to cut business demands for new factories, and commercial buildings? (3) What training programs will construction unions permit if a serious housing program were undertaken?

The demand for skilled labor depends substantially on the type of home under construction. If housing needs are to be met essentially by constructing single family homes, there will be no shortage of labor regardless of the other two factors. If housing needs are to be met by construction of high rise apartment buildings or multiple family homes there will be substantial labor shortages unless something is done about the other two factors.

Labor shortages could be eliminated by either a program of greatly expanded training in the construction trades or by cutting back on business investment in factories and commercial buildings or on the construction of public facilities. If expanded training programs are not possible, the Congress will have to institute selective monetary controls or fiscal controls to reduce business construction or to stop construction by all levels of government.

C. Land

Land is an interesting input into home construction because it is in fixed supply. In any urban area there is just so many acres of land. Being in fixed supply means that any substantial increase in the pace of home construction will have a sharp effect on the price of land. Over the next 10 years, a rising population, rising incomes, and the market demands for housing (in the absence of any special government programs) will cause a 40 percent increase over and above any price increases caused by general inflation. If programs are instituted to meet our housing goal, the price increase will be something on the order of 60 percent rather than 40 percent.

Land purchases do not require any real resources since they merely represent a transfer of assets from one person to another, but they will require budgetary resources and place strains on our monetary system. Monetary authorities will have to be ready and willing to provide the financial resources (liquidity) necessary to make the transfers. Thus, meeting our housing goals will require a substantial increase in the rate of growth of the money supply to facilitate such transfers.

Land scarcities also mean that it is impossible to meet our housing goals using primarily single family homes-the method which does not create labor shortages. This means we may be forced back to the expanded training programs or selective controls on public and business construction, but there are two other options.

The first is to think seriously about programs to establish new urban centers. By such urban centers I do not mean Columbias or Restons, but Chicagos and Bostons. To create such large cities and the infrastructure that would be necessary would call for large federal commitments or resources and a willingness to force private firms to locate in them.

The second option is to think seriously about radically improved urban transportation systems-not as policies for removing existing congestion-but as policies for expanding the geographic areas which our existing cities can cover, thus providing more land for housing construction. Realistically, I think this option is the only one that has any chance of success. I would suggest that meeting our housing goals will call for the creation of a radically improved transportation network. Without it, we simply won't meet the postulated goals. Either of these last two options will require large government expenditures and the higher taxes that must accompany such an increase in expenditures.

IV. Summary

Achieving our housing goals will require the following policy changes:

(1) Recent changes in the money markets to increase the attractiveness of housing investments relative to other investments must be expended so that housing not only reaches parity, but becomes more attractive than other types of investment.

(2) Monetary authorities must be willing to supply enough money to finance construction and land purchases. This means an easy money policy.

(3) Substantial tax increases will be necessary to free the real resources necessary for home construction.

(4) Some combination of:

a. expanded labor training programs,

b. selective monetary and fiscal controls on business and government construction.

c. new urban centers,

d. radical improvements in urban transportation.

Each of these four items is an essential ingredient. Without all of them, 30 million housing units will not be constructed between 1970 and 1980.

Chairman PATMAN. Thank you, sir.

Now, we will hear from our next witness, the last one before we interrogate you gentlemen, Mr. Kenneth Wright, vice president, Life Insurance Association of America.

Mr. Wright, we are delighted to have you, sir. You may proceed in your own way.

STATEMENT OF KENNETH WRIGHT, VICE PRESIDENT, LIFE INSURANCE ASSOCIATION OF AMERICA

Mr. WRIGHT. Thank you, Mr. Chairman; my name is Kenneth Wright, and I am vice president and chief economist in charge of the economic research department of the Life Insurance Association of America in New York City. I am pleased to accept the invitation of your committee to discuss the 1970 outlook for the money and capital markets in general and the residential mortgage market in particular. My presentation is based on a staff analysis of the financial outlook prepared within the economics department of the LIAA. But I should make clear, however, that I am appearing today in an individual capacity and not on behalf of the member companies of LIAA.

For the past 18 years, the economic research department of the LIAA has prepared an annual analysis of the "sources and uses" of investment funds in money and capital markets of the United States. This analysis includes a detailed forecast of capital market conditions for the year ahead and is prepared for distribution to our member life insurance companies, as well as to other interested parties in the financial community.

In its simplest terms, the sources and uses forecast is an estimate of the demand for loanable funds from borrowers of all kinds, in relation to the expected supply of funds from savings institutions, commercial banks, government institutions, and other investors. The resulting analysis is fairly complex but has the virtue of completeness by its inclusion of the many different sectors of the total financial market.

In order to focus on the highlights of this forecast for 1970, I should like to ask the committee's permission to submit the full text of the recent LIAA capital market analysis as an addendum to this statement, and confine my remarks today to a summary and interpretation of these findings.

Chairman PATMAN. Without objection, so ordered. You may insert the material.

Mr. WRIGHT. Thank you, sir.

(The economic analysis referred to follows:)

1969 ECONOMIC AND INVESTMENT REPORT

Economic and Financial Developments in 1969

Inflation and the Economic Slowdown

The outstanding problem for the United States economy in 1969 was inflation. Price levels rose by well over 5 percent during the year, coming on top of the 4 percent rate of inflation experienced in 1968. The accelerating pace of inflation aroused widespread concern over the effectiveness of government policies in holding back further price increases and also raised the spectre of wage and price controls as a possible last-ditch measure to bring inflation under control.

Government policies to curb inflation were directed toward deliberately slowing down economic growth through a three-part package of fiscal and monetary restraints. First, the 10 percent Federal income tax surcharge was extended through the second half of calendar year 1969 in order to remove purchasing power from the private sector and thereby reduce the total demand for goods. Secondly, a Federal expenditures ceiling of $192.9 billion was announced by the new Administration shortly after taking office as a means of reducing the direct pressure of government demand on an already overburdened economy. Taken together, these fiscal measures were designed to achieve a budgetary surplus which would have a restraining effect on economic expansion, in contrast to the stimulating effect of sizeable deficits in 1967 and 1968. A third method of restraint was Federal Reserve monetary policy, which shifted decisively toward a tight credit posture in December 1968 and permitted a growth in bank credit of only about 2 percent in 1969, compared with an 11 percent increase in the preceding year.

There can be no question but that these policies have been effective in slowing down growth in the economy during the past year. As may be seen in Table 1, annual rates of "real growth" in constant dollar GNP had been running at 5.9 percent and

7.4 percent in the first and second quarters of 1968, respectively, and were subsequently reduced to about 2 percent in the second and third quarters of 1969. The disappointment in the effectiveness of restrictive fiscal and monetary policies has arisen primarily from the continuing pace of inflation, shown as the "price factor" in the growth rates of gross national product in Table 1. From an inflation rate of 3.7 percent in the first quarter of 1968, the price factor in GNP rose unrelentingly to 5.4 percent by the third quarter of 1969.

Gross national product for the full year 1969 is presently estimated at $933 billion, an increase of $67 billion over the preceding year. Roughly threefourths of the dollar increase represented rising prices, however, while the real growth of the economy measured in constant dollars accounted for the remaining one-fourth. Viewed another way, the economy actually grew by only 2 percent in real terms from the end of 1968, but price levels moved up by more than 5 percent during the year.

The slowdown in economic activity was by no means universal throughout the economy. Residential construction activity moved downward during the year from the peak level reached in early 1969, but expenditures for business plant and equipment continued to advance strongly to register an 11 percent increase for the year. Personal consumption expenditures continued to advance, though at a slower pace than in 1968, and the rate of personal saving was reduced as consumers struggled to maintain purchases in the face of higher personal taxes and rising prices. Federal purchases of goods and services registered a modest decline during the first half of 1969, but the Federal pay increase which took effect last summer helped to boost Federal spending totals to a new high level in the third quarter. The growth in state and local government spending slowed measurably in the third quarter, possibly reflecting difficulties encountered in marketing debt obligations in a period of rising borrowing costs.

Throughout the summer and fall, economic observers watched closely for concrete signs of the long-awaited slowdown in business activity, with a careful eye to indications of an impending recession or downturn. However, the signals from key sectors of the economy have been mixed and often confusing, with signs of softness in some areas appearing alongside greater strength in other sectors. Industrial production, for example, declined modestly from the peak reached in July but did not register a sizeable dip until late in the year when the effects of the General Electric strike further depressed the index. The unemployment rate rose sharply in September to 4.0 percent but then fell back in November to 3.4 percent, the lowest level since last February. New orders for manufacturers' durable goods continued to move higher through September and then fell back in October and November. Retail sales have fluctuated along a high plateau close to the peak level reached last spring. Surveys of business capital spending plans first showed that a cut-back was in prospect for the fourth quarter of 1969, but later revealed a further rise rather than the expected decline. In the face of these mixed and often contradictory trends, it is little wonder that economic forecasts have ranged widely from imminent recession to unabated expansion with further inflation.

In the financial sector, interest rates throughout the money and capital market continued to advance dramatically during the year, reaching successive new highs that that would have been considered unthinkable at the beginning of

1969. As shown in Chart A, 3-month Treasury bill yields rose markedly during the summer months and then advanced further near the year-end, approaching an 8 percent level in the December auctions. Yields on top-rated corporate and municipal bonds and long-term government securities likewise pushed up to new high ground in response to persistent borrowing demand in the face of a constricted supply of available long-term credit. Yields on lower-grade corporate obligations, shown in Chart B, approached or exceeded 9 percent in late 1969, an increase of approximately 1-1/2 percentage points from a year earlier.

The home mortgage market was pinched by a limited supply of new investment funds and yields in this sector likewise rose sharply, as may be seen in Chart C. At the end of 1969, average market yields on home mortgages ranged between 8 and 8-1/2 percent or even higher in some regions; one year earlier, the range had been from 7 to 7-1/2 percent.

Generally speaking, the costs of long-term borrowing in the capital markets at the end of 1969 stood almost 2 percentage points higher than the peak rates that had been reached during the "credit crunch" of 1966. It is noteworthy, however, that the capital markets in 1969 adjusted to credit stringencies and higher rate levels in a far smoother and more orderly fashion than in 1966, primarily because the mounting pressures on interest rates developed more gradually, without widespread concern over an impending money panic or market crisis.

One result of the market rate advances of 1969 was a return to severe "disintermediation" in which individuals' savings held in thrift institutions were shifted in sizeable amounts into higher yielding open-market instruments, including Treasury securities, Federal agency issues, and commercial paper. In the case of life insurance companies, disintermediation took the form of a massive drain of policy loans which increased twice as much as in 1968 and cut back sharply the amount of investment funds which life insurance companies could place in securities and mortgages.

Sources and Uses of Capital Market Funds in 1969

The policy of credit restraint that was in effect throughout 1969 was reflected in a diminished volume of funds raised through the money and capital markets. Compared with the record total of $107.8 billion in net new funds supplied in 1968 (see Table 2), the total amount supplied in 1969 declined by $10 billion to an estimated $97.4 billion, as shown in Table 3. The data for 1969 represent preliminary estimates by the LIAA economic research staff based on incomplete and partial data from a variety of sources.

The sharpest cutback in the sources of funds occurred in the commercial banks, which provided only $8 billion to the money and capital markets during 1969, compared with almost $39 billion of new bank credit supplied in 1968, when monetary policy was relatively easy. Federal Reserve policy in 1969 forced the commercial banks to liquidate an estimated $9 billion in government securities and over $1 billion in state and local obligations. The amounts of mortgage credit, business credit, and consumer credit supplied by commercial banks in 1969 registered declines from the preceding year.