THE UNIVERSITY OF TEXAS AT AUSTIN
COLLEGE OF ARTS AND SCIENCES
AUSTIN, TEXAS 78712

Department of Economics

PERSONAL-CONFIDENTIAL

October 8, 1970

Dear Henry:

Good luck with the cease-fire, et al.

Whether it works or not, I would like to underline the brief note I
left for you when I was in Washington.

If the war goes on, the Vietnamese election of 1971 is a critical
event. The outcome may well depend on the state of the urban economy
and urban social and political life.

If a cease-fire is achieved, the struggle will shift to politics where,
again, the volatile cities will be critical as in most developing countries.

I found the papers generated in Saigon by Chuck Cooper (and those
generated in Washington) extremely intelligent. Clearly, the inflation is
very dangerous and must be stopped. From them flows one simple point.
Aside from exchange rate and other measures which the GVN must take,
it is simply bad policy to skimp in the year ahead on the level of American
imports. Too much is at stake. And you all should remember what is
burned into the experience of the 1960's: it was political disruption in the
cities starting in May 1963 which broke up a hopeful situation and led to the
whole tragic second phase of the war which is still with us.

What is missing from the papers is the need to start now with a
purposeful program of light industry development for the home market and
exports: ply wood and other timber products; modern fisheries and frozen
fish; assembly and component production for radios, Hondas, pumps, etc.

Saigon ought to bargain with the Japanese: no exports to SVN without
starting them on assembly and component production and helping them with
quality control and exports. The same for some of our key exporters. We
ought to bargain with the GVN on a generous level of imports from the U.S.
versus their getting going on their own industrial program.

PERSONAL-CONFIDENTIAL

THE UNIVERSITY OF TEXAS AT AUSTIN
COLLEGE OF SOCIAL AND BEHAVIORAL SCIENCES
AUSTIN, TEXAS 78712

Department of Economics

March 24, 1975

Dear Mr. President:

I believe we are at a juncture in our history which could lead on to a great war -- perhaps World War III.

I also believe this outcome is not inevitable, and that your prompt leadership could arrest the slide.

This memorandum explains why I believe the danger is so grave and suggests some lines of action that might be useful.

## The Danger

We are suddenly confronted with a mixture of economic and security problems which recall the process that led to the Second World War. As a historian, I know history does not repeat itself precisely. Every situation is, in a sense, unique. But the following analogies are too close for comfort:

- a period of world prosperity and growth has been brought to a sudden halt;

- economists and governments are uncertain how to proceed; despite your leadership and Secretary Kissinger's, remedial measures are being sluggishly applied; the peoples of North America, Western Europe, and Japan are shaken, pessimistic, turning inward to defend their status, savings, jobs, families, even at the expense of others in the community;

- the Congressional performance on aid to Southeast Asia has conveyed to one and all - friends, adversaries, and onlookers - a sense that American military power and potential are no longer available to insist that agreements be honored;

- we are in danger of moving into something like the situation after Japan took over Manchuria in 1931.

The voices in the Congress and public opinion polls also echo a bit those of the 1930's. The Executive must be constrained; under no circumstances must our military forces be engaged or the threat made of their engagement; we must concentrate on our economic difficulties at home.

-2-

As you know well, the stability of Europe, of Northeast Asia (Japan-Korea), and of this Hemisphere flowed from the fact that our adversaries were convinced that our military power was credible: in the Berlin airlift of 1948-49 and the Berlin crisis of 1961-62; in the Korean War; in the Cuba missile crisis.

Détente has been built on the credibility of our strength. We started working on the atmospheric test ban treaty on 30 October 1962, two days after the end of the Cuba missile crisis -- at Soviet initiative, but we were ready. President Johnson made progress with the Russians despite the war in Vietnam (including the nonproliferation treaty and the setting up of the SALT talks) because we were a credible power. I am sure your own experience, as well as President Nixon's, confirms this judgment.

Détente with Peking is similarly based on an assessment of our strength: we can help deter a Soviet attack on them; our reliability can keep Japan from going nuclear; they do not want the USSR to gain a strong foothold in Southeast Asia, but they know our role in Southeast Asia is not a threat to them.

I know what a remarkable effort you and Secretary Kissinger are making for peace in the Middle East. But, unless things have changed since my time, the credibility of American strength is the basis for the position of both Israeli and Arab moderates. I have no current information, but I am confident that the recent Congressional performance in Southeast Asia has weakened the moderates in both camps.

If Congress goes on as it did in the 1930's and as it is doing now, we shall have chaos and worse, as nations try to fill the vacuums left by the loss of American credibility: in Southeast Asia, the Middle East, southern Europe, etc. It took the fall of France, the Battle of Britain, and German submarines in the Atlantic to reverse Congressional sentiment on Europe; and it took Pearl Harbor to get us to face reality in the Pacific.

There is right now, blessedly, no Hitler obsessed with visions of world domination. But if we leave a vacuum in Southeast Asia, China will have to move to protect its flank; Russia will probably move to fill the empty chairs left by American policy; India will react as Burma and Malaysia come under pressure. I don't see how Moscow can avoid trying to exploit our discomfiture in the Middle East: after all, they have been plugging away at the area since 1955. And so also with whatever openings are left in Portugal, Spain, Yugoslavia, Greece, Turkey, etc.

-3-

The task, of course, is to reverse the moods and policies of the
Congress before we confront a catastrophe.

## The Remedy

Having been a professional in government, I hesitate to make proposals
in detail. I simply do not know enough about the situation on the ground in
Southeast Asia, the exact state of diplomacy there and in the Middle East, etc.

But I am confident enough of the following four points to lay them before
you.

1. **A Protracted Leadership Meeting.** I believe you should consider a protracted meeting with the Congressional leadership -- perhaps a weekend at Camp David. You might lay out in great detail the world situation and the dangers we confront if things are permitted to slide. You might tell them you plan to address a Joint Session of Congress explaining where we are, what we must avoid, and what specifically you want Congress to do. You might recall to them what all of our generation lived through: Senators Nye and Borah died in their beds; but a hell of a lot of our generation did not. We have no right to repeat that story in a nuclear age.

2. **Re-establishing U.S. Credibility.**

a. **Southeast Asia.** There must be more than rhetoric. Whether Congressional aid to Cambodia and Vietnam is enough, I do not know. Whether air and sea units should be sent out to the area -- again, I don't know, but they shouldn't be sent unless there are circumstances in which we would again use them. But if we propose to draw a line anywhere in Southeast Asia, now is the time to do it.

b. **Middle East.** Whatever it is that we shall have to promise Israel and the Arab moderates as part of a stable settlement might be shared with the Congress. Perhaps we need a Joint Middle East Resolution to back our diplomacy at Geneva, assuming a Geneva conference is on.

c. **Military Budget.** The Congressional handling of our military budget is part of the credibility problem; but it is not central. What Congress must recognize is that the whole security structure in the world is endangered -- and the national security of the United States is endangered in the most narrow, literal sense -- if it comes to be believed that U.S. military force will not be used to enforce agreements and commitments we make. Nevertheless, a Congressional willingness to accept the Executive Branch military budget would help some.

[1c]

-4-

3. **Public Opinion.** Evidently, both the President and the Congress face problems with public opinion. The conventional wisdom is that the American people want no part of trouble in Southeast Asia and the Middle East. And they sure don't. On the other hand, the older generation remembers appeasement and the 1930's; and, as a teacher close to the young, I can tell you the events of the past several weeks have hit students hard. In the past week I have been in California (Claremont), San Antonio (Trinity), as well as here in Austin. The students are worried. They come at me not to re-argue the old Vietnam debate, but to ask: what's happening; does it mean war; how can we halt the slide? They have no trouble at all seeing the connection between Southeast Asia and the Middle East.

Only you can make a responsible judgment on this matter, but it is my distinct impression that American public opinion is in a process of change -- even Dan Rather on this morning's CBS show!

What I'm saying, ultimately, Mr. President, is that you and the Congressional leadership must agree to go jointly to the American people; tell them the truth about the dangers we face, as only the President is in a position to perceive them; tell them what the Congress must do and they must support.

My guess is that if it's laid out cold turkey at Camp David, you have a fair chance of getting the response President Truman did from Senator Vandenberg on February 27, 1947: I will support you (on Greek and Turkish aid) if "the grim facts of the larger situation [are] laid publicly on the line...."

I believe our people are wise and resilient and courageous when told the truth and remedial lines of action are proposed. In any case, I do believe the dangers are so great you ought to try; for every day that passes is raising the ultimate cost of re-establishing our credibility.

4. **Economic Policy.** Some further economic measures might well be included in a Joint Session package. In a recent *Newsweek* piece I made two proposals:

- accelerated programs of investment through public-private cooperation;

- a wage-price agreement now -- at the bottom of the recession -- that would end wage-push inflation.

MY TURN: W.W. Rostow

Investing in the Future

There is an old-time economic religion of American liberalism as well as American conservatism, and both fail to come to grips in a satisfactory way with the current problems of unemployment and inflation.

If we do not break out of the terms of the debate as set by the old believers of both sides, we are in danger of wallowing for a long time in a world of chronic severe unemployment and chronic severe inflation—a fair description of the prospect held out to us by the Administration's predictions for 1975-76. We are also in danger of presenting to ambitious leaders abroad such an image of disarray that they decide to act in ways that might endanger the peace.

First, unemployment. The conservative pundits argued until recently that high and protracted unemployment was the only way to defeat inflation, then identified as the nation's primary task. They have now learned from the public-opinion polls what some of their predecessors learned in the elections of 1958, 1960 and 1970: the American political process will not tolerate that kind of unemployment. Therefore, President Ford has turned to the prescriptions of the liberal pundits with a modest income-tax cut and an enlarged Federal budget deficit. But he also proposes to cut gasoline consumption by raising the gas price. Virtually the whole political debate on the economy is now centered on these two questions: How big should the tax cut be? Is gas rationing preferable to a price-raising gas tax?

EXPANSION

The fact is that no politically realistic tax cut is capable of getting us back to full employment. Moreover, a tax cut is an inadequate prescription for our ills. What we need is a massive expansion of investment in certain specific directions.

Why?

We are deflating the automobile industry and everything connected with it: steel, rubber, plastics, etc. This makes sense. The automobile industry was overexpanded on the basis of artificially low energy prices which, at best, are not likely to return for at least a generation. The same is true of electric-powered durable consumer goods. For more than a half century the progressive diffusion of the automobile and durable consumer goods has played a key role in the expansion of our economy.

What is going to fill the gap in our

economic structure their deflation is creating? The answer is: enlarged investment in domestic energy production and conservation; insulated housing; solid-waste disposal; urban transport; agriculture; research and development over a wide range and in a big way. Expanded investment in these and other necessary directions should be the primary instrument for bringing us back to full employment and toward the structural balance we must evidently try to attain in a world of scarce energy and food and endangered water supply. As a practical matter, an expansion of investment on the requisite scale awaits in each case significant government action to clear the way—and in some cases, large government funds.

URGENCY

To the expansion of investment in the new key sectors through public-private cooperation we should bring the urgency we would to a war economy. We should separate out the investment component of the Federal budget and permit it to expand on different principles than those we would apply to its less productive components.

Now, what about wage-push inflation? The latest strike settlements imply an annual wage increase of more than 12 per cent per year, at a time when our average productivity has actually declined. There is, literally, no way that inflation can stop with wage increases of this kind. Neither conservative nor liberal economists, neither Mr. Ford nor Mr. Albert, is facing up to this fact.

Wage-push inflation is only going to be contained by a political negotiation, led by the President, backed by Congress, that relates wages to productivity increases; assures that no labor group (or leader) suffers significantly vis-à-vis any other; assures that (through price policy, excess-profits taxes, etc.) business will not exploit labor self-restraint to expand profits excessively. We now know three things about such negotiations: they are possible; they are difficult; they have not been sustained over long periods. We also know that in modern democratic societies, fiscal and monetary policy cannot do the job alone.

In 1961-62 President Kennedy worked out a rough-and-ready version of such an arrangement. The pattern was set in a negotiation with Walter Reuther of the United Automobile Workers in June 1961. He agreed to a wage increase

of 2½ per cent—matching the average productivity gain in the economy—on two conditions: that David McDonald's steel-industry bargaining, which was to follow

immediately, result in no higher wage increase; and that there be no increase in steel prices. JFK met these conditions, and the pattern of restraint thus set, backed by the formal enunciation of wage-price guideposts in January 1962, held until 1966. Its weakening in 1966 was not inevitable, if President Johnson and the Congress had then increased taxes and handled the airline machinists' strike during the summer of 1966 with greater wisdom.

The destruction of wage-price guideposts by President Nixon in January 1969, contrary to the advice of his predecessor, was also not inevitable. Nor was the somewhat cynical effort of Nixonites to use their later experience (of 1971-72) to assert such arrangements cannot work. Those at the top of the Nixon Administration never tried. We as a nation must try again.

TYRANNY

I conclude, then, that we need to focus on great issues systematically concealed by the apparently contending advisers to Republican and Democratic politicians. If we go on the way we are, we are going to have some kind of restraint on gasoline consumption; a Federal budget deficit bigger than Mr. Simon would like, smaller than liberal economists would like. But by themselves, these measures are not going to solve the problems of structural unemployment, energy, food, the environment or inflation.

We shall not begin to get hold of our problems until we break out of the tyranny exercised over our minds and policies by the reigning economists, all of whom can think only about demand, and focus on the problems of supply and investment. We must focus equally on the task of political negotiation we face in controlling inflation in an age when citizens know unemployment is an act of man, not of God.

Rostow, a former JFK and LBJ adviser, is a professor of economics and history at the University of Texas at Austin and author of the forthcoming book, "How It All Began."

W. W. Rostow Paper for the
Conference on National
Economic Planning,
Chamber of Commerce of the
United States,
Washington, D. C.
November 12, 1975

# The Case for Sectoral Planning

## I

I am told by the organizers of this conference that I was invited to speak today because of the following passage in a paper I recently published:¹

> "We must operate in a world somewhere between a Keynesian mixed economy and an indefinitely prolonged war economy. We need to cultivate again the kind of indicative sectoral planning developed in Western Europe in the postwar years of reconstruction, but this time on a broader international level."

I believe that proposition holds for the next quarter-century, and perhaps for longer.

I take that view because I believe planning the sectoral pattern of investment is the key to the problem of returning to full employment and resuming a high rate of growth in the United States, the OECD world, and in the developing nations; and it is equally the key to the structural adjustments in energy, agriculture, raw materials, and the environment required to maintain the viability of the world economy. As in wartime, we

1. "The Developing World in the Fifth Kondratieff Upswing," *Annals*, No. 420, July 1975, p. 114.

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must concern ourselves not merely with the level of investment and output or with the real rate of increase in investment and national output. We must concern ourselves also with the composition of investment and the composition of output. Our concern is not, of course, as detailed as it is in a war economy where reasonably precise sectoral targets are required over a wide range: uniforms and blankets, planes and ships, tanks and guns. But we are and shall remain in a world where certain types of energy and agricultural output, certain levels of purity in the air and water, certain kinds of raw materials production are achieved and sustained in our own country and in other regions of the world. And it is my central judgment that the approximation of those targets requires a significant degree of national and international planning which is not now taking place.

The point I seek to make is at once quite simple and quite difficult. In arguing it over the past year with neo-Keynesian economists, I am reminded of Keynes' observation in the Preface to his *General Theory*² on the probable reaction to his book of classical economists who "will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new." The difficulty arises because a sectoral approach to investment and output clashes directly with the reigning modes of economic thought. These suffuse our minds more powerfully than we know. They drive us towards highly aggregated concepts focused almost exclusively on the level of effective

2. J. M. Keynes, *The General Theory of Interest, Employment, and Money*, New York: Harcourt, Brace and Company, 1936, p. v.

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demand which make it difficult to think systematically about our
structural problems of supply. Evidently, population, food,
raw materials, energy, air, water, and research and development
have moved to the center of the stage in the world economy.
We must act to try to make them move in the right directions.
But these are variables which in modern economics are dealt with
in one of four ways: they are left out of our equations (e.g.,
air and water); they are assumed to be fixed; they are introduced
as exogenous, from outside our equations (e.g., population); or
they are assumed to be easily and automatically evoked, in the
correct amounts and patterns, by the price and profit incentives
set up by our equations (e.g., food, energy, etc.). For good or
ill, the kind of world in which we live and shall live is not
well illuminated by frames of thought which are both highly
aggregated and structured so as to rule out or to make dependent
critical aspects of supply. An authentic revolution in economic
thought is involved in the propositions I shall develop today.
As always, the constructs of the past have not been rendered
wholly irrelevant. As I said at the beginning, we shall con-
tinue to live, in part, in a Keynesian mixed economy where we
shall continue to need the tricks and methods of modern income
analysis. But Walter Heller spoke with precision as well as
wit when he said in December 1973: "We [economists] have been
caught with our parameters down." A great deal of useful *ad hoc*
work is now going forward, conducted by economists and others,

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addressed to the problems of energy, population, food, etc. But before we have a firm grasp on our times and its problems -- before politicians and citizens see the panorama we confront and what we must do to cope with it -- we economists will have to create new structures of thought, which fit these problems into a comprehensible dynamic theory of production and prices. That dynamic theory must be based on a different set of parameters than those now conventionally taught or buried implicitly in our arguments and prescriptions; and, in the end, it should provide the intellectual basis for the sectoral planning we require.

## II

So much by way of introduction. I shall develop this theme in four segments:

- First, the relation of sectoral planning to our return to full employment;

- Second, the relation of sectoral planning to the medium term structural adjustment required in the world economy (and the United States) between now and 1985 and, indeed, over the next quarter-century, as nearly as we can perceive;

- Third, a brief aside on inflation;

- Finally, some observations on the implications of all this for the position of the United States in the world arena, our security, and the prospects for peace.

First, then, the return to full employment. The debate about the current state of the American economy is characterized by a curious paradox. The paradox illustrates the clash between

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highly aggregated and sectoral methods of analysis. On the one hand, we are worried about the sluggish recovery now taking place in the United States and the OECD world. The forecast is that by the end of 1976 we shall still be wallowing along with something like 7% unemployment. If past patterns hold, this implies perhaps 12% unemployment for non-whites, 18% unemployment for those (white and non-white) 16-19 years old. In Europe, governments tend to look for an export-led return to full employment; but, as the London *Economist* recently reminded its readers,³ "You Can't All Export at Once." At the moment, the estimates are that the OECD world will move ahead in the second half of the 1970's much more slowly than in the 1960's, with serious decelerating consequences for the rate of growth in the developing regions.

On the other hand, economists and others are worried about a capital market crunch. Adding up the volume of investment required for new forms of energy and energy conservation, anti-pollution programs, and other investment implications of stated public objectives, many feel instinctively that, in the time ahead, the United States will require a higher investment rate in relation to gross national product than in the past. The OECD energy analysts, for example, after estimating a rise of 44% in the proportion of energy to total gross fixed capital formation, between 1977 and 1985, with oil at $9 per barrel, counsel against seeking a much higher level of energy independence because of its potential conflict with "other objectives

3. July 12, 1975, p. 68.

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of government policy concerning income distribution, industrial structure, and policies aimed at combating inflation."⁴

In their analysis of *Capital Needs in the Seventies*, James Duesenberry and his colleagues examined carefully whether 'we could afford the future' in terms of capital requirements for high priority social purposes.⁵ They conclude: "We can afford the future, but just barely"; that is, they calculate increased outlays for energy, anti-pollution measures, and public transport, are more or less balanced out by relatively diminished outlays for education and the interstate highway system if there are no new major social programs, if we move to a federal budget surplus, and if a high average rate of growth yields its flows of both private investment resources and government revenues.

The paradox of severe unemployment and unused capacity versus the capital crunch was vivid but unresolved in the response of Walter Heller to Secretary of the Treasury Simon's proposal this summer for increased tax incentives for private investment.⁶ Heller points to American industry operating at about 80% capacity.

4. "Energy Prospects to 1985," summarized in *OECD Observer*, No. 73, January-February 1975, pp. 18-19. The caution is expressed with respect to a full exploitation of OECD's energy import replacement potential, which would reduce the proportion of imports by 1985 to 2-7%, as opposed to 36% in the early 1970's, 21% in the "$9 case".

5. Barry Bosworth, James S. Duesenberry, and Andrew S. Carron, *Capital Needs in the Seventies*, Washington, D. C.: The Brookings Institution, 1975.

6. "Taxes and the 'Capital Shortfall,'" *Wall Street Journal*, August 19, 1975.

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He implies that to cut business taxes now would be pushing on a string: there would be no significant investment response. He argues that the aggregate level of investment in relation to GNP has remained stable over the past decade; that a high rate of economic growth would generate the savings and investment to meet the investment needs of the next decade; and that we require, therefore, increased general stimulus to consumption and a closing of tax loopholes rather than regressive tax changes to stimulate investment at a time of large, idle industrial capacity. As a debating matter, Professor Heller scores some good points; but this is because the Ford administration then posed the problem in an over-aggregated way, permitting Heller to reply in similar terms. With great respect, I submit that both Simon and Heller fail to get at the root of the matter.

What is required in the United States (and in other OECD countries) to get back to full employment is not an undifferentiated expansion of investment; but a rapid expansion in certain particular directions. We now know those directions in the United States: new energy resources; energy economy; investment to clean the air and water; insulated housing; mass transport. To these I would add, for reasons I shall later develop, radically expanded investment in R&D and, quite possibly, investment to rehabilitate agricultural acreage we believed was arable until we took off acreage restrictions and found the land sub-marginal.

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My central point, then, is quite simple: the return to full employment should come from rapidly expanded investment in certain key sectors; private enterprise has a role in each of these sectors; but in none of them will investment expand promptly enough and on a sufficient scale to bring us back to full employment unless the government acts in various ways to make investment flow. In some cases, direct government outlays are necessary; in others, the settlement of conflicts between production and environmental criteria; in others, legislation is required; in others, one form or another of subsidy or guarantee.

Thus, to get back promptly to full employment requires more of government policy than either Simon or Heller imply; although, evidently, intelligent fiscal and monetary policies retain an important role. A return to full employment on a viable basis requires intimate and painstaking sectoral collaboration between the public and private parts of our society.

As one who would prefer to see private enterprise carry forward the economy to the maximum and who believes government intervention has its costs, as well as benefits, let me put the question bluntly: Why is it that neo-Keynesian prescriptions for reducing unemployment through stimulus to consumers demand are not now sufficient? The answer is that the inescapable imperatives of higher energy prices and, for some advanced industrial countries, a sharp unfavorable shift in the terms

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of trade, have cut into real income. These factors (reflecting both price and income elasticities of demand) have radically reduced consumers' outlays on postponable items; notably, automobiles and other consumers durables. They have also reduced the demand for housing. Against this background, and the combination of inflation and recession, governments cannot compensate adequately by rapidly expanding real outlays for social services (e.g., education and health care). These may, in any case, be approaching natural limits. The rapid expansion of OECD exports to the OPEC countries has been a balancing factor in terms of employment. But it also constitutes a quite insufficient compensation for these decelerating private and public outlays. Thus, the rise in energy prices has weakened the leading sectors which have carried forward economic growth in North America, Western Europe, and Japan over the past quarter-century. Resumed prosperity and growth require a massive shift of investment in new directions; and these directions (unlike automobiles, durable consumers goods, and suburban houses) require an enlarged government role and serious, sustained public-private collaboration.

Put another way, it is the multiplier (expanding income and employment through new forms of investment) rather than the accelerator (expanding investment through the increase in income), that will be rather more required than in the recent past to pull the OECD world out of recession and back to sustained growth. In a sense, we are returning to the dynamics of the

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pre-1914 world economy -- the world of railroads, steel, and
the opening of new territories -- as opposed to the environment
we have known since the 1920's when the leading sectors of high
mass-consumption emerged, and investment was closely linked to
the expansion of consumers' outlays on durable goods and certain
services. This proposition relates, of course, to a marginal
shift in the relative role of the two inter-acting mechanisms,
not to a complete reversal. Surely, various built-in supports
to the level of income and consumption have cushioned the re-
cession of 1974-75 in the OECD world, as have government defi-
cits; and this cushioning has prevented even greater declines
in investment levels than those which have in fact occurred.
And surely, as I have said, fiscal and monetary policy must
contribute further to the return to full employment. Neverthe-
less, the marginal shifts required in the workings of the OECD
economies are of significant orders of magnitude. They are the
basis for my short-run case for sectoral planning.

### III

I turn now to the longer run case for sectoral planning.
A new phase in the history of the world economy began at the
close of 1972 when bad harvests and the Soviet grain deal caused
a convulsion in grain prices. World food reserves, waning in
the 1960's as a proportion of world consumption, suddenly dis-
appeared. At the same time, United States gas and oil reserves
in relation to consumption were declining, and production

11

began absolutely to decline after 1970. Then in the autumn of
1973 came the quadrupling of the oil price. Raw material prices
simultaneously moved up across the board under pressure of a
powerful worldwide boom. Although raw material prices have con-
siderably softened in the subsequent recession of the industrial
world, most analysts would agree that the prospects in the time
ahead are for relatively expensive energy and food; and if the
world economy recovers its lost momentum, in raw materials as
well. The price revolution of 1972-75 yielded an accelerated
general inflation; an extremely high range of interest rates;
pressure on the real wages of industrial labor and on those
with relatively fixed incomes; a shift of income and in the
terms of trade favorable to producers of food as well as energy.

This is the fifth time in the last two hundred years that
such a shift in relative prices has occurred; and on each of the
other four occasions it has been accompanied by exactly the
manifestations we have experienced since 1972. The other four
occasions occurred in the 1790's; the early 1850's; the second
half of the 1890's; and the late 1930's. On each occasion these
prices then remained in a relatively high range for about a
quarter-century. A roughly equal period followed in which the
trends reversed. Each of these periods was, in an important
sense, unique; but the fact is that the world economy for almost
two centuries has been subject to a rough and irregular pattern
of long cycles in which periods of about 20 to 25 years of high
relative prices for food and raw materials gave way to approxi-

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mately equal phases of relatively cheap food and raw materials.
The last downswing ran from 1951 to 1972. I am not wedded to
the notion that these cycles will continue into the future.
But I would guess that the inexorable pressure of excessive popu-
lation increase in the developing world; the tendency of the poor
to spend increases in income disproportionately on food; the
rising demand for grain-expensive proteins; the pace of indus-
trialization among those catching up; and the strains of the
energy crisis will persist. Given these powerful and sustained
demands operating on food, energy and raw material prices, and
the costs we shall have to incur to achieve and maintain clean
air and water, I believe we are in for a long period when the
prices of these basic inputs to the economy will remain rela-
tively high. Down to 1914 the classic response was to open
new agricultural and raw material producing areas: the American
West, Canada, Australia, Argentina, the Ukraine. The great
movements of international capital during this era were, in
substantial part, induced to bring new supplies into the market
and to restore balance in the industrializing world by the price
system, combined with new technologies of transport and pro-
duction. But we confront this trend period in a setting quite
different from that of the past. We cannot rely wholly on the
automatic workings of the price system and private capital mar-
kets to restore and maintain balance. All over the world, in
one way or another, policy toward resources is in the hands of

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governments or is strongly influenced by governments. At every stage, therefore, public policy will be involved, seeking, if we are wise, to reinforce -- and in some cases to control -- the incentives and constraints set up by the price system.

What, specifically, do we have to do to bring the world economy back towards some kind of balance?

First, we need a concerted effort among energy importers to generate a mixture of expanded output and energy conservation sufficient to give us the bargaining leverage to negotiate a rational and equitable long-term agreement with OPEC. A large part of that effort must be undertaken by the United States, given the availability here of alternative energy resources and, perhaps, greater margins for energy economy. As among Western Europe, Japan, and the United States, only we command the capacity to reduce sharply our OPEC imports by 1985. We owe it not only to ourselves but to all energy importers to do so. If we do, there is a fair chance that an agreement could be reached between OPEC and the importers reconciling the three criteria which ought to be respected: an energy price sufficiently high in the United States and other advanced industrial countries to encourage economy and conservation and to induce the R&D required to supplant oil and gas as a primary energy source by, say, the end of the next generation; a politically and economically reliable flow of oil to consumers in advanced industrial countries at a price which does not impose chronic economic stagnation through excessive balance of payments pressures;

14

[L.C.]

a reliable long-term flow of oil to non-OPEC developing nations which would permit them to accelerate agricultural production and resume over-all growth at high rates, either via a concesional oil price or via long-term OPEC aid on a scale (along with OECD aid) capable of achieving the same dual objectives. To achieve the requisite bargaining position, the OECD world evidently requires a concert among national programs of energy production, conservation, economy, and R&D we have not yet achieved. The price system is slowly pushing us in the right directions; but the price system by itself is palpably insufficient. And then we shall have to achieve a diplomatic concert for the negotiation with OPEC which also does not now exist.

Second, agriculture. It is now agreed in the international community that while the OECD world can help, the task of feeding the inescapable increase of population in the developing world between now and the year 2000 must be undertaken primarily through a sharp increase in the rate of growth of agricultural output in Latin America, Africa, the Middle East, and Asia. This is an important consensus and a major result of the various international meetings of the past two years. As I say, the OECD world can help in various ways: by generating reserves for famine; supplying capital and technical assistance; offering enlarged markets for some agricultural exports. But the crucial variable may be the rate of increase of chemical fertilizer consumption in the developing regions. To achieve that increase will require public-private collaboration on a truly interna-

15

tional basis. The domestic agricultural policies of developing nations are involved as they affect the incentive for farmers to use more fertilizers; their policies towards foreign private investors in their countries are, in some cases, involved; the direction of public as well as private aid flows is involved; the possibility of guarantees may have to be considered in case of temporary fertilizer surpluses, so that investment in fertilizer capacity can proceed at a high rate without excessive anxiety; and, finally, there is the question of the price of fertilizer feedstocks, which comes to rest on OPEC's price or OPEC's aid. Here, evidently, is a task for sectoral planning on an international level of critical importance.

Third, international anti-pollution measures. In the OECD world, nations have generally moved to increase investment significantly to clean the air and water. This is proving a manageable but expensive task. We may argue about standards, time periods to achieve them, and trade-offs; but the fact is that we have irreversibly accepted the fact that air and water are not free goods; and we shall have to argue about and plan the air and water sectors for as far ahead as any of us can peer. But we have barely begun the task of coming to grips with the international dimensions of the problem, notably with respect to the seas and oceans. Here, again, sectoral planning will have to become international if the Atlantic and Pacific, the Baltic, Mediterranean, and Rhine are to be tolerably maintained.

16

Fourth, raw materials. The world recession has, for the moment, cut raw material prices. If the world economy resumes and maintains high growth rates, a range of issues similar to but less acute than those we confront in energy will assert themselves. As in the case of energy, there is no known physical limit to raw material resources on the planet. But a great deal of creative effort will be required to continue to fend off diminishing returns; to conserve and recycle; and to create an international framework within which the legitimate interests of producers and consumers are reliably guaranteed.

Fifth, R&D. I cannot prove it, but I am morally certain that the maintenance of a rapidly growing industrial civilization requires a substantial increase of investment in the form of R&D. The imperatives of our situation are already at work in the energy sector. The most thoughtful analysis of American agriculture I know commends an increase in agricultural R&D; that is, the report on Agricultural Production Efficiency⁷ done by the National Academy of Sciences. We ought to be learning more about climate, as well as new anti-pollution technologies. I would expect us to have to be creative with respect to raw materials over the next generation. We owe it to the developing nations to find birth control methods that are cheaper, psychologically easier to accept, and longer lasting than any we now have. There is a lot more to bringing birth rates down rapidly than birth control devices. But their inadequacy has diminished

7. Washington, D. C.: National Academy of Sciences, 1975.

17

the effectiveness of family planning efforts in the southern
continents.

The list could, evidently be extended; but the underlying
reason for my judgment about the necessary scale of R&D is that,
as compared to the longer past, we cannot generate the new,
necessary inputs to the world economy simply by opening up new
territories. There is no American West, Argentina, Canada, or
Australia to redress the balance of industrial civilization.
A few frontiers there are: Alaska and the North Sea, Siberia
and the seabeds. But every projective analysis of the longer
future I know -- pessimistic or optimistic -- comes to rest
technically on the capacity of the human race to continue to de-
feat classical diminishing returns with R&D and thus to provide
a viable base for a global industrial civilization whose vast
scale will be determined by both the inescapable expansion of
the world's population over the next century and the determina-
tion of the developing world to achieve a meaningful version of
affluence.

From the special perspective of this discussion of plan-
ning, R&D is a form of investment that requires a significant
public role. A great deal can be done and should be done by
the private sectors in response to private profit incentives;
but public policy must set priorities and otherwise assure that
R&D is directed to ends which respect non-economic values
(including the environment and national security) and which
guarantee work is done which is too large, risky, or distant
in time for the private sector to undertake.

18

And if, as I believe, R&D may prove to be our scarcest and
most vital sector for the next generation at least, there is,
as with energy, agriculture, raw materials, and the environment,
a whole new world of diplomacy to pioneer in achieving effective
coordination of national efforts geared to commonly perceived
priorities.

So much for my positive longer run case for sectoral planning.
I could, of course, debate the matter much more simply. The fact
is, governments are in the sectoral planning business, including
the government of the United States. Indeed, bad sectoral plan-
ning, here and abroad, accounts not for the existence but for
the severity of our current agricultural and energy problems.
Governments are deeply involved in R&D. There is no indication
governments are about to get out of the sectoral planning busi-
ness. The objective, therefore, is to do the best job intelli-
gence and a sense of proportion permit. But to arrive at this
conclusion, by one route or another, is the beginning, not the
end of the matter.

Governments face tasks as basic as new forms of data col-
lection and as difficult as guiding the private sectors on to
the right patterns of investment without frustrating them and
destroying their powers of initiative. With respect to energy,
for example, Edward Teller's report® concludes with fourteen
substantive recommendations for federal action under the heading
of conservation; nine bearing on energy in relationship to the
environment; seven with respect to oil and gas production;

8. *Energy: A Plan for Action*, New York: Commission on
Critical Choices for Americans, 1975.

19

[LC]

four with respect to coal; seven with respect to nuclear re-
actors; two with respect to electricity; twenty-two with res-
pect to R&D; five bearing on demonstration plants; one con-
cerning underground nuclear plants; three with respect to highly
specific forms of international cooperation; and four general
and institutional recommendations, including the creation of a
National Resource Mobilization Corporation, a recommendation to
which the Ford administration has already responded. Every one
of these seventy-one recommendations involves technical and/or
policy complexities, including, in some cases, legislation.

The Ford Foundation report on energy concludes with almost
as long a list. Studies of family planning, agriculture, raw
materials, and the environment emerge with similar catalogues
of recommended public action, national and international.

Without accepting or rejecting any particular prescrip-
tions, they all reflect a simple fact: in the modern political
world the price system will not suffice to bring about the kinds
of structural adjustment -- the changed patterns of investment --
our common situation requires. This does not mean we must create
large new bureaucracies. The bureaucratic raw materials for
effective national planning are sprawled all over this city,
in a variety of poorly coordinated departments and agencies.
What we lack are three things:

-- The kind of data intelligent sectoral planning
demands;

9. A Time to Choose: America's Energy Future, Cambridge,
Massachusetts: Ballinger Publishing Company, pp. 325-343.

20

-- A Council of Economic Advisers and a centralized Economic Policy Council organized so that they can set, in coordination with the Congress, national sectoral targets in relation to what is going on in the world economy as a whole;

-- And, above all, new attitudes of mind in the Executive Branch and the Congress, the business community and the public, which would support the collaboration of private and public segments of our society in achieving large common purposes.

But behind each of these requirements is the basic need for a consensus on where we are in the sweep of our own economic history and the evolution of the world economy; and a common sense of direction for the next years and generation.

## IV

Now one observation about inflation which is, evidently, as large a subject in itself as planning. Inflation relates to planning technically because wage-push inflation complicates the investment tasks we face, erodes provisions for the future, inhibits the vigorous pursuit of full employment, and, by setting each group in society against every other, makes difficult the national consensus we badly need for effective planning.

My observation is that the coming together of the public and private institutions of our society needed for selective sectoral planning should also make it easier for us (and the OECD nations in general) to bring under control the pathology of wage-push inflation. As an early observer of European income policies remarked, a disciplining of wages and prices must be

21

[LC]

"part of a coordinated effort to achieve a clearly defined
national objective."¹⁰ The appropriate objective of the OECD
nations should be clear enough: to resume regular growth in
ways which maximize the chance that their own societies and
the larger civilization of which they are a part remain viable,
Within the framework of that kind of consensus, it ought to be
possible to achieve stable social contracts relating money wages
to increases in productivity, and to do so in ways which do not
result in an excessive surge of profits. My own preferred
formula is radical by the standards of contemporary neo-Keynesian
economists but more understandable to students of economic his-
tory who have examined the protracted periods in the past when
wages were stable, prices falling, and real wages rising. It
should also commend itself to those who have examined the
dangerous problem of wage struggles and strikes in the public
service sector of our economy. My formula is: a protracted
wage freeze for at least five years, accompanied by strong,
credible measures to ensure that increases in productivity are
passed along to the consumer in lower prices and not trapped
in excessive profits. This would require not merely mutual assur-
ances among business, labor, and the Executive Branch, but also the
backing of the Congress. Ultimately, what is involved, however,
is not a technical formula, but a coming together of labor,

10. Mark Leiserson, *A Brief Interpretative Survey of Wage-Push Problems in Europe*, Study Paper No. 11 for Consideration of the Joint Economic Committee, 86th Congress, 1st Session (Washington, D. C.: GPO, 1959), p. 55.

22

[LC]

business, and government to achieve a common goal. And, in this case, the common goal reflects the authentic long-run interests of business and labor, since both groups suffer severely, on balance, from the multiple consequences of wage-push inflation. I am well aware that it is not easy to create a negotiating framework in which authentic long-run interests triumph over even chimerical short-run interests. The mediocre record of efforts in this direction by OECD nations over the past generation underlines the psychological, institutional, and political difficulties involved. I raise this issue without naivety. But in a time when a higher sense of communal purpose will be, in any case, required to move the major sectors in the right directions, the chances of instituting more stable social contracts, capable of disciplining wage-push inflation to common advantage, should be enhanced.

V

Now a final word about the relationship of this argument about sectoral planning to the larger questions of the American role in the world and the task of moving towards stable peace.

If I am right about the character of the period we entered at the close of 1972 and the character of its remedy, the responsibilities of the United States and our potential for influencing constructively the world economy have risen in a rather dramatic way. The American role emerges from five circumstances.

23

[LC]

First, the United States, if it continues to nurture its agricultural base, is and should remain the dominant source of food exports, including exports required to certain developing nations until their own production can be expanded at a higher pace. About 75% of the world's grain surplus flows from the United States. The United States agricultural export capacity is also a significant cushioning factor in our balance of payments strengthening the relative position of the dollar among the major currencies and making more possible large oil imports. In addition, the flow of grain from the United States is important to the Soviet Union, Eastern Europe, and China, all of which are now in a chronically deficit position. The deficit each year varies with the harvests, but it is not likely to disappear. This import requirement does not give the United States a blackmail power over the foreign policy and international behavior of these nations. But it is a fact of life with which they must reckon — and a stabilizing fact of life.

Second, as I noted earlier, the United States alone commands sufficient alternative energy resources to reduce sharply OECD dependence on OPEC oil and, thereby, set the stage for well-balanced agreement between oil producers and consumers. If we do so, OPEC would face the choice of reducing its prices or forcing certain of its members (notably, Saudi Arabia) to cut output to unacceptable levels. The combination of good weather last winter and the OECD recession began to pose this

24

[LC]

problem to OPEC at its recent meeting. But they have thus far
been protected because the United States lacks an energy policy
worthy of the name. If we are to get a rational oil policy in
the world -- relieving the burden imposed by OPEC on the poorest
nations, easing the vulnerability of the OECD nations, insulating
our foreign policy from blackmail -- it will come about only if
we break the costly impasse between the President and the Congress
and get on with the job.

Third, the energy and energy-related investment require-
ments in the United States are so large that it should be
easier for the United States to return quickly to full employment
and thereby help lead the OECD world in that direction. Changed
patterns of investment will be required in all OECD countries
in the next phase of growth. They cannot rely wholly on a prior
American revival permitting a return to full employment based on
expanded exports to the United States. Nor can they continue
to rely, as over the past generation, on rapid expansion in pro-
duction of automobiles, durable consumers goods, and other
energy-intensive products. But the scale of additional invest-
ment required in the United States in the expansion of energy
output, the diffusion of methods for energy conservation, mass
transport facilities, insulated housing, and energy R&D are
such as to make it somewhat easier for the United States than
for others to return to full employment on such foundations and
to help, at least, to lead the OECD world back to full employment
and regular growth.

25

[LC]

Fourth, the United States evidently has special advantages and responsibilities in the R&D sector as a whole. The American advantage stems from the absolute scale of our R&D resources and the potentialities for orchestrating them efficiently within a single national community. The proportion of United States GNP spent on R&D has fallen into the same range as that, say, of Germany and the United Kingdom (say, 2.2% per annum); but the absolute level of American R&D expenditures still towers over that of the other major industrial nations -- by a factor of ten. If organized around the appropriate priority tasks they are an asset of universal value; and they place on the United States a special responsibility in bringing about effective international cooperation in this domain.

Finally, the United States has a special responsibility for political leadership in dealing with the new economic agenda. In part, this flows from our potentialities in agriculture, energy, research and development. But it is also the case because if the United States fails to lead there is, as yet, no nation or political group that can fill the gap: Western Europe is insufficiently unified; Japan too vulnerable; the Soviet Union too constricted by its ideological commitments to lead comfortably a heterogeneous mixture of polities; China is similarly constricted and at a stage of development when its inner problems and border anxieties must dominate its energies. Leadership in this context in no way implies dominance. It requires a mixture of three elements: a national capacity to

26

[LC]

act significantly with respect to the major issues; a capacity
to define common objectives in ways that are not excessively
self-serving; and, then, the capacity to help translate those
objectives into a working agenda, and to help move it forward
with dogged stubbornness. These are assets the United States
potentially commands.

After a wobbly start in 1974, the United States began to
exercise this potentiality in the critical area of North-South
relations during the September 1975 special session of the
United Nations Assembly. Over the previous year things went
badly. There was the acrimonious United Nations General Assembly
debate of April 1974; the population meeting at Bucharest; the
food conference at Rome; and the sterile session on the law of
the sea at Caracas. In all of them, the air was filled with
rhetoric about imperialism; with claims for the unilateral trans-
fer of resources from the rich to the poor; with the ardent
assertion of national sovereignty by the less developed nations,
combined with equally ardent demands that the more developed
states surrender sovereignty and behave in terms of the require-
ments of the international community. It was not difficult to
envise all this yielding a neomercantilist fragmentation of
political, economic, and military affairs -- and disaster for
the human race -- as men and nations squabbled meanly for
scarce resources in a nuclear age.

The September 1975 meeting was better not only because the
United States outlined the headings for a North-South partnership

27

[LC]

but for two other reasons. The developing nations, which in 1974 were talking about the excessive raw material consumption of the North, had felt fully the effects of recession in the North. Their exports and export prices were down and their development prospects were badly damaged. In addition, they had come to appreciate how badly damaged they were by OPEC's price policy. The somewhat specious unity of OPEC and other developing nations in 1974 was strained. The result was a wide-ranging series of formally agreed resolutions covering aid, trade, agricultural production, the transfer of technology, commodity agreements and the other legitimate headings for action if North-South confrontation is to be converted into the partnership the facts of interdependence demand.

But it was only a beginning. United Nations resolutions do not automatically translate themselves into action. Hard work lies ahead. Moreover, the United States took its distance from several important resolutions, including that which reaffirmed the United Nations aid target for the 1970's: an expansion in official aid by 1980 up to the level of 0.7% of GNP, as opposed to the present figure of about one-third that proportion.

Right now, the potentialities of North-South partnership -- and much more -- are endangered. The danger is not of a great depression. It is of a protracted period of chronically high levels of unemployment, with its damaging social consequences compounded by continued high rates of inflation. These could

28

[LC]

bring about a kind of progressive weakening of our society like
that experienced by Great Britain between the two world wars.
It would enfeeble the OECD world and drag down the rate of re-
covery of the developing nations. The World Bank staff recently
estimated that if the OECD countries grow in the second half of
the decade at an average rate of 4.9%, the lower income developing
countries will move ahead at 1.2% per capita -- an inadequate
but positive rate. If the OECD countries grow at only 3.5%, the
poorest nations will virtually stagnate. Moreover, it is extremely
doubtful that, if the OECD world continues to experience a dis-
appointing recovery and sluggish growth rate, it can generate
the political will to liberalize trade, expand aid, and do the
other things a serious North-South partnership requires.

Something of the same can be said for the prospects of
détente and the stability of Europe, the Middle East, and Asia.
It is worth recalling that the chronic debilitation of Great
Britain between the two world wars weakened in quite direct ways
the balance of power and palpably played a part in bringing on
the Second World War. It is not difficult to envisage an America,
failing to solve its domestic economic problems, wracked by in-
creasing social unrest, turning away from its responsibilities
in Europe, the Middle East, and Asia. In that process, the
potentialities of détente could easily be lost and important
parts of the world plunged into chaos or worse.

On the other hand, if we can shake loose from the neo-
Keynesian framework which distorts the vision of our task,

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[LC]

define our agenda, and act on it with the President and Congress united, the prospects are rather hopeful. The stabilization of the Middle East and Asia as well as Europe is not impossible; the economic tasks of the quarter-century ahead are difficult but doable and, in their way, rather exciting.

In a toast to the Royal Economic Society in December 1945, shortly before his death, Keynes spoke of economics and economists as "the trustees not of civilization but of the possibility of civilization." That has never been more true than of this time when we must shift from an obsessive focus on effective demand -- which Keynes' *General Theory* set in motion -- to the generation of the sectoral inputs required to sustain an industrial world economy. Keynes would have been among the first to urge us to make that shift.

11. This observation reflects not merely a judgment about Keynes' flexibility of mind but the fact that, as a young man, he was much concerned with the problem of the relative scarcity and high prices for foodstuffs and raw materials during the period 1896-1920. (See, notably, his note "Return of Estimated Value of Foreign Trade of United Kingdom at Prices of 1900," *Economic Journal*, 1912, pp. 630-31.) This anxiety suffused his *Economic Consequences of the Peace*, especially Chapter II. His focus shifted quickly, however, when the break of relative prices in 1920-21 confronted Britain with excessively favorable terms of trade, weakened export markets, and chronic high unemployment.