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November 30, 1967

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cost of living rises outpace benefit gains. There are those who feel
that benefits should automatically adjust to changes in living costs,
and there are even advocates who suggest that benefits should track
rising wage levels (so that retired workers participate in increases
in the economy's productivity). In the abstract, these may be desirable
goals, but huge costs are involved, and they should not be undertaken
without balancing them against the benefits.

**Health and Medical Care.** A great hurdle has been overcome in our national recognition of the need for adequate medical care for all citizens. Still, the quality and cost of medical care threaten to turn into greater, not less serious, problems.

1. The relationship between Medicare and Medicaid, and the relationship between Medicare and private insurance remains uncertain.

2. The problem of medical personnel shortages remains.

3. The problem of federal administrative control is a distinct concern. A unified state hospital planning and regulatory agency may be needed to insure cooperation at federal, state, and local levels.

4. Medical costs will continue to rise, but technology and reorganization of medical facilities must bring the rate of increase down. Effective community health planning and comprehensive, integrated community health services could

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November 30, 1967

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help in this area. Greater emphasis on preventive medicine
and out-patient treatment will be needed.

5. Neither private insurance nor federal efforts
(which are just starting) go anywhere near to meeting
certain medical needs -- particularly in the fields of
dentistry and comprehensive child care.

**Poverty and Economic Opportunity.** Some 10 million persons have been lifted out of poverty since 1959, but it is estimated that income of the poor in aggregate is still about $10 billion less than it would be if all poor persons lived at the poverty line. Government programs reach many persons classed as poor -- of the 30 million persons in poor households, about 7 million receive social security and over 8 million receive public assistance -- but still half receive no aid from these programs at all.

As a nation we are increasingly dissatisfied with how these
programs are helping the poor -- that is, helping them to help them-
selves. In the area of public assistance, in particular, the record has
been discouraging. And the bureaucratic inefficiencies of the _Economic_
_Opportunity Act_ have added to the disenchantment of those who had looked
to more direct federal participation as the answer.

Those seeking new approaches are asking whether more emphasis
should be placed on changing the underlying roots of poverty -- lack of
education, job training, inadequate housing, poor family structure -- or

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November 30, 1967

whether more resources should be devoted to decreasing poverty directly by enlarging money income. And, should income maintenance be separated from the programs providing services to the poor? Finally, how can income-maintenance programs best be structured to lift incentives to work and strengthen the family structure? Proposals have been put forth for negative income taxes, minimum guaranteed incomes and family allowances. Costs range from under $5 billion to over $40 billion a year, depending on the plan. Costs vary with the amount of poverty to be eliminated and the financial scheme used. Costs can rise beyond the $10 billion "poverty gap" because of work incentives built into programs -- as an individual increases his own earnings, he loses only a part of his federal allowance. Negative tax plans are criticized as dividing the national into "haves" and "have nots," with large questions about the effectiveness of incentives. A family allowance plan (suggested by Dr. Moynihan) has an estimated cost of $9 billion -- paid to poor and non-poor alike, based on the number of children. Wealthier families return part of the allowance in the form of income taxes. Far more research has to be put into weighing the relative costs and benefits of these plans, but it is clear that within the next decade the existing structure of income-maintenance plans must be overhauled.

Adding Up the Costs. Adding up the costs of social welfare programs as presently structured, we find that by 1977 we may be

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November 30, 1967

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spending between $90 and $110 billion a year. If we add in the goal of
bringing all families above the poverty line by the end of the next ten
years, the total is raised to a possible $130 billion. In this connection,
it should be stressed that economic growth in itself will bring millions
of persons out of poverty, so the tenth year cost should be considerably
below what it would be if we tried to accomplish the process in one
immediate stroke.

GOVERNMENT SOCIAL WELFARE EXPENDITURES

(Billions, 1967 Dollars)

<table><thead><tr><th></th><th>1967</th><th>1977<br>Low</th><th>1977<br>High</th></tr></thead><tbody><tr><td>Social insurance and public assistance<br>Including new income maintenance<br>programs</td><td>$36.4</td><td>$60.0</td><td>$70.0</td></tr><tr><td>Health and medical services (including<br>construction)</td><td>15.0</td><td>27.0</td><td>35.0</td></tr><tr><td>Economic Opportunity programs</td><td>2.1</td><td>4.0</td><td>6.0</td></tr><tr><td>Total</td><td>$53.5</td><td>$91.0</td><td>$111.0-131.0</td></tr></tbody></table>

The very large dollar amounts involved only serve to dramatically
underscore the need to assess carefully the route we are traveling.

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November 30, 1967

METROPOLITAN AREAS

"The metropolitan problem has been called the major domestic problem of our times. But the nation as a whole has not awakened to its gravity." This statement written into the Panel IV Report ten years ago could be transferred unedited to a new report today. Panel IV's diagnosis of urban problems and suggestions for policy change could also be incorporated virtually intact. What has happened, however, in the past ten years is this: these words have been spoken with increasing fervor, but action to meet the problems has not occurred on the scale outlined in the Panel IV Report.

In summary, Panel IV stressed the need to view metropolitan problems as a whole -- problems of suburbs and central city differ only in degree; the Report stressed the need for coordination at different levels of government and in planning for different types of urban facilities; finally the Report called for greater government assistance and for new methods to encourage the flow of private investment into urban renewal.

Translating needs into dollar outlays, the Report called for government expenditures of between $4 and $7 billion by 1967. In contrast, only $2.7 billion was actually spent in 1967 at all levels of government (or $2.1 billion in constant prices).

II-B

November 30, 1967

GOVERNMENT OUTLAYS FOR HOUSING AND COMMUNITY DEVELOPMENT

(Billions of Dollars)

| Panel IV Report | | Estimated Outlays | |
| :--- | :--- | :--- | :--- |
| **1957** | **1967** | **1967** | **1967** |
| $ .7 | Low - High <br> $4.0 - $7.0 | $ current | $ constant |
| | | $2.7 | $2.1 |

Besides the outlays above, the federal government extended about $300 million in direct loans to the private sector (for FNMA purchases of below market rate housing mortgages, direct loans for housing for the elderly, and loans for code enforcement). And of course government aids to private housing are many times larger: FHA-insured loans outstanding total $55 billion, and FNMA mortgage portfolios, which largely represent secondary purchases in support of the private market, total $7.6 billion.

The feeling today is that we are still groping for solutions. We have not slipped backwards. Progress has been made. But Americans can no longer ignore the problems after being shaken by the impact of racial violence and the realization that Negro and urban problems are closely intertwined.

## Recent Trends

Recent years have seen the continuation of earlier trends rather than a startling departure from past patterns. It is only our perception of these trends that is radically changing.

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November 30, 1967

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*<u>Metropolitan areas continue to grow rapidly.</u>

Within metropolitan areas growth is concentrated in the urban fringe. In the central cities, the nonwhite population rises while white families continue to flock to the suburbs.

*<u>Negroes today make up 20 percent of central city population against 11 percent of the total population.</u> In many large cities, the ratio is considerably higher:

Washington -- 66 percent, Newark -- 47 percent, Baltimore -- 38 percent, Detroit -- 34 percent, Philadelphia -- 31 percent, Chicago -- 28 percent.

*<u>Large-scale investment is taking place in our metropolitan areas.</u> Altogether, 14 million new dwelling units have been built (at a construction cost of $180 billion) in the past decade. In addition, about $90-$100 billion has been spent on maintenance and improvements. About 70 percent of all new housing goes up in metropolitan areas. Within metropolitan areas, 35 percent of starts are in central cities (which account for 48 percent of SMSA population). As impressive as the totals are, still one million fewer units were built in the 1957-67 decade than in the prior decade.

*<u>Fragmentary data suggest that housing conditions have improved since the 1960 census, although the rate of</u>

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November 30, 1967

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_gain has declined_. Substandard housing dropped from 37 percent of the total stock in 1950, to 15 percent in 1960, and to an estimated 10 percent in 1966. Even in central cities improvement has taken place. In 1960, one out of four nonwhites in large cities lived in substandard housing; today it is estimated that the ratio has dropped to one in six. However, it must be stressed that the data do not show what has happened to the stock of _deteriorating_ housing. Nor do the Census definitions for substandard housing (which were developed when we were more of a rural nation) adequately describe housing conditions in central cities.

*_The private sector continues to supply the bulk of new housing investment._ In fact, less than 5 percent of new housing is public housing or housing receiving special government aids. (If ordinary FHA and VA programs are also counted, about 13 percent more would be government aided -- this compares with about 27 percent in the mid-Fifties.) In a city like New York, the picture is different -- public and publicly-aided housing (through the Mitchell-Lama program) account for more than one-third of all new units.

In spite of the apparently small role of government in the country as a whole, government has sought to develop new tools for attracting private investment, and it has sought to widen the scope

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November 30, 1967

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of involvement -- from the narrow viewpoint of housing to the full gamut of urban problems. However, success has been far below expectations because of inadequate funding and incentives, and a surfeit of programs and red tape.

## Government Involvement

The roughly $2.7 billion which government now spends on urban renewal and community development reflects a wide variety of programs. Some are long-lived; others are just getting off the ground and have a spending potential far above present funding.

This is what has happened in the past decade in a few areas of government involvement:

*_Urban renewal:_ In 1957, Title I of the National Housing Act had produced little tangible evidence of urban renewal. Today, after 18 years, some 330 projects have been completed. About $2 billion in federal money has been dispersed to date, and a total of $8.7 billion in redevelopment has been completed or is underway; 60 percent is residential and the rest is commercial and institutional redevelopment.

Altogether 2,200 projects are in the works which could ultimately draw on $6.3 billion in federal money. Few programs have been under as wide attack as Title I Urban Renewal.

According to its critics: It is agonizingly slow in execution;

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November 30, 1967

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it results in a net loss of housing for the poor, while
creating luxury apartments; under the guise of a housing
program, it creates a disproportionate amount of commercial
and institutional building (about 60 percent of the work now
underway). Economic costs in many projects appear to out-
weigh economic benefits -- which means that social benefits,
or nonmonetary benefits, must be high if the projects can
be justified. In defense, it must be stressed that large-
scale attacks on decaying areas and replacement with a
different type of land-use need not be wrong -- if provision
is made to upgrade or increase the stock of low-cost housing
elsewhere.

*Public housing: In recent years only 30,000-35,000 units of public housing have gone up annually, well below the 50,000-70,000 years of the late 1950's. Rising construction costs, lack of funding, and disenchantment with the results have led to cutbacks. High rise low-cost housing has been sharply attacked, but it is not high rise per se which is at fault (some tenants pay hundreds of dollars per month to live in luxury high rise), but sterile design and the creation of new ghettos within the ghettos. The rent supplement program (which pays a portion of rent in private low-middle income housing) rejects the concept of segregation by economic class. Similarly,*

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November 30, 1967

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the Model Cities program attempts to integrate low-cost housing into the redevelopment plans of entire neighborhoods. However, in moving away from segregated low-cost projects, critics may neglect that economic costs will be higher if redevelopment is on a vest-pocket, piece-meal scale.

*New aids to the private market: "The private sector is more efficient than government. But with construction and land costs so high, the private sector cannot produce profitably for middle and low-income sectors. If only the right combination of government incentives are created, private money will flow in." This was the theory of urban redevelopment ten years ago; it is the theory today. But all of our tinkering with incentives has not come up with the right combination. New York State pioneered with low-interest loans to stimulate middle-income housing (the Mitchell-Lama program). Federal government developed several special subsidy programs: 221d3 below-market-rate loans for low and moderate income housing; 233 experimental housing loans; 231 direct loans for housing for the elderly; rent supplements. Most of these programs are geared to nonprofit sponsors.
And the inevitable inadequate funding, high costs and time-consuming red tape have held them back. ($10 million was appropriated for rent supplements in fiscal 1968 versus $40

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November 30, 1967

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million requested. To date, after 6 years, only 65,000 low and moderate income units have been assisted under the below-market-rate loan program.)

*The many-pronged approach: Metropolitan renewal means more than creating new and rehabilitated housing in the slums. Improved transportation, adequate open space and public facilities, and balanced commercial and industrial development in both central city and suburb are vital. Social and economic factors are also involved. Ten years ago, Panel IV recognized the need for a many-pronged approach. And recent years have seen incipient moves to encourage coordinated attacks which reach across problem areas and arbitrary government divisions. The Public Facilities Loan Act and the Mass Transit Act broaden federal responsibility. The Elementary & Secondary Education Act recognizes special needs of low-income urban areas. The Demonstration Cities and Metropolitan Development Act (Model Cities) emphasizes broad-scale planning. (Initial funding at $300 million is only 60 percent of administration requests.) The Model Cities Act does not create new tools to attract the private sector. Through rewarding coordinated planning efforts at the local level, it attempts to streamline urban redevelopment, and thereby attract greater private participation.

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November 30, 1967

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Where Do We Go From Here?

Social discontent has reached alarming proportions. Still, we deal with the metropolitan "crisis" through a maze of inadequate state, local, and federal regulations. Long-term solutions are required, but the "long run" seems to stretch indefinitely into the future. Most important, we still wrestle with uncertain theories, and have yet to resolve several basic problems.

*Pandora's Box, hiding the answer of how to attract private industry, has not yet been opened.* Pension funds, banks, savings and loan associations, etcetera, are both threatened and cajoled into investing in slums without really analyzing the effect on other forms of investment. (Will slum finance substitute for stock market investment, or will it draw off funds from bonds and conventional mortgages?) Various proposals from the Percy Plan to the Kennedy Plan sweeten the bait, but essentially offer nothing new to alleviate basic bottlenecks to private participation associated with acquiring large blocks of property, relocating tenants, and reducing construction costs. Circuitous subsidy routes are pushed (below-market interest, tax credits) rather than direct subsidy. Perhaps a local public development corporation should simply contract for projects, and then sell them below cost to

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November 30, 1967

- 10 -

profit-making (rather than nonprofit) sponsors. Or, rent supplements (and a counterpart direct subsidy for homeowners) should be extended.

*A multiplicity of programs and governmental layers continues to hamstring operations. Model cities will not eliminate this. The time will soon be ripe for a sharp break with the past (where new programs are simply built up and around others). Block grants or some form of federal tax sharing seems essential to break the growing dependence of cities on Washington. At the least, greater autonomy for local development units is needed so that each project would not have to go through separate local (and sometimes state) as well as federal approvals. And statewide or regional development units should be set up to close the artificial central-city suburban break.

*The multi-pronged approach is accepted in theory, but its implications have not been faced in practice. Attention is now focused on central city slums, but rapid (and less expensive) strides could be made if we also opened more facilities (both jobs and housing) to low and moderate income groups outside the urban core. We make feeble attempts to bring factories back into dense cities because that is where unskilled labor now lives. We reject high rise living as

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November 30, 1967

- 11 -

socially harmful to the poor, but blithely erect 50-story
luxury apartments and 110-story office buildings as the
apotheosis of urban progress. The federal government
considers itself in the vanguard of racial progress, but
only 3 percent of FHA housing is sold to Negroes (in spite
of the fact that where integration is carefully planned in
new projects, it succeeds). We hail "new towns" as the
wave of the future, but are on the way to creating more
upper-middle class enclaves rather than fully representative
communities.

*High costs are recognized as the bete noire of urban redevelopment, but a minimum of resources goes into lowering costs. Redevelopment is concentrated in dense urban cores rather than in outlying areas where land costs are lower. Building codes and zoning laws are extremely restrictive. Union rules are archaic. And the fragmented building industry is content with the status quo. The federal government would find its subsidy dollar going much further if it underwrote more research and development aimed at urban technology. Isolated companies have already found profit potential in seeking new technology for urban problems. Systems development in California schools, pre-cast modular construction, and pre-fabricated units for rehabilitation are all being tried.*

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November 30, 1967

- 12 -

However, theory can be turned into technology only if union and local government cooperation permit large-scale undertakings to be carried on. Housing costs per single-family unit rose from $13,000 in 1957 to $17,000 today. If this trend could be reversed, the dollar dimensions of urban redevelopment would be greatly reduced.

## Adding Up the Dollar Costs

Costing the investment needed to revitalize our urban areas has become a numbers game. Depending upon what is counted, estimates range from the billions to the trillions. The required investment is large, but it is not beyond the bounds of achievement.

Conservative estimates (with an optimistic measure of housing conditions) suggest that there are roughly 2.5 million substandard units in metropolitan areas, and another 2.5 million deteriorating units. This stock must be upgraded, and "standard" units lost through demolition and other causes must be replaced. (About 250,000 units a year are lost in urban areas -- more, in fact, because of highway construction than urban renewal. A significant [but unknown] proportion of these units are neither substandard nor deteriorating). In many cases, to accomplish redevelopment, a public body must purchase land and pay for existing structures. Further outlays will be made to finance other nonresidential public and private

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November 30, 1967

13-

facilities in the redevelopment areas. Altogether, a conservative estimate would put the cost at close to $200 billion (in 1967 prices). If spread out over ten years, costs average $20 billion a year -- a sum that is large, but not staggering. (These estimates do not take account of investment to _increase_ the housing stock for population growth, merely that to replace substandard and deteriorating conditions now existing in metropolitan areas. Also with the passage of time, additional substandard housing enters the housing stock.)

The amount of direct government spending would be a fraction of total investment -- perhaps about $5 billion -- if the private sector takes the large role envisioned for it; much more, if they fail.

The estimate is "minimum." Several factors will raise the costs.

**_First_**, aspirations will rise and our concepts of substandard housing will change. In fact, there are those who feel that the amount of inadequate housing in urban areas is _twice_ that now shown by Census definitions. If in the future greater emphasis is placed on open space and relatively low-rise units, costs would be still greater.

**_Second_**, housing markets are imperfect. If markets were perfect, as we created housing for those at higher income levels, a turnover effect would open up more housing at the next level, until

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November 30, 1967

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at the bottom, the worst housing was abandoned. A large amount
of turnover does occur. But because Negroes (and other minority
groups) do not have full access to housing markets, a larger total
amount of housing has to be constructed specifically to meet renewal
needs. We must build more new low and moderate cost housing in
present slums when the market fails to upgrade through the turnover
process.

Together, both these forces can greatly raise renewal costs.
Only if important technological breakthroughs are reached would
they be lower. It must be emphasized, however, that only when
all construction in metropolitan areas to meet expanding population
as well as the renewal backlog is counted does needed investment
reach trillion dollar levels. Still, the estimates, as rough as they
are, underscore the need to evaluate alternative approaches if we
are to make better progress than we have to date.

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November 30, 1967

EDUCATION

The U.S. commitment to education has mushroomed over the past decade. Public resources devoted to education certainly exceed the minimum for 1967 recommended by the Panel IV Report. They may equal the high end of the range then advocated. In addition, there has been a sizeable increase in private resources committed to education.

By vastly increasing its financial commitment to education, the nation has achieved many of the objectives outlined by the Panel V Report. Classrooms by the score have been raised; curricula have been strengthened; teachers' salaries have been raised; college enrollment has been opened to numerous students of limited means. And on other similar grounds the decade's achievements would have to be judged quite impressive.

But the overriding concern of the Panel V Report stretched far beyond formal education. A desire for excellence in individual achievement and enhanced dignity of the individual in society at large lay at the very core of the report. Evaluating progress toward these goals is far more difficult.

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November 30, 1967

The Rise in Education Output

Because education's annual output is not traded in the market place its value to the U.S. economy never is precisely established. In official income accounts the value of educational services is recorded simply as the cost of the teaching and other resources involved -- a clearly unsatisfactory way of estimating output.

Though difficult to evaluate, annual output of educational services in the U.S. plainly has risen dramatically over the last ten years. This conclusion is inescapable when enrollment trends are examined. For example, enrollment in private and public schools at all levels has risen from 41.3 million in 1957 to an estimated 57.7 million in 1967 -- nearly 40 percent. Measures that are available suggest that this increase in educational workload has been absorbed without a sacrifice in educational quality. Indeed, there is a strong likelihood that quality has simultaneously improved. Student/teacher ratios, for example, have on the average showed significant declines over the decade; in public elementary schools, where enrollments have increased some 5 million since 1957, the number of pupils per teacher has dropped, from 29 in 1957 to 27 in 1967.

The striking rise in demands on educational institutions has required even more impressive increases in dollar outlays. As the

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November 30, 1967

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following table indicates spending by government and private educational institutions rose from less than $18 billion in 1957 to an estimated $46 billion in 1967, a 162 percent increase.

U.S. EDUCATIONAL OUTLAYS*

(Millions, Current Dollars)

<table><thead><tr><th></th><th>1957</th><th>1967</th></tr></thead><tbody><tr><td>Total</td><td>$17,734</td><td>$46,400</td></tr><tr><td>Private</td><td>3,500</td><td>9,100</td></tr><tr><td>Public</td><td>14,234</td><td>37,300</td></tr><tr><td>Addendum: Federal Education Grants</td><td>266</td><td>2,400</td></tr></tbody></table>

Price Versus Output Changes

However, because of increases that have occurred in teachers' salaries, in construction costs, and in the prices of other inputs, the rise in dollar outlays overstates the increase in real resources committed to education. Again, there are serious estimating difficulties involved, but it appears that the rise in prices of educational resources as a whole over the past decade has been in the neighborhood of 3 percent annually -- about 34 percent for the whole period. And the rise in dollar outlays must be reduced by that proportion to approximate the increase in "real" resources that was involved. Corrected in this way for price increases, the rise in educational

*Outlays by establishments, excludes personal outlays.
Data are estimated.

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November 30, 1967

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outlays loses some of its impact; nevertheless, it remains quite
impressive, as the following table suggests.

U.S. EDUCATIONAL OUTLAYS*

(Millions, Constant Dollars)

<table><thead><tr><th></th><th colspan="2" style="text-align:center;">Rockefeller Panel Projection of<br>Public Educational Outlays for<br>1967</th><th></th><th></th></tr><tr><th></th><th style="text-align:center;">1957</th><th style="text-align:center;">1967</th><th style="text-align:center;">Low</th><th style="text-align:center;">High</th></tr></thead><tbody><tr><th scope="row" style="text-align:left;">Total</th><td style="text-align:right;">$17,734</td><td style="text-align:right;">$34,500</td><td></td><td></td></tr><tr><th scope="row" style="text-align:left;">Private</th><td style="text-align:right;">3,500</td><td style="text-align:right;">6,700</td><td></td><td></td></tr><tr><th scope="row" style="text-align:left;">Public</th><td style="text-align:right;">14,234</td><td style="text-align:right;">27,800</td><td style="text-align:right;">$24,000</td><td style="text-align:right;">$30,000</td></tr></tbody></table>

The $34.5 billion constant dollar outlays for 1967 represents a doubling in the nation's education resources over the decade. The $27.8 billion in public outlays is in the upper-half of the range recommended a decade ago by the Panel. Because the estimated 34 percent increase in input prices (because of technical factors) probably overstates the actual increases in costs of inputs, this year's educational outlays may be quite close to the $30.0 billion high end of the range advocated in 1957.

The Expanding Federal Role

The expanding federal role represents possibly the most
significant development in educational finance over the decade.

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November 30, 1967

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True, Washington long has had a hand in education. But its influence
has taken on dramatic new dimensions in recent years. For example,
as recently as 1964, when there were 37 authorized programs of
federal educational aid to state and local governments, grants in aid
under this heading fell short of $700 million. Currently there are
over 80 authorized programs, and federal grants in aid for education
are expected to be around $2.4 billion in 1967.

Undoubtedly, the most far-reaching piece of legislation in
this field during this period was the enactment of the "Elementary and
Secondary Education Act of 1965." Under it Washington for the first
time enunciated a very ambitious involvement in education below the
college level.

The most prominent features of the Act are contained in Title I.
It authorizes federal financial assistance to local public education
agencies serving areas with concentrations of children from low-
income families. However, the concentrations need not be heavy.
As a result, it has been estimated that over 97 percent of the nation's
25,000 school districts may qualify for some aid under this provision
of the Act. Federal grants under this Title are expected to be in the
neighborhood of $1.0 billion in 1967; and they are likely to grow
rapidly. Under other provisions of the Act, additional grants of about
$500 million will be made for other educational services and facilities.

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November 30, 1967

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Beyond outlays being made under that landmark legislation, federal educational grants also will be made under the National Defense Education Act of 1958; the Higher Education Act of 1965; the Higher Education Facilities Act of 1963; and other authorizations. Although excluded from expenditure estimates, a number of indirect federal aids to education -- such as loan and loan insurance programs -- have also been established. Finally, numerous programs of education and orientation for the disadvantaged are being administered by the Office of Economic Opportunity. Spending on these programs will approach $1.0 billion this year; however, it is not classified as educational outlay.

## Looking Ahead

Despite the existing massive commitment to education, substantial increases in the nation's educational resources surely will be needed in the decade ahead. On the sole basis of enrollment increases expected, an increase of about 30 percent in constant dollar outlays will be needed by 1977 if present levels of expenditure per student in college and lower-level institutions are to be maintained. Satisfying that criterion alone would entail public and private outlays of about $61 billion (in '67 dollars) by 1977.

But maintaining existing levels of expenditure per student may not be an adequate goal. For one reason, most of the enrollment

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November 30, 1967

-7-

increases will be occurring at advanced study levels, particularly
in colleges. Efforts will be needed to reduce the ratio of students
to teachers in higher education, much as they were made at lower
educational levels over the past decade.

Most important, perhaps, intensified efforts will be needed
to diffuse more widely throughout the land "quality" education at all
levels. Currently, educational outlays per pupil vary widely from
state to state, and among school districts in individual states. In
poor belts, such as Appalachia, educational outlays per pupil simply
are not adequate to afford promising youngsters equal educational
or economic opportunity. Efforts should be made to reduce existing
educational disparities.

To allow for resources sufficient to overcome such short-
comings, a continuing rise in outlays per student probably should be
anticipated for the future. It is difficult to estimate quickly just how
large that rise should be. An increase in real expenditure per pupil
equal to that of the past decade would entail an added rise of about
20 percent in total outlays over the coming decade, bringing the
1977 level of educational expenditures to $72 billion; public expen-
ditures alone on this basis would be in the neighborhood of $60
billion (1967 dollars in both cases).

Changes in U.S. education over the coming decade are likely
to be even more dramatic than those dollar increases in outlays might

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November 30, 1967

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suggest. Pronounced changes in curriculum, administration, and
teaching methods appear an almost certain outcome of intensive
educational research and other activities now underway.

A decade ago, research in education was confined largely to
modest efforts supported by foundation grants. Now it gets wide-
spread financial encouragement. The federal government is supporting
ambitious education research efforts; state and local governments
have expanded their educational research, as have private institutions.
Combined research spending by these groups is well over $100 million
annually. In addition, private business firms -- computer makers and
publishers particularly -- are deeply involved in research on teaching
and learning processes. More exotic, more effective -- and more
costly -- teaching methods are certain to come out of these wide-
ranging endeavors.

But the ferment in education extends beyond the hardware and
techniques of teaching. Adults outside the educational establishment
are showing greater interest in what is taught at all levels as well as
how it is taught. And they are seeking a greater voice in determining
both. Their efforts as parents, businessmen, and concerned citizens
generally will also influence education's course over the coming
decade.

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November 30, 1967

- 9 -

The Problem of Choice

Success in attaining educational goals will be conditioned
by the pressures of competing demands on public and private
resources. But in establishing its priorities the nation should
recognize that education -- investment in human capital -- pays
handsome economic and social dividends. And on this basis educa-
tional outlays should merit high priority. Moreover, it should recog-
nize that even allowing for increased real outlays per pupil over the
decade, the rise in educational outlays required will be far less than
the rise experienced during 1957-67.

In the face of pressing alternatives, however, we should be
prepared to face frankly the possibility that some considerable
proportion of education may represent conspicuous consumption,
which yields few real dividends. Waste should be eliminated from
education as well as other public services.

We should be prepared to face, also, the need to assess
against those who benefit most directly a greater proportion of the
costs of the services they receive. In education, where personal
benefits are substantial, those who can personally bear a proportion
of the costs entailed should be asked to do so.

Finally, we should recognize that in promoting heavily the
development of the nation's intellectual capacity we may be

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November 30, 1967

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neglecting seriously the development of complementary manual
skills that are so essential to the economy's efficient operation.
Appropriate emphasis on the development of prospective artisans'
talents should be a continuing objective in a well balanced program
of education.

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November 30, 1967

HUMAN WELFARE AND THE QUALITY OF LIFE

"Security and wealth must be intermediate, not ultimate goals. Only as they serve as tools for the realization of our deeper spiritual aspirations will we as a nation achieve true greatness." This statement of the Panel IV Report stands as true today as it did ten years ago. However, although all the indices of the good life are up -- increased leisure, more vacation homes, burgeoning concert, museum, ballet attendance -- we are far less sanguine about whether we are realizing our non-material goals.

*Economic growth is accompanied by undesirable offshoots -- air pollution, safety hazards, unacceptable noise levels, congested living, unaesthetic design.

*Financial security is going hand in hand with higher crime rates -- both to property and in violence to persons.

*The greatest period of prosperity this nation has known finds segments of society "alienated" -- from the extreme conservative to the disenchanted liberal, from the militant Negro to the hippie and the middle-class drug addict.

The fact that today's discontent is highly visible and vocal does not necessarily mean that its roots are deeper than in earlier periods (though greater mobility and communications makes it more easily catching).

However, the existence of this turmoil should lead contented society to question the values by which it lives. Perhaps the greatest challenge to society in the decade ahead is to channel the seeds of discontent into

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November 30, 1967

constructive forces. This paper looks at some of the areas where discontent appears to have built up in the past decade. It provides a brush-stroke view rather than a study in depth.

## The Physical Environment*

One of the by-products of industrial progress is the creation of environmental conditions which threaten individual security. Both the human and the economic costs of not protecting our environment are high. Property damage from air pollution is estimated at $12 billion a year. Dollar costs of accidents is close to $20 billion.

All too often we wait for conditions to become practically unbearable before doing anything about them. In the past decade, government has moved into several new control areas. Federal legislation has been passed concerning auto safety, highway beautification, water pollution, and air pollution. Government is seeking controls over aircraft noise levels and gas pipeline safety. The private sector in many cases pays much of the bill for correcting conditions, but industry does not yet take the initiative. Instead, industry waits for government to force a solution and in the process create new federal bureaucracies.

*Also see section on Natural Resources.

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November 30, 1967

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In the years ahead, expenditures for controlling our
environment will rise. It is estimated that pollution control costs
about $5 billion during 1967. By 1970 expenditures could double.
Federal funds for constructing waste treatment works are scheduled
to go from $200 million in fiscal 1968 to $1.25 billion by 1971. The
clean air bill authorizes $400 million to be spent over a three-year
period. In addition, attention will focus in new areas. For
example, safety hazards from congested air travel, new methods of
solid wastes disposal, the threat from "sonic boom" are all receiving
attention.

With the full knowledge that our metropolitan areas will
expand in the years ahead, we are realizing that we must give more
thought to the kinds of places in which we want to live. The
congested unattractive urban scene reveals past failures in building
design, open space, and planning standards. Large sections of our
cities must be rebuilt; alternatives to urban sprawl must be found;
cities and suburbs alike must find ways to acquire land for open
space and for their institutional needs. High standards of design
and effective planning, long an anathema to Americans, will be
essential if the physical environment we create in the years ahead is to
have aesthetic values too.

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November 30, 1967

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Crime

Crime and violence continue to be a source of deep concern. In economic terms alone, crime is costly. Estimates for 1965 of the economic cost of crime come to $21 billion. Government outlays for enforcement and justice amount to one-fourth of the total. Outlays for police and correction have doubled in a decade (in constant dollars, the increase is 50 percent). However, more important than the dollar costs are the effects of crime on human welfare. The recent study of the President's Commission on Law Enforcement and Administration of Justice confirmed what many had suspected: that crime is far more widespread than we would wish to believe. In the United States today one boy in six is referred to the juvenile court. More than two million Americans are received into prisons or juvenile training schools, or placed on probation annually.

The Commission was unable to decide whether individual Americans are more criminal than their counterparts five, ten, or twenty-five years ago. The inability to reach a conclusion was based on the inadequacy of statistics (crime reporting) and the rapidly changing nature of our society -- age distribution, occupation, living environment. But statistics do show that most forms of crime are increasing faster than population growth. And this seems to be correlated with the fact that we are a younger nation (youngsters

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November 30, 1967

-5-

commit a disproportionate amount of crime) and more urbanized
(the larger the city, the higher the crime rate). Since both these
trends will continue into the next decade, crime could well become
even more serious than it is today.

In looking into the causes of crime, we find that there is
no such thing as the crime problem, or the criminal. There are
crimes related to addiction (robberies and burglaries in large cities);
crimes related to passion (homicide); crimes related to affluence
(auto thefts); crimes correlated with age (embezzlement and drunkenness
with older people, auto thefts with youth). Crime rates for Negroes
are much higher than crime rates for whites, but when rates are
standardized for socio-economic differences, a good part of the
disparity disappears. Far more research is needed in delving into
the causes of crime if we are to advance meaningfully in preventing
crime and rehabilitating those who have committed offenses.

Beyond seeking the causes of crime, much ground is still
to be covered in protecting the citizen from crime -- particularly
through better weapons control. And the whole field of criminal
investigation is in a state of flux because of the Gideon confession
decision and the unsettled state of wire-tapping laws. Gaining
proper balance between protecting the civil rights of the individual
and the rights of the community is still a somewhat elusive goal.

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November 30, 1967

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## Leisure and Culture

Almost every available index shows we have more leisure, more money to spend on leisure activities, and more different ways to spend those funds. And a great deal of leisure time is being spent in ways which would please those who worry about the moral fibre of our society. In the past decade, the number of visits to public parks doubled; outlays on books and maps increased 2.5 times; museum attendance doubled; concert attendance increased 40 percent. Without making value judgments, attendance at horseracing rose 60 percent and professional football 80 percent in the same period.

**Quantity** does not seem to be a problem for the decade ahead so much as the **cost** and **quality** of culture. Culture, as a service industry, does not fully participate in productivity advances, so costs tend to rise. Without a tradition of government support, operating deficits of opera houses, orchestras, ballets, theatres, etcetera, steadily mount with the result that admission prices are forced up and greater pressure is put on outside charitable support. Economic pressures are cited as the reason for catering to mass tastes, rather than innovating for the intellectual. The establishment of the National Foundation on the Arts and Humanities in 1965 (with expenditures of $15 million anticipated for fiscal 1968) marks new federal entry into this field.

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November 30, 1967

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The "quality" of culture will, of course, always be subject to debate. There is no doubt that over the past decade a dramatic change has occurred in the kinds of culture openly available to Americans. The new standards in films, books, magazines, and theatre are taken by some to be signs of increasing maturity in the previously naive, Puritan Americans. Others find the greater tolerance of pornography and deviant sexual behavior to be outward signs of the moral downfall of American society.

However, the "deadening" quality, rather than the "deviant" quality of American culture is probably of greater significance. In the area of commercial television, in particular, with its mass audience of millions, broadcasting standards have too often been guided by the lowest common denominator. Indeed, educational television broadcasting has expanded -- the first station began broadcasting in 1953, and there are now about 125 in operation. But the number of stations is below requirements, and the existing stations are operating at budgets estimated to be less than half of what they need to attain their present goals. Budgets at $60 million are presently about one-quarter the level needed by the late 1970's when about 275 additional stations may be operating.

Shortcomings in educational television have been documented in recent years by the Ford and Carnegie Reports, and events are

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November 30, 1967

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now changing rapidly. A $10 million Ford grant is financing PBL (the Public Broadcasting Laboratory), and the first broadcasts show it is far easier to criticize standards than to improve them. Congress has passed the *Public Broadcasting Act* which provides funds for instructional broadcasting in schools, and $9 million for initial funding for a Corporation of Public Broadcasting, to stimulate excellence in broadcasting. However, we are far from agreed as to the best way to raise television quality -- particularly the appropriate funding and the degree of centralized control. The coming decade will see many of these conflicts resolved -- the use of communication satellites, the role of CATV (Community Antenna TV Systems), the appropriate scale of a public corporation and whether it is funded from general tax revenues, consumer taxes, or industry tithing.

## *The Dignity of the Individual -- Civil Rights*

Of all the events that have marked the past decade, none has been more dramatic than the upheaval in civil rights. Panel IV singled out the damage that was being done in this country through racial discrimination -- both the loss of human dignity and the economic costs -- but it did not foresee that civil rights would become the most important domestic problem to confront the nation. And when we re-read the history of the period, it is amazing that

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November 30, 1967

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so much has happened in the past ten years, in terms of attitudes,
if not in material progress.

*The focus of the civil rights movement shifted from the South to the North and West. Today, the Negro problem is equated with the urban problem.

*Emphasis shifted from integrating public schools in the South to a broad spectrum of problems -- jobs, housing, education, political power.

*Efforts first centered on gaining equality through integration. Now the movement is split between those seeking "quality" for Negroes in their own environment, and those seeking integration with the white middle classes.

*Civil rights tactics shifted from legal defense to peaceful demonstration, and then to the violent riots (or rebellions) of the last three years.

*Civil rights organizations multiplied and changed their outlook. From the NAACP and Urban League, and to a lesser degree CORE, the movement expanded to groups like Martin Luther King's Southern Christian Leadership Conference, and then later to radical groups such as the Black Muslims and SNCC.

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November 30, 1967

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Most Americans, Negro and white, are disturbed by the violence and alienation of the militant groups. Still, the militants have succeeded in awakening Negroes, as well as other Americas, to shortcomings in our society. And these young radicals, for all their present violence, could become constructive forces in their communities. This process will be facilitated if Negroes who have gained power through the political channels of democracy are given adequate tools with which to make a significant contribution to Negro well-being.

For it cannot be denied that Negro progress in gaining dignity and security still leaves much to be desired. Only 10 percent of the Negroes in the South are attending desegregated schools. A larger proportion of urban Negroes in the North are attending de facto segregated schools than a decade ago. Negroes count for 11 percent of the population, but 25 percent of the unemployed, 40 percent of those on relief, and 30 percent of those living in substandard housing. Negroes have improved their economic status: 28 percent now earn more than $7,000 against 11 percent in 1959. However, median income is still no more than it was in relation to white family income before World War II. If Negro income were brought to the average level of white families, $17 billion in purchasing power would be added to the economy.

The gap then is real, and our problem, as a nation, is to help the Negro reduce this gap and gain the dignity befitting American ideals. Too much discussion today is clouded by absolutes used in apposition:

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November 30, 1967

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black power versus white power; separatism versus integration;
ghettos versus suburbia; action now versus long-run measures; racism
versus middle class liberalism. The fact that time is needed to close the
gap does not, as our history already proves, mean that effective steps
cannot be taken immediately. The fact that education is the most powerful
long-run solution does not mean that job opportunities and housing
conditions cannot be improved now. The fact that Negroes are congregated
in our decayed urban centers does not mean that exclusive attention must
be paid to rebuilding black communities in the core. That some Negro
families want to live in middle class suburbia does not make them
traitors to civil rights causes.

In fact, the history of advanced socialist countries shows that
middle class values -- often scorned by the intellectuals -- are what
the mass of society seeks when it gains economic security (see the
Russians and the Slavs and their devotion to automobiles, miniskirts,
and American-brand jazz). That Negroes seek to share in these values
should not then be considered unusual. That militant Negroes currently
disavow these standards is comprehensible, but true progress will find
more and more Negroes entering the mainstream of American life, not
detaching themselves from it.

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November 30, 1967

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Alienation in American Society

The attitudes of youth are considered bell-weathers of the degree of discontent in a society. When Panel IV Report was written, the "apathetic" generation of the McCarthy era was just moving out of college into the world of business and government. The "apathetic" generation of the early Fifties are today's young executives, rising politicians, secure professors. They are participating in the economic prosperity of the nation and seem fairly well-attuned to their lot in life. However, they and their immediate predecessors (the veterans of World War II) are producing a new generation, characterized as "alienated."

Society always has individuals who feel out of tune with current values -- from drifters and bums to bohemians and anarchists. And frequently the dissenters turn into powerful forces of positive social change. Nobody can cite meaningful statistics to prove that alienation is more widespread today. However, the alienated are more visible and more vocal in their communities, and their existence and doings are instantaneously communicated to the world through the press, television, etcetera. Everyone knows what a hippie looks like and where he lives; for the mildly discontented teenager the lure to find out for himself can be irresistible.

Still, today's alienation cannot simply be discounted. The link between the discontented and the increasing use of drugs is potentially

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November 30, 1967

dangerous to the individual and to society. The dropping out of the hippies ' can lead to crime and disease, not peaceful contemplation. The violence of the black power cult can lead to loss of lives and property that cannot be justified in terms of civil rights. Even the anti-war advocates are moving away from peaceful demonstrations into the realm of violence.

What is important for the nation in the years ahead is not merely to decry the doings of the alienated, but to see what there is in our own values that creates such deep-seated discontent when economic well-being is greater than before. Many of today's cultural dropouts are the brighter and more creative of their generation who cannot find sense in their parents' striving for the material trappings of the good life. Many of them may bring a higher standard back into American life when they do return, more mature.

Thus, in summary, it is important to stress that in the decade ahead economic growth will give us the material resources to dramatically improve the standard of living of millions of Americans. But economic advances will not insure that the *quality* of life improves unless we address ourselves to the kinds of problems highlighted in this paper.

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November 30, 1967

AGRICULTURE

Despite significant developments in agriculture, farming in the United States retains many of the dominant characteristics it had in 1957. A minority of farmers still produce most of the nation's food and fiber -- 30 percent of the country's farms account for 80 percent of farm sales -- and they could produce even more if permitted to do so. Many farms still produce comparatively little, and account for a significant proportion of the nation's poverty. Because of the diversity of measures of government agricultural outlays, it is difficult to appraise existing program levels against recommendations made by the 1957 Panel IV Report. Plainly, however, the very considerable cutbacks in outlays recommended by the Panel have not been realized. On the contrary, outlays have continued to rise, as the following table indicates.

GOVERNMENT AGRICULTURAL OUTLAYS

(Billions, 1957 dollars)

<table><thead><tr><th></th><th>1957</th><th>1967</th></tr></thead><tbody><tr><td>Federal Subsidies, Total</td><td>$ 2.4</td><td>$ 4.2</td></tr><tr><td>Direct Payments to Farmers</td><td>1.1</td><td>2.6</td></tr><tr><td>Total Government Outlays for Agriculture and Agricultural Resources</td><td>2.7</td><td>4.2</td></tr></tbody></table>

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November 30, 1967

Some progress has been made since 1957 to encourage greater efficiency by a slight lowering of the price support level and in the expansion of land diversion programs -- which were recommended by the 1957 Panel IV Report. On the whole, however, basic national agricultural policy has continued in the direction of acreage allotments and price fixing, which (1) restrict the output of efficient farms (2) maintain many small, low-income farms in a position of genteel poverty.

Despite policies of restriction, progress has been made toward a more rational agricultural industry. Efficient farmers have been expanding production; smaller farmers have been induced by more attractive employment opportunities outside agriculture to withdraw from farming. Agricultural productivity thus has been able to increase far faster than the economy's overall productivity.

Reflecting these trends, the number of farms has declined from 4.8 million in 1957 to 3.2 million in 1967 -- a 33 percent drop. However, since many farms have simply been absorbed by larger operations, the total land area in agriculture has changed relatively little over the decade. And contrary to popular impressions, large-scale corporate farming is not assuming a dominant position in U.S. agriculture. Family farms remain the backbone of the industry, accounting for about the same proportion of farm sales as in 1957. But family farms have gotten larger.

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November 30, 1967

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Meanwhile, net income per farm has doubled. However, direct payments by government to farmers have risen from $1.1 billion in 1957 to well over $3 billion ($2.6 billion in constant 1957 prices), and increased in importance from under 5 percent of net farm income to more than 20 percent.

Possibly the most significant change that has occurred in the environment farmers face has been the sharp reductions in surplus stocks of key farm products. From 1954 to 1961, world grain stocks gradually increased each year -- mostly in stored inventories in the U.S. Thereafter, that picture changed. Crop acreage restrictions, shifts from planting grains to soybeans in some areas, and increased commercial and foreign aid exports from U.S. stocks produced reductions in inventories. By 1966 U.S. stocks of wheat, corn, grain sorghum, and rice had fallen by two-thirds from peak levels and were below prudent reserve levels.

This sharp reversal in supply conditions occurred largely because rapidly increasing demands from developing nations had accelerated disposition of U.S. agricultural surpluses through Public Law 480. The developing countries, which had been exporting about 11 million tons of grain annually prior to World War II, now are importing nearly three times that amount. And their demands will remain large. By 1980 the expanding populations of Asia, Africa, and Latin America will need an estimated 300 million additional

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November 30, 1967

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tons of grain -- needs far beyond the potential supply capacities of the U.S.

In addition to growing aid commitments, commercial agricultural exports will remain a strategic factor in continuing efforts to restore healthy balance in U.S. international trade and payments accounts. For these reasons it is essential that the trend toward increasing efficiency in agriculture be encouraged. Achieving that objective without losing sight of the farmer's economic and social well being will be a major challenge of U.S. agricultural policy over the coming decade. But the problems entailed will be essentially the same as they were a decade ago.

As indicated in the 1957 Panel IV Report, the de-emphasis of price supports in favor of retirement of marginal cropland and farms offers the best opportunity to bring about the changes needed in agriculture. The idea of land retirement has been accepted as a viable approach to farm problems; and millions of acres have been retired annually under various programs. But these represent a very small proportion of total U.S. cropland, which is now 1.1 billion acres. For the future, land diversion should get even greater emphasis. As suggested in the 1957 Report, vocational training and other guidance to farmers must be an integral part of a balanced program of cropland retirement.

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November 30, 1967

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In general, the current expenditure level of $4-4.5 billion annually for price supports and related agricultural programs should be expected to continue for the next 3 to 5 years. If future program emphasis is shifted away from price support payments to land diversion, annual costs probably can be reduced to $2-3 billion thereafter.

After ten years, increasing demand and the continued diversion of farmers to other occupations will have improved farm product market balances and reduced federal costs to about $1 billion annually.

If, however, direct payments and price supports receive continued emphasis, costs probably will remain at present levels, and could go higher.

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November 30, 1967

NATURAL RESOURCES

Management of the nation's physical environment encompasses a wide spectrum of activities. It ranges from the preservation and development of water and mineral resources to mundane necessities, such as garbage collection. The 1957 Panel IV Report gave brief but perceptive attention to some key problems in this diverse area. The challenge of providing water supplies equal to the nation's growing personal and industrial needs was singled out for explicit comment -- a judgment justified by the extended drought of the early 1960's. Similarly, the Report wisely emphasized innovation and inventive thinking as the most fruitful routes to conservation of the nation's material resources. The productiveness of that approach has been demonstrated clearly over the past decade: in the petroleum industry, secondary recovery techniques now are producing oil from wells once considered depleted; most dramatically, communications satellites have reduced sharply the copper that will be required to tie together the nation's vast communications networks in the future.

On the other hand, the Report failed to detect the gravity of air pollution and the associated problem of refuse disposal. It failed also to recognize explicitly the need for more ambitious efforts to develop outdoor resources to meet sharply enlarged recreational demands. Noise, a growing environmental problem, was not

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November 30, 1967

discussed. The economic waste of human and natural resources represented by depressed areas was overshadowed by general business recession. Depressed areas hence were singled out as a problem in human resources by Panel V, and not in the Panel IV Report as a problem in economics.

## Water Resources

The forceful warning provided by the water shortages of the recent past inspired significant steps to husband the nation's water resources -- some along outlines suggested by the Panel IV Report:

*Existing water pollution legislation was amended by the Water Quality Act of 1965. The Act increased federal grant levels for municipal sewage treatment facilities and mandated the adoption and implementation of water quality standards for all interstate and navigable waterways. Federal grants for water treatment facilities were scheduled by the Act to rise from $150 million in 1967 to $1.25 billion in 1971. More recently, limitations on individual dollar grants for these purposes have been liberalized. In addition to support for facilities construction, the Act provided for grants for research into methods of handling major water pollution problems.

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November 30, 1967

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*The Water Resources Planning Act of 1965*

provided for the coordinated and comprehensive planning
for conservation, development, and utilization of water
resources and related land. It authorizes the formation
of river basin commissions to coordinate intergovernmental
plans for exploitation of such resources -- satisfying a
need cited by the Panel IV Report. It calls for a
systematic and unified effort by governments at all
levels to meet water needs. Preparations of comprehensive
water and related land resources plans for rivers throughout
the nation are to be completed by 1972.

*The Housing and Urban Development Act of 1965*

authorized grants-in-aid to local government agencies
for basic water and sewer facilities. Expenditures of
$200 million annually were authorized through fiscal
1969.

*The Public Works and Economic Development Act of 1965*

authorized grants-in-aid of up to $500 million
annually through fiscal 1969 for the construction of
basic public works, including water supply and sewage
facilities, in localities of concentrated unemployment.

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November 30, 1967

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In addition to these efforts to conserve fresh water resources, research and development on desalinization and other means of enlarging usable water have been intensified.

The full impact of these relatively recent programs is not yet being registered in expenditures on water resources. As the following table indicates, however, public expenditure efforts in this crucial area had been falling far short of the minimum envisioned by the Panel IV Report. Very probably efforts would have continued to flag in the absence of federal inducements enacted in recent years.

PUBLIC OUTLAYS FOR WATER SUPPLY AND DISPOSAL FACILITIES

(Billions, 1957 Dollars)

<table><thead><tr><th colspan="2">Estimated Outlays</th><th colspan="2">Panel IV Report Recommendations for 1967</th></tr><tr><th>1957</th><th>1967</th><th>Low</th><th>High</th></tr></thead><tbody><tr><td>$1.4</td><td>$2.3</td><td>$2.7</td><td>$3.5</td></tr></tbody></table>

To eliminate continuing backlogs and realize the supply increases dictated by rising human and industrial uses, substantial investment in water supply and disposal facilities will be needed over the coming decade. Public outlays alone will need to be roughly doubled by 1977, bringing expenditures to about $6 billion (in 1967 dollars). In addition, higher outlays for these purposes will be required by business firms and individuals.

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November 30, 1967

Air

Adequacy of the nation's pure air resources was not an overriding public concern a decade ago. More recently, however, public uneasiness over air quality has produced enlivened Congressional interest and action on air pollution.

Determined efforts to control and abate air pollution were initiated by the Clean Air Act of 1963. Under the Act and its amendments, grants are made to universities for research into the causes and to state and local governments on a matching basis for the control of air pollution. Direct federal research and control activities are also provided. Federal grants-in-aid and direct expenditures in the neighborhood of $50 million will be made under this act this year. Recently enacted legislation will raise federal air pollution control outlays to more than $100 million a year over the next three years.

Although seemingly modest, federal air pollution outlays of that magnitude can achieve major results. They properly are directed at research into the means of preventing and controlling air pollution. As advances in technology are realized, easily identifiable offenders can be required to bear the cost of appropriate control devices that emerge from research laboratories.

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November 30, 1967

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Solid Wastes

Refuse disposal represents a relatively minor segment of
government activity. Largely it is the function of local governments.
Quite appropriately, the 1957 Panel IV Report overlooked this facet
of environmental management in favor of more pressing needs.

However, trash removal is rapidly becoming a major problem
in the nation's metropolitan areas. And because air pollution is
making incineration an unacceptable means of disposal, the problem
is likely to grow more acute. Prospective health hazards, practical
considerations, and the strong conviction that the nation's urban
areas (and its countryside in some cases) are inexcusably littered
suggest the need for more intensive efforts at waste disposal.

Public expenditures for street cleaning and other solid waste
disposal currently are less than $700 million annually. If the
growing problem of waste is to be overcome, at least a doubling of
outlays will be needed by 1977. Federal aid in the form of planning
and research grants to state and local governments is available under
the Solid Waste Disposal Act of 1965. Expenditures under the Act
are expected to be about $3 million this year. In addition, there
will be spending under authority granted by the Highway Beautification
Act of 1965 to conceal the great and growing disposal problems
created by junked automobiles. In the future, relocating and
obscuring junkyards are likely to prove inadequate. Thus, outlays

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November 30, 1967

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for this purpose, too, are likely to have to rise considerably. In
this and other areas of waste disposal, however, inventiveness
probably will be able to play a major role in holding down outlays
needed to achieve necessary objectives. Improved salvaging
techniques will help conserve resources and environment at the
same time.

Recreational Resources

Adequacy of the nation's outdoor recreational resources --
parks, playgrounds, campsites, ski areas -- did not come in for
explicit consideration in the 1957 Panel IV Report. Clearly,
however, providing adequate and accessible outdoor recreational
facilities is and will remain a major challenge. The need is
particularly great in urban areas. Recreational outlays already are
very substantial -- about $1.5 billion for 1967 -- and they have been
growing rapidly. In many cases, however, recreational resources
simply are not sufficiently accessible to areas most in need of them.
A very considerable proportion of federal recreational outlays go to
areas far removed from population concentrations.

For 1977 a reasonable goal for recreational outlays would be
an increase of 75 percent in constant dollar terms, over this year's
$1.5 billion; a doubling of current outlays would be desirable. In
addition to expanded recreational facilities, ambitious new efforts

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November 30, 1967

will be needed to bring outdoor recreation within reach of those
seeking it. For this purpose, coordinated action will be needed to
expand and improve highways and other transportation access routes
to recreational areas.

Efforts to achieve these objectives have been stepped-up in
recent years. The _Water Resources Planning Act of 1965_, for
example, seeks to encourage development of river basins and other
water resources for recreational as well as other purposes. The
_Housing Act of 1961_ provided matching federal grants to encourage
and support local efforts to acquire open space for parks and other
recreational uses; about $125 million in grants is expected for fiscal
1968. And recognition, at least, has been given to the desirability
of channeling federal highway aid to access routes to outdoor
recreation areas.

III

November 30, 1967

III. GROWTH IN THE DECADE AHEAD

The United States economy averaged a 4 percent per annum growth rate in the past decade. This was instrumental in enabling us to come as far as we have towards achieving national goals.

Projections for the decade ahead suggest that a 4 percent growth rate is well within the realm of possibility, and with faster expansion of our labor force, which is anticipated in the decade ahead, we may well be able to attain a 4.5 percent growth rate if we manage our affairs properly.

A 4 percent growth rate yields a GNP of $1.16 billion (in 1967 dollars); a 4.5 percent rate is equivalent to a GNP of $1.22 billion. To produce national output of this magnitude will require over $120 billion in investment in plant and equipment. Our projections assume that plant and equipment will comprise 10.5 percent of GNP (this is about the same proportion as in recent high-level investment years).

Housing is anticipated to move up to 5 percent of GNP against the ratios of 3-4.5 percent in recent years. Personal consumption will expand just about as rapidly as national output. Families will be able to raise their standard of living at 2.5-3 percent per annum -- a high rate by past standards. With this model, government purchases of goods and services could range between $224 billion and $242 billion. This comes to less than 20 percent of GNP against a ratio of 22.6 percent in 1967.

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November 30, 1967

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consumption expenditures must fall below those projected in the model). Projection C assumes defense will remain at present levels and includes the "high" nondefense requirements of B.

Rough calculations of needs (these have not been arrived at by in-depth study, but represent "judgment" assessments) suggest that at a continuation of our present (historically high) 4 percent growth rate we could attain minimum government requirements if Vietnam hostilities end and we enter a period of prolonged peace.

Peace in this connotation means a situation where defense expenditures fall back gradually to at least pre-Vietnam levels. However, even if Vietnam ends and we have a prolonged period of peace, we would need to realize a 4.5 percent growth rate to meet higher estimates of social needs. If we are forced to maintain our present (or a similar) defense posture, even a 4.5 percent growth rate would be inadequate to meet the higher estimates for our nondefense goals. The accompanying table summarizes the projections.

These short-hand estimates suggest that:

1. Choice among priorities will continue to be of paramount importance.

2. A permanent peace (where we maintain strong defenses, but are not forced into active hostilities or extremely high-cost defense systems) will widen the options we can take to meet our social needs at home and to take a greater part in economic development abroad.

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November 30, 1967

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3. Sustained economic growth is essential. If we can attain the 4.5 percent rate, which is unprecedented, but theoretically within our grasp, our chances of attaining our national goals will be improved.

It must be further stressed that attaining a high growth rate is not synonymous with achieving our national goals. Important policy considerations must be resolved if we are to avoid bottlenecks which could upset the momentum. For example, our federal tax structure (once we get out of present deficit difficulties caused principally by Vietnam) will begin to produce substantial surpluses which could cause a future drag on the economy. At the same time, state and local expenditures will be expanding more rapidly than their own revenues. To put our resources to best use, then, it will be necessary to increase the flow of funds to state and local governments through greater grants-in-aids, or, more preferably, through a system of tax sharing. At the same time, further reform in the federal tax structure should be accompanied by a lowering of rates as we move into the 1970's.

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Projection C. Defense outlays maintained at present levels. "High" estimates of nondefense requirements.

** Includes capital outlays for transportation, conservation, public buildings, etcetera.

*** Includes interest, general government, police, fire, sanitation, post office, and operating outlays for transportation, water supply, etcetera.

IV

November 30, 1967

IV. THE PROBLEM OF CHOICE

The broad conclusions of this review of the Panel IV Report's findings and recommendations add up to the same final results as did the Report. Chapter VI of the Panel IV Report is perhaps even more pertinent now than a decade ago. Only the numbers need to be changed. Some hasty projections of new numbers were set forth in the preceding chapter.

It is still true that the problem is one of making the wisest possible choices. Even with the greatest possible emphasis on economic growth a society must face up to the problem of determining priorities. The problem will be eased by more rapid growth. But it will not be eliminated, since man's aspirations constantly expand at a more rapid pace than any modern industrial society's ability to increase output.

The problem of choice is particularly pressing at the moment. It is brought into sharp focus by the huge deficit the federal government will run if hard decisions as to cutting spending and increasing taxes are not made. In terms of the cash budget (the best available measure) the deficit could run in the $20-25 billion range with no fiscal restraint. To run a deficit of this size at a time of low unemployment is to risk a severe inflationary outburst.

Given the size of the deficit some tax increase appears inevitable in the short run. The devaluation of sterling increases the urgency of such action. However, the longer-term problem is even more serious.

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November 30, 1967

Unless we bring government expenditures under control by an intelligent ordering of national priorities, we face a continuing budget problem, with both periodic tax increases and persistent inflation.

While part of the problem is obviously related to the war in Vietnam, the key problem is the sharp rise in nondefense spending.

From early 1965 to early 1967 total federal government spending rose $40 billion with defense accounting for $21.5 billion of the increase. Nondefense spending went up $18.4 billion.

From the first quarter 1966 to the first quarter 1967 defense spending increased $15 billion while nondefense rose $11 billion.

The real problem is the attempt to pile on top of existing federal programs a whole new and expensive set of programs to deal with poverty and the social and economic decay of central cities. A continuation of present trends in nondefense spending, even with an end to the fighting in Vietnam and assuming no new trouble spots, would mean a large increase in the share of government in GNP by the early 1970's. A straight extrapolation of recent trends in nondefense spending, plus the assumption of no limited wars, would point to an increase in the federal government share of GNP from 21 percent now to 26 percent by 1975. Such an extrapolation is very hazardous as a forecast, though it is useful to show where present trends would take the nation.

IV

November 30, 1967

Financing such an increase in federal expenditures (almost a doubling from now to 1975) would require either a sharp rise in tax rates, or inflation, or more probably some of both. Under existing arrangements, where the tax base is something like half of national income, the rise in rates would have to be large. For that reason, part of the rise in government spending would probably be financed by inflation. Governments can always pre-empt resources through inflation, which is really a form of taxation.

There are serious dangers in such a train of events:

Inflation is inequitable (hitting the poor hardest and raising the question as to whether welfare-oriented programs which bring inflation may not do more damage than good to the intended recipients). Inflation is an inefficient form of taxation, and it always runs the risk of promoting the sort of boom which could lead to a difficult and intractable slump.

Higher tax rates are also dangerous because of our proclivity to raise taxes on saving and investment more than on consumption. While the corporate tax is passed on over time, the passage is effected largely through a reduction in capital investment, which slows economic growth.

The great risk is that, in seeking to do too much, too soon about the problems of poverty and cities, we shall restrain private investment and get ourselves into the sort of fix which afflicts the United Kingdom. Our ability to meet the aspirations of our citizens would be severely constricted if we were to slip into a U.K. -type stagnation.

IV

November 30, 1967

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In theory, one possible way out would be to change the tax structure. More revenue could be raised by a value-added tax (a sophisticated form of sales tax) without unduly burdening investment and growth. It would also help our balance of payments if a value-added tax replaced all or a significant part of the corporate income tax. As is the case with other advanced countries, the value-added tax can be suspended on exports whereas the corporate income tax applies. In many ways a value-added tax would make sense even if nothing were done about the rise in government spending.

However, the real key to our present and future problems lies on the expenditure side. What is wanted is a complete reorientation of the priorities or objectives of government. Essentially, this involves a major shift of emphasis from programs which mainly benefit middle-income groups to programs that benefit low-income groups.

Upper-income groups (say, with family incomes of $15,000 or more) benefit little from many of the government programs of the past three decades while paying a disproportionate amount of the cost. When you take account of federal, state, and local taxes, and of the fact that the corporate income tax is a (bad) form of sales tax, the share of income going for federal, state, and local taxes is roughly constant for income groups from $3,000 to $15,000. The tax share increases sharply for family incomes from $15,000 to $50,000 and holds roughly constant above that level. To put it another way, our tax system is not progressive in the middle- and

IV

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very high-income ranges, but is very progressive in the $15,000 to $50,000 range.

Interestingly, most of the bold new programs of the 1930's and of the postwar period yielded the greatest benefits to middle-income families.

*Such programs as the FHA, the GI Bill of Rights, the enormous investment in education and highways helped middle-income people and supported the exodus to the suburbs.

*Social security and even Medicare are largely middle-income programs.

*The farm program does little to help low-income farmers.

Many of these programs do positive harm to low-income families.

Many urban renewal and highway projects displace low-income people and provide facilities for middle-income groups. The farm program, which in effect subsidizes mechanization, has accelerated the migration from farms to cities. The exodus of low-income people from the farms to center cities promises to continue for many years.

Government programs to help low-income families have, until recently, consisted mainly of welfare and a few public housing projects. Public housing programs have been singularly inept, and the welfare system is simply a mess. Both programs need a thorough overhaul.

Many of the programs aimed mainly at middle-income families have been excellent investments. The GI Bill of Rights, the enormous investment in education and highways, the agricultural research and extension

IV
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programs are examples of programs which have clearly yielded very high returns. Indeed, most of the programs met genuine needs at the time they were adopted. They have played an important part in America's growing affluence.

Yet our priorities are changing with new emphasis on problems of poverty and cities. The question is whether many existing programs might not be eliminated, reduced, or altered to make way for new programs which now rate higher on the list of national priorities.

America has undergone vast changes in the past 30 years, the period during which most of the programs which constitutes today's welfare state were started. One of the most significant changes has been the tremendous upward shift in the pattern of family incomes. Today well over half of all families have annual incomes of $6,000 or more and one-fourth receive $10,000 or more. Ten years ago 40 percent of all families were in the $6,000 and over group, and in 1929 only 18 percent were (all figures in 1965 dollars). This upgrading process is continuing -- by 1975 more than two-thirds of all families will have annual incomes of $6,000 or more.

Until recently, middle-income families needed the government programs which enabled them to live in a decent home, educate their children, and drive their cars. But with the upgrading of family incomes it is no longer necessary to subsidize middle-income families to the same extent as was necessary even ten years ago. They are able and willing

IV

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to pay for government programs they believe necessary, and it would be in
their interest to review government programs to reduce or eliminate those
which now rank on the low end of the list of their priorities.

Every society faces the problem of choice, since it is impossible
to do everything at once, or even over a long time. There is no free lunch.
If we assign higher priorities to urban and poverty problems, we should
review existing programs and adjust them in light of changing conditions
and changing priorities.

While efforts to increase the efficiency of government operations
should be pursued constantly, no huge savings appear likely from this
approach. Contrary to much popular belief, most government operations
are quite well managed, and most government employees work hard and
effectively. The question is whether the objectives government is
pursuing, and the programs aimed at these objectives, rate high enough
on the national system of priorities to justify their cost. The really big
economies in government are likely to come only by an intelligent and
informed review of objectives and programs to eliminate those which have
outlived their usefulness, if indeed they ever ranked very high on the
priority scale. This is the essence of the Program-Planning-Budgeting
approach. It assembles and analyzes the information necessary for
intelligent decisions as to the costs and benefits of different objectives
and different programs.

IV
November 30, 1967

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There is need for greater realism in approaching new problems.
Crash programs run the real risk of spending vast sums to no good end.
The fact is that we do not now have the trained people needed to mount
an all-out attack on poverty. In this respect the Marshall Plan analogy
breaks down. We could shovel billions into Western Europe with
assurance that they would be used reasonably well. This is not the
case in our cities today.

Similarly, talk of make-work programs or vast public works
programs are unrealistic. Leaf raking is no answer for those who lack
the training and skills for today's jobs. Public works are built by
machines and skilled workers. Both of these ideas date back to the
1930's when they were tried and found wanting.

Is there any way out? There is, if we exercise our choices
wisely. We can devote greater effort to problems of poverty and
cities if we can maintain a good rate of economic growth and if we order
our priorities properly. This underlines the importance of the concept
of the "fiscal dividend". With economic growth, federal tax receipts
rise some $8 billion a year at the current level of GNP even with no
change in tax rates. State and local tax receipts are somewhat less
responsive, but they also increase some $4 billion a year with no
change in tax rates. This increase in tax revenues from the growth
in the economy has been termed the "fiscal dividend". It will increase
over time if the economy achieves a good rate of economic growth.

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November 30, 1967

The federal government's fiscal dividend can be used to increase direct federal spending, pass along more money to state and local governments or reduce tax rates periodically. If all, or more than the fiscal dividend is used to increase spending directly and in the form of grants to state and local governments, as is the case at the moment, then federal tax rates will have to be increased to avoid large and increasing federal deficits.

The key point is the importance of preserving and embellishing the factors making for economic growth. Part of the fiscal dividend (perhaps something like one-third over time) should go to reduce tax rates and enhance the incentives for investment and enterprise. The beauty of this approach, as was demonstrated in 1964, is that the cut in tax rates can, through encouraging economic growth, actually bring in more revenue. The fiscal dividend is reduced only briefly by the cut in tax rates, and actually increased later on by more rapid economic growth.

At the same time, we should try to reduce, and certainly should not increase, government programs which have a low rating on the scale of national priorities. Application of the new Program Planning Budget approach to nondefense areas can be very useful to this end. (See the attached article from *Business in Brief*.) Programs whose main beneficiaries are middle-income families need to be re-examined. For example, free college tuition for all makes little sense under today's pattern of income

IV

November 30, 1967

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distribution, whereas greater use of student loans would make sense.
Those who drive in urban areas and park on the streets should pay the
full costs involved, whereas they are now heavily subsidized.

The Interstate Highway Program represents an interesting case
in point. It has discommoded many low-income families through
demolition of housing in cities. Yet it will contribute, and already
has, to economic growth, thus working in the longer-run interest of
low-income families. Its main immediate beneficiaries are middle-
income familes. It is financed by a gasoline tax, to which middle-
income families contribute heavily. All in all, the program appears
well-adapted to today's needs.

One should have no illusions that it will be a simple matter
to reorder national priorities. Each government program acquires a
constituency with a vested interest in its continuation. It has been
said that, if a monument were erected in Washington for each government
program that was discontinued, the appearance of the city would be
little altered. The positive hostility with which the House Agriculture
Committee greeted the eminently sound and forward-looking farm
program conceived by the Committee for Economic Development
illustrates the problem. The basic ideas underlying our farm program
date back not to the 1930's but to the 1920's and earlier (the base of
the farm parity index is 1914).

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November 30, 1967

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There is no better way to conclude this review than to quote four of the final paragraphs from the Panel IV Report.

"A third major conclusion derived from the trial balance projections is that, even with a high rate of economic growth, the future will make heavy demands on our ability to make choices. While we can envisage an era of well-being far beyond present experience, it will not come about automatically. We will be able to achieve much in the immediate future and a great deal more over a period of time. But we cannot do everything at once. To seek to do too much too soon will increase our economic problems but not our economic results.

"Thus, the immediate challenge is to our sense of values and to our self-restraint. We must decide between the essential and desirable; we must choose among our aspirations those which carry the highest value. We must make our decisions of choice in the framework of a confident belief in our future ability to continue to progress.

"We need, in short, a greater and more articulate sense of national purpose to guide us in this inevitable process of choice. This is in large measure a problem of promoting a broad public understanding of the problems and challenges that lie ahead. As an example, a more general appreciation of the values that could be secured by increased government expenditures for education or

IV

November 30, 1967

social welfare might well generate broad public support for such programs."

"America has a notable record of responding to challenges and making the most of opportunities. With our growing population, our extraordinary record of rising productivity, the inherent dynamism in our free enterprise economy, there is every reason to face the future with full confidence that we shall measure up to the challenges that lie ahead."

BUSINESS IN BRIEF

No. 77—DECEMBER 1967

Issued bi-monthly by the Economic Research Division

THE CHASE MANHATTAN BANK, N.A.

New York, New York 10015

U.S. economic problems—both domestic and international—increasingly revolve around various aspects of inflation. The basic trend in costs and prices is no longer consistent with the best interests of the nation. And there is no sign of improvement in the near future.

Devaluation of the British pound highlights the importance of U.S. price trends. Devaluation means that U.S. goods now face tougher competition in world markets, thus adding to pressures on our own unsatisfactory balance of payments. From now on, it will be harder to sell U.S. goods to the nations that devalued. Those nations will now provide more vigorous competition for sales in other markets. And, if the devaluation achieves its full purpose, exports from the U.K. to the United States are likely to rise.

U.S. prices performed remarkably well during the first half of the decade. But once we ran out of extra human and industrial capacity, the trend changed. The recent record reads this way:

* Wage settlements averaged 4.4% on a straight time basis for the first nine months of 1967. By contrast, they were 3.9% in 1966 and averaged 3.0% during 1960-65.

* Offsetting productivity gains have slowed down, reflecting slower economic growth. Output per man-hour in manufacturing gained only 2.1% in 1966, compared to an average of 4.1% per year in 1960-65.

* Costs per unit of output increased 4.8% in the first 9 months of 1967.

* Consumer prices rose close to 3% in the past year.

It is popular to describe the current problem as the "cost-push"—as opposed to "demand-pull"—type of inflation. This is a misleading simplification. It is true that it is easier to raise prices when costs advance on a broad front. In these days of industry-wide bargaining, higher wages are likely to affect all firms in any industry. Thus the rise in costs is felt by all, and competitive resistance to higher prices is minimized.

But strong demand is in fact a necessary ingredient of inflation. And demand today—stimulated by expansionary fiscal and monetary pressures—is strong enough to support the rising price trend. Personal income has increased 7.0% in the past year. Even though savings have increased, consumer spending rose 5.5% in the last twelve months for which we have data.

Demand is particularly strong for services, a fact that has profound implications for the price level.

Services—medical care, travel and the like—account for 35% of the consumer price index. Back in the early post-war years, consumer spending for nondurable goods exceeded spending for services by well over 50%. Today the difference is less than 10% and rapidly disappearing.

Prices for services have been rising rapidly. Workers in some of these industries are among the lowest paid in the nation. With demand strong, and the labor supply tight, they are able to get big wage increases that pass quickly into the price level.

Led by services, consumer prices gained almost 3% in 1966, and a similar increase is likely this year. And rising consumer prices are a contributor to inflation as well as a symptom of it. A higher cost of living finds its way directly into some wages through escalator agreements. But even where there is no contractual arrangement, living costs inevitably affect wage negotiations, and they have undoubtedly contributed to the rising trend of recent settlements.

The outlook for 1968 calls for more of the same—higher wage settlements, higher costs and thus higher prices. Productivity will improve, but demand will also increase. Recent developments in costs virtually assure that consumer prices will rise by another 3% or so.

A 3% rate of price inflation is not very impressive by world standards, of course. Most nations would be glad to do that well. But 3% is more than the United States can afford. It is too great for the health of our economy. And the balance of payments provides us with an additional motive for restraint.

Our balance of payments deficit will be over $2 billion this year, compared to $1.4 billion in 1966. If we are to keep the deficit from rising further, we must:

* In 1968, prevent a burst of inflationary demand that would sharply boost imports. This is one reason why so many economists favor raising taxes next year.

* In future years, maintain a better price trend than our trading partners are able to manage in their own countries. Only thus can we build up further our excess of exports over imports and eventually bring the balance of payments under control.

Much of our balance-of-payments deficit will disappear once a satisfactory solution is found for Vietnam. It would be an economic tragedy to have the Vietnam drain end, only to find that it has been replaced by a far more fundamental problem of deterioration in our capability for international competition.

NEW LIFE FOR DEMAND DEPOSITS?

Among city bankers and financial writers in recent years talk about deposit growth has centered largely on time and savings money. Demand deposits, in the main, have been the occasional subject of gloomy forecasts foretelling their declining relative importance.

Chances are, however, that demand deposits will be sparking livelier conversation in those circles before long. For, almost unnoticed, events of the last two years may have been signalling the beginnings of a significant reversal in the unfavorable trend in demand deposits at larger banks—a change that would have far-reaching importance for the entire financial community.

## Signs of Change

In the period from 1961 to 1965 the yearly average of net demand deposits (excluding U. S. government deposits) at all weekly reporting member banks rose $1,936 million, or 2.5%. That amounts to less than 1% a year. New York City banks, meanwhile, recorded an actual *decline* of $337 million—1.7%—in their net demand deposits. But in 1966, average net demand deposits in weekly reporting banks rose $2,315 million—a gain of 2.9%. And for the first nine months of 1967 they were up 4.1% over 1966, on a seasonally adjusted basis.

For New York City the improvement has been even more striking. The gain in the weekly average for the city's banks in 1966 was $534 million—a 2.8% increase compared with the slight declines of prior years. This year has brought an additional increase of 4.1%, raising net demand deposits $805 million above the 1966 average, on a seasonally adjusted basis.

## Interpreting the Signals

Why has this improvement occurred? And, more important, does it represent a sustainable deposit growth? Or is it merely occasioned by fickle factors in the na-

tion's business picture that might shortly change, to the disadvantage of net deposit growth? These are the questions bankers will be asking.

At this point, the answers are necessarily speculative. However, there is a strong likelihood that a continuing upturn in demand deposits is underway. Cyclical factors, though present, do not appear to be the dominant forces behind the changes being observed.

Among the more lasting factors involved are:

* The leeway business firms have for economizing cash has been narrowing. For the future, even with continuing use of sophisticated financial management techniques, corporate cash needs will parallel more closely business growth.

* As loans to business have risen, so have supporting balances. Although net demand deposit figures are not available by deposit category, much of the recent improvement in gross demand deposits has been in IPC deposits, consisting mainly of business demand deposits.

* Business firms may be carrying larger balances as payment for the banking services they receive. Additions to demand deposits as payment for banking services rendered could also explain much of the rise that has occurred in inter-bank deposits.

* Larger banks are pricing more realistically the services they provide for depositors. Through careful cost-accounting, banks have become more aware of just how costly their services are. Explicit recognition of these costs may be creating pressures to enlarge customer balances held to compensate banks.

* Finally, experience with tight money in 1966 has led business firms to reassess the value of prospective credit resources in a tight money market. In addition to increasing deposits to improve their liquidity, they are also seeking to enlarge the credit resources they can draw upon. They can expect that by maintaining larger continuing deposits with a bank, loans will be made more available if a money squeeze occurs.

## Looking Ahead

Admittedly, the changes that have been observed in demand deposit growth cover a relatively brief period. Moreover, cyclical influences have played some role in their development. Hence, inferences about their longer-term evolution require cautious interpretation.

However, evidence now available suggests the need at least for a careful re-examination of currently held convictions about the future of demand deposits in the major lending banks. The outcome of this investigation could be a revision of the assumption that the nation's bigger banks are moving rapidly toward ever increasing reliance on purchased money. The implications of such a revision would extend to profit expectations, liquidity needs and asset portfolios.

TURN FOR THE BETTER IN NET DEMAND DEPOSITS

Data: Federal Reserve Board, CMB

# THE PLANNING-PROGRAMMING-BUDGETING SYSTEM

Federal, state and local government expenditures are approaching $250 billion a year, and demands for new programs are proliferating. Our resources to meet these demands are vast, but nonetheless limited. How can we assess priorities and decide among alternatives so that we get the best return for our government dollar?

The Planning-Programming-Budgeting System, or PPBS as the tongue twister is abbreviated, is being hailed as a new aid to government decision-making by providing, through a formal system, the information necessary for arriving at intelligent choices. Just how does PPBS work? How widely is it being used? What are its limitations, and what is its potential for government?

## What PPBS Is

PPBS is neither a revolution in government management nor is it merely old-style budgeting couched in new terms. PPBS is not a computer takeover, nor is it a substitute for common sense. What is new, and dramatic, is how separate concepts evolved in the past are being brought together in a comprehensive system. PPBS draws on earlier budget reforms that were designed to control abuses and to assess work-efficiency, but it adds a new dimension, planning, to the budget process. Current outlays are analyzed within the framework of long range goals. And fairly sophisticated technologies such as systems analysis and cost/benefit analysis are employed as tools in the process.

The basic questions that a Programming-Planning-Budgeting System asks and attempts to answer are these:

**Objectives:** What are the goals of government? What is it trying to achieve?

**Alternatives:** What are the different ways of achieving the objectives?

**Costs:** What are the full costs of each alternative, both present and future costs, both dollar and non-monetary costs?

**Effectiveness:** Which of the alternatives will be most effective, at a given cost, for achieving the desired objectives or goals? How do the costs compare with the benefits?

The Planning-Programming-Budgeting System is the formal framework for posing these questions, organizing the data and analyzing the information so that better decisions can be made. The elements of the system are:

**Planning:** Objectives and the alternative ways of achieving them are studied through a long term perspective. Long range planning, once an isolated stepchild, becomes tied into the administrative budget-making process. The full costs of programs are compared, and financial plans are drawn up for several years ahead (usually five) instead of the typical one-year budget cycle.

**Programming:** Activities are grouped according to

broad common objectives. This is a shift from old-style budgets that typically ask "what is an agency *buying*" to a new focus, "what is the agency *supplying*." It is a shift in emphasis from inputs (how much is spent on doctors, how much on drugs, how much on X-ray machines?) to outputs (how many mothers are receiving pre-natal care, how many children are seeing dentists?).

The broad objective of a health service, for example, can be stated as providing for the physical and mental health of the citizenry. Then a health service will have several major program categories, each centered around an important aim such as: control and prevention of disease; treatment; long term care. Each major program in turn can have subcategories or "program elements." Each program brings together all activities that are related to its objective. Then the program is analyzed in terms of how effectively it meets its goals. Outputs, what the program achieves, are related to inputs, the costs of the program. If a dollar value can be placed on the output (and this is sometimes difficult: what is the dollar value of reducing mental retardation by proper prenatal care), then cost/benefit analysis follows.

**Budgeting:** Program plans are translated into the financial terms necessary for the annual appropriating and accounting process. At the present time, most government units appropriate through input-oriented line budgets (by salaries, supplies, capital outlays) so program plans must be made consistent with old budget formats. Even when this is not a problem, budgeting (in

## FIRE PREVENTION AND FIREFIGHTING PROGRAM

Under PPBS, activities are grouped according to their objectives. Program objectives are spelled out, and criteria are developed which can be used to evaluate programs. The following criteria might be used to measure the effectiveness of a fire prevention and firefighting program.

**OBJECTIVE:** To reduce the number of fires and loss due to fires.

**CRITERIA FOR MEASURING PROGRAM EFFECTIVENESS:**
1. Annual number of fires of various magnitudes.

2. Fire rates, for example, number per 10,000 inhabitants.

3. Annual dollar value of property loss due to fire (adjusted for price changes).

4. Annual dollar value of property loss due to fire per $1 million of total property value.

5. Annual number of persons killed or injured (by degrees of seriousness) due to fires.

6. Reduction in number of fires, in injuries, in lives lost, and in dollars of property lost from a base year.

7. Average time required to put out fires, for various classes of fire.

Data: State-Local Finances Project

## GUIDELINES FOR PLANNING—PROGRAMMING—BUDGETING IN NEW YORK STATE

### Basic Stages in Preparing Program Planning Reports

AGENCY HEAD

EXECUTIVE STAFF

PROGRAM ADMINISTRATORS

Data: State of New York, Executive Department

the traditional sense) is required to put long range plans into a current year framework.

**System:** When all of the above—Planning-Programming-Budgeting—is done in a comprehensive way, you have the System.

### Where PPBS Is Being Used

Today PPBS has passed from behind the closed doors of the Pentagon, where it was formally introduced in 1961, and is spreading to the rest of the federal government, and to state and local governments too. However, in most nondefense situations, PPBS is still in operative stages.

At the federal level, PPBS is being introduced on a broad scale. Departments and agencies have been given detailed instructions on how they should set up systems and a timetable for implementing the instructions. All major agencies prepare their budgets in a PPBS framework. This entails submitting to the Budget Bureau Program Memoranda (the agency's recommendations to the President based on its objectives, its programs and the alternatives considered), Program and Financial Plans (the multi-year summary of agency programs in terms of costs and outputs) and Special Studies (in-depth analyses underlying the alternatives chosen). The Budget Bureau in turn is reorganizing itself into six broad categories (national security, international, natural resources, human resources, general government and science, technology and economic) so that it can focus on broad programs that cross department lines.

At the state and local level, PPBS is making headway. The State-Local Finances Project at George Washington

University (financed by the Ford Foundation) is working on a demonstration basis to see how PPBS can be implemented. Participating in the project are the states of Colorado, Michigan, New York, Vermont and Wisconsin, the counties of Dade (Florida), Davidson (Tennessee), Los Angeles (California) and Nassau (New York) and the cities of Dayton, Denver, Detroit, New Haven and San Diego. Wisconsin and New York have already gone quite far in setting up their own PPB systems. New York City, with its massive budget and limited resources, is using what it calls a "probe" technique, conducting in-depth studies of particular problems. In addition, the Rand Corporation, pioneer of PPBS during the 1950s, will be working with New York City in several broad program areas.

In no sector of government is PPBS fully implemented. Converting line budgets into a multi-year framework focused on goals can run into hurdles. Few competent cost/benefit analyses have been completed, and even fewer are integrated into the program budgeting process.

### Problems and Potential

The fact that problems are cropping up should not be

### BENEFIT/COST ESTIMATES FOR THE JOB CORPS

Does the investment in Job Corps training pass the economic test of efficiency? Are benefits greater than costs? A case study compares the improvement expected in lifetime earnings of Job Corpsmen with the costs of training. Two measures of earnings improvement are used: one based on the additional earnings associated with educational gains, the second based on a comparison of wages earned by ex-Corpsmen and a control group without Job Corp training. The future stream of earnings is discounted to arrive at present value. The example shows the importance of the discount rate in determining whether a program passes the test of efficiency.

BENEFITS: Present Value of Future Earnings

thousands of dollars

Data: Office of Economic Opportunity

a surprise. Shortages of manpower and funds put limits on progress. Changing from one system to another inevitably causes bottlenecks. And there is a more fundamental problem: Moving from theory to fact opens up a host of pragmatic questions.

On the surface, formulating goals is the easiest part of PPBS. In practice, there is much debate about how this should be done. If goals are stated too broadly, they are little more than truisms and have little analytical value. A self-contained program can have more than one goal: The primary purpose of street lights can be to reduce auto accidents or to increase pedestrian sense of security. The goal considered dominant will color spending decisions. Programs with the same goal can cross agency lines. For example, at the federal level creating job opportunities is a function of the Department of Health, Education, and Welfare, the Office of Economic Opportunity and the Department of Labor. In such a case, bringing all activities together for analysis without imposing undue centralization becomes a problem. In spite of these problems, the very process of thinking about what you are doing and for whom should add a new dimension to government.

Weighing alternatives is the analytical core of PPBS, but at the present time PPBS does not set one broad objective up against another, although there are those who feel it should. PPBS does not ask whether it is better to spend an additional dollar on education or on clean air, but given the objective of clean air, PPBS asks what is the best way of allocating the resources going into clean air programs.

In carrying out cost/benefit analyses for specific government programs such as job training or adult education, analysts can come up against thorny problems. Data shortages are frustrating: How do you analyze the effects of college loan programs when you have no information on what happened to the students who received loans? Conceptual questions are tantalizing: How do you measure the dollar benefits of a beautiful highway, of a well-educated child, of a rat-free house? And whose benefits are you measuring, the benefits to the individual receiving the service or "society"? Costs are incurred at one point in time, and benefits received at another. Analysts borrow techniques applied to business investment and discount the cost and benefit streams to arrive at present value. But what discount rate should be used? Benefits may exceed costs at a 5% discount rate, but fall below costs at an 8% rate. Benefits occurring far out in time will be valued less than those with immediate payoff.

It is problems such as these that cause the cynics to charge that PPBS is "statistical double-talk." On a cost/benefit basis, the Boston Tea Party might never have taken place. However, the admitted limitations of PPBS do not invalidate its potential. PPBS is not intended to be decision-making by computer. PPBS does not intend to take judgment, or even politics, out of decision-making. Rather, PPBS attempts to pose the questions and give a decision-maker a reasonable range of alterna-

tives. If nothing else, the decision-maker should be forced to recognize what he doesn't know.

With government entering new spheres of action, undertaking new programs and developing new federal-state-local spending patterns, it is becoming ever more important to break away from the old budget philosophy in which old programs never die, they only grow by increments. In the past seven years, 78 new federal programs have been initiated while only one program has been terminated. The U.S. has the resources to meet its social and economic problems, but its resources are not so vast that they can be frittered away. The questions being asked today—how to increase job opportunities, raise educational standards, rebuild the slums—are not susceptible to easy answers. Nor will PPBS provide the answers to them. PPBS should, however, provide guidance for assessing how well we are doing and in what direction we should move.

## AIR POLLUTION CONTROL

What are the relative costs of gradually upgrading apartment house incinerators versus gradually shutting them down and hauling away the refuse? How do the alternatives compare in reducing air pollution? Analysis of the problem in New York City showed that shutting down all incinerators would be somewhat more effective in reducing air pollution, but costs, over a ten-year period would be considerably greater, chiefly because of the costs (to the city and the landlord) of garbage disposal. (However, for landlords of small buildings, it would be cheaper to shut down than to upgrade.)

### COSTS

millions of dollars

millions of dollars

### EFFECTIVENESS

Gradually
Upgrade
Incinerators

Data: McKinsey & Co. for the City of New York

RELAXING AT SEA

The lure of sunshine, exotic tropical ports and seven,
fourteen or more days relaxing at sea has proved irresist-
ibly appealing to Americans—and has led to a booming
cruise business: In fiscal 1952, some 65,000 cruise passen-
gers checked in at U. S. ports; by 1966, this figure had
swelled to nearly 356,000.

Not for Transportation

The benefits of taking a cruise can be quite attrac-
tive—and are so to many. For the single person, there's
the possible romance of two looking over a ship's railing
at a calm, moon-covered sea, with the prospects of some
visits to palm-studded islands in the sun. For the harried
businessman (and his no less harried wife) there's the
freedom from ringing telephones and other interruptions.

But, aside from the intrinsic appeal of relaxing luxuri-
ously at sea, there are other reasons for the rising number
of people who go on cruises. The increasing amount of
leisure time has allowed Americans to pursue hobbies
such as traveling. And rising incomes have provided us
with the wherewithal for our free-time activities.

On the supply side of the economic equation, the
shipping companies have been putting more emphasis
on cruises for two reasons. First of all, the obvious one:
To meet the traveler's increasing demand for cruises.
Second, and not so obvious, the shipping lines have faced
a formidable competitive challenge from the airlines over
the last 15 or so years. This challenge is dramatically
shown by some figures: In 1948, over 760,000 passengers
went across the Atlantic—for every five that went by
ship, only two flew. In 1960, reflecting the boom in
European tourism, nearly 2.4 million passengers went
to Europe. That time, however, for every one who sailed,
three flew. These trends have continued into the sixties:
The air-sea ratio has climbed from 3:1 to 6:1.

These data signify a change in the traveler's attitude
toward transportation. Until World War II, if a person
wanted to travel to Europe, or for that matter Asia,
Africa or South America, he took a ship. After the second
World War, however, the decision wasn't so clear-cut.
Advances in aviation technology had improved the com-
petitive position of the airplane. Although flying always
had the advantage as far as speed was concerned, going
to Europe by plane was expensive at the beginning of
the decade of the fifties.

But the introduction of the tourist class air fare in
1952, and the first commercial trans-Atlantic jet flights in
1958, cut into the shipping lines' business of transporting
passengers by sea. While the costs of traveling by sea
have steadily increased, air fares have declined, making
the competitive battle between these two forms of trans-
portation rather one-sided.

Confronted with this fact of competitive life, shipping
lines fought back. Although cruises and cruise ships dated
back before the second World War, the 1950's saw in-
creased emphasis on cruises. Most new ships were de-

signed as cruise ships, that is, they had only one or two
classes (with accommodations for a small number of first-
class passengers) rather than three. Many trans-Atlantic
ships, the Queen Mary, the Queen Elizabeth and the
United States, for example, were put on cruises during the
Christmas to Easter cruise season. And, perhaps most
important, the shipping lines promoted and advertised
cruises heavily, whetting the appetites of many to try a
relaxing vacation at sea.

Ahead: Smooth Sailing With Some Choppy Waters

The future for cruises seems bright. Americans will
continue to gain more leisure time, and they will benefit
from rising incomes. Furthermore the imminent advent
of the jumbo jets (which will carry anywhere from 300
to 500 passengers—with possible reductions in fares)
and the coming of age of millions of Americans who
have only lived in the air age, and presumably have
no fear of flying, should further reduce the use of ships
as transportation. At the same time, shipping companies
will probably push cruises even more strongly. The re-
sults can only be further gains in the number of cruises
and the number of people enjoying them.

But there are some choppy waters ahead. According to
a Port of New York Authority study, "The volume of ocean
travel in 1975 or 1985 will depend upon the **supply of**
passenger vessels as well as upon the **demand** for sea
travel. Because of various economic uncertainties in the
passenger ship industry, it is likely that there will not be
a sufficient supply of passenger ships to meet the pro-
jected demand." Since foreign governments, as well as
the U.S. government, are financially involved with ship
construction, and in some cases subsidizing operations,
the Port Authority argues that these governments may
not want to help build ships that will be used for cruises
out of American ports. In short, the choppy waters will
probably be represented by restricted supply of ships
rather than any weakness in the demand for cruises.

MORE CRUISES—MORE CRUISE PASSENGERS

*Trans-Atlantic liners used as cruise ships from Christmas to Easter. Does not include ships devoted exclusively to cruises.

Data: Trans-Atlantic Passenger Steamship Conference

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