February 7, 1958

MEMORANDUM

TO: Dr. Henry A. Kissinger

FROM: John Cowles

SUBJECT: Comments on Subpanel IV Draft Report

It is only because you urge me to give you my reactions and "feel" about the tone of the report of Subpanel IV that I am hastily dictating this to Miss Drucker over the phone before leaving for Antigua.

I read the Subpanel IV report last night. I have no idea who wrote it. While it is well written in the literary sense, I think it is much too soft and "Pollyanna-ish."

The final sentence in the first paragraph on page 28, for example, strikes me as being nothing but pious pap. Most people who are familiar with the realities of union featherbedding, restrictions on output, restrictions on the admission of apprentices, dead-horse make-work, and many other union practices will be greatly disappointed as it does not come to grips with reality. I don't think it is worthy of being in the Rockefeller Report.

Also, does anyone really believe that as a practical matter expenditures for veterans or for farm subsidies will be substantially reduced unless the country is made to realize that our current situation is much more serious than I believe the general tenor of this memorandum suggests?

I am not an economist, but I believe the present determination of the labor unions to achieve a progressively shorter work week and longer paid vacations is so great that I doubt that we will increase GNP at the rate of 4% a year in the period immediately ahead, unless the public is made far more aware of the gravity of the situation than it now is.

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The report says on page 75, "For the past decade our GNP has grown at the average rate of 4 per cent a year, compared with a general growth trend of 3 per cent in the period 1870 - 1930."

I am ignorant. Are these figures computed on stable prices? If so, shouldn't they be stated?

Also, what happened to our GNP during the 1930's? On pages 81 and 82 and 87, shouldn't alternate tables be included showing what would happen if GNP grows at 3 per cent instead of 4 per cent?

I hope I am much too pessimistic but I feel that the author of this panel report gives it too optimistic a tone. If the American people are given the facts, I am convinced that they will make the necessary response, even to paying willingly higher taxes and accepting a slower increase in their standards of living.

I dislike being negative, but I don't think this report is as tough as the facts warrant.

A final trivial point. The author refers twice to our running out of iron ore. I suggest that some other metal be substituted for iron ore, as several steelmen have told me that we now have enough taconite (low grade iron ore) in the Mesabi Range alone to last several hundred years. Nearly a billion dollars has been invested in taconite beneficiating plants in recent years, and I am told that the final costs of making steel from taconite are not much higher, if any, than from good iron ore.

JOHN COWLES

cc: Mr. Nelson A. Rockefeller

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# I - THE CHALLENGE

Every society comes to grips with existence in a different fashion. From the sum total of the challenges presented by the environment different people choose different events as meaningful, different goals as worthy of effort.

This is particularly true of an open society such as our own. Tradition-bound societies inherit definitions of what life is and how it is to be lived. Authoritarian societies have their life choices thrust upon them. But open societies must constantly reexamine their purpose and struggle to produce a world harmonious with their aspirations. In the chosen tasks of a society are the active expressions of its values, its decisions as to what things matter.

Thus the material abundance on which we so rightly pride ourselves cannot be the ultimate purpose of our society. Economic growth is essential to sustain the dynamism of our nation. It will determine the resources available to us. But the purpose to which we apply our abundance will determine the character of our society and ultimately its vitality.

The prospects of our economy are extraordinary. From 1870 to 1945 the total national output increased at the average rate of 3 per cent per year while the population was growing at the rate of only 1.9 per cent annually. As a result, real living standards of the population have nearly tripled in a 60-year period. Since the end of World War II our Gross National Product has

60-year period. Since the end of World War II our Gross National Product has
risen a result, real living standards of the population have nearly tripled in a
while the population was growing at the rate of only 1.3 per cent annually.
the total national output increased at the average rate of 3 per cent per year
the prospects of our economy are extraordinary. From 1830 to 1948
the character of our society and ultimately its vitality.

able to man. But the purpose to which we apply our abundance will determine
the sustain the dynamism of our nation. It will determine the resources avail-
can be the ultimate purpose of our society. Economic growth is essential
to the material abundance on which we so tightly depend ourselves
things matter.

according to the active expressions of its values, its declarations as to what
due to would determine with their aspirations. In the chosen tasks of a
open society must constantly be determined their purpose and attitude to pro-
ught. All political societies have their life choices thrust upon them. But
strongholds of society inherent definitions of what life is and how it is to be
ught.

This is particularly true of an open society such as our own. Tredit-
effort.

people choose different events as meaningful, different goals as worthy of
passage. The sum total of the challenges presented by the environment different
Every society comes to grip with existence in a different fashion.

I - THE CHALLENGE

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increased at the rate of 4 per cent a year. If we maintain this rate of progress for another two decades, our Gross National Product, which was $434 billion in 1957 will reach $800 billion in 1975 in today's prices. Even our traditional growth rate of 3 per cent will produce a Gross National Product of over $700 billion. Needless to say, this growth rate takes into account the inevitable fluctuations of a free economy -- it refers to an average rate of expansion, not to a pace from which no slackening is possible. It assumes that we will act courageously and decisively to prevent major deflation and inflation.

Such a rise in the Gross National Product will mean a dramatic increase in the average income. Even with the expected increase of population, the average income would rise by 1975 from today's $5500 to $7500 at current prices. And considering the trend of income distribution, which indicates that we are becoming predominantly a middle-class nation, the average income will be increasingly representative. Thus the material meaning of our economic growth is the upgrading of our society to the point where twenty years hence the representative family will enjoy an income comparable to that of the upper middle-class today.

Yet the ultimate meaning of our material abundance is not simply the rising standard of living it will make possible. Our growing economy also represents the approach to the realization of a cardinal American concern: the creation of a society in which every individual is given a chance to achieve a life of dignity, purpose and accomplishment.

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To achieve this objective the United States faces two challenges in the economic and social field: the first is the technical management of the growth and the dynamism of our economy. The second is the application of the *result* of our material growth to further the values of our society.

Of the two problems, the technical management of our growth, while highly complex, is the more straightforward. To be sure, it will require wise policies of encouragement and restraint. Our growth will push hard against our *physical* resources and make necessary farseeing conservation measures and constant research into new sources of raw materials and energy. It will strain our *economic* resources and therefore necessitate courageous policies of inflation control. From time to time, growth will have to be reactivated by prompt and vigorous private and public effort.

But the management of our economy, for all its difficulties, involves familiar questions. Our level of economic understanding, while still far from perfect, is growing. We are in substantial agreement about the means to encourage growth and we possess tools by which we can put our agreement into effect. We have achieved a considerable degree of consensus on the proper role and place of government in dealing with economic recession. What remains to be seen is the extent to which we will have the courage, vision and self-restraint to do what is necessary.

A far deeper challenge is what may be called the nemesis of success. The essence of a society of growth is that its frontiers are constantly changing.

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The frontier of today becomes the familiar territory of tomorrow. Achievement thus contains the danger of future failure. The pioneers of today can become the obstacles to continuing advance, for the very act of discovery may drain society of energy for new adventures. There is a natural tendency to cling to patterns of action that have served so well in the past, to seek to deal with new challenges by the methods and concepts of previous periods.

No more important task confronts us than to make sure that our creativity keeps pace with our opportunities, and our moral and social concerns with our productivity. A frontier not only exists; it is also discovered. History bears witness to the decline of many nations which sought their future in their past. It is the tragedy of history and its meaning, too, that no exertion can ever be final, that no society can ever be spared of discovering for itself the purpose of existence.

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## II - THE BACKGROUND OF ECONOMIC ORGANIZATION

A society of growth must be unusually sensitive to the nature of the forces that shaped it and to the environment in which it lives. A society willing to innovate must know its environment and its past far more profoundly than a society which accepts things as they are. Only in this manner will it understand what possibilities are open to it and which are denied.

Many forces have combined to bring about the American abundance. We have had the advantage of a richly endowed territory. Two great oceans protected our shores while opening highways of commerce, and we had the good fortune of developing a largely unexplored continent, But the mere presence of these factors was not enough. To a considerable extent the growth of our economy was the result of a tradition and an attitude.

At the risk of oversimplification it may be useful to emphasize the nonmaterial influences behind our material abundance. The first is a religious strain which has permeated American society from its beginnings. A product of the Calvinist movement, this severe, self-denying ethic was the natural expression of a society seeking to develop a wilderness and needing to encourage attitudes of hard work, thrift, and dedication to one's worldly calling. The concept of predestination implied that temporal success was an indication of divine favor. Our Calvinist background thus laid the basis for the competitive striving which has characterized our society, for the hard, sometimes ruthless quest to master the environment.

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But while the religious background contributed to the dynamism of our
economy, it also infused the American system with a self-conscious morality
and a conviction that the pursuit of gain was not an end in itself but had to
be justified by the use to which the gain was put. Thus our Puritan ancestry
has been importantly involved in the evolution of the American social con-
sciousness. And despite the fact that some of our economic history is the
story of irresponsibility writ large, this strain of self-imposed accountability
has been a persistent, if not always dominant note of our society. It has
asserted itself in the American phenomenon of institutionalized private phil-
anthropy, in the championship of the causes of the underprivileged, in the
recognition -- sometimes tardy and reluctant, but never totally lacking --
that the ultimate justification of the economic system was, in the final
analysis, not the private pocketbook, but the public welfare.

A second vital characteristic of the American economic system has
been the absence of a national feudal heritage. This resulted in the absence
of rigid class consciousness; it also came to expression in the American
attitude toward the inherent capacities and the rightful opportunities to be
accorded to the common man. Over the history of the American economy the
common man has at times been abused, misused, even exploited, but he
has has never been despised. The idea of a permanently inferior class of
men is and always has been repugnant to the American mind. Traditionally
ours has been one of the very few countries in the world where a man was

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proud of his humble ancestry rather than ashamed of it, and where his advance-
ment typically depended on his ability rather than on his social background.

Quite aside from the fraternal tone which such an idea gives to social
life, the absence of a feudal preconception of "classes" has prevented Ameri-
can social and economic disputes from turning into irreconcilable antagonism.
To be sure, there are classes in this nation, and class antagonism has some-
times been sharp and bitter. Yet a basic outlook on men as individuals rather
than as representatives of a class has tended to permeate American thought,
and social attitudes. At the height of the anti-union days of the late nine-
teenth century or of the anti-capital days of the 1930's, the idea of a struggle
to the finish never characterized more than a fringe of the contestants.

A third impetus to the American economic system has been the demo-
cratic political framework within which it has operated. In effect this has
meant the supremacy of the political ideal over the economic, and
since that political ideal was ultimately responsive to the will of the people,
it has resulted in the constant adaptation of the economic system to the
political wishes of the electorate. The democratic concept in America has
always expressed itself in a suspicion of power, private or public, and in
the insistence that power be regularized, and legitimized by public consent.
The wariness with which the public eye has regarded size, whether in Wash-
ington or Detroit, has resulted in the gradual evolution of an attitude of

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self-consciousness on the part of big organizations, economic or political.
Big business has been a focal point of attack over the American past, justly
and unjustly. Whatever the merits of the specific attacks, their consequence
has been the gradual recognition on the part of business that its ultimate
justification was public service. Recently part of the labor movement has
been undergoing the same kind of public scrutiny, a procedure that has re-
sulted in a greater recognition of the public responsibilities of these large
and powerful unions.

Closely related was a fourth element of the American economic system:
its essentially pragmatic approach. American enterprise refused to be bound
by dogma, while remaining receptive to whatever doctrine seemed appropriate
to master a given situation. The American was concerned with results, not with
methods. He wanted transportation, or steel, or decent wages and working
conditions; he wanted a viable credit mechanism, adequate electric power or
modern aviation; and he wanted the measures and policies which produced
these results. He was unimpressed by the fact that some measures were
evolutions of old-time feudal practice, that others were derived directly
from early European socialism, and still others were a fantastic amalgam
of devices. In general he did not want government in business or business
in government. But if the straight line to a desired result called for either,
the American system chose to do what was necessary. Even in the heyday

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of laissez-faire capitalism, the government subsidized the railroads in their
drive to span the continent.

The central motivating force of the economic system has been a per-
vasive consciousness of the right of any individual to share in the results
of an expanding economy if he cares to exert himself toward that end. Im-
perfectly realized and never expressed as a doctrine, the belief that equality of
opportunity was a social concern proved decisive at crucial periods in Ameri-
can development and in quite varied aspects of American life. It produced
the assumption of responsibility for universal education because ignorance
was considered an "unreasonable" handicap. It led to the Homestead Acts,
for to a frontier society it seemed fair that everyone should have equal oppor-
tunity to own land. It provided the impetus for the drive against monopoly in
any form, whether of credit as when Andrew Jackson fought the Second Bank
of the United States or of industrial power as in the Sherman Anti-Trust Law
of 1890. This affirmation in favor of individual opportunity antedated Tolstoy
or Marx or the Reform movements which transformed British life.

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The result has been an economic system in which private initiative, public responsibility, and moral convictions have formed a singularly dynamic combination. To be sure, without the resources of a continent, and the insulation for over a century from the mainstream of international affairs, the formidable expansion of the American economy could never have taken place. But no discussion of our economic growth is complete without including the extraordinary role played by our *aspiration* to growth. In the driving energy with which we assailed the wilderness, planted our cities, and developed our economy, there was a quality of impetuous vitality and hopefulness. The economic building of America was not only a matter of economic motivation. Bold, imaginative, sometimes ruthless and even cruel, it was above all a tremendous human adventure.

That quality of adventuresomeness and competitiveness marks it still. But the problems of the future will call for a different direction of the spirit of adventure and competition. A necessary consequence of a growing economy is that its "frontiers" cannot remain fixed. As our society becomes more complicated and interdependent, it is inevitable that the frontier moves into ever more subtle fields. In the 19th century the open offer of lands available to those who had the courage to reach them colored the outlook of those who stayed behind no less than of those who ventured west. Afterwards new frontiers -- of minerals extraction, trade and industry -- opened new vistas of opportunity. Today it is not the geographic

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frontier which beckons us, but the frontiers of science, and of human relationships. Whatever aspect of American life we consider -- population trends, manner of living, technological change, the role of government -- we confront enormous transformations which are rapidly accelerating. Here are some of the most striking.

Only 50 years ago less than 30 per cent of Americans lived in cities. By 1950 more than one half had moved to big cities or their suburbs. By 1975 more than 70 per cent will be urban dwellers. Vast metropolitan complexes overspreading city, county and state lines, posing vast problems of living and of access, and demanding new definitions of local government, constitute the living environment of America.

Equally dramatic has been the change in the composition of our working population and of our income distribution. Only forty years ago, our farmers and unskilled laborers accounted for over half our working population. Today these two groups comprise less than a fifth of the total, and the majority of our citizens are to be found in skilled or clerical work, or employed in professional or managerial capacities. Thirty years ago, the income distribution curve of America was characterized by two bulges: one at the bottom and another at the top. Today the bulge is in the middle -- signifying that we are rapidly becoming a one class nation and this class the middle class.

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Our economy used to be almost totally independent of foreign sources of supply for vital materials. In the future we shall depend heavily on imports of such basic commodities as iron ore, copper, and a long list of critical minerals and fibres. Our economy was formerly one of prodigious surpluses of resources. In the present decade and a half we are likely to be short of that classical "free good" of economic texts: water.

Our social environment has changed as radically as our material. Fifty years ago the representative social and economic unit in America was small and local. Businesses were typically proprietorships, and individually managed. Labor unions were craft groups and government was conceived as an arbiter, not as a formulator of economic policy. Political loyalties tended to focus on local levels and issues.

Today large organizations are playing an ever more important role. Ownership has been largely separated from management and the function of the administrator has become ever more crucial. Our industry is corporate. Our labor unions are industry-wide. Government has assumed an ever larger responsibility, partly because of the exigencies of national defense, partly because of changing concepts of social responsibility. And all these changes are occurring while we have had to adjust to emerging from a largely isolationist power into the forefront of world affairs and under the pressure of a military threat which absorbs an unprecedented amount of resources and energy.

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Thus the deepest transformation we are undergoing may be psychological. In the past American society did not really have to ask itself for what purpose it worked so hard, competed so aggressively, built so furiously: the answer was determined by the need to conquer a wilderness. But as a subsistence economy has changed to an economy of increasing comfort, the challenges to the pioneering spirit become ever more complex.

The lesson of the past is never automatic. A society which seeks to apply its experiences mechanically soon stagnates. The past furnishes us an attitude and a point of view. It cannot serve as a substitute for creativity.

We will obtain the resources for dealing with our problems from the continuing process of growth which has characterized our society. But we will derive our sense of direction and our dynamism from our purpose and our vision. This in fact is the deepest lesson of our past.

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### III - GOVERNMENT AND PRIVATE RESPONSIBILITIES

To future historians, it may well seem that one of the most significant developments of the last twenty-five years has been the forging of an agreement on the role of public economic powers. The past three decades have seen nothing less than a new definition of the function of government in a basically free-enterprise society.

In the heat of the great debate, during the 1930's and 1940's, both sides of this issue were badly misrepresented by the passions of the debaters. Those who wished to deny to government any positive role in the economic conduct of the nation's affairs tended to overlook the historic partnership between government and enterprise: a partnership beginning in the early days of the Republic when the government actively promoted the foreign trade interests of the young nation and sought to protect its infant industries; later evidenced when the government provided large land grants for the accomplishment of our transcontinental railways; and continuing down the 1920's in the form of conservation, commercial stimulation and protection, currency regulation and a hundred other universally accepted government functions.

The opponents of "government intervention" often talked of government as if it were a foreign body in the American economy, rather than an indispensable component of that economy. Equally one-sidedly, some

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proponents of all-out government planning failed to recognize the long-term
trends of vitality, flexibility and invention of American business enter-
prise had revealed. They discounted the value to a free society of the
fragmentation of economic power and decision-making.

It is one of the evidences of the pragmatism and adaptability of the
American economic system that this rift of views is now virtually healed.
There continues to be, and there will quite properly continue to be, diver-
gence of opinion about the exact line of demarcation between public and
private economic responsibility. But the passions are now largely a thing
of the past. The broad lines of a workable philosophy have emerged.

In its essence this agreement has made government a partner in the
task of assuring the economic health and vitality of the nation. To be sure,
the *source* and *direction* of economic energy continue to be lodged primarily
in the motivations of free individuals and in the pursuit of profit by business
organizations. But the climate in which that energy is stimulated depends
importantly on public economic action and policy. This fact becomes all
the more evident when we realize that federal, state and local governments
account for about 20 per cent of our Gross National Product. Nostalgia for
a period -- only thirty years ago -- when government contributed less than
10 per cent to our Gross National Product, can only result in a serious mis-
conception of present realities. Our future growth and vitality depend not
on wishing government away, but on conceiving a creative role for it.

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For this, the evolution of our public economic function has placed
many responsibilities on the shoulders of our public agencies, local, state
and federal. Some of the major ones are these:

The husbanding of scarce resources.

The provision of necessary public assets, such as schools, or roads,
or hospitals.

The responsibility for rehabilitation of those areas of economic life
which are beyond the scope of private enterprise alone, such as agricul-
tural poverty or urban redevelopment.

Assistance in the provision of private economic well-being and
leadership in the rehabilitation of the underprivileged.

These social and economic functions of our public institutions de-
rive their support mainly from an agreement that our abundance, to be made
meaningful, must be applied for the social good. Equally important, there
is an agreement that our government must aid the process of growth itself.

A. GROWTH AND STABILITY

This last responsibility is a formidable one, and we do not yet know
the extent to which it can be fully discharged. For experience shows us
that the normal upward sweep of our economy has been marked by the fluctu-
ations of the business cycle. The economy moves ahead through alternate
phases of prosperity, during which inflationary pressures may build up, and

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recession, during which the forces of deflation become the major threat. The objective towards which we have been working (and which is set forth in the Employment Act of 1946) is not to eliminate these fluctuations around the growth trend, but to hold them within tolerable proportions. In an economy of growth, some degree of fluctuation is inevitable. The consequence of each advance and to some extent the impetus behind it is a degree of temporary maladjustment. Our goal is to prevent these fluctuations from attaining a cumulative momentum.

There are a number of ways in which public action may seek to dampen undesirable fluctuations. The provision of public assets such as roads, or schools gives necessary support to private growth. Tax policies can affect both growth and stability. Monetary and fiscal measures can be influential in reversing serious business downswings and in containing inflationary pressures in prosperous periods. The manner in which government discharges its administrative or housekeeping functions may have important repercussions on the private economy. Regulatory agencies can exert an important influence over significant areas of our economy, such as power, transportation and communication. And, finally, within its own sphere of activities, government must establish priorities among programs ranging from defense to welfare, not all of which can always be accommodated in any given year.

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Thus far we have only tested the efficacy of these anti-recession tools in the mild downturns of 1949 and 1953, and again in the business decline which we are currently undergoing. To date this experience has been good. The easing of credit by the Federal Reserve System, the automatic curtailment of tax receipts and the expansion of unemployment payments (the so-called "built-in" stabilizers of our system), and the judicious use of tax cuts have sufficed to halt an over-all decline and to provide conditions conducive to a new advance. But we have yet to test our arsenal of economic weapons against a formidable economic setback. We cannot afford complacency. Both government and industry must always plan for dealing with recession and have at their disposal a "stockpile" of programs which can be implemented quickly should conditions call for it.

Meanwhile our record in combating inflation is less reassuring. To be sure, our experience with inflation has not been intolerably severe statistically. While the consumer price index rose approximately 18 per cent between 1948 to 1957, two-thirds of that increase came during the Korean War.

What is worrisome about this increase is not so much its scale as its seemingly built-in character. A number of explanations have been advanced. It has been maintained that there is a tendency, in a "high-pressure" economy for investment chronically to outpace savings, with a resulting inflationary pressure through the credit mechanism. Others argue that strong trade unions in a full employment society can secure wage increases going beyond gains in productivity and that employers can pass these increases along as price rises. Finally, it has been noted that industries, where a large share of the market is

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controlled by a few producers, are able to advance prices even during
periods of slack demand.

Whatever its roots, the containment of inflationary forces must be
one of the most important objectives for the exercise of government's power
of economic supervision. At the same time, the fact that inflation is un-
doubtedly rooted, at least in part, in the _joint_ economic power of business
and labor, points up the unavoidable responsibilities of private groups --
in keeping wage increases in line with the general advance in productivity,
in setting price and investment policies with an eye on the longer term
future rather than on the exigencies of the moment, and in exercising caution
and restraint in periods of booming business.

Thus the fact that government at all levels now has a major role in
promoting economic growth and stability does not mean that either is thereby
assured. With the power to take forceful action inescapably comes the
ability to make powerful mistakes. Though we clearly possess a greater
capacity for economic self-direction than ever before, this capacity is not
an assurance of performance. Government action cannot provide the techno-
logical innovation, the executive skill, the aspiration to make growth an
actuality. Nor can it provide the self-control which alone will make
stability possible. It _can_ create an atmosphere in which these qualities can
flourish.

Specific recommendations for anti-inflation or anti-deflation policy
are not within the scope of this report. Undoubtedly we can strengthen and

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refine our capacity to deal with economic fluctuation. But what is needed now is not so much more power, but more courage in the use of existing powers. This will require not only leadership at the public level, but a higher degree of understanding and self-restraint at all private levels.

There is no element in the economy which does not have a vital stake in continuous and reasonably stable growth. The degree of our economic maturity will be evidenced by the responsibility and vigor with which we translate that conviction into action.

## B. TAX POLICIES AND PRIVATE INCENTIVES

The power to tax, it is traditionally said, is the power to destroy. But the exercise of this critical economic power today has a more affirmative function. The power to tax is also the power to build, for taxation is a method by which we transfer resources to the government for the construction of public assets and the provision of public services. It is also the power to accelerate or retard our over-all growth by accumulating public surpluses or incurring public deficits. The ability to vary tax rates in a counter-cyclical fashion provides us with a potent weapon against both inflation and deflation. And, the types of taxes we select will have important repercussions on economic growth.

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Any general approach to a tax policy for the future must recognize
two basic facts. One is that present tax receipts are barely adequate to
cover the present outlays of federal, state and local governments. Federal
receipts will produce a small surplus over present expenditures in years
of high level business activity. But most state and local governments,
are hard-pressed to meet needs for more and better governmental services,
and state and local government debt has more than doubled in the past
five years.

The second basic fact is that government outlays are sure to rise
so long as present international tensions persist. As our subsequent
analysis will show, we must anticipate a rise in federal, state and local
expenditures that is relatively greater than the increase in Gross National
Product between now and the mid-1960's. The present prospect is that
the government's share of our Gross National Product may rise from the
present 20 per cent to at least 22 per cent by 1965.

These facts underscore the impossibility of large-scale reductions
of tax rates in the face of continued world tensions. This does not mean

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that **no** reduction of **any** of the existing taxes is possible; it does indicate
that reductions must be carefully selective, and that any loss in revenues
must be amply compensated by a significant contribution to our economic
vigor.

Because a general reduction of tax rates is impossible, a reform of the
tax structure becomes increasingly important. Our present tax system has
grown in response to quite diverse needs over a long period of time. It is
difficult to assess its over-all impact on incentives and on our economy.
As a result, piecemeal revision of the kind we have had in recent years,
is not likely to give us a tax system geared to the needs of the future.

It is obviously impossible in the brief compass of this report to
consider detailed problems in a field so complex and technical. However,
we do feel it important to stress three broad points which might serve as
guidelines in adapting our tax structure.

1. There is need for careful review of the impact of our present tax system on incentives. In this connection, the problems of small business deserve special consideration, as do the problems raised by our present excise system.

2. There is need for simplification of the tax structure. The present complexity and high marginal rates of the tax structure virtually enforce a dubious standard of morality

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on taxpayers. The number of things that can be "taken off the income tax" has burgeoned to the point where a valid principle is in danger of being obscured by misuse.

3. The tax scope of the Federal Government needs to be brought into better relationship with that of state and local governments. In the competition for public revenues, state and local governments have come off badly. There is a very great need for a restudy of tax opportunities available to state and local governments and for a clearer demarcation between federal and non-federal tax sources.

### C. GOVERNMENT'S ROLE IN PROMOTING GROWTH --PUBLIC EXPENDITURES

Perhaps the most direct way in which the government can affect the economy is through the level of its expenditures on public assets and services. The question of how much we should spend for these assets and services depends importantly on the economic vitality of the private investment sector. When business is actively seeking funds and resources for expansion, government expenditure may add to the strains on the market economy and push the economy toward inflation. When, on the other hand, private investment is lagging, government expenditures can help stimulate the economy without excessive interference with the market.

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Over the next 10-15 years it is reasonable to expect business investment to continue generally buoyant and expansive. Two factors will probably tend to maintain a high level of capital expenditure. One is the increasingly important role of systematic research, which is likely to result in a steady stream of new investment opportunities. The other is the high-consumption tendency of our rapidly growing middle-income market stimulated by effective merchandising. As a result government spending over the next 10-15 years will not be dictated primarily by the need to make up for a seriously lagging rate of private investment. It should therefore be designed to encourage and support private growth, rather than serve as a substitute for it. And except in periods of recession it should be justifiable by longer-term considerations than the immediate effect of "pump priming."

With all these reservations it is no longer possible to apply literally the view that private expenditure automatically has first priority and that public expenditure must inevitably be throttled down to a pace at which it nicely complements the other. The overriding priority of national defense and the need for a more dynamic foreign economic policy will result in greater expenditures. The inadequacy of our school plant, the deterioration of our cities and the problem of our hospital shortage all indicate that even minimum federal, state and local expenditures over the next twenty years will have to increase substantially. Thus the annual expenditure on roads is now scheduled to rise from $5-1/2 billion in 1957 to $10 billion in 1960.

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Many transportation engineers believe that this will still be considerably short of the necessary amount.

Equally important is the expansion of our public school plant.

Though expenditures on school buildings have doubled since 1950, many education experts are convinced that our current public expenditures of $2.7 billion should rise to at least $4 billion by 1965.

A third area of concern is our hospital shortage -- discussed at greater length in a later section on social welfare. Here we may note that public expenditures on hospitals should rise from an annual total of about $0.3 billion in 1957 to $0.9 billion by 1965. These are only illustrations of "hard-core" items of required public assets. They make clear that there are no rules by which the need for public expenditures beyond the requirement for defense can be determined.

The fact that over-all government expenditure will have to increase to keep pace with the needs of an expanding economy makes government economy and efficiency not merely a matter of financial orthodoxy, but the _only_ policy which will enable us to carry out the expanded programs we need.

Specifically this leads us to recommend the following measures:

1. The continued application of many of the internal economy and efficiency methods advocated by the Hoover Commission.

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2. The periodic review of government subsidies. Many of these have their roots in the depression of the 1930's or World War II and no longer serve the public interest. An example is the use of the stockpile program to support the prices of some industrial raw materials. Subsidies in other fields -- shipping and airlines, for instance -- also warrant re-examination.

3. Two fields where subsidies involve heavy expenditures deserve special attention: payments to veterans for non-service disabilities, and the economic waste of our present agricultural program. The potential savings from a more carefully considered veterans' program and an agricultural program devised along the lines of the philosophy of the following chapter could run to several billion dollars annually.

4. A continuing review of the field of national security which now accounts for 40 per cent of all government spending. National security must obviously have highest priority over-riding normal budgetary considerations. But we must intensify our efforts to reduce organizational overlaps and inefficiencies and to insure the continued relevance of expenditures to our strategic aims.

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D. THE GOVERNMENT REGULATORY POWER

In addition to its impact on over-all business growth via taxation and expenditure, the government has a direct impact on specific industries by its regulatory powers. The vitality of small business, for example, may be as importantly affected by a conscious government effort to encourage sub-contracting or to place orders with smaller enterprises as by tax encouragement. The fate of "distressed" industries may be greatly helped by government-sponsored research -- an example being some of the pioneering work done by the government agricultural research agencies. On the negative side of the picture, imbalances and maladjustments which the pressures of a free competitive market would tend to eliminate, may be perpetuated by an unwise use of government subsidies.

The primary area for the exercise of the government's regulatory powers should continue to be the reinforcement of the competitive texture of our economy. Despite a substantial number of large-scale mergers in recent years, statistical evidence does not indicate a greater degree of economic concentration than in the past. In addition the number of small business units has shown a healthy and fairly steady rise to an all-time high in the latest statistics (1955). Nonetheless, the potential growth of monopolistic power, must be constantly guarded against. The vigorous use of our Anti-Trust laws is essential.

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A difficult question in this regard is the economic power of our
larger unions. Union control over competition in the labor market is quali-
tatively different and has very distinct social implications from industrial
control over prices and production. We therefore doubt that the Anti-Trust
laws provide the proper regulatory mechanism. It is our hope that union
self-discipline will make further legislative regulation of union power un-
necessary.

E. CONCLUSION

If this survey of the problems of an economy of growth seems to
present a formidable array of unsolved issues, it must not obscure the
opportunities which our very problems represent. For in our very concern
with these problems lies a means of appraising our over-all economic phil-
osophy. Private enterprise is the main source of the growth of our economy,
but it is not the sole source. The satisfaction of private desires is a main
objective of our economy, but it is not the sole objective. The public
sector of our economy has come to assume a position of critical, although
by no means commanding, influence.

There is vitality and flexibility in our mixture of private and public
economic drives. On our rich material environment and in our supply of
human talent there is the capacity for a great expansion. Our true respon-
sibility lies in making use of the opportunity which these resources hold out.

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IV - SPECIAL ECONOMIC AND SOCIAL PROBLEMS

Despite the growth and over-all well-being of our economy, there are areas of our national life where special problems will not be solved by the general advance. There are groups in American life which do not automatically share in the rising standard of American life. Many of their problems will not cure themselves. They require purposeful and determined action.

In this section we shall concern ourselves particularly with four special problem areas, agriculture, urban renewal, resources and transportation. Each of these areas contains within itself not only powerful barriers to our over-all growth, but a need for positive action beyond the confines of what is being done today.

Yet we need to approach these areas within a still larger setting.

This is an appreciation of our total well-being -- not as an impersonal aggregate of Gross National Product, but as it appears to the individuals comprising our society. One useful way to gain this perspective is to examine a table of income distribution.

DISTRIBUTION OF INCOME *-- 1956

<table><thead><tr><th>Number of Families</th><th>Per Cent of Total Families</th><th>Incomes</th></tr></thead><tbody><tr><td>7,000,000</td><td>20</td><td>less than $2,000</td></tr><tr><td>16,000,000</td><td>36</td><td>$2,000 - $5,000</td></tr><tr><td>16,500,000</td><td>36</td><td>$5,000 - $10,000</td></tr><tr><td>3,500,000</td><td>8</td><td>over $10,000</td></tr></tbody></table>

*Reported by Census Bureau, N.Y. Times, September 9, 1957. This table does not include "individuals" who constitute another 6 million independent households.

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Each major group will be discussed in turn.

The wealthiest group calls attention to an extremely important histori-
cal fact: the share of the uppermost income bracket has shown a steady
decline. In 1928, the top 1 per cent of the nation enjoyed 19 per cent of the
nation's disposable income. In the 1930's it ranged between 11 and 14 per
cent of the nation's income. By the late 1940's it had fallen below 8 per
cent -- a drop of nearly 60 per cent in 20 years. Moreover the *relative*
position of the upper 10 per cent has also steadily declined. While it has
benefited from growth along with every other sector, its share in our growth
has been the smallest, percentage-wise, of any group. Great wealth inheri-
ted and earned, still exists in America, but the remarkable feature of the
American scene is the degree to which a revolutionary redistribution of
income has taken place without social upheaval.

The next large income group -- that between $5,000 to $10,000 --
representing 36 per cent of the population, is the single most impressive
phenomenon of the American economy. It is the middle-class whose expansion
has been the most striking result of our economic and social advance and
which is now the single largest economic group. Every indication points to
a further expansion of the middle sector: it is likely to comprise a majority of
income receivers within the next twenty years. This is not to say that economic
problems do not exist for this group. Typically its desires are in excess of
its incomes, for a whole new range of living patterns opens within its economic

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brackets. But this is also the bracket which is typified by the achievement
of economic self-sufficiency and independence.

The next largest group are the 16 million families with incomes of
between $2,000 - $5,000. Here are the unskilled laborers and many of the
semi-skilled; the farmers who manage to make ends meet but little more; the
marginal storekeepers and the fringe of small business enterprise. A family
income of between $2,000 - $5,000 today does not spell want, but neither
is it large enough, even at its upper end, to permit complete economic inde-
pendence. There is no question, for instance, that many individuals at this
level of income cannot or do not adequately provide for their health, particu-
larly when illness assumes "disaster" proportions. However, this group has
had the most rapid percentage rise in income. Between 1935-36 and 1948 the
second lowest "fifth" of our income pyramid increased its income by 93 per
cent, compared with an over-all gain of 59 per cent. And this upward tend-
ency is likely to be accelerated. This income group is the middle-class of
the next generation.

Perhaps the most disturbing aspect of our income distribution is the
fact that one American family out of five subsists at an economic level of
below $2,000 a year. To be sure, the statistics are somewhat misleading.
An income of $2,000 on a farm is different from the same income in a city slum.
A retired person whose house is free of a mortgage faces a different problem at
this scale of income than the head of a family with young children. Moreover,

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the statistics do not take account of the low incomes of those just starting in
a profession and of others whose incomes fluctuate widely. Nevertheless,
however we re-evaluate the statistics they unmistakably
indicate an uncomfortably large layer of families living below minimum stan-
dards.

Yet it is important to note the character of this poverty. The group
does not comprise the family of the industrial worker; his average yearly
earnings in 1957 were over $4,200. Nor does it contain the family of the re-
tail clerk, who averaged $3,100. Rather the great majority of the lowest
income group are to be found outside the mainstream of our economy. They
include the aged pensioners, the broken homes, the handicapped and mentally
ill, and many of the submarginal farm families. This is not a body of exploited
labor sustaining the economy, but a group which lies essentially outside the
economy.

Two conclusions emerge from the above analysis. The first is that
no substantial gains in general well-being can be expected from a further
redistribution of wealth. This method of assuring greater equity in the sharing
of abundance has been largely accomplished.

The second and more important conclusion concerns the purpose of
public policy with respect to these special problem areas. Clearly its aim
should be not the support of the needy but the redirection wherever possible,
of the socially underprivileged back into the main economic channels. The

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purpose of public welfare policies should be to enable the lowest economic income groups to achieve their proper economic status in the more flourishing sections of the economy.

This framework of our distribution of income sets the stage for a discussion of some of our special social and economic problems. Hence we now turn our attention first to a problem which dramatically highlights the very conditions we have just reviewed. This is the problem of agricultural distress.

## A. AGRICULTURE

One of the most important areas of distress in our economy is agriculture. Paradoxically, its distress is due to a spectacular rise in agricultural productivity. In the last quarter century, agricultural employment has dropped 38 per cent, and the amount of acreage devoted to agriculture has fallen by almost a third. Yet farm production has increased by 52 per cent. By an extraordinary advance in technology, American farm output has not only stayed abreast of the rising demand for food but outpaced it.

The bane of agriculture has thus been overproduction. Despite the rise of 14 per cent in our per capita consumption of food -- and our rise in population -- 40 per cent of our present farm population could supply the nation abundantly. Of five million farm families, 2,200,000 produce over 90 per cent of the value of the agricultural output. Thus close to 3,000,000 are economically superfluous as commercial farm units.

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This suggests that there is not one farm problem but two. The productive 40 per cent of the farmers need public help only in case of disaster. But the unproductive 60 per cent -- the 3,000,000 submarginal farmers -- cannot become prosperous through agriculture. Half of them have cash incomes of less than $1,000 a year. They have neither the land nor the capital to compete, and hence each technological advance only increases their relative disadvantage.

Today we are treating both classes of farmers alike. Rich and poor, efficient and inefficient receive price support payments for their crops. Hence we are guilty of two economic mistakes. The prosperous farmer is given a public subsidy to which he is no more entitled than a prosperous manufacturer. And the depressed farmer is encouraged to remain in an occupation he should be given an incentive to change.

Clearly we need to divide our farm problem into its component parts and to treat each according to its particular needs. The proper objective for an agricultural support program for prosperous farmers is not to support their prices but to underpin their incomes in times of disaster. Under such a policy, payments would be made to farmers whenever prices declined to disaster levels or volume of output is reduced because of major physical causes. But the crops would move at market prices.

The objective would thus be to insure the efficient farmer against severe economic and natural hazards, but not to induce him, by means of a fixed price umbrella, to produce beyond the capacity

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of the market. At the same time, the removal of a fixed price shelter would greatly lessen the incentive for the inefficient producer to continue his non-economic activity. In addition to this major reform of the price support program, the continuation and expansion of farm credit programs, rural electrification, soil and water conservation, self-financing crop insurance and basic agricultural research must be given high priority.

A quite different problem is posed by the submarginal farmer. From the point of view of the national interest and of his own opportunities for growth, one major remedy suggests itself: many of the submarginal farmers must be induced to leave their present occupation. Those who remain must be helped to become more efficient.

From a purely economic standpoint, this is not insuperably difficult. Inefficient farmers could be given a cash grant to facilitate their transfer to urban employment. A fund appropriated by Congress for the purpose of purchasing submarginal lands would effect a substantial reduction in the number of unproductive farmers. It would yield collateral benefits by adding to the nation's forest or open park areas and by bringing under adequate management lands which are now badly run.

These suggestions would make possible an estimated reduction in annual farm support payments from their present level of $4.8 billion to a level of $2.0 by 1960 or 1965. Against this must be counted the capital outlays needed to repurchase submarginal lands, and the slightly higher costs

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of some federal and state agencies charged with larger functions, particularly
those engaged in vocational training in rural areas.

Yet the relative straightforwardness of the economic remedy conceals
the real difficulties of the situation. There is involved far more than a purely
economic change; the problem is to help several million farm families to change
their way of life. In fact this change has already begun. The poorer farmers
are drifting out of agriculture -- a million people each year leave the farms
for the cities, and only high rural birthrate keeps our farm population from
shrinking even faster than it is.

Hence there is need not only for a stimulus to leave the farm, but for
active help in readjusting to a new way of life. This will necessitate coordi-
nated social programs at local, state and federal levels. Specifically some
of the steps needed are these: consideration should be given by industry to
settle in areas of farm distress; programs should be developed to inform farmers
of job opportunities in cities; present federal agricultural agencies should
direct their efforts toward social counselling; housing assistance for displaced
farmers, and technical training for new employment in the rural areas.

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## B. URBAN REDEVELOPMENT

Another sector of the economy which urgently requires attention are our urban areas. It has been observed earlier in this report that one of the most dramatic shifts in the American scene has been the metamorphosis of a small town culture into an urban culture. The city-belts which stretch in almost unbroken lines along our coasts and the city-states which mushroom from Chicago, Pittsburgh and similar centers are becoming our typical habitat -- 75 per cent of our population will be found there by 1975.

Most of the growth in the metropolitan areas, however, has taken place in the suburban fringe rather than in the core city. It is anticipated that of the estimated fifty million population increase expected by 1975, 45 million will be located in these suburban areas. This movement away from the core city is of very great importance. The central cities themselves are increasingly becoming the home of the very rich and the very poor. The participants in the move to the suburbs are overwhelmingly the middle and upper-income groups and the enterprising and civic-minded leadership segment of the community. They leave behind in the core cities the economically underprivileged and the low income groups coming from rural and small town sources, who face their first adaptation to urban living.

Their adaptation is made more difficult by problems of race and color. Almost uniformly, the Negro communities in our metropolitan areas

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are concentrated in the central city, and their proportion is increasing as a result of the move of white groups to the suburbs, and the continuous immigration of poorly educated, low-income Negroes from the rural South. It has been estimated that if present trends continue, Negroes will constitute one-quarter to one-half the population of ten of our fourteen largest central cities within thirty years. Recent high rates of immigration of Puerto Ricans into the central cities in the Eastern seaboard represents another aspect of the same problem.

As a result, the blight of slums is spreading through our metropolitan areas and particularly in the central cities at a rate far in excess of our programs to remedy it. An indication of the extent of the decay is given by the following quotation from a recent report by the Twentieth Century Fund:

"About one-fifth of all the dwellings in cities and metropolitan regions were in slums or blighted areas in 1950. There were more than six million of those slum dwellings. Nearly four million more dwelling units, though not in slums, fell below good standards and were a menace to their neighborhoods. Housing for more than 30 million people was below reasonable standards of health, decency or convenience."

While physical decay is the most obviously observable symptom that all is not well in our cities, it is only a symptom of more deep-seated dislocations. Our metropolitan areas are simply not organized to deal with the burdens being placed upon them. Urban transportation is approaching the chaotic. Basic community facilities such as parks and schools are inadequate. The decline or leveling off of the tax base which accompanies the process of urban blight jeopardizes the financial stability of central cities throughout the country. At the same time, the concentration of low

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income groups in the central city is imposing increasing costs for health service, welfare, and fire and police protection. Arbitrary and outmoded political and administrative boundaries complicate or prevent decisive community action.

These problems are not confined to the central city. They are beginning to inundate the new suburban areas which are having difficulty finding the resources for new schools, sewers, roads and public facilities for their surging population.

The costs of the present and projected situation of our metropolitan areas in terms of human living are evident, juvenile delinquency, crime, ill health and undesirable social attitudes are the inevitable consequence. Particularly for the low-income migrant, ill-prepared for urban existence, a slum environment hinders adjustment and promotes reactions of aggressive hostility.

What can be done about the plight of our urban areas? Many programs have been offered and in some part, accepted. The federal urban redevelopment program with its combined public and private approach has made some progress in cities such as Pittsburgh, Cleveland, St. Louis, New Haven and New York. Some public housing has been built. Ground work for future action by city planning commissions is far more advanced than it was a few years ago. The use of control devices such as zoning regulations is spreading. And, most important of all, the nation has, by and large, begun to awaken to the gravity of its urban problem.

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Yet much more is needed. Accordingly, we would suggest these lines of attack:

1. The piecemeal approach which has characterized our activity to date is inadequate and self-defeating. We have not yet done the study and analysis which would enable us to develop a conception of what the city of tomorrow should be.

Hence many programs now cancel each other out or have results opposite from those intended. For example, the current highway program will pour automobiles into areas where there is no place to park them. Newly rebuilt or stable urban areas will be condemned and torn out for the super-highways.

The problem of cities must be viewed as a whole and attacked as a whole.

2. New political combinations and arrangements are desperately needed to deal with problems which are metropolitan in scope, such as sewers, water and transportation. In much the same way as the Federal Government has been readjusted in the last 25 years to cope with the problems of a national economy, our metropolitan political units require redrawing. Successful pioneer examples are to be found such as the Miami efforts to develop a metropolitan federal structure and the New York Port Authority implemented by Interstate compact.

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3. Housing is a central problem. The federal urban renewal program does not come to full grips with it. In many situations, in fact, urban renewal projects produce a net loss in housing units. Moreover, even where housing is rebuilt, current construction costs are so high that the persons displaced from the slum can seldom, if ever, afford to rent the new facilities.

A major difficulty is that, almost uniquely, the housing industry has been largely unable to share in the technological advance of the rest of the economy. America has solved most of its other production problems through its private enterprise system. But everything seems to have conspired against the housing industry. The organizational atomism of the industry, irrational and outdated building codes, restrictive labor practices, shortsighted government banking and financial policies -- all have combined to keep the productivity of the building industry deplorably low. And the cost of housing thus remains prohibitive.

Until a long delayed revolution in building techniques and practices breaks this bottleneck we must pay much more attention to the preservation of existing housing plants. This provides another example of the need of an over-all approach to the urban problem. By enforcement of sanitation and housing codes, provision of adequate financing programs, public education, community planning, and perhaps most important of all, by the restoration of confidence that

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blight _will_ be stemmed, the decline of many areas could be stemmed and other areas would be rehabilitated.

4. Even with an increased dynamism of the private housing industry, and with an effective rehabilitation program there will remain a segment of the community now living in slums which will require public housing. Urban renewal which does not provide additional housing is in the long run self-defeating; and rehabilitation cannot be effective without relieving the pressures of overdensity in the slums. An integral part of any over-all program, therefore, is the provision of some public housing. Again, however, our efforts at public housing have been conducted without sufficient regard to their repercussions on the urban problem as a whole. Public housing has tended to become self-contained and racially distinct low-income islands, producing inevitable friction and social stigmas.

What is needed is a public housing program fitted together with the other elements of an urban program. Not least of its elements should be a vigorous program of racial integration, utilizing every social means at our disposal: the training of police officers, the establishment of special community programs for the improvement of interracial contacts; the provision of services to new city immigrants, education programs for prospective employers; block activity

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and national civil rights programs. Every community facility -- churches, school, labor unions, recreational groups, governments -- can and should be enlisted in this essential effort.

5. In view of the need for an integrated attack on the problems of the city, it is recommended that a Department of Urban Affairs be created with a Secretary of cabinet status. It is an example of the lag in adapting to our new environment that the 20 per cent of the population involved in agricultural pursuits are so represented, while the two-thirds of the population living in metropolitan areas are not. More importantly, the problems which afflict the city require interrelated educational, social, economic and physical reconstruction programs. Creation of a national department would add to the possibility of a more coordinated approach and would provide a point of public focus upon the critical nature of our urban problem. Such a department should, in addition to synthesizing our existing disparate housing, finance renewal and road construction programs, attempt to initiate new combinations of partnership between federal, local and state governments.

6. A last comment should be made respecting the relationship of the urban program to the economy as a whole. A precondition to the solution of our urban problems is a continuing growth of the economy, but as with road construction, urban construction may have a direct effect upon the growth of the entire economy. Undoubtedly our expenditures for urban renewal will

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have to be substantially increased. The total urban demand runs to huge
figures, and our actual rate of spending will have to be adjusted to many
exigencies of our economic situation. Every effort should be made, con-
sistent with the critical nature of the urban situation, to implement our
urban programs so as to make them serve double duty as a part of our anti-
recession armory of public works.

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# C. THE PROBLEM OF RESOURCES

## 1. Materials

Few areas illustrate so well the degree to which an economy of growth constantly creates new problems through its very achievement as in the field of resources. It is clear that a major element in the strength of a nation's economy is its stock of, and access to the sources of raw materials and of energy from which to fashion its output. Much of the impetus behind our early economic development derived from the availability on this continent of the most important raw materials and sources of power.

In the past half-century, however, the very growth of our economy has dramatically altered our position with respect to the most important resources. For the drain on our traditional supplies of raw materials is prodigious. We used to export copper, petroleum, and zinc. Now we are importers. Between 1900 and 1950 our use of copper increased three times, our use of iron ore three and one-half times, our use of zinc four times. In 1900 our production of all minerals exceeded our consumption by 15 per cent. By 1950 our consumption exceeded our production by 9 per cent. By 1975 our consumption is expected to exceed our production by 20 per cent. It is estimated that our reserves of good iron ores -- those containing more than 50 per cent iron -- may vanish in the next two decades. Only our reserves of poorer ores -- containing 25-35 per cent iron ore are still substantial and it is to these lower-grade ores that we will have to resort through the development of new technologies, new plants, more efficient extraction processes and more efficient use.

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The same is true of the fuels that supply our industrial society with energy. If present trends continue our power consumption in 1960 is likely to increase by 42 per cent over 1950; by 1975 it will have increased by 135 per cent. Of the various fuels we now use, only the reserves of coal are adequate to sustain us for an indefinite future.

Our resource problem thus has three aspects: the interdependence between our economy and the rest of the world, conservation and the development of new supplies of energy. The foreign aspect will be discussed by Panel III. This Report will deal with the more efficient utilization of some of our present supplies of raw materials and energy and with the importance of research into new sources of energy.

The problem of conservation is aptly illustrated by the

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two resource items which threaten to pose the most serious problems over
the next two decades, oil and water.

Estimates of oil supply vary widely: some projections indicate that we will be able to take care of our needs only for another few decades; others promise us a huge -- although yet undiscovered -- supply for indefinite future use. The immediate problem is to decide the degree to which we should rely on our known domestic fields as against oil imports. Too great a reliance on imports may jeopardize our domestic supply by lessening the incentive for exploration within our own borders. Too small a reliance on imports may result in a serious depletion of domestic reserves if the oil explorations turn out badly. Each course involves risks. However, with a view to conserving our domestic reserves we would favor a considerably enlarged program of oil imports from abroad.

A policy of more careful husbanding should be accompanied by research
into the more efficient use of our domestic oil supply. For example, better
oil and gas recovery methods could add another 10. to 20 per cent to our
domestic resources without the need to discover another new field. If the
cost of extracting the oil can be reduced, the use of domestic oil shale, which
exists in gigantic quantities, would insure us of an ample supply of petroleum.
The redesign of automobile and other engines could conserve our oil resources
significantly by utilizing their power more efficiently.

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The second resource item which requires attention is water. Our water problems stem from the fact that in the last half century the number of water users in American cities has doubled, while their use of water has increased five-fold. By 1975 the increase in our population, coupled with the growth of industries which require large quantities of water will more than double the current rate of water consumption. To give one example: it requires 300,000 gallons of water to manufacture one ton of rayon, and the rayon industry in the U.S. turns out 600,000 tons of rayon a year. The nation's water problem may well become, in the next ten to fifteen years, one of the most difficult issues facing our economy.

A solution depends partly on evolving technology, partly on more coordinated policies to bring about the more efficient utilization of existing resources and to avoid pollution. The industrial use of water -- which accounts for 38 per cent of the total -- can be greatly economized: modern steel mills use only one-quarter of the water per ton of those built twenty years ago. In agriculture as well, more efficient techniques can stretch water use. In the arid regions of the west, losses through evaporation account for as much as 50 per cent of the total water in reservoirs. Active research is now under way to reduce this loss by thin surface films of other liquids.

Of even greater immediate urgency than an improved water technology is the need for political and social action. The utilization

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of our water resources calls for ingenuity in devising the proper public instruments. The problems of the Connecticut River and the Colorado River are neither so similar that they can be easily handled by a single agency, nor so localized that each can be adequately dealt with purely at the state level. Typically water problems are *regional* problems, and can be best dealt with by specifically designed public agencies, such as the New York Port Authority. In addition to these regional bodies, a degree of national coordination and policy formation may be essential for such nation-wide problems as water pollution, or for research into technological problems of water conservation.

If our resource problem calls for a vigorous program of conservation, it also highlights the need for research into entirely new sources of raw materials and energy.

Of the new sources of energy, nuclear energy offers the most immediate prospects. The technology of turning fission energy into use for electric power has been developing rapidly within the last decade. At present, nuclear fuel is somewhat cheaper in the United States than oil or coal. On the other hand, nuclear power is more expensive than conventional power due to the complexity of the plant.

With further development of nuclear technology it is probable that within the next decade electric power production in big units (more than 100,000 kw) will become cheaper in the United States than the production of

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the same power by conventional means. By the last quarter of the 20th
century this type of energy production will have become predominant for big
stationary power plants.

The chief significance of nuclear power on the economy does not
reside in the reduction of cost, however. The availability of nuclear energy
will conserve our supply of coal and oil. Furthermore, nuclear energy will
be available in <u>any</u> place at approximately equal cost as long as the power
is required in great amounts. Price differentials which have been due to the
cost of the transportation of the fuel will not affect the cost of nuclear energy.
We are fortunate in possessing very large supplies of fissionable material.

Nuclear power is not likely to replace the internal combustion engine.
The need for heavy shielding and the danger of spreading poisonous radiation
in case of accident reduces the usefulness of nuclear fission for automobiles
and civilian aviation. Nuclear powered merchant ships are more feasible.
On the other hand, the danger of radiation accident is likely to limit and
delay the development of nuclear power for shipping.

Another somewhat unexpected application of nuclear power may well
gain economic importance within the next decade: the use of nuclear explo-
sives for peaceful purposes. Conventional high explosives have been used
to a greater extent in peacetime than in war. Heretofore, nuclear explosives
could not be so used because of the radioactive contamination. The develop-
ment of "clean" nuclear explosives is, however, proceeding rapidly. Within

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the next decade it will become possible to use nuclear explosives in some
projects where it is important to release a great amount of energy. And energy
released from nuclear explosives is incomparably cheaper than energy released
by high explosives even if one disregards the great cost of placing a great
mass of high explosives into positions which sometimes are awkward. This
may bring about a revolution in the techniques of mining. It also opens up a
completely new field which we may want to call geographic engineering, such
as the removal of mountains from over deposits of iron ore.

Even more dramatic vistas are offered by a new technology which must
be encouraged by systematic support for scientific research. As one writer
concludes: *

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

"One hundred tons of igneous rock contain, in addition to other useful elements, eight tons of aluminum, five tons of iron, 1,200 pounds of titanium, 180 pounds of manganese, 70 pounds of chromium, 40 pounds of nickel, 30 pounds of vanadium, 20 pounds of copper, 10 pounds of tungsten, and four pounds of lead. Given adequate supplies of energy these elements could be extracted from the rock, and it appears likely that the rock itself contains the requisite amount of energy in the form of uranium and thorium."

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

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2. The Human Factor

In the final analysis the most important factor in economic growth is
the quality and size of a nation's working force. According to current popu-
lation estimates, our population will total some 220,000,000 by 1975. Our
working force, however, will not have increased proportionately: due to the
low birthrate of the depression there is even the prospect of a temporary
decline in the age group between ages 25 and 45. Hence for the next ten
years, the pressing need seems to be the most efficient use of a tight, if
not insufficient, resource. This problem will be discussed by Panel V. Here
we confine ourselves to stressing it as a crucial factor in growth requiring
attention at all levels.

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V - SOCIAL OBJECTIVES

Although our problem of social welfare begins with the need to help
those outside the mainstream of the economic advance to share the benefits
of economic growth, it does not end there. Even with the elimination of
poverty, our concern for social welfare would not vanish. For the term "social
welfare" is widening and broadening. As the capacities of our economic
system have grown, so has the reach of our concerns.

Thus, as our economy becomes richer, we may anticipate that the con-
cept of social welfare will refer less to the assistance of the individual who
falls below a subsistence level economically, and more to creative programs
conducive to self-achievement. Our social welfare programs may well become
the avenue by which an economy of relative abundance seeks to improve the
quality as well as the quantity of its life.

We have made a good beginning in emphasizing the constructive and
creative side of social welfare. An excellent example is the growing scope of
our programs of vocational rehabilitation, aimed at giving the physically or
mentally impaired an opportunity for gainful employment. But much still
remains to be accomplished.

In summary terms, we believe that:

1. a vigorous social welfare policy is an integral part of an economy dedicated to the idea of growth;

2. our social welfare policy should be directed in the first instance at creating the conditions under which people are enabled to help themselves to the extent of their capacities, and to participate in our growth economy; and

["economy, and\nagriculture, and the export of the commodities, and to contribute to our trade,\ncontinuing the conditions which would be enabled to help that-\nearning the conditions which would be

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3. there is a broad area of responsibility on society for helping to prevent and alleviate human misfortune, irrespective of its economic implications.

We shall now turn to some of the specific problems confronting our nation in the social welfare field during the next 10 to 15 years.

## A. HEALTH

### 1. Paying the Costs of Medical Care

Among the areas which are increasingly included in our new definitions of welfare, our national health bulks large. For despite the radical advances of medical science -- and partly because of them -- we are becoming aware that in our national health lies a prime national resource. Hence our public health services, which were originally organized to cope with elementary problems of sanitation or with immunization against infectious diseases, have steadily expanded to include prenatal clinics, tubercular care, and even psychiatric services. It is clear that the governments, local, state and federal, will be held increasingly responsible for an ever wider concept of what is meant by national health, including mental as well as physical well-being. Hence the debate in recent years has increasingly focused on what means can best accomplish this objective while maintaining the quality of medical practice.

Efficient and relatively inexpensive medical care has been achieved in many communities through group practice, affiliated with a common hospital, and with prepayment of costs. The prepayment is in the form

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of fees or health insurance premiums paid periodically and covering family units. The remuneration of the physicians is derived from the prepayment pool. The resulting incentives tend to emphasize preventive care in early diagnostic services; and to minimize unnecessary hospitalization.

The resistance of organized medicine to group practice prepayment plans does not appear to be based upon objective analysis. Putting a "firm" or group of professional men on an annual retainer is the essence of group practice prepayment -- a concept quite common to other personalized service professions in our social and economic system. We believe that the group practice prepayment approach should be adopted more broadly, so as to determine its effectiveness under many differing circumstances.

Another desirable type of protection is a form of "catastrophic" illness insurance administered by the states. The crushing economic effect of a serious illness or accident, with a long recuperation period, should be alleviated by spreading costs broadly among all the people of a state. We believe it possible to design state plans which would take effect only if costs of an illness exceed the basic health insurance coverage, and which could permit the placing of insurance with private organizations. This would serve to encourage rather than impede the continued growth of private health insurance. Success in a few states might indicate the desirability of federal legislation and support to stimulate the adoption of similar plans in all states.

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Still another major problem in the economics of health care is that of paying for the medical costs of the aged. The two approaches suggested above, of group practice prepayment plans and state "catastrophic" illness coverage, would alleviate the problem substantially. In addition, all health insurance plans should seek to spread the medical costs of the retirement years over the work life of the insured, so as to produce a "paid-up" policy at the time of retirement. For those presently aged and chronically ill, various forms of state assistance should be provided or expanded where needed.

Other major objectives of health insurance over the next decade should be the coverage of outpatients diagnostic and preventive services, and the extension of hospitalization insurance to cover various types of home and nursing care. In these ways prepayment plans will encourage reduction of expensive hospitalization. Diagnostic and preventive health services are now covered under some 150 plans, which have proved that prompt attention to illness and early treatment can be encouraged by insurance. Some plans have experimented successfully with limited coverage of care in convalescent homes and chronic illness hospitals. Administrative means must be sought, probably through the hospitals themselves, to extend the coverage to special nursing and other auxiliary services provided even in the homes. Such coverage would help to relieve the hospitals of many non-acute long-term patients and to reduce the costs of care to families.

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## 2. Medical Research

Medical research must receive an even higher priority than in the recent past. It has been estimated that the current annual cost to our economy of heart disease disability alone is over $3 billion in earnings and $400 million in lost federal income taxes. Similarly, over an eight-year period, mental illness has been estimated to have cost $7 billion in hospital care, with a comparably heavy loss in federal income taxes.

The case for medical research does not rest primarily on its economic utility, however. A society as ours must be concerned with health in its own right. Thus, we should continue to expand our medical research program as rapidly as the supply of scientific talent and the dictates of sound administration will permit.

At the same time that we step up our medical research efforts, equal strides must be taken toward putting their results to use more rapidly. We urge that federal health authorities initiate a full study analyzing the extent of the time lag between the acquisition of new medical knowledge and its practical availability to the general public, identifying the causes of delay, and delineating measures to reduce it.

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To achieve this end, the inauguration of a substantial number of new medical schools seems essential. This will require immediate planning by States and medical groups. At the same time, Federal, and State Loan and scholarship programs commend themselves as a means of helping to overcome the high cost of medical education, which is not recouped by the student for many years.

The demand for more professional and practical nurses will similarly rise. And, in view of the fact that mental illness is becoming our primary national health problem, the training of psychiatrists, psychiatric nurses and psychiatric social workers should be especially encouraged.

In addition to an increased supply of health personnel, we need more hospitals and other health facilities of many kinds. The increase in chronic disease and the needs of an aging population highlight the necessity for substantial expansion of facilities for long-term care, particularly of high-quality nursing homes for the care of the aged with moderate impairments. Radically new types of medical facilities should be developed with the help of federal research funds--such as hospitals permitting maximum self-help, and community care centers offering diagnostic and extensive outpatient treatment and homemaker services. At the same time, modernization and rehabilitation of existing hospitals -- particularly older ones in large cities -- must be a major target of the next decade.

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## 4. The Cost

What would be the total cost of a full scale health program? It is difficult to make estimates in detail, but a general order of magnitude for public health, medical care, and hospital construction costs for 1965 would approximate $7.5 billion, compared with just over $4 billion today. The great bulk of the nation's ill health will continue to be privately paid for, and insured, and as the number of our middle-income recipients rises, we can expect our total private health expenditures to increase substantially. But this does not remove the necessity of a complementary rise in public health services, both for those who cannot afford private medical care, and as an added element of security for those who can.

## B. SOCIAL INSURANCE

The concept of welfare has moved increasingly from the cure to the prevention of distress. The spearhead of this movement is represented by the principle of social insurance. As Mr. Arthur Larson has eloquently said, "We insist upon having the advantages that flow from a risk economy, but we know also that a risk economy leaves in its wake victims. The socialists and communists propose to remove the risk itself. That solution we reject. But having rejected it, we have an inescapable duty of contriving our own solution, consistent with free enterprise. That solution is income insurance...." *

* Larson, Arthur, *The Future of Income Insurance*, Mary Donlon Lecture, Cornell University, November 5, 1956, as quoted by Somers, H. and A., in Special Studies paper, *Major Trends and Issues in Social Insurance*

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Income insurance of various sorts has become part of our economy in many ways. Today the total cost of government social insurance plans is over $15 billion and is estimated to rise to $29 billion by 1965. Most of this increase is the result of increases in benefit payments already legislated and a numerical increase of the eligible age groups. Unemployment insurance now covers approximately 80 per cent of wage and salary workers. Over ______ million are covered by Federal Old-Age Survivors' and Disability Insurance. Another ______ million come under the other federal, state and local retirement provisions, while an estimated ______ million are now given supplementary pension coverage through private plans. In addition to this broad general coverage recently established (and still untested) supplemental unemployment insurance plans open a new avenue of individual security against economic setback. As a generalization it appears likely that the importance of income insurance will increase in the next decade and that it will cover more citizens more fully. It should be noted, further, that these programs are already demonstrating their effectiveness in stabilizing the economy.

No major change in the concept of our social insurance plans seems indicated, but a number of improvements of the present structure would be very useful. Two of these concern our Federal Old-Age Survivors' and Disability Insurance. The first involves the eligibility age for totally disabled persons. Our experience in regard to this kind of claim has only begun in the last few years. However, the present age of eligibility, 50, tends to

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exclude from benefits precisely those younger workers who because of
dependent children most badly need assistance. Our goal should be the
reduction in the age of disability eligibility, by successive steps if neces-
sary. This should be combined with an intensification of vocational rehab-
ilitation programs aimed at self-support.

The other important social insurance question concerns the retire-
ment age itself. We have previously urged the psychological as well as the
economic advantages of continuing in employment those workers who wish
to work past age 65 and are able to do so. A firm policy should therefore
be maintained against a *general* reduction of the present social security
retirement age, and continued study should be devoted to means of adjust-
ing it to encourage postponement of retirement.

Another broad area in need of change is unemployment insurance.
About 12 million workers are still excluded from this kind of protection,
nearly 40 per cent of them employees of state and local governments.
Furthermore, the duration of benefits in many states is wholly inadequate.
These gaps are badly in need of attention, although a precursor to action
may have to be a much needed improvement in the state and local administra-
tion of the program. Additional administrative funds may well be required
for this purpose.

Workmen's compensation has also been a static field of social insur-
ance in recent years, and is often out-of-date in its awards and administra-
tion. Our best estimates of its coverage range from two-thirds to four-fifths

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of employees, and some of the omissions are serious. For example, agri-
cultural workers who are not covered have higher than average injury rates
as well as higher than average unemployment rates. In short, there has been
conspicuous indifference to workmen's compensation, and there is a need for
renewed state legislative interest in the matter.

The newest area of income insurance at the state level is temporary
disability or "sick pay" insurance. It is unfortunate that only four states
have adopted plans of this nature. We believe that they are an integral part
of an adequate social insurance coverage, and that all states should adopt
some such plans within the next decade.

Financial dependency is a familiar and easily understandable but by
no means the most serious manifestation of social distress. Some manifesta-
tions, indeed, have no constant relationship to the income factor but appear
at all levels of economic well-being. These include broken family life,
personal frustration, intergroup tensions, aberrant juvenile conduct, to name
only a few.

This latter area of interest calls for measures that are, in a sense,
more complex and intimate than those required in rural and urban redevelopment.

For not only are the American people living in larger and ever-increasing units, but their extraordinarily fluid relationships, growing out of unprecedented domestic migration, project a future system of group living-together that will be deeply affected by the energy and resourcefulness with which we plan for the future.

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So far we have paid more attention to the alleviation of distress than to prevention. This emphasis should be reversed. A judicious mixture of public and voluntary services is required, involving the skills of the social scientist as well as the social worker. Social research and community organizations are required as well as individual and family counselling, aid to mothers and dependent and neglected children, rehabilitation of the handicapped, guided use of leisure time, adult education, services to the aged and a variety of other services that would never have been dreamed of as necessary in an earlier less complex American society.

## C. OTHER WELFARE PROGRAMS

The unifying and guiding concepts which should control our welfare policies for the next decade are these:

1. intensive research to analyze as precisely as possible the causes of social distress and the best techniques of prevention and treatment;

2. maximum emphasis on methods of prevention and early diagnosis of the causes of individual and family breakdown; and

3. greatly intensified efforts toward rehabilitation for self-support or self-care.

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Recent amendments to the Social Security Act enacted in 1956 have laid the foundations for furthering the general policies enunciated above. But we have not even begun, as a nation, to erect the great structure of dynamic and positive social effort which our present day economy and state of knowledge have made possible.

## D. RELATIONSHIP TO EDUCATION

This section has not dealt with education, as it is within the purview of Panel V of this series of studies. It is obvious, however, that education is perhaps the most basic element in our social structure. Upon a healthy and sound education system largely rests the future of our national strength, the growth potential of our economy, the economic security of the individual, and the general improvement of our social environment.

## E. PRIVATE EFFORT IN THE SOCIAL FIELD

The foregoing discussion has not distinguished, in all cases, between public and private effort in social welfare. The fact is that private expenditures for health, education and welfare purposes aggregate many billions of dollars. For example, the bulk of our national health expenditures are and should remain payments by individuals and families for health services and health insurance. In addition, the "fringe benefit" plans of private industry are playing an increasingly important role. Even organized philanthropy, which constitutes only a small portion of the aggregate of private expenditures for health, education and welfare purposes, is increasing.