Maintenance of Prosperity

December 2, 1966

Report Outline
Uncertainties in the American Economy
Postwar Record of Booms and Recessions
Tools for Controlling Economic Cycles

Uncertainties in the American Economy

Requirements and Risks in Easing of Strains

A decision on whether to raise federal taxes on individual and corporation income is expected to be announced soon, possibly as early as December 10. The size of the tax increase, if there is one, will reflect the Johnson administration's assessment of current inflationary trends. Some economists maintain that higher taxes are needed to bring fiscal policy into line with the Federal Reserve System's currently restrictive monetary policy and forestall further inflation. Other analysts point to soft spots in the economy and warn that a tax increase would set off a recession.

There is general agreement that the American economy, now in its sixth year of uninterrupted expansion, is beginning to show signs of imbalance and strain. Until early 1966, the current economic boom had been remarkably noninflationary; prices and wages rose only moderately as unemployment steadily declined. In contrast, price inflation to date this year has accelerated to three times the annual rate prevailing from 1960 through 1965. Thus, major labor contracts to be negotiated next year by telephone workers, construction workers, railway unions, the Teamsters, automobile workers, and garment workers almost certainly will provide for substantial wage increases.

The tight-credit policy now being pursued by the Federal Reserve System has added to the concern of economists looking ahead to 1967. With credit more difficult to obtain, housing starts have fallen to a postwar low and sales of 1967 model automobiles have not lived up to expectations. Moreover, temporary suspension of the 7 per cent investment tax credit and of the accelerated depreciation allowance has put a crimp in the expansion plans of business.

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