr. MUSKIE. I have rarely found the Senator's questions to be simple.
Mr. DOMENICI. Let me say very specifically that I am not asking for the Senator's preference on how that stimulus should be implemented. The committee has varying views individually, but left the stimulus as the Senator described in the new revenue base. There is no doubt that, if it is the will of the Senate, that figure will accommodate, for the year 1977, the permanent tax cut proposed by Senator DANFORTH and Senator JAVITS. Is that not correct?
Mr. MUSKIE. The Senator is correct. I hasten to add the second point, that the 1978 number would not accommodate it.
Mr. DOMENICI. The Senator has described the 1978 number in his remarks, indicating that the effect of the permanent tax cut might not be accommodated within the $395.6 ceiling in our first concurrent resolution for 1978.
The VICE PRESIDENT. Under the previous order, the remaining 20 minutes before the vote is divided equally between the Senator from New York and the Senator from Missouri and the Senator from Louisiana.
Who yields time?
Mr. LONG. I yield 2 minutes.
Mr. DOMENICI. Two minutes.
On the other hand, if the Senate was to adopt the permanent tax cut contemplated for 1977 and 1978, the Senate Budget Committee would have that before it and the Senate as a body would have that before it when we consider the yet unpassed first concurrent resolution, is that not correct?
Mr. MUSKIE. The Senator is correct.
Mr. DOMENICI. And there may be other tax implications in the ensuing months from the President's energy package, and others that will impact on that, which we would also take into consideration between the first and second concurrent resolutions, is that not correct?
Mr. MUSKIE. The Senator is correct.
Mr. DOMENICI. I thank the Senator from Maine.