LETTER TO C. DOUGLAS DILLON FROM JOHN A. MCCONE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80B01676R002900140016-1
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 13
• Document Creation Date: December 12, 2016
• Document Release Date: March 11, 2002
• Sequence Number: 16
• Publication Date: May 4, 1962
• Content Type: LETTER

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-- D ~ 1.
 CENTRAL INTELLIGENCE AGENCY
OFFICIAL ROUTING SLIP
DATE
Col. Grogan
For your information and for whatever
action yOu may deem as appropriate.
FOLD HERE TO RETURN TO SENDER
FROM: NAME, ADDRESS AND PHONE NO.
5/4/62
FORM NO. 237 Use previous editions U.S. GOVERNMENT PRINTING OFFICE: 1961 0-587282
2-61 11 I FC;IR
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SECRETARY OF THE TR AiRY
May 2, 1962
Because of its bearing on
the Trade and Tax bills, I think
you may be interested in the
speech I delivered last week to
the New York Economic Club, a
copy of which is attached.
Douglas Dillon
Executive Registry
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TREASURY DEPARTMENT
Washington
FOR RELEASE 6:30 P.M., EST
TUESDAY, APRIL 24, 1962
REMARKS OF THE HONORABLE DOUGLAS DILLON
SECRETARY OF THE TREASURY
BEFORE THE ECONOMIC CLUB OF NEW YORK
TUESDAY, APRIL 24, 1962, 6:30 P.M.,EST
"RESPONDING TO THE CHALLENGE OF THE COMMON MARKET"
The fabulous success-of the European Common Market presents
this Nation with a challenge -- an opportunity -- and a promise:
-- A challenge, because the industrial might and know-how of
the Common Market make it a formidable competitor in the trading
centers of the world.
-- An opportunity, because the increasing demands of its
thriving peoples are creating potentially vast new markets for
American products.
-- A promise, because the prospering nations in the Common
Market now have the capacity to assume a larger and more appropriate
share of the cost of strengthening the defensive forces of freedom
and of assisting less fortunate nations along the path to progress.
In responding to the challenge of the Common Market, we must
realize that we live today in a highly competitive, fast-changing
new world, in which trade barriers are rapidly being lowered or
eliminated. President Kennedy's new trade program recognizes that
without mutual tariff reductions, we will be hobbled in our efforts
to compete with foreign producers and will be unable to take
advantage of the opportunities posed by the Common Market. But
trade legislation alone will not keep up competitive. We must
compete effectively. This calls for ingenuity and. energy in
developing new products and new markets, and it demands that the
costs of American production be competitive.
These are not simple tasks. They will require concerted
effort by every sector of our economy. For every sector of our
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economy is intimately involved. There is far more at stake than
trade. The real stakes are the continued strength and well-being
of this Nation and the survival of freedom itself.
In shaping our over-all response to the challenge of the
Common Market, we must keep constantly in mind these major national
economic goals:
First, achieving the more rapid rate of economic growth that
we must have to solve our persistent unemployment problem, as well
as to remain competitive.
Second, maintaining reasonable price stability, which is
essential if we are to increase our export sales, solve the imbalance
in our international payments, and ensure the full enjoyment of
their later years by senior citizens living on fixed retirement
incomes.
Third, achieving and'maintaining balance of payments
equilibrium in a fashion that will permit'us to carry our proper
share of the free world's defense and furnish a fair proportion of
the assistance needed by the newly-developing nations.
Growth is essential to our continuing prosperity because we must
grow faster if we are to provide reasonably full employment for our
swelling labor force. And only through rapid growth can new
technology be put to work fast enough to keep us competitive.
Growth is also essential to long term equilibrium in our balance of
payments. We cannot hope to solve our payments difficulties if our
growth rate continues to drag along at little more than half that
of our friends and competitors in Western Europe and Japan.
If we are to increase our growth from the rate of about three
per cent a year that characterized the Fifties, to the 4-1/2
per cent that has been set by the Organization For Economic
Cooperation And Development as a fair and reasonable goal for
its members in the Sixties, we must have an economic environment
that will stimulate productive investment and business activity.
Demand must be adequate to absorb our production. We must make
every effort to avoid recessions and, if they occur, to mitigate
their effect. We must have a tax system that will stimulate both
individual initiative and private investment. And we must have
capital readily available to finance the needs of the economy.
The Administration is moving actively in all these areas. The
President has submitted a three-point program to the Congress that
would improve the effect of the so-called automatic stabilizers in
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moderating recessions. These automatic stabilizers are the increased
unemployment payments and the decline in income tax revenues,
particularly in corporate taxes, that automatically accompany any
recession. Their action simultaneously decreases the government's
tax take from the economy, and increases government payments in the
area where they will do the most good. These automatic stabilizers
have softened post-war recessions, which have had little resemblance
to the depressions of earlier days.. Even so, we still spend too
much time in recession and it is these recessions, moderate though.
they have been, that are primarily responsible for our inadequate
growth rate over the past decade.
The President's program is designed to give us the tools we
need to effectively combat these economic slow-downs:
First, there is a need for better unemployment insurance.
This need became glaringly apparent during the past two recessions,
when we were caught with an inadequate unemployment compensation
system that made no provision for the long-time unemployed, whose
ranks swell every time business slows down. Congress has twice
been forced to improvise with temporary unemployment compensation
measures. The time has clearly come to take account of those
experiences and enact a permanent law along the lines proposed by
the President, a law which would adequately meet the problem.
Second, the President has asked for limited authority to order
modest temporary tax reductions that would further speed the
automatic reduction in tax revenues that has been so effective
during recent recessions. While there is understandable reluctance
to grant such new authority, the concept of temporary tax reduction
as an anti-recession measure appears to be generally accepted.
Limited authority to the President under strict Congressional
control would seem the best way of carrying out this concept.
The third element in the President's anti-recession program is
limited standby authority to initiate or speed up public works
programs of the type that could be gotten underway rapidly, and
substantially completed within twelve months.
These three new tools would greatly enhance our ability to deal
with the economic slow-downs that have characterized our post-war
economy. In so doing they should make possible a substantially more
rapid rate of growth over the years ahead.
Rapid growth in our free enterprise system also requires a tax
setting conducive to risk-taking -- a setting that will give full
play to individual initiative and effort -- one that will genuinely
stimulate investment. Such a tax structure calls for a basic
revision of our income tax system, and that is exactly what the
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President has had in mind for the past year. At his direction, we
in the Treasury have been working hard to develop such a new tax
program. But taxes are complex. They effect every facet of our
lives. They take time to develop, as well as to enact. The initial
program submitted last year is still before the Congress. This has
slowed our progress in developing the new program, but our work is
progressing and we fully intend to submit proposals for overall
reform of the income tax rate structure.-
In the meantime, we are hopeful of rapid Congressional approval
of the current tax bill, since its major element, the investment
credit, is'absolutely essential both to our growth and to our
competitive position in the world.
During the past year, I have found general agreement that it is
necessary to liberalize our treatment of depreciation so as to
stimulate investment. A good deal can be done under present law,
for our depreciation statutes are not as bad as they are often depicted.
It is the administration of the law that has been primarily at
fault. Revenue agents have been required to use as their guide for
depreciation allowances, a bulletin put out by the Internal Revenue
Service twenty years ago and never since modified. And, as if this
obsolescence of the guidelines were not enough, it has also become
clear that the basic concept in the guidelines of separate
depreciable lives for each and every tool and machine brings with it
a great deal of unnecessary paperwork and argument. We intend to
thoroughly revise and update these instructions. In our revision we
will set forth broad classes of equipment to replace the 5000 odd
items presently listed in Bulletin F, as it is called.
Treasury studies, underway for nearly two . years -- and which for
the first time take account of anticipated future obsolescence --
indicate that we will also be able to substantially reduce the
average guideline lives for depreciation. In the case of the
textile industry, where the task has already been completed, the
reductions averaged forty per cent. However, since our manufacturers
are already legally writing off their equipment at considerably
faster rates than are provided in existing guidelines, the actual
benefit of the revisions now underway will be considerably less
than the projected percentage reductions in the guidelines. Present
rates of depreciation are the result of agreements with revenue
agents. These agreements have not been reached easily. They have
involved a great deal of debate and compromise. Sometimes, they
have required resort to the courts. Such unfortunate controversy
has been the inevitable result of out-of-date guidelines which
forced revenue agents to rely upon their own judgment in determining
depreciable lives for the various pieces of equipment used by
industry. One of our major aims in modernizing administrative
depreciation practices is to reduce this area of contention and
uncertainty to a minimum. We are confident that very significant
progress is possible.
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But all we can accomplish by the administrative route is not
sufficient to meet the needs of American industry in today's
competitive world. All of our competitors in Europe, Canada, and
Japan go farther by providing some form of special incentive to
modernize. Some of them use unrealistically short lives, which work
in the same manner as the five-year amortization we have used in-
times of defense emergency. Others provide substantial special
write-offs in the first year, usually called initial allowances.
More recently, some of them have been turning to allowances over
and above one hundred per cent of depreciation -- the same
principle we are advocating in our investment credit. Such investment
allowances are presently in effect in Belgium, the United Kingdom',
and the Netherlands, and are now being adopted in Australia.
The resulting contrast with current practices here is dramatic.
Taking the case of a piece of equipment, which has a fifteen-year
life under our present laws, we find that manufacturers in
Western Europe and Japan can write off an average of twenty-nine
per cent on similar equipment in the first year, compared to only
13.3 per cent for American industrialists. Modernizing
administrative practices can close only a small percentage of this
gap. If American industry is to compete effectively, we must
provide special incentives comparable to those available abroad.
The only possible question can be over the way in which these
incentives should be provided. The investment credit is one such
way -- and an extremely effective one. The combination of an
eight per cent investment credit and modernized administrative
procedures will put American manufacturers on a comparable footing
with their foreign competitors as.far as investment in machinery
and equipment is concerned.
The same result can, of course, be accomplished by various
methods of accelerating depreciation beyond what is called for by
realistic depreciable lives. But in the Treasury's view, the
investment credit has two clearcut and important advantages over
all methods of accelerated depreciation. The first is that the
investment allowance or credit, utilizing the principal of an
allowance over and above 100 per cent of original cost, increases
the profitability of a given investment far more than any equivalent
acceleration of depreciation. One of-the most thorough studies on
the subject, prepared for its membership in the machine tool
industry by the Machinery and Allied Products Institute, finds that
on a typical fifteen year asset, an eight per cent investment credit
has the same effect on profitability as a forty per cent first
year depreciation write-off. Let me repeat that. The eight
per cent investment credit which we are recommending has the same
effect on profitability of investment as a special forty per cent
first-year depreciation write-off. However, when we calculate
the effect of these two methods on our tax revenues, we find that
the first-year revenue cost of the credit is $1.35 billion, while
the cost of the forty per cent initial allowance is $5.3 billion.
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Over a five-year period, assuming steady growth in the economy, the
credit might cost something like $10 billion, compared to $24
billion for the comparable forty per cent first year write-off.
Similar results are reached when we compare the cost of other
methods of accelerating depreciation to that of the credit.
I think you will all agree that government in these days should
make every effort to get the most out of its dollars. Avoidance of
waste is just as important in tax policy as it is in expenditure
policy. And that is one very good reason why we prefer the
investment credit to the more expensive and less effective route of
accelerated depreciation.
The second unique advantage of the credit is that it will not
adversely effect costs or prices. Accelerated depreciation is often
entered as an item of cost. This naturally inflates costs and
shrinks profits, thus tending to promote the very price increases
we must avoid.
I think you are all aware that the single largest increase in
general manufacturing costs over the past few years has come from
the increased depreciation write-offs permitted by the 1954 law
which updated and liberalized depreciation procedures. This increase
in costs was fully warranted, since it recognized the actual
obsolescence rates of machinery. That is what depreciation is for
and this will, of course, also be the effect of our administrative
reforms. However, when it comes to an incentive, over and beyond
realistic depreciation, the situation is quite different. As I
have pointed out, the use of accelerated depreciation for this
purpose would be wasteful of the government's tax dollar as compared
to the credit, and would also tend to distort earnings and prices.
For these two reasons, we stand firmly for the investment credit
approach as the most feasible and practicable method of providing
the stimulus to investment in machinery and equipment that we must
have if we are to achieve the rate of growth required for a
competitive and reasonably fully-employed economy.
Enactment of the investment credit also has an immediate
importance. The greatest uncertainty and the major soft spot in
our current economic situation is the indication that business
investment over the next year may be inadequate to sustain the pace
of our recovery. Enactment of the credit will immediately generate
new business in the machine tool and allied industries and will
accelerate the incorporation of the latest technology into our
productive system. It will shorten the lag-time between development
and manufacture of new products, and thus help to open up new
markets. It will stimulate industrial expansion and thus help to
create the new jobs we so badly need. In short it will give a lift
to our economy in exactly the place where it is most needed and at
the very time it is most needed.
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To the extent that investment is stimulated, new capital will be
required. The national monetary and debt management policies that
have been followed for the past year give assurance that the needed
funds will be available at reasonable rates of interest. Today,
with the recovery fourteen months old, the cost of new long-time
corporate borrowing is lower than at any time since the economic
advance got underway. At the same time, for balance of payments
reasons, we have maintained and even moderately increased short-.term
interest rates, so as to equalize them with those obtainable abroad.
The investment credit, by promoting the use of modern, cost-
cutting machinery, will help us to achieve our two other major
economic goals: reasonable price stability and balance of payments
equilibrium. Price stability is a must if we are to compete
successfully in world market places, and it also makes for healthy
economic and social conditions at home. Fortunately, conditions
today in the United States are favorable to price stability -- if
only we use restraint.
The strongest type of inflation is classical demand-inflation --
too much money chasing too few goods. It is because of the danger
of demand-inflation that we are wary of budget deficits. For
Federal budget deficits create purchasing power. Whenever capacity
is tight and demand is strong, deficits lead almost inevitably to
a rise in prices which diminishes the value of all savings and helps
no one but the lucky speculator.
However, for at least the past four or five years, we have had
no problem with demand-inflation. We have not known reasonably full
employment since 1957. The slack'in our economy was revealed by the
fact that the record $12-1/2 billion deficit of fiscal year 1959 had
no noticeable effect on wholesale prices. Neither has there been
any effect from the $7 billion deficit we are running this fiscal
year. As a matter of fact, wholesale prices are lower today than
a year ago. I by no means wish to imply that we should not be
concerned by deficits. But I do want to point out that the effect of
a deficit on a slack economy is totally different from the effect
of the same deficit on a full employment economy. We cannot afford
deficits at full employment. Indeed, we anticipate substantial
surpluses in such periods. With the prospect of rapid economic
growth that led to last January's forecast of a gross national
product of $570 billion for 1962, the President wisely presented
a balanced budget. While the January and February slow-up has made
the achievement of this goal considerably more difficult, it is
still possible. If we achieve it, there is no reason why we
should not have a balanced budget as well. The main point to
remember about our deficits is that they have been a reflection of
the uneven pace of our economy. Cure the recessions and the
deficits will also disappear.
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While we are on the subject of fiscal policy, I would like to
digress for a moment to compare our experience with that of some of
our European friends. There is a common misconception, both here
and abroad, that our fiscal or budgetary performance is poor
compared to such countries as France, the United Kingdom, and
West Germany. That is simply not so. A recently completed study
which converts the budgets of those countries to our accounting
system, shows that our record is quite good. By adapting their
data to our budget accounting methods Germany would show a.bud get
deficit in every one of the past four years -- the only years in
which her post-war defense expenditures have been of any
significance. France would show them in every one of the past ten
years. And the United Kingdom would show deficits in nine of the
past eleven years -- and, in this connection, the Chancellor
of the Exchequer has just forecast another deficit for the upcoming
fiscal year. In contrast, the consolidated cash budget of the
United States has been in deficit in only six out of the last
eleven years.
Perhaps even more impressive is the fact that, over those same
periods of time, the cumulative American deficit, as a percentage
of gross national product, was the lowest. France's was the highest,
with Germany next, and the United Kingdom third.
It is worthy of note that France and Germany, which run
persistent deficits in their budgets, also run the greatest and most
persistent surpluses in their balance of payments. That, of course,
is not because of their deficits, but rather because they have
maintained competitive prices on their export goods -- the key to
payments surpluses -- and have maintained them in the face of
continuing full employment.
Despite the fortunate absence of demand-inflation from the
American scene, we must continue to guard vigilantly against
wage-price inflation, which can be just as dangerous and can strike
at any time. If we are to avoid this type of inflation, prices
should remain level or drop, and wage increases should be governed
by increases in labor productivity. To help in defining these
limits, the President's Council of Economic Advisors, in their
annual report, set forth guidelines based on the performance of our
economy, which has shown an average annual increase in productivity
of from 2-1/2 to 3-1/2 per cent. As long as our economy continues
to grow and productivity continues to increase at this rate, it
should be possible to absorb wage increases of like magnitude with-
out any increases in price. And remember that productivity also
applies to capital. As the productivity of capital increases,
there should also be room for increases in profits, to correspond
with the increased wages of labor. All this will be possible if
management and labor work jointly to make it possible -- bearing
the national interest in mind at all times
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Price stability is essential if we are to achieve our third
major goal -- balance of payments equilibrium. Without it, there
can be no hope of achieving balance unless we invoke drastic actions
that would do as much harm as good. That was the major reason for
the President' ' s great concern when, for a few days earlier this
month, price stability anneared to be threatened.
Growth and price stability must both make their contribution to
improving our payments problem by. keeping our exports competitive.
But still more.,js needed. For we have been forced to assume
exception .l _ 'responsibilities in the defense of the free world. Those
responsibilities put a great drain on our balance of payments --
a drain which has recently averaged about $3 billion a year. We
must work. to reduce this outflow by cutting out all non-essential
costs and by obtaining offsetting payments from our European Allies
for U. S. military materiel and services.
A good start has been made. You have heard the President state
that Secretary McNamara has accepted a goal of a billion-dollar
reduction in the net outflow of defense dollars. About half of
that goal has already been achieved through the recent agreement
with West Germany, by which she is sharply increasing her purchases
of U. S. military equipment. We are hopeful that similar
arrangements can be made with other countries. The rest of the
billion-dollar goal will have to be achieved through economies in
dollar expenditures.
We are also using every opportunity to channel the maximum
amount of our foreign aid funds into purchases in the United States,
where they do not affect our balance of payments.
But there is another important area affecting our balance of
payments where action is required if we are to achieve overall
balance. I refer to the steadily increasing outflow of private
investment capital. The easiest way to handle this problem would be
to utilize the standard European method -- exchange controls. But we
are firmly opposed to this approach, and so are pursuing two other
avenues: We are working with our European friends in the OECD to
liberalize their controls on capital movements, and we are urging
them to develop their own internal capital markets so that they
will not have to rely so heavily on our capital market. This is a
slow process, but progress is being made. Our second method of
slowing the capital outflow is by eliminating that portion of the
outflow, perhaps as much as ten per cent, that is induced by tax
reasons. That is the basic aim of the Administration's foreign tax
proposals. Those proposals are not directed against foreign
investment as such. They merely attempt to put investment in the
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other industrialized countries on a par with investment here at
home, as far as tax treatment is concerned. Their enactment would
not only reduce the outflow of capital for direct investment in
the other industrialized countries by some ten per cent, it would
also remove the artificial tax incentive to retain profits abroad
and so would improve their return flow to the United States by
rougly the same amount. The resulting overall balance of payments
improvement should be something like $400 million a year. The
great bulk of foreign investment -- and I am confident it'is not
made for tax purposes -- would continue as in the past. But that
relatively small part that is purely tax-induced -- and we all
know that it does exist -- would be eliminated, with substantial
benefit to our balance of payments.
At the outset of my remarks, I said that the Common Market
presents us with a challenge. But the greatest challenge lies
within ourselves. We have the means at hand to solve our economic
problems -- if only we will use them wisely and well. The most
important is the stimulation of additional private investment in
productive equipment. We must use that means to the full, and in
a manner that will not jeopardize the national interest by short-
sighted decisions -- be they public or private.
If we do so, we can make significant progress toward achieving
our goals of more rapid growth, price stability, fuller employment,
and payments equilibrium. We can move boldly to take advantage of
the competitive challenge of the Common Market, secure in the
knowledge that our Nation is capable of seizing opportunities in
foreign trade to help make a reality of America's vast promise of
a fuller life for our own people and for free peoples everywhere.
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