Published Weekly by
AMERICAN INSTITUTE
far ECONOMIC RESEARCH
Great Harrington, Massachusetts
RESEARCH
REPORTS
01230
August 9, 1971
Uncontrolled Deficit Spending
total expenditures involved in "pet" programs of all
congressmen.
Evidence offered by Senator Carl T. Curtis of Nebraska
supports these views. He has observed that during the first
60 days of the current session of Congress, 85 programs
were proposed that would involve expenditures during
fiscal year 1972 of about $130.5 billion more than total
expenditures of $229.2 billion proposed by the Administration. Senator Curtis noted that many spending
programs have been introduced in Congress with "little
apparent regard for the ability of the Nation's taxpayers
to pay for such panaceas or for the impact the adoption
of these programs would have on carrying out such
vital. . . Federal responsibilities as national defense and
security and adequate funding of domestic programs
already adopted by Congress. . . . " He added that the
American people seem unaware of "the profligacy with
which some of their elected representatives propose to
divest them of their hard-earned tax dollars."
An example of indifference toward the effect of
spending legislation of the budget is some action taken by
Congress early this year. In only 5 days, without hearings
and without debate on the floor of either House about
the effect on the budget, Congress approved an increase
in Social Security benefits involving expenditures of $1.5
billion more this year than those proposed by the
Administration, and Congress postponed an increase in
the wage base for Social Security taxes, thereby reducing
budgeted revenues by $2.5 billion this year. This action
thus added $4 billion to the Federal budget deficit this
year.
Congressional profligacy has continued apace. Early last
month Chairman Paul W. McCracken of the President's
Council of Economic Advisers testified before the Joint
Economic Committee of Congress that the Federal budget
deficit during the current (1972) fiscal year will be at
least $7 billion more than the original estimate of $11.6
billion. He noted that Congress had added about $3
billion to expenditures proposed by the Administration,
including $2.1 billion more for further increasing Social
Security benefits and $800 million more for increasing
military pay. He said that so-called uncontrollable
expenditures, including welfare and Medicaid payments,
farm subsidies, and veterans' benefits, were $2 billion
more than original estimates, and that Congress had
reduced expected revenues during fiscal year 1972 by
almost $2 billion by postponing a scheduled increase in
Social Security taxes.
Since Dr. McCracken gave his testimony, the President
signed a public employment bill that will add another $1
billion to expenditures during the current fiscal year.
Moreover, Dr. McCracken failed to mention the shortfall
in revenues that will result from a rate of economic
activity smaller than that assumed when the Federal
The message on the Federal budget for fiscal year 1971
that President Nixon sent to Congress on February 2,
1970 began as follows: "I have pledged to the American
people that I would submit a balanced budget for 1971.
This is particularly necessary because the cost of living
has risen rapidly for the past five years." The President
announced in that message that he expected receipts of
$202.1 billion to exceed expenditures of $200.8 billion
during fiscal year 1971, which would result in a surplus
of $1.3 billion.
In discussing these expectations of the President at that
time,* we pointed out that ". . . Federal revenues may be
much less than the amount expected. Corporate profits
already are declining, and continuation of the downward
trend during the next several months, at least, seems
probable. Even a modest contraction of general business
activity would reduce the taxable incomes of individuals.
If corporate and individual income-tax payments decreased by even the relatively small proportion that they
did during the moderate recession of 1960-61, Federal
revenues would fall short of the President's $202 billion
estimate for fiscal 1971 by $20 billion."
Late last month the Administration revealed that the
Federal Government incurred a budget deficit during
fiscal year 1971 of $23.2 billion, which is the second
largest deficit since World War II. Revenues indeed proved
to be much less than expected as a result of the recession
that was underway during that fiscal year; they totaled
$188.3 billion, which was $13.8 billion less than those
that had been expected when the budget was drafted.
Total revenues were nearly $6 billion less than those
expected by Administration authorities as recently as last
January.
In earlier discussions of the Federal budget, we have
noted that estimates of Federal revenues and expenditures
are based on many assumptions about the future trend
and rate of business activity and future congressional
action on the Administration's legislative proposals and
that such estimates sometimes have proven to be seriously
inaccurate. Expenditures during fiscal year 1971 totaling
$211.6 billion exceeded those originally proposed in the
budget by $10.8 billion.
A former director of the Federal budget, Charles L.
Schultze, has expressed the view that failure to control
Federal spending is partly attributable to the fact that
congressmen tend to be more "program-minded" than
"budget-minded." He believes that they do not have the
means for adequately appraising the effect on the budget
of all the spending programs that are proposed. He noted
that each congressman proposes "pet" programs supposedly beneficial to his constituency, and that each is more
concerned with adoption of such programs than with the
*In Research Reports for February 9, 1970.
125
^Common stock prices also decreased during July, for the
third successive month, but that series still is appraised as
probably expanding cyclically. During June the net
change in consumer installment credit increased slightly,
following a decrease during May, and that series was
apparently expanding cyclically through June. With no
change in the cyclical status of any of the leading
indicators, the percentage of that group apparently
expanding cyclically was unchanged at 33.
Since our previous report no new data were received
for any of the primary coincident or lagging indicators,
and the percentages of these groups expanding cyclically
remain, respectively, 86 and 50.
Apparent cyclical expansion of six of the seven primary
roughly coincident indicators suggests that general business activity may have begun to expand cyclically.
However, five of the eight primary leading indicators
whose cyclical statuses are indeterminate increased early
this year but decreased during recent months. Until the
percentage of primary leaders expanding cyclically
increases to more than 50, optimism about the future
trend of business activity does not seem warranted.
budget for fiscal year 1972 was estimated.
With $4 billion more of expenditures legislated, $2
billion more of "uncontrollable" expenditures, and
revenues now estimated at $6.5 billion less than expected,
the Federal budget deficit projected thus far for the
current fiscal year is about $24 billion. Moreover, Budget
Director George Shultz reportedly warned at the
Administration's recent economic conference at Camp
David that the deficit could be as large as $35 billion.
The annual Economic Report of the President that was
transmitted to Congress last February 1 revealed that the
Administration had adopted the notion of the "fullemployment" budget as a guide for formulating budget
policy for the United States. In that report, the President
asserted that " . . . we need to abide by a principle of
budget policy which permits flexibility in the budget and
yet limits the inevitable tendency to wasteful and
inflationary action. The useful and realistic principle of
the full employment budget is that, except in emergencies, expenditures should not exceed the revenues that the
tax system would yield when the economy is operating at
full employment. The budget for fiscal year 1972 follows
this principle."
Researchers of the Brookings Institution and the
National Industrial Conference Board recently estimated
that Federal Government expenditures during the current
fiscal year will exceed the estimate of "full-employment"
revenues by $5 billion. The allegedly "useful and realistic
principle of the full employment budget" obviously has
not been observed by either a majority of congressmen or
Administration authorities.
Early this year we summarized our analysis of the
"full-employment" budget as follows:*
"We conclude that the 'full-employment' budget is
an exercise in make believe. It is an elaborate and
pseudo-sophisticated attempt to justify politically expedient and artificial stimulation of economic activity by
fostering more inflating. If the large deficits endorsed by
the Administration are financed by borrowing saved
purchasing media from the nonbank public, they will not
involve inflating nor stimulate economic activity, but they
will result in diversion of resources from capital formation
to consumption. However, if part of the deficits is
financed by purchasing media created by the commercial
banking system, such further inflating will worsen already
serious maladjustments and the rise in prices again will
accelerate. In any event, that fiscal policy is being
formulated by economic charlatans bodes ill for the
economic future of the Nation."
The notion of the "full-employment" budget probably
will be described by future historians as one of the most
irresponsible fiscal principles ever embraced by U.S.
authorities. Instead of providing responsible leadership,
the President and key officials of his Administration have
encouraged increased profligacy by members of Congress.
How much longer American citizens will endure uncontrolled deficit spending by the Federal Government
and the economic consequences resulting from it, we do
not know. Perhpas it will end only after the currency
becomes virtually worthless.
SUPPLY
INDUSTRIAL PRODUCTION
Production of steel, automobiles, electric power, and
lumber (1) in the 1- and 4-week periods ended on the
indicated dates in the current year and (2) in the
corresponding periods of earlier years was as follows:
1929 1932
Steel
Ingots - million tons
1 week: July 31
1.32 0.26
4 weeks: July 31
5.24 0.91
Automobiles
Vehicles - thousands
1 week: July 31
94
28
4 weeks: July 31
381 136
Electric Power
Kilowatt-hours - billions
1 week: July 31
1.7
1.4
4 weeks: July 31
6.9
5.6
Percent change from 4
Lumber
Board feet - billions
1 week: July 24
0.74 0.23
4 weeks: July 24
2.72 0.83
p Preliminary.
1957 1961 1970 1971
2.03 1.82
8.11 7.32
2.41 1.97
9.80 9.02
119
466
31
353
75
391
55p
422p
12.5 16.1 33.3 32.3
49.0 61.1 126.0 131.1
weeks a year earlier: + 4.1
0.67 0.63 0.75 0.80
2.46 2.33 2.54 2.95
DEMAND
CONSUMER INSTALLMENT DEBT
The seasonally adjusted amount of consumer installment debt outstanding increased by the relatively large
amount of $525 million during June, according to the
Federal Reserve Board. This increase in the net change in
consumer installment credit was more than twice as large
as the average increase during the first quarter and also
during 1970. This series, which is a primary leading
indicator of business-cycle changes, apparently is expanding cyclically.
Unadjusted consumer installment debt totalled $101.9
billion at the end of June, which was 3.2 percent more
than that a year earlier.
The amounts of consumer credit extended and
consumer debt repaid were relatively unchanged from
those during the preceding month, but each amount was
11 percent greater than that a year earlier.
Among the major categories of consumer installment
credit, extensions for purchasing automobiles increased
2.9 percent during June and were 9.7 percent greater than
those a year earlier. Repayments of automobile loans
during June were 1.1 percent greater than those during
STATISTICAL INDICATORS
Among the primary leading indicators of business-cycle
changes, the index of industrial raw materials prices
decreased, for the third consecutive month, during July.
The cyclical status of that series remains indeterminate.
*In Research Reports for February 15, 1971.
126
The index for June was 121.5 (1967=100), which was
equivalent to 289.9 on the 1935-39 base. The June index
was 4.5 percent greater than that for June 1970. The
purchasing power of the consumer dollar during June was
only 34.5 percent of that during the 1935-39 period.
Among the principal components of the unadjusted
index, food, housing, transportation, and health and
recreation increased during June, but apparel and upkeep
decreased slightly. Percentage changes among the principal
components of the unadjusted index from those a month
and a year earlier, respectively, were as follows: food,
+0.8 and +3.5; housing, +0.6 and +4.6; apparel and
upkeep, —0.1 but +3.5; transportation, +0.7 and +6.1;
and health and recreation, +0.4 and +5.2.
Although prices of all goods other than food increased
less during June than during May, such prices on a
seasonally adjusted basis still increased 0.3 percent. Prices
of houses, household durable goods, and home repairs
increased during June, as did prices of used cars,
automobile repairs, gasoline, taxicab and airline fares, and
tobacco products.
An increase in prices of services during June reflected
the absence of a decrease in mortgage interest rates. The
service component of the index, which is not adjusted for
seasonal variation, increased 0.5 percent. Substantial
decreases in mortgage interest rates earlier this year had
restricted increases in prices of services as well as in the
Consumer Price Index. However, further decreases in such
rates seem improbable during the next few months.
Despite the increase in the Consumer Price Index
during June, Ronald L. Ziegler, White House Press
Secretary, stated that the Administration officials "had
confidence in the policies we are preceeding with" and
that "very good progress" in solving the Nation's
economic problems is being made. In contrast, Federal
Reserve Board Chairman Authur F. Burns told the Joint
Economic Committee of Congress that "I wish I could
report that we are making substantial progress" against
rapidly rising prices but that "I cannot do so."
The 0.6-percent increase in the Consumer Price Index
before seasonal adjustment was the largest monthly
increase since April 1970. The average annual rate of
increase in the index of 4 percent during the first half of
May and 4.3 percent greater than those during June 1970.
Installment credit extended for the purchase of other
consumer goods (primarily general merchandise, apparel,
appliances, and furniture) increased 1.2 percent during
June and was 14 percent more than the amount extended
a year earlier. Repayments were 0.6 percent more than
those during May and 17.5 percent more than those
during June 1970.
The increases in extensions of consumer installment
credit for purchasing automobiles and other consumer
goods were nearly offset by a 6.4-percent decrease in
extensions of personal loans during June. The latter,
however, were 8.1 percent greater than those a year
earlier.
Extensions of consumer installment credit increased
rapidly during the 5 months ended in April, but they
decreased somewhat during May and changed little during
June. The increases during the early months of this year
were attributable largely to increases in extensions for
purchasing automobiles and in extensions of personal
loans. The latter may have been used for repaying other
debts rather than for buying things.
Extensions of consumer installment credit for purchasing consumer goods other than automobiles increased
somewhat during June but were little more than those
last December. The absence of substantial increases in
such extensions suggests that consumers were not willing
during the first half of this year to incur much additional
debt for buying things other than automobiles.
RETAIL SALES
Estimates of retail sales for the most recent week and 4
weeks compare with such sales during the corresponding
periods a year earlier as follows:
Period
Percent change
Week ended July 30
+8
Four weeks ended July 30
+5
PRICES
CONSUMER PRICES
The Consumer Price Index increased during June 0.6
percent before seasonal adjustment and 0.5 percent after
such adjustment, according to the Department of Labor.
INDEX OF CONSUMER PRICES
250 |
f---| 150
L__i.
•
21!
'
.10
f.2
• 32
127
' 64
' 06
*._.•
.J 5 0
1971 was less than the 6-percent rate during the
corresponding period last year. However, the rate
accelerated from 2.8 percent during the first quarter of
this year to 5.3 percent during the second quarter.
Further substantial increases in the Consumer Price
Index seem probable during the next few months.
COMMODITY PRICES
1970
1971
Index
July 26 July 19 July 26
Spot-market, 22 commodities* 293
282
283
Commodity-futures
290
305
300
Steel-scrap
$39.83 $32.17 $32.17
*For the preceding Tuesday.
Note: The indexes are, respectively, those of the U.S. Bureau of
Labor Statistics, Dow-Jones, and Iron Age. The spot-market and
futures indexes are converted so that their August 1939 daily
averages equal 100. The steel-scrap index is a composit price for
No. 1 heavy melting scrap.
BUSINESS
MANUFACTURERS' ORDERS,
SALES, AND INVENTORIES
Note: All data are seasonally adjusted.
New orders received by manufacturers during June
were 0.3 percent less than those received during May but
3.7 percent more than those received during June 1970.
New orders for durable goods were 0.6 percent less than
those during the preceding month but 3.2 percent more
than those during the corresponding month last year. New
orders for nondurable goods were unchanged in June but
4.2 percent more than those a year earlier.
Unfilled orders of manufacturers at the end of June
were 2.9 percent less than those a month earlier and 6.2
percent less than those at the end of June 1970. Unfilled
orders for durable goods account for about 96 percent of
total unfilled orders.
Sales (shipments) by manufacturers during June were
1.4 percent more than those during May and 6.6 percent
more than those during June 1970. Sales of durable goods
were 2.7 percent more than those during the preceding
month and 8.7 percent more than those during the
year-earlier month. Sales of nondurable goods were 0.2
percent less but 4.0 percent more, respectively, than those
a month and a year earlier.
Inventories of manufacturers at the end of June were
0.1 percent less than those a month earlier but 1.8
percent more than those a year earlier. Inventories of
durable goods manufacturers decreased 0.5 percent during
the month but were 1.0 percent more than those a year
earlier. Inventories of nondurable goods manufacturers
increased 0.5 percent during June to an amount 3.2
2.60
percent more than that a year earlier.
Data on durable goods manufacturing activity through
June of this year reflected both the post-strike activity in
the automobile industry and the effect of inventory
accumulation on the steel industry. Those unusual
influences have continued to obscure the implications of
durable goods manufacturing activity for future industrial
production.
Except during April, durable goods manufacturers' sales
increased substantially during each month of the first half
of this year, which ordinarily would be a favorable
development for industrial production. During the earlier
months of this year, such sales were supplemented by
"catch-up" activity by automobile manufacturers and
pre-strike activity by steel manufacturers. Augmentation
of durable goods sales by those developments had ceased
during recent months, but such sales continued to
increase. This would suggest that the underlying trend of
such sales was upward.
However, other aspects of durable goods manufacturers'
activity suggest that increasing sales by such manufacturers may not be sustainable. Whereas earlier this year
durable goods manufacturers' new orders were increasing
and were greater than sales, since March such orders have
decreased, and during June they were substantially less
than sales. As a result, unfilled orders of durable goods
manufacturers, which earlier this year were increasing,
have decreased markedly since March and in June were
the smallest in 4 years. Therefore, unless new orders soon
begin to increase, increases in sales may not encourage
increases in industrial production, because with the order
backlog decreasing and in the absence of increased new
orders, future sales probably would be expected to
decrease, and there would be no need for manufacturers
to accumulate inventory or to increase production.
Thus, although the ratio of inventories to sales of
durable goods manufacturers has decreased markedly this
year and in June was the smallest in nearly 2 years, such
inventories nevertheless may be considered adequate by
such manufacturers in view of the unusual situation
described above. The fact that inventories of all durable
goods manufacturers decreased during 4 of the past 6
months, although inventories were accumulated by steel
users, suggests that inventories were not considered too
small in spite of increased sales.
The increasing trend of sales of durable goods
manufacturers during recent months may have encouraged
many such manufacturers to increase production of such
goods. However, without increases in new orders for
manufactured durable goods during the coming months,
recent increases in such sales and production may prove
to be unsustainable.
RATIO OF INVENTORIES TO SALES OF DURABLE GOODS MANUFACTURERS
2.40
2.20
2.00
1.80
1.60
1.40
1948
'50
'68
'70