For the year as a whole, slightly less of our resources than last year will be used to build new homes, although a sharp recovery in residential construction from its current deep recession is expected during the course of the year.

As the flow of goods and services to consumers expands, the ability of our elderly citizens to share in these gains will be supported by a rise of more than $6 billion in Social Security and Medicare payments.

We must

In 1967, we will have no bonus dividend from using previously idle resources. But the dividend from growth alone is a big one. be sure we get it; and we must use it wisely.

RESTORING PRICE STABILITY

From the beginning of 1961 until 1965, the United States enjoyed both price stability and a strongly expanding economy. The average of wholesale prices hardly moved, and consumer prices rose only a little more than 1 percent a year. Last year, that record was blemished. Consumer prices rose 2.9 percent between 1965 and 1966, wholesale prices 3.2 percent.

When we were involved in Korea, consumer prices rose 8.0 percent between 1950 and 1951, wholesale prices 11.4 percent. And we had price controls during most of 1951.

Even when we were not at war, consumer prices rose 3.5 percent between 1956 and 1957, wholesale prices 2.9 percent.

Nevertheless, we are not satisfied with our record on prices. And we expect to improve on it this year.

There are many reasons why we refuse to tolerate rapidly rising prices:

They injure those with fixed incomes, especially older people.

They can lead to speculation and economic distortions which could undermine prosperity.

They weaken our competitive position in world markets.

As they persist, they become harder to stop without throwing the economy into reverse.

Restoring price stability is one of our major tasks. It will not be accomplished all at once, or all in 1967. That could be done-if at all— only at the cost of mass unemployment, idle machines, and intolerable economic waste. But a gradual return to stability can go hand in hand with steady economic advance.

Such an improvement will require

-prudent fiscal and monetary policies;

-Government efforts to help relieve the key points of pressure on prices;

-the responsible conduct of those in business and labor who have the power to make price and wage decisions.

With steady, sustainable, and balanced growth, we can look forward to

-relief of pressures on capacity in such strained areas as machinery and metals;

—adjustments of raw materials supplies to demand;

-the end of labor shortages in key areas.

Other efforts of the Federal Government can help to relieve particular pressures on prices and wages. We will continue

-to develop manpower training programs to meet skill shortages; -to increase the efficiency of the employment services in matching jobs and men;

-to handle Government procurement so as to minimize its pressure on prices;

-to dispose of surplus Government stockpiles to alleviate shortages of raw materials;

-to manage farm programs to assure adequate supplies as well as equitable returns.

But efforts of the Government alone will not be enough. The cooperation of business and labor is essential for success.

In the past year, most businessmen who had a choice in setting prices and most trade unions that negotiated wage contracts acted responsibly. They did so because they took account of the national interest and saw that it was also their own.

If business and labor were to consider only their own short-run interests -each union might seek a wage increase which exceeds the most recent settlement by some other union;

--each business might strive to achieve a new profit record by translating strong demand into higher prices, whether or not costs have increased.

But when business and labor consider the national interest-and their own longer-run interests—they realize that such actions would have only one result: a wage-price spiral which is in the interest of neither.

• If unions now attempt to recoup in wages all of the past or anticipated advance in the cost of living-in addition to the productivity trend;

• If businesses now seek to pass along rising costs when it would be possible to absorb them or do not reduce prices when costs fall; then the result will be just such a spiral-damaging to business, damaging to labor, and disastrous to the Nation.

Once again, I appeal to business and labor—in their own interest and that of the Nation-for the utmost restraint and responsibility in wage and price decisions.

INTERNATIONAL ECONOMIC POLICIES

The current year is a critical one for our international economic policies and for the economic progress of the world community.

As the largest single market and source of capital, the United States carries special responsibilities.

TRADE

This Administration is committed to reducing barriers to international trade, as demonstrated by my recent action terminating the 1954 escape clause action on watches, and rolling back the special tariff on imports of glass.

The Kennedy Round of trade negotiations is now entering its final and most critical phase. I emphasize once more how important this great attempt to liberalize world trade is for all the developed and developing nations of the free world.

After more than 4 years of discussion, it is essential that the participants now resolve the many complex problems that still remain. It would indeed be a tragedy if the wide authority granted to the President by the Trade Expansion Act of 1962 were allowed to lapse unused. Never before has there been such a splendid opportunity to increase world trade. It must not be lost.

But the Kennedy Round is not the end of the road. We must look beyond the negotiations in Geneva to further progress in the years ahead. We must begin to shape a trade policy for the next decade that is responsive to the needs of both the less developed and the advanced countries.

We should seize every opportunity to build and enlarge bridges of peaceful exchange with the countries of Eastern Europe and the Soviet Union. We should have the ability to adapt our policies to whatever political circumstances or commercial opportunities may present themselves. I again urge the Congress to provide authority to expand our trade relations with Eastern Europe and the Soviet Union.

AID

Although 1966 was a relatively good year for world economic growth, average output in developing countries rose by less than $3 a person.

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There were, however, encouraging signs of progress. Developing nations demonstrated a willingness to take difficult but necessary steps to help themselves. India, for example, revised her foreign exchange and agricultural policies to promote more rapid growth.

Among the wealthier nations, stronger efforts were made to assist the development of the poorer countries. Canada and Japan increased their assistance programs. Major free world aid donors joined in new groups to coordinate their flow of aid.

The United States will continue to respond constructively to the aspirations of the developing nations. We will give first priority to fighting the evils of hunger, disease, and ignorance in those free world countries which are resolutely committed to helping themselves.

There should, however, be increasing efforts to make both the receiving and giving of aid a matter for creative international partnership. We shall therefore

-continue to support enthusiastically, in a manner consistent with our balance of payments position, such promising cooperative regional efforts as the Alliance for Progress, the Inter-American, the Asian, and the African Development Banks, and the Mekong Development Fund of the United Nations;

-further encourage the coordinated extension and expansion of aid by the major donor countries in ways that result in an equitable sharing of the burden;

-seek the cooperation of other major donor countries this year in replenishing the resources of the International Development Association.

BALANCE OF PAYMENTS

We can take some satisfaction in the fact that our balance of payments in 1966 may prove to have been in surplus on official reserve settlements. Despite the added costs of the war in Vietnam and the rapid growth of imports, our deficit on a liquidity basis increased only slightly in 1966.

But we cannot relax our efforts to seek further improvement.

Our goal in the coming year is to continue to move toward balance of payments equilibrium as rapidly as the foreign exchange costs of the Vietnam conflict may permit. This goal will be supported through measures and policies consistent with healthy growth at home and our responsibilities abroad.

We already have extended and reinforced the voluntary restraint programs for corporate investment abroad and for foreign lending by financial institutions. I am counting on the continued full cooperation of businesses and banks with these programs in 1967. And I have

instructed all agencies of the Government to intensify their efforts to limit the dollar drain resulting from their activities.

But more is needed. I now recommend the following steps:

1. The Congress should extend the Interest Equalization Tax, in strengthened form, to July 31, 1969. This tax has proved extremely useful in limiting the borrowing of developed countries in our capital markets and in reinforcing the Federal Reserve voluntary program. As we move toward easier money in the United States, foreign borrowing in our financial markets may tend to increase. I am therefore requesting authority to adjust the rates of the Interest Equalization Tax as monetary conditions warrant, so that the effective impact on interest costs can be varied between zero and 2 percent. This would replace the present flat 1-percent impact.

Moreover, to ensure against possible anticipatory increases in foreign borrowing, I am also requesting that the tax be imposed at rates which provide an impact of 2 percent on interest costs while the legislation is under consideration by Congress. 2. The most satisfactory way to arrest the increasing gap between American travel abroad and foreign travel here is not to limit the former but to stimulate and encourage the latter. I shall appoint in the near future a special industry-Government task force to make specific recommendations by May 1, 1967, on how the Federal Government can best stimulate foreign travel to the United States. After a careful review of their advice, I shall ask the U.S. Travel Service and other appropriate agencies to take the steps that seem most promising.

3. As part of our long-run balance of payments program, I shall also

-request continuation and expansion by $4.5 billion of the

lending authority of the Export-Import Bank in order to support the expansion of exports;

-continue to urge other countries to participate in the development of better means both of sharing the resource burdens and of neutralizing the balance of payments effect arising from the common defense and foreign assistance efforts.

4. For the longer run strength of our payments balance, we should intensify efforts to

-stimulate exporters' interest in supplying foreign markets; -enlist the support of the financial community to attract additional foreign investment in the United States; encourage further development of foreign capital markets.