THE Chapter 1 Extending the Record of Prosperity 'HE UNITED STATES in 1966 enjoyed the benefits of the fullest employment in more than a decade. The unemployment rate reached a 13-year low of 3.9 percent. At that level, demand finally matched supply in most labor markets, a situation which economists define as essentially "full employment." Real incomes of all major groups registered sizable gains. Expansion continued for the sixth straight year. For the third successive year, growth exceeded 54 percent, a record unparalleled in our postwar experience. By any standard, then, 1966 was a big year for the economy. Gross national product (GNP) expanded by a record $58 billion in current prices and reached $740 billion. As in the 2 preceding years, a major advance in business fixed investment was a key expansionary force. And the rising requirements of Vietnam ådded $10 billion to defense outlays. State and local spending and inventory investment also rose strongly. As a result, 1966 was in some respects too big a year, especially in the early months. Spurred by the defense buildup, total demand-public and private- forged ahead at an extraordinarily rapid rate in late 1965 and early 1966. Strains developed in financial markets. Demand outstripped supply in several sectors which were already near full utilization. As Chapter 2 explains, many of the new orders simply added to backlogs and put upward pressures on prices. Some of the excess demands were met by imports, reducing the U.S. foreign trade surplus and retarding progress toward equilibrium in the balance of payments, as Chapter 5 indicates. After years of stimulating demand, policy was called upon to restrain the economy. The need for restraint was recognized at the start of the year. Monetary policy assumed a restrictive stance. In anticipation of large increases in private expenditures and defense outlays, tax policies were applied to curb private demand. In 1964 and 1965, an expansionary tax policy had stimulated the economy; but in March 1966, restrictive tax changes were enacted at the President's request. Excise tax cuts were postponed, and income tax payments were accelerated. Moreover, the President's budget program in January stringently held down nondefense outlays. These measures produced a Federal surplus in the national income accounts budget and a net restrictive fiscal impact in the first half of 1966, despite the strong advance in defense spending. But the magnitude of the task was not fully appreciated at the beginning of 1966. As private demand and Vietnam requirements exceeded forecasts, policy was adjusted to the new developments. Monetary policy tightened further, causing a major cutback in homebuilding. In September, the President proposed additional selective fiscal measures to alleviate excessive demands for funds and for capital goods. The initial restraining measures, reinforced by the previously enacted rise in payroll taxes, began to take effect in the spring. By the closing months of 1966, it was clear that the brakes had worked. The economy had shouldered the burden of active hostilities without the need for cumbersome and inefficient controls and without losing its basic health and stability. It was shown that policy could work both ways; it could restrain the economy, much as it had been able to provide stimulus during the preceding 5 years. In particular, the power of tight money as a tool of restraint—as well as its uneven impact-was demonstrated beyond any reasonable doubt. As 1967 opens, inflationary forces set in motion during the period of overly rapid expansion are still alive, although their strength is waning. But now there is also a renewed challenge to sustain expansion; any further slowdown would be undesirable. A healthy advance of demand in pace with the growth of potential output would permit gradual restoration of price stability. It would also promote a recovery in our foreign trade balance, thereby aiding the pursuit of equilibrium in the balance of payments. The fiscal program for 1967 is designed to meet these objectives and to assure that the easing of monetary conditions, presently underway, can be extended. ACHIEVEMENTS OF AN EXPANDING ECONOMY Last year's record of economic gains added in length and strength to the remarkable uninterrupted expansion that began early in 1961 (Table 1). This advance can be viewed in many dimensions. Prosperity has conferred its benefits on nearly every sector, industry, and region in almost every year. EMPLOYMENT GAINS Of all its facets, the growth of employment may be of greatest significance. Increasing numbers of Americans have obtained opportunities to earn secure livelihoods and to contribute to the material welfare of society. Employment in 1966 Employment gains in 1966 were the largest of any year in the expansion. Civilian employment increased by 1.9 million, and 400,000 persons were added to the Armed Forces. The civilian unemployment rate fell from 4.6 percent in 1965 to 3.9 percent in 1966, the lowest since 1953. During the year, the seasonally adjusted rate remained essentially on a plateau, fluctuating between 3.7 and 4.0 percent. The number of persons unemployed 2 Includes change in business inventories and net exports of goods and services, not shown separately. 3 Less than .05 percent. Sources: Department of Commerce, Department of Labor, Board of Governors of the Federal Reserve System, and Council of Economic Advisers. dropped by 500,000 in 1966. Nearly all groups shared in the reduction, the only exceptions being nonwhite females in two age groups, 14-19 and 45 years and over. Although employment in both of these groups expanded, the increase was not enough to keep pace with the rapid growth of these groups in the labor force. The expansion in the demand for labor extended to every nonagricultural sector of the economy. The most remarkable gains were in manufacturing where the number of jobs rose 1 million from 1965 to 1966. Since most manufacturing employment consists of high-productivity, high-wage jobs, the gain contributed to a major advance in real income. Employment in trade and services and State and local governments also expanded substantially, rising by about 12 million workers in 1966. The mirror image of the rapid increase in nonagricultural jobs was a remarkable decline of 400,000 in agricultural employment in 1966. This decrease of 84 percent was the largest percentage drop on record, as higherpaying nonfarm job opportunities attracted farmers and hired workers out of agriculture. Labor Supply The labor force expanded by 1.8 million workers last year, nearly 500,000 more than demographic trends alone would have indicated. In particular, a larger fraction of women and teenagers participated in the labor force. Low unemployment encourages entry into the labor force. Some people, especially women and teenagers, who would be interested in working if jobs were plentiful, do not actively search for jobs when they believe none are available. At such times, these persons are considered neither as employed nor unemployed, and are not counted in the labor force. When job opportunities improve, they enter the labor force, seeking and frequently finding jobs. The evidence of 1966 suggests that nearly 500,000 of "hidden unemployed" or "discouraged workers" entered the labor force. Probably, additional workers, who did not respond fully to improved job opportunities last year, will enter the labor market if it remains buoyant. The Record Since 1961 The number of unemployed today is about 2 million lower than 6 years ago. Over the same period, nearly 9 million additional Americans have gained employment. Millions more moved into higher paying, more secure, and better jobs, and out of declining areas and low-wage industries. The benefits of full employment have extended far beyond the important gains in real income and material welfare. By reducing poverty and hardship, the opportunities for productive employment have contributed to human dignity and self-esteem and to freedom of choice. The decline in unemployment in a vigorous and buoyant economy has changed the diagnoses and the proposed remedies for our labor market problems. Allegations that a substantial fraction of the labor force lacks the motivation to work have been refuted by the facts. Proposals to cut unemployment by artificially shortening the workweek, or by instituting practices deliberately designed to hold down productivity, are no longer seriously advanced. The marked decline in unemployment in the past 6 years has been shared by nearly all groups. In some instances, improvement has been dramatic. Only one-third as many Americans were unemployed for 15 consecutive weeks or longer in 1966 as in 1961. Over the same period, the unemployment rates for nonwhite adult males, blue collar workers, and married men fell by more than half. Many of the previously hard core depressed areas are no longer suffering from high unemployment. In early 1961, 101 of the Nation's 150 major labor market areas were classified as areas of substantial unemployment, with rates in excess of 6 percent. Today, there are only 8 labor market areas in that category. There are now 66 areas that have unemployment rates of less than 3 percent; for most of 1961, there were none. Of course, some groups have gained less than others. Unemployment remains high among nonwhites, teenagers, and, especially among workers with few skills and little training. As Chapter 3 indicates, inexperience, inadequate education, and racial discrimination unfortunately penalize these groups, placing their members at the end of all too many hiring lines. PRODUCTIVITY Productivity increases during the expansion have been excellent. The slow growth in the number of adult male workers was often cited as a reason for expecting bottlenecks in the labor market and a sluggish productivity |