Annual Message to the Congress: The Economic Report of the President

To the Congress of the United States:

A healthy and productive economy is a bulwark of freedom.

Around the world and here at home, our trials of strength, our works of peace, our quest for justice, our search for knowledge and understanding, our efforts to enrich our environment are buttressed by an amazing productive power.

Americans have confronted many challenges in this century. The ones we face in 1967 are as trying of men's spirits as any we have known. But the overwhelming majority of us face our challenges in comfort, if not affluence. The sacrifices required of most of today's generation are not of income or security; rather we are called on to renounce prejudice, impatience, apathy, weakness, and weariness.

In purely material terms, most Americans are better off than ever before. That fact expands our responsibilities, as it enlarges our resources to meet them.

RECENT ECONOMIC GAINS

An averagent. million were at work in 196--2 million more in 1965. Nonfarm payrolls averaged 64 million, a gain of 3 million. On the whole, these jobs were better paying than ever, and more regular and more secure than most workers can remember.

The value of our total production of gods and services in 1966 was $740 billion--$58 billion, or 8 1/2 percent, higher than in 1965. More of the increase than we wanted represented higher prices. Still, the gain was nearly 5 1/2 percent after correction for price changes.

Labor, business, and the farmer all contributed to this major gain in production, and they rightly shared the benefits.

Aggregate compensation of employees rose 10.3 percent. Average compensation per man-hour in the private economy rose 6.5 percent, reflecting increased wages and fringe benefits, more overtime, the shift to higher-paying jobs, and increased employer contributions to Social Security. Corporate profits after taxes advanced more than 8 percent; per dollar of sales they were roughly unchanged from the high rate of 1965. Net income per farm rose more than 10 percent.

The single most meaningful measure of economic well-being is real disposable income per person--the after-tax purchasing power in stable dollars, available on the average to every man, woman, and child. It rose 3 1/2 percent or $89 per person in 1966. Although this advance was somewhat smaller than in 1965, it was still three times as large as the average yearly gain in the 1950's.

February 1961 launched the strongest and most durable economic expansion in our economic annals, and it still continues.

• Almost 9 million jobs have been added in the last 6 years.

• The rate of unemployment has fallen from 7 percent in early 1961 to under 4 percent. The rate for white adult males fell from 5 percent to 2 percent; for Negro men, from nearly 12 percent to less than 5 percent.

• Early in 1961, more than two-thirds of our major labor markets were "areas of substantial unemployment"; today only 8 of the 150 are so classified, and 66 have unemployment below 3 percent.

• While total population rose 11 million between 1961 and 1965, the number of Americans in poverty declined 5 1/2 million, and probably fell at least another 1 1/4 million in 1966. (The poverty definition is adjusted for the increase in living COSTS.)

• Our gross national product (GNP) has grown 50 percent in 6 years. In constant prices, the gain has averaged 5 1/2 percent a year. The physical output of our factories and mines is up over 50 percent. Private output per man-hour in 1966 was 19 percent higher than in 1961.

The 6-year addition to our gross stock of private productive capital--machines, buildings, transportation equipment, land improvements, and inventories--is valued at $220 billion.

American families have added $470 billion to their accumulated financial assets. They have added $150 billion to their debts. So their net financial position is $320 billion stronger than 6 years ago.

OUR ECONOMIC PROBLEMS

Prosperity is everywhere evident. But prosperity is never without problems, and--in 1966--some of them were serious.

SOME LEADING PROBLEMS

1. Economic progress still left far too many behind.

• Nearly 3 million workers were without jobs at the end of 1966. Perhaps twothirds of them were "frictionally" unemployed: new entrants to the labor force in the process of locating a job; persons who quit one job to seek another; workers in the "off" months of seasonal industries; those temporarily laid off but with instructions to return. Their unemployment will be temporary; many were drawing unemployment insurance.

• But most of the remaining third will wait a long time for a steady job. They are the "hard-core" unemployed--lacking the necessary skills to find other than intermittent work; the victims of past or present discrimination; those unable or unwilling to move from depressed areas and occupations; the physically or emotionally handicapped.

Another half million to one million potential workers were not even counted as unemployed. Many had long ago abandoned any search for a job. Some had never tried.

• But even among those who worked year-round, some 2 million breadwinners--particularly the low-skilled with large families--earned incomes insufficient to support a minimum standard of decent subsistence.

• And 6 1/2 million families were poor because the heads of their households were unable to work: either aged, severely handicapped, or a widowed or deserted mother with young children.

Those left behind used to be called the "invisible poor." But an awakened public conscience has sharpened the vision of most Americans.

2. Price increases--although less than in many comparable periods--still were greater than we wanted or should long tolerate.

It is tempting to blame the creep of prices on the greed of producers--or the irresponsibility of labor--or Government policies-or bad weather--or economic disturbances abroad. Some of the price rise may have been due to each. But the main causes lay elsewhere:

• Some can be traced to imbalances created by the special pressures of Vietnam procurement and booming private investment.

• The spurt of demand--partly real, partly psychological--that followed the step-up of our Vietnam effort in mid-1965 simply exceeded the speed limits on the economy's ability to adjust. Our resources were sufficient for the task; but the sheer speed of the advance strained the ability of industrial management to mobilize resources at the required pace.

• Some price advance was the inevitable cost of the adjustments required in recovering from a decade of slack: --Wages had to be raised sharply in underpaid occupations, which previously held their labor only because the alternative was no job at all.

--Producers in once stagnant, lowprofit industries saw opportunities for expansion and found it possible to raise prices and earnings in order to attract needed capital.

--Demand pressed harder on skilled occupations and professional services where we had trained too few persons to meet the needs of a high employment economy.

Some price increases would still have occurred had we moved at a steadier pace.

But these price increases could have come slowly enough and have been small enough not to threaten a chain reaction of wages chasing other wages--wages chasing prices-prices chasing wages--and prices chasing other prices.

It is this spiral we must and can avoid. But it will require responsible action on the part of all.

3. Achieving equilibrium in our balance of payments remained a problem, in spite of strong new measures.

The costs of Vietnam required us to spend many more hundreds of millions of dollars beyond our shores. At the same time, the spurt of demand caused our imports-especially of capital goods--to soar.

We are determined to continue our progress toward equilibrium.

4. Tight money and high interest rates concentrated the burden of restraint on housing.

Interest rates in 1966 were as high as at any time in 40 years. They were pushed there by an insatiable demand for credit, straining against a deliberately restricted supply. Monetary policy in 1966--like tax policy--was properly aimed at slowing down an economy expanding too fast.

The brakes applied last year worked. But tight money worked painfully and inequitably. It cut construction by more than $8 billion during 1966. Its impact was equivalent to a heavy across-the-board tax increase, but with most of its effect concentrated on a single industry.

FINDING SOLUTIONS

We will move this year toward solutions for these problems and others. But they cannot all be completely solved in 1967.

Lilting the burden on housing.--Now that the economy's advance is again more moderate, the burden of tight money is being lifted. Interest rates are still extremely high-but they are moving down from their peaks. Credit is still not readily available to all who can make sound and productive use of it-but it is becoming easier to get. More savings are flowing into our thrift institutions and are beginning to be available to builders and homebuyers.

The steps we took last year and those I am now proposing, the steps the Federal Reserve has recently taken and is continuing to take to increase credit availability and lower interest rates, should have our housing industry moving smartly forward by the end of 1967, and ready for one of its best years in 1968.

Restoring price stability.--The advance of prices has already begun to slow. Wholesale prices in December were below their levels of August.

The more moderate pace of economic advance now underway, which the policies I am recommending are designed to maintain, should further diminish inflationary pressures.

We cannot rescind all of last year's increases in cost, some of which are still spreading through our structure of prices. Price stability cannot be restored overnight. But we will be making good progress toward price stability this year.

Improving our international payments.We have recently announced stronger voluntary balance of payments programs for 1967. Our policies to constrain economic expansion to a sustainable pace should permit an improved export surplus.

I am now recommending further steps to strengthen our external payments. Yet so long as we remain heavily engaged in Southeast Asia, we will have a balance of payments problem.

Combating poverty.--We will continue to attack poverty and deprivation through such weapons as

--Community Action and Head Start; --rent supplements and child nutrition;

--aid to elementary and secondary education in poverty areas and the Teacher Corps;

--the Manpower Development and Training Act, the Job Corps, the Neighborhood Youth Corps;

--Medicare, Medicaid, and neighborhood health centers;

--measures to end discrimination in jobs, education, and public facilities;

--the expanded coverage enacted last year for a higher minimum wage.

I am proposing that our attack be reinforced with new weapons in 1967.

Yet, with old weapons and new, the war on poverty will not be won in 1967--or 1968. There is no wonder drug which can suddenly conquer this ancient scourge of man. It will be a long and continuing struggle, which will challenge our imagination, our patience, our knowledge, and our resources for years to come. Our capacity to stay with the task will be a test of our maturity as a people.

USING THE GAINS OF GROWTH

From early 1961 to the end of 1966, our GNP rose an average of $44 billion a year. About $9 billion a year was price increase. Of the balance

• An average real gain of $10 billion a year (in 1966 prices) came from putting idle men and machines back to work.

• An average real gain of $25 billion a year (in 1966 prices) came from the growth of our resources: a larger work force, more and better capital and management, higher productivity.

Further gains from putting idle resources to work will now be harder to achieve.

But our annual dividend from growth has meanwhile become more generous. In 1967 it will add $30 billion at today's prices to our potential output.

Our economic policies must assure that we realize this potential dividend--and use it wisely.

REALIZING THE GROWTH DIVIDEND

To ensure our full dividend from economic growth requires that markets for goods and services expand steadily and adequately--but not excessively. In recent years, we have tested and refined the power of fiscal and monetary policy to stimulate or moderate the expansion of total demand.

During 1966, Federal expenditures were expanding rapidly. But tax policy worked to counter their impact.

Federal expenditures in our national income accounts grew $19 billion in calendar year 1966, reflecting the step-up in national defense; in Social Security, Medicare, and related payments; and in grants to State and local governments. They added strongly to private purchasing power. They would have added more but for the substantial expenditure cutbacks put into effect during the year.

On the other side, taxes restrained demand. Higher payroll taxes, the restoration of some excise taxes, the institution of graduated withholding, and the suspension of tax incentives to investment all represented new measures that were draining off more than $9 billion of spendable incomes by year-end. In combination, and for the full year, these measures and an expanding economy produced $18 billion more in revenues than in 1965. Prompt action by Congress in response to my tax proposals of January and September made tax policy an important force for economic restraint.

Taking the two sides together, our national income accounts budget was in surplus in the first half and in balance for 1966 as a whole.

But as private investment threatened to outrun private saving, sharp monetary restraint was also applied. In response to both fiscal and monetary restraints, the economy shifted gears from excessive speed to a moderate advance.

FISCAL POLICY FOR 1967

In the year ahead we are determined to maintain that moderate advance; we need no further slowdown; we can tolerate no new spurt of demand. After midyear, the tax increase I have proposed and a more moderate growth of Federal spending will increase the freedom of monetary policy to support expansion. I am confident that the opportunity will be used.

The specific fiscal program I am recommending includes --a surcharge of 6 percent on the tax liabilities of individuals, exempting persons in the lowest income brackets;

--the same 6 percent surcharge on the tax liabilities of corporations. Here are some examples of the effect of this proposal, as applied to a married couple with two dependents, using typical deductions:

• With $5,000 income, their tax will be unchanged--still $130 lower than they would have paid in 1963.

• With $10,000 income, their tax in 1968 will rise $67, or $1.30 a week. Their annual tax will still be $190 less than they would have paid in 1963.

• With $20,000 income, their tax in 1968 will rise $190, or $3.65 a week. But their annual tax will still be $450 less than they would have paid in 1963.

A corporation with profits before tax of $100,000 will pay an extra $2,490. It will still pay $2,510 less than it would have paid in 1963.

One with profits of $1,000,000 will pay an extra $28,410, still $12,590 less than it would have paid in 1963.

The surcharge will provide for $5.1 billion of extra revenues in fiscal year 1968 on a national income accounts basis, substantially offsetting the expansion of $5.8 billion in defense purchases.

The national income accounts budget will also be affected by my proposals for Social Security benefits and taxes.

After allowance for these changes, the national income accounts deficit for fiscal year 1968 is now estimated at $2.1 billion, compared with $3.8 billion in fiscal year 1967.

I am also recommending two further accelerations of corporate tax payments, to begin in 1968:

--requiring quarterly payment of estimated tax on the basis of 80 percent rather than 70 percent of liability;

--requiring, over a 5-year period, that small corporations, as well as large, become current in their tax payments, in the same way as individual proprietors. We have fashioned a fiscal program for sustainable expansion. With that program, we now see a rise of about $47 billion in our GNP in 1967--a growth dividend close to 4 percent in real terms.

USING THE GROWTH DIVIDEND

The first priority for the use of our growth dividend must, as always, be the defense of freedom. But it will take only a small part of our $47 billion of added production.

These will be the public claims on our growth dividend: • $10 billion more of our output in 1967 will go for the support of our men in Vietnam and other urgent needs of defense.

• $1 1/2 billion will go for the expansion of other Federal purchases, including adjustments in Federal civilian and military pay.

• State and local governments will use about $8 billion more of the Nation's resources in 1967. In this, they will be aided by Federal grants totaling nearly $15 billion.

The remaining $27 1/2 billion of our GNP gain in 1967--nearly 60 percent of it--will be used in the private sector. And the flow of goods and services to consumers will expand this year by even more than that.

• In the past several years, an unusually large part of our output growth has gone to expand the productive capacity of business and to build up inventories to support high and growing production and sales. On balance, a slightly smaller portion of our resources will be used for these purposes in 1967 than in 1966.

• 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.

In 1967, we will have no bonus dividend from using previously idle resources. But the dividend from growth alone is a big one. We must 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 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.

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 a 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.¹ 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.

¹ On November 16, 1967, the White House Press Office announced the appointment of an Industry-Government Special Task Force on Travel to make recommendations as to how the Federal Government could increase travel to the United States and thereby improve the U.S. balance of payments. The announcement, including a list of industry and Government members of the task force, is printed in the Weekly Compilation of Presidential Documents (vol. 3, p. 1580).

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.

IMPROVING THE INTERNATIONAL MONETARY SYSTEM

In 1966, significant progress was made toward a better international monetary system. Through close consultation and cooperation among the financial authorities of major countries, temporary strains were met promptly and effectively.

Two large forward steps were taken on the road to international monetary reform: wide consensus was reached on basic principles for the deliberate creation of additional reserve assets; and the negotiations advanced to a second stage in which all members of the International Monetary Fund are participating.

An even greater effort must be made in the coming year to improve our monetary system. In particular, I urge that

--all countries participate in the continuing task of strengthening the basic monetary arrangements that have served the world so well;

--both surplus and deficit countries assume their full responsibility for proper adjustment of international payments imbalances, and cooperate in efforts to lower world interest rates;

--full agreement be reached on a constructive contingency plan for the adequate and orderly growth of world monetary reserves.

HELPING THE DISADVANTAGED

The United States is the first large nation in the history of the world wealthy enough to end poverty within its borders. There are many fronts in the War on Poverty. We are moving forward on them all.

• There must be full employment so that those qualified and able to work can find jobs .... The unemployment rate last year was the lowest in 13 years.

• Those not now fully qualified must be given the education and training, the health and guidance services which will enable them to make their full contribution to society .... We have greatly increased our aid to education and enlarged our training programs, and we will expand them further.

• For those who will be unable to earn adequate incomes, there must be help-most of all for the benefit of children, whose misfortune to be born poor must not deprive them of future opportunity .... We have increased our income support, and we will increase it further.

• Wherever the poor and disadvantaged are concentrated, intensive and coordinated programs to break the cycle of deprivation and dependency must continue and be reinforced .... We have instituted these programs in hundreds of cities and rural areas; we are expanding them and designing others.

INCOME GUARANTEES

Completely new proposals for guaranteeing minimum incomes are now under discussion. They range from a "negative income tax" to a complete restructuring of Public Assistance to a program of residual public employment for all who lack private jobs. Their advocates include some of the sturdiest defenders of free enterprise. These plans may or may not prove to be practicable at any time. And they are almost surely beyond our means at this time. But we must examine any plan, however unconventional, which could promise a major advance. I intend to establish a commission of leading Americans to examine the many proposals that have been put forward, reviewing their merits and disadvantages, and reporting in 2 years to me and the American people.

PUBLIC ASSISTANCE

Our system of public assistance is now 30 years old and has obvious faults. The standards of need set by many States are unrealistically low; benefits are further restricted by excessively stringent eligibility conditions. In some respects the system perpetuates dependency.

1. State standards of need are miserably low. In 18 States a family of 4 is presumed able to manage for a month on $45 a person--or less. And in many States, actual payments average far below their own standards of need.

It is time to raise payments toward more acceptable levels.

As a first step, I ask the Congress to require that each State's payments at least meet its own definition of need; and that its definition should be kept up to date annually as conditions change.

2. With minor exceptions, payments under public assistance are reduced dollar for dollar of earnings by the recipient, removing any incentive to accept part-time work. We should encourage self-help, not penalize it.

It is time to put an end to this 100 percent tax on the earnings of those on public assistance.

I shall therefore ask Congress to enact payment formulas which will permit those on assistance to keep some part of what they may earn, without loss of payments.

3-Many recipients of public assistance are capable of receiving training which would ultimately make them self-supporting.

I therefore urge the Congress to make permanent the Unemployed Parent and Community Work and Training programs associated with Aid to Families with Dependent Children (AFDC), and to require all States receiving Federal support under AFDC to cooperate in making Community Work and Training available for the unemployed parents of dependent children.

TRAINING AND EMPLOYMENT

The coexistence of job vacancies and idle workers unable to fill them represents a bitter human tragedy and an inexcusable economic waste. One of society's most creative acts is the training of the unemployed, the underemployed, or the formerly unemployable to fill those vacancies.

A dynamic economy demands new and changing skills. By enabling workers to acquire those skills, we open opportunities for individual development and self-fulfillment. And we make possible higher production without inflationary pressures.

I shall ask the Congress for funds to support a new and special effort to train and find jobs for the disadvantaged who live in urban ghettos.

I shall also propose legislation to improve the effectiveness of the Federal-State employment service.

SOCIAL SECURITY

Millions of aged still live in poverty. Millions of younger Americans are willing to pay for more adequate retirement benefits in the future.

I ask the Congress to approve an over-all 20 percent increase in our Social Security program. We can increase benefits for all Social Security beneficiaries by at least 15 percent, raise the minimum benefit by 59 percent to $70 a month, assure workers with 25 years of coverage at least $100 a month, extend Medical Insurance to disabled beneficiaries, and allow larger earnings without loss of benefits.

UNEMPLOYMENT INSURANCE

Our system of unemployment insurance was created in a world of massive unemploymerit. The needs of a high employment economy are different. Today, when jobs are available, the jobless who exhaust their benefits typically need training, guidance, or other supportive services.

Therefore, I am asking the Congress to consider legislation to provide such services in conjunction with extended benefits to the long-term unemployed, to extend the protection of the system to additional workers, to establish more uniformly adequate benefits, and to correct abuses.

CITIES AND HOUSING

The American city is not obsolete; it is still a great engine for economic and social progress. But cities are in trouble, threatened by congestion, pollution, crime, poverty, racial tension, slums, and blight.

Yesterday's rural poor have been moving to the city just as many of the jobs they seek and need have been moving to the suburbs. Inadequate transportation and discrimination in housing make it difficult for them to follow the jobs; and deficiencies of education, health, and skills compound their disadvantages.

Most cities cannot afford the massive expenditures necessary to solve these problems. The flight of higher income families and businesses to the suburbs erodes sources of revenue for the cities, even as expenditure demands escalate. Inflexible city limits have created a hodgepodge of local taxing jurisdictions, often dividing the tax base from the need. The cities cannot collect for the many benefits they supply to residents of the suburbs.

The problems of the cities flow across irrelevant boundaries established by historical accident. So solutions must draw on the resources and imagination of a larger area. Our efforts have been aimed to encourage a metropolitan approach to metropolitan problems.

We must also find ways to enlist more fully the resources and imagination of private enterprise in the great task of restoring our cities.

I have just appointed a Commission, under the chairmanship of Senator Patti H. Douglas, to work with the Department of Housing and Urban Development to examine problems of codes, zoning, taxation, and development standards and to recommend ways to increase the supply of low-cost housing. I am convinced that this study can make a major contribution to the solution of urban problems.

Last year, the Congress enacted the pathbreaking Model Cities legislation. The Federal Government will help cities to focus all available programs on their needs-eventually to overwhelm the problems that have heretofore overwhelmed the cities.

More than 70 cities will have completed their plans and be eligible to start receiving assistance in 1968. Federal aid for water and sewer projects, open land conservation, and urban mass transportation is encouraging a more coordinated approach to metropolitan problems. I seek increased appropriations for all of these programs. And I shall seek authorization and resources for a greatly expanded program of research on urban problems.

Growth in the number and incomes of American families will require us to build about 2 million new houses a year for the next decade, most of them in and around cities. Last year, housing bore a disproportionate part of the burden of needed restraint. But we are now moving into a period of renewed homebuilding. I look for construction to rise briskly during 1967.

Federal programs for fiscal 1968 will assist in construction or renovation of 165,000 housing units for the urban poor, the elderly, and the handicapped. The Rent Supplement program will contribute to this goal.

This year will be a brightening one for the housing industry; it can also be a landmark year in the progress and evolution of our cities.

EDUCATION AND HEALTH

Individually and collectively, Americans have insatiable appetites for more education and better health. Education and health contribute both to individual well-being and to the Nation's productivity. But far too many of our urban and rural poor are denied adequate access to either. The efficiency of our methods of education and of providing medical care can and should be strengthened.

History will record these years as the time when this Nation awoke to its needs--and its limitations--in education and health. The Elementary and Secondary Education Act, Head Start, the Teacher Corps, Medicare, Medicaid, and the Partnership in Health will be landmarks in our social and economic development.

I shall propose

--an expanded Head Start program; a Follow-Through program in the early years of school; and the opening of other new educational opportunities for children;

--both legislative and administrative changes to accelerate research and development on more efficient and effective ways of providing health resources;

--an expanded child health program, including early diagnosis and treatment, a pilot program of dental care, and the training of additional health personnel to provide services to children.

ABATING POLLUTION

A polluted environment erodes our health and well-being. It diminishes individual vitality; it is costly to industry and agriculture; it has debilitating effects on urban and regional development; it takes some of the joy out of life.

The 89th Congress enacted important legislation to improve the quality of our environment. All 50 States have now signified their intention to establish water quality standards for their interstate and coastal waters. The Federal Government is assisting State and local governments through comprehensive water basin planning, and is providing financial help to States for the administration of water pollution control and to local areas for the construction of sewage treatment facilities. In addition, we are studying appropriate methods to encourage industry to control its discharge of pollutants.

The foundation for abating air pollution was laid in the Clean Air Act of 1965. But the air over every city proves that further steps are necessary.

I propose that we get on with the jobs of preserving and restoring our environment. I will present detailed proposals on control of air pollution in another message.

IMPROVING OUR TAX SYSTEM

Our tax system is one in which we can take pride. In terms of fairness, revenue productivity, and balanced economic impact, it is unsurpassed by any other tax system in the world today.

Nevertheless, it can be improved. As they now stand, our tax laws impose undue burdens on some and grant unfair benefits to others.

A system as complex as ours cannot be perfected in a single bill. Rather, the process of tax reform must be continuous, with every provision of the law subject to constant examination and adjustment where needed. Moreover, this work of basic reform should proceed independently of the requirements for raising taxes or the opportunities for tax reduction.

I therefore plan to submit proposals to the Congress to improve the equity of our tax system and reduce economic distortions. These proposals will be designed to avoid significant budgetary effects.

As one specific reform, I will urge changes to deal with abuses by tax-exempt private foundations.

IMPROVING GOVERNMENT ORGANIZATION

Separate Departments of Labor and Commerce perpetuate the obsolete notion that there is fundamental conflict between the interests of business and labor, or between the interests of either and that of the Nation.

A single department of labor and business can more effectively carry out those national programs which affect the private productive sector as a whole. The two departments share many common objectives; their interests and activities coincide or overlap in

--fostering economic and regional development;

--matching the skills of labor with the

needs of employers;

--providing more jobs at better wages;

--avoiding labor disputes;

--maintaining a fair distribution of private incomes without inflation;

--providing stability of production and jobs;

--providing basic economic and social information and technical services needed by both private and public sectors;

--supporting expansion of international trade and considering its impact on the domestic economy.

By combining these activities, we can greatly improve efficiency, reduce costs, simplify the reporting burden on business, provide better and more uniform statistics, and assure that the views and the problems of the private sector enter more effectively into decisions on general economic policy.

I urge the Congress to support my recommendation for a new department of labor and business.

OTHER ECONOMIC POLICIES

1 I renew four recommendations made in my Economic Report of 1966 and not acted upon by the 89th Congress:

--a fair system of charges for users of highways, aviation facilities, and inland waterways, to improve efficiency in the use of transportation resources, and to reimburse the Federal Government for a part of its expenditures on facilities which directly benefit those who use them;

--truth-in-lending legislation, to provide consumers with a full and clear statement of the true cost of credit;

--stronger regulation of savings and loan holding companies;

--provision of Federal charters for mutual savings banks, to enlarge and strengthen our system of thrift institutions.

2. To aid the advance of technology on which economic progress depends, I now urge Congressional support for

--a long-overdue modernization of our patent system;

--a large-scale program of research in transportation.

3. Total holdings in the Nation's stockpile of strategic and critical materials now stand at $6.5 billion. Of this amount, $3.4 billion are excess to our defense needs as presently determined.

During the last fiscal year, the Administrator of General Services disposed of excess stockpile materials valued at slightly more than $1 billion without disruption of the domestic economy or the normal channels of trade.

The last session of the Congress authorized disposal of excess stockpile material valued at $782 million. I will ask the Congress for authority to dispose of additional stockpile excesses, bringing to about $2 billion the present value of excess stockpile material available for disposal.

I believe that we should relieve taxpayers of the burden of carrying unneeded surplus stocks, and provide businesses and workers with the materials necessary to assure continued high levels of production.

4. The responsibility which we share with the States to ensure that our banks and thrift institutions are honest, competent, and competitive is a continuing function demanding constant attention. We must continue to encourage the orderly and progressive development of a financial system adequate to meet the needs of a growing and dynamic economy.

I urge the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the Federal Home Loan Bank Board to continue and to intensify their efforts to coordinate their regulatory policies and procedures, and to improve their examination methods.

AFTER VIETNAM

Despite all our efforts for an honorable peace in Vietnam, the war continues. I cannot predict when it will end. Thus our plans must assume its long duration.

But peace will return--and it could return sooner than we dare expect.

When hostilities do end, we will be faced with a great opportunity, and a challenge how best to use that opportunity. The resources now being claimed by the war can be diverted to peaceful uses both at home and abroad, and can hasten the attainment of the great goals upon which we have set our sights.

If we keep our eyes firmly fixed on those goals--and if we plan wisely--we need have no fear that the bridge from war to peace will exact a wasteful toll of idle resources, human or material.

But when that welcome day of peace arrives, we will need quick adjustments in our economic policies. We must be prepared for those adjustments, ready to act rapidly--both to avoid interruption to our prosperity and to take full and immediate advantage of our opportunities.

Planning for peace has been an important activity in many executive agencies. But the effort needs to be stepped up and integrated.

Accordingly, I am instructing the heads of the relevant agencies in the Executive Branch, under the leadership of the Chairman of the Council of Economic Advisers, to begin at once a major and coordinated effort to review our readiness. I have asked them

--to consider possibilities and priorities for tax reduction;

--to prepare, with the Federal Reserve Board, plans for quick adjustments of monetary and financial policies;

--to determine which high priority programs can be quickly expanded;

--to determine priorities for the longer range expansion of programs to meet the needs of the American people, both through new and existing programs;

--to study and evaluate the future direction of Federal financial support to our States and local governments;

--to examine ways in which the transition to peace can be smoothed for the workers, companies, and communities now engaged in supplying our defense needs, and the men released from our armed forces.

I have directed that initial reports be prepared on all of these and related problems, and that thereafter they be kept continuously up to date.

CONCLUSION

Our task for 1967 is to sustain further sound and rewarding economic progress while we move toward solutions for the problems we met in 1966. It will require a flexible and delicate balance of economic policies.

Above all, we must guard against any interruption of our prosperity. The steady advance of jobs and incomes is our most powerful weapon in the battle against poverty and discrimination at home. And it undergirds our policy around the world.

Yet we must be equally alert to the dangers of inflation.

In his Economic Report of January 1956, President Eisenhower wrote: The continuance of general prosperity cannot be taken for granted. In a high-level economy like ours, neither the threat of inflation nor the threat of recession can ever be very distant .... The only rigid rule we can afford to admit to our minds is the principle that the best way to fight a recession is to try to prevent it from occurring.

Only 18 months later, the sharpest recession of the entire postwar period began-which also led to the largest peacetime budget deficit in our history. Over the same 18 months, both consumer prices and wholesale prices advanced 5 1/2 percent--consider. ably faster than in the 18 months since June 1965.

That history does not invalidate but rather reinforces President Eisenhower's proposition. Neither the threat of inflation nor of recession is ever distant in a high level economy.

How can we steer between these dangers, and--at the same time--supply the needs of national defense, strengthen our overseas payments, relieve the inequities of tight money and high interest rates, maintain the momentum of social progress, and provide the growth of incomes which lets each of us move toward fulfilling his private aspirations?

I am confident that we can find such a course. We will continue to coordinate the tools of monetary and fiscal policy to the common goal--the sound, balanced, and noninflationary advance of production and incomes. We are steering toward lower interest rates, a better balance in our economy, a budget and a Social Security program that reflect national priorities.

There will be surprises in store along the way. We must be prepared to meet them swiftly and flexibly. And I think we are. The tools of economic policy are not perfect; but they are far better understood and accepted-in the Government and in the private community-than ever before.

We have surely proved over recent years that economic progress does not need to be interrupted by frequent recessions. And, although prices have risen faster in the past year and a half than we expected or wished, we have done better than in most similar periods of our economic history. And we have done it without burdensome controls on prices or wages.

The Federal Government cannot do the whole job--or even very much of it. Production and incomes arise from the strength and skill of workers, the ingenuity of managements the willingness of savers to risk their capital, the genius of inventors and engineers, the patience of teachers, the devotion of local public servants--the contributions of all who participate in our economy.

Yet the Federal Government has a role of leadership and a responsibility for coordination.

The Congress defined that role in the Employment Act of 1946:

--it is the continuing policy and responsibility of the Federal Government...

--with the assistance and cooperation of industry, agriculture, labor, and State and local governments,

--to coordinate and utilize all its plans, functions, and resources for the purpose of creating and maintaining, in a manner calculated to foster and promote free competitive enterprise and the general welfare ....

--useful employment opportunities... for those able, willing and seeking to work, and to promote maximum employment, production, and purchasing power.

Our economic policies for 1967 respond to that mandate.

LYNDON B. JOHNSON

January 26, 1967