Draft Chapter XVIII - Overall Report

November 25, 1957

CHAPTER XVIII

THE ENCOURAGEMENT OF ECONOMIC GROWTH

I

In our last chapter we dealt with the encouragement of our creative capacities as private individuals. In this chapter we turn to a related question -- the creation of an environment compatible with private growth. For individual creativity, although a necessary condition of a healthy society, is not a sufficient condition. Talent may be cramped and confined if society does not allow it scope for free and expansive expression. Creativity may turn to destructiveness, aspiration to anger, if a society does not match the talents of its people with concrete opportunities for self-realization.

The environment for the exercise and enjoyment of our private capacities is determined primarily by our economy. An economy of growth and vigor may not necessarily ensure a society of dignity and moral purpose, but an economy of stagnation and rigidity makes non-economic growth impossible. We need only reflect on the moral and psychological damage of the Great Depression to remind ourselves that economic failure exacts a larger price than one of dollars and cents: a price of shattered personal security, frustrated careers, embittered hopes.

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We do not face the next twenty years in a mood of economic anxiety.

Many of the imbalances which created the Great Depression have been removed from our society: our incomes are more equitably distributed, our speculative propensities have been considerably hedged about, our credit structure has been made immensely stronger. Many new buttresses of economic strength have been added as well: a government responsibility for maintaining economic well-being, a far higher level of business farsightedness and responsible conduct, and not least a clearer understanding of the basic economic causes of economic instability itself. The American economy of the 1950s has never forgotten the terrible lesson of the 'thirties, but its prospects are totally unlike that searing decade.

Realistically as well as hopefully the American nation looks forward to economic growth and conceives its major problem to be that of maximizing growth rather than of warding off or minimizing decline. In past chapters we have looked back to some of the underlying causes of this temperate but sanguine economic attitude. Now we must turn to the immediate problems and obstacles to be overcome if our economic expectations are to be justified.

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II

The factors which make an economy expansive are many, but all of them can be frustrated if a nation does not have the physical capacity for growth. An economy must have food, fuel, essential minerals and fibers; and if these basic resources lack within its own borders, it must have trade access to them in the markets of the world. The material resources available to a nation are a major element in its strength and a potentially limiting factor on its ability to grow.

For the most part the United States is happily gifted in this regard. We have been abundantly endowed by nature in respect to the most important raw materials: agricultural land, basic minerals, sources of power. To state a broad generality, there is no prospect that our overall desired rate of advance of about three to four per cent a year should be importantly hindered by the lack of any single major resource -- land, minerals, or most important of all, energy.

This generally reassuring statement derives in part from the dynamic nature of the contemporary resource problem. As one writer concludes:*

"The time must inevitably come when ores as such no longer exist and machine civilization, if it survives, will feed on the leanest of substances -- the rocks which make up the surface of our planet, the waters of the seas, and the gases of the atmosphere ...

"One hundred tons of igneous rock contain, in addition to other useful elements, eight tons of aluminum, five tons of iron, 1,200 pounds of titanium, 180 pounds of manganese, 70 pounds of chromium,

*Paper IV-13, Lindsay, F.A. (quoting Harrison Brown), Planning for Non-Renewable Resources, page 4. (Italics added).

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40 pounds of nickel, 30 pounds of vanadium, 20 pounds of copper, 10 pounds of tungsten, and 4 pounds of lead. Given adequate supplies of energy these elements could be extracted from the rock, *and it appears likely that the rock itself contains the requisite amount of energy in the form of uranium and thorium.*"

These hopeful generalities must, however, be immediately qualified.

They serve a useful purpose in redressing the gloom which sometimes obscures the resource issue, but they must not be taken as a glib dismissal of the problem. We are only at the threshold of a technology of such powers as those described. In the immediate future we shall depend directly on ores and conventional resources, and we shall have to adjust to a diminished availability of first-grade supplies in many of them.

For the drain on our traditional supplies of raw materials is prodigious. We used to export copper, petroleum, and zinc. Now we are importers.

Between 1900 and 1950 our use of copper increased three times, our use of iron ore 3-1/2 times, our use of zinc four times. In 1900 our production of all minerals exceeded our consumption by 15 per cent. By 1950 our consumption exceeded our production by 9 per cent. By 1975 our consumption will exceed our production by 20 per cent. It is estimated that our reserves of good iron ores -- those containing more than 50 per cent iron -- will have vanished in the next two decades. Only our reserves of poorer ores -- containing 25-35 per cent iron are still substantial and it is to these lower-grade ores that we will have to resort through the development of new technologies, new plants, more efficient extraction processes and more efficient use.

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The same situation is true of the fuels that supply our industrial society with energy. Our demands for all energy sources are rising rapidly. By 1960 our power consumption will have increased by 42 per cent over 1950; by 1975 it will have increased by 135 per cent. Of the various fuels we now employ, the reserves of coal alone are adequate to sustain us for several centuries to come, although it is reassuring to note that we possess large quantities of fissionable ores against the day when atomic energy becomes a significant factor in our economy.

Thus the medium-term outlook is far from satisfactory. As our resource economists have warned us for a long time, we are rapidly ceasing to be a "have" nation in a number of critical areas. Yet we should make a serious error if we were to estimate our resource strength solely in terms of physical availability. For this is only one of many facets of a dynamic rather than a static problem.

This is aptly illustrated by the two resource items which threaten to pose the most serious problems over the next two decades. One of these is oil. The extremes of current estimates of oil supply are widely variant, from alarmist projections that would cover our needs only for another few decades to optimistic projections that promise us a huge -- although yet undiscovered -- supply for future use.

Until this geological guessing game has given us a more dependable picture of our domestic oil reserves, our immediate dilemma is to decide how

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much we should utilize our known domestic fields and how much we should
rely on oil imports, particularly from the Middle East where petroleum exists
in abundance. The question is a highly complex one. Too great a reliance
on imports may jeopardize our domestic supply by lessening the incentive
to explore for oil within our own borders. Too small a reliance on imports
may result in a serious depletion of domestic reserves if the ever-problematical
oil explorations turn out badly. Meanwhile the dilemma is rendered still more
complex by the delicacy of the Middle Eastern situation where our economic
needs involve us in one of the most politically explosive situations in the
world.

Thus the immediate resource problem is as deeply entangled in political
and economic as in geological questions. Perhaps no policy can satisfactorily
resolve the dilemma as it now exists. Each course involves risks. In view
of our international political and economic responsibilities, however, as well
as with a view to conserving our domestic reserves we would favor a consider-
ably enlarged program of oil imports from abroad. If need be, domestic explora-
tion might be encouraged by outright subsidies or other incentives as being in
the national interest.

This policy of more careful domestic husbanding is indicated even more
strongly if we view the oil problem in a longer run perspective. For by then
the geological problem, which is now overshadowed by political and economic
concerns, will give way to another consideration: technology. The relative

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abundance or scarcity of petroleum twenty years hence may reflect research and development trends even more significantly than new domestic oil discoveries.

For example, better oil and gas recovery methods would add another ten to twenty per cent to our domestic resources without the need to discover another new field. The use of domestic oil shale, which exists in gigantic quantities, would insure us of an ample supply of petroleum, if we can bring down the cost of extracting the oil. Meanwhile shifts in other technologies will exert their influence. The redesign of automobile and other engines would conserve our oil resources significantly by utilizing their power more efficiently. An increase in the use of atomic energy for power production would considerably reduce our need for heavy fuel oil. It is not even beyond the bounds of possibility that in the longer-term future petroleum will find its main use not as a fuel but as a basic chemical of extraordinarily versatile application.

Thus oil conservation is not a policy merely designed to protect a static reservoir of wealth. It is better conceived as a policy of caution to insure us against an unnecessary economic slowdown during the period ahead in which we are developing a more efficient and less oil-dependent technology.

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The second resource item which commands our attention is that of the classical "free good" of the economic texts: water. Our water problems stem from the fact that in the last half century the number of water users in American cities has doubled, while their use of water has increased five fold. By 1975 the growth of population, plus the growth of certain thirsty industries -- chemical industries which need water for cooling, paper and pulp industries which need water for processing, and all the industries and offices and homes which install air-conditioning -- will more than double the rate of water consumption today. To give one example: it requires 300,000 gallons of water to manufacture one ton of rayon, and the rayon industry in the U.S. turns out 600,000 tons of rayon a year. The nation's water problem may well become, in the next ten or twenty years, one of the most serious and complex issues presented by our national resources.

A solution again depends partly on technology. The industrial use of water -- which accounts for 38 per cent of the total -- can be greatly economized: an instance in point being the fact that modern steel mills need but one-quarter the amount of water per ton of those built twenty years ago. In agriculture as well, more efficient techniques can stretch water use. On Hawaiian sugar plantations, for example, it has been found that overhead irrigation is four times as efficient as standard irrigation through groundtroughs. In the arid regions of the west, losses through evaporation account for as much as 50 per cent of the total water impounded in reservoirs. Active

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research is now under way to reduce this loss by thin surface films of other liquids. And, finally, there exists the possibility of distilling sea water for use along our coastal areas.

Perhaps of even greater immediate urgency than an improved water technology, however, is the need for political and social action. Specifically, what is needed is a unified water program, under the aegis of a federal water resource agency. This agency should be charged with the coordination of all federal water programs and with the supervision of flood control, irrigation, steam pollution, navigation and other measures at the state and local action. Since we must realistically anticipate an increase of government expenditures for water control from their present level of $1.5 billion to about $2.5 billion by 1965, we strongly urge prompt action along these lines.

Thus a full perspective of our resource problem far transcends static considerations of physical availability. Social and political action, technological progress, imaginative economic policies all bear on the impending shortages and stringencies of the future. Certainly the problem of our dwindling resources makes imperative a vigorous policy of conservation, but its implications go beyond that. For instance, our problem highlights our increasing dependence on foreign trade. It gives added importance to foreign assistance programs which make it possible for unindustrialized nations to develop raw materials for trade. It brings a new urgency to our need to cultivate

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scientific talents to discover substitute materials and to invent more
efficient uses for present materials. And not least it points up the need
for the vigorous domestic capital expansion by which presently uneconomic
resources can be developed on a paying basis.

The problem of our diminishing resources is not to be made light of.
It is characteristic of a growing economy that it constantly creates shortages
where formerly there was abundance. Selfish action or shortsighted inaction
can make of these shortages crippling obstacles to our further growth. But
it is also characteristic of a growing economy that it can solve its shortages
not alone by economizing on the use of a good but by bypassing its dependence
on that good. Thus the problem of resources is also a challenge, and the
very fact of scarcity can become a stimulus to further growth for a dynamic
economy.

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### III

What will determine whether we are in fact a dynamic economy?

As we have already emphasized, but as we can hardly overstress, an essential ingredient for growth in a free private economy is a high volume of private investment. All of our past experience shows us that a brisk pace of business investment is a necessary condition for economic prosperity, and that when investment lags, the growth of the entire economy is impaired.

The premise on which our report is based is that business investment will generally be buoyant and expansive over the twenty year span ahead. Although a continuous high flow of private capital can never be assured beyond doubt in a free market system, we believe that a number of factors will tend to maintain a high level of capital expenditure, and for renewed emphasis, we reiterate them here.

One is the increasingly important role of systematic research into new products, which comes very close to assuring us of a steady stream of new investment opportunities. Another is our present pattern of income-distribution with the high-consumption tendencies of its rapidly growing middle-income market -- a pattern which creates an environment exceptionally favorable to private business growth. Yet another stabilizing factor is the greater farsightedness of large-scale business enterprise in budgeting capital expenditures over a longer period ahead. And not least is the confidence of business in the responsibility of government to maintain an overall stability in the

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economy and to prevent a recession from developing into a major decline. But the fact that the long term outlook for business expansion is favorable does not undo the need for a careful use of public economic power. Rather it sets the basic framework for the application of public power. It enables us to plan for a future in which public policy will not primarily concern itself with the need to make up for a seriously laggard rate of business investment but will essentially aim at sustaining and maximizing an underlying impetus toward expansion. How this may best be accomplished is the important matter to which we now turn.

How can our government most effectively stimulate a high level of private investment and of business activity generally? By and large there are three means by which it can affect the climate in which business enterprise is carried on. One is its tax policy. The second is its fiscal policy. And the third is its direct public expenditure.

The underlying considerations of our tax policy are clear enough. Everyone concurs in a desire to reduce taxes. However this objective must be made subservient to the need for normal taxation to cover the average budgets of the Federal government. We do not wish, except in depression periods, or national emergencies to finance government expenditures by deficits. To this general approach to a tax policy we must now add two incontrovertible facts.

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One is that our present tax receipts of -- billions are barely adequate to cover the present outlays of the Federal government. The second fact is that Federal outlays are sure to rise. As our subsequent analysis will show we must realistically anticipate a rise in federal, state and local expenditure of well over 10 per cent by 1965.

These general considerations impose certain broad conclusions upon us from the outset. The first of these is the impossibility of large-scale tax reduction in the face of continued world tensions. This does not mean that _no tax reduction is possible_, but it makes apparent that reductions must be carefully selective, and that any loss in revenues must be amply compensated by a significant contribution to our economic vigor. In this connection it must be borne in mind that the impact of taxes is often a mixed one: our high rates of individual taxation, for instance, serving both as a deterrent to the provision of venture capital, and as a stimulus to investment in venturesome equities (where the chances for capital gains are higher).

A second basic conclusion we draw from our present tax outlook is the need for a substantial overhaul of our tax structure. This need for tax reform does not imply the abandonment of our present basic tax policy. Although our structure of taxes is today unwieldy and onerous, it has not proved itself unworkable or directly incompatible with growth. Rather, its deficiencies stem from the fact that our tax system has not been carefully planned to _promote_ growth.

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It would be an oversimplification to pretend that the present tax struc-
ture can be perfected by a few reforms. Many Congressional committees,
some of very high calibre, have wrestled with this problem, and progress --
although discernible -- has been slow. Hence we would content ourselves
with pointing out the direction in which changes should take place if we are
to bring the actual tax structure into closer conformity with the ideal.

1. Our tax structure should be constantly reviewed to detect its interference with business growth. The severely deterrent impact of taxes on the growth of small business is clearly a matter calling for attention. Similarly the present excise tax system, which is little better than a hodgepodge of items without design, should be reconsidered in the light of how much hindrance to growth these taxes impose on the business lines they affect.

2. Our tax policy must also be reviewed for its undesirable side effects. The present complexity and high marginal rates of the tax structure virtually enforce a dubious standard of morality upon taxpayers. The number of things which can be "taken off" the income tax -- particularly on expense account items -- has burgeoned to the point where a valid principle is in danger of being discredited by misuse. A thorough streamlining of deductible categories, an elimination of "loopholes," and further efforts to simplify tax returns are all in order.

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3. The effect of our tax structure on economic stability also needs further consideration. The high level of individual and corporate tax rates, while perhaps necessary and tolerable in a boom situation, may become a serious deterrent to re-expansion in a recession. While this effect is partly offset by our progressive rate structure, some kind of cyclical adjustment of overall rates might be a useful supplement.

4. The tax scope of the Federal government needs to be brought into better complementarity with that of state and local governments. In the competition for public revenues, state and local governments have come off badly. There is a very great need for a restudy of nonfederal tax opportunities and for a clearer demarcation of federal and nonfederal tax sources.

## IV

Perhaps even more important than taxation in its impact upon business buoyancy is the general level of national economic activity. Here government monetary and fiscal policies play an influential role. Since the enactment of the 1946 Employment Act, responsibility for our general economic climate has lodged to a large degree with the federal government, and while very few economists would contend that the government can change the direction of the economic winds, there is widespread agreement that our normal

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fiscal powers can, if properly used, protect the economy from feeling their
full blast. To their steadying influence must be added that of the "built-in
stabilizers" of our economy -- that is, the natural operation of a progressive
tax structure to bear less heavily on the economy in periods of recession and
the simultaneous natural operation of certain expenditure programs such as
unemployment insurance automatically to expand in recession.

Viewing the stability problem as a whole, what seems necessary at
the moment is not _more_ power for government, but more _refined_ powers and the
more courageous use of existing powers. Our present anti-deflation and
anti-inflation measures were planned to deal with broad national economic
emergencies, such as a widespread condition of unemployment or a rampant
inflation. But the nature of our present and prospective economic problems
calls for a different basic premise. The danger of severe depression or of an
equally disastrous inflation is less likely -- and far more easily dealt with --
than the smaller-scale dangers of creeping inflation, pocketed recession, or
perhaps both simultaneously.

It would be misleading to imply that this problem of economic stabil-
ization in an economy of cross-currents will be a simple one. In particular
it is rendered more complex by two considerations. One is that fact that our
inflationary tendencies are partly rooted in the power of our large labor unions
to win wage increases in excess of those justified by productivity gains.
These higher wage patterns then act to pull up wage rates in industries where

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productivity is still more laggard, as in our service industries. This serious problem is not one which can be met by any single measure of control, short of outright wage and price-fixing. It is a matter which must be candidly examined by labor and management and whose ultimate solution, if it is to be on a voluntaristic basis, must come from the self-discipline of each. If management has a duty not to withhold from labor its gains from increased productivity, labor has a duty in turn not to press beyond feasible limits. The ability with which we can voluntarily solve this difficult question will be an indication of the degree of true consensus we have reached. If we do not solve it voluntarily there is every possibility that more drastic measures will eventually be necessary.

A second complicating factor in dealing with the stabilization problem is that we are operating, in this strategically crucial area, very largely by half-informed guess. While we have considerable information about the use of fiscal and monetary powers to affect large-scale recessions or inflations, we have relatively little understanding of the problems of a chronically "tight," but spotty economy. To deal with the problem we urge the appointment of an impartial commission to study and review the entire field of government fiscal policy, local and state as well as federal.

Some of the problems with which such a commission might concern itself are these:

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1. The exploration of flexible contra-cyclical devises such as variable depreciation allowances, variable withholding taxes and perhaps variable unemployment benefits. The purpose of such measures is, of course, to stimulate expenditures in recession periods, and to restrain them in inflationary times by leaving more or less money in the hands of business and consumers. This is identical in theory to the suggestion we have already advanced that individual and corporate income tax rates might also be subject to cyclical adjustment. Canadian and British experience with flexible contra-cyclical measures should be studied.

2. Exploration of means for raising the rate of consumer savings.

The single greatest pressure on the price level comes from the single greatest source of expenditure -- the consumer. This rising consumer expenditure flow provides a powerful incentive to growth, and it would be foolhardy to attempt to strait-jacket it.

Nonetheless, a campaign to induce greater voluntary saving would undoubtedly exert a useful counterpressure against too fast a rate of increase. In this regard, suggestions to make government bonds a more attractive avenue of saving, would appear worthy of serious consideration.

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3. A plan for "stockpiling" quickly triggered and useful public works, planned as _local and regional_ anti-recession correctives. An additional stockpile of national public works projects could be held in reserve against a national decline. It has been co-gently pointed out that such a stockpile of projects -- such as, for instance, a massive urban rehabilitation program -- would be a salutary demonstration to many nations of the world that far from relying on defense expenditures for our economic prosperity, we are only hindered by them from undertaking a vast program of national reconstruction.

4. Finally, such a commission would serve as a means for encouraging a more realistic appreciation of the problem of stability in a full-employment economy. It would serve to dispel the depression-mindedness which can lead to an underestimation of the dangers of gradual inflation. It would study the wage-productivity problem and the ability of large companies to pass along wage increases, with a view to educating both sides to self-discipline by candidly appraising the result of indiscipline. It would seek to determine for which areas of economic activity statistical information and warning signals are needed. And not least it would serve to stress to all elements -- labor, business, consumer -- the importance of growth as the criterion by which economic action and policy may be judged.

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V

We have kept until last the most important method by which the government can promote economic growth. This is by direct public expenditure. We need only reflect on the tremendous boost given to the economy by each burst of war spending to realize that the government can, if it wishes, exert on immense expansive influence. But we do not wish to live in a war economy, nor do we desire the government to engulf the economic life of the nation. Hence the questions which a free economy must solve are two: first how much should the government spend for growth?; and second, for what objectives is public expenditure proper? It is fair to say that these are perhaps the most important economic questions with which we shall have to contend over the span of the future.

We may begin to clarify the questions by taking cognizance of the certainty that federal, state and local expenditures over the next twenty years will increase substantially. For quite aside from its usefulness as an economic stabilizing device, public expenditure can promote growth in its own right, it is through public spending that our economy lays down its base of necessary public assets and services. Some of these assets and services -- such as roads or schools -- are essential to support and underpin private growth; others, like research or social rehabilitation, may spearhead new directions of private growth. Recently we have been falling behind in the provision of even our most basic public facilities. Indeed, per capita expenditures on

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public works are now only some eight per cent above the level of the 1930s, whereas a continuation of their trend of expansion in the 20s and 30s would indicate that they might well be almost double their current rate today.

The case for increasing our investment in many forms of public works is very great indeed. River and harbor development, parks and playgrounds, rural electrification and flood control -- all these public assets add in one way or another to our growth. But rather than undertaking a review, item by item, of our needed public assets, we shall illustrate the issue with mention of but a few of the more pressing needs. The first of these is the critical necessity for highways, particularly in view of the expected doubling of our automobile population by 1970. This is clearly a government responsibility, and its annual expenditures on roads are now scheduled to rise from $5-1/2 billion last year to $10 billion in 1960. Many transportation engineers believe that this will be considerably short of the necessary amount -- pointing out that it does not even begin to cover the need for parking facilities in our con- gested cities.

A second area for immediate stepping-up of public assets is the ex-
pansion of our public school plant. As we have already seen in discussing
our educational outlook, the provision of facilities for educating our citizenry
is manifestly a matter of direct concern for growth, and equally patently a
public rather than private undertaking. We have pointed out the need to devote
about ten per cent of our increase in output to education between now and 1965.

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This would mean an added public expenditure of $13 billions at a minimum over the next ten years.

A third area of concern is our national health and welfare -- a matter which is discussed at greater length in our next chapter. Here we may note that the need for expenditures on hospitals alone should rise by over $500 millions by 1965. To these minimally required public assets we must now add the far larger claims of general government, the defense establishment, international aid programs etc. We must postpone to subsequent chapters a detailed consideration of these figures, but we may note now that a conservative estimate for gross government expenditure -- federal, state and local -- for 1965 is $125 billions, compared with $110 billions today.

Needless to say these extremely large figures make explicit the case for internal economy and efficiency in government. The need for a weeding out of non-essential and non growth-producing items is made all the more pressing because of the undeniable requirement for larger essential expenditures. Many of our current government programs are clearly not related to growth, to defensible welfare objectives, or to the provision of necessary public assets. Some of our subsidy programs, for instance, badly need review in this light. The postal deficit is a standing disgrace. Payments to veterans for non-service-connected disabilities costs us nearly $2 billions a year and are tolerated only because of political pressure. Our agricultural payments can be substantially reduced and our next chapter will offer some suggestions in this regard.

Subsequent to this record, payments can be satisfactorily reduced and our next chapter will offer some
a year and are tolerated only because of political pressure. Our stationary
veterans for non-service-connected disabilities costs us nearly $25 billions
view in this light. The postal deficit is a standing disturbance. Payments to
public assets, some of our subsidiary brands, for instance, badly need to
be shown to determinable website selectors, or to the provision of necessity
force. Many of our current development problems are clearly not related to
purchasing because of the unenforceable requirement for further essential expendi-
ture of non-essential and non-growth-producing items is made all the more
for internal economy and efficiency in government. The need for a meeting
will be difficult to say these extremely large figures make explicit the case
for 1962 is $152 billions, compared with $110 billions today.

This estimate for gross government expenditure -- federal, state and local --
detailed consideration of these figures, but we may note now that a figure
international aid program is. We must postpone to subsequent chapters a
add the fat target claims of general government, the defense establishment,
millions by 1962. To these minimally required public assets we must now
that the need for expenditures on hospitals alone should rise by over $200
which is discussed at greater length in our next chapter. Here we may note

A final note of concern is our national health and welfare -- a matter
over the next ten years.

This would mean an added public expenditure of $13 billions at a minimum.

November 29, 1962
Draft Committee XIII - Committee Report

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The need for such economies is real and pressing. Yet under the best of assumptions, the overall outlook is basically unchanged: we must anticipate and indeed urge a considerable increase in government expenditures over the next decade.

Thus our inquiry into the question of what the government should spend for growth brings us necessarily to a complex rather than a simple conclusion. A primary objective which runs throughout our thinking is that government expenditure must be viewed as a means of promoting growth rather than merely as a way of pumping in purchasing power without specific purposes in mind. This means that the rate of expenditure is necessarily keyed to the overall economic condition of the nation. Clearly it is not only proper but necessary to spend more in slack times than in boom times, although the increased economic necessity for government contribution does not mean a careless relaxation in the selection of the projects towards which it is best directed.

But this basic framework serves at best to give us an ideal criterion for determining the volume of expenditure. In fact the problem is far more complex than this overall guide would indicate. For there are some national expenditure objectives which must take precedence over those considerations of economy which a buoyant private sector might otherwise enjoin. National defense expenditures, for example, clearly assume the highest priority at all times. Other programs which contribute indirectly but significantly to

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national security, such as international assistance, can also take precedence
over normal economic criteria. Yet other programs to provide public assets
for which there is an immediate social need, such as additional public educa-
tional facilities may warrant a disregard at normal rules of budgeting. Still
other programs such as slum clearance, whose importance derives from the
moral imperatives of our society, may seem too important to relegate to the
future.

There are no hard and fast criteria by which the need for such public
expenditures can be made. It is no longer always possibly to apply the view
that private expenditure automatically "comes first" and that public expendi-
ture is simply throttled down to that pace at which it nicely complements the
other. The increasing importance and size of government spending for defense,
for international economic objectives, for necessary public assets and for
general welfare poses a difficult and continuing economic problem for a society
which is -- and wishes to remain -- essentially one of free enterprise. Yet
it is a problem whose solution is essentially determined by the political and
social values of our people rather than by calculations of economics. At best
an economic calculus can tell us how expensive our values are in terms of
the resources needed for and the alternatives ruled out by our choice of public
expenditures. But economics cannot tell us whether housing projects are more
important than office buildings, or whether scholarship programs are "worth" the
taxes they cost. These are value judgements which our nation must make.

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All that can be asked of a democratic society is that it form its value judgements within a realistic framework. On the one hand it must have in mind the real gain to be had from its public programs, not alone in economic but in human terms. In our next chapter on welfare policies we shall have a chance to appraise some of our public expenditure possibilities in this light. But a society must also have a realistic sense of limitations. Even in an economy of great present and greater potential abundance such as ours, not everything is within reach. All desires cannot be accommodated simultaneously, simply because we lack the wherewithal. The question of how large our capacities are is therefore a vital question, and we shall devote a chapter to it after our full range of desires and aims, international and national, has been spelled out.

To view its own capacities generously but not untruthfully, and to estimate its needs economically but not meanly, is the supreme economic judgement demanded of a democratic people. It will be the test by which our economic maturity is measured.

VI

If this survey of the problems of an economy of growth seems to present a formidable array of unsolved issues, it must not obscure the opportunities which our very problems represent. The difficulties presented by dwindling resources, the dilemmas and unknowns of tax and fiscal economic

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management, or of the control of public expenditure are real enough, we must also recognize that each of these problems is evidence of our awareness of an opportunity for growth. The resources question challenges our technical skill, our social responsibility, and our political courage in the face of impending physical barriers to growth. Our tax problem asks us to solve in a fashion both equitable and conducive to growth the unavoidable costs of government. Our fiscal quandaries reveal our concern with the balance and equilibrium of a dynamic and expansive economy. The question of our public expenditure not only expresses our determination to keep our economy expansive, but indicates our awareness of alternatives in determining the direction which expansion will take. These are not the problems of bankruptcy, material or moral. They are peculiarly problems of an economy of high hopes and great possibilities.

Thus in our very concern with these problems lies a means of appraising our overall economic philosophy. Private enterprise is a main source of the growth of our economy, but it is not the sole source. The satisfaction of private desires is a main objective of our economy, but it is not the sole objective. The public sector of our economy has come to assume a position of critical, although by no means commanding, influence.

This does not mean that we are a planned economy, nor that we wish to become one. But neither does it allow us to think of ourselves as an economy of planlessness. The mixture of private economic initiative and public economic

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Draft Chapter XVIII- Overall Report

November 25, 1957

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guidance and stimulus suggests that the appropriate label might well be that we are an _economy of responsibility_. For when we set our sights today on A $800 billion economy for 1975 we do not rely solely on the unaided momentum of private expansion to get us there. Indeed that which enables us to talk meaningfully of our economic objective of universal well-being is the assumption that our private growth will be responsibly guided and stimulated by public economic direction and growth.

One need hardly point out the risks and dangers of an economy of responsibility. It is inevitable that as men choose to exercise more control over their economic destinies that they cannot avoid the chance of miscontrol. Yet we must also recognize in the economy of responsibility an immense potential for growth and self-realization. In our mixture of private and public economic drives there is a vitality and flexibility. On our still rich material environment and in our supply of human talent there is the capacity for a great expansion. In our moral traditions lies a bulwark of defense against some of the dangers of the future and a lofty guiding standard by which to set our course. Our true responsibility lies in making use of the opportunity which these material and spiritual resources hold out.