My topic this morning is the economic game plan as set forth by the Administration. We were told on the fifteenth of August that the nation is in an economic mess and needed strong medicine. Quite obviously, we agree with that diagnosis. In two and one-half years unemployment in this country has gone from 2.6 million to over 5 million in the summer of 1971, from 3.3 percent as registered by the Index to now 6 percent—and this not counting almost a million more people, mostly women, who drop out of the search for jobs because of the inability to find them, and who are no longer counted as unemployed.
The recession from which now possibly we are moving was an engineered recession. The President in October of 1969, said that he had inherited from the previous Administration an inflationary mess-—and he was correct—and that the only way in which that could be corrected was to have a measure of unemployment in order to restrain the inflation. Well, we say not with any happiness that the promise was half kept.
We got a substantial increase in unemployment, but unfortunately it was accompanied by a further increase in inflation. Let me say this inflation is rooted in the escalation of the Vietnam War in 1965. When that inflation began it was directly traceable to the military expenditures for that war, unaccompanied unfortunately in the months immediately succeeding by additional taxing measures to keep the economy in balance. At that time labor unit costs were going down. They continued to go down for several months, then moved sideways; and it was not until almost 18 months after the event that as labor fought to correct its eroded position and then fought to try and protect itself against future inflation that labor cost-push also became part of the problem.
Inflation moved at an annual rate in 1968 of 4.2 percent. By 1970, unfortunately, it was moving at an annual rate of 5.9 percent. In the months May-July, 1971, immediately prior to the freeze, it was moving at an annual rate of 5.2 percent—and this with 27 percent of our industrial capacity idle.
Only one time before in our economic history have we had both a recession and sharp inflation, and that was in 1958. The gross national product in 1970 in uninflated dollars was down for the first time since 1958. We are experiencing our first adverse balance of trade since 1893. And indeed we were and are in an economic mess. And the nation was ready for medicine.
But we are a little concerned about what kind of medicine it is . The wage-price freeze, which was put on us so unexpectedly and which was the direct reverse of the previous economic policies of the Administration, obviously cannot last much longer than its prescribed 90 days. Wages obviously will be well policed because the employers police those wages -- and are only too happy to keep them under control. Prices, unfortunately, are also unilaterally controlled by the employers. History has shown that after a given period of time reliance on voluntary compliance quickly begins to ravel at the edges.
We have complained about the fact that suspended payments during these 90 days are going into the corporate treasuries of the various companies. In the McDonnell-Douglas Corporation, for example, where by letter of agreement attached to the contract that ran out on September 15,34 cents per hour was due to those people, now suspended from payment. If you calculate that over the 20,000 people — members of our union — entitled to that money, it comes to more than $5 million by the end of the freeze period. We say it does nothing to fight inflation to simply take that $5 million from 20,000 families and put it into the corporate treasury of the McDonnell-Douglas Corporation.
As a matter of fact, I think a case can be made that where such a company is already in a highly profitable situation, as they happen to be, it is a further contribution to the pressures of inflation. That is why we say this is money owed and money that must be paid. Our union first said when the freeze was first put on, if at the end of the period, in phase two which we are now approaching, the government should reach in and make some of the terms of our contracts inapplicable, that then we will consider those contracts null and void. We have been greeted by the editorial world as taking an unthinkable, unacceptable position.
Well, I submit to you that if any person sold a house in November, 1970, for $30,000 and was receiving money payments month by month based upon a selling price of $30,000 and the government then came along and said that house cannot now, a year later, be sold for more than $25,000, that individual certainly would have the right to say, "Well, under those terms I will not sell." We simply say that under those terms we will not sell.
I might say that a year ago we were on strike in the General Motors Corporation. Certain economists—certain liberal economists—have said labor leaders should be happy because this gives them a chance to get off the treadmill. We looked at that treadmill a year ago as we went into the automobile negotiations, a treadmill which was against the national interest because bigger and bigger wage increases were being negotiated for, struck for, won, in years two and three of three-year agreements to try and protect against a future inflation, but unfortunately by that very event guaranteeing the continuance of that inflation. And we said to our membership this is the wrong way to go in your own self-interest and certainly in the national interest, and that we should be content with moderate increases tied to the national productivity, the ability of the economy on a long-term trend to produce more goods in the same period of time.
We should be content with a moderate increase, providing such increases are protected by a cost-of-living escalator clause, because if inflation is restrained, then the cost-of-living money is not paid or paid only in part and clearly, we say, is counter-inflationary.
We draw attention particularly to the fact that in the Korean wage stabilization period, when we had a much different kind of inflationary situation, where we had an economy bursting at the seams, when we were rationing scarce metals, and we in fact had too many dollars chasing too few goods, and when we had an inflation rate in 1951—the first full year of the Korean War—of 7.9 percent, much worse than today, a stabilization program was set up and specifically the kind of contract we won back from General Motors a year ago was approved by the Wage Stabilization Board. New contracts based on those principles were approved by the Wage Stabilization Board, and that worked. In that highly inflationary situation the rate of increase in inflation, which had been 7.9 percent in 1951, was moderated to 2.2 percent in 1952 and fell to eight-tenths of one percent in 1953, which in practical terms is price stability.
We have also been critical of the investment incentive. The House Ways and Means Committee has now said that will be seven percent across the board instead of the 10 percent per year and then five percent asked by the Administration. This is to encourage new investment in order to get the economy moving. They also propose to make it retroactive to last April.
It puzzles us how one can have an incentive scheme which is retroactive, how you can pay somebody something now to do something which they have already done or not done. But nevertheless, that is what is proposed. And this comes to almost $4 billion a year of reduced taxes by American industry. And we oppose it not simply out of spite or for the sake of opposition, but because we say it doesn't work. When the economy is at 73 percent of capacity what is needed is stimulus to spending to utilize the capacity we now have.
Let me quote the chief executive officer, James Roche of the General Motors Corporation, who on August 31 in a statement supporting the President said, and I quote him, "The investment tax credit is intended to stimulate spending, especially by some smaller companies and those in weak financial condition. It should be understood that most companies of any size determine their purchases of equipment by the needs of the business and not by any short-term tax advantages."
It has been said, "Well, do you oppose this just because a Republican president has asked for it?" We opposed this when President Kennedy asked for it in 1962; we opposed this when President Johnson asked its renewal after its suspension in 1966. And we say that if it is to be done, then in line with Mr. Roche's thinking, it should be restricted either to smaller companies or to a given amount to encourage the companies in weak financial condition, but not a wholesale giveaway of $4 billion of tax money.
Now this is on top of changes made administratively on how depreciation is calculated. I repeat, this was an administrative action in the early part of this year, not passed by the Congress, which allows accelerated depreciation and which does not change the dollar flow into corporate treasuries but does change into an expense what otherwise would have been a profit. And this by the Treasury Department's own estimate is $37 billion over 10 years, again almost another $4 billion per year.
We are attacking this as being an illegal administrative action. UAW is in court against the matter, joined by Common Cause, by Ralph Nader, and other groups. Our lawyers believe we have an excellent case. The House Ways and Means Committee, however, has moved in and has cut the depreciation rule change in half; and we say in effect they are legalizing a half when if they stood aside, none of it would stand. So here we have these two together coming to approximately $6 billion annually.
And there are other tax provisions provided for, so-called help to exporting companies. This brings about a problem. Just as long as American companies make profits abroad, and leave those profits abroad, they pay no taxes on them. Therefore there is an incentive to keep the profits abroad and this new incentive is to try and meet the problem of that loophole. We say if there is a loophole, you cure the loophole by getting rid of it instead of making a second one to try and stop the action of the first.
I repeat, what is needed is a stimulus to purchasing power. And here what is being put through the Congress, already enacted by the House of Representatives, is to increase the personal exemption by another $50 and then to move forward what was already on the books from January, 1973, to January, 1972, to give more concessions to the lowest incomes, and these things are good but they are not good enough. They are a small patch on the giveaway to business. The President, too, in his program proposes cuts in government spending to offset the tax cuts. Paul Samuelson, the Nobel prize-winning economist, has said, "I hope the President's arithmetic is wrong. If he cuts expenditures by $4.7 billion to match the tax cuts, that won't create one extra job."
Vice President Agnew has said he doesn't know why Woodcock is hollering, because the automobile excise cut of seven percent will put his members back to work. Of course, we support the elimination of the automobile excise tax. We think it is unfair and it is discriminatory. We are disturbed when the president of the General Motors Corporation and the president of the Ford Motor Company say that if this results in increased production because of increased sales, they will at least initially meet that by overtime of the existing work force instead of putting some of the unemployed back to work.
But here again, if the excise tax elimination and the import surcharge increases domestic car sales by, let us say 500,000 units, and the additional jobs will be offset by the five percent cut in governmental jobs on an attrition basis which is also proposed by the program, then the total economy will not be assisted.
We as a union do support the import surcharge not because we have adopted a protectionist posture, but because the trading currencies of the world are grossly out of alignment with one another. The deutsche mark and the Japanese yen are grossly undervalued as against the American dollar, and this enables them to sell much more cheaply in this country than otherwise would be the case. We support it as a weapon in the hands of the Administration to get a realistic alignment of those currencies and to get other changes to make, in fact, international trade fair trade.
On the import problem, there are some who suggest that we should cut our standards to meet the competition. Well, we say that's not the way. We are disturbed in our industry that the companies with which we deal are multi-national rather than American. They are based in America, it is true, but they solved their problem—the problem of competition—by joining the other economies. They did this long ago in the case of Europe, the case of Australia, South Africa, and they are now doing it in the case of Japan.
The Chrysler Corporation is spending a hundred million dollars of American money to buy a 35 percent interest in Mitsubishi Motors. The Ford Motor Company is making a similar arrangement with Toyo Kogyo, already announcing that they will bring in from that supplier one-ton trucks to be marketed by Ford in this country. And General Motors has a 34.2 percent interest in the smallest of the Japanese companies, Izusu. But word has already been announced based upon General Motors' support that their capacity will be doubled and tripled in the next two or three years with all of the additional product going to export. And you know where most of those exports will come given the present continuance of the situation.
We also have the troublesome question of profits. We are told they are not what they should be, that they are really low.
Well, I go back to the change in the depreciation rule. That's called the asset depreciation range system. It has increased depreciation amounts the first six months of this year by $7.25 billion. What used to be profits in the statistics now show up as capital consumption allowances. When you look at the profits change from year to year this has a very considerable effect. With the asset depreciation range in the picture, second quarter profits increased over a year ago by 8.2 percent, but if you put the asset depreciation range back where it used to be in the profit column, profits in the second quarter increased this year by 13.2 percent over those a year ago. And without the asset depreciation range — that is with the figures being in the profit column as they used to be — then we find that in the second quarter manufacturing profits in this country were six-tenths of one percent below the record high of the year of 1968 — this with unemployment at a rate of six percent, this with a very meager recovery from the recession.
The First National City Bank — the third largest bank in our country — newsletter for August, 1971, said this: "This (talking about profits) puts it within striking distance of the all-time high of 119 reached in the fourth quarter of 1968. In other words, virtually all of the 22 percent decline in the manufacturing earnings during the recession has been made up during the first two quarters of recovery."
We have had a procedural argument with the Administration relative to the Pay Board. I don't think it was so much an argument as it was a misunderstanding. As first explained to us by the Secretary of Labor what was proposed was acceptable. This was confirmed by the Director of the Office of Management and the Budget, Mr. George Schultz, and we were prepared from the beginning to go along as participants. But then in certain briefings made in the White House on the day the President made his speech to the nation in the evening, there was discussion about the Cost-of-Living Council having a veto power. Now we accept the fact, of course, that the ongoing responsibility is the President's; that's what the law says. But for the Board to have any chance to operate successfully and fairly, it has to be given practical autonomy.
And finally, a week ago today, we were given written assurances by the President that this in fact had been intended and this in fact would be the case. So the Pay Board will be tripartite — it will be industry, it will be labor, and it will be public, not governmental. It will cover all forms of compensation, not simply wages. We say, and we will say within that board, that existing contracts must be honored, because very frankly, if long-term contracts can be torn up at any time the government so decides, then we'll go back to our earlier beginnings and simply negotiate contracts for one year to allow ourselves maximum freedom of latitude. We say that new contracts must be measured by sensible rules. We submit that the contracts that we now have — I'm speaking of course of my own union in this particular regard, but it has been copied by other substantial unions following the GM settlement — are sensible rules.
This charge of labor being the sole responsible party in the inflation situation is an old one. It was part of our collective bargaining ritual. Every time we went to the bargaining table we were charged with being the perpetrators of inflation.
Well, sometimes the truth does peep through. On the 25th of April of this year, the president of the General Motors Corporation, Mr. Edward Cole, speaking in Philadelphia said, and I quote him exactly, "New manufacturing processes and efficiencies were for many years able to offset wage increases. In the automobile industry, increased productivity of manufacturing operations matched or exceeded increases in the cost of labor from 1945 to 1965."
I take note of the fact he said "matched or exceeded." In those 21 years the wage rate and the other economic benefits went from $1.31 7 /10 in 1945 to $4.31 in 1965 — that's including all the costs of fringe benefits — for an annual increase of 6.1 percent, which Mr. Cole said was matched or exceeded by increases in the productivity of the industry, not simply General Motors. Yet, in that period wholesale car prices more than doubled.
There has to be some kind of answer why in recessions nowadays we have continued price increases. We suggest that if you separate prices into competitive prices where there's a multitude of producers, you will find those prices go down in recessions just like they always did. But it's the administered prices, the controlled prices that continue to go up.
So we have long supported a permanent price-wage review board which would have members appointed by the President, approved by the Senate. That board would have subpoena power, and whenever a company that was in a dominant price position in any industry proposed to increase prices, that they would be required to give a 60-day notice and during that period would have to make their case as to why that price increase was necessary. If they charge that a union was pushing them into this position, then the union too would be required to come forward under the powers of subpoena and make its case for why it was insisting on the demands that it had. The board would have no power to set aside any price decision, would have no power to set aside any union determination to prosecute a certain demand. The board would simply publicize the facts involved to see if it was not possible to have the power of public opinion begin to operate in a democratic fashion in what is now a closed-off, but so important sector, of our economic life.
We have said there has to be a control on profits. But if we are to have an incomes policy, obviously in the name of fairness it has to operate on all forms of non-wage income. We say, too, that when the President says the more profits, the more jobs, that isn't necessarily true. Certainly, enterprises have to be profitable in order to supply jobs.
But simply to say as an axiom that the more profits, the more jobs, knocks out a lesson of history that this nation learned bitterly when I was your age. All through the 1920's there was no labor movement to speak of. In 1929 wage rates were practically the same as they had been in 1924; in 1929 prices were somewhat lower than they had been in 1924; all through the 20's prices moved either sideways or drifted gently down. And yet we had the greatest explosion in our economy that we have ever experienced. And that is because all the rewards of productivity were going into the profit column, and you have to have a balance among all the segments of the economy to have a properly operating economy.
We submit the economic game plan should be the reverse of that proposed by the Administration. We need to increase constructive public spending. Not all public spending is inflationary. When the public spending is for ends that in themselves are wasteful, then it is inflationary. But when the public spending is for constructive investment, such as in education and other things, that is not inflationary.
So we say we need to begin by ending the war and ending it completely, and then to have additional, but constructive public spending for environmental improvement. Here we have a magnificent agency in the National Aeronautics and Space Administration which has expert knowledge and expert use of the systems analysis approach in its engineering job of putting man on the moon. Why can't they use that same expert knowledge to find out just how badly our water is degraded, just how badly our air is degraded? We talk about it, but we don't know the extent of the degradation; and not knowing the extent of the problem we don't know how to solve the problem. But this agency has the capacity, utilizing the techniques it already knows, to do that. And we suggest that NASA could be used in the whole area of environmental improvement, urban renewal, education — which is in such sore straits at all levels—welfare reform on a national basis, mass transportation, and medical care.
Let me say a word about the special problems in the health care economy. It's sick. Most informed observers are agreed on this whether they use the term health care crisis, non-system, fragmentation, or collapse.
The health care economy reflects, of course, the state of the general economy, but it has economics of its own. Over the past 10 years the costs of medical care have consistently increased at least twice the rate of the increase in the cost of living. In this fiscal year — July, 1970-June, 1971 — total health care expenditures will have been upwards of $75 billion, or seven percent of our gross national product. Twenty years before we were spending $12.1 billion, or only 4.6 percent of our gross national product.
We spend more money and a larger percentage of our national income for health care than any other nation in the world. This is an increasingly grave problem for the consumer, who is gradually being priced out of the health care marketplace, and for government, which is paying a larger and larger portion of the escalating health care bill. Eleven years ago public funds paid 26 percent of all national health care expenditures; today the figure is 37 percent and rising. The skyrocketing costs show no signs of abating.
Last fall the Social Security Administration estimated that in five years, by 1975, total national health care expenditures would be expected to rise to $120 billion. This is an annual rate of inflation of 12 percent, clearly an unsupportable state of affairs and one which has to be remedied.
Yesterday, the House Ways and Means Committee began hearings on the health care problem. We are supporting the so-called Kennedy Bill — Senate 3, introduced to the House as H. R. 22 — which we think is the only proposal before the Congress that will restrain costs, improve health care, and at the same time give health care to all American citizens as a matter of right.
And finally we say the thing that could do more than any one thing to turn this economy around is the provision of more public service jobs, putting the unemployed to work at regular wages. Now, this isn't made work; all one has to do in any city of our country, or in the countryside, or even the smaller towns is to look around and see the work that is aching to be done. We have unmet needs, rising unmet needs and rising unemployment. It's really an economic idiocy. We could put the unemployed to work on public service jobs doing meaningful work to improve our society.
This would restore confidence, this would turn the economy around. And as the economy begins to rise, then inevitably productivity increases with it. It always happens. And as productivity increases, the inflationary pressures are reduced. We suggest by these means we can restore faith in the system because this system can work.