Speech

For Release on Delivery Sunday, May 30, 1971 2:30 p.m. (E.D.T.) INFLATION, PRIVATE SPENDING, AND THE PROVISION OF PUBLIC SERVICES Remarks By Andrew F. Brimmer Member Board of Governors of the Federal Reserve System At the 171st Commencement Exercises of Middlebury College Middlebury, Vermont May 30, 1971 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis INFLATION, PRIVATE SPENDING, AND THE PROVISION OF PUBLIC SERVICES By Andrew F. Brimmer* By tradition, the commencement season is supposed to be a joyful one: it is a time to celebrate accomplishment and a time to look ahead with hope. It certainly is not a time for pessimism and doubt about our goals and purposes as a people. Yet, at this juncture in the life of our nation, there is much doubt about us, and many of our goals are in open conflict. So, the commencement season this year appears to be a good time to stand aside from some of our day-to-day concerns to weigh alternative means of reconciling competing aims and thus enhance the prospects of achieving a more equitable society. Unfortunately, the necessity of balancing-off competing claims on our national resources is not always appreciated. This clash of purposes is illustrated nowhere more clearly than in the drive to improve the economic position of the disadvantaged (whether because of advanced age, race, or urban locality) and the effort to quicken ^Member, Board of Governors of the Federal Reserve System. I am grateful to several members of the Board's staff for assistance in the preparation of these remarks. Mrs. Susan Burch helped with the analysis of the outlook for private spending. Mr. Paul Schneiderman estimated the impact of inflation on the major functions of State and local governments. Mr. Jared J. Enzler was responsible for the computer simulations to assess the costs of transferring resources from the private to the public sector. Miss Harriett Harper estimated the effects of inflation on the cost of servicing State and local debt, and she also helped with other statistical problems. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - progress in the preservation of our natural resources and to stop the pollution of our air and waterways. At first glance, it might appear to many observers that our abundant resources are large enough to support a faster pace of progress on all of these fronts -- to meet our social and environmental needs simultaneously while continuing to improve our general standard of living -- especially so since we are reducing the volume of resources set aside for military purposes. Sadly, however, a careful analysis of the present and prospective claims on our national output suggests that such an accomplishment is likely to be far more difficult than it might first appear. In fact, it is becoming increasingly evident that the people of this nation will have to make an even greater effort to establish -- and enforce -- a more careful array of priorities than has been made in recent years. Even a cursory review of the competing public and private demands for the goods and services produced in our economy makes it clear that, even with the end of the Vietnam War, the budgets for all levels of government ~ Federal, State, and local — will be just as tight in 1975 as they are in the current year. Moreover, while the growth of our population and the campaigns for improvement in public services have placed strains on available revenues, inflationary pressures have also imposed a heavy burden -- a burden from which governmental units could not escape readily. And what is evea more distressing, the forces which have generated inflationary pressures may persist for some time. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - Under these circumstances, I see an inherent conflict among the major competing claims on our future production of goods and services. This competition is not simply between the private and public sectors -- but also between sorely needed new public initiatives and public programs already in existence, many of which have out-lived their original purposes. Over the next few years, this conflict may be intensified rather than lessened -- as the private sector (particularly consumers) strives to expand its relative claims on national production. In my opinion, to help reconcile these conflicting objectives and to help provide the revenue to finance the growing demand for public services, it may be necessary to raise the average level of taxation in the United States -- rather than lower it as so many taxpayers hope will be the trend. Consequently, despite the longing on the part of many persons for a lessened role for government, the latter may actually have to assume a proportionally greater responsibility if the expanding demand for public services is to be met. I would now like to discuss each of these major points more fully. Inflation and the Rising Costs of Public Services A great deal of concern has been expressed in recent years about the rising costs of State and local government services. Some of this concern undoubtedly can be traced to the greatly increased demand for public services — reflecting larger numbers of children to be educated in the public schools, larger enrollments in publicly-supported Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 4 - colleges and universities, a larger population needing increased medical care, a greater dependence of poor persons on public welfare, more traffic on streets and highways, more crime, more air and water pollution, more parks and recreation facilities — in fact, more of virtually every kind of service provided by States and local jurisdictions* Naturally, to meet these demands, expenditures by State and local governments had to rise. In fact, they more than tripled during the last 1-1/2 decades, climbing from $39 billion in 1955 to $132 billion in 1969 (See Table 1, attached). In terms of purchases of goods and services recorded in the gross national product (GNP) accounts, their spending also more than tripled over this period. In contrast, total GNP and personal consumption expenditures rose about 1-1/2 times, and Federal Government spending expanded about 1-1/4 times. All major State and local functions shared in the increased outlays in the 1955-69 period, but the relative rise in expenditures for higher education was especially noticeable. Spending on local schools rose roughly in line with general expenditures as a whole. Public welfare costs increased somewhat more rapidly than total expenditures, and spending on highways lagged appreciably. But the most dramatic feature of State and local government finances was the significant impact of inflation on their activities. For example, between 1955 and 1970, prices paid by these units rose at an annual average rate of 4.2 per cent, compared with 3.6 per cent for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 5 - the Federal Government and 2.7 per cent for the economy as a whole.—^ In contrast, the rate of increase was 2.2 per cent for personal con- sumption expenditures, 2.7 per cent for business fixed investment, and 3.0 per cent for residential construction. The differential impact of inflation is shown even more clearly by the experience of different sectors during the years 1965-70, the period of the most intense inflation associated with the Vietnam War. Again, State and local governments had to carry the greatest burden of inflation: for them prices rose at an annual average rate of 5.8 per cent, compared with 5.0 per cent for the Federal Government and 4.0 per cent for the country at large. The rate was 3.5 per cent for consumers, 3.4 per cent for business fixed investment, and 4.8 per cent for residential construction. The effects of inflation on those units which provide our basic public services have been even more dramatic than is shown by the differential trends in prices. In fact, despite the enormous increase in the volume of services supplied, inflation has been the most important cause of the increase in the level of State and local government expenditures. This conclusion is supported strongly by the evidence in Table 1. An effort has been made to distribute the increase in expenditures, by major function, according to the source, giving rise 1/ Prices discussed at this point are measured by the implicit price deflators for the GNP. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 6 - to the higher level of spending. Three sources are identified: (1) workload (number of people served, number of school-age children, number of automobiles, number of beds in hospitals, etc.); (2) price increases (higher costs for the same volume of service); and (3) increases in scopd or quality of service rendered. The contribution of each of 2/ these factors was calculated for two periods, 1955-69 and 1965-69.— For all general expenditures combined, between 1955 and 1969, inflation accounted for well over two-fifths of the total increase in outlays -- while one-quarter was due to workload, and less than one- third was accounted for by changes in scope or quality of services. The impact of inflation varied considerably among different functions. Higher prices had the most noticeable effect on the growth of expenditures on local schools (52 per cent) and basic urban services (51 per cent). The proportion of the rise in outlays due to inflation was below average in the case of public welfare (30 per cent), higher education (36 per cent), and general administration (38 per cent). Only in the area of highways did workload account for a larger share of increased expenditures than did inflation -- 51 per cent vs 42 per cent. In two functional areas, changes in scope or quality of service outweighed inflation; these were public welfare (70 per cent vs 30 per cent) and general administration (44 per cent vs 38 per cent). 2/ The percentages attributable to workload, price, scope and quality, 1955-69, were estimated by Robert D. Reischauer for Charles L. Schultze, et. al. , Setting National Priorities: the 1972 Budget, Brookings Institution, Washington, D. C., 1971, Ch. 6, pp. 138-40. The corresponding figures for 1965-69 were estimated by Paul Schneiderman of the Board's staff, using Census Bureau data and Reischauer's estimating technique. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 7 - When one looks at the years of the Vietnam War-related inflation, 1965-69, the general pattern is roughly the same — except that the impact of inflation is even greater. For all general expenditures, the proportion of the increase accounted for by inflation climbed to 47 per cent. Only in the areas of public welfare and higher education was there a relative decline in the impact of higher prices. In both cases, a considerable expansion in the scope of coverage was more important. The rise in the incidence of inflation was particularly striking in the case of highways and basic urban services. The reasons why inflation has had such a severe impact on State and local governments are readily understood. Well over half of their total expenditures is accounted for by wages and salaries, and they have been under substantial pressure to raise compensation. These pressures in turn can be traced partly to efforts to offset increases in the cost of living and partly to the need to bring traditionally low wage and salary scales into better alignment with those in the private sector,. Moreover, the sharp advances in construction costs in recent years have also had a severe impact on these governmental units. Inflation and the Rising Cost of Debt Financing The above are some of the direct effects of inflation on State and local governments. An important indirect effect is the significant increase in the cost of financing their debts. As is generally known, these jurisdictions rely heavily on the issuance of debt to finance a major share of their capital projects. For example, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 8 - in the fiscal year 1969, their new debt issues amounted to $18.9 billion; their capital outlays were $28.2 billion. Since borrowing usually precedes spending (and since a small proportion of borrowing is for non-capital purposes), debt financing and capital outlays during a given year may not mesh closely. However, over time, capital spending is greatly influenced by the ability of State and local governments to borrow. Between 1955 and 1969, the outstanding general debt of State and local governments rose from $44.3 billion to $133*5 billion, an increase of over 200 per cent. During the same period, the Federal Government's debt rose from $274.4 billion to $353.7 billion, a gain of about 30 per cent. In the later part of the period — in the years 1965-69 — State and local indebtedness registered an increase of $34 billion, an advance of about one-third. The corresponding increase in the Federal debt was $36.4 billion and 12 per cent. However, the advance in interest cost was even more striking. In 1955, the average interest rate paid by State and local governments 3/ was 1.9 per cent.— By 1965, the average rate had risen to 2.5 per cent, and it rose further to 2.8 per cent in 1969. The corresponding average interest rates paid by the Federal Government were: 1955, 2.4 per cent; 1965, 2.8 per cent; and 1969, 3.8 per cent. Thus, in the last 1-1/2 decades, the average cost of borrowing by State and local 3/ It should be kept in mind that the income to investors from holding State and local securities is exempt from Federal income taxes. The average rates reported in the text reflect the heavy volume of long- term debt issued at low rates in the decade following World War II. Since then,municipal yields have risen considerably — from 2.48 per cent in 1955 to 3.26 per cent in 1965 and to 5.72 per cent in 1969. Thus, their debt service in the future will be much higher. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 9 - governments rose by almost one-half (although the proportionate rise was less than that experienced by the Federal Government where the increase was nearly three-fifths). Another way to view the effects of higher interest rates on State and local governments is to look at the extra cost of maintaining a given volume of debt. If the average interest rate had remained unchanged between 1965 and 1969, the interest on the $133.5 billion of debt outstanding in the latter year would have been $3.3 billion — or nearly $400 million (12 per cent) less than the $3.7 billion they actually paid. If the average interest rate paid in 1955 had also been paid in 1969, the interest payments on the debt outstanding in the latter year would have been $2.5 billion — a saving of $1.2 billion, or 48 per cent. Of course, we know that State and local governments -- no more than any other class of borrowers -- cannot be insulated from interest rate changes and other conditions in the capital market. We also know that the substantial rise in the general level of interest rates in recent years is a by-product of inflation and the effort undertaken to check the rise in prices. Nevertheless, it is instructive to focus on the rising cost of carrying State and local debt. Moreover, unlike some borrowers in the private sector (particularly business firms), State and local governments cannot recover the rise in interest cost through higher prices or by writing it off against taxes. Thus, these jurisdictions -- which bear so much of the burden of providing public services — are Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 10 - particularly exposed to the adverse impact of inflation and the attendant rise in interest rates. Competing Claims on Future Output As I indicated above, the major claims on our future pro- duction of goods and services that have already been identified -- including public programs already in existence -- may make it extremely difficult to improve our public services in the years ahead. The severity of the problem we face comes into sharp focus when we try to match the economy's future production with the demands originating in particular sectors. For this purpose, it would be useful to present rough estimates of the potential output four years from now and to identify some of the more pressing demands that we now foresee. Let us assume that the economy returns to full employment by 1973 (defined as an unemployment rate of 4.0 per cent) and that productivity (or the increase in goods or services produced by a worker in an hour) will grow at an average rate of about 3 per cent a year through 1975 -- about in line with the long-term trend. If the labor force grows at about 1.8 per cent a year (reflecting both increased population of working age and the rising participation of women workers) and if there is a further slight decline in average hours worked, the potential growth of real GNP in the next four years will average about 4.3 per cent a year. By 1975, with allowance for the present under-utilization of resources, this would mean a GNP in 1970 dollars of over $1.2 trillion -- about $200 billion more than the level of GNP last year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 11 - Large as it may seem, even a GNP of this size will require a careful review of priorities, if the public sector is to meet its responsibilities. The social and environmental improvements desired by so many today must compete for their share of GNP with the strong requirements of consumers and business firms. The Tax Reform Act of 1969 and more liberal depreciation rules both reflect the judgment that -- to a greater extent than many observers think was wise -- private spending should take priority over public spending. As a result, the automatic expansion of resources available to the government from what economists have defined as the "fiscal dividend" (a gain in revenue that accrues, even with an unchanged tax structure, as the economy generates larger taxable incomes) will be about $10 billion less in 1975 than without the tax changes. In the years immediately ahead, a great increase expected in the relative importance of young families will create an urgent need for goods and services. There is also a desperate need to upgrade the currently inadequate stock of housing. Business requirements for expanding investment in plant and equipment — both to add capacity to serve the greater number of people but also to control pollutants -- are also likely to be exceedingly intense as the economy returns to full employment. Almost automatic increases in public programs already in existence will also claim significant increments of future GNP as well as most of the funds diverted from Vietnam. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 12 - These mounting demands were highlighted in the Reports of the Council of Economic Advisers (CEA) in 1970 and 1971. In both Reports, CEA presented five-year projections of the competing demands of the private and public sectors for resources. In both years, the Council came to the gloomy conclusion that -- without further changes in our tax laws — demands for personal consumption, private domestic investment (including residential construction), and built-in increases in present public programs would absorb most of the increase in real GNP and savings from the Vietnam War in the next few years. Even in 1975, the latest CEA Report suggests that the amount of unallocated resources at full-employment may be only 1 per cent of GNP. The Brookings Institution is even more pessimistic in its estimates of discretionary expenditures possible in the public sector.—^ The Council's Reports thus suggest, in effect, that we have already mortgaged both our "peace dividend11 and our "fiscal dividend" as well. The Tax Reform Act and accelerated depreciation -- even with some offsetting increases in Social Security taxes -- will reduce the public share of GNP (both direct and including transfers and grants) from 29.6 per cent in calendar 1969 to an estimated 28.7 per cent in 1975. As a result of these tax changes, "built-in" increases in existing Federal programs (because of changes in population, workload, and normal pay increases) and new programs already proposed in the fiscal 1972 4/ Charles L. Schultze, et. al., Setting National Priorities: the 1972 Budget, Washington, D. C., 1971, Ch. 17. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -13 budget, all but perhaps $12 billion of the projected $57 billion cummulative increases in full-employment Federal revenues between fiscal 1972 and 1975 is already allocated. The point which I have been trying to make so far is that in the next few years, without a fundamental change in present private expenditure patterns and in government programs, there will be no large sum of money which the government can easily devote to the expansion and improvement of public services. The small "fiscal dividend11 of perhaps at most 1 per cent of 1975 GNP could easily vanish with a slower economic recovery than we expect at the moment, or the addition of even $3 billion a year of other types of new programs. Moreover, the surplus in the Federal budget which is projected for 1975 will accrue mainly to the Social Security trust funds, and in the past when large sums were building up in these funds we have either not gone forward with scheduled Social Security tax changes or liberalized the benefits paid from the trust funds. At present, there is already talk of both possibilities. Re-ordering National Priorities It is against this background that we must assess the prospects of meeting the insistent demand that a greater share of our resources be devoted to improvements in education, health, urban services, the environment, and similar areas of public responsibility. Essentially, with virtually all of our resources already committed, we must determine Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 14 - the extent to which resources can be transferred from present -- primarily private -- uses to alternative — mainly public — purposes. Since the bulk of the actual spending on public services is done by State and local governments (although Federal grants may finance a sizable share of the cost of specific programs) , it would be helpful to look at the problem from the viewpoint of their pur- chases of goods and services within the framework of the GNP accounts. The objective would be to obtain a rough indication of the consequences of transferring a given volume of spending from the private sector to State and local governments. One way to approach the task is to employ the modern, computer- based statistical techniques on which economists are relying increasingly to identify possible solutions to complex issues of public policy. During the last few years, the Federal Reserve Board1s staff (with the technical assistance of economists at the Massachusetts Institute of Technology and the University of Pennsylvania) has developed and is now operating such a large-scale, econometric model. With help from the staff, I have employed this computer-based model to pose several questions relating to the reallocation of resources. The results (in constant 1958 dollars) are shown in Table 2.-^ 5/ Mr„ Jared J. Enzler of the Board's staff was responsible for the computer simulations of the national economy to obtain the projections. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 15 - Essentially, I wanted to know what would be the broad economic effects -- both direct and indirect -- of allocating a larger share of national resources to State and local governments during the period 1970-75. To get an answer, it was first necessary to have an indication of the share which they would have in the absence of special measures to produce such a redistribution. Using the Board's econometric model, a "base projection" of real GNP and principal components in 6/ 1975 was prepared."" According to these estimates, real GNP might climb from $724 billion in 1970 to $893 billion in 1975. Purchases by State and local governments might account for $97.4 billion (or 10.9 per cent) in 1975, compared with $74.1 billion (10.2 per cent) in 1970. The share of personal consumption might rise slightly -- from 65.9 per cent to 66.6 per cent. The Federal Government's share might decline somewhat (from 9.4 per cent to 8.8 per cent), and so might the proportion going into gross private domestic investment (from 14.1 per cent to 13.2 per cent). The key point to keep in mind is that the percentage of our resources used by State and local governments would probably rise slightly during the next few years -- if the economic forces at work in 1970 were to extend unhampered through 1975. However, that is the crucial issue. Currently, there is serious doubt as to whether recent trends will continue. To a con- siderable extent, the relatively rapid expansion in per capita State 6/ Key assumptions underlying the exercise were that tax rates were unchanged and that resources were fully utilized, with unemployment in the neighborhood of 4 per cent in 1975. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 16 - and local government expenditures in recent years reflects spending for education — which accounts for a large proportion of total out- lays by these units. In the years ahead, the school-age population will be growing less rapidly than it did during the last 1-1/2 decades. Consequently, per capita increases in State and local services might be expected to moderate. Because of these considerations, the Council of Economic Advisers has estimated that real per capita State and local government spending may grow at an annual average rate of 2.6 per cent between 1969 and 1975; this WDuld represent a moderately slower expansion than for total output, and it would be well below the 3.8 per cent growth rate recorded in the period 1955-69. In contrast, the CEA estimates that real per capita consumption will grow at an annual average rate of 3.6 per cent between 1969 and 1975, substantially above the rate of 2.2 per cent recorded between 1955 and 1969. As a result, the consumer sector would raise its share of real GNP (in 1969 dollars) from 62 per cent in 1969 to 64 per cent in 1975. On the other hand, the share of State and local governments would remain virtually unchanged -- moving up from 11.9 per cent to 12.0 per cent. These estimates by the CEA cast in bold relief the issue of reallocating resources in favor of the public sector. To assess the consequences of a prospective decline in the growth rate of real per capita spending by State and local governments, I made a second projection of real GNP in 1975, using as a guide the Council's estimate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 17 - that such outlays might grow by 2.6 per cent per year through 1975. The results of this projection are also shown in Table 2 (designated as the "low11 projection). These results can be compared with the "base" projection (which, as mentioned earlier, sketches the contours of the economy in 1975 on the assumption that recent trends would continue and in the absence of measures to reallocate resources). Several features should be noted: real GNP would be somewhat higher, and the proportions taken by personal consumption and private domestic investment would also rise.—^ But for our purposes, the most important effect is a cutback of $7.1 billion in the level of State and local purchases of goods and services in 1975. These would amount to $90.3 billion, compared with $97.4 billion suggested by the "base" projection. Their share of total GNP might decline to 9.9 per cent, compared with 10.9 per cent indicated by the "base" projection. This less rapid expansion in the level of spending by State and local governments would have several side-effects. The level of unemployment might be slightly higher, the pace of inflation might ease 8 / somewhat, and interest rates might be moderately lower.— On the 7/ Throughout this exercise, the level of spending by the Federal government was held constant. The reason for this was the desire to permit the computer simulation to describe the inter-action of State and local spending with spending in the private sector. 8/ For those interested in the technical aspects of the simulation, it should be mentioned that the adverse impact of the slower rate of growth in per capita spending by State and local units was tempered by assuming that monetary policy would be relaxed sufficiently to off- set the depressing effects and maintain full use of resources. Other- wise, real GNP would decline by $2.2 billion (from the "base" projection)* the GNP deflator would be 6.8 percentage points lower, and the unemploy- ment rate would climb to 5.3 per cent -- nearly 1-1/2 points higher than the estimate in the "base" projection. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 18 - other hand, since population would be higher in 1975, the scope and quality of public services would probably be deteriorating. If it were thought desirable to check this tendency, an effort would have to be made to reallocate a larger share of real resources to State and local governments. The consequences of pursuing this course are suggested in the final projection shown in Table 2 (identified as the "high11 projection). These estimates assume that real per capita spending by these jurisdictions would increase by 3.8 per cent per year between 1970 and 1975. In this case, State and local outlays might be in the neighborhood of $95.9 billion, or 10.7 per cent of GNP. While this would be $1.5 billion below the level suggested by the "base" projection, it would also be $5.6 billion above that indicated by the "low" projection. Thus, compared with the latter situation, in which State and local units would yield to the private sector part of their relative command over resources, the public sector would have that much more ($5.6 billion) to spend on public services. However, the real costs of making this transfer would be considerable. To achieve it might require a relative cutback in real consumer spending of $12 billion, and business fixed investment might also be nearly $5 billion less. Expenditures on residential construction could shrink by as much as $1.2 billion. Moreover, reflecting the com- bined impact of these changes, real GNP might decline by over $13 billion from the level indicated by the fbase" projection. In addition, while the level of unemployment might decline slightly, the pace of inflation would quicken, and the level of interest rates would be somewhat higher. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 19 - I personally find the results presented here both illuminating and instructive. While I would not advance the results as definitive, they do point up a central truth: if real resources are to be transferred from private use to the public sector, it will involve a real -- and perhaps substantial -- cost in terms of inflation and the rate of growth of the national economy. In the opinion of many observers, that cost is worth paying. Concluding Observations From this review of the effects of inflation on State and local governments -- and from this assessment of competing claims on our productive resources -- I am personally convinced that we are in considerable danger of seeing a serious deterioration in the scope and quality of our public services. Unless steps are taken before too long to reverse the trend, the situation seems likely to get worse as newer demands (such as pollution abatement) are added to the already inadequate supply of traditional public services. In my opinion, the issue before us is clear: in the last few years (mainly because of the tax relief provided by the Federal government in 1969) , private consumption has been given a much higher priority over public spending than is consistent with our long-run requirements in the area of public services. If this imbalance is to be corrected, these lost tax revenues might have to be recaptured and channeled to State and local governments. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 20 - Thus, rather than looking forward to further tax reductions, all of us may have to accept the burdens of paying an even larger share of our already limited incomes in the form of higher taxes. Moreover, despite the widely-noted longing for a lessened role for government in our society, we may have to be prepared to see the government assume even greater responsibility for the provision of those common services which all of us demand -- and which cannot be provided by any other means. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table 1. State and Local Government Expenditures, By Function and Principal Causes of Increases Fiscal Years 1955, 1965, and 1969 (Amounts in billions of dollars) Percentage of 1955-69 Percentage of 1965-69 1955-•69 1965--69 increase in expenditure increase in expenditure Percentage Percentage attributable to increase in attributable to increase in Amount Percentage of Total Percentage of Total Work- Scope & Work- Scope & Function 1955 1965 1969 Increase Increase Increase Increase load Price Quality load Price Quality All Functions 39.0 86.5 131.6 237.4 100.0 52.1 100.0 — — --- — — --- General Expenditure 33.7 74.5 116.7 246.3 85.8 56.6 86.1 26.2 43.8 30.0 14.2 47.2 38.6 Local Schools 10.1 21.9 33.8 234.7 25.6 54.3 26.4 31.7 52.4 15.9 14.5 57.6 2jL. 6 Higher Education and Other 1.8 6.6 13.5 650.0 12.6 104.6 15.3 25.1 35.5 39.4 25.0 30.3 mm Public Welfare 3.2 6.3 12.1 278.1 9.6 92.1 12.9 * 29.7 70.3 * 19.2 Highways 6.5 12.2 15.4 136.9 9.6 26.2 7.1 50.8 42.3 6.9 40.0 60.0 ** Hospitals and Health 2.5 5.4 8.5 240.0 6.5 57.4 6.9 18.8 43.8 37.4 7.7 50.8 41.5 Basic Urban Servicesi' 4.3 12.4 14.6 239.5 11.1 17.7 4.9 22.8 50.6 26.6 11.5 88.5 ** Administration and Other!/ 5.3 9.6 15.3 188.7 10.8 59.4 12.6 18.5 38.0 43.6 7.2 46.4 46.4 Utility Deficit 0.4 0.9 1.4 250.0 1.1 55.6 1.1 --- --- — --- --- Debt Retirement and Additions to Liquid Assetsx' 3.9 7.3 12.3 215.4 9.1 68.5 11.1 --- — — --- --- -- Contributions to Retirement Systems 0.9 2.3 3.2 255.6 2.5 39.1 2.0 — -- --- --- --- --- Sources: Basic data are from the U. S. Bureau of the Census, "Governmental finances" in selected years. Note: Percentages attributable to workload, price, scope, and quality, 1955-69, were estimated by Robert D. Reischauer for Charles L. Schultze, et. al., Setting National Priorities: the 1972 Budget, Brookings Institution, Washington, D. C., 1971, Ch. 6, pp. 138<-40. The 1969 data were revised since the original publication. The corresponding figures for 1965-69 were estimated by Paul Schneiderman of the Federal Reserve Board's staff, using Census Bureau data and Reischauer's estimating technique. * Workload decreased. ** Scope and/or quality decreased. 1/ Includes fire protection, police protection, correction, sewerage, other sanitation, parks, and recreation, housing and urban renewal, and transportation and terminals. 2/ Includes administration and general control, general public buildings, interest on general debt, employment services, and miscellaneous functions. 3/ Excludes social insurance funds. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table 2. Principal Claims on Real Gross National Product, 1970 and Alternative Projections to 1975 (Amounts in Billions of 1958 Dollars) 1975: High (3.8 per cent) 1975: Low (2.6 per cent) Growth Rate of Per Capita, 1975: Base Growth Rate of Per Capita State and Local Purchases-' 1970 (Actual) Prolection!/ State and Local Purchase si' Variance from: Per cent Per cent Per cent Variance from Per cent Base Sector Amount of Total Amount of Total Amount of Total Base Projection Amount of Total Prolection Proiect^^P Gross National Product 724.1 100.0 892.6 100.0 907.7 100.0 15.1 894.4 100.0 1.8 -13.3 Personal Consumption 477.1 65.9 594.4 66.6 608.3 67.0 13.9 596.3 66.8 1.9 -12.0 Gross Private Domestic Inv. 102.8 14.1 117.9 13.2 125.2 13.8 7.3 118.3 13.2 0.4 - 6.9 Producers Durable Equipment 56.1 7.7 63.6 7.1 66.3 7.3 2.7 63.4 7.1 - 0.2 - 2.9 Producers Structures 23.1 3.2 25.8 2.9 27.9 3.1 2.1 25.9 2.9 0.1 - 2.0 Residential Construction 20.6 2.8 24.6 2.8 26.2 2.9 1.6 25.0 2.8 0.4 - 1.2 Inventories 3.0 0.4 3.9 0.4 4.8 0.5 0.9 4.0 0.4 0.1 - 0.8 Exports 52.1 7.2 62.5 7.0 62.5 6.9 --- 62.5 7.0 — — Imports 49.7 - 6.9 58.0 - 6.5 57.2 - 6.3 - 0.8 57.1 6.4 - 0.9 - 0.1 Net Exports 2.4 0.3 4.5 0.5 5.3 0.6 0.8 5.4 0.6 0.9 0.1 Federal Purchases 67.7 9.4 78.6 8.8 78.6 8.7 --- 78.6 8.8 — — State and Local Purchases 74.1 10.2 97.4 10.9 90.3 9.9 - 7.1 95.9 10.7 - 1.5 5.6 Mem T o r r e an a d s u u m ry : Bill Rate (Per cent) 6.37 6.20 5.47 - 0.73 6.10 -- 00..1100 roJCHB Prices (GNP Deflator) 134.9 160.2 156.2 - 4.0 158.8 - 1.4 Unemployment Rate 4.9 3.9 4.3 0.4 4.1 0.2 - 0.2 JL/ The "base projection" is derived from a simulation of the national economy by using the Federal Reserve Board's econometric model. A key assumption was that resources were fully utilized with unemployment in the neighborhood of 4 per cent in 1975. 2/ In this projection, it is assumed that real per capita purchases by State and local governments will grow about 2.6 per cent per year in the 1970-75 period. This is the assumption on which the Council of Economic Advisers based its projection of State and local purchases. (See 1971 Annual Report, p. 98.) 3/ This projection assumes that real per capita purchases by State and local governments will grow about 3.8 per cent per year in the 1970-75 period — the same rate of growth that occurred from 1959 to 1969. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Andrew F. Brimmer (1971, May 29). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19710530_brimmer

@misc{wtfs_speech_19710530_brimmer,
  author = {Andrew F. Brimmer},
  title = {Speech},
  year = {1971},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19710530_brimmer},
  note = {Retrieved via When the Fed Speaks corpus}
}