POSTWAR ECONOMIC STUDIES 

No. 6, June 1946 

HOUSING, SOCIAL SECURITY, 

AND PUBLIC WORKS 

RAMSAY WOOD 

ELIOT J. SWAN 

WALTER F. STETTNER 

BOARD OF GOVERNORS 

OF THE FEDERAL RESERVE SYSTEM 

WASHINGTON 

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Published June 1946 

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CONTENTS 

PAGE 

PREFACE Inside Front Cover 

HOUSING NEEDS AND THE HOUSING MARKET. .RAMSAY WOOD. 1 

Housmg Conditions and the Housing Market 3 

Magnitude of the Problem 4 

Prospect for Meeting the Need 6 

Experience of the 1920's 7 

The Market in Which Houses are Built 9 

Need for a Housing Program 11 

The Setting for a Housing Program 13 

Improvement of Housing and the Stimulation of Activity 13 

Reasons Commonly Advanced for the Existence of Poor Housing.. 14 

Nature of the Solutions Proposed 15 

General Solutions 15 

Owner-Occupied and Rental Housing 16 

Housing in Suburbs and in Cities 16 

Housing for Different Income Groups 17 

Analysis of Proposed Solutions 18 

The Role of Capital Values 18 

Reduction of the Cost of Building 19 

Reduction of the Cost of Maintenance and Operation....... 20 

Reduction of Interest Rates 21 

Monopolistic and Restrictive Practices 22 

Urban Redevelopment 24 

To Sum Up 25 

Elements in a Housing Program 25 

Objectives of a Housing Program 25 

The Kind of Market to be Achieved 26 

Approaches to the Objectives..- 26 

The Role of Local Governments 27 

The Role of State Governments 30 

The Role of the Federal Government.: 30 

Specific Steps toward the Objectives 32 

National Housing Agency 32 

Federal Housing Administration 33 

Federal Home Loan Bank System 34 

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CONTENTS 

PAGE 

HOUSING NEEDS AND THE HOUSING MARKET {Cont) 

Elements in a Housing Program {Cont.) 

Specific Steps towards the Objectives {Cont.) 

Federal Public Housing Authority 34 

Housing Loans for Veterans 35 

Problems Remaining 36 

ECONOMIC ASPECTS OF SOCIAL SECURITY... .ELIOT J. SWAN. 40 

Present and Proposed Social Insurance Protection 42 

Unemployment Compensation 43 

Old Age and Survivors Insurance 45 

Disability and Medical Care Insurance 46 

Economic and Fiscal Aspects of Social Insurance 48 

The Contributory Principle 49 

The Reserve Problem 50 

Government Financial Participation and Economic Policy 51 

Fiscal and Economic Effects of the Existing Insurance System 54 

Effects of Pay-Roll Taxes 54 

Unemployment Compensation 55 

Experience Rating 57 

Old Age and Survivors Insurance 58 

The Cost of Social Security 60 

PUBLIC WORKS AND SERVICES IN THE POSTWAR ECONOMY 

WALTER F. STETTNER 63 

The Place of Public Works and Services in the Economy.: 63 

Public Works and Services—A Reflection of Changing Needs.... 63 

Public Activity and Private Enterprise 65 

Public Works and Employment 67 

Public Works and Cyclical Fluctuations 68 

Paying for Public Works and Services 70 

An Inventory of Needs 73 

Transportation 73 

Urban Redevelopment 75 

Agricultural Needs, Forests, and Recreation 77 

Regional Resource Development 79 

Public Health and Medical Care 80 

Education 82 

Recapitulation in Terms of Annual Outlays 83 

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CONTENTS 

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PUBLIC WORKS AND SERVICES IN THE POSTWAR ECONOMY 

(ConL) 

Prerequisites of an Effective Program 85 

Advance Planning 86 

Adjustability to Changing Needs 86 

Functional Balance 86 

Effective Intergovernmental Relations 87 

An Illustration—Urban Redevelopment 2>^> 

Prospects for Expansion 89 

Congressional Reports 90 

Federal Legislation 90 

State and Local Preparations 92 

Conclusion 94 

v 

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HOUSING NEEDS AND THE HOUSING MARKET 

by 

RAMSAY WOOD 

Division of Research and Statistics, Board of Governors 

Different people look forward to a large volume of residential building 

in peacetime with different objectives in mind. Some see in it an avenue 

for the investment of savings; some see the employment of labor; some 

see markets for the products of the industrial system; and some see the 

provision of decent and wholesome living conditions for the families 

which make up the population of the United States. 

To bring our housing up to decent levels for the middle and lower income groups, as well as to meet the demands of those who have always 

been able to afford good housing, will require a good deal of new building. 

It will thus provide a great amount of employment at the site, open a large 

market for industrial products, and engage the services of the various 

groups concerned with the transfer of real estate. To get this building 

done and the new houses occupied, credit will be needed—credit both to 

builders and contractors, and to the owners who occupy or rent out the 

structures built. 

Housing is needed primarily, however, not to provide employment to 

workers, profits to businessmen, or fees to professional groups, but rather 

to supply a basic service. The primary purpose of a housing program 

should be to see to it that an adequate supply of housing that meets recognized standards of health and decency is available at charges commensurate with family incomes. 

Such a housing program, directed chiefly at the conditions of housing, 

is perfectly consistent with programs looking to the maintenance of full 

use of resources in the economy. Indeed, a definition of consumption 

goals is necessary before full use of resources itself can be defined. The 

goal which we must set for housing, as one part of the consumption goal 

of the economy, is that, within a reasonable period of time, every American family shall have living space which meets accepted standards— 

standards not only for structures, but also for occupancy and environment. To achieve this we must build housing on a sustained scale such as 

we have never approached before. How this housing is to be provided 

depends on how much we want, what kind we want, how much we want 

1 

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to pay for it, and the resources, techniques, institutions, and organizations which we have available, or can make available, to provide it. 

The provision of new housing has varied widely in the past. In the 

period between the two world wars, the number of new nonfarm dwelling 

units built rose from 247,000 units in 1920 to 937,000 in 1925, fell to 

93,000 in 1933, and then rose again to 515,000 in 1939. New nonfarm 

residential building has consequently represented a varying proportion 

of total economic activity; it averaged about 3 per cent of the gross national product in the interwar period, but varied from 1 per cent in 1920 

to 5 per cent in 1925 and less than 1 per cent in 1933. 

The relative importance of expenditures for the use of existing housing 

—which averaged close to 12 per cent of gross national product between 

the wars—is greater and has not been subject to such wide changes. 

Between 1929 and 1941, about one dollar out of every seven spent by 

consumers for goods and services was spent for house space, counting the 

use of owner-occupied houses at market rental value. This proportion 

has varied somewhat over the period, being about one dollar in six in the 

depths of the depression, and about one in eight in 1940. In 1944 the 

proportion was lower—only about one dollar in twelve of consumption 

expenditures went for house space—largely because rent controls were 

imposed before rents had risen markedly. 

What particular families spend for housing depends largely on the size 

of their incomes. In general, families with smaller incomes spend less for 

housing than do families with larger incomes, but at the same time, devote 

a somewhat larger proportion of their expenditures for goods and services 

to housing. For example, in 1935-36, non-relief urban families with incomes between $500 and $1,000 spent on the average about $182 for 

housing, while families with incomes between $2,000 and $3,000 spent 

about $406, or somewhat more than twice as much. The $182, however, 

represented 22 per cent of the entire expenditures of the lower income 

group for goods and services, while the $406 represented only about 19 

per cent of the expenditures of the higher income group. Because the 

more prosperous were able to add to savings while the lower income group 

had deficits, the $182 spent for housing represented 24 per cent of income, 

and the $406 only 17 per cent. 

The quality of housing obtained by lower income families is much 

lower than that obtained by higher income families. In 1940, two-thirds 

of the houses occupied by nonfarm families whose incomes in 1939 were less 

than $1,000 had gross defects—such as lack of sanitary facilities and need 

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for major repairs—which could be observed by Census enumerators, while 

only about one-eighth of the houses occupied by families with incomes 

between $2,000 and $3,000 had such defects. Of all the houses occupied by 

families with incomes below $1,500 (somewhat more than half of all 

families) only about 40 per cent were free of gross defects. For families 

with incomes above $1,500, almost 85 per cent of the houses were free of 

gross defects. 

In a measure, therefore, the problem of assuring decent housing for 

every family, which is part of the general problem of maintaining adequate 

consumption, is one of assuring sufficient income to every family. There 

are special problems in the field of housing, however, which have to be 

considered and solved within the framework of a plan for a high level of 

employment and income and high living standards in the economy as a 

whole. These special problems arise from the nature of housing and of the 

housing market and from the way people react to their housing conditions 

and changes in their incomes. The significance of these elements can be 

better appreciated after we have examined housing conditions and needs 

and the way in which housing has customarily been provided. 

HOUSING CONDITIONS AND THE HOUSING MARKET 

The housing problem is often discussed mainly in terms of eliminating 

slums, but in reality it is much wider than this. So long as the bulk of the 

middle class is only indifferently housed, relatively little headway can be 

made in improving conditions for the lowest income groups. In other 

words, a large part of the problem is to devise ways of raising the quality 

of housing available to those in the middle income groups to a level consistent with the capacities of the modern American economy. If we can 

do this, slums and substandard housing will appear clearly as the anomaly 

they are; if we cannot do this, there is little likelihood that public opinion 

will support programs of the kind and scope needed for the elimination 

of archaic housing. This is not to say that slum-clearance and the provision of subsidized housing should be stopped until the housing of the 

middle classes is perfected—on the contrary, both goals must be sought 

together; but the success of programs to improve housing conditions for 

the lowest income groups will depend more on the improvement of housing 

conditions in general than on convincing the public that bad housing 

costs the community money or on devising techniques which make the 

financing of public housing easier. 

Nevertheless, we can obtain an idea of the magnitude of the housing 

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problem if we look first at the amount of substandard housing in existence. 

Magnitude of the Problem. The National Housing Agency, using 

Census data, has estimated that 7 million of our 30 million, nonfarm 

houses, or close to one-fourth, were substandard in 1940.1 If we apply 

somewhat lower standards to farm housing, we find that about 2.5 out of 

7.6 million, or one-third, were substandard.2 The number in both categories has no doubt increased since then. 

Precisely what is adequate housing can be debated at great length, 

but most of the debate is over details of more and less. On the major 

elements essential to adequate housing there is little disagreement. Houses 

must be substantially built, safe against fire, tight against the weather 

and vermin, and provided with at least elementary equipment and facilities. They must be of a size, in both area and number of rooms, appropriate to the size and composition of the families which are to occupy them; 

they must be located on suitable land in neighborhoods and communities 

which offer the services and facihties needed in modern society; they 

must be available on a tenure adapted to the circumstances of the families 

which are to occupy them; and they must be available at costs which the 

occupants can calculate and pay. The criteria for essential sanitary equipment and other facilities in houses may vary from place to place, but 

they should always be sufficiently exacting to safeguard the health and 

decent comfort of the occupants. 

Because the 1940 Census of Housing took account of only a few of 

these elements, the NHA estimate of the amount of inadequate nonfarm 

housing in the United States in 1940 must be regarded as a minimum. It 

seems likely that if we were to examine our nonfarm housing with the 

idea of eliminating all that cannot economically be made to conform to 

the community's sense of what is at least adequate, we should find the 

count of substandard units to be at least half again as high as was found 

by the National Housing Agency. In other words, substandard housing 

probably makes up more than one-third rather than one-fourth of the 

nonfarm supply. 

There are several reasons for the existence of substandard housing. 

Much of the housing built in our great seaports for immigrants at the 

1

 National Housing Agency, Housing Needs: A Preliminary Estimate {National Housing 

Bulletin i), Washington, D. C, November 1944. 

2

 This paper is concerned with nonfarm housing generally, and does not deal at all with 

farm housing, which presents quite different problems. In a more detailed treatment, distinctions would also be made between urban and other nonfarm housing problems and markets. 

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end of the nineteenth and beginning of the twentieth centuries was substandard, even in terms of the standards which existed then. This is true 

also of the housing built for miners in many areas. Houses that were substandard 50 or 25 years ago almost certainly violate municipal building, 

health, and housing codes today. One of the reasons the local governments 

have not removed such houses is that other housing has not been 

available. 

Some substandard housing was good in its day, but age and neglect have 

worn it out; part of this housing can be brought up to our present standards of adequacy by repair and modernization. Still other housing is substandard, not because the structure itself has run down, but because the 

area in which it is located has run down. Industry has come in, commercial 

activities have grown up, or the area has become overcrowded. Generally, 

the occupants of such quarters should be housed somewhere else and the 

areas developed for other purposes. 

The National Housing Agency has estimated that, if we want to eliminate substandard housing in 20 years, we will need to build 12,600,000 

houses in the first 10 years after the war. About half of this number 

would be needed to take care of the normal growth in population, and of 

returned veterans, and to permit those families now sharing units in 

existing structures to have quarters of their own; the other half would be 

needed to replace half of the substandard housing standing in 1940 and 

all of the units becoming substandard currently, as well as the relatively 

small number of dwellings destroyed by fire, storm, and other disaster. 

But even at this rate of building, at the end of the first decade 3.5 million 

nonfarm families would still be living in substandard houses. If, on the 

basis of the discussion above, we raise the number of substandard units 

standing in 1940 to 11 million, we could build between 14.5 and 15 million 

nonfarm units in the next 10 years and still end the decade with 5.5 

million families living in substandard houses. 

Is the building of between 1.2 and 1.5 million new nonfarm units a 

year within the capacity of the economy and the construction industry? 

In the best year we ever had—1925—we produced only 937,000 units, 

and in the best five years—1923 to 1927—we averaged only 872,000. Today, 

however, the economy is much larger and more productive than it was 20 

years ago, and the record of the past makes an inadequate goal for the 

future. We shall require time to overcome difficulties arising out of the 

war and to start new houses at an annual rate of even 900,000 units; 

but once these difficulties are met, there will be nothing—at least in 

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terms of available resources and organization—to prevent our building 

at the rate needed. 

Lest it be argued that the low quality of our present housing is an indication that people do not want good housing, it may be noted that there 

is substantial evidence against such a thesis. We know that the kind of 

housing people have depends largely on what their incomes are—the 

higher a family's income, in general, the better the housing it has—and 

when there is a choice available, people move out of poorer housing into 

better housing. Part of the wartime shortage of housing is attributable to 

the fact that many families became financially able to obtain more suitable quarters. We need not fear that a program of raising the quality of 

housing in the United States would run counter to the wishes of the 

people whose living conditions would be improved. And we have ample 

resources for such an increase as well as for considerable increase in the 

consumption of many other goods and services. 

Prospect for Meeting the Need. What is the likelihood that we shall 

build 1.2 or 1.5 million housing units each year for even a decade after the 

war? A number of influences will make for a large volume of building 

during the next four or five years: after the United States entered the 

war, there was very little residential building except in war production 

areas, and even there the amount of housing provided was the minimum 

necessary to house the increased population under more crowded conditions than would be acceptable in peacetime, even if family incomes were 

considerably smaller; many families have built up savings which can be 

spent rapidly when goods and services become available; special financing 

facilities have been made available to returning veterans for the acquisition of homes; and a relatively short time will suffice for house builders to 

get into operation. 

These influences may be offset by several other factors. Rapid restoration of supplies of goods which consumers have gone without in recent 

years may result in a decline in prices, curtailment of production, and a 

substantial amount of unemployment; if this happens, many individuals 

will be forced to spend their savings for living expenses and many others 

will prefer to keep their savings rather than spend them on durable goods, 

and especially on houses, which require long-term commitments, and 

there will be some sharing of quarters by families whose incomes decline. 

If war workers migrate in force from war production areas, the shortage 

of housing which has developed may be reduced in these areas, though 

it may be increased in the areas to which families move. Values of existing 

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houses have risen substantially since the war began, and, if we have 

further marked price advances in the immediate future, costs may rise 

to a point where workers cannot afford to buy or rent new houses. 

Even if these unfavorable elements do not turn out to be important, 

the prospect, for reasons that are developed in the following sections, is 

for a postwar residential building boom of perhaps four or five years duration, rather than for a sustained high level of residential building, unless 

basic conditions in the housing market are considerably improved.2* 

Experience of the 1920's. Our experience in the 1920's offers some clues 

to what is likely to happen in the next few years. After the last war there 

was an acute shortage of housing, partly because there was relatively 

little residential building during the war, partly because the increase in 

the number of families and the migration of families from farms to cities 

were both great during the war, and partly because high incomes during 

the war accustomed many families to quarters of their own. Rents and 

prices increased rapidly after 1918 when most of the wartime controls 

were removed, and the building of houses got under way quickly. Twice 

as many nonfarm houses were built in 1919 as in 1918, and, after the 

depression of 1920-21, building increased until 1925 when it reached a 

peak of 937,000 units. Thereafter, building activity declined as rapidly 

as it had risen; by 1931 the number of units built was down to 250,000— 

about the same as in 1920. In 1933 only 93,000 were built—the smallest 

number since the turn of the century. 

The boom of the early 1920's was a response to the high rents and prices 

brought about by the housing shortage, but it was helped along by other 

23

 As this note is written (May 6, 1946), there is a strong likelihood that the residential 

building boom which is now under way will collapse within perhaps 15 or 18 months. Prices 

of existing houses advanced during the war, and the advance has continued, apparently at a 

more rapid rate, since the end of the war. The cost of building has risen in roughly the same 

proportion as the prices of existing houses. 

There are probably enough families who have savings and borrowing capacity to form a 

market for new houses, as far as down payments are concerned, even at higher prices than now 

prevail; but the current payments required to carry the large mortgages with which houses 

are being bought are a serious charge on income. Every further increase in prices will reduce 

the number of families able to meet the current charges, and any decline in incomes, even if 

it is temporary, will leave many owning families unable to fulfil their mortgage contracts, 

and would-be buyers unable to assume mortgage obligations. In these circumstances, prices 

are likely to decline. 

If prices turn down before costs have overtaken them, building may be sustained, but if, 

as seems more likely, costs are as high as prices when the decline comes, building will be curtailed. 

Whether such a decline would be followed shortly by the boom referred to in the text 

would depend almost entirely on the measures taken between now and the decline, and 

on the steps taken to protect the victims of the collapse. 

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developments. The movement to the outskirts of cities, which had started 

before the war with the coming of the interurban streetcar, was greatly 

stimulated by the growing use of the private automobile and the motorbus. After the depression of 1920-21, as great new industries and markets 

developed, the United States looked forward with growing assurance to 

the "new era." By 1923 optimism was widespread, and people were 

eagerly buying the new houses that builders had to offer. Some bought to 

avoid high rents, some because housing could not be obtained otherwise, 

and some in the belief that real estate was a good investment. 

Building and real estate transactions took on a speculative character. 

Houses were sold for what the market would stand, which, for a time at 

least, was far in excess of the cost of building. Thin equities were encouraged to "broaden the market," and were supported by appraisals 

which anticipated the "new era." Mortgages were written at interest rates 

which now would seem fantastic and, with the widespread use of unamortized short-term first mortgages and junior liens, many buyers became committed to obligations they later found they could not meet. 

In the later stages of the boom, apartment building was important. 

Here, new construction was financed in large part by speculative investment of a small and sometimes fictitious equity, and by the issue 

of mortgage bonds to a public which had already started to turn from 

real estate speculation as such to speculation in securities. The results 

were such as to discourage apartment construction for a long time. 

The prosperity of the 1920's was not sufficient to maintain the high 

level of building for long. The whole rent, price, and cost structure for 

housing was so high, even in relation to the advanced income levels, 

that there were not enough families who could afford new houses. Although the prices of houses stayed up, the volume of sales of both old and 

new houses declined, and vacancies began to increase. By the time of 

the stock-market crash in 1929, residential building had declined 45 per 

cent from the peak of 1925, and over 40 per cent from the average of the 

five years 1923-27. 

Further declines in volume after 1929 were accompanied by reductions 

in prices and rents. By 1933, in cities generally, rents had fallen by more' 

than a third, all the way back to the 1919 level, and a fair number of the 

tenants were delinquent in their rent payments. Building costs, too, had 

dropped after considerable delay; but the depression forced families to 

double up to reduce expenses and there was little demand for new houses 

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at any price. New building was at a standstill and activity in the industry 

was limited mainly to repair and modernization work. 

Later in the 1930's rents advanced gradually and markets revived, 

partly because of Government action in assuming distressed mortgages 

and introducing a system of mortgage insurance, and partly because of the 

business recovery. Government intervention helped to maintain the 

prices of houses and also made it easier for families to pay the prices; the 

business recovery raised incomes and put more families in a position to 

buy. Costs were at a lower level than in the 1920's, and, with prices stabilized and the market enlarged, building became more profitable. In the 

late 1930's there was a steady and substantial recovery of residential 

building, but even in 1939 only 515,000 units were started. 

The Market in Which Houses are Built. Although the period of the 

1920's was unique in some respects, it holds several lessons for us in showing why high building activity, once achieved, is not sustained. 

Because the number of new houses available at any one time is very 

small compared with the existing supply, prices of new houses are determined to a very large extent by the prices of existing houses. New houses 

can be sold when they are more attractive to consumers than existing 

houses in that their prices are lower or they have more desirable features: 

that is, the upper limit to the prices of new houses is, as a rule, the prevailing prices of existing houses which buyers regard as equally desirable. 

The lower limit to the prices of new houses is the cost of building: new 

houses are built when there is an expectation that the prices they will 

bring will cover the costs of building, including a profit to the builder. 

If the prices of existing houses fall below the cost of building comparable 

new houses, or if the cost of building new houses rises above the price 

which comparable old houses command, building will stop. On the other 

hand, the prices of new houses cannot fall far below the prices of old 

houses, for, if new houses could be obtained for appreciably less than old, 

speculative buying for resale would develop. In practice, in such a case, 

the builder sets a price which is "in line" with the prices of competitive 

houses. Homer Hoyt tells us, for example, in his exhaustive study of real 

estate cycles in Chicago, that during the boom of the 1920's bungalows 

costing $5,000 to build sold for $7,500.3 

3

 A more recent example of this is furnished by Mr. Frank W. Cortright, Executive VicePresident of the National Association of Home Builders of the United States. During the war, 

priorities assistance was extended by the War Production Board to the builders of housing for 

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The cost of building houses, moreover, is not fixed. It is especially sensitive to the possibility of upward adjustments in periods of strong demand. 

As many observers have pointed out, no one element is an obviously large 

part of the cost of a house. When business is good, each supplier—either on 

his own initiative, or by accepting premiums offered by builders for 

prompt delivery, maintenance of grades, and similar factors—can raise 

his price a little without seeming unreasonable. Thus, when the price that 

can be obtained for the finished product exceeds the cost of building at 

the existing prices of the resources used, these prices tend to rise; in a 

relatively short time, total cost, including land, equals selling price, and 

then exceeds it. When the cost of building exceeds the price of existing 

houses which consumers regard as comparable, however, cost does not 

decline rapidly enough to prevent almost complete cessation of building. 

This is partly because even a large reduction in the price of one item has 

relatively little effect on the total cost, and such collusive arrangements 

as exist in the industry do not often extend to coordinating price reductions. 

New houses are not built when prices are below the cost of building, 

but the levels of prices and costs are not the only factors which determine 

whether building will take place. Changes in incomes, vacancies, prices, 

and costs are also important; if costs are stable, for example, more building is likely to be done when prices are rising than when they are declining, 

even though prices stay above costs. 

Changes in incomes, vacancies, prices, and costs are closely related. 

Old houses advance in price chiefly from two causes, which may act either 

independently or together, but almost always operate by producing a 

in-migrant war workers ("H-1 housing"), on condition that specified maximum prices would 

be observed. When controls were removed from building on Oct. 15, 1945, the price controls 

were also removed. Mr. Cortright reported in the Washington Letter of the Association for 

Nov. 3, 1945 that "Builders .. . have recently sold H-1 housing at the priority level and have 

seen this housing immediately resold at profits of $1,000 to $2,000 " In the issue of Nov. 10 

he said: "Disillusioned by the highly improper action of some home purchasers, members in a 

number of cities are seeking legal advice as to methods by which this practice can be prevented. 

. . . Restrictions being written into the agreements vary considerably. Some builders require 

that purchasers will not resell within a stipulated period of time without [giving the builders] 

the opportunity of buying back the property at cost plus legitimate charges. Others require 

that resale cannot be made within one year at a profit. Herein lies an opportunity for all sellers 

including builders, owners and banks to make an extremely important contribution in the fight 

against inflation in real estate.'' 

The difficulty of this fight should be apparent. Sellers who forego profits of from $1,000 

to $2,000 can be excused for becoming discouraged if they see other sellers accepting all that 

buyers will pay. 

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HOUSING NEEDS AND THE HOUSING MARKET 11 

reduction in vacancies. First, an increase in the number of families in an 

area results in reduced vacancies and competition for existing quarters; 

in such a market, landlords and owners raise rents and prices. Second, a 

rise in family incomes causes families to cast about for better quarters, 

which results in reduced vacancies in the higher priced quarters, and a 

consequent rise in rents and selling prices. Both of these factors were 

in operation in the 1920's. Incomes were rising during most of the 1920's 

and by 1925 the number of families living in cities was much larger than 

before the war, both because many of those who moved to the cities 

during the war stayed, and because after 1921 the new employment 

opportunities in the cities attracted many more people from rural areas 

and small towns. 

Thus, houses are built under a highly selected set of circumstances: 

building will not take place at all unless the prices of existing houses are 

above the cost of building comparable new houses; and it goes on most 

vigorously when the difference between prices and costs is large, prices 

are rising, and vacancies are declining. In addition to this, the markets 

for which building is done are limited, both in composition and in duration. Builders cannot supply houses for families in the lowest income 

groups, even though these families are being compelled to double up, 

because houses conforming to local codes cannot be built under certain 

minimum costs which vary from place to place and from time to time. 

People's incomes enable them to pay only so much for housing, and more 

and more families must drop out of the market as prices go up. Both rising 

prices and the new houses produced in response to rising prices tend to 

cause vacancies to increase, and, although the prices and rents of old houses 

may not drop immediately as a result of an increase in vacancies, building 

will stop if costs continue to rise or the margin between prices and costs is 

small, or if the number of families who can pay the prices declines. By 

1928, vacancies had reached a "normal" level—partly because the building boom had added many houses to the supply, and partly because rising 

prices had forced many families to share quarters—costs had reached a 

high level which left little margin of profit to builders, and the families 

which could afford new houses at the going prices had, for the most part, 

been supplied. 

Need for a Housing Program. In the next few years the housing market 

will be similar in several respects to that of the early 1920's. There will be 

a shortage of housing; many families will have ready money; and the production of goods which consumers and others, both here and abroad, have 

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been without during the war is likely to provide considerable economic 

activity for some time. There will also be some differences. Governments 

are more aware of problems in the housing field and better equipped to 

restrain unwise borrowing; cities are more aware of the tragic effects on 

their own finances of uncontrolled land development; and individuals 

may be less willing to believe that fortunes can be made over-night. We 

may therefore be able, by taking precautions, to avoid some of the speculative aspects of a residential building and real estate boom. 

A boom need not be speculative in character, however, to be undesirable, and even without the gambling in capital values which characterized the 1920's, we can have a boom and collapse in residential building. 

During the war, rent control kept rents from rising appreciably, but the 

prices of houses, which were not controlled, have risen substantially—in 

general, probably as much as 40 or 50 per cent over 1939. The cost of 

residential building has increased by at least a third. Even if rent controls 

are retained for some time, a substantial amount of building will be 

undertaken in many areas because housing will be scarce and the prices 

of existing houses high. There will be buyers as long as incomes are reasonably high for a large group of families and not so low for others that 

they have to give up their own quarters and share quarters with friends 

and relatives, or move very far down the rent scale. Veterans are likely 

to be an important part of the market because they will have their separation allowances and a certain amount of employment preference, and the 

Government has made special provision to guarantee or insure their 

mortgage loans. 

From this boom we cannot expect that more than from 3.5 to 5 million new dwelling units will be built in the next five years, or that a high 

volume of building will be maintained much beyond 1950. If family 

incomes are maintained during this period, rents and prices will advance, 

and the boom may continue longer than five years even though costs also 

advance. If incomes decline substantially, the families able to afford new 

houses will be completely supplied sooner, and the boom will be cut off 

sooner. Whether incomes are maintained or not, it is very unlikely that 

we shall obtain sustained production of houses at the rate needed to bring 

our housing up to standard in a reasonable time unless the housing market 

can be made to respond better to long-term needs than it has heretofore. 

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tions. If such a change is to come, it must come in large part from a 

housing program undertaken by the community. 

THE SETTING FOR A HOUSING PROGRAM 

In some recent discussions, the stimulation of economic activity has 

been confused with the improvement of housing conditions. The two 

things are not the same, though each is a valid object of social policy. 

Discussion of the connection between the two may be helpful in indicating 

the framework within which housing policy must be formulated and 

carried out. 

Improvement of Housing and the Stimulation of Activity. There is a 

very direct and necessary relationship between achieving the goals of a 

program whose object is to raise the quality of the housing available in 

the market and the amount of economic activity carried on. It is not 

necessarily true in any such direct sense, however, that in carrying out a 

program of stimulating or maintaining economic activity we shall produce 

improvement in housing conditions. Indeed, if housing standards are 

sacrificed for objectives such as full employment or a high level of expenditures on construction, we may wind up with worse housing than we would 

have had without a program for maintaining activity. Incentives to build 

poor housing are fairly easy to create, but incentives to build good housing 

are somewhat more difficult. 

In an economy as complex and as unstable as ours, the community 

must take action to see that resources are fully used; but full use of 

resources cannot be obtained directly, partly because the economy does 

not operate in comprehensive totals, but also—more important—because 

full use of resources cannot be defined except in terms of the values which 

people as individuals and in groups place on the end products of economic 

activity, and on the processes by which activity is carried on. Economic 

activity might be maintained at a high level for a long time if we undertook to fill in the North Pacific Ocean, but, though everyone in the labor 

force might be continuously employed, and all "savings" might easily be 

"invested" as a result of this project, there would not be full employment 

of resources if people preferred schools and rubber bands to a land link 

between North America and Asia. 

The goals of a housing program, then, must be established, in large 

measure, independently of the goal of full use of resources. The amount by 

which goals exceed the prevailing state of affairs at any given time, the 

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period allotted for attaining the goals, and the techniques to be used in 

carrying out the program will all be influenced by the resources available 

to satisfy all wants. But fundamentally the goals must be a statement of 

the preferences people show for the satisfaction of various wants. 

Reasons Commonly Advanced for the Existence of Poor Housing. A 

great many different courses of action have been advocated for raising 

the quality of housing available to families, and most of them are founded 

on the propositions, first, that what is needed is a large increase in the 

number of units available, and second, that the cost of housing—both 

new and existing—is too high in relation to incomes to permit the required 

supply to be built. 

With this part of the diagnosis, however, general agreement stops. 

Many different reasons for high cost are advanced: monopolistic practices 

and obsolete techniques in building, the high cost of mortgage loans, the 

high costs of operation, and the inequitable taxation of real estate are 

some of the most common. Diverse courses of action are recommended 

by those who agree about the reasons for high cost. For example, some 

who attribute high cost to unduly high interest rates recommend that the 

Government take direct steps to reduce mortgage interest rates, or rates 

in general; others recommend that the Government guarantee certain 

classes of mortgage loans in one way or another and thus force selective 

reductions in the mortgage rate; others recommend that the Government 

itself make mortgage loans at attractively low rates; others recommend 

that housing be financed by bonds issued by large builders or real estate 

companies; and still others recommend that equity capital be substituted 

for borrowed capital. And the specific techniques which are to be used to 

carry out these recommendations vary from one observer to another. 

It is not the purpose of this paper to review all the reasons advanced 

for high costs and other impediments to the provision of housing, or to 

appraise all the techniques suggested for correcting these conditions. 

Rather, this paper attempts to bring out some of the characteristics of 

housing and of the housing market, so as to distinguish, in a general way, 

those lines along which action will be worth while from those which hold 

little promise. To this end, some of the factors to which difficulties are 

attributed and some of the proposed remedies are discussed in the light 

of the physical and economic nature of housing, the organization of the 

building and real estate market, and the incentives to real estate transactions, all of which have been described in general terms in earlier sections. 

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Most of the proposals discussed here have been selected to represent 

important approaches offered in current discussions of solutions, and 

some have been selected to represent approaches which, though they 

receive relatively little attention, seem promising. No attempt has been 

made to cover all proposed solutions or all the variants of the general 

solutions dealt with. 

Nature of the Solutions Proposed. In practically all discussions of "the 

housing problem," the proposed solutions are aimed at increasing the 

supply or reducing the cost of one or another of the different kinds of 

housing. In general, various parts of the supply are distinguished by the 

tenure on which the housing is occupied, the areas in which it is located, 

and the prices at which it is available. A further distinction, which cuts 

across these lines, arises out of the way in which costs are paid—that is, 

whether the public subsidizes the housing. 

Not all observers grant the need for specific action to make available 

each kind of housing. For example, some claim that there is no need—or 

even that it is undesirable—to encourage the building of new housing to 

be available at low prices, since higher priced housing, as it becomes older, 

will decline in value so that families of low income can afford it; and it is 

also maintained by some that the encouragement of rental housing is 

similarly unnecessary since those who wish to rent are generally in the 

lower income groups and that, as owner-occupied houses lose their value, 

they are turned into rental properties. 

In the same way, action proposed to encourage the provision of one 

kind of housing is frequently held to encourage all kinds, as when the 

insurance of mortgages on new owner-occupied houses is regarded as 

reducing interest rates for mortgages on all types of housing. 

Despite such cross-currents of objectives and analysis, we may separate 

proposals in a general way according to the part of the market which they 

are designed to help. 

General Solutions. The broadest proposals, which are aimed at providing the setting in which the total supply of housing, of whatever type, 

can be increased most easily, are that we take steps to raise family incomes and to lower housing costs. 

The proposal to raise incomes, of course, involves problems which, in 

the main, are beyond the scope of a housing program or policy as such. 

The approaches and techniques which may be advocated are many, ranging from a guarantee of "full employment" or of a minimum income to 

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each family, through unemployment insurance, the provision of dependency benefits, and minimum wage laws, to a flexible or progressive 

tax system. 

The proposal that costs be reduced is usually made more specific in 

terms of particular costs and particular types of housing; but the general 

solutions that are commonly advocated for the general problem are the 

elimination of monopolistic and restrictive practices in the building business, the elimination of obsolete materials and techniques, and the reduction of mortgage interest rates. 

Proposals for stimulating the provision of particular kinds of housing 

are many, sometimes contradictory, and often overlapping. 

Owner-Occupied and Rental Housing. Different measures for stimulating 

the building of owner-occupied houses are advanced by different groups. 

Builders, their organizations, and their suppliers seem to favor modifying 

building and housing codes and reducing the periodic capital charges, the 

initial equity required of purchasers, local real estate taxes,1 and wage 

rates. Some large builders also advocate that local governments install 

utilities and community facilities, and assess the costs against the properties after they are sold rather than before. Observers outside the business 

are likely to advocate, in addition, that the cost of building be reduced 

by the adoption of more efficient techniques or new materials and that 

builders acquire more capital so that "construction money" can be obtained without mortgage credit. Mortgage lenders generally resist the suggestion that changes be made in the prevailing terms of mortgages, and 

tend to emphasize the revision of building codes, the adoption of more 

efficient techniques of building, the reduction of the cost of materials and 

labor, and the lowering of real estate taxes. 

Suggestions for increasing the volume of rental housing include some 

of those advocated in connection with owner-occupied housing. To these 

are added reduction of the cost of land as well as encouragement of equity 

financing by the elimination or substantial reduction of the corporate 

income tax on rental housing enterprises and by a Government guarantee 

of a certain yield on invested capital. 

Housing in Suburbs and in Cities. During the past 25 years, most residential building has been done outside the main built-up areas of cities— 

in small towns, metropolitan suburbs, or outlying districts within cities. 

Suggestions for stimulating the building of owner-occupied houses are 

generally made with the idea that building will continue to be done, in 

large measure, outside the built-up urban areas. 

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In recent years, increasing support has been given to the proposition, 

formerly voiced mainly by city planners, that the steady movement of 

population to the outskirts of cities should be reversed, and "urban redevelopment" is now an important subject in discussions of housing 

programs. 

A great many different plans have been offered for bringing about the 

reconstruction of run-down sections of cities, from the voluntary pooling 

of property rights by the owners of the property concerned to outright 

purchase by the Federal Government of the areas to be redeveloped and 

the resale of these areas to private developers at substantially lower prices. 

Although many who advocate large-scale urban redevelopment insist 

that housing is not the only—or even the main—use to which redeveloped 

areas should be put, those who wish to see more residential building inside 

the cities look to reduced land cost and the provision of utilities and 

facilities by the local governments to provide the stimulus. 

Housing for Different Income Groups. The great bulk of the housing 

which has been built in recent years has been built for owner-occupancy 

and has been available only to families with high incomes. 

There is a substantial body of opinion which holds that this is the only 

way housing can be provided; lower income families and those who want 

to rent can be provided for only in housing which has "filtered down" 

through successive income groups as it wears out and loses value. Those 

who take this approach hold that if better housing is to be available to 

low-income families, more housing must be built for upper income families 

so that there will be enough housing to "filter"; and some hold that if 

there is not enough housing at the low end of the scale, poor families 

should be aided, by ordinary relief payments, to pay for their accommodations. 

Another large body of opinion says that reliance on the "filtering" 

process has resulted in housing conditions as they are today—that is, 

that by the time housing filters down, even to income levels considerably 

above the bottom, it is no longer fit to live in, either because the houses 

themselves are in such bad condition, or because the neighborhood has 

deteriorated. In addition, this group points out, housing has frequently 

increased in value rather than declining, especially in cities, because the 

land is valued at what it might bring in commercial development, or 

because, as they grow older, the buildings are made to accommodate 

more families. 

Among this group, several types of solution are to be found. Some hold 

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to a modified thesis of "filtering" and urge that steps be taken to build 

housing that will wear well, in communities that can be expected to last. 

Some urge that costs be reduced by the adoption of new techniques and 

materials, that financial charges be reduced, and that tax concessions be 

granted for low-priced housing. In the main, both these groups would 

also provide incentives for the rehabilitation of existing housing which can 

be made over into decent quarters available at low cost. 

Others who reject "filtering" as an adequate process for housing lowincome families hold that these families will not obtain decent housing 

unless the community itself builds housing and runs it at a loss. They 

therefore advocate a public housing program large enough to provide 

housing for all families who cannot find acceptable housing in the private 

market on terms within their means. By and large, this group also urges 

that steps be taken to lower the costs at which private housing can be 

made available. 

Analysis of Proposed Solutions. Advocates of these various solutions 

seem to feel that, if their solutions are adopted, all conditions except 

those they aim to change will remain unaffected. It is pointed out, for 

example, that if, by means of new techniques and materials, the cost of 

building the "shell" of a house can be reduced by 50 per cent, the cost 

of the house will be reduced by 30 per cent since the cost of the shell is 

now about 60 per cent of the total; thus a contribution will have been 

made, it is believed, to the provision of low-cost housing.4 The same sort 

of reasoning has been applied in the past 15 years to show that reductions 

in interest rates, labor costs, material costs, and the price of land would 

have similar effects. 

The Rdle of Capital Values. Proposals to reduce cost to the occupant by 

reducing particular component costs overlook the important role played 

by capital values in regulating the amount and kind of new housing added 

to the supply. It has already been pointed out that new building takes 

place when the prices of existing houses are higher than the cost of building 

new houses which consumers regard as comparable, and also that, when 

building is under way, costs tend to rise to absorb the difference between 

the market value of existing houses and the sum of the prices of the component resources used in building comparable new houses. This behavior 

of the market, it has been shown, stops building fairly soon because, when 

4

 See, for example, National Housing Agency, Bousing Costs: Where the Housing Dollar 

Goes (National Housing Bulletin 2), Washington, D. C, December 1944, p. 22. 

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values have risen as high as incomes will permit, and costs have caught 

up with values, builders cannot operate profitably. 

This process goes on whether the techniques of building and the conditions on which houses are bought and paid for are changing or standing 

still. The introduction, at strategic times, of techniques and conditions 

which enable builders or landlords to make new housing available at 

lower prices than would otherwise be possible may give rise to building 

which would not have taken place under the earlier circumstances, but 

the very process of making use of these advantages tends to eliminate 

them. The market evaluates such advantages against the existing stock 

of housing and the incomes prevailing in the community; comparable 

houses command comparable prices; and the cost of building approaches 

market value. This process may be illustrated by a discussion of what 

happens when particular costs are reduced by one method or another. 

Reduction of the Cost of Building. Houses which are judged by a substantial number of people in a community to be of comparable desirability take on comparable value. A house which costs $5,000 to build but 

which is judged to be the equal of existing houses which bring $7,500 will, 

in a very short time, command $7,500 even if the builder, aware of the 

desirability of low prices, sells it originally for $5,000. The influence of old 

houses in the market is so great that, even if costs are reduced substantially, there is an overwhelming pressure to price new houses only just 

so far below comparable old houses that all will be sold. 

Intermittent reductions in cost, if they occur at the right times, can 

be passed on to consumers in the existing market. If a building boom is 

approaching its end, either because costs are overtaking prices or because 

the number of buyers at going prices is being exhausted, a builder who 

can reduce costs may be able to broaden his market by selling his houses 

for less than he has been charging, thus reaching a lower income group. 

The influence of such a cost reduction on the market depends on how 

much it adds to the supply of housing relative to the whole market. If it 

should result in a large enough number of houses being built and sold, 

prices of existing houses would be brought down substantially, but this is 

not likely to occur. To have this effect, the cost reduction would have 

to appear at the proper time, and it would have to be large enough to 

make the resulting price attractive to a large number of people who had 

not been reached by the high-pressure salesmanship of the boom. 

It is much more likely that the effect of a reduction in cost toward the 

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end of a building boom would be to enable the builder who enjoyed the 

reduction to offer a bargain, in terms of alternative houses, to people who 

were almost persuaded to buy but were reluctant at the going prices. 

The builder could thus continue building for a time after he would otherwise have stopped, but the additional houses built would probably be 

negligible in the market. The benefit of the low price would therefore be 

confined in the main to those who bought the bargain houses from the 

builder, because, by the time these buyers were ready to sell, prices, costs, 

and incomes would have gone through a period of adjustment and the 

bargain houses would reflect the market for generally comparable houses. 

Similarly, if, when building is depressed, a builder can make savings in 

cost, he may be able to provide houses at prices which are attractive to 

consumers and thus add to supply, but he is likely to be confronted very 

soon with rising costs, either because other builders copy his innovation 

and bid up the prices of materials, land, and labor, or because his suppliers 

raise prices on their own initiative. 

Intermittent cost reductions might conceivably be made from time to 

time in such a way that building would be continuous at declining costs. 

If we could have this situation we should be able to look forward to lower 

costs which would endure, and to the prospect that the upper limit of 

residential real estate values would be established primarily by minimum 

cost of reproduction. The organization and functioning of the real estate 

market, unfortunately, hold out little promise that such a state of affairs 

will come about. 

Reduction of the Cost of Maintenance and Operation. The level of current costs, in relation to income, which a family must pay for housing and 

housing facilities is important in determining the quality of housing which 

it can enjoy, and attention has properly been given to finding ways in 

which these costs can be reduced. But just as high incomes and low construction costs of new houses tend to be translated into high market 

values, reductions in carrying and maintenance charges also tend to be 

taken up in higher capital values. A house is valued higher if it has a 

heating plant which is more economical—either in money cost of fuel or 

in personal attention required—than the general run of heating plants 

in the community. Insulation, brass or copper water pipe, hardwood 

floors, a generous supply of electrical outlets, and metal casement windows all add more to the value of a house than the additional cost of 

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tional convenience which can be expected over the life of the house from 

such items is capitalized so that the advantages of this house, compared 

with others in the market, disappear. 

Reduction of Interest Rates. Federal intervention in mortgage financing, 

aimed at making home ownership easier, had a good deal to do with the 

revival of residential building after 1935. In the refinancing operations 

of the Home Owners' Loan Corporation and the insuring operations of 

the Federal Housing Administration, interest rates considerably below 

those prevailing generally were offered, and great emphasis was placed 

on regular amortization of the debt. Much of the effectiveness of these 

operations flowed from the fact that both programs supported the residential real estate market: the refinancing of existing mortgage debt 

under Government auspices through both HOLC and FHA reduced the 

need for foreclosures and forced sales, and the insurance of long-term, 

low-interest-rate, amortized mortgages on new houses increased substantially the number of people who could afford to buy new houses. 

There is no clear evidence that this reduction of mortage interest rates 

and general adoption of the direct-reduction loan has enabled families 

of a given income status to obtain appreciably better houses; nor is 

there convincing evidence, despite the reduction in interest rates, that 

current costs have declined. To be sure, the average price of houses 

bought with the aid of FHA-insured mortgages was declining before the 

war, but so too were the average size of the houses and the average income of the buyers. It is impossible, of course, to separate the effect 

of the rate reduction from the effect of the rising incomes of the late 

1930's, and the changes in the equipment of the houses over the years, 

but it seems clear that the difference between the higher and the lower 

rates has not all been passed on to the consumer of housing. Builders 

themselves seem* to have no illusions about the process. Many of them 

advocate further reductions in the interest rate and further lengthening 

of terms of mortgages, but they advocate these changes quite frankly 

not to reduce prices and costs, but to reduce the current charges per 

dollar of debt and thus to increase the size of the market at existing 

costs. Some of them do believe that, if the market can be increased 

sufficiently, costs can be reduced through sustained building. But easy 

terms are an advantage of the house that can be bought under them, and 

are consequently capitalized in the market to a large extent. 

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gage from the buyer as part payment than if he demands all cash; and the 

house sold on a 25-year mortgage at 5 per cent tends to bring more than 

the same house sold on a 5-year mortgage at 6 per cent. 

These examples are probably sufficient to show why manipulation of one 

element of cost alone is not enough to reduce the cost of housing substantially or to bring about the large, sustained volume of building for a 

long period of time which we must have if housing conditions are to be 

greatly improved. This is not to say that improved practices and materials, lower costs of upkeep, lower interest rates, and the like are of no 

value; on the contrary, they are essential. The point is that if we are to 

have better housing, we must find ways of modifying the operation of the 

housing market so that improved techniques and the like will show up in 

much more housing and much lower costs rather than in a little more 

housing and unchanged or higher costs. 

Monopolistic and Restrictive Practices. Some observers may insist that 

monopolistic and restrictive practices in building are responsible for high 

costs and that they account for the dissipation of increased incomes and 

cost-reducing innovations into higher capital values. It seems likely that 

the cost of housing could be reduced—perhaps reduced substantially— 

even with our present state of technology if various restrictive practices 

did not prevail, and if the market operated in a different way; and there 

is some indication that technology could be improved rapidly in a more 

favorable setting. There are severe limitations, however, to what a frontal 

attack on restrictive practices can achieve. 

The first, and perhaps most serious, limitation arises from the nature of 

the market in which residential building is done. As long as additions to 

the supply of housing are so small in relation to both the existing supply 

and the current need, cost reductions are likely to result initially in windfall gains to those who participate in the building, and, in the longer run, 

in the money costs of producing new housing rising to meet the prices 

which old houses command in the market. 

The second limitation arises out of the fact that not every monopolistic 

or restrictive practice which raises or maintains costs and prices is illegal. 

Despite the seemingly broad, definite, and all-inclusive language in which 

the Sherman Act, before the addition of the Miller-Tydings Amendment, 

forbade combinations in restraint of trade, many practices with restrictive 

results are perfectly legal. The exclusive agency, for example, which 

insures that a buyer must obtain a given product from one dealer, chosen 

by the manufacturer, is perfectly legal and respectable (unless its effect 

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is, in the judgment of the court, "to substantially lessen competition"). 

There is an over-riding legal doctrine that a seller has the right to choose 

his customers. 

The third limitation arises from the control of supplies by producers. 

Almost 75 per cent of the enameled iron bathtubs produced in the United 

States in were produced by four companies, and the other 25 per 

cent by nine companies. The four largest producers turned out 97 per cent 

of the asbestos shingles, and the remaining 3 per cent were produced by 

four small companies. The four largest companies produced 85 per cent 

of the window glass, and five other companies produced the remaining 

15 per cent. Even more striking concentrations of sellers confront builders 

and consumers in given markets.5 

Such concentration of production is not itself illegal, and not every 

practice on the part of producers which would result in such concentration 

would be condemned by the courts. Furthermore, practices which arise 

out of the fact that production is concentrated in a few companies cannot 

. easily be reached by legal action, and, in some measure, the recent policy 

of the Anti-Trust Division of the Department of Justice has been directed 

to rationalizing such practices if business necessity can be shown for them. 

This approach was dubbed by Mr. Thurman Arnold, then Assistant 

Attorney General in charge of Anti-Trust, the "doctrine that you can't 

unscramble eggs."6 A taste for scrambled eggs is thus assumed, and 

attention is focused on how they shall be seasoned. It is difficult to see how, 

given the framework of public policy toward private economic activities, 

the solution could be very much different. 

Practices which are in fact restrictive must be expected to persist if the 

conditions under which economic groups operate make them feel that 

they cannot continue without such practices. Where two brick producers 

supply all of the brick used in an area, for example, it is futile to try to 

prohibit one from cutting his price when the other does so. Similarly, it is 

futile to expect that, when one feels that prices can be raised to advantage, 

he will not try—by devious means if direct means are effectively illegal— 

to be sure that his competitor is of like mind before he raises his prices. 

Neither is it realistic to expect that, when builders offer premiums for 

5

 See, for example, Temporary National Economic Committee, The Structure of Industry, 

(Monograph No. 27), Pt. V, "The Concentration of Production in Manufacturing," App. B, 

pp. 420-81; and Hearings, Pt. 11, "Construction Industry," testimony of Dr. Willard Thorp, 

particularly pp. 5220-27. 

9

 P. 5157 of Hearings cited in footnote 5, 

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prompt delivery, one producer will accept and the other reject them for 

long, or to expect that when a premium has been paid for a period, the 

sellers will not regard it as part of the basic price. 

The product of the building industry is at best expensive, and its production requires a multitude of different components and skills. The 

market for construction work is highly irregular and segmented, and the 

intricacies of the process of assembling materials and skills at the proper 

place and time are such that conventions must be established and maintained subject to relatively little or very slow change if anyone is to 

operate at all. And the law, being adaptable to the felt needs of time and 

circumstance, makes its concessions in terms of the alternatives which 

are offered. 

Like others in the building business, workers try to protect themselves 

against the hostile nature of the market, and, with a few notorious 

exceptions, the measures of protection they invoke have become recognized by the community as legitimate means of collective bargaining 

in an unstable world. Labor unions are criticized for refusing to handle 

certain materials, or materials in certain conditions, and in certain respects building practices could be improved if these restrictions were 

removed. But in general labor unions come in for a larger share of criticism than is warranted; manufacturers of materials are seldom criticized 

for following price and merchandising policies which may interfere quite 

as seriously with the adoption of new materials and techniques. 

The restraints in building are reactions to the nature of the market— 

the market in which materials are sold as well as the market in which the 

final product is sold—and to the complexity of the process required to 

build a house. Unless we are willing to substitute, in the operation of the 

building business and its suppliers, some system of public judgments for 

private judgments based on desire for gain, there is little that can be done 

through direct attack on restraints. The development of a stable, adequate market for building would probably go far, not necessarily to eliminate all restraints, but to make those that remain less objectionable in 

their effects. 

Urban Redevelopment. There can be little doubt that American cities, 

in the main, have been unable to adapt themselves rapidly enough to the 

changing and increasing demands made upon them, but it is unfortunate 

that the problem is discussed increasingly in terms of "blighted areas." 

Those who advocate programs of "urban redevelopment"—and these are 

the only programs of assistance to cities which are being discussed widely 

—envisage the rebuilding of cities in their physical aspects. Yet in large 

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measure the present physical inadequacies of cities are attributable to the 

fact that cities do not have adequate legal and economic powers and 

resources with which to protect themselves and meet their problems as 

they arise. Some of the programs of urban redevelopment, if adopted, 

could add substantially to these difficulties if they were not accompanied 

by increased capacity of the cities to take care of themselves. In the next 

section a few suggestions will be made about the relation of these problems to housing. 

To Sum Up. The conclusion to be drawn from this discussion is that, 

though total costs cannot be reduced except through the reduction of 

specific costs, the reduction of particular costs will be of only temporary 

and very limited value unless we can somehow prevent changes in capital values from cancelling advances made on other fronts. This merely 

emphasizes what has been recognized by some observers for a long 

time—that the solution of the housing problem can be found only in 

comprehensive and painstaking attacks along many fronts at once. All 

of the attacks must be coordinated, and they must be modified from 

time to time in the light of the results they produce. The problem can 

be solved, but only through a much more comprehensive approach than 

we have ever taken in the past. 

ELEMENTS IN A HOUSING PROGRAM 

It is clear that if housing conditions are to be improved substantially 

in the near future, the community, acting through its various governmental units, will have to take a hand all along the way. It is also clear 

that what is needed for the future is not a boom in the building of one or 

another type of housing, but a sustained high level of building, for a great 

many years, of a supply of housing which is balanced in terms of the needs, 

desires, and means of the families which will use the housing. It is also 

clear that measures of the type usually proposed will not, by themselves, 

produce a sustained volume of building of this balanced supply. 

Objectives of a Housing Program. There are, in general, three goals for 

a comprehensive housing program: first, to assure that every family has, 

or can obtain, quarters which permit its members to live under acceptable 

conditions, as the community defines acceptable; second, to assure that 

as few families as possible have to live under merely acceptable conditions; 

and third, to assure that new supplies of housing come on the market on 

terms which make possible the improvement of housing for all, as well as a 

rising standard of what is acceptable to the community. 

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Such a program must be formulated and carried out within a framework 

which includes, on the one side, the resources we have available to meet 

all wants, and on the other side, the preferences people show for the satisfaction of various wants. This means that the standard of adequacy must 

not be fixed so high that it can be met only by diverting resources from 

uses which the individuals or communities concerned feel are more urgent, 

and that, in deciding to have progressively better housing above the 

minimum, families should have a reasonable opportunity to choose between purchasing housing and using their incomes in some other way. 

These conditions do not imply any reduction of prevailing housing 

standards, which in a great many cases are not now met. The general 

nature of commonly accepted housing standards has already been indicated, but the precise content of the standards which each community is 

prepared to enforce must be determined locally. If consumers could constantly express their preferences freely, the exact content of these standards would vary in detail from time to time and place to place. 

The Kind of Market to be Achieved. Attainment of these objectives 

implies a certain kind of market; and, unless the measures we adopt tend 

to produce this kind of market, they will be unsuccessful in improving our 

supply of housing materially. 

In the ideal housing market there must be no houses occupied or offered 

for occupancy which are structurally inadequate by the standards of the 

community; and in this market there must be available to each family a 

unit of proper size, in a suitable location and environment, under a convenient tenure, and at a price which the family can pay. 

Moreover, there must be enough vacant units of each size, environment, tenure, and price so that any family can move freely for its own 

good reasons. There must be enough vacancies in each type of housing 

so that the community can absorb normally predictable increases in population without discomfort and so that families can improve their housing 

conditions as their incomes rise. Incentives to build must be such that 

vacancies will always be maintained close to this level; there must be 

provision in the market for eliminating housing which has worn out or 

become obsolete; and it must be possible to remove housing when the 

development of the community requires that the land should be used for 

other purposes. 

Approaches to the Objectives. It should be clear that, if we are to bring 

about a market of this character, we need a great deal of new building; it 

should also be clear that, in the market as we know it today, there are not 

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the incentives necessary to provide this volume of building or to maintain 

vacancies at the required level. 

The Role of Local Governments. The housing market is exceedingly local, 

and for this reason local governments must take an important part in any 

housing program. What they can do varies with the powers they receive 

from the States, their financial resources, and the nature of their communities. If progress is to be made, local governments must have the authority 

and the money they need to direct the development of their own housing 

markets. 

Local governments already have what appear to be substantial legal 

powers over housing. Municipalities have endeavored to establish certain 

types of housing standards through laws designed to safeguard health, 

prevent fire, and assure sound building. Most large cities, many smaller 

cities and towns, and some counties have zoning ordinances and land-use 

regulations which, though they may have been adopted originally to safeguard the values of the real property affected, operate in a measure to 

improve the conditions of housing. Probably the main shortcoming of 

these existing local laws is that they have been adopted to regulate particular conditions and activities related to housing but not to regulate 

housing conditions as a whole. A few cities—all too few—do have housing 

codes which prescribe the minimum conditions of housing under which 

people may live. 

The actual power of municipalities over housing is generally much le ss 

extensive than it appears on the statute books, partly because the legal 

power to close illegal housing is hedged about with qualifications, partly 

because the power is exercised by many different departments of government without much coordination, partly because the expense of condemning property is greater than municipalities can meet, and partly because 

the municipalities have no authority to provide alternative housing if 

illegal property is closed. 

Local governments must extend and strengthen their powers, both by 

exercising more fully those they now have and by obtaining further powers 

from the States. Perhaps the first step that each community should take 

is to work all its pertinent regulations for building, fire control, health 

conditions, public morals, land use, and the like into a code of housing 

standards for the community. Most communities now have many of the 

powers of prescription needed for the construction of an adequate housing 

code of this nature, but almost all of them will need additional powers 

from the States on some points. 

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Powers of prescription, however, are not sufficient. Practically all communities will need to obtain supplementary powers from their States in 

order to enforce a housing code. Most localities now have the power to 

condemn unsafe and insanitary buildings, for instance, but in many cases 

action is impeded by procedural difficulties. The standards for determining the compensation to be paid to the dispossessed owners are too 

high, or the power of the municipality to raise the money is restricted. 

If municipalities are to regulate the housing conditions in their jurisdictions, their powers of enforcement must be adequate for their powers of 

prescription; in other words, the consequences of violation must be obvious, and they must follow certainly. 

While the adoption of sound housing codes, backed by adequate powers 

of enforcement, would place municipalities in a position to improve housing conditions substantially, strong powers of prescription and direct 

enforcement may become completely ineffective if municipalities have no 

power for constructive action. Any municipal government would be voted 

out of office promptly for enforcing ordinances which demolished even the 

worst slums if the displaced families had no alternative but to crowd into 

the somewhat better slums. Along with suitable powers to prescribe and 

enforce housing standards, the power to provide housing, either by 

their own enterprise or by their direction, is thus an important part of the 

whole group of powers which municipalities need if they are to do their 

part in any sound program for improving housing conditions. 

But these are only part of the augmented powers which communities 

need over their own fortunes. The legal capacity for action by communities has not kept pace with the rapid expansion of the problems which 

communities are called upon to meet. Improper land use (and housing is 

a major user of land), especially in densely populated areas, gives rise to 

many problems which are of overwhelming importance to local governments. In the United States of the twentieth century, the most effective 

way to meet these problems is to control the use of land so that mistakes 

which can be foreseen may be avoided and those which are not foreseen 

may be remedied promptly. 

Regulation of land use through zoning ordinances and land-use plans 

has not been outstandingly successful. Communities have found it difficult 

to establish the most desirable patterns of land use in the original plan 

because of the rights which property owners have in the existing uses. 

As time goes on and development takes place more or less in conformity 

with the compromise plan adopted, changes to meet changing conditions 

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become more and more difficult to make. At the present time, it is proposed in most urban redevelopment plans to counteract the past inability 

of communities to protect themselves against improper land use by buying 

up present rights, rubbing the slate clean of past errors, and returning the 

land to private development, subject only to regulations of the kind 

which have proved ineffective in the past, with the hope that slight extensions and more effective administration of the regulations will overcome the inherent weaknesses of this approach. 

If local governments are to be able to regulate land use successfully 

and avoid the need to bail out periodically the owners of unsuccessful or 

obsolete developments, they must obtain a great many of the rights of 

ownership over large blocks of the land in their jurisdictions. The present 

state of legal doctrine does not promise that the most important of these 

rights will be upheld under the police power or the accepted interpretations of public welfare. It is hard to escape the conclusion, therefore, that 

communities need the power to own as much of the land within their 

boundaries (and, in some cases, outside their boundaries) as they feel 

necessary, and to use all the rights of disposition or development of such 

land which go with ownership. 

With such powers, communities would be able to regulate the more 

important uses of land. They would be able, at the time a lease is written, 

to specify the uses to which the land may be put and to enforce the specifications under the laws of contract. At the same time, they would retain 

a large measure of control over the future by writing leases for periods 

during which events can reasonably be predicted, and errors of prediction 

could be erased fairly quickly. Furthermore, by exercising the power to 

develop land on their own initiative, communities would be able to insure 

that desirable land use is not hindered or distorted by the failure of private 

developers to provide one or another necessary service. 

This interpretation of the role of the community in a housing program 

may seem too broad, and to imply a greater departure from tradition 

than is warranted. Part of the danger for the near future, however, is 

that we shall tackle problems which seem to be relatively easy to solve 

and find that our solutions only complicate broader and more difficult 

problems. Current urban redevelopment programs promise to be of this 

nature. What seems to be most needed at the present juncture is a 

thorough study of the land and housing problems of urban communities 

and a reasonable consensus of qualified opinion on the changes we must 

make in established ways of working. 

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The Role of State Governments. State governments are less intimately 

concerned with the problems of housing and land use than are local 

governments, but their importance is great. Communities derive all of 

their powers and privileges from the States, either in constitutional provisions or in legislation; and the States regulate the conditions of land 

tenure and the terms on which real estate may be financed by lending 

institutions within their boundaries. The sanction and support of State 

governments must therefore be obtained for a great many elements in a 

housing program. 

The States have an interest in the problems of their communities, the 

housing of their citizens, and the solvency of their financial institutions, 

if for no other reason than that they find it necessary to foot many of the 

bills presented by distress; but in the main, the States are better equipped 

to lay down broad policies for communities and to supervise the activities 

of financial institutions than to administer detailed programs. 

Perhaps State governments would make their greatest contribution to 

a sound housing program by sponsoring studies of the problems of their 

urban communities and working with the local governments to develop a 

set of powers with which the communities can take care of themselves, 

under the general supervision and with the active aid of competent State 

departments. 

The Role of the Federal Government. In the decade and a half since 

the Federal Government seriously entered the housing field, the tendency 

has become increasingly strong to lay the responsibility for housing 

reform and progress on the shoulders of the National Government. To 

the extent that much that is valuable has been done, and attention has 

been focused on the problem, this has been good; but there is a danger that 

too heavy reliance on the Federal Government will result in neglect of 

aspects of the problem with which the Federal Government is unable to 

cope effectively. 

High on the list of Federal housing activities should be continuous, 

active, and detailed cooperation with State and local governments with 

the object of defining more clearly the roles to be played by each type of 

government and developing a consistent set of relationships for carrying 

out and modifying programs decided on cooperatively. The Federal 

Government should also help stimulate groups of citizens who have enduring common interests, such as trade-union members, to experiment 

with new or relatively untried methods of providing housing, along the 

lines of limited dividend housing corporations and mutual ownership 

associations. 

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There is need for a reappraisal of Federal policies now in effect and an 

examination of those proposed for the future in the light of the implications of these policies and the limitations on Federal action. Since the 

magnitude of the problem of doing anything significant about housing 

has become apparent among large groups of people in the past 10 years, 

and it is now proposed that the Federal Government do vastly more about 

the problem than it has ever done before, it is essential that any contradictions inherent in past and proposed programs be discovered and dealt with. 

Three contradictions may be pointed out here as illustrative: 

(1) The Federal Housing Administration has assumed large obligations through 

the insurance of mortgages, on the assumption that the mortgage debt bears a reasonable relation to "long-term stabilized values," and this program will continue. It is 

now proposed that the Federal Government take an active part in reducing the cost 

of housing, including the capital cost. But capital cost cannot be reduced and market 

value maintained at the same time on any scale that gives real meaning to the ideas 

as parts of a major policy. 

(2) Along with the proposal to reduce capital cost goes a proposal to reduce interest rates on mortage debt still further. Unless steps are taken to reduce the 

market rental value of mortgaged property, a reduction in the interest charge will 

increase the return on the equity, and thus—if alternative yields remain unchanged—the value of the property will be likely to rise because of an increase 

in the value of the equity. 

(3) The proposal to reduce the capital cost of housing seems to be inconsistent with 

the proposal that a large volume of building be maintained for a decade or more, for 

reasons which have been set forth at some length earlier in this paper. Briefly, a large 

volume of building is done when market values are rising (or at least not falling), and 

when vacancies are low; but reduction of capital cost to the consumer, by definition, 

means a decline in market values, and this takes place most readily when there is at 

least a comfortable number of vacancies. 

So long as the scale of intervention by Government is small, these contradictions are not serious, though they may offset a great deal of effort, 

but they may become very troublesome as the scope of Government 

intervention increases. Moreover, the pressing problem now is how to 

prevent both costs and values from increasing still further in response to 

the acute housing shortage. Although costs and values could be reduced 

substantially from present levels without endangering mortgages written 

during the 1930's, the mortgage transactions of the immediate past and 

the near future may exercise a powerful restraint on cost reductions. 

There is also a real danger that we shall try to overcome the housing 

shortage in part by inflationary measures such as easier credit terms 

and reduced standards of housing and construction. 

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To a degree, in the first two cases cited, the present programs do resolve 

the contradictions. The Federal Housing Administration pays practically 

all of the losses which the lender may suffer from all causes, including a 

decline in the value of houses because of a decline in costs. Investors' 

funds are attracted into low-rent housing at low rates because the income 

from local housing authority bonds is tax free. But the reconciliation is 

only partial: mortgage insurance does not compensate the borrower for 

his losses, and it is doubtful that mortgage insurance could be written 

economically if it were certain that values would decline continuously; 

tax exemption of income from housing authority bonds is a deviation 

from the general policy of reducing exemptions from taxation which the 

Treasury Department and Congress have indicated is desirable on other 

scores, and tax exemption probably cannot be justified for returns from 

investments in housing in general. 

The Federal Government can avoid such inconsistencies, either by 

abandoning part of its program or by enlarging its program to prevent 

the inconsistencies from becoming effective. If it chooses to abandon 

enough to eliminate all inconsistencies, however, it will find itself with 

little more of an interest in the field than it had IS years ago, and this is 

hardly a practical alternative. If it chooses, as it apparently must, to stay 

in the field, it will have to enlarge its role even beyond what is now contemplated. If its activities are not to become too unwieldy, however, it 

must formulate its policies with discrimination and enlist aid from many 

sources. 

Specific Steps toward the Objectives. The general approaches discussed 

in the preceding pages imply a great many specific steps which must be 

taken if we are to evolve a comprehensive and consistent housing program. 

At many points it is not clear what these steps should be since we do 

not know enough about some of the problems involved. At some other 

points it is fairly clear what steps should be taken now, but it is also clear 

that the measures we adopt should be reappraised from time to time and 

modified or abandoned as experience improves our understanding.7 

National Housing Agency. The first essential step is to establish a 

7

 On Nov. 14, 1945, Senator Wagner introduced in the Senate, for himself and Senators 

Ellender and Taft, the bill cited as the "General Housing Act of 1945." This bill is a revision of, 

and replaces, S. 1342, introduced by Senator Wagner on Aug. 1, 1945. The main outlines of 

this paper had been established before these bills were introduced, and, although several of 

the proposals discussed here are to be found in S. 1592, usually in slightly different form, no 

attempt is made here to analyze the bill. 

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Federal agency whose responsibility it would be to investigate continuously the nature of the problems which confront us, to formulate for the 

consideration of Congress consistent and comprehensive programs to 

deal with the problems, to coordinate the activities of Federal agencies 

established to carry out the programs, and to work with State and local 

governments and private groups to assure the success of the programs. 

The National Housing Agency, established as a temporary, wartime organization, has had some of these responsibilities during the war, and it 

might well be made permanent, with somewhat broader functions. 

The housing activities which the Federal Government has engaged in 

during the past 15 years should, in the main, be continued, but serious 

consideration should be given to the contradictions and inconsistencies 

inherent in these activities at the present time. 

Federal Housing Administration. The present home ownership program of the Federal Housing Administration should be continued. It 

would be improved substantially if it offered more protection to the home 

owner who is not now protected against loss except as he may be discouraged from making unwise commitments and as the FHA program 

has raised the quality of construction and land development. One desirable 

improvement over the present arrangement would be that the Administration insure the buyers of houses built under FHA inspection against 

any defective workmanship which comes to light within five years, perhaps 

by requiring builders to post bonds to guarantee their work. 

A worth while supplement to the program of mortgage insurance would 

be a program for insuring to the buyer a minimum (but gradually declining) resale value for his house, whether it is mortgaged or not. Such 

minimum resale values, it may be noted, are implied in the present program of mortgage insurance, although they are lower than what would be 

required in the suggested program by the amount of the depreciated 

equity which the borrower risks. If this insurance carried with it the right 

of the insurer to the first chance to buy, at a price perhaps 10 or 15 per 

cent above the insured value, it could be a powerful influence in preventing both serious losses to owners and harmful rises in values. With such 

a protective device, the Federal Government could proceed with a clearer 

conscience to stimulate reductions in the cost of housing. 

Two plans currently proposed for extension of the program of the 

Federal Housing Administration are worthy of adoption. Under the 

first plan, the Administration would issue to builders commitments to 

insure the mortgages on a specified number of houses of approved types 

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to be built and sold over a period of from one to three years. The object 

of this program would be to obtain sustained mass building of houses, at 

the lowest possible cost, for families in lower income groups than have 

been provided for traditionally by private builders. This plan seems sound, 

provided the houses covered by the plan and their costs are determined 

separately for each locality; and in such a program, a guarantee of workmanship would be particularly desirable. 

Under the second plan, the Administration would insure a stipulated 

return on the equity invested in rental housing. This plan, too, seems 

sound, provided some standard of management policies is established so 

that a certain degree of occupancy must be maintained before the insured 

return will be paid; in other words, the insurance of returns must not be 

allowed to act as an incentive to the landlord to maintain rents in the 

face of a declining market. On the other hand, the degree of occupancy 

required must not be so high as to discourage new building, when 

vacancies have reached comfortable levels in the community. It would 

also be desirable for the insurance contract to stipulate that if the insured 

wants to sell his property, the Administration shall have the first chance 

to buy it, for the amount of the equity on which insurance is in force; 

this would protect against the speculative recapitalization of rental 

properties on a rising market which has had such an evil influence in 

this field. 

Federal Home Loan Bank System. The operations of the Federal 

Home Loan Bank System should be continued substantially as they are. 

It would be desirable, particularly in view of the probability of a rising 

real estate market in early postwar years, to require that all members 

of the System use a uniform technique of appraisal. This technique should 

be consistent with standards approved by the National Housing Agency, 

and the valuation staff of the Federal Housing Administration might be 

made available to make appraisals for members of the Home Loan Bank 

System, whether the mortgages are to be insured or not. An alternative 

would be to have the Federal Savings and Loan Insurance Corporation 

or the System establish an adequate appraisal service for members. 

Federal Public Housing Authority. The program of the United States 

Housing Authority (now the Federal Public Housing Authority) should 

be revived and extended so that much more low-rent housing may be 

built. Through this program there have been developed worth while 

techniques of cooperation between the Federal Government and local 

governments in the provision of housing for those who cannot obtain 

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decent private housing on terms which they can meet. The approximately 

200,000 units built to date under all Federal and Federal-aid low-rent 

programs cannot be called more than a beginning, but it is at least a 

promising beginning. 

Congress should consider the advisability of divorcing the program 

for provision of low-rent housing for low-income groups with Government assistance from the program of eliminating existing slums. It is desirable, of course, that slums be eliminated as a result of public low-rent 

building, but the present law insures that there will be no addition to 

the number of units in the market as a result of the public housing program. It would be much better if local governments were enabled to add 

to the supply of housing as part of their programs for eliminating substandard housing. A sufficiently large supply of decent housing is the 

only sound protection we can ever have against slums. 

The financial program of the United States Housing Authority and 

the local housing authorities operating with its assistance is built on the 

assumption that the housing constructed under the program will have a 

useful life of 60 years. There is little doubt that the buildings will stand 

for 60 years, and it seems probable that some of the housing will be physically desirable and located in attractive environments 60 years hence. 

But social change has been rapid in the United States, and the likelihood 

is that it will continue to be rapid. It would be wise, therefore, to allow 

for a somewhat shorter useful life for these projects—say 40 years—but 

without reducing greatly the permanence of construction. Annual payments of debt under a 40-year schedule would be somewhat higher than 

under the 60-year schedule, but less of the total payment would go for 

interest. If we frankly recognize that housing costs money and that long 

amortization periods merely spread out the original cost, at interest, we 

may be willing to pay more per year for capital cost in the near future, 

when operating costs and occupancy are fairly predictable, and reduce 

our payments later, when these factors are very uncertain. 

Housing Loans for Veterans. An important element in the Federal 

housing program of the next few years will probably be the guarantee 

and insurance of veterans' mortgage loans under the Servicemen's Readjustment Act of 1944, commonly known as the G. I. Bill of Rights. 

Under this Act, as amended in 1945, the Government will guarantee the 

repayment of one-half of an eligible veteran's mortgage loan, but not 

more than $4,000, provided the price paid for the mortgaged property 

does not exceed its "reasonable value." The interest rate on the loan may 

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not exceed 4 per cent and the veteran may take advantage of the Act 

at any time within 10 years after the end of the war. A loan which is 

supplementary to a loan made, insured, or guaranteed by a Federal 

agency may also be guaranteed provided the amount of the supplementary loan does not exceed 20 per cent of the purchase price of the 

property, and the total amount guaranteed does not exceed $4,000. 

Instead of having particular loans guaranteed to the extent of 50 per 

cent or $4,000, a lender may elect to have loans which are eligible for 

guarantee insured in a group. In this case, the Government will reimburse the lender for all losses suffered on these loans up to 15 per cent 

of the amount of loans made. 

This program undoubtedly offers advantages to veterans, but at the 

same time it strengthens materially the sellers' market which would 

probably prevail in the next few years even without the program. The 

pressure on buyers was lessened somewhat by the amendment which 

extended from two years to ten years the period within which the veteran 

may make use of the program. At the same time, the substitution of 

"reasonable value" for "reasonable normal value" as the definition of 

the maximum price which the veteran may pay for the property mortgaged under the Act removed a protection which is sorely needed at the 

present time. 

Perhaps the program would offer more protection to the veteran, the 

lender, and the Government, as well as to the housing market in general, 

if it were administered by the Federal Housing Administration under a 

new title to the National Housing Act. The FHA has experience in underwriting private mortgage loans and has, in its established appraisal procedures, the facilities for safe-guarding the interests of veterans in real 

estate transactions. 

Problems Remaining. This paper has dealt with only a few of the 

questions surrounding housing needs and the housing market, and the 

suggested approach to a housing policy has probably raised more problems than it has solved. But in human affairs we seldom solve problems; 

at best, we find ways of living agreeably with them. An important step 

in reaching amicable relations is to recognize the problems as fully as we 

can and to remember that, as we find new ways of living with them, 

the problems themselves change, and we must make new adjustments. 

Even so, it is apparent that the suggested approaches to the problems 

have not pointed very strongly to ways of achieving the kind of market 

which was set up as ideal. Two questions in particular have not been 

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answered: how to obtain sustained building in a market characterized by 

vacancies so plentiful and so well balanced that families have a free 

choice of their quarters; and how to reduce the costs of housing progressively. Some of the measures proposed, both in this paper and by others, 

may provide part of the answers, but they will not provide complete 

answers. 

Curiously enough, the first question appears to be the more important 

for the long-run. So long as building goes on sporadically in response to 

scarcity as it is reflected in inflated values, our inventive energies— 

whether directed to improving the processes of assembling materials, to 

reducing current charges, or to any of the other traditional subjects of 

cost reduction—will be dissipated in attempts to prolong the duration 

of booms by keeping costs from rising as far as values. If we can devise a 

housing market in which new houses are built and old houses are retired 

fairly continuously in response to long-run developments, reductions in 

cost will be both easier to achieve and less important in their effects than 

they appear to be today. It is to the problem of devising this kind of 

housing market that the attention of citizens and students must be 

directed if we are to have a meaningful housing program. 

High costs of housing may be regarded as unmitigated evils, to be attacked in their own right wherever and whenever they are encountered; 

or they may be regarded as a manifestation of interrelated evils which 

must be attacked in coordinated fashion, and not necessarily for their 

own sakes. If we take the second view, high costs represent an opportunity as well as an obstacle. In the immediate future, we can obtain a 

great deal of help from the fact that, as matters now stand, there are 

many costs which can be reduced. We have the conditions necessary for 

a residential building boom, but we do not have the kind of market which 

will transform this boom into the sustained provision, year after year, 

of the housing needed to raise our standard of living steadily. Not only 

can the coming boom be moderated and lengthened by reducing costs— 

it can be made the opportunity for developing the kind of housing market 

in which housing will be provided continuously in response to long-run 

needs, if a selective, consistent, and well-conceived program of cost reduction is followed. The most challenging problem of cost reduction is 

not to discover how to reduce particular costs; rather, it is to determine 

which reductions in costs can be made and maintained without producing serious conflicts in other parts of the economy, and how these 

reductions can be used most effectively in the development of a better 

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38 HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS 

housing market. If we obtain a more suitable market, even if we must be 

content with moderate, but effective, cost reductions, we shall have done 

much; but if we lose the opportunity to reform market processes, high 

costs will continue to be an obstacle to the improvement of housing conditions, even though we adopt cost-reducing innovations on a substantial 

scale. 

The kind of market we need is one in which the building of houses takes 

place to a greater extent in response to long-term needs and less in response to short-term lack of balance. In this context, "needs" is not to 

be contrasted with "demand," in the sense that "demand is need backed 

by ability to pay." Here, "long-term needs" is used in the sense that a 

public utility might use the term in forecasting the changes it will be 

called on to make in its plant over a period of time. Many of the changes 

that will be needed in our housing supply in the future are at least as 

predictable as the number of new telephone installations that will be 

required. 

In the development of this more suitable market, the roles of risk and 

incentive must be re-examined. Some of the risks now borne by those who 

participate in the buying and owning of real estate and the building of 

houses can be foreseen, and many of these could be eliminated with advantage to everyone; many of the losses which were suffered in the late 

twenties and early thirties in speculative subdivisions arose out of risks 

of this character. Other risks can be foreseen in a general way, but, because they are the consequences of the desirable or unpredictable adaptations people make in the process of living, cannot be eliminated or avoided, 

except at the expense of regimenting and stultifying our society. We may 

wish to minimize, but we should not try to avoid completely, for example, the possibility that, before new houses have worn out, the industry on which a community depends may become obsolete, or that 

people will prefer to live somewhere else. While such risks must be borne 

by someone, we must devise a more efficient system of apportioning necessary risks, and a more satisfactory system for rewarding those who control or minimize these risks. 

Steps have been taken in recent decades to minimize and redistribute 

some of the risks in the real estate market. Municipalities have largely 

eliminated the possibility that buildings will collapse by adopting and 

enforcing building codes, and they have reduced some of the risks arising 

out of uncontrolled changes in land use by the application of zoning 

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HOUSING NEEDS AND THE HOUSING MARKET 39 

tioned by the Federal Government in its program of insuring mortgages. 

These measures are only partial, but they are a good beginning for a 

more comprehensive and consistent attack on the problems of risk and 

incentive. Until we have attacked these problems of risk and incentive, 

we shall not be able to develop the kind of housing market which is necessary if we are to have the kind of housing we deserve. 

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ECONOMIC ASPECTS OF SOCIAL SECURITY 

by 

ELIOT J. SWAN 

Assistant Director of Research, Federal Reserve Bank of San Francisco 

The goal of social security is the universal maintenance of individual 

and family income at at least a socially acceptable minimum. In modern 

industrial society social security is unquestionably a matter of public 

concern and an accepted aim of public policy. The very forces which by 

raising the productivity of labor have accounted for the high standard of 

living of Western society have at the same time decreased the control of 

the family over its own fortunes. 

In a broad sense, all public programs directed toward maintenance of 

adequate incomes are social security measures. This paper is primarily 

concerned with social insurance, that is, with protection in the form of 

cash payments, when earning power is interrupted or lost, provided as a 

matter of right to those in the plan. Eligibility for benefits usually, but 

not necessarily, includes contributions made by or for members of the 

system and no test of need is required. Although compulsory social insurance has come to be generally accepted as the principal instrument 

through which the problem of income loss can be dealt with, public assistance to those in need is a necessary supplement. The more comprehensive 

a social insurance program becomes, the less public assistance will be 

necessary, but some individuals and families will fall outside of the insurance system and special circumstances will prevent insurance benefits 

from being adequate for others. 

To deal with the situation after the flow of income has been interrupted, 

however, will not achieve social security. A comprehensive program including other public measures related to the problem of adequate income 

is necessary. First, unemployment and disability must be prevented 

through positive action so far as possible. Cash benefits do not protect 

the individual from the destructive effects of continued idleness or sickness nor the economy from the waste represented by idle workers. 

—income security which is all that can be given by social insurance is so inadequate 

a provision for human happiness that to put it forward by itself as a sole or principal 

measure of reconstruction hardly seems worth doing. It should be accompanied by an 

40 

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ECONOMIC ASPECTS OF SOCIAL SECURITY 41 

announced determination to use the powers of the State to whatever extent may prove 

necessary to ensure for all, not indeed absolute continuity of work, but a reasonable 

chance of productive employment.1 

Second, incomes actually being earned are not always adequate to maintain minimum standards. Such devices as minimum wage legislation and 

children's allowances provide an approach to this aspect of the problem.2 

The basic purpose of social insurance is security for the individual and 

his family. In providing partial replacement when wage income is involuntarily interrupted or terminated, an adequate social insurance program 

alters the distribution of income among individuals and among income 

groups. Complete individual equity, in terms of premiums or contributions equated to the degree of risk and the amount of benefit, is inconsistent with adequate protection. The collection and disbursement of 

social insurance funds affects the size of the income flow as well as its 

distribution. A properly financed insurance program will help to maintain 

high levels of employment and income by raising and at least partially 

stabilizing consumption expenditure. 

Any social insurance program, then, must be evaluated in two ways. 

First, what protection does it afford the individual; how completely does 

it express the responsibility of society toward its members? Second, what 

is its effect upon the economy; does its financing promote output and 

employment to the fullest extent? 

In the following pages, existing protection for the individual is briefly 

described and proposals for more adequate coverage presented. This section is followed by a discussion of certain economic and fiscal aspects of 

social insurance. In this area considerable misunderstanding and consequently barriers to expansion are found. In brief, the thesis of this paper 

is that a comprehensive and unified plan of income maintenance through 

social insurance is desirable, and should be financed in large part from 

general revenues. The existence of such a program would itself encourage 

production and employment and, by increasing the national product, 

would lighten the burden upon the active working force of maintaining 

those who from causes beyond their control have become nonproducers, 

either temporarily or permanently. 

1

 Sir William Beveridge, Social Insurance and Allied Services (1942), p. 163. 

* Insurance against the cost of medical care logically falls in this category of social security 

measures, but it is ordinarily considered in conjunction with social insurance. 

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PRESENT AND PROPOSED SOCIAL INSURANCE PROTECTION 

The major threats to income that should be provided against through 

social insurance are the unemployment, disability, old age, and death of 

the earning family members, and the cost of medical care. The loss of 

earnings from old age, permanent disability, and death are sufficiently 

recognizable for all members of the labor force and their dependents to be 

protected against them. Unemployment and temporary disability compensation should be available to all with the possible exception of the selfemployed. For them, the fact of loss may be too difficult to establish. The 

cost of medical care may fall on anyone, whether employed or not, and 

universal coverage would be desirable. 

Because of the wide variation among both occupations and regions in 

wages and living standards, benefits should probably continue within 

limits to be related to previous earnings. The emphasis belongs, however, 

upon the adequacy of minimum benefits, including dependents' allowances. At the same time, benefits should not be so generous as to discourage the search for employment. 

Some distinction should be drawn between unemployment and temporary disability benefits on the one hand and those paid in the remainder 

of the system on the other. Unemployment and temporary disability 

interrupt, rather than destroy, earning power, and benefits could be so 

high, in relation to wages, that they could conflict with the willingness to 

work. In occupations where benefits that would provide for some sort of 

basic minimum would approach or exceed the wages paid to workers, 

there is a strong presumption, however, that correction of the wage level 

should be sought through minimum wage legislation. 

Dependents' allowances also raise the danger of unemployment and 

temporary disability benefits in excess of earnings. In fact, the size of the 

family may itself make it impossible for adequate living standards to be 

maintained, apart from any interruptions in earnings. These factors, together with the extreme importance to the nation that children receive 

adequate care, suggest that a national system of children's allowances 

should also be given consideration.3 

Although social insurance in the United States has advanced substantially during the past decade, it is far from complete. The Social Security 

Act, adopted in 1935, established unemployment and old age insurance * 

for the industrial and commercial labor force and provided for Federal 

9

 Great Britain and Canada now provide children's allowances to all families. 

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ECONOMIC ASPECTS OF SOCIAL SECURITY 43 

financial participation in three types of public assistance administered 

by the States. All of these—old age assistance, aid to dependent children, 

and aid to the blind—are available only to those who can establish need 

on the basis of a means test. Major amendments in 1939 added dependents' and survivors' benefits to the Federal old age insurance plan. Even 

though this significant legislation provides the keystone, protection varies 

among occupations and localities, and there are separate systems at different levels of government. 

Unemployment Compensation. Although the general conditions for unemployment compensation are outlined by Federal legislation, the industrial and commercial labor force is protected under the 51 separate systems of the States and territories. Federal plans cover railroad employees 

and veterans, regardless of occupation. The plan for veterans is temporary, however, in that benefits are available only within a given period 

after discharge from military service. The self-employed, agricultural and 

domestic workers, and seamen are excluded from all these unemployment 

compensation plans, as are employees of governments, nonprofit establishments, and small firms in covered industries in some States.4

 It is estimated that less than three-fifths of the nation's jobs are covered by State 

unemployment compensation plans. 

Benefit provisions are far from uniform. Eligibility for benefits depends 

upon involuntary unemployment within the meaning of the law, which is 

much more restrictive in some States than in others,5 and upon varying 

requirements as to previous earnings. Benefits nominally approximate 

SO to 65 per cent of wages, and in four States they include allowances for 

dependents, but they are subject to minimum and maximum limits. The 

maximum limits, which range from $15 in ten States to from $24 to $28 in 

six States,6 keep weekly benefits of many recipients well below 50 per cent 

of their weekly wages. In 1945, the average weekly benefit paid under 

State programs for total unemployment was $19, and ranged from $11 

to $13 in seven States to from $21 to $23 in four. Under the Federal plan 

provided by the Servicemen's Readjustment Act of 1944, weekly unem4

 The tax provisions of the Federal act apply to employers of eight or more, but many States 

have extended insurance coverage to those in firms employing less than eight persons. 

5

 Involuntary unemployment implies that a worker did not quit without good cause, did 

not lose his job for misconduct, and did not refuse suitable work. These requirements are 

variously interpreted and carry penalties, in the form of postponement or disqualification of 

benefits, of varying severity. 

6

 Including dependents' allowances in three States. 

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44 HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS 

ployment benefits of $20 are paid to veterans, irrespective of their past 

earnings. 

In the State plans, the maximum duration of benefits in any one benefit 

year varies from 14 to 26 weeks, and in 37 States it may be reduced by 

insufficient amounts of previous earnings. In contrast, unemployed veterans may draw benefits for a maximum of 52 consecutive weeks within 

two years of their discharge or release from the service, or of the termination of the war, whichever is the later date, regardless of their previous 

employment experience. 

It is evident that adequate protection against unemployment does not 

exist for many workers. Unemployment compensation should be available 

to all persons in the labor force, with the possible exception of the selfemployed, for whom the fact of unemployment may be too difficult to 

establish. Benefits should not be expected to compensate whdlly for loss 

of income, because of the adverse effect upon the willingness to work, but 

they could be increased before that point is reached. Dependents' allowances should be adopted. Benefits should be of uniform duration; 

if a worker has satisfied the test of attachment to the labor market, by 

having earned sufficient wages in the base period to qualify for benefits, 

the duration of his benefits should not be affected by the size of his past 

earnings. 

Unwarranted variations in eligibility requirements and size of benefits 

should be eliminated by the establishment of national minimum standards—or better by Federalization of the entire system. Dollar benefits 

need not be uniform; regional differences in living costs and living standards are reflected in wage rates so that such differences would continue to 

be reflected in benefits. A national program would also eliminate the discrimination sometimes experienced by workers who have been employed 

in more than one State, although interstate cooperation has already solved 

many problems arising out of this situation. 

Cash benefits do not meet the problem of unavoidable idleness as such, 

and unemployment compensation should attempt to deal only with relatively short-run unemployment. Benefits should not be unlimited in duration, but they could well be extended to at least 26 weeks. Continued 

unemployment beyond that point should be dealt with through public 

employment and occupational retraining programs. At present, a worker 

who exhausts his benefit rights before obtaining other employment has no 

recourse except his own resources or local relief. 

It should be noted that a strong and efficient employment service, to 

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ECONOMIC ASPECTS OF SOCIAL SECURITY 45 

which most job openings are referred, is essential for satisfactory operation of an unemployment compensation system. Willingness to work cannot be tested unless job openings are at hand. Some employers who are 

most disturbed about the adverse effects of unemployment compensation 

upon the desire to work inconsistently fail to utilize the public employment exchanges. 

Old Age and Survivors Insurance. Unlike unemployment compensation, old age and survivors insurance for industrial and commercial 

workers is established on a purely Federal basis by the Social Security Act. 

Eligibility requirements, benefit payments, etc. are uniform in all the 

States. Employment covered is the same as that covered by unemployment compensation, except that employees of small firms in covered 

industries are also included. Some 30 million of the 52 million persons 

employed in an average week in 1944 were in jobs subject to old age insurance, and some 40 million persons are now insured.7

 In addition, some 4 

million railroad workers and Federal employees have their own Federal 

retirement systems and about half of 3 million State and local government 

employees are members of separate retirement systems. Other occupational groups are excluded from public plans and perhaps 8 million aged 

are not eligible for compensation, whether or not they formerly engaged 

in employment now covered. 

Under the Social Security Act, old age benefits and dependents' allowances are paid to those insured upon retirement at age 65. Upon the death 

of an insured worker, benefits are paid to the surviving children under 

18 and mothers, to aged parents if there is no widow or child, and to 

widows when they reach 65. Monthly benefits range from a minimum of 

$10 to a maximum of $85, based upon past earnings, length of employment, and number of dependents. Few families are eligible for maximum 

amounts, however. The average monthly benefit received by a retired 

male worker in 1943 was $25; the average retired worker and his wife 

received $39. 

The principal gaps in old age and survivors insurance are lack of coverage for many persons and inadequate benefits. Protection should be extended to all the gainfully occupied and their dependents. Large numbers 

of persons least able to provide for their old age or for their survivors, 

including agricultural and domestic workers, are outside the system. 

7

 That is, they have had sufficient wages in covered employment for survivors insurance 

to be in force. 

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4 6 HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS 

Many who worked in covered employment during the war will lose their 

insured status after they return to other peacetime occupations. Some 

persons previously insured who are in the armed forces or in Federal civilian employment may lose their insured status. The magnitude of the 

shift from covered employment to other employment or out of the labor 

force and back again is indicated by the fact that 74 million persons have 

some wage credits in covered employment, although only 40 million are 

insured. 

Old age and survivors benefits purport to provide basic protection for 

their recipients.8 If an adequate minimum is actually to be afforded, 

it would seem that a minimum benefit of at least $20 to $30 and a general increase in benefit scales through the lower levels are necessary. 

Present benefit schedules were hardly adequate when they were set up 

in 1939, and price increases in recent years have lessened their adequacy 

considerably. Higher wages have increased benefits only slightly during 

this period; they have had no effect upon payments to those previously 

receiving benefits and little effect upon new claims since benefits are 

related to past average earnings. 

If past earnings within a specified period are a necessary condition for 

benefits, as in the existing plan, those already past working age pose a 

special problem. Complete coverage of the present labor force would 

afford them no protection other than public assistance.9 Even though 

their numbers will ultimately diminish, compensation for all persons 

past working age comparable to that available to insured workers should 

be given serious consideration.10 

Disability and Medical Care Insurance. Social insurance in the United 

States deals with disability and the cost of medical care to a very limited 

extent. All States save one require some insurance protection against 

occupational injuries or disease, but it is estimated that substantially less 

than one-tenth of all disabling illnesses of persons in the labor force fall 

8

 The age requirements attached to the receipt of both old age and survivors benefits 

eliminate the possible danger in unemployment compensation of benefits exceeding wages. 

Here a possible danger is rather that the system could be used to force withdrawal from employment, as a means of reducing unemployment. Old age compensation should be sufficient 

to enable the aged worker to retire if he wishes, but he should not be penalized by having 

future benefits reduced or denied if he wishes to work. 

9

 Those permanently disabled at the time permanent disability insurance is adopted would 

be in a similar position. 

10

 Benefits would obviously have to be paid at flat rates. 

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in this category. Railroad employees have some coverage against permanent disability along with old age insurance under the Railroad Retirement Act, and some protection is afforded Federal employees and 

veterans. Two States have adopted temporary disability insurance for 

those insured against unemployment. Otherwise, no public action has 

been taken except for war veterans. 

In terms of risks, the most significant omission in the existing social 

insurance system is the lack of protection against the loss of income and 

the expense of medical care associated with sickness and disability. All 

members of the labor force face the risk of income loss through disability, 

and the risk of medical expense is universal. The loss of earning power 

because of disability and the inability to obtain sufficient medical care 

are serious causes of dependency. Illnesses are more prevalent and more 

severe the lower the family income. It is estimated that some 7 million 

persons, half of whom would normally be in the labor force, are disabled 

at any one time. Of the total, little more than half have been disabled 

less than six months. 

Compulsory disability insurance is the only means through which loss 

of income from disability can be adequately offset. The permanently 

disabled worker and his dependents are in a position similar to that of a 

family in which the wage earner is incapacitated by age, and their need 

is likely to be greater. Similarly, the temporarily disabled worker is in 

a position analagous to that of the unemployed worker. Permanent 

disability insurance could readily be added to old age and survivors insurance and compensation for temporary disability incorporated into the 

unemployment compensation system. 

Social insurance is well suited also to meet the expenses of medical 

care. The adequacy of medical care for many families is in part a matter 

of the distribution of medical and hospital facilities. Hospitals tend to be 

established and doctors to be located in relation to financial resources 

rather than in relation to need. However, a fundamental cause of inadequate care—and the major cause of the maldistribution of medical resources—is simply individual inability to pay for needed services. 

Families in low-income groups have a greater need for medical care 

but obtain much less than those in higher income brackets. The proportion of unattended illnesses varies directly with family income. To be 

sure, medical services for the poor are considered a public responsibility, 

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4 8 HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS 

vents others who are not eligible from obtaining care that they need but 

cannot afford. 

Voluntary prepayment plans for medical and hospital care have expanded in recent years, as the medical profession has shifted from opposition to support of such schemes, but they provide adequate coverage for 

only a small part of the population. Adequate medical care can best 

be assured through compulsory insurance against its cost. With such a 

plan in conjunction with disability insurance, families would be protected 

from the adverse economic effects of sickness and accident, doctors and 

hospitals would be assured of more secure incomes, and the nation would 

gain from a healthier and more efficient population. 

ECONOMIC AND FISCAL ASPECTS OF SOCIAL INSURANCE 

Social insurance financing is not simply a matter of making benefit 

payments out of a solvent fund built up and maintained by premiums 

collected from those participating, assessed according to the degree of 

risk and the amount of benefit payable if loss occurs. Because this is 

the essence of private insurance financing, and exists to a considerable 

degree in the present unemployment and old age insurance systems, it 

does not follow that social insurance should be financed in this fashion. 

In fact, individual equity in terms of premiums equated as nearly as 

possible to the degree of risk and the amount of benefit, comparable to 

the equity necessary in private insurance, is inconsistent with adequate 

social insurance. That lower income groups cannot afford to pay in full 

for the protection they receive is one of the principal reasons that voluntary social insurance is inadequate. 

More important, it would be an undesirable and short-sighted policy 

not to consider the effects of social insurance financing upon employment 

and spending and not to finance the insurance system so that its operation would contribute to high and stable employment. Social insurance 

expenditures, properly financed, can be a significant part of a fiscal policy 

directed toward full employment. Benefits tend to be promptly and 

wholly spent by their recipients. Largely but not wholly on account of 

unemployment compensation, social insurance benefits in the aggregate vary directly with unemployment. Payment of benefits is a form of 

Government action that does not intrude significantly upon the province 

of private enterprise. Since the longer run problem of our economy appears 

to be to develop and maintain, within the framework of a free society, 

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sufficient demand for goods and services to utilize fully our productive 

capacity, social insurance is an apt governmental weapon. It should not 

be financed in such a way, however, that consumption expenditures will 

be simply shifted among individuals and left unchanged in the aggregate. 

If the ultimate liability of the Government to provide benefits is admitted, separate insurance funds are no longer necessary. Benefits may 

be met in whole or in part out of general revenues. Contributions need 

not be directly related to benefits. The choice of sources of funds over 

and above those provided by contributions becomes a part of the problem 

of general fiscal policy and problems of insurance reserves do not exist. 

If social insurance benefits are to be paid entirely from funds contributed by or for those insured,11

 however, a choice must be made between a pay-as-you-go plan, in which rates are adjusted to meet current 

expenditures, and a reserve plan, under which level rates provide reserves 

to meet the increased future liabilities of an old age and permanent 

disability plan and the potentially fluctuating liabilities of unemployment 

insurance. 

The Contributory Principle. The use of earmarked funds from pay-roll 

taxes and some attempt to relate contributions and benefits were probably necessary to obtain public acceptance at the inception of unemployment and old age insurance in the United States. It was felt that 

separate funds fed from particular taxes would provide greater assurance 

that benefits would be available to claimants, on the one hand, and that 

excessive benefits would be checked, on the other, than if congressional 

appropriations were continually necessary. In addition, the fact that 

only certain groups were included made it difficult to justify the use of 

general revenues. Contributions meet the definite desire on the part of 

those insured to pay for their protection. They also provide a wage 

record against which claims can be checked and benefit amounts 

determined. 

It would probably not be desirable to abandon the contributory principle entirely, but in a comprehensive system, benefits could be met in 

large part from general revenues. The wider the insurance coverage and 

the more general the understanding and acceptance of social insurance 

as a necessary public responsibility that, like public education, conveys 

indirect benefits to all members of the community, the more appropriate 

it becomes to draw upon general revenues. The right of individuals to 

11

 With or without a fixed Government contribution. 

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5 0 HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS 

benefits and the guarantee that future obligations will be met do not rest 

on the fact that claimants have a previous contribution record nor on 

reserves built up from such contributions, but on the harmony of social 

insurance with the economic and social desires of the nation. 

The Reserve Problem. There is a great deal of misunderstanding about 

Government insurance reserves. Regardless of the financial methods 

adopted, the output of the economy at the time social insurance benefits 

are paid must furnish the goods and services consumed by beneficiaries. 

The real burden of maintaining the aged in the future cannot be placed 

upon the present generation by currently accumulating dollar credits. 

The real, as opposed to the dollar, burden cannot be shifted over time.12 

A private insurance company must provide in the present for future 

liabilities by building reserves which are invested in claims against others 

in the economy. Financial solvency is meaningful and necessary. The 

Federal Government, however, cannot practicably create a reserve in 

any form except its own obligations. The claim has been made that, in 

so doing and then spending the proceeds upon ordinary Government 

expenses, contributors' funds are being dissipated, rather than conserved, 

and the reserve is worthless. Although this position is meaningless in so 

far as it suggests insolvency of the insurance system, it illustrates the 

confusion arising from the existence of a large public reserve for which 

there is no alternative except investment in Government securities. 

There is no point in collecting pay-roll taxes and burying the receipts 

in a public vault. This would only necessitate higher taxes or more borrowing from other sources to meet general Treasury expenditures. A 

more efficient procedure is to make the cash receipts of the reserve fund 

available for general budget expenditures or for the redemption of public 

debt, and to credit the fund with Government bonds. But even then 

the fact remains that the existence of a reserve in Government bonds to 

meet future obligations does not alter the problem of meeting those obligations. When it is necessary for the insurance fund, in order to make cash 

outlays, to draw upon its reserve or even upon current income fiom interest, the Government must tax or borrow to obtain the money that is 

transferred to the insurance fund. The same amount could be raised in 

12

 Only if a reduction in consumption expenditures, caused by contributions in excess of 

benefits, should result in increased production of capital goods with resources that would 

otherwise have been used in consumption, might there be a greater future output of consumer 

goods than would have occurred had reserves not been created. 

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the same way and transferred to the insurance fund as a Treasury expenditure if the reserve did not exist.18 

With only particular groups covered, a reserve gives some appearance 

of equity between those covered and those outside. The covered group 

exercises a claim against the remainder of the population when the reserve 

is drawn on, just as it would through a direct Government contribution 

to the fund. The justification for this, when a reserve exists, is the fact 

that the covered group has previously restricted its expenditure by providing more in contributions than it received in benefits. Whether the 

uncovered group has actually benefited from the previous decline in 

expenditures of the covered group or has been adversely affected by the 

deflationary effect is another matter. With comprehensive coverage, even 

this justification disappears. To meet increased liabilities can be a matter 

of choice between increased contributions by participants and general 

Treasury revenues. 

Government Financial Participation and Economic Policy. The necessity of the use of general revenues depends upon the degree of income redistribution necessary to provide adequate benefits and upon the extent 

to which the nation wishes to integrate social insurance financing with 

general fiscal policy. It is often suggested that equal amounts of revenue 

be obtained from employers, employees, and the Treasury.14 A superficial 

appearance of equity seems to be its only basis. The responsibility of the 

13

 Since the excess of contributions over benefits represented by a reserve account is "lent" 

to the Government for general use, it is sometimes argued that this process tends to reduce 

the privately held Government debt and its interest burden. It is said to be easier, therefore, 

for the Government at a later date to raise funds for insurance benefits than it would have 

been had the reserve not been created. Since at a future time a substantial part of the benefits 

will be financed from interest payments on the bonds held in the reserve fund, it will be 

possible later on to continue a relatively low rate of pay-roll taxation even though benefit 

payments have increased. This argument assumes that, in the absence of pay-roll tax revenues 

sufficient to create a reserve, total tax revenues over the period would have been lower. Certainly this does not necessarily follow; other taxes could have been higher. During the war, 

for example, the Victory tax rate and subsequently the normal income tax rate might very 

well have been higher had it not been for pay-roll taxes. In the late thirties, on the other 

hand, it is quite likely that Treasury borrowing from the public would have been utilized in lieu 

of pay-roll tax revenues, but this would have represented a fiscal policy decision to avoid the 

deflationary effects of additional taxation. The especially deflationary effects of pay-roll 

taxation could even have indirectly increased the necessity for Government borrowing during 

that period. At least, it is reasonable to assume that incomes and employment were reduced 

because of the restrictive effect of pay-roll taxes on consumption expenditure. 

14

 This is the approximate ultimate division suggested by the Social Security Board and 

by Senator Wagner in their proposals. It has also been the nominal, but not the actual, division of the cost of unemployment insurance in Great Britain. 

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population as taxpayers rather than as covered workers would better be 

expressed in a fluctuating Treasury contribution based indirectly upon 

the level of employment. 

For example, aggregate contributions might be equated to benefits at 

full employment, allowing for frictional unemployment. Under such employment conditions, the effect on consumption would be more or less 

neutral.15 Contributions would exceed benefits with over-employment 

such as existed during the war and benefits would exceed contributions 

in periods of under-employment. This relationship would be in accord with 

a general fiscal policy which sought to restrict aggregate expenditure 

when inflationary pressures exist and to encourage it when deflationary 

forces threaten. 

The stimulating effect of social insurance upon consumption could 

be increased by establishing contribution rates that would provide less 

than sufficient funds to meet benefits at reasonably full employment. The 

extent to which general revenues should be relied upon at such an employment level depends upon the longer run aspects of many factors: the 

distribution of income, savings habits, investment outlets, other sources 

of Treasury revenues and objects of Treasury expenditures, and the like. 

The important thing is that above a minimum which would piovide 

recognition to the contributory principle, the sources of funds for social 

insurance benefits should be a matter of fiscal policy, not of social insurance. The greater the margin between contributions and benefits, the 

more effective social insurance can be in terms of economic policy. 

Some attention should be given at this point to another proposal for 

increasing the effects of the social insurance program upon the level of 

monetary demand; namely, that of providing rates of contribution 

which would vary inversely with the level of employment.16 This procedure 

might tend to increase consumption in depression and check it in prosperity more effectively than would constant rates, but it has several disadvantages. To vary frequently the rate of employees' contributions 

would obscure the contributory principle still more, and might well 

provoke confusion and uncertainty among both employees and employers. 

The fact that contributions would go down might tend to create unwarranted demands for further reductions, and increases in contributions 

15

 See pp. 54-55 for a brief discussion of the effects of pay-roll taxes on consumption. 

18

 Among others, the British Government proposed this in its White Paper on Employment 

Policy. 

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might be effectively opposed, no matter how definite the previously agreed 

upon schedule of rates might have been. There would be political opposition to increases in employers' taxes as well. There is serious question in 

any case about changing rates of employers' contributions according to 

a criterion which cannot be anticipated very far in advance. Rate changes 

based on unemployment would tend to make business decisions as to 

future events more difficult, and not enough is known about the incidence 

of pay-roll taxes paid by employers to indicate at what levels of employment such taxes should rise or fall. A simple inverse relation between rates 

and employment might be inimical to the progress of business recovery 

in its early stages. On the other hand, a decline in contribution rates when 

unemployment is rising might result only in an increase in profits that, 

because of its source and presumably temporary character, would have 

little or no salutary effect upon business activity. On the whole there is 

much to be said for stability of pay-roll tax rates. 

Even if frequent rate adjustments were not made, the proportion of 

expenditures to be met from other than pay-roll taxes at high employment, once determined, would not necessarily be permanent. It would be 

subject to revision when underlying changes in the factors listed above 

seem to be sufficient to require a reappraisal of general fiscal policy. In 

addition, the changing age distribution of the population over the next 

four decades would increase expenditures, even in a comprehensive system, quite apart from changes in employment. Periodic reconsideration of sources of funds would be necessary on this account alone. 

This approach would retain the contributory principle to some degree, 

but benefits would not be limited by contributions and the collection of 

revenues would be directly related to other Government finances. This 

does not mean that contributors would have no other financial burden 

related to social insurance. Manifestly, Treasury expenditures would 

affect them as taxpayers. The extent to which this burden would differ 

from the added burden of higher pay-roll taxes would depend upon the 

other tax sources utilized. Other public measures dealing with unemployment would be encouraged, as their success would be directly reflected 

in a reduction in the Government contribution to the insurance fund. 

The social insurance system should be designed to promote a generally 

high level of consumption expenditure and to increase such expenditure 

when employment declines. The role of unemployment compensation in 

maintaining consumer expenditure in depression is limited, however, by 

necessary restrictions upon the duration of benefits and by necessary 

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limits upon benefits as a proportion of wages. Fiscal aspects of social insurance should be consistent with general fiscal policy, something that 

has not been true under existing programs. No attempt has been made 

in this paper to deal with the general problem of Government fiscal 

policy,17 however, except by implication. 

FISCAL AND ECONOMIC EFFECTS OF THE EXISTING 

INSURANCE SYSTEM 

Both unemployment and old age insurance are now financed in a 

manner more or less analogous to private insurance. The cost of benefits 

is met by pay-roll taxes paid by and for those in covered occupations. 

Contributions bear some relation to benefits, but no adjustment is made 

in contribution rates paid by those eligible for dependents' allowances or 

by those now in the older age groups, who receive considerably more 

generous old age benefits relative to their contributions than will younger 

contributors. On the whole, beneficiaries in lower income groups are 

treated more generously, in terms of their contributions, than those 

with larger incomes. An attempt has been made to meet the problem of 

fluctuation in costs over time by the creation of reserves, rather than by 

variations in the rates of contribution, although this continues to be a 

disturbing element in the old age insurance plan. 

Effects of Pay-Roll Taxes. Pay-roll taxes on employees are restrictive 

in their effects upon consumption since they are borne by wage earners, 

most of whom have little margin for saving under ordinary conditions. 

The effects of pay-roll taxes paid by employers are less clear, but their 

burden probably also falls on wage earners in considerable part, whether 

it is shifted to them through higher prices or lower wages.18 Consequently 

employers' taxes also restrict consumption over the longer run. In the 

short run at least, changes in employers' contributions probably affect 

profits as much as or more than wages or prices. 

In the aggregate, the payment of insurance benefits out of pay-roll 

taxes tends merely to redistribute, not to increase, consumption expenditures.19

 If benefits equal pay-roll taxes, total consumption may be somewhat increased, however, since benefits are likely to be fully spent, while 

17

 See the various essays in Public Finance and Full Employment, No. 3 in this series of 

pamphlets. 

18

 To the extent that employers' taxes are reflected in higher prices, those outside covered 

employment are also affected. 

19

 The restrictive effects of existing pay-roll taxes on consumption are increased by the fact 

that they are levied only on the first $3,000 of total annual wages. 

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contributions may not be provided entirely out of funds that would 

otherwise have been spent on consumption. This effect is offset to some 

extent by the fact that consumption expenditures made out of benefits 

probably do not wholly represent a net increase in spending. To some 

extent they replace spending by or for beneficiaries out of their savings or 

those of their relatives and out of public or private relief. We may conclude that, if the outflow of funds through benefit payments equals the 

inflow of contributions through pay-roll taxes, aggregate consumption 

expenditures tend to remain unchanged or to increase only slightly; if 

contributions exceed benefits, spending on consumption will be reduced; 

if benefits are larger than contributions, spending will be increased. The 

extent of the increase will depend, however, upon the alternative revenue 

sources that are drawn upon. 

Pay-roll taxes are an accepted and productive source of revenue. Taxes 

on employees give them direct participation in the system, and provide 

useful administrative records. Contributions from employers in the form 

of pay-roll taxes do not appear to have as much justification, apart from 

their revenue producing ability, except in the case of occupational accident 

and disease. Over this risk, the employer has some control, and to tax him 

on the basis of rates adjusted to the degree of risk provides an incentive 

to the employer to eliminate this risk as far as possible.20 Otherwise, there 

is serious question about the desirability of a business tax measured by 

employment. Nevertheless, the tax on employers would be difficult to 

eliminate, as long as the tax on employees is continued, especially if under 

an expanded program employees' taxes are raised above current rates. 

Unemployment Compensation. Pay-roll taxes for unemployment compensation are levied almost entirely on employers.21

 Only four States add 

a tax on employees.22 There is no attempt made to balance current contributions and benefits; balance is supposed to be attained over the period 

of the business cycle. Unemployment is so unpredictable, however, that 

20

 Experience rating in unemployment compensation is discussed on pp. 57-58. 

21

 Employers are subject to a Federal pay-roll tax of 3 per cent, which may be offset up to 

90 per cent by corresponding State taxes. In effect, the proceeds of a 2.7 per cent tax are 

credited to State accounts in the unemployment trust fund and the yield of 0.3 per cent tax 

accrues to the Treasury for expenses of administration of the plan. All but four States have 

taken advantage of Federal permission to reduce tax rates paid by individual employers, however, depending upon their loss experience. The actual average rate of employer taxes is currently about 2 rather than 3 per cent. 

22

 In two of these States, Rhode Island and California, the existence of employee contributions is now related to temporary disability insurance programs. 

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such a balance, if it were attained, would be the result of fortuitous 

circumstances. 

Benefits exceeded current contributions for brief periods in a few States 

in 1938 and 1940 and in a number of States in the latter part of 1945. Total 

collections consistently exceeded total benefits, however, until the last 

quarter of 1945, when benefits were about 125 per cent of collections. 

From the inception of the system through December 1945, less than 30 

per cent of the contributions collected were paid out in benefits. No 

benefits were payable during the first two years of operation; benefit 

scales were more illiberal than at present; and, though many persons 

were unemployed prior to the war and after benefit payments had 

begun, a substantial proportion were outside the system or eligible only 

for brief periods. The effect of the war on unemployment, together with 

these factors, resulted in State unemployment funds that totaled 6.8 

billion dollars at the end of 1945. 

The incidence of unemployment in the near future is likely to differ 

markedly among States and not in accordance with the adequacy of their 

separate reserves. The Social Security Board states, however, that accumulated funds should be "sufficient for any foreseeable unemployment 

in the future, even if all States provide protection as great as that in the 

most liberal States."23 States may also obtain interest-free Federal loans 

out of that portion of pay-roll taxes received by the Federal Treasury 

but not spent for administration of unemployment compensation. 

Since its inception, the operation of the unemployment compensation 

plan has been deflationary. Most of the excess of contributions over 

benefits represents a reduction in consumption expenditure. To be sure, 

these accumulated funds have been exchanged for Government securities 

and the proceeds expended by the Treasury in its ordinary operations. 

But had they not been available, the Treasury would have obtained 

funds elsewhere, in all probability from less deflationary sources. 

Nevertheless the system does have a degree of sensitivity to changes in 

the level of unemployment. Expenditures increase and collections fall as 

unemployment rises and pay rolls shrink. Experience rating provisions 

tend to make rates of contribution vary directly with unemployment, 

however, and consequently lessen the extent to which total collections 

vary inversely with unemployment. If the present system is to make a 

M

 Social Security Board, "Ten Years in Review," Social Security Bulletin, August 1945, 

p. 21. 

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significant contribution to consumer expenditure on the down-swing, 

however, excluded occupations should be covered promptly and benefits 

liberalized and extended.24 

Also, pay-roll taxes should not be expected to balance benefits at some 

presumed average level of employment over the cycle. The two should 

come into balance at reasonably full employment with allowance for 

frictional unemployment, and less deflationary sources of benefit payments should be drawn upon during periods of severe unemployment. 

This would necessitate Federal participation in financing. 

Experience Rating* One type of variation in employers' unemployment 

compensation tax rates is found in their relation to the loss experience of 

the individual employer. Individual employers' rates of contribution 

(or premiums) are directly related, within certain limits, to their losses 

under workmen's compensation and, in most State plans, under unemployment compensation. Reductions in rates for employers whose losses 

are small are supposed to provide incentives for preventive action by the 

employer that will diminish the causes of industrial accidents or unemployment. Experience rating has operated successfully in workmen's 

compensation. Industrial accidents and disease are controllable to a 

considerable degree by safety devices, inspection, education, and the like. 

The major causes of unemployment, however, are not within the control of individual concerns to any significant degree. Some regularization 

of casual or seasonal employment might be possible in a relatively few 

concerns, but even in these instances, other and greater advantages than 

pay-roll tax reductions would probably attend the regularization of 

employment. Although unemployment cannot be appreciably reduced 

by experience rating, its widespread adoption attests to its popularity; 

the difference between the statutory rate of 2.7 per cent and the actual 

national average rate of employer contributions of about 2 per cent 

attests to its effectiveness in reducing tax bills. Most employers could 

qualify for tax reductions under wartime conditions, but the low level 

of unemployment had nothing to do with efforts of individual employers. Ten States have required additional so-called war-risk contributions from employers whose pay rolls have expanded markedly. Such 

employers are not the only ones, however, whose unemployment record 

was improved by the war. In addition, experience rating schemes do 

u

 To broaden coverage after widespread unemployment appears could even have restrictive 

effects, since those already unemployed would receive no benefits, and a net inflow of funds 

might result from the contributions of those still employed in the newly included occupations. 

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not differentiate among industries. An employer in an unstable industry 

who does his utmost to regularize employment within his plant may not 

obtain as great a rate reduction as one in a more stable industry who takes 

no steps whatever. 

A serious objection to experience rating is the employer pressure it 

develops to obtain lower rates, not by lessening actual unemployment but 

by reducing the benefits charged against particular employer accounts. 

It is sometimes possible to spread work excessively to avoid layoffs and 

to lay off workers in relation to their eligibility for benefits. Legislative 

restrictions on qualification for benefits have been obtained, and increasingly severe disqualification for benefits appears to be directly associated 

with the spread of experience rating. Experience rating in the State programs has also led to competition among States in lowering employers' 

taxes, which has probably intensified benefit restrictions. The doctrine 

emerging in many States that unemployed workers should be denied 

benefits when their unemployment is not attributable to the specific 

action of their employers is a more limited concept than the basic one 

that workers should be denied benefits only when they are at fault. The 

employer has a similar financial incentive to oppose liberalization of 

benefits. 

Finally, the effects upon aggregate contributions are exactly contrary to 

good fiscal policy. Rates tend to fall when employment is high and to 

rise when employment declines. Whether these short-run changes are 

reflected in corresponding changes in prices or in profits, they tend to 

discourage outlays when employment is low and to encourage them when 

employment is high. These considerations point to the conclusion that 

experience rating should be abolished in unemployment compensation 

taxes. The reduction of risk associated with the financial incentive is so 

slight that it is outweighed by the unfavorable developments associated 

with such provisions. 

Old Age and Survivors Insurance. Pay-roll taxes for old age and survivors insurance are collected from both employer and employee in 

covered industries. Contributions tend to fluctuate with employment, 

since they are based upon wage payments, and benefits are affected to the 

extent that retirement is postponed when job opportunities are prevalent. 

Contributions have exceeded benefits by a wide margin, and the reserve 

fund now totals over 7 billion dollars. The reserve is invested in 

Government obligations; net receipts are borrowed by the Treasury and 

used for general expenditures, just as are net unemployment compensation 

tax receipts. Like unemployment compensation, old age insurance has 

been deflationary to date. Unlike unemployment compensation, the 

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growth in the fund may be expected to continue, although at a diminishing rate, well into the future under rates now in effect. 

Old age insurance involves definite and growing future liabilities. For 

some time to come, an increasing proportion of those in covered employment will attain insured status. The average length of service of claimants 

will increase. The proportion of the population in the older age brackets 

is steadily rising. These factors will increase total benefit payments for 

half a century, without any change in wage levels or benefit provisions. 

The extent to which this increasing future liability can and should be 

provided for currently has been the subject of much debate and confusion, 

and is directly related to the effects of the system upon levels of expenditure and employment. Proposals have ranged from pay-as-you-go plans, 

in which current revenues would be related to current benefits and rates 

of contribution would steadily increase, to level premium rates, which 

would result in the accumulation of a full actuarial reserve. 

The plan originally adopted called for rapidly rising rates of contribution in the early years up to a level rate and the creation of a large reserve. 

It was hoped that no contribution from general revenues would be necessary. Opposition to the proposed reserve accumulation and to increases 

in pay-roll taxes soon developed. Adherents of deficit financing in depression pointed to the deflationary effects of contributions substantially in 

excess of benefits. Business interests objected to the increase in pay-roll 

taxes as such. This opposition, together with pressure for more liberal 

benefits, brought a revision of the system in 1939. Benefits for those near 

retirement age and for those with lower incomes were liberalized, and dependents' and survivors' payments were added. Scheduled increases in 

contribution rates were suspended. As a result of these changes, much 

smaller reserves were expected to accrue, and revenues from other sources 

will be necessary to supplement pay-roll taxes, assuming that present 

rates of contributions and benefits are unchanged. It has been estimated 

that, for the present system to be self-supporting, pay-roll taxes would 

have to be from 4 to 7 per cent. The current rate for employer and employee is 1 per cent each, with the rate scheduled to rise by 1949 to 3 per 

cent each.24a 

Rate increases were suspended until 1943 in 1939 and have been suspended annually since that time. Many who opposed rate increases before 

the war because of their deflationary effects have favored increases in 

S4a

 A bill introduced recently by the Ways and Means Committee but not as yet considered 

by the House proposes to increase the rate from 1 to 2 J per cent as of Jan. 1, 1948, and to 

continue that rate until Jan. 1,1952, when it would be raised to 3 per cent. 

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recent years for the same reason, but opposition, largely from employers, 

has prevailed. Also, there is some indication that labor unions may be 

turning toward the position that general budget revenues rather than 

pay-roll taxes should be the main reliance for financing. 

It would seem that, within the framework of the existing system, a 

pay-as-you-go plan with a small contingency reserve to take care of 

short-run fluctuations in receipts and benefits should be used. This would 

mean continuing the current rates of contribution until expenditures 

equal receipts. From that point on, a Government contribution from 

general revenues would probably be preferable to increases in pay-roll 

taxes. 

THE COST OF SOCIAL SECURITY 

No detailed estimates of the dollar outlays involved in a comprehensive 

social insurance plan have been attempted in this paper. Very rough indications of possible dollar amounts may be given, however. It has been 

estimated that a quite comprehensive system (the Wagner-MurrayDingell Bill of 1943) could, with high employment, be financed in the 

immediate future with pay-roll taxes of 5 to 7 per cent.25 This would 

amount to perhaps 8 billion dollars. Those already past retirement age 

would not have insurance coverage but would have to rely, as now, on 

old age assistance by the States. Over the next four or five decades, as an 

increasing proportion of the aged became eligible and as their numbers 

increased, costs would rise. The cost of a still more comprehensive plan 

which would include all of the present aged, as measured by an applicacation of the Beveridge plan to the United States, has been estimated at 

13 billion dollars in 1945 and 16 billion in 1965.26 

Eight billion dollars is less than 5 per cent of total income payments at 

full employment, and 13 billion is about 8 per cent. Considered in relative 

terms, the cost does not loom quite so large as in dollars. But neither 

the dollar nor the percentage figure accurately describes the real cost of 

social insurance and related measures. The nature of social insurance 

expenditures and the effect of the system on the economy must be considered. 

25

 S. J. Mushkin and Anne de Scitovsky, "A Formula for Social Insurance Financing/ 

American Economic Review, September 1945, pp. 650-51. 

28

 L. R. Klein, "The Cost of a 'Beveridge Plan' in the United States," Quarterly Journal of 

Economics, May 1944, p. 423. These estimates, however, assume something less than full 

employment. 

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Almost all social security outlays are transfer payments; that is, they 

do not use up labor or other productive resources as do expenditures for 

goods and services. To build a dam involves a real expenditure in terms of 

labor and cement; less labor and cement is available for other uses in the 

economy. A similar money expenditure for old age benefits does not 

directly use up any resources; it is a transfer of resources from the working 

population to non-producers, but total resources of the economy are not 

directly affected. In these terms no real cost to the community is involved, 

but only a change in distribution. 

The real cost of social security to the nation must be sought in its 

indirect effects upon resources and output. Social security may affect the 

level of production in two ways: (1) It may alter the willingness or ability 

of people to work (because of the tax liability incurred or the receipt of 

benefits), and (2) it may affect the level of total expenditures on consumption or investment in the economy. 

Transfer payments are not accomplished without friction; taxes are 

not painless. If too high, taxes may diminish incentives to enterprise and 

effort by the working population and consequently lessen total available 

resources. The burden upon producers of additional taxes for social security purposes is lightened, however, by the reduction in direct demands 

upon them for dependents' support and for contributions to private and 

public relief. Some goods and services must be made available to nonproducers, in whatever manner. 

The effect of social security benefits upon recipients whose earning 

power is only temporarily interrupted or has not yet come into existence 

is also important. Too liberal benefits may diminish incentive and effort 

by weakening the willingness to work. Adequate benefits, on the other 

hand, will increase the present and future labor supply by maintaining 

incentive and protecting the health of those of working age and their 

children. Poverty may on occasion mother invention, but it more often 

breeds illness and dependency. 

Unemployment is the great barrier to individual security, and it brings 

with it a smaller national output and an increased need for social security 

expenditures. An effective antidote for most—but not all—unemployment 

is increased outlays for goods and services. The transfer of funds to nonproducers, whose consumption needs are great, will increase aggregate 

consumption expenditures, if funds are not wholly obtained from those 

who would otherwise have spent them—and they need not be. There may 

be some upward shift in consumption and a reduction in savings on the 

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part of the working population as well, by virtue of the insurance protection afforded them. Some believe that insurance against the cost of medical care is especially likely to have this effect. With a small margin for 

saving, old age may seem far away and other demands much more 

immediate, unemployment and permanent disability may appear to be 

hazards that confront the other fellow, but illness and medical expenses 

are an ever present threat to every individual. 

Increased demand for consumption goods and services has a favorable 

effect upon investment expenditure, as does the increased social stability 

resulting from adequate income protection. Inadequate living standards 

and insecurity of earning power hardly create an atmosphere conducive to 

a stable and prosperous economy. Against these factors must be set the 

possible adverse effects upon investment decisions of the taxes and public 

borrowing necessary to make social security payments. On balance, it 

seems reasonable to conclude that adequate and properly financed social 

security can help to increase aggregate expenditure and, under most conditions, by so doing to increase employment and real output. 

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PUBLIC WORKS AND SERVICES IN THE 

POSTWAR ECONOMY 

by 

WALTER F. STETTNER 

Division of Research and Statistics, Board of Governors 

With the end of the war, full employment and production with rising 

standards of living has become our foremost economic goal. It should be 

achieved within the framework of a competitive private enterprise system, 

but this requires that public policy assume its share of responsibility. The 

development of a broad public works and service program will be an important factor in this task. This paper deals with the proper scope of public 

works and services in the postwar period and their contribution in attaining economic objectives. 

THE PLACE OF PUBLIC WORKS AND SERVICES IN THE ECONOMY 

The economic importance of public works and services is twofold. They 

satisfy certain needs of the community which cannot be met as well in any 

other way and they may also be used at times to ameliorate fluctuations 

in the volume of employment. Until the thirties, the first of these aspects 

dominated public works planning.1 During the depression the employment 

and income-creating aspects of public expenditures came to receive more 

prominent, if not always favorable, attention. Now, in the postwar economy, it will be necessary to set both the need and the employment aspects 

of public works in proper perspective if effective and beneficial planning is 

to be carried out. 

Public Works and Services—a Reflection of Changing Needs. The conservation and development of our human and natural resources for the 

benefit of the community as a whole is an accepted goal of economic and 

social policy and establishes the framework and the limits within which a 

program of public works and services has to be developed. 

At any particular time the content of a public works and service program depends on the economic and cultural progress of a nation. At an 

early stage of economic development when capital is scarce, only the most 

urgent economic needs can be satisfied. These are primarily the ones felt 

1

 Both in this country and in Europe the possibility of using public works as a stabilizing 

factor in the economy had been recognized by the early part of this century, but the lack of 

properly planned public works in sufficient amounts made it impossible to carry out this 

principle. 

63 

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by the people as individuals and provided for by private enterprise. With 

an increase of wealth, the desire to satisfy community needs increases, and 

the allocation of a growing portion of the country's resources to community purposes becomes possible. 

The steady rise in the general standard of living, for example, has been 

accompanied by a growing awareness of social responsibility for the assurance of minimum living standards. The need for expanded community 

facilities and services, such as health and education, is widely accepted. 

Sanitary housing and other needs which formerly had been thought to 

concern the individual only are becoming vested with public interest. 

A rising national income, however, is no assurance that needed public 

projects will be undertaken. In this respect the relationship between the 

level of national income and the satisfaction of public needs differs from 

the relationship between individual incomes and the satisfaction of 

individual needs. Despite prosperous business conditions during the 

twenties, the nation emerged with serious deficiencies of such basic 

requirements as housing, schools, and medical facilities. In appraising 

economic well-being, it is not the position of the most fortunate members 

of the community which is decisive, but the kind of life which our economy 

affords to those who are least able to share in its wealth. Thus, the general 

level of health, education, and living conditions should weigh heavily in 

the final appraisal. 

Other factors leading to an increase in public activity relate to the growing complexity of the economy. Heavy concentration of population in 

urban centers has created a host of new needs for public works and services. Technological changes such as the growing importance of electric 

power have created new responsibilities for resource development. Intensive exploitation of our best agricultural and forest lands has created 

a need for large-scale irrigation and flood-control projects. The increase in 

ability to pay for public works, therefore, has been accompanied by a 

closely related, though not always equivalent, growth in the need for 

them. 

The term public works has been traditionally applied to public construction projects only. However, public construction projects frequently 

are only a part of broader public functions. To carry on education and 

public health functions, schools and hospitals are needed, but so are the 

services of teachers and doctors. Public services must thus be considered 

jointly with public works. A discussion of public works, furthermore, cannot be limited to public construction projects of the more traditional type, 

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PUBLIC WORKS AND SERVICES 65 

such as highways and postoffice buildings, but must also include broad 

improvement projects, such as urban redevelopment or the development 

of river valleys. Actually, these are not new types of public activity, but 

the modern counterpart of Federal participation in canal and highway 

construction dating back to the early part of the last century. Individual 

projects, moreover, must be considered as parts of a comprehensive program and planned on a broad basis with the cooperation of public and 

private agencies and public bodies at the various government levels. 

Notwithstanding the gradual expansion of public works and services, 

modern civilization has been characterized by a lag in the satisfaction of 

community needs.2 While the general need for increased public activity is 

recognized by large parts of the community, different groups disagree on 

the relative urgency of particular projects. The projects finally undertaken 

usually reflect compromise on many issues, and thus often fall short of the 

community need. 

Public inertia, lack of information, disagreement on financial issues, and 

legal or administrative obstacles also cause delay. These conditions account in part for the fact that public works and services undertaken in the 

past are not necessarily indicative of the extent of past needs or of what 

people at large would consider a desirable program. Extensive investigation of community needs and problems at various government levels will 

prove helpful in providing the necessary background for informed community discussion. 

Public Activity and Private Enterprise. An objection frequently made to 

public works and services is that they represent a less efficient use of resources than would be achieved in alternative private uses. One reason for 

this may be the difficulty of obtaining full agreement on the desirable 

scope of a public program. The disparity of interests represented and the 

diversity of needs to be served in any community often lead to a compromise that is completely satisfactory to no one. Private action often leads 

to similar results, as the failure of many a business venture attests; but 

since the desires of the community are seldom consulted in advance the 

disappointment is less vocal and less evident. 

There is also a difficulty in comparing the relative returns from public 

and private enterprise. Business calculations, for instance, are concerned 

with demand in money terms only. They cannot deal with needs which 

* Needless to say, the backlog of public works grew larger during the war when all public 

construction not immediately connected with the war effort was postponed for the duration. 

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may be supported by inadequate purchasing power but which are nevertheless economically and socially important. Moreover, they do not take 

account of many costs which are borne by the community as a whole, but 

do not show up as business expenses. Balance sheet profitability, therefore, 

does not always indicate whether the benefits of a private undertaking 

outweigh its cost to the community. The maintenance of urban slums, for 

instance, may be profitable to the landlord while most costly to society. 

The contention that public works and service outlays should be limited 

because they represent a less efficient use of resources is thus not a valid 

general principle. Alternative public and private uses of resources must be 

considered on their specific merits. 

No clear-cut line of division can be drawn between exclusive spheres of 

public and private activity. Both are closely related and dependent upon 

each other. The important fact, historically, has been the growth of both 

private and public functions, which supplement each other in meeting new 

needs and providing more adequately for existing needs. Indeed, new 

public works are often a necessary condition for private expansion. The 

development of the automobile industry, for example, went hand in hand 

with the construction of a hard-surfaced highway system, and the provision of public airports may be expected to parallel the growth of the aircraft industry. 

An expanded public works and service program to meet existing needs 

does not mean infringement upon private economic activity. On the 

contrary, it means that private enterprise is certain to benefit. It will 

benefit, for instance, from the increase in labor productivity resulting 

from adequate public health and hospital care, from the preservation of 

resources through flood-control measures, and from the supply of cheaper 

power through the development of river valleys. 

Public initiative, moreover, often stimulates business enterprise by 

creating entirely new opportunities for private investment. Regional development programs, for example, make available for private exploitation 

land and power resources that formerly were undeveloped or inaccessible; 

roads, sewers, water works, schools are necessary to bring urban fringe 

areas within the orbit of expanding private business activity; and urban 

redevelopment revitalizes dead areas by removing obsolete structures 

which block new enterprise on potentially valuable land. Public works like 

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facturer, retailer, and builder. More than is generally realized, private 

business follows the public dollar. 

Compared with the large area of mutual support, the points of conflict 

between public and private activity are few. They are based largely upon 

misapprehensions. An expanded public works and service program, for 

instance, need not mean "more government in business." Most public 

works and development projects, though financed by the Government, are 

actually planned and carried out by private engineers and contractors. 

Similarly, the goods and services provided by public programs are often 

of a kind for which there are no private suppliers. Even in those areas 

where public programs furnish goods similar to those traded in private 

markets—as in the field of housing—the public program will aim at sectors of the market, such as low-cost dwellings, which are unprofitable to 

private enterprise. 

Some public works and services may, to be sure, be designed to compete 

with private enterprise. This may be the case where publicly owned institutions are established as competitive yardsticks to combat monopolistic 

practices and assure more effective services to the consumer. In such 

instances, they must be run according to the principles of private profitability and their cost accounting must provide a fair standard of competition. The problem of public enterprise or ownership is thus a separate 

issue, without direct relation to an expanded public works and service 

program. 

Public Works and Employment. Public works and service programs 

contribute to employment and national income in several ways. Expenditures for goods and services in connection with the execution of the program, first of all, result in a direct addition to demand. If highways are 

constructed, jobs for highway workers are created and the products of the 

construction industry have a new market. The additional income paid out 

will raise the total income received by the community. Accordingly, the 

level of private expenditures will tend to rise and this in turn will result 

in increased demand, output, and employment. An over-all increase in income, however, will come about only if the projects are financed in a way 

which does not involve a corresponding reduction in the level of expenditures on the part of those who supply the funds. The way in which the 

programs are financed is, therefore, of vital importance for their employment effects. 

There is a further and perhaps more important way in which public 

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works and services may affect the level of employment and output. A 

broad program of public works and services will, in the course of years, 

develop the nation's natural and human resources, add to its productive 

capacity, and create new opportunities for business enterprise. Whereas 

the income and employment effects mentioned in the preceding paragraph 

will continue only while the program is maintained, the latter type of contribution will be of a permanent nature. Once markets for new industries 

are developed, these industries will continue to operate and provide employment. Once the working efficiency of the population is raised, a permanently higher level of output can be expected. There is nothing transitory about these factors; they are designed to give a permanent lift to the 

economy. 

Public Works and Cyclical Fluctuations. Neither of the two aspects of 

public works and services—satisfaction of community needs and creation 

of employment—provides by itself a sufficient guide to planning. Extensive public works and service programs are needed aside from their effect 

on employment. But program timing must allow for fluctuations in the 

general level of income and employment. With public works and services 

composing a substantial part of Federal and non-Federal government 

budgets, their role in a policy of cyclical stabilization cannot be overlooked. 

Clearly, expenditures on public works and services should not be reduced when private investment falls and raised when private investment 

increases. A policy of this kind accentuates cyclical fluctuations and is 

altogether unsound. As a minimum requirement, public works and service 

programs should be maintained at a stable level over the cycle. The resulting stability in an important segment of total economic activity will place 

a floor under national income in times of depression. At the same time continuity in the development of an effective public works and service program will be possible. 

Recently, however, this argument has been expanded into a rigid principle of counter-cyclical timing. According to this principle, public works 

and service expenditures should be increased when private investment 

falls off and decreased when private investment rises. The difficulty is that 

the rigid application of such a principle might involve a conflict between 

the need and the employment aspects of public programs. If the level of 

income and employment in the post-transition period should remain high, 

for instance, public works and services would not be a necessary part of 

employment policy. Yet a substantial volume of such expenditures will 

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still be required to meet continuing needs even though employment is at a 

high level. If the program were postponed until some future depression 

occurred, the development of essential community functions would be 

delayed. 

It is true, of course, that during a period of depression the community 

is in a better position to afford extensive works and service programs than 

in times of prosperity when full employment of resources is assured with 

or without such programs. At such times, therefore, programs can well be 

expanded to include useful public works and services which could not be 

afforded during periods of full employment because of competitive 

demands upon our resources. 

In either case it is well to remember that the level of public works and 

service programs is only one of the instruments of fiscal policy. If a high 

level of public works is necessary during a prosperity period, possible 

inflationary effects may be mitigated by a proper financing policy. Similarly, the problem of a depression cannot be solved by public works alone; 

full employment must also be approached through other channels such as 

tax reductions. 

Some special considerations are relevant during the immediate period 

of reconversion from a war to a peacetime economy. The competition of 

public works and services for limited resources is likely to be small at this 

time since an extensive program cannot be started on short notice and 

plans and preparations at the present time are largely nonexistent or in a 

preliminary stage. A large number of public projects, furthermore, make 

only an insignificant demand upon the resources needed for private construction. To the extent, however, that public projects during this period 

would compete with urgent demands, such as for housing, their postponement is obviously justified.3 

If after a few years unemployment should again assume considerable 

proportions and be of a less transitory character, the execution of public 

works and service programs could be speeded up. The current backlog of 

needed public works is so enormous that there is a considerable margin 

between the rate at which projects can be initiated and the rate at which 

8

 On Feb. 12,1946 the Federal Works Administrator reported that the Interdepartmental 

Committee on Construction had agreed to defer those types of Federal construction which 

would compete for men and materials with the demands of the housing program for veterans. 

However, the Committee also recommended that the construction of highway projects, 

reclamation projects, river and harbor improvements, and flood-control projects should go 

forward. The Committee, furthermore, pointed out that the construction of certain community facilities such as streets, sewers, and water works was essential to the construction of 

housing. 

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they are needed. So long as this margin exists and projects are planned 

sufficiently in advance, their execution may be accelerated when conditions require, without reaching into projects of dubious social value or 

make-work character. 

Once the most urgent needs for public works and services are met, the 

possibility of postponing certain parts of the program during business 

prosperity is likely to become greater. 

Paying for Public Works and Services. In any one year the financing of 

public works and services will have to be planned in accordance with 

general fiscal policy considerations which apply equally to the other items 

of the budget. In this respect the financing of public works and services 

does not differ from other budget expenditures and depends altogether 

upon the requirements of the economic situation.4 

To the extent that it is compatible with general budget considerations, 

however, the character of the public works and service expenditures itself 

may determine whether preference should be given to taxation or borrowing. Where recurrent expenditures on public services are involved, 

taxation would appear the more appropriate way of financing. In the 

case of larger capital outlays on construction and public improvement 

programs, on the other hand, preference may be given to borrowing, and 

the annual interest and amortization payments could be distributed over 

the period of the services rendered by these structures. Irrespective of 

general economic conditions this method would hold particularly for small 

government units whose financial resources are limited. During a 

budget period in which their expenditures reach a temporarily high level, 

due for instance to the construction of a schoolhouse in a small community, reliance on outside sources will be necessary. By repaying the 

debt in gradual instalments the cost to the local community may effectively be spread over time. 

As distinct from matters of financing technique, a second issue dealing 

with the broad economic cost involved has to do with the question 

whether the community can afford an expanded public works and service 

program. Public works and service programs involve an economic cost 

because the resources thus applied cannot also be used for the satisfaction 

of other needs. By the same token, no direct cost to the community is 

4

 For further discussion of this point see Richard A. Musgrave, "Fiscal Policy, Stability, 

and Full Employment," in Public Finance and Full Employment, Pamphlet No. 3 of this 

series. 

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involved where the resources used would otherwise have been unemployed.5

 The public works programs of the thirties largely fall into this 

group. 

Where a high level of employment is maintained independently of the 

public programs, the question is one of choosing between the satisfaction 

of alternative needs. To repeat, there is no a priori reason for assuming 

that one or another use of resources should be more or less desirable, 

merely on the grounds that it is aimed at the satisfaction of public or private wants. If the people feel that the construction of a public hospital is 

to be preferred to an expansion of private plant, additional public expenditures "can be afforded;" if the plant is preferred, they cannot. As will be 

shown in the subsequent discussion, the United States not only can 

"afford" an expanded public works and service program, but is urgently in 

need of it. 

This presentation of the issue, however, tends to overstate the cost impact of a public program on the economy. It makes no allowance for the 

fact that the public works and improvement programs themselves will 

contribute to a permanent increase in the economy's output and hence in 

the level of national income. Outlays for public services furthermore will 

be reflected in greater health and efficiency of the population, and increase 

its ability to produce and to earn larger incomes. Thus the competition for 

resources even over a short period of time will be reduced. An increase in 

the public debt will involve no additional burden if it results in a corresponding expansion of the national income. The charges can then be financed from the increased yield of the existing taxes. Debt financing of 

public works and service programs therefore is sounder in the long run 

than debt financing of current outlays which induce no permanent rise in 

income. 

In many cases the original money cost of a public works and service program results in corresponding savings to the community, without increasing total outlays. Highway construction expenditures, for instance, reduce 

transportation costs to individuals and business. Flood control projects 

reduce the annual losses of life and property. Improved health of workers 

lowers labor costs at any given level of wage rates. 

Finally, public works and service programs have direct repercussions 

on the public budget itself. Soil irrigation programs may greatly increase 

6

 This, of course, provides no excuse for inefficient program planning. 

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agriculture's productivity in certain regions and reduce the need for subsidies. A vigorous program of slum clearance will raise budget expenditures 

temporarily, but as a result other cost items, such as fire and police protection, health and hospital care, may be greatly reduced in the longer run. 

The merits of public works and service programs and the magnitude of 

the projects which the community can afford, therefore, must be appraised 

not on the narrow basis of direct cash outlays or profitability, but in the 

broader framework of economic welfare and development. In cases where 

an immediate increase in national income and tax revenue cannot be expected, longer range programs may still be eminently desirable in the 

interest of economic and social development. Only the Government is in a 

position to take account of these longer range needs and does not have to 

be limited by the prospects of immediate monetary return. However, 

until the full results of the program become effective, existing taxation 

may have to be increased. The question therefore arises how this affects 

the income of the individual. 

The increased tax payments of the individual will not necessarily affect 

his real income. If in return for additional taxes he receives from the Government goods and services which were not otherwise available, his real 

income will be roughly unchanged. If he is in a lower income group which 

is exempted from the additional tax payments, any benefits he enjoys from 

the public outlays will increase his real income. If he is in a higher income 

group where he pays more in additional taxes than he receives in direct 

benefits from the public expenditures, his real income will decrease; nevertheless, even in thiis case, he is likely to benefit from the increase in social 

stability and opportunity for private investment brought about by the 

public projects. 

A more specific question of financing technique arises with regard to 

self-liquidating projects, that is, projects financed not out of general revenue but from fees paid by the users of the services. While fee finance is useful in some cases, it is clearly no criterion for the desirability of specific 

public works projects. The contribution which public works and services 

may render to economic welfare and development, as has been pointed out, 

cannot be judged on these grounds. For a large number of highly useful 

improvement projects, specific allocation of benefits is quite impossible 

and fee finance therefore not feasible. Even where financing on a selfliquidating basis is technically possible, its application may frequently be 

undesirable because it would interfere with the purpose of the project. 

Outlays for child welfare, for instance, might conceivably be financed on a 

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fee basis, but this would undermine their objective which is in part to provide free services to people not in a position to pay on a cost basis. In other 

cases some fee financing may be called for, but it may be undesirable to 

defray the entire cost in this manner. 

The case for fee finance, on the whole, is stronger for State and local 

governments than it is at the Federal level. State and local governments 

are more limited in their taxing and borrowing capacity, and often can 

finance needed services only through the issue of bonds to which the project receipts are pledged as collateral. Parking lots or swimming pools are 

examples. The possibility of paying for such projects without having to 

increase tax loads furthermore gives an incentive to States and localities 

to provide the needed services. 

AN INVENTORY OF NEEDS 

The importance of a comprehensive program of public works and services to the economy and its role in achieving high levels of employment and 

rising standards of living will be brought out more fully by surveying 

briefly the more important areas where public action is urgently needed. 

The estimates given are rough approximations only and do not purport to 

be all-inclusive estimates of the total cost of a complete program. The purpose is to convey an idea of the order of magnitude of the need in important areas. All cost estimates are at 1940 prices. As is indicated in the table 

on page 84, they would be appreciably higher at 1945 prices. 

Transportation. The urban and rural highway transportation system 

was greatly improved during the two decades before the war, but it is still 

far behind the requirements of modern traffic. Since all road work not 

directly connected with the defense and war effort has been suspended for 

several years, the war has added a heavy backlog of repair and maintenance work to prewar deficiencies. 

In the rural sections, deficiencies consist primarily of too narrow roads, 

excessive curvature and grade, poor surfacing, and too many crossings at 

grade level. These shortcomings are reflected in high operating costs and 

wear and tear on vehicles, delays in transportation, and accidents resulting 

in a heavy annual toll of lives and property. A considerable part of the 

rural road mileage, including farm-to-market routes, needs to be improved 

for year-round service. A program to provide a satisfactory system of 

rural roads would improve the economic condition of many rural areas 

and provide farm families with better access to schools, hospitals, and 

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medical care. As has been indicated before, these social and economic gains 

must be considered in appraising the total cost of road improvement. More 

tangible and direct savings would also result. There would be a saving of 

about 2.5 billion dollars annually in operating costs, which are more than 

twice as high on earth roads as they are on paved roads. 

In many respects the urban transportation system is in worse condition 

than the rural, for several reasons. Urban rights-of-way are often costly 

and difficult to obtain, and improvements are relatively more expensive on 

urban streets than on country roads. More extensive and coordinated 

planning is required for urban than for rural areas. Furthermore, until 

recently, the Federal-aid program has favored rural highways and roads. 

The chief urban transportation problem is traffic congestion. In many 

big cities the time needed for traveling in certain sections has actually 

increased since the horse and buggy era. The transportation system has 

not kept pace with the development of our cities and the inclusion of suburban residential areas in the metropolitan system. One of the main problems is to facilitate the traffic flow between the central business district 

and the outlying areas during the daily peaks. 

In improving urban transportation, account has to be taken of the fact 

that the heaviest traffic is to and from the center of cities. Express highways with limited access provide the best answer to this problem. They 

relieve city streets from through traffic and preserve the residential character of many neighborhoods. Separation of transit routes for public and 

private conveyances also adds to the speed and efficiency of the transportation system. Radial thoroughfares and circumferential highways feed 

traffic to express highways and distribute it between the residential and 

outlying areas. Used in conjunction with by-pass routes, they enable 

through traffic to avoid city streets. Several studies of the traffic situation 

and the needs for improvement were made during the war, both by private 

organizations and government agencies. The estimates presented here are 

based mainly on these studies. 

The cost of merely correcting the accumulated deficiencies of our rural 

and urban transportation system has been estimated at between 25-30 

billion dollars. Somewhat more than half of this amount would be spent 

for the improvement of the main State highway systems and other rural 

roads. Approximately 1.2 million miles of the latter would have to be improved for year-round traffic. Somewhat less than half of the 3.3 million 

miles of highways (including city and town streets) are still unsurfaced, 

and most of them should be surfaced over a reasonable period of time. 

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In addition to these outlays the National Interregional Highway Committee, appointed by President Roosevelt in 1941, recommended in 1944 

the establishment of a limited system of approximately 34,000 miles of 

greatly improved interregional highways connecting the principal geographic regions of the country. The cost of this improvement (probably 

between 7 and 10 billion dollars) would be divided approximately equally 

between the urban and the rural sections of the system. In the FederalAid Highway Act of 1944 legal endorsement is given to this recommendation, and a national system of interstate highways is included in the 

Federal-aid highway system. 

On an annual basis the average outlay for construction, replacement, 

and maintenance of city streets and thoroughfares and of rural highways 

and roads over the next 20 years is here estimated at 3 billion dollars. Expenditures in 1941 for the same purpose amounted to about 1.7 billion 

dollars. The American Road Builders' Association has recommended new 

highway construction in the amount of 3 billion dollars a year. This 

amount includes about 1 billion dollars each for State highway systems 

and metropolitan area highways, and about half a billion each for city 

streets and county and local roads. 

Improvement of highways and streets is only part of the urban transportation problem. Better parking facilities for private vehicles and a consolidated terminal for different types of public transportation are urgently 

needed in most cities. The cost of both passenger and freight transportation is greatly increased by the time and effort consumed in movement 

between terminals. This in turn adds considerably to traffic congestion on 

city streets. Discharge of passengers and freight at a central terminal 

having facilities for efficient transfer from one line to another would be a 

major improvement in urban transportation systems. 

Air routes and terminals are an important and expanding part of modern transportation. If air lines are to give maximum service to the public, 

their terminals must be located within easy access to supplementary rail, 

water, and highway transportation. Otherwise much of the time saved in 

rapid transit over long distances will be dissipated in making local connections. 

Urban Redevelopment. Blighted areas and slums are the result of many 

factors, including the haphazard way in which our cities have grown. 

Other factors have been the rapid economic changes of recent decades, the 

great movement of population to industrial centers, and the consequent 

high density of population in many residential areas. Added to this is the 

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difficulty of devising and enforcing police and zoning regulations and 

housing and sanitation codes that will protect the health and morals of 

city families. 

Comparatively recent investigations have revealed that slums and 

blighted areas are heavy economic liabilities to municipalities as well as 

social hazards and human wastes. One Middle Western city has found that 

the per capita cost of police protection is three times higher in its slum area 

than in the city as a whole, and that fire protection is seven times as 

costly. The social findings are also appalling. Juvenile delinquency is approximately three times as frequent in these areas as elsewhere, murder 

eight times as frequent, and deaths from tuberculosis five times as 

frequent. 

A Southern city has found that the cost of supporting certain slum areas 

is over five times the tax revenue they yield. These decadent sections are of 

course a financial burden on the commercial and industrial districts and 

better residential areas. Furthermore, their existence is a threat to the 

economic health of neighboring commercial and residential districts and 

lowers the real estate values in the adjacent areas. 

Two major difficulties have interfered with urban redevelopment on a 

large scale.6 One is that the cost of acquiring and improving slum areas is 

very high in relation to the monetary returns to be expected from the investment. Land tends to be overvalued in slums because of the relatively 

high income that can be obtained by overcrowding poorly maintained and 

congested buildings. With redevelopment in accordance with decent 

standards, however, this source of profit disappears. Limitations imposed 

upon population density and the higher percentage of acreage devoted to 

public purposes, although of advantage to the community, result in lower 

revenues from the redeveloped property unless the area is no longer expected to house lower income families. 

A second difficulty in the way of urban redevelopment has been the lack 

of suitable housing into which displaced slum dwellers could move. In the 

past the housing market has provided an ample supply of new dwellings 

for the upper income groups only. Thus, because of the pressure of demand 

for lower income dwellings, there has been overcrowding in buildings that 

have been occupied long beyond their useful life. According to the Housing 

Census of 1940, about one-third of all dwellings in urban areas were substandard and almost half were over 30 years old.7 

8

 For an illustration of the factors involved in urban redevelopment, see pp. 88-89. 

7

 For further discussion of the housing problem, see "Housing Needs and the Housing 

Market" by Ramsay Wood, pp. 1-39 of this pamphlet. 

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Private enterprise alone cannot be expected to clear away urban slums 

and blighted areas. The process involves temporary financial losses that 

will result in social and economic gains for the community, and the shouldering of these losses is a function of Government. The cost of a nationwide urban redevelopment program commensurate with existing needs 

has been tentatively put at 20-25 billion dollars at 1940 prices. This includes the cost of site acquisition and improvement, and of nonresidential 

facilities, but it does not include the cost of housing for the lower income 

groups which cannot afford to pay commercial rents at present levels. 

A frequent estimate puts the need of our population for additional 

housing at a million and a quarter dwelling units a year for the next two 

decades. Over a third of the total demand is for houses costing less than 

$30 a month, which is a lower figure than the private housing market can 

meet. Consequently there is need for public action to provide from 300,000 

to 500,000 low-cost housing units a year. A housing program of this magnitude would require an annual outlay of about 1.5 billion dollars. By 

comparison, the number of publicly financed dwelling units constructed in 

1940 was about 73,000. 

Agricultural Needs, Forests, and Recreation.8 Even before the war the 

long-range productivity of land, our most valuable natural resource, was 

badly impaired, and vigorous public measures to conserve and improve 

the soil were urgently needed. Erosion due to soil washing and blowing had 

damaged and impoverished over half our agricultural acreage. Lack of 

rainfall interfered with the development of some 40 per cent of the land, 

and only about 3 per cent of the acreage affected was being irrigated. For 

want of maintenance and improvement, the grazing capacity of range 

lands and the productivity of cultivated fields had been depleted. The war 

aggravated these difficulties by emphasizing the necessity of immediate 

large yields. 

The National Resources Planning Board estimated in 1943 that approximately 40 million additional acres of cropland were needed by 1960 to 

provide the prewar diet for the expected increase in population. This estimate was based on the 311 million acres devoted to domestic food production shortly before the war, and on a yield per acre equal to the 1936-40 

average. In view of the known deficiency of this diet for a considerable 

part of the population, the estimate appeared conservative. 

The wartime expansion of acreage and especially the great increase in 

8

 For a full discussion of postwar agricultural problems, see Arthur C. Bunce, "Our Agricultural Policies/2

 in Agricultural Adjustment and Income, the second pamphlet of this series. 

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yield per acre would seem to justify a downward revision of this estimate. 

Exceptional weather, mechanization, improved seed, and better feeding 

methods and farm practices have produced record crops. However, about 

45 million acres at present devoted to crops should be retired eventually 

to grass or forest because of destructive erosion. Also, the National Resources Planning Board estimate should be raised by approximately 5 

million acres to provide for an adequate diet for our population. 

There is no doubt that the long-run economic use of our land requires 

the conversion of considerable marginal crop land to more suitable uses, 

and the improvement and reclamation of other land that can be worked 

effectively by modern methods. In view of this fact, a rough estimate of 

the cost of making necessary improvements and adjustments in our agricultural resources, based primarily on the study made by the National 

Resources Planning Board, is still relevant. The estimate of 13 billion 

dollars includes approximately 6 billion for soil erosion control, 3 billion 

for drainage and clearing projects, 3 billion for irrigation and 1 billion for 

the conservation and improvement of range land. 

Our forest lands have also been impaired by uneconomic use. While a 

growing need for timber products is anticipated for building and the 

manufacture of plastics, paper, textile fibers, and other industrial products, the yield of our timberlands has long been decreasing. Too rapid and 

wasteful use of mature timber, together with large-scale neglect of reforestation, has left large areas of denuded forest lands. Not only are these 

tracts unproductive in themselves but through their effect on rainfall and 

erosion they threaten the productivity of large surrounding areas. The 

cost of a forest conservation program which would achieve balance 

between yields and requirements has been put at about 4.5 billion dollars. 

It would include planting, stand improvements, additional forest roads 

and trails, and control of fire, destructive insects, and water shed. 

Forest areas within relatively easy reach from urban centers might well 

be developed as part of a recreational program which would also provide 

for greater public use of lake and sea shores. The social and economic 

value of recreation areas is well recognized, and the preservation of natural 

beauty and historic sites has long been considered a function of public 

authorities. From either the recreational or cultural point of view, much 

remains to be done. According to recent estimates approximately 5 billion 

dollars would be required to make the necessary additions to our State 

and national parks, scenic highways, and other rural recreation areas.9 

• Based on preliminary and confidential estimates prepared by the Twentieth Century 

Fund in connection with its forthcoming study entitled America's Needs and Resources. 

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Regional Resource Development. The economic progress achieved in a 

decade by the Tennessee Valley Authority illustrates the possibilities of 

regional development.10 Throughout the United States, many river 

valleys are in need of development, including those of such major arteries 

as the St. Lawrence, the Ohio, the Missouri, the Mississippi, the Columbia, and the Colorado. The major purpose of regional development is to 

raise the income and standard of living of people within the region. This 

result is achieved in many ways. Flood control reclaims fertile lands for 

agriculture by preventing periodic inundation of some areas and relieving 

drought in others. It helps farmers to increase yields even while they 

retire land of marginal productivity. In many instances it makes possible 

a better diversification of crops. At the same time it prevents the heavy 

loss of life and property which uncontrolled rivers too frequently exact. 

The erection of dams and reservoirs for flood control offers the opportunity to develop power for rural electrification and industrial expansion. 

The possibilities of rural electrification can be seen from the fact that over 

a third of the rural dwellings in this country are still without electricity. 

The availability of power at reasonable rates combined with easier river 

navigability improves the competitive position of industries within river 

valleys and stimulates new industries that can process local raw materials 

to advantage. River development programs thus contribute to economic 

diversification within regions and greater economic equality between 

various regions. 

While traditional public construction projects are part of a river valley 

development, they must be so coordinated and integrated that they will 

reconcile divergent needs within the region and serve the best interest of 

the area as a whole. Irrigation needs of upstream areas must be dovetailed 

with the need for flood control and improved water transportation of the 

lower regions. Dams and reservoirs must be so planned as to prevent floods 

and also to store and supply water for irrigation. Power plants at the site 

of these dams should be capable of serving the area as a whole and of 

expanding as needs increase. 

Development of the economic potentialities of our river valleys is a 

long-range project, and programs must be adjusted continuously to 

growing needs and changing conditions. It is therefore hard to estimate 

10

 See, for instance, David E. Lilienthal, TVA "Democracy on the March (Harper & Brothers, 

1944). 

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eventual costs. With these limitations, a recent estimate believed to be 

conservative puts the total at 25 billion dollars.11 

Public Health and Medical Care. Since the turn of the century the 

death rate in the United States has been steadily declining—from 17.2 

deaths per 1,000 persons in 1900 to 10.5 per 1,000 in 1941. The leading 

causes of death in 1900—influenza, pneumonia, and tuberculosis—have 

been cut down by more than two-thirds. Typhoid fever and diphtheria 

now account for a negligible fraction of deaths. Yet the Interdepartmental 

Committee to Coordinate Health and Welfare Activities reported in 1939 

that with more adequate medical care the pneumonia death rate could be 

further reduced by more than 25 per cent and tuberculosis could be made 

a negligible hazard to life and health. The Committee also reported that a 

more aggressive application of present knowledge to cancer—the second 

leading cause of death in 1941—would save a considerable proportion of 

the patients. 

The national health survey undertaken by the United States Public 

Health Service in 1935 revealed that over 23 million people in this country 

—nearly one-sixth of the population—had some chronic disease or physical impairment. The findings were further supported by experience under 

the Selective Service Act. According to Selective Service records about 40 

per cent of the men who reported for physical examination, or between 8 

and 9 million men, were physically unfit for general military duty, and well 

over half of this number were not acceptable for rehabilitation and had to 

be rejected entirely. 

An additional fact brought out by the national health survey is the 

deficiency in medical care among the poor and low-income families.The 

death rate from tuberculosis was seven times higher among unskilled 

workers than it was among professional workers. The close relation between low income and inadequate health care results in a vicious circle 

which it is beyond the power of the individual to break. In 1942 the 

average amount spent for medical care by families with incomes under 

$2,000 was less than half of that spent by families with incomes over 

$3,000, but it was almost twice as large a proportion of the family income. 

In 1935 wage earners in families with incomes under $1,000 suffered about 

twice as many days of disabling illness as did workers in families with 

incomes over $3,000. 

Another striking fact is the wide disparity in the health record of 

11

 For source, see footnote 9 on p. 78. 

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various parts of the country. According to Census figures for 1941, for 

instance, the maternal death rate is about twice as high in the South as it 

is in the North, and is considerably lower in urban than in rural communities. In 1941 the infant mortality rate was 97.5 per 1,000 in one State and 

29.7 in another, while it was about 45 for the United States as a whole. 

It is clear that all parts of the country have not benefited equally from 

the medical progress which reduced the infant mortality rate from 100 to 

45 within 25 years. 

The distribution of public health and medical care facilities is very 

uneven. In 1935, little more than a fifth of the counties had full-time 

public health agencies and two-fifths of the counties, having a combined 

population of 15 million, had no registered hospital. Since the proximity 

of a hospital strongly influences the location of physicians, areas far from 

hospitals are usually also greatly deficient in physicians. Counties with 

hospitals are known to have two and one-half times as many physicians 

as have counties without hospitals. 

Two hospital beds per annual tuberculosis death and 4.5 general 

hospital beds per 1,000 of population are considered reasonable minimum 

standards. Yet before the war the number of beds per tuberculosis death 

was less than one in 27 States and as high as two or more in only 8 States. 

Ten States had less than two general hospital beds per 1,000 of population. Furthermore, lack of funds on the part of patients or potential 

patients interfered with the optimum utilization of existing facilities 

in many areas where hospitals were inadequate in terms of minimum 

standards. 

A public program of health improvement involves several important 

steps. Effective public health service can be provided by establishing 

district health centers to serve each 50,000 of the population. The important functions would be the control and possible eradication of contagious diseases, and the development of more effective programs for 

mental and industrial hygiene. Hospital facilities for about 500,000 

additional beds are needed to assure adequate hospital care and to replace 

obsolete facilities. This number pertains to both general hospitals and 

tuberculosis and mental hospitals. Special programs of maternal and child 

care are needed to reduce the incidence of infant mortality. According to 

the Interdepartmental Committee the lives of more than 70,000 mothers 

and children could thereby be saved annually. Until a nation-wide health 

insurance system is established, more public funds are needed to provide 

adequate medical care. These programs have to be supplemented by 

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continuous and expanded research in health and medical science and the 

training of medical personnel. Since defective diets are one of the main 

causes of ill health, for some time a nutritional program may have to 

supplement the health program. 

Another important but preventable health hazard is the pollution of 

our rivers. It also threatens the destruction of aquatic life, and makes 

many streams unsafe for recreational purposes. Municipal sewage and 

industrial and mining wastes are known to be the major sources of contamination, and yet approximately 10,000 communities have deficient 

sewage systems or none at all. About 20 million people are consequently 

exposed to a special and preventable health hazard. Equally great is the 

need for new and improved systems to furnish safe water. Over 10,000 

communities need new water supply systems or extensions and improvements of existing systems. In addition, 5 million of our rural homes lack 

sanitary privies and an equal number lack proper water supplies. 

On an annual basis, needed public expenditures for health and medical 

care are estimated at 2.5 billion dollars. They include capital outlays and 

current expenditures for increased public health services and maternal 

and child care, as well as expenditures for hospital construction and replacement, more adequate medical care for the lower income groups, and 

adequate sanitation facilities. Comparable expenditures in 1941 amounted 

to slightly less than one billion. 

Education. During the last 50 years educational opportunities and standards have been greatly improved in this country. Eighty-five per cent 

of the population between the ages of 5 and 14 attended school in 1940 

as compared to 64 per cent in 1890. Nevertheless, the 1940 Census revealed that 2 million children between the ages of 6 and 15 had never 

been in school. At the same time there were 3 million adults who had never 

been to school and almost 11 million who had not gone beyond the fourth 

grade. Serious educational deficiencies are also revealed by Selective 

Service records. Up to December 1944, the combination of illiteracy and 

failure to meet minimum intelligence standards caused the rejection of 

620,000 registrants. In addition there were 150,000 illiterates whom the 

Army accepted between 1943 and 1944 and gave instruction in reading 

and writing before assignment to regular duty. 

Deficiencies in our provision for education are also reflected in low 

salaries for teachers and inadequate school plant and equipment. In 1942 

the average annual salary of teachers, principals, and supervisors of 

public schools was about $1,500 and of rural teachers only about $900. 

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Several thousand teachers were receiving less than $300 a year. Of the 

240,000 elementary and secondary school buildings in 1940 almost half 

were one-teacher schools, and the same proportion of the total were 

substandard and poorly located. About 5 per cent, which accommodated 

1.4 million children, were unsafe for use. One million children attended 

school in temporary structures and 600,000 children attended school only 

part time because of a shortage of school buildings. 

In general, children in urban areas and in the wealthier States have the 

best chance of obtaining adequate schooling. Although the lower income 

States spend on the average a much higher proportion of the income 

received by the people for educational purposes than do the more prosperous States, they are unable to finance the necessary educational improvements. In 1941-42 the annual expenditure per pupil in one State 

was more than five times as high as in another, yet outlays of the latter 

State in relation to its income were one-third higher than in the former. 

This is in part due to the fact that the birth rate is much higher in rural 

areas and in some of the poorer States. The attendance rate of children 

of school age is furthermore much higher in urban areas and in the wealthier States. A higher attendance rate in the poorer States would further 

increase the cost of education to them. 

Achieving adequate minimum standards of education involves the 

relief of overcrowded buildings, replacement of outworn buildings, and 

the consolidation of small schools. It means increasing the school equipment per pupil, lengthening the school term in many areas, and raising 

the salaries of teachers. In many areas the teaching staff is heavily overburdened; to equalize their pupil load would mean an increase of at least 

50 per cent in teaching staff. 

To attain a desirable minimum level of education of 10 years of schooling for each child, the enrollment in elementary and secondary schools in 

1950 will have to be about 20 per cent greater than it was in 1940. An 

adequate outlay for plant and equipment would mean an annual capital 

expenditure of $400 per pupil. Total annual public outlays needed for 

education have consequently been estimated at 5.5 billion dollars in the 

postwar period, including approximately 200' million dollars for public 

libraries. This compares with an expenditure of less than 3 billion dollars 

in 1940. 

Recapitulation in Terms of Annual Outlays. The preceding inventory 

was intended to give a general idea of the kind and volume of public works 

and services needed to achieve goals generally recognized as desirable and 

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attainable. In the table below the various items are estimated on an 

annual basis. This facilitates comparison with similar outlays in past years 

and also with other budget items. 

AN ANNUAL PROGRAM OF NEEDED PUBLIC WORKS AND SERVICES 

(In billions of dollars) 

Type of outlay 

Transportation (highways and streets) 

Airports, waterways, and ports 

Housing and urban redevelopment 

Conservation, reclamation, recreation, and regional resource development 

Public health and medical care 

Nutrition 

Education 

Public buildings 

Total. 16.0 

At 1940 prices 

y.o 

0.3 

2

2.0 

1.5 

2.5 

1.0 

5.5 

0.2 

At 1945 prices 

4.0 

0.4 

2.5 

1.8 

3.0 

1.3 

6.8 

8

0.2 

20.0 

1

 Includes maintenance. 

Includes site acquisition. 

* Owing to rounding, the increase is not shown. 

Both current needs and accumulated deficiencies are included in the 

estimates, with the assumption that the deficiencies will be met within 

approximately 20 years. Some arbitrariness is unavoidable in deciding 

on any particular span of years and trying to reconcile the urgency of the 

need with the magnitude of the program. To take care of accumulated 

deficiencies and develop projects fully is likely to require different amounts 

of time for various component parts of the program. The expenditure 

estimates should therefore be interpreted as averages of the annual outlays 

during the next two decades. It seems likely that the outlays will be 

unevenly distributed throughout the years because of the initial delays in 

planning and getting programs under way and because parts of the program must be held in abeyance until other parts have been completed. 

The figures are based on present estimates of needs and make no allowance for additional needs which may develop during the 20-year period. 

Slightly less than half of the total, or about 7.5 billion dollars at 1940 

prices, are outlays for new construction and replacement, while the 

remainder represents service programs and the acquisition of necessary 

sites and rights-of-way. 

It is difficult to evaluate these outlays on the basis of relative, urgency. 

They are all intended to satisfy basic needs and, so far as possible, they 

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should be initiated without delay and carried out simultaneously. From 

the point of view of government economy this would be particularly 

desirable in the case of related needs, since it probably would reduce total 

costs. 

Actually, at the present time the preparation and planning is in a 

more advanced stage for some projects than others and their execution is 

likely to be pushed. Also, the inauguration of some programs may be 

delayed by the necessity of recasting financial arrangements. Unfortunately, it is exactly in those areas in which the need is most urgent from a 

welfare point of view that the greatest obstacles will have to be overcome. 

Plans and preparations for enlarged health and educational programs, for 

instance, are lagging far behind those for highway or airport programs. 

In the immediate future, therefore, the state of present preparations will 

largely determine the speed with which various parts of the program can 

be carried out. While these projects are getting under way, however, it 

will be important to concentrate on the preparation and planning of those 

public works and services which are relatively new or which require a 

considerable additional outlay as compared to the prewar period. 

In appraising the contribution of the program to cyclical stability, 

short-run and long-run considerations must be distinguished. For the near 

future, the most important feature will be gradual growth with the 

increase centering mainly on construction projects, partly because they 

are the ones whose plans are in a relatively more advanced stage and 

because they are, in part, prerequisites to more extensive service programs. Once the foundations for the latter and for development and improvement programs have been laid, a larger part of the program could 

be made responsive to changing economic conditions. 

PREREQUISITES OF AN EFFECTIVE PROGRAM 

The effectiveness with which a public works and service program will 

meet the needs of the people and of the economy in the postwar period 

will depend to a considerable extent upon the care with which the program 

as a whole is prepared and carried out and the extent to which its various 

parts can be coordinated. Close cooperation between the various government levels will further contribute to smooth execution. 

No rule-of-thumb methods can be expected to insure the success of 

all types of public projects. In order to be most useful, each project must 

be adjusted to the special needs of the region and population it is to serve, 

and to the inevitable changes in requirements that are introduced by 

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economic, social, and in some instances physical developments. All this 

must be accomplished within the limits set by financial arrangements, 

multiple jurisdictional participation and control, and available professional knowledge and skill. A few indispensable prerequisites are common 

to all successful public programs, however, and meticulous care in meeting 

them will smooth the way to effective and economical execution of individual projects. 

Advance Planning. A considerable amount of time necessarily elapses 

between the time a project is decided upon and its actual execution. 

Even after the necessary funds have become available, the project has 

to pass through several stages of planning and blueprinting before contracts can be let. Even then, some time may elapse before the project is 

well under way and exerts its full impact on employment. One important 

function of all planning is, therefore, the elimination of delay in making a 

thorough appraisal of the needs to be met and the best means of meeting 

them. This will include investigation of ways to avoid possible legal and 

financial obstructions and other impediments to prompt action when the 

blueprints have been completed. 

In a broad national program, advance planning will include coordination and integration of related projects as well as determination of the 

proper sequence in which to undertake complementary parts of single 

projects. It will also include decisions concerning the relative urgency 

of many different projects and the possibility of dovetailing the program 

as a whole with other economic activity. These decisions are indispensable, 

not only to efficiency in providing necessary public works and services 

but also to the usefulness of the program in strengthening other efforts to 

maintain a high level of production and employment. 

Adjustability to Changing Needs. Estimates of future requirements 

as well as knowledge of past deficiencies should serve as the basis of 

blueprints, and even then the way must be left open to change during 

execution of the project. It may be necessary to prepare several alternative 

or successive blueprints before the work is completed. Considerable flexibility in planning is particularly important in the case of State and local 

projects, since the public works and services they provide must be closely 

geared to private residential construction and the location of industrial 

activity. 

functional Balance. Judicious appraisal of the relative importance of 

physical plant and operating personnel to the functioning of the completed 

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project is the third prerequisite of effective planning. In the field of 

education, for instance, the construction of schools would be of little 

advantage to pupils unless good teachers and equipment were made 

available. Similarly, hospitals and clinics can contribute little to the health 

of the nation unless they are competently staffed. Past emphasis on 

public construction enhances the danger that the growing importance 

of public services will not be fully reflected in public projects. 

Effective Intergovernmental Relations, Recent emphasis on public 

works and services as an instrument of national policy has somewhat 

obscured the fact that the greater part of most programs will be carried 

out by State and local governments. The resulting wide dispersion of 

responsibility and points of view is a challenge to ingenuity and diplomacy. A regional development project, for instance, enters the jurisdiction of many local political units, and urban redevelopment may affect 

a metropolitan area which includes several municipalities and lies within 

more than one county and State. The problem is to devise a harmonious 

working arrangement that will reinforce the strengths of all units and 

overcome their weaknesses. 

Local governments are intimately acquainted with the special requirements and resources of their communities and are thus better qualified 

than is the Federal Government to execute programs within their jurisdictions. They seldom have the legal powers and financial resources to undertake advance planning, however, and they are in no position to carry out 

the intensive research required to formulate satisfactory standards. 

Moreover, local governments are not in a position to coordinate and 

synchronize all parts of a regional or national program or to adjust them 

to general economic conditions. 

With regard to all these aspects, the Federal Government can make an 

important contribution to the execution and ultimate usefulness of the 

project as well as to the economic health of the nation. Surveys of need on 

a national level, establishment of minimum standards, expansion of 

research, and collection of pertinent data provide helpful information 

and guidance for State and local governments in the preparation of their 

own plans. The need for nation-wide minimum standards in health and 

educational services requires Federal participation in their financing. 

Federal grants for advance planning can overcome local difficulties as 

well as contribute toward cyclical timing of public works on a nation-wide 

scale. The effectiveness of this aspect could be increased if congressional 

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authorizations of national public works and services allowed for greater 

flexibility in the initiation and timing of projects and in the use of the 

funds made available. 

The possibilities of intergovernmental cooperation in the execution of a 

public works program are illustrated by a recent proposal made by the 

Canadian Government to the Provinces.12 It is part of a comprehensive proposal to adjust the financial relations between the Dominion and 

the Provinces to peacetime conditions. Its purpose is to influence the 

timing of local projects so that they will supplement other efforts to 

achieve economic stability. The Dominion Government proposes to 

grant financial assistance to the Provinces for the planning and execution of useful but postponable public projects, provided that the projects 

have been fully planned prior to the time of execution and that they 

are executed in a period designated by the Dominion Government. 

An Illustration—Urban Redevelopment. Most of the important 

general considerations in planning and executing a program of public 

works and services are illustrated by urban redevelopment. It requires 

coordination of many related needs, integration of several individual projects into a master plan, and attention to relative timing. It involves 

the cooperation of various government units at the same and at different 

levels, and depends to a considerable extent upon Federal financial 

participation. Both the Government and private enterprise are participants in its execution, and the benefits accrue not only to the community 

at large, but also to commercial, industrial, and real estate interests. 

The first step in a program of urban redevelopment is a survey of existing conditions and preparation of a master plan which takes account of 

present needs and foreseeable developments. Residential sections and 

commercial and industrial districts are clearly separated and provision 

is made for adequate community facilities. Housing projects to supply 

standard dwellings for low-income groups are laid out so as to prevent 

the recurrence of overcrowded and insanitary conditions. Plans are made 

to improve the transportation system by eliminating bottlenecks, reducing 

hazards, and assuring rapid transit between different districts. 

Execution of the master plan involves careful timing and dovetailing 

of many projects. The improvement of the transportation system will 

involve the enlargement and relocation of certain arteries. This cannot 

be done without tearing down some buildings and demolition cannot 

begin before provision is made for rehousing the displaced occupants. 

12

 Proposals of the Government of Canada, Dominion-Provincial Conference on Reconstruction, August 1945. 

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This may involve the construction of low-cost housing units to avoid 

overcrowding of existing facilities and to offer suitable living quarters at 

prices which the former slum dwellers can afford. 

Although the city has to be considered as one redevelopment unit, 

several local jurisdictions are often involved. The preparation of the 

master plan therefore involves agreement among the participating units 

and reconciliation of divergent interests. This becomes particularly 

important in deciding on financial arrangements. Large expenditures of 

public funds are involved in the initial acquisition of land. A considerable 

part of these outlays may be recouped later in selling or leasing the land 

to private builders. However, a net loss may be unavoidable because in 

the process densities will have to be reduced, existing inflated land values 

will have to be written down, and a larger proportion of the area will be 

converted to streets, parks, and other public purposes. Provision will also 

have to be made for the financing of low-income housing. In most cases 

the local community alone will not be able to shoulder the losses involved 

and make the necessary financial arrangements. The Federal Government will have to participate through low-interest loans, loan guarantees, 

and annual subsidies. Until the exact form of participation by the Federal 

Government has been decided through appropriate legislation, action 

on urban redevelopment is likely to be delayed. 

PROSPECTS FOR EXPANSION 

The right of every family to a decent home and the right of every 

individual to adequate medical care and a good education were among 

the principles of the Economic Bill of Rights enunciated by President 

Roosevelt in his message to Congress on January 11, 1944. They were 

emphasized by President Truman in his message of September 6, 1945, 

in which he also asked for early action to check the depletion of our 

natural resources by reclaiming and rebuilding land, harnessing our 

waters, and initiating regional development programs. President Truman 

suggested that an agency be set up to make an inventory of our national 

wealth and basic resources and to formulate a consistent public works 

and development program. Later, he recommended early congressional 

approval of the Agreement of 1941 between the United States and 

Canada for the development of the St. Lawrence Basin. A further recommendation for congressional action was contained in President Truman's message outlining a comprehensive national health program. 

Establishment of separate authorities to deal with the comprehensive 

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development of the economic resources of our river valleys has been an 

accepted goal of national policy ever since the launching of the TVA 

experiment. By September 1944, President Roosevelt had recommended 

to Congress the creation of additional authorities for the Arkansas, 

Columbia, and Missouri Rivers. 

Congressional Reports. A report of the Subcommittee on Wartime 

Health and Education of the Senate last year discussed the urgent need 

for medical care of our population and recommended Federal grantsin-aid to the States to assist them in postwar construction of hospitals, 

medical centers, and health centers. It also recommended Federal scholarships or loans for medical and dental education to overcome the acute 

shortages of doctors and personnel with training in psychology and 

psychiatry. 

On August 1, 1945, the Special Committee on Postwar Economic 

Policy and Planning of the Senate issued a report on postwar housing in 

which it accepted the principle that "the Federal Government has an 

interest in seeing that minimum standards of housing, food, and health 

service are available for all members of the community." In recommending 

a program of urban redevelopment and public housing construction, the 

Committee recognized the need for Federal participation, but stressed the 

importance of assigning to the Federal Government a role "subordinate 

and supplementary" to the part played by the States, localities, and 

private institutions. 

In a recent report the Special Committee on Postwar Economic Policy 

and Planning of the House of Representatives considered the role of 

postwar public works in maintaining a high level of construction activity. 

It stressed the need for advance planning of a reserve shelf of useful 

public works, and of timing the execution of both Federal and non-Federal 

projects. It recommended the establishment of a Construction Policy 

Board to guide the public works program and work closely with the 

construction industry as a whole. For the longer run, the Committee 

recommended Federal advances to State and local governments to encourage their planning of a shelf of public works sufficiently large to have 

at any time a 5 billion dollar backlog of construction projects. 

Federal Legislation. Congressional action does not as yet measure up 

to the needs of the situation and their reflection in official recommendations. The only important laws enacted in the field of postwar public 

works and services are the Federal-Aid Highway Act of 1944, the Flood 

Control Act of December 1944, and the Rivers and Harbors Act of 

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March 1945. To these has been recently added the Federal Airport Act 

passed by the Congress in April 1946.13 

The Highway Act provides for a three-year highway construction 

program of 3 billion dollars to be financed through equal contributions 

by the Federal Government and the States. The Federal grant is to be 

allocated between the Federal-aid highway system, principal secondary 

and feeder roads, and highways in urban areas. The Flood Control Act 

authorizes public works projects amounting to one billion dollars and the 

Rivers and Harbors Act authorizes an additional 500 million dollars. The 

Airport Act provides for Federal aid to States and localities for the development, construction, improvement, and repair of public airports. 

The Act authorizes the expenditure of 500 million dollars over a period 

of seven years, beginning July 1, 1946, as grants for the construction of 

airports in conformity with a national airport plan. In most cases the 

Federal grants are to be matched by States and localities on a 50-50 basis. 

Only a small proportion of the contemplated projects is ready to be 

initiated promptly, however, and many of them will take years to complete. It is expected that not more than 25 per cent of the highway program provided for the first year can be carried out. In a recent statement 

before Congress, the Federal Works Administrator testified that Federal 

public works construction is unlikely to amount to more than 500 million 

dollars during the current year.14 Federal expenditures on general public 

works based on existing legislation are estimated in the latest budget at 

585 million dollars for fiscal 1946 and 860 million dollars for fiscal 1947. 

This amount includes outlays for highways and airports, river and harbor 

work, flood control and reclamation, but does not include expenditures for 

the construction of veterans' hospitals and housing. Almost one-third of 

the outlay for fiscal 1947 is for the Federal-aid highway program. 

Important legislation for a broad public works and service program is 

now pending in Congress. In December 1945, the Senate passed a Hospital 

Survey and Construction Act providing 75 million dollars annually for 

the next five years to assist States in the construction of public and nonprofit hospitals. In April 1946, the Senate passed the comprehensive 

General Housing Act of 1946 which contains provisions for Federal aid 

to urban redevelopment, low-cost public housing, and farm housing. A 

bill authorizing the establishment of a Missouri Valley Authority is 

before the Committee on Agriculture and Forestry of the Senate after 

13

 This paper does not cover events later than May 1, 1946. 

14

 Full Employment Act of 1945: Hearings before a Subcommittee of the Senate Committee 

§n Banking and Currency on S. 380 (79 Cong. 1 sess.), p. 866. 

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having been reported adversely by the Senate Committees on Commerce and on Irrigation and Reclamation. Other bills dealing with 

Federal grants for health services and medical education, the construction 

of educational facilities, the control of water pollution, the provision of 

recreational facilities, and with the stabilization of construction are pending before various committees of the Senate and the House. Should these 

bills be passed in the near future, it would still take considerable time for 

the programs to become effective. 

State and Local Preparations. State and local governments likewise 

have no extensive completed plans for public works and services. Two 

surveys recently undertaken by the Federal Works Agency give a good 

picture of the present status of State and local planning of public works.15 

Both surveys indicate that the public works for which plans are completed, without Federal assistance, amount to less than one billion 

dollars. This figure excludes Federal-aid highway and State highway 

programs. About 80 per cent of this amount is the estimated cost of 

construction, the remainder being divided between the cost of land acquisition and rights-of-way, equipment, and other cost. Less than half of 

the programs in the completed stage could be constructed within one year. 

The estimated cost of State and local public works in the design stage 

more than doubled between July 1944 and January 1946, and amounts to 

4.4 billion dollars. Many of these plans, however, have not progressed far 

and cannot be completed without Federal aid. Sewer, water, and sanitation projects comprise more than one-fourth of the plans in the completed 

and design stage. Next in importance are schools and other educational 

facilities. Over 10 per cent of the plans are for highways, roads, and 

streets. 

Considerable inequality exists with regard to the geographical distribution of such projects as have been prepared. Two-thirds of the completed plans are concentrated in four States: New York, California, 

Pennsylvania, and Ohio. New York State alone accounts for nearly half 

of all completed planning in terms of estimated construction costs. The 

same four States, together with Illinois, account for two-thirds of the 

plans in the design stage. 

Similar inequality exists in the distribution of plans among cities of 

15

 The first survey was made in collaboration with the [Bureau of the Census on the "request 

of the Special Committee on Postwar Economic Policy and Planning of the House of Representatives, and includes projects planned up to July 1, 1944. The second survey includes 

plans up to Jan. 1,1946. 

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PUBLIC WORKS AND SERVICES 93 

various sizes and between rural and urban areas. Almost 50 per cent of 

the completed plans are for cities having populations of over 500,000. 

Of these, New York, Philadelphia, San Francisco, Los Angeles, and 

Detroit account for over 45 per cent of the total. 

Even among the larger population centers, however, 12 cities of over 

100,000 and 20 cities between 50,000 and 100,000 reported having no 

plans in either the completed or the design stage. Plans are lagging even 

more among the smaller government units. Over one-third of all the 

counties reported no plans in either the completed or the design stage, 

and the same situation prevailed among two-thirds of the reporting 

cities and towns with populations of less than 10,000. 

Less than half of the funds needed by the States and localities to carry 

out the completed plans are available at the present time or obtainable 

through authorized bond issues and anticipated tax revenues. For most 

of the remainder, reliance is placed on Federal subsidies. While the 

financial position of States and localities improved during the war, the 

main result has been a reduction of their indebtedness. Their financial 

problems are by no means solved. Many non-Federal government units 

are still unable to finance needed public works programs and are furthermore hampered by legal restrictions forbidding the accumulation of 

surplus funds or the appropriation of money in advance of construction. 

Many are waiting for the establishment of a clear Federal policy on public 

works before embarking upon their own programs. 

Title V of the War Mobilization and Reconversion Act of 1944 authorized the Federal Works Administrator to make loans and advances to 

the States and their political subdivisions for the purpose of planning the 

construction of public works. Congress thus far has appropriated 30 

million dollars for this purpose. At least 150 million dollars would be 

required to build up and maintain a 5 billion dollar reserve of planned 

public works construction projects on the non-Federal level. By December 31, 1945, the Federal Works Agency had approved applications for 

advances amounting to slightly over 13 million dollars. These plans 

represent public works with an estimated total cost of 565 million dollars. 

This amount is in addition to the estimate of public works planned without Federal assistance. 

In his recent testimony, the Federal Works Administrator stated that 

execution of completed plans by Federal, State, and local governments 

would result in a public works program amounting to not more than 

2.5 billion dollars in the first postwar year. This is only half of the annual 

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9 4 HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS 

amount allocated to public construction by most programs for full 

employment in the post-transition years. If the prewar relation between 

construction and national income prevails in the postwar economy, full 

employment will mean that construction work, excluding maintenance, 

will total about 15 billion dollars annually. One-third of this volume, or 

5 billion dollars, would be devoted to public works, in line with past 

relations. In planning a flexible program of public construction, however, 

this figure should be considered the lower level of annual activity. Whenever private activity slackens, a larger volume of public works would be 

needed to offset the decline in private construction. Advance planning 

for a larger shelf of public works is essential to the prompt introduction 

of such projects as can be timed to offset declines in private construction. 

This point was again brought out in the latest Budget Message of the 

President, transmitting the budget for fiscal 1947. 

CONCLUSION 

Public works, public services, and development projects are important 

to the economy because of their immediate usefulness. They are not primarily an instrument of fiscal policy and are no substitute for other 

government economic policies for full employment. However, a comprehensive program is likely to make an important contribution toward 

economic stability and social progress. 

A review of present plans for public works and services indicates that, 

although a beginning has been made, preparations on a much broader 

scale are urgently necessary to meet the deficiencies existing at the present 

time. Such a program is fully compatible with, and indeed very important 

to, the maintenance of the private enterprise system. 

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