November 28, 1977

November 28, 1977 | Backgrounder on Regulation

An Analysis of the Carter-Humphrey-Hawkins Proposal

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44 November 28, 1977 AN ANALYSIS OF THE CAR TER-H.UMPHRE Y-HA WKINS PROPOSAL INTRODUCTION During the Presidential campaign of 1976, candidate Jimmy Carter endor sed the Humphrey-Hawkins Bill, but later hedged his position. This was done on the advice of campaign aides who informed him of the massive centralized planning of the economy called for in this legislation Since taking office President Carter has been he s itant to endorse the Humphrey-Hawkins measure. Faced with a skeptical business community, Carter has attempted to refrain from endor sing any legislation that would produce chills i.lp and down Wall Street and send the economy into a tailspin. However, th is has placed him politically "between a rock and a hard place." If he endorses legislation that gives the business community the "jit ters this may abort .the moderately bullish economy we are ex periencing and precipitate a recession.

On the other hand P resident Carter has political promises to keep. In 1976 he was the first Democratic Presidential candi date since Franklin Roosevelt in 1944 to carry the Solid South except for Virginia). Carter's share of the black vote was the same as McGovern's in 1972 (well over go plus he was supported by labor and liberal intellectuals. This is the old "Roosevelt Coalition and except for the South, it is liberal. In return for their campaign support, they.have demanded a quid pro quo, and that is the Humphrey-Hawkins bill. This the President has done, yet the version he has endorsed is vastly different from the 1976 legislation (H.R 50). a rlrl a mIlal k00kCI aJ 3 k-4 oa a a7um aJ4J tr kl7 Qlaa a *kC h ma E-4JaJ C 4 E4J IO 0 kaJ7obu em 0 am 3'm rl I N m w I N I aJI ma J 7kW I I 4J -aJ 0 00 4J4JaJ m c 4J I 4Jd al OF 4 na m k Q ad 0 rl -4 Ik rwa cmau 4J ma a rl arm 4J wo mw k c OU a 4J aamc 4J hk aJ m 0-4 E a4 0 h c as0 m E krl xaJaJa k O4J dE0 a, m h4J h.4 n a rn 7 4J c 4 Aur=l4J 70 ac WWEa aJ aJu kmek 170 a0 a d-4 a 7 k urn om7 8 sa12 0 h00 aakclrn k rl cum aJ4J.U L4 d k 0 rl I N m Q rn 2 a a, ka 3mua k m rn.4 e In I M I In krnkrnS a,-4 a, E 0 ccc'7 k mal3 rn a D D INFLATION 4 Many newspaper accounts have reported that President Carter's reluctance to endorse this legisl a tion earlier was tied tG his con cern that the bill would further heat up inflation. Only when he was assured that it would not did he indicate his approval of the there be coordination between programs already in progress and the goals of this bill. Some critics see a discrepancy between Presidential actions and Presidential rhetoric bill. However, the Humphrey-Hawkins legislation requires that Even though the President says that the bill contains a strong anti-inflation commitment in addition to the anti - unemploy ment commitment," other economists see it differently. Surpris ingly, one of them is John Kenneth Galbraith. "At a' four percent unemployment rate, there is no question, the American economy can be disastrously inflationary I must specifically an d deliberately warn my liberal friends not to engage in the wishful economics that causes them to hope that there is still undiscovered fiscal or monetary magic which will combine low unemployment with a low level of inflation Testimony before the Committe e on Banking Housing and Urban Affairs, U.S. Senate, on S. 50, the Fair Employ ment and Balanced Growth Act, May 21, 1976 Furthermore,manv economists see a serious flaw in this bill's approach to inf latioi. Sec 1

09. Overcoming Inflation, Sec. 9 (a states that "The Conqress hereby determines that the objective of achieving price stability as so& as feasible I this section treats high prices as inflation. The classical and generally accepted definition of inflation is an increase in the money supply. More s pecifically, it is an increase in the money supply over and above that of a parallel increase in the production of goods and services. Free market economists agree that more and more money chasing fewer goods produces higher demand and therefore higher pr i ces An example: During the five fiscal years, 1971-76, about 23 percent of the Federal deficits were on the basis of which the banking system then created some $250 billion of additional money and credit. Largely as a result of the monetization of the 197 1-76 Federal deficits, the money sup ply M2) rose by 55 percent at a time when the output of goods and services grew by only 15 percent. The result was an increase in consumer prices of almost 40 percent.

Senate Joint Economic Committee, has this to say ab out inflation, the major cause--certainly in the long run--has been the pon derous and burdensome government which has produced first the creeping, then the running, and finally the galloping inflation Goveynment spending has to be financed by the private sector eLther'through taxes, which add to the cost of production and thus to the costs of living, or through inflation Senator William Proxmire's paper "Inflation and Government Spending," was delivered at the Menace of Inflation Symposium of the Committe e The-rest of dinanced simply by having the Federal Reserve provide more credit Senator William Proxmire (D-Wisc.),Vice Chairman of the House 5 for Monetary Research and Education, Inc. at the Center for Stra tegic and International Studies of Georgetown U n iversity, Wash ington D.C November, 1974 have to be debated if the Humphrey-Hawkins bill is to be considered by the Congress Certainly the variance of these two views on inflation will FEDERAL RESERVE POLICIES According to this current proposal, the Board of Governors of the Federal Reserve would be required to furnish to the Con gress "an independent statement setting forth its intended policies for the year ahead, and their relationship to the short-term goals set forth in the Economic Report the Congres s shall then take such action as it finds.'necessary to assure closer conformity to the Full Employment and Balanced Growth Act of 1977 A number of observers are concerned that this would make the Federal Reserve Board more open to partisan control The Was hington Star in its editorial of May 7, 1976, had this to say about the previous Humphrey-Hawkins bill:.

The.bil1 would necessitate an undetermined but con siderable amount of political manipulation of the monetary and interest rate policies of the Federal Re serve Board. Some fellow in the White House basement might be making monetary policy. If that happens we might be well advised to swap our wallets for wheelbarrows UNEMPLOYMENT EssentialAy the Humphrey-Hawins bill is an effort to fight un- employment. However, two.questions have to be asked when we talk about unemployment. The first is, whether'there are government programs that contribute to.unemployment among certain segments of our society. The second question that economists are asking is whether o ur methodology of determining who is unemployed needs some attention.

In October the general unemployment for all workers was 7 per cent: while among teenagers it was 17 percent and well over 40 percent with black teenagers. Under this legislation unemploy ment would be reduced by a combination of job training programs and macroeconomic monetary and fiscal policy. One economist who dis agrees with this approach is Dr. Walter Williams. In 1977 Dr.

Williams, Associate Professor of Economics at Temple Universi ty Philadelphia, Pennsylvania, prepared a 59-page study for the Joint 6 Economic Committee of the U.S. Congress on the minimum wage. His findings were that the minimum wage law held back the employment of teenagers, racial minorities, and the physically h andicapped.

Williams suggested that the best way to reduce unemployment among these marginal workers was to abolish the federal and state mini mum wage laws and reduce monopolistic union practices THE MYSTIQUE OFSTHE 4% UNEMPLOYMENT RATE The Humphrey-Hawkins bill cal l s for a reduction of "unemploy ment among the entire civilian labor force aged 16 and over to not more than 4 percent I' The 4 percent unemployment rate has been traditionally called the zero-unemployment or full-employment rate. Below this figure inflati onary pressures begin to accelerate.

Also this 4 percent figure has been interpreted to include people who are changing jobs, students just entering the market place and housewives also looking for employment. The history of how this figure has become a be nchmark for full employment is quite interesting.

In 1948 the general unemployment rate was between 3+ and 4 per cent, and during the Korean War it slipped to 24 percent. From that time onward it has gone up. Excepting the 1960-61 recession, the rate duri ng the early 1960's was between 5 and 6 percent. At that time the Kennedy Administration chose the 4 percent rate Council of Economic Advisors, Annual Report, 1962, p. 46 This was con sidered to be quite a conservative level since a 34 percent rate had be e n attained in the early 50's. In December 1965 the 4 per cent rate was achieved along with some slight inflation although by the second half of 1968 a 3+ percent was met, but not without raging inflation. From that time forward the 4 percent rule was cons idered optimum yet since January 1970 it has not been attained with or without.inf1ation.

Even though the 4 percent rule has remained inflexible, there have been massive changes in the composition of the labor market.

An example of this has been the role of women in the job market.

Their representation in the labor force has increased from 31 per cent in 1956 to 40 percent in 19

76. This has been an increase in their participation rate from 37 to 48 percenGwhile at the same time there has been a decline in this rate for older men. With th-is change in women's employment, there has also been a shift amon>-.yo.ung workers aged 16 to 24 increased from 17 percent in 1956 to 24 percent in 19

76. It should be noted that women and young workers have more freque nt periods of unemployment because they enter, leave, and reenter the labor force and shift between jobs in search of better opportunities In the high-employment year of 1973, men between the ages of twenty-five and fifty-four had an unemployment rate of 2 .5 percent whereas women had a 6.0 percent rate and young workers had a 10.5 Their participation rate has 7- percent rate Phillip Cagan, "The Reduction of Inflation and the Magnitude of Unemployment I' Contemporary Economic Problems 1977, William Fellner, . ed Washington, D.C.: American Enter prise Institute, 1977, p. 29 Many economic observers are surprised that with these signi ficant changes in the makeup of the nation's work force that it has taken over two decades for the federal government to update th e ir definition of a full employment rate. Finally, this year the Council of Economic Advisors estimated that an unemployment rate of 4.9 percent in 1977 was equivalent to a 4.0 percent rate in 1955, "perhaps, closer to 5.5 percent Economic Report of the Pr esident, 1977, pp. 48-51.) Even this 5.5. percent may be unnecessarily low. Phillip Cagan estimates that the noninfla tionary unemployment rate is now between 5.8 and 6.2 percent.

In a November 13, 1977 editorial the Washington Post also noted that a 4 per cent full employment rate-seemed to be unrealistic The main point of the bill, in its present form, is to set a 4 percent unemployment rate as a goal to be achieved over five years. How? The bill doesn't say. Why 4 percent? Because, until recently, that w as the conventional definiton of full employment.

It was the level below which the rate could not be pushed without a surge of wage inflation, as employers bid against each other for scare manpower. Unfortunately, that threshold has shifted upward in recen t years. In terms of inflationary risk, an unemployment rate of 5 or even 5.5 percent currently is the equivalent of 4 percent in the 1950's."

Another government program that may.inflate unemployment statistics is the work registration requirements for certain wel fare recipients. In March 1977 a study was published by the Law and Economics Center of the University of Miami School of Law.

The authors were Drs. Kenneth W. Clarkson and Roger E. Meiners onom-3-st-s- at the University of Miami, and the study was entitled Inflated Unemployment Statistics: Effects of Welfare Work Registration Requirements." This study was also presented as a paper at the 1977 Public Choice Society meeting in New Orleans.

Their findings show that the inclusion of individuals who would not have been previously considered unemployed has had the effect of padding the unemployment rate over the past few years by ap proximately 2% percentage points. For example, in 1976 when un employment was officially at 7.7 percent, it was actuall y 5.3 percent under traditional standards. In 1976 the food stamp pro gram alone inflated the ,unemployment statistics by more than one million persons The following table shows the effects these work registra tion requirements have on the.unemployment rat e . It is taken from p. 18 of their study.c Table 8 ESTIMATES OF THE EFFECTS OF FOOD STAMP AND AFDC WORK REGISTRATION REQUIREMENTS ON THE UNEMPLOYMENT RATE 1974-1976 ITEM YEAR 1974 1975 1976 Average Civilian Labor Force 91,011 92,613 thousands Average Offic i al Unemployment 5,076 7,830 thousands Average Official Unemployment Rate 5.6% 8.5 Average Food Stamp Work Registration 784a 1,209b percentage Active Employment Service Applicants (thousands Registrants (thousands Average AFDC (WIN) Mandatory 917b 1,099b C o rrected Average Unemployment 3,375 5,522 thousands Corrected Civilian Labor Force 89,310 90,305 thousands Corrected Unemployment Rate percentage 3.8% 6.1 94,773 7,288 7.7 1,227C 1,160C 4,901 92,386 5.3 Sources: Bureau of Labor Statistics, EMPLOYMENT AND E A RNINGS Table A-1; Department of Labor, Employment Series Automated Re porting System, (unpublished statistics); National Center for Social Statistics, THE WORK INCENTIVE PROGRAM, Report E-5 a)Based on monthly average for June through December b)Based on m o nthly average for January through December c)Based on monthly average for January through September. -9 The conclusion of their study is Since the unemployment rate is often used as a basis for policy decisions, it is import to distinguish between the eff e cts due to the new institutional requirements and those attributable to the more traditional rea sons 'for identifying individuals as unemployed p. 19 SUMMARY With these figures showing that perhaps the unemployment rate is overstated, President Carter ma y be basing his full employment program on some fallacious assumptions. The possibility of in creased inflation is real and should be fully debated if and when the Congress begins consideration of this legislation By David A. Williams Policy Analyst EConom ics/Taxa tion

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