IV - Report

August 27, 1957

# SUBPANEL IV - U. S. ECONOMIC AND SOCIAL OBJECTIVES AND POLICY

## FOREWORD

The task assigned to Subpanel IV is a complex, demanding, and singularly important one. It is the assessment of the American prospects for social and economic development over the next twenty years.

Such a task is as forbidding in its difficulties as it is challenging in its importance. Thus we count ourselves fortunate in having been able to draw upon the wisdom of scholars in many fields, whose supporting papers form an impressive foundation for the summary conclusions of this Report.

We hope that many readers will turn to these basic monographs for a fuller appreciation of their contributions.

In addition we have had within the composition of the panel itself an unusual diversity of backgrounds, points of view, and special competence.

The formal advice and intelligence of scholarly experts has been sifted through a body of panel members who have brought to bear on it a wealth of practical experience.

Because the task assigned to us is so large, we have sought to avoid the presentation of an exhaustive catalogue of the problems and opportunities confronting this nation's social and economic development. In the interests of unity as well as brevity we have been forced to omit the consideration of some problems which, while important in themselves, were extraneous to our main theme; and for the same reasons, the major issues which we do consider are necessarily treated in a less fully-rounded manner than their

[Lc]

IV - Report

August 27, 1957

- 2. -

complexities might indicate. Once again we must refer the reader to the
rich background of supportive material for a full discussion of some of these
issues.

Yet the very conciseness and unity which this Report demands
lends themselves to the special purpose on which we have concentrated
our attention. This is the relation of social and economic objectives and
policies to the one issue which appears to us paramount and overriding:
growth. The central concern of this Report is growth -- real rather than
illusory growth in economic output, self directed rather than paternalistic
growth in social well-being, and most of all, enduring growth in the oppor-
tunities for individual self-realization.

Within this over-all purpose our report divides into two complementary
sections. The first concerns the *process* of growth itself. It begins with the
objectives which we aspire to reach by 1975, and then examines the nature
of the problems which hinder and the measures which may assist in the
achievement of that goal. This will occupy the first two sections of our
Report.

Our second task is not less important. It consists in an examination
of the *use* to which the growth process shall be put. Here we consider the
claims against our potential output -- claims originating in part from the
considerations of other subpanels and in part from our own analysis -- and
attempt to adjudicate the priorities which these claims might properly have.

IV - Report

August 27, 1957

- 3 -

The fact that the total of these claims, as we shall see, exceeds the total product which will be available to us, makes this particularly important as a part of our Report. It is dealt with at length in the third section of this document.

A final word concerns the consensus of the Report proper. We cannot hope that so far-ranging a discussion will do justice to all of the expertise which it attempts to summarize, nor that the viewpoint of every member of the panel can always be adequately represented by it. Yet with full allowance for individual reservation about details, it is indeed hoped that the broad outlines of the objectives and policies which appear here will command the assent and affirmation of all.

[LC]

IV - Report

August 27, 1957

- 4 -

I

The Opportunity

An extraordinary economic opportunity confronts the American nation at mid-century -- an opportunity not only without precedent in terms of all previous American accomplishment, but quite literally without parallel in history. It is nothing less than the creation of a new economic environment for an entire society. Another twenty magnificently productive years can bring about in America a degree of well-being never before attainable or enjoyed by any great nation. And it is not merely an economic change, a further quantitative elevation of our standard of living which the future holds in store. It is also a qualitative change, for in our economic potential achievement lies the foundation for a profound and hopeful elevation of our standard of life.

This challenging statement is not a prediction of what will be, but what *can* be. It is a projection of the opportunity which lies within our grasp -- of a future for whose realization we have the necessary materials, energy and skills.

Whether we shall in fact realize that future is a question which only history will answer for us; how we may best go about trying to realize it is the theme of this report. But before we turn to an analysis of problems which must be met, let us briefly describe the statistical basis which makes such a projected future possible.

IV - Report

August 27, 1957

- 5 -

For the past seven years -- in fact since the unleashing of the economy from the controls of World War II -- American business enterprise has been adding to its productive equipment at a rate of approximately $25 billions a year. This is in itself too large a figure to be visualized: we may give it concreteness by pointing out that it is the equivalent of adding to the nation each year all the productive assets of General Motors, Standard Oil (N.J.), Ford, U. S. Steel, and General Electric.

If the American business community continues for another two decades to add $25 billions a year to its plant and equipment, this will give us half a trillion dollars worth of new capital goods by 1975. In fact this is a conservative estimate, since the trend of capital expenditures has been upwards. However, the half trillion figure is stupendous enough. It is the virtual equivalent of adding fifty percent to the value of our entire stock of national wealth -- the land, gold, machines, houses, cars, grain which comprise our national economic riches.

This colossal increase of plant and equipment will bear its fruit in the quantity of goods and services which the American people can annually produce. By 1965 the leverage of five hundred billion dollars on our Gross National Product -- the gross value of the annual output of the nation -- can have raised it from today's value of $432 billions to at least $550 billions, in value terms of today's dollar. By 1975 the total could easily reach $700 billions. And these projections cautiously assume that our economy will grow at only three per cent a year. It is quite within the

[lc]

IV - Report

August 27, 1957

- 6 -

bounds of plausibility for it to grow at four per cent -- in which case our
Gross National Product for 1957 could exceed $800 billions, again measured
in today's prices.

These are astronomical figures which have a bewildering rather than
clarifying effect, but they can be translated into magnitudes which are
more readily comprehended. By 1957 according to the upper range of estimates,
our population will be 220 millions, or about 70 million households. Hence,
we must divide the $700 to $800 billions of potential Gross National Product
in 70 million shares, and then reduce each share by three-quarters, since
only about that proportion of Gross National Product becomes part of our
individual incomes. The result is an average income per "spending unit"
of approximately $7,500 -- once more, in terms of the purchasing power of
today's dollars.

This figure must now be considered in the light of the expected
characteristics of our 1975 economy. There is no doubt that it will be
earned in a work week of 35 hours or less, for the trend of worktime has
shown a steady decline over the past decades. It may further be assumed
that this average income will be supplemented with an amount of "free"
(i.e., socially supported) services considerably larger than today: the
trend of welfare services has shown a steady tendency to increase. It is
probable that the dependability of this income will be greater than that of
most incomes today, not only by virtue of more effective public control
over economic fluctuations, but by some growth of private responsibility

[LC]

IV - Report

August 27, 1957

- 7 -

for the "guaranteeing" of incomes: both these factors as well point toward increased income stability. And finally we must picture the $7,500 family income as a more "typically" representative figure than the corresponding average income of $5,500 today. Although we cannot know what the actual distribution of income will be in 1975, it is certainly in line with the trend of the past to expect to find the great bulk of the nation's families within the $5,000 to $10,000 range.

But what is significant here is not alone the quantitative magnitude of these figures themselves. It is the qualitative meaning of the level of life which such figures make possible. Consider only this single fact: the average income for all professional and semi-professional families in the United States in 1954 was just over $7,300; that of "managerial" families just under $7,500.* Thus the possible economy of 1975 represents the upgrading of an entire society to the point where its representative family enjoys an income comparable to that of the upper middle class today. Hence it is not the abolition of poverty which is the signal factor of the potential future -- indeed, it is fair to say that poverty in its ugliest sense is already on its way to being eradicated in America today. Rather it is the first approach to a society of wealth -- a society in which the average person enjoys not merely the perquisites of civilized existence but a modest share

* United States Statistical Abstract, 1956, Table 368, p.306.

[Lc]

IV - Report

August 27, 1957

- 8 -

of its luxuries as well. Such a mass social environment has never before
existed.

This bright image, it must again be emphasized, is not a prediction
but a projection. It assumes that we will grow, that we will avoid or easily
overcome economic recession and -- which may be more difficult -- that we
will not vitiate our growth in inflation. It further assumes that all the diffi-
cult problems of taxation and fiscal policy, international economic imbalance
and domestic economic and social bottlenecks will have been, as they can
be, met and mastered. Thus the outlook is at once enheartening and sober-
ing -- great with promise but chastening in the degree of intelligence, self-
discipline and energetic action which it presupposes.

It is not, let us hasten to say, a vision of the perfect society which
we project. At the very best, 1975 will be far from a Utopia. Laggard eco-
nomic sections of the community will undoubtedly remain. Great and neces-
sary works will remain to be performed. Vexing, perhaps even grave prob-
lems of economic policy will assuredly assert themselves. Social problems
such as those connected with our mass movement to the cities, will very
likely aggravate and heighten the tensions of daily living. And finally, it
is by no means impossible that the gain in mass well-being will not itself
produce new problems in the place of older ones: the use, or misuse, of an
unaccustomed leisure comes quickly to mind as such a problem of the future.

[L]

IV - Report

August 27, -957

- 9 -

To many of these issues we will revert in the course of this report.

But at this initial juncture it is well to realize that the cautions and reservations at best obscure the magnitude of the underlying potential achievement itself. If, -- and it is this _if_ to which the bulk of this report addresses itself -- the American economy performs according to its capacities, we shall have created a society different in kind, as well as in degree, from any heretofore.

## The Framework of Economic Organization

The projected economy of 1975 will be the outcome of, and will itself represent, a method of economic and social organization which we call _American capitalism_; and it is directly germane to the purposes of this report to reflect for a moment on the meaning of that term.

Capitalism as such implies an _economic_ system -- a means of arranging the essential social provisioning process. Its core is the private ownership and direction of the means of production and its equally indispensable attribute is the free contract market for labor.

But such a bare description of capitalism is at best a kind of text book definition. It brings out the two main points by which capitalism is critically differentiated from alternative systems such as socialism or feudalism, but it fails to clothe these economic abstractions with the garments of reality. For capitalism cannot be described in economic terms alone, any more than feudalism or communism can be accurately depicted only

IV - Report

August 27, 1957

- 10 -

with an economic vocabulary. Capitalism in living reality must be visualized in its full context as an amalgam of social, political and moral -- as well as economic -- ideas.

This point is of the essence when we talk of American capitalism.
For the path which "capitalism" has followed in many foreign nations differs
importantly in social, political and moral ways, from that followed by Ameri-
can society. Consequently we often bear the opprobrium which attaches to
these social and political and moral attributes -- or lack of attributes -- of
other "capitalisms". The most important stereotype in this regard is the
common communist assumption that the features of social and moral life of
19th century England which so forcibly struck Karl Marx are inextricably
connected with and bound into any society which bases its economic structure
on private ownership and free contract labor.

Americans do not need to be told of the falsity of this assumption,
but it is useful nonetheless very briefly to enumerate some of the influences
which have gone into the making of the system in which we believe, and which
will go into the making of our future.

At the risk of severe oversimplification these influences can be re-
duced to three. The first is a religious strain which has permeated American
society from its beginnings. A product of the Calvinist movement, this some-
what severe, self-denying ethic was a natural complement to a society seek-
ing to convert a wilderness and needing to encourage attitudes of hard work,

[LC]

IV - Report

August 27, 1957

- 11 -

thrift, and dedication to one's worldly calling. But the religious roots of American capitalism have had important results over and above this supportive role. From the beginning they have infused the system with a self-conscious morality, with an ideal of public service, and with an uneasy feeling that the pursuit of gain was not to be an end in itself but must be justified by the use to which that gain was put. Thus our Puritan ancestry has been importantly involved in the evolution of the American moral attitude of social consciousness. And despite the fact that much of our gaudier economic history is the story of irresponsibility writ large, this strain of self-imposed public and private accountability has been a persistent, if not always dominant note of our society. It has asserted itself in the typically American phenomenon of philanthropy, in the championship of the causes of the underprivileged by some of our most patrician leaders, in the essential recognition -- sometimes tardy and reluctant, but never totally lacking -- that the purpose of the economic system was, in the final analysis, not the private pocketbook but the public weal. This ethical concern will continue to provide a moral guide for the future.

A second vital point of difference between American capitalism and the Marxist stereotype of capitalism has been the absence of a national feudal heritage. It was not a matter of class ties alone, not merely a question of titles and the privileges of nobility which were of the essence here, but a deeper attitude towards the inherent capacities and the rightful

IV - Report

August 27, 1957

opportunities to be accorded to the common man. Over the history of American capitalism that common man has frequently been abused, misused, even exploited, but -- and this is the crucial thing -- he 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 the only country in the world where a man was proud of his humble ancestry rather than ashamed of it, and where his advancement typically depended on his abilities rather than his blood.

Again, the result for the living reality and for the future of American
capitalism is profound and salutary. Quite aside from the fraternal tone which
such an idea gives to social life, the absence of a feudal preconception
of "classes" has rescued American capitalism from the terrible civil conflict
of internecine warfare. Certainly there are classes in this nation, and class
antagonism has been sharp and sometimes bitter. Yet it has never burst
the bonds of the communal consensus; it has never rigidified into an
irreconcilable conflict not only of economic interest but of social aim. At
the height of the anti-union or the anti-capital days of the late 19th century
or the desperate 1930s, the idea of a struggle *à outrance*, a fight to the brutal
finish, never characterized more than the fringe of the contestants. A
basic outlook on men as individual men rather than as representatives of
a class has always permeated American thought, and will continue to be
its central emphasis.

[c]

IV - Report

August 27, 1957

- 13 -

A third point of difference for American capitalism has been the democratic political framework within which it has operated. In effect this has meant the supremacy of the political ideal over that of the economic, and since that political ideal was itself responsive to the will of the people as a whole, it has meant constant adaptation of the economic system to the political wishes of the electorate. Thus capitalism in America has always been contained within the political framework and has had to make its peace -- sometimes an uneasy peace -- with the political desires and ideals of the populace.

And it is not only in the largest national setting that this has been true. The democratic concept in America has also expressed itself in a certain suspicion of power, private or public, and in the insistence that power be regularized, curbed, and legitimized by public consent. Hence the wariness with which the public eye has always regarded size, whether in Washington or Detroit, has resultd in the gradual evolution of an attitude of self-consciousness on the part of big organizations, economic or political. Big business has been a focal point of attack, justly and unjustly, over the American past, but the happy consequence of this hostility has been the recognition on the part of big business that it existed by public sufferance rather than by God-given right. This, the democratic strain in American life, has imposed a standard of good conduct which has shaped American economic institutions as importantly from within as from without. This

[lc]

IV - Report

August 27, 1957

allows us to envision our economic future as *self-disciplined* rather than
as an externally directed movement.

This is far too cursory to review of the factors which render American
capitalism unique. What is more important, perhaps, than a probing for
these basic influences is an appreciation of the role which they may play
in our future development.

We see their influence most dramatically in the extraordinary capacity
of a pragmatic, morally disciplined and socially open society to grow.
Growth has been the hallmark of American capitalism, from an economic
point of view. In less than two hundred and fifty years our nation has
progressed from an underdeveloped country whose principal assets were
the moral and social qualities of its inhabitants, to the industrial center
of the world. While our population has increased 100-fold in numbers since
1752, our individual incomes have increased literally beyond the power of
comparison with that earlier day. Even during the last century our expansion
has been little short of astounding. The average American workman today
produced nearly six times as much wealth in an hour of work as his great-
grandfather did in 1850. The statistics of the American performance are a
unique record of powerful increase for every indicator of economic strength.

But whereas growth has always been an integral part of the American
economy, it has not been economic growth alone which has characterized
American society. Growth has also been the means by which we have met

[10]

IV - Report

August 27, 1957

- 15 -

the demands of Americans for a better life in non-material ways -- providing us with the necessary environment in which better health, a fuller family life, more leisure, greater opportunities for learning, and richer possibilities of self-realization could also be achieved.

This total and many-sided growth has been the product not only of the special moral, religious, and social traits of American capitalism, but also of the specific economic institutions which those traits fostered. Thus a free enterprise system has evolved in which economic incentive and moral suasion meet to form a singularly fruitful combination. A zest for enterprise, combined with a willingness to innovate, has given us a driving stimulus which has been socially tempered by an acceptance of competition, a tradition of low-profit margins and high volumes of output, and an acqui---esence in the regulation of private excess, such as that provided by the anti-trust laws. Equally important, a strong and free trade union movement has contributed to growth, not alone in protecting the dignity of the working-man, but in assuring the widest possible sharing of the economic results of increased productivity.

These institutions of capitalism have been -- and will be -- the vehicles for the American economic odyssey, but they are not yet its ultimate justification. This we find in the paramount focus of capitalism on the individual -- in its ability to spur him on, reward him, encourage him, sustain him. American capitalism is oriented to the man -- it is built around the idea of private growth. The religious, the moral, the political underpinnings

IV - Report

August 27, 1957

- 16 -

and accompaniments of our economic system all come to a common terminus
in this central ideal.

It is well to bring our Introduction to a conclusion with this cardinal
point. For the importance of the individual, indeed the paramountcy of the
individual, was never more necessary as the ultimate justification of
capitalism than today and tomorrow, within the perspective of growth which
we have projected as our national task. There is a certain danger in
the magnitude of the sheer achievement before us, and in the natural
feelings of pride and eagerness which the vision of a society of universal
well-being inspires. The danger is that of confusing *more* with *better*, and
of assuming that because we may bring about an environment of unprecedented
abundance, that this will necessarily be an end in itself.

It will not, Indeed, if the prospect of such a society "solves" some
age-old questions of economics, it opens new questions of a still deeper
nature. There is not, in a society of increasing abundance, the same easy
rationale for much economic endeavor, for the pursuit of private gain, or
for the high estimation of economic activity itself, which prevails in a
society still coping with the strictures of want and need. In the past
American society has not had to ask itself for what purpose it worked so
hard, saved so much, built so furiously: the answer was apparent in the
needs of the people themselves. But when those needs have been met,
when additional economic effort administers not to basic human wants,

IV - Report

August 27, 1957

- 17 -

but to the satisfaction of increasingly trivial ones, the question of the moral purpose of economic activity itself cannot so easily be dodged.

This is not to suggest that the motives, the institutions, and above all the moral core of capitalism will not continue to serve us well. Rather, it highlightes the probability that in the future, the question of *quality* will come to have a higher degree of social importance than quantity; that the meaningfulness of work will weigh more heavily in the scales than its monetary rewards. It suggests, in a word, that with the solution of the problem of want, society will have an increasing motive to turn its attention away from an absorption in economic affairs to social, cultural, and spiritual pursuits. The real justification of the now impending triumph of the capitalist system is not the mere creation of wealth for its own sake, but the building of a society in which each individual, in a climate of plenty, may realize to the full whatever capacities for self-expression he may possess.

IV - Report

August 27, 1957

II

## The Path Ahead

In the possibilities and the promise of a society of well-being -- and in full cognizance of the problems which such a society may impose -- lies the inspirational purpose of American economic and social policy over the next twenty years. It is to these policy considerations which we now turn, for with our goal in mind, we have a set of ultimate objectives which may be useful in assessing the tactical problems immediately before us.

Clearly the overriding necessity, if we are to achieve our final objective, is the encouragement of economic growth and this will accordingly be the theme which runs through the following pages. At this first juncture, however, it may help us to survey the problem at large, if we group the many issues facing us into an orderly array.

These are the broad categories of issues with which our economic and social policies must cope:

### 1. The problem of resources.

Growth must concern itself with limitations as well as with objectives; it is a matter of capacities as well as determination. Our economic growth will therefore depend, in the final analysis, on the availability of men and materials. We must assess the resources of the nation for each.

### 2. The problem of motivation.

Growth is also a response to stimulus; it is a matter of positive action, rather than routine. Our economic growth will depend in part on the

IV - Report

August 27, 1957

- 19 -

nature of the stimuli which affect it, and on the environment in which it takes
place. We must pay due regard to this in our analysis.

3. The problem of administration.

In a complex society, economic growth must be ~~administered~~ *supervised*. This
is not to say that it must be made the subject of direct government planning,
but it cannot escape the influence of indirect government planning. We must
consider the ways in which the *supervisory* ~~administrative~~ process can best encourage
growth, by providing an economic climate conducive to enterprise, and secure
from the dangers of severe recession and inflation.

4. The problem of social and economic distress.

Economic growth is not a uniform process, for a society is not a
uniform entity. And economic growth is not meaningful when measured only
in economic terms, for our society, as we have been at pains to point out, is
not merely an economic entity. Growth demands special attention to those
areas of our society -- social as well as economic -- in which progress is slow
or absent.

5. The problem of overall priorities.

Economic growth over the next twenty years must take place in the
larger context of a society enmeshed in a needful world and threatened by
the possibility of fearful aggression. The growth potentials with which we
have been and will be concerned, are those of our total economic framework.
But within the framework, no matter how successfully enlarged, we must still
reconcile and accommodate claims which may well exceed our total capacity.

[LC]

IV - Report

August 27, 1957

- 20 -

Thus we shall see that while growth will make many things possible, _it will not make all things possible_, and part of our task must be the assignment of priorities other than those provided by the marketplace alone. How to divide the use of our increased wherewithal between private and public wants, between civil and military needs, and among competing social objectives is a critically important problem to which we will return in the third section of this Report.

This systematization of the issues before us is not intended to be more than a conceptual guide to the multiplicity of questions with which we shall be forced to deal. A cautionary word before we begin our closer analysis may be useful. This is the essentially unitary nature of the problem before us. We may be forced, for the purposes of clarity, to discuss "economic" problems as distinct from "social" problems, or problems of fiscal policy as distinct from those of, say, agriculture. In reality no such hard and fast dividing line exists. A social problem has economic results; an economic action will make its impact felt on social matters in turn. The problems of cotton and wheat impinge on our monetary mechanism, just as a tax revision will eventually make itself felt in slum clearance. There is a unity to social and economic concerns which is all-important for their understanding and which inhibits dogmatic or overly-precise prediction. As "planners" for the future it is wise to have this chastening sense of the inevitable incomplete-ness of any diagnosis.

* * *

[lc]

IV - Report

August 27, 1957

- 21 -

# The Problem of Resources

## 1. Materials

The primary strength of a nation's economy is its stock of, or its access to, the raw materials from which it must fashion its output. For the most part the United States is happily gifted in this regard. We have been abundantly endowed by nature in respect to the most important raw materials: agricultural land, basic minerals, sources of power. To state a broad generality, there is no prospect that our overall desired rate of advance of about three to four percent a year should be importantly hindered by the lack of any single major resource -- land, minerals, or most important of all, energy.

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

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

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

These hopeful generalities must however, be immediately qualified.

They serve a useful purpose in redressing the gloom which sometimes obscures

[c]

IV - Report

August 27, 1957

the resource issue, but they must not be taken as a glib dismissal of the problem. We are only at the threshold of a technology of such powers as those described, and in the immediate future we shall depend directly on ores and conventional resources. Many of these, particularly in their top qualities, are dwindling fast: an example is the probable exhaustion of iron ore containing 50% iron within two decades. These impending stringencies -- and iron ore is only one of many -- will compel us to turn to ever less economic sources of raw material.

In fact this reduces the "resource" issue from that of sheer physical availability to a series of related technical, social and economic problems. It enjoins the need for heightened research into substitute materials and better extraction and utilization methods. It makes imperative a sound policy of conservation. It highlights the need for a steady flow of critical materials from abroad. And not least it emphasizes the importance of the capital expenditures which will be necessary to use secondary resources efficiently. Thus the investment problem, to which our report will shortly turn, is itself directly connected with the resource issue.

Within the 20 year range of our immediate interest however, two major resource items call for special attention. One of them is oil. Our basic lemma in oil is well known: if we rely on domestic supply, we risk an early exhaustion of oil reserves, whereas if we turn to foreign sources, we run a certain risk of discouraging the domestic exploration for new oil fields. The

[lc]

IV - Report

August 27, 1957

problem is an exceedingly complex one, and rendered no simpler by its in-
evitable entanglement with the delicate political situation of the Near East
and by the fact that we do not have a fully reliable estimate of the total
available supply of oil at home. The extremes of current estimates of oil supply
are widely variant from alarmist projections that would cover our needs only
for another few decades to optimistic projections that give us an "indefinite"
future availability. Two facts are of importance in this geological guessing
game. One is that oil shale exists in gigantic quantities. This insures us
an ample physical supply of petroleum, provided that we can bring down the
present uneconomical cost of extracting the oil, and we note with satisfac-
tion that considerable experimentation is now going on in this line. The
second important fact is that more adequate recovery methods could add 10
and 20 percent to our domestic resources without the need to discover another
oil field. Hence a solution to the oil resource problem rests partly with the
further development of oil technology and partly with the turn of international
events. As an overall guide to policy we should recommend further husband-
ing of domestic oil properties as a strategic raw material, pending clarifica-
tion of these factors.

The second critical item for the next 20 years is that classical "free
good" of economic texts, water. The magnitude of the water problem is indi-
cated by the fact that already in 1953, 25 out of every 100 persons in the
United States were restricted in their use of water because of supply failures

[c]

IV - Report

August 27, 1957

or inadequacies. Yet by 1975 it is estimated that the domestic demand for
water will have **doubled** and the industrial demand **trebled**.

A solution appears to be partly dependent on technology and partly
upon social action. By the more *efficient* use of water, its industrial use
can be greatly economized: an instance in point being the fact that modern
steel mills use but one-quarter the amount of water per ton of those built
20 years ago. By the *protection* of water, its loss through evaporation --
estimated to be as high as 50% in the reservoirs of the arid west -- can be
sharply cut. And finally, there exists the heroic possibility of distilling
sea water for use along our coastal areas.

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

[LC]

IV - Report

August 27, 1957

- 25 -

## 2. Men

It is quite possible that in the final analysis the size and quality of a nation's working force are more directly related to its economic growth than any other single factor: one might only instance the handicap to a nation such as India of a population which crushes and a level of skills which cripples its rate of advance.

Once again, to take an overall view, the human resource problem in America is propitious for growth. Its skills, versatility, industrial aptitudes are proverbial. Its morale, to which we turn in the next section for a closer examination, is on the whole excellent. Its numbers are increasing, itself both a stimulus for and a consequence of economic expansion. In fuller detail, however, the human resource problem needs considerable attention and this has been provided in the report of Subpanel V. Here we confine ourselves to a few immediate economic issues, relevant to growth.

By 1975 we shall, according to the current largest population estimates, have a total census of some 220,000,000. Our working force, however, will have increased by nowhere nearly so much: there is even the prospect of an immediate *decline* in the numbers between age 25 and 45. Hence for the period we are considering, the pressing need seems to be the most efficient possible use of a tight, if not insufficient, resource. This leads us to recommend certain policies as currently necessary. However, we should like to emphasize that these are also policies to which we hold a longer term commitment: they

[Lc]

IV - Report

August 27, 1957

- 26 -

are not only courses of expediency, but courses dictated by our underlying moral criteria for the proper "use" of human beings.

The first of these policies is the more fruitful use of older workers. Many workers who retire at age 65 do so involuntarily, and in view of the expected large increase in the proportion of our older population this represents a considerable wastage of skills and talents, not only for the nation but for the idle older worker himself. What are needed are not only appropriate changes in our public and private retirement provisions (to which we return in our consideration of social welfare measures), but also the redesign of certain jobs to fit them profitably to the capacities of the older man or woman. Here is a task to which industrial research might profitably be turned.

Our second recommendation concerns the use of our largest pool of inefficiently employed labor: our Negro, Puerto Rican and Mexican ethnic groups and our excess farm labor. This is a social problem with deep roots in prejudice as well as an economic problem, but it is also one instance of many, in which the utilization of our resources for the purposes of economic growth will also provide us with an opportunity to work towards desired social and moral objectives. The race problem in America will not, unfortunately, be disposed of by any simple reform but certainly we can contribute towards that end by undertaking the economic training which these groups desperately need if they are to become full-fledged economic citizens.

[c]

IV - Report

August 27, 1957

Much of this retri ning and rehabilitation will necessarily require
government support. But a substantial -- and in the end a more enduring
-- contribution can be made by private employers. Many firms have already
pioneered in the training and upgrading of underprivileged racial groups. If
the availability of this labor supply is made more generally known, we can
expect the private use of "backward" labor to rise, with corresponding indi-
rect social benefits as well as direct economic ones. We strongly endorse
all efforts to this end.

A third recommendation for the improved use of our human resources
again mixes the economic and the social: it concerns the level of skills
which our work force brings to bear. It is now a commonly accepted idea
that one impact of automation will be to raise the general plateau of intelli-
gence needed to maintain, adjust, and administer an automated plant at the
factory floor level. This in turn will require a substantially increased com-
mon level of electronic, electrical, and mechanical knowledge and this de-
gree of knowledge in its turn will require a far higher level of general technical
education than presently exists. We would view with dismay the conversion
of our educational system into a national electronic trade school, but it is
unquestionably the case that the educational problem, which is dealt with
fully by Subpanel V, here ties in directly with the rate of growth which we
can achieve.

This brief survey of the problem of resources, human and material,
highlights an essential consideration for all economic prognosis and planning:

[lc]

- 28 -

IV - Report

August 27, 1957

statistical analysis is not in itself enough. The quantities of things and
people which are available to an economic system mean little unless they
are seen in a context of action. All economic facts are dynamic; they pre-
sume an underlying impetus, a framework of drives and restraints. Thus
the state of American resources which we have found to be, all things con-
sidered, a healthy one, is at best a permissive factor in the growth of the
nation. An abundance of raw materials and a large supply of willing and
intelligent men and women will not automatically combine to create eco-
nomic progress. Additional motivating factors must be present to act as a
catalyst between the two and it is to these problems of motivation that we
now turn.

[L]

IV - Report

August 27, 1957

- 29 -

# The Problem of Motivation

## 1. Economic Faith

It is one of the unexpected consequences of the recent study of the painful growth of underdeveloped countries that it has taught us much about the importance of factors responsible for our own growth. One of these contributing causes to growth is an attitude which we here call economic faith. It consists in a belief in a realizable future and a confidence in the economic system as a vehicle for arriving there; of a willingness to undertake tasks whose fruition may be beyond the life span of the individual and of a readiness to make sacrifices in the present for the sake of future return.

This matter of economic faith is indispensable for growth. Without it a people will have to be dragooned to work, or will refuse to evidence the drive or to exercise the self-discipline which a nation may demand. As examples of cases where growth is imperiled by a failure of such faith, we may cite the panic behavior of nations during periods of runaway inflation, the passivity of peoples in Africa, Asia, much of Latin America; the resistance of peoples in satellite countries.

America is fortunate in the possession of a magnificent economic faith but it is not without problems in this area too. Particularly at the lower echelon of tasks, on the great assembly lines there is evidence not of a dissatisfaction with the monetary rewards of work, but with its content. A number of recent studies have brought to light the fact that what most

[LC]

IV - Report

August 27, 1957

- 30 -

workers resent about their jobs is not its pay, but its repetitiveness, its dullness, its lack of creativity. Men eagerly compete for the job of utility man on a car-assembly line, not for its trivial differential in wage rates, but for the relative richness of its variety of assignments.

This is a problem which peculiarly touches the economic system at its moral center, posing the dilemma between the efficiency of mass production methods and the spiritual impoverishment which mass production can impose on its human agents. Since the 1920s and the now-famous experiments with workers' morale at the Western Electric Company, this problem has been known and much talked about by industrial psychologists. As yet, however all too few serious efforts have been made to apply this knowledge to life. We strongly urge that the matter be made a subject of far wider and more pressing labor-management concern. Particularly as we grow wealthier the purely economic "rewards" of work will fail to command their former all-important status. If the capitalist -- or more truly the industrialist system of production (for this is a problem which no mass production nation can eventually avoid) -- is to continue to inspire economic faith among all its working members, it will need to pay far more attention than before to its work content as well as to its work rewards. It is a hopeful note that in a growing economy the task of coping with dissatisfaction is greatly facilitated by the burgeoning of new job opportunities of higher inherent skill and interest, such as those associated with automation.

[L]

- 31 -

IV - Report

August 27, 1957

## 2. Incentives

But the problem of motivation is not limited to the repetitive jobs of society; as a factor bearing on growth, it also touches us at the top echelons. Here it shows itself as a certain "security-mindedness", as the executive conformity recently talked about as an attribute of "The Organization Man"; as an increased stress on "equilibrium" rather than on creativity.

In large part this is a question to which we must look for governmen-
tal remedies, particularly from improvements in the tax structure, and this
will be one of our concerns in the subsequent section. But the problem is
not entirely one of monetary incentives. It is also one of the diseases of
bureaucracy, an illness from which large organizations in business are no
more immune than those in government. Insofar as business firms themselves
foster the "safe" personality, exercise a benevolent paternalism rather than
encouraging an independence of executive leadership, they are themselves
contributing to the problem of a decline in the entrepreneurial spirit. A re-
turn to the rugged, and often capricious and authoritarian individualism of
the 19th century executive is hardly our desire. Yet it is important that
management become aware of its own unused potential. Again, we note that
forward-looking businesses have begun to explore this problem. Executive
decentralization, a higher level of personal responsibility, rewards in pres-
tige as in taxable income, can do much to refresh the independence of spirit
which is a mainstay of a growing economy. We feel that the matter deserves
the serious attention of the business community.

[Lc]

IV - Report

August 27, 1957

- 32 -

These remarks about motivation, although necessarily cursory, seem
to us to touch an important aspect of a growing capitalism. In a very real
sense the purpose of an economy of growth is to provide economic morale,
as much as it is to benefit from it. A feeling of purposefulness, a quality
of dedication to one's work, and not least the enjoyment of the pleasures of
work are among the highest rewards which any economy can offer. Many
factors will eventually contribute to a high state of morale; once again we
see here a junction of social and economic forces. Government welfare
programs, enlightened labor union activities and management practices; these
and many other policies all can serve to increase the motivation of the indi-
vidual. It is an important purpose to be kept in mind. Our purpose here is
not to specify the means, but to stress the importance of this end as an active
contributor to growth.

IV - Report

August 27, 1957

# The Problem of Administration

## 1. The Climate of Government

To political historians, it may well seem that the great issue of the past three decades has been the gradual forging of a consensus on the role which government can legitimately occupy in a basically free enterprise society. In the heat of the great debate, during the 1930s and 1940s, 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 early republican days when the government actively promoted the foreign trade interests of the young nation and sought to protect its infant industries; later evidenced in the halcyon railroad building era when the government provided both land and funds for the accomplishment of these herculean projects; and continuing down through the 1920s themselves in the guise 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 public element of that economy.

Equally rashly, the proponents of all-out government planning failed to recognize the long-term trends of vitality, flexibility and invention which American business enterprise had revealed. They discounted the value to a

[LC]

IV - Report

August 27, 1957

- 34 -

free society of the fragmentation of economic power which such private centers
of economic activity insured. Dismayed by the terrible aspect of the depres-
sion, worried over the concentration of economic power into large private units,
the advocates of the planned economy often proposed remedies for real short-
comings which portended an aggravation of the very problems they feared: for
the concentration of big business they would have substituted the concentra-
tion of the big state; and for the lack of private investment initiative, the
lethargy of a public bureaucracy.

It is one of the evidences of the pragmatism and adaptability of Ameri-
can capitalism that this rift of views is now virtually healed. There continues
to be, and there will quite properly continue to be, divergences of opinion
about the exact line of demarcation which is best drawn between public and
private economic responsibility, but the passions are now largely a thing of
the past. The broad lines of a workable philosophy seem to have emerged and
these seem worth stating here:

a. It is accepted that the government should not, except in those rate cases directly charged with the most vital national interest, own and administer the productive or distributive machinery of the economy.

b. It is likewise accepted that the government should, as the guardian of the general economic health of the nation, take positive steps to encourage economic growth, to reverse any

[lc]

IV - Report

August 27, 1957

- 35 -

major recession, or to restrain an excessive and potentially
dangerous rate of advance.

c. It is further agreed that the methods which the government must employ for this general purpose are, in the main, indirect rather than direct; that the tools of fiscal and monetary policy are preferable to intervention into the private decision-making apparatus.

d. There also exists a consensus that the government may and often must undertake special projects for purposes which are beyond the scope of private enterprise. Not only the economics of defense, but the economics of distress, is considered to be a government function.

Within this broad working agreement there is more than an "acceptable"
division of state and private economic power. The aim of this philosophy is
the creation of a climate conducive to growth, on the one hand, by the estab-
lishment of a degree of confidence which enables business to undertake longer-
run planning than would be possible in a totally unsupported economy, and on
the other hand, by creating an economic atmosphere in which private risk-taking
and expansion, by its very presence, will minimize the necessary economic
activities of the state. One need hardly point out that this is an ideal which
may not always, or perhaps ever, be quite achieved. Yet it seems to offer a
framework for the economic administration of a highly complex society in which

[LC]

IV - Report

August 27, 1957

- 36 -

freedom and responsibility are made as compatible as their opposite natures permit.

What follows is a discussion of some of the opportunities and problems for growth connected with the exercise of government power in this context.

[Lc]

IV - Report

August 27, 1957

37

- 38 -

## 2. What Should the Government Spend for Growth?

One important way in which the government may contribute to growth is by the direct provision of public assets and services. Such government action contributes to expansion in two ways. It can be an active employment-creating factor, pouring in purchasing power and thus giving rise to an indirect stimulus for private expansion. And equally important, it can be a sustaining factor, filling in the gaps left by the advancing private sector, consolidating and solidifying the gains already won.

In either event, the problems it poses are twofold: how much we should spend, and on what we should spend it.

The question of how much we should spend depends importantly on the economic vitality of the private investment sector. When business is actively seeking funds and resources for expansion itself, government expenditure is apt to be an interference in the normal growth process, creating artificial market strains and pushing the economy towards inflation. When, on the other hand, private investment is laggard, the case for government expenditure is greater -- not only because it can help the economy resume its forward march, but also because the disruption of the market price structure is minimized.

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

IV - Report

August 27, 1957

systematic research into new products, which comes very close to assuring us of a steady stream of new investment opportunities. The other is our present pattern of income-distribution with its high-consumption tendencies, which creates an environment exceptionally favorable to private business growth. Thus, while we recognize that a recession may temporarily change our premises, we begin with the assumption that government spending may properly be determined as a matter of necessary minimums, rather than tolerable maximums.

Nonetheless it is impossible to avoid the conclusion that even minimal federal, state and local expenditures over the next twenty years are slated to increase substantially. A case in point is the provision of public assets. Recently we have been falling behind in the provision of adequate public facilities to match and support our growth. Indeed, per capita expenditures on public works are now only some eight per cent above the level of the 1930s, whereas a continuation of their trend of expansion in the 20s and 30s would indicate that they might well be almost double their current rate today.

The case for increasing the provision of many of these public works is very great indeed but rather than undertaking a review of them, item by item, we shall illustrate the issue with mention of but three of the most pressing needs. The first of these is the critical necessity for highways, particularly in view of the expected doubling of our automobile population by 1970. Annual expenditures on roads are now scheduled to rise from $5-1/2 billion last year to $10 billion in 1960. Many transportation engineers believe

IV - Report

August 27, 1957

that this will be considerably short of the necessary amount -- pointing out
that it does not even begin to cover the need for parking facilities in our
congested cities.

A second area for immediate stepping-up of public assets is the
expansion of our school plant. Despite a doubling of expenditures on school
buildings since 1950, many education experts feel that our current public
expenditures of $2.7 billion should rise to at least $4 billion by 1965.
Subpanel V covers this problem in greater detail, but we wish to stress its
importance here.

A third area of concern is our hospital shortage -- a matter discussed
at greater length in a later section. Here we may note that the need for
expenditures on hospitals should rise from a total of about $0.3 billions
today to $1.9 billions by 1965.

If we take these "hard-core" items of public assets, adding to them
the needed water supply expenditures discussed earlier, we see a projected
rise of government expenditure for 1965 as follows:

<table><thead><tr><th></th><th>1957</th><th>1965</th></tr><tr><th></th><th colspan="2">billions of dollars</th></tr></thead><tbody><tr><td>Roads</td><td>5.6</td><td>10.0</td></tr><tr><td>Schools</td><td>2.7</td><td>4.0</td></tr><tr><td>Hospitals</td><td>0.3</td><td>1.9</td></tr><tr><td>Water Supply</td><td>1.5</td><td>2.5</td></tr></tbody></table>

To these minimally required public assets we must now add the far larger
claims of general welfare items, of the defense establishment, and of our
international aid programs. We postpone to the final section a detailed

[L.C.]

IV - Report

August 27, 1957

consideration of many of these figures, but must note now that a _conservative_ estimate for gross government expenditure for 1965 is $125 billions, compared with $110 billions today.

The point is clear. Under any realistic assumptions we must anticipate a considerable increase in government expenditures over the next decade.

But the very fact that overall government expenditures will and in fact should increase to keep pace with the needs of an expanding economy, emphasizes the necessity for efficiency of government spending and for the winnowing from the budget of items which are not conducive to growth. It makes government economy not merely a matter of financial orthodoxy or an excuse for eliminating unwanted programs, 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 the economy and efficiency methods advocated by the Hoover Commission. In this regard, the Presidential item veto, recommended by Panel VI (?) offers important economic as well as political advantages.

2) the review of government subsidies. Many of these have their roots in the depression of the 1930s 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, but subsidies in other fields also warrant re-examination.

[lc]

IV - Report

August 27, 1957

41

- 41 -

3) the elimination of certain heavy expenditure items whose abuses are tolerated only because of their political importance.
We particularly call attention to payments to veterans for non-service disabilities, and to the economic waste of our present agricultural program. The potential savings from a more reasonable veterans program could reduce the cost of that item from $4.7 billions today to $3.0 billions by 1965. A radically revised agricultural program could reduce costs from today's $4.8 billions to $2.0 billions. Both of these suggestions (the agricultural revision being outlined in a separate section) clearly run counter to strong political pressure, and it would be unrealistic to assume that they could be made overnight. But within the longer time range of this Report it is not realistic to assume their adoption, particularly if we begin today to call attention to their importance.

4) the use, wherever possible, of users' taxes to be paid by the beneficiaries of government programs. The precedents set in toll roads, in the new Federal Highway program and in the OASI pension system might well be expanded or developed. The presumption is that government programs will be more carefully weighed if they are to be paid for directly by those who benefit from them.

IV - Report

August 27, 1957

5) a careful study of the complex problem of Federal-Local taxation and of Federal grants to state and local governments, with the aim of bringing expenditures and administrative responsibility closer to the taxpayer.

6) a continuing review of the field of national security which now accounts for 40 per cent of all government spending. National security is obviously a matter of the highest priority for our nation, but it is far from clear that we have worked out an appropriate division between national security expenditures as narrowly defined in the Federal Budget and the broader aspects of security in a world of continued conflict.

Thus our inquiry into the question of what the government should spend for growth comes out with these conclusions:

1. Our objective, under the premise of privately-stimulated growth, should be the minimization of government expenditure -- reserving the understanding that a recession may temporarily alter this working guide.

2. Despite this objective we must recognize an inescapable need for higher government expenditure in the provision of certain essential public assets.

IV - Report

August 27, 1957

- 43 -

- 44 -

3. In addition to these needed assets, other pressures, social, military, and international, will very likely add to the increase in minimum government outlays.

4. Accordingly, the need for economy and efficiency within government, for user-finance of expenditures wherever possible, for the elimination of non-growth-producing or security-warranted programs is made the more imperative.

5. Finally, the continuing criterion in scrutinizing all government expenditure programs should be their contribution to growth.

### 3. How Should the Government Tax for Growth?

As we have already many times stated, but as we can hardly overstress, the essential ingredient for growth in a free private economy is a high volume of private investment. All of our past experience shows us that a brisk pace of business investment is a necessary condition for economic prosperity, and that when investment lags, the growth of the entire economy is imperiled. We have thus far discussed the boundaries within which government expenditure is a useful supplement to private investment, but we must now turn to direct encouragement of private investment itself. The investment problem itself,

This brings us directly to two problems which we shall discuss in this and the succeeding section: how shall the government tax, and what shall its fiscal policy be?

It may help if we may begin a consideration of the tax question with a few generally accepted premises:

IV - Report
August 27, 1957

- 44 -

- A5 -

1. Everyone concurs in the desire to reduce taxes. However, this main objective must be made subservient to the need for normal taxation to cover the average budgets of the Federal government. We do not wish, except in depression periods, to finance government expenditures by deficits.

2. Within this general framework, we wish to find tax methods which will be equitable in their incidence, economic in their administration, devoid of undesirable side-effects, and as little harmful as possible to capital expansion.

These general conditions impose certain broad policy conclusions upon us at the outset. The first of these is the impossibility of large-scale tax reduction in the face of rising federal budgets. The second is that in the main our tax structure is not in need of drastic reorganization. If present rates impair the provision of venture capital in some respects, which they undoubtedly do, they also partly serve to drive capital towards venture fields, particularly in equities, where the chances for capital gains are higher. And if our corporate rates are often onerous, it has not been demonstrated, in studies at the Harvard Business School and elsewhere, that they significantly interfere with large-scale investment.* To phrase the overall incompatible with growth. conclusion negatively, our present tax system is not a destructive one.

*See Paper IV-5, "The Outlook for Federal Tax Policy" by Richard A. Musgrave, p.54.

[LC]

IV - Report

August 27, 1957

- 45 -

- x6 -

Yet it is equally clearly not planned to **maximize** growth.

For T if we cannot contemplate a wholesale dismantling of our tax structure, it is equally clear that the present situation cries out for improvement and reform. To mention only a few of its worst faults, we call attention to these areas of much-needed correction:

1. Present tax rates make the expansion of _small business_ nearly an impossibility. It is an unhealthy effect of our tax system that it drives the successful small businessman to look, not for further opportunities for expansion, but for the chance to sell out at a capital gain.

2. The present excise tax system is a hodgepodge of items without design. Composed of "emergency" taxes which have ossified into quasi-permanency, it exerts an unfair and unneeded hindrance to many businesses.

3. The double taxation of corporate dividends continues to impose an unjust tax principle for expediency sake.

4. The high level of individual and corporate taxes in general, while tolerable in a boom situation, might become intolerable in a less buoyant economy. Some kind of cyclical adjustment of tax rates seems necessary to correct this.

[lc]

IV - Report

August 27, 1957

46

5. The present complexity of the tax structure virtually enforces a dubious standard of morality upon tax payers. The number of things which can now be "taken off the income tax" has burgeoned to the point where a valid principle is in danger of being obscured by misuse.

6. The estate and gift tax provisions, and capital gains taxes, are left-overs of an earlier day and may not longer serve the purposes for which they were intended. They need revision and re-examination.

7. The flow of capital into venture enterprise, into research, and into plant expansion is not, as it should be, *encouraged* by the tax structure.

8. The competition between federal and state and local tax powers has come out badly for the latter two. Non-federal tax sources and methods desperately need modernization.

This incomplete bill of particulars has one central complaint: our tax structure has not been planned to augment, foster, and protect growth. It is with this end in mind that it must be reformed. Our suggestion for immediate action will be found at the conclusion of the following section.

[LC]

IV - Report

August 27, 1957

-47-

- 48 -

### 4. What Should Be Our Fiscal Policy for Growth?

At least as important as the impact of taxation on private investment is the effect of the general economic climate of the nation. Since the enactment of the 1946 Employment Act, responsibility for this general economic climate had lodged unequivocally with the federal government, and while very few economists would contend that the government can change the direction of the economic winds, there is widespread agreement that our normal fiscal powers and "built-in stabilizers" can protect the economy from feeling their full blast.

Actually we have not had much experience yet to judge our stabilizing policies in action. We have had only two mild recessions -- one in 1949 and the other in 1953-4 -- and in both cases government fiscal and monetary policies operated to cushion the decline and to create conditions that favored re-expansions. While we have not as yet had a severe test of anti-deflation policies, we have made progress in learning how to deal with such a situation.

In contrast with this, our ability to combat inflation is less reassuring. In point of fact, our record with regard to price stability during the period 1948 to 1956 is not a bad one, particularly if heed is paid to the distortions (such as rent-freezes) which the economy inherited from the war periods. Over this time of great boom, when output rose at 4 per cent per year, prices averaged a rise of 1.3 per cent per year -- a much better showing than the average price rise of 3.0 per cent per year from 1900 to 1925, and of 1.5 per cent a year from 1925 to 1950.* Our inflation has not been dangerous

*Hansen, Alvin. The American Economy, p. 48.

IV - Report

August 27, 1957

because of its runaway pace.

Rather the concern which it very rightly causes springs from the roots of inflation in the very characteristics of a growth economy itself. There is a tendency, in what has been called a "high-pressure economy" for investment chronically to outpace savings, with a resulting inflationary pressure via the credit mechanism. Equally a product of our high-employment, tight-market, growth economy has been the power of strong trade unions to press for wage increases and the ability of strong companies to pass these increases along as price rises. Thus what is especially sobering about our inflationary problem is endemic character.

Despite the fact that a tendency to inflation may be a "price" of
growth, there is no question but that the nation must strive to maintain a
stable price level in the years ahead. While the dangers of deflation hardly
need be spelled out, continued inflation can also be disastrous. In addition
to its erosion of the savings and security of millions, by creating distortion in
our economic structure, it can lead to dangerous patterns of boom and bust.
Moreover by undercutting the incentives for saving and investment, inflation
poses a real threat to the nation's capacity to grow. The containment of
inflationary forces must be considered one of the most important objectives
for the exercise of the government's power of economic supervision.

Viewing the stability problem as a whole, what seems necessary at
the moment is not more power for government, but more refined powers.
Our present anti-deflation and anti-inflation measures are often too broad in

[LJ]

IV - Report

August 27, 1957

49
- 50 -

their impact; they are blunt rather than fine instruments, neither cut to fit
regional nor specific industrial and economic problems. Therefore the
following measures seem to us to warrant serious study as effective remedies:

1. The "stockpiling" of quickly triggered and useful public works, planned for use as <u>local and regional anti-recession correctives</u>.

2. The examination of <u>flexible contra-cyclical devices</u>, such as variable depreciation allowances, variable withholding taxes, and perhaps variable unemployment benefits. Canadian and British experience with some of these measures should be studied.

3. Exploration of the use of industrial productivity indices as a guide to wage increases.

4. Exploration of means for raising the rate of consumer saving.

It will be noted that many of these suggestions, as well as those in
our section on taxation, call for research as a precursor to action. The fact
is that we are operating, in this strategically crucial area, very largely by
half-informed guess. This calls for two immediate courses of action which
we strongly urge:

1. The broadening and deepening of our flow of economic sta-
   tistics. Despite the very considerable improvement in this
   field, much vital information needed to control economic

IV - Report

August 27, 1957

- 50 -

fluctuations is still lacking. The Federal government now spends
about $40 millions a year to gather and compile the economic
statistics which are our intelligence service in economic strategic
planning. Additional expenditures on the order of $5 millions a
year are needed to improve our knowledge of such items as in-
ventories, construction, and savings.

2. The appointment of an impartial commission to study and review the entire field of government finance, local and state as well as federal. Such a commission must approach tax and fiscal policy with a fresh and unbiased eye, and with one objective uppermost in its mind -- the furtherance of growth.

We believe the time is right for such a study. The acrimony
which in the past has surrounded the debate over government
finance has largely given way to the broad consensus we outlined
above. What is needed is not a radical change in our tax and
fiscal machinery, but an adaptation of it to the new perspectives
of our times. We believe that within the general agreement on
the need for growth itself, both political parties, as well as
labor and management, can find common ground for a
modernization of our fiscal and monetary instruments of control.

[LC]

IV - Report

August 27, 1957

-- 51 --

## The Problem of Social and Economic Distress

In the last several sections we have been concerned with a discussion of what might be called the technical considerations of growth -- those purely economic requirements and remedies bearing on our objective. In this section we shall be concerned with "social" problems in their widest sense.

Because of the essential unity of the social and economic problems affecting growth, we shall devote the first portions of this section to a discussion of matters in which the economic and the social aspects are clearly mixed. These are the main laggard socio-economic areas of our society: agriculture and urban development. As before, they will serve us in an illustrative fashion to indicate the nature of certain problems and of the remedies we feel applicable. Then we shall cross the bridge to the more generally recognized social welfare side of the total growth picture, to consider the role of welfare programs, as such, in an expanding economy.

### 1. Agriculture

Agriculture is an industry with many special problems, and one overriding problem -- the fact that of the 5,000,000 farm families in the United States, 3,000,000 are superfluous. Current estimates show that the better 40% of present farms could supply the nation abundantly -- and profitably to themselves. They would need neither subsidy nor price supports, and would look to government help only in disaster. On the other hand, the

[c]

IV - Report

August 27, 1957

-- 52 --

3,000,000 sub-marginal families **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 each technological advance in agricultural techniques only increases their relative disadvantage. For them price supports are a necessity -- a kind of disguised duty.

This correctly suggest that the agriculture problem is in fact two problems. One is the encouragement of the efficient farmer and the redesign of our price parity formulae to conform with his 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 below, say, 50 to 75 percent of indicated parity, but crops themselves would move to market at lower prices. The objective would thus be to insure the efficient farmer against severe economic hazards, while not artificially creating a price umbrella under which the inefficient producer could continue his nonproductive 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, and basic agricultural research must of course be given the high priorities they deserve.

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, there is only one indicated solution to his problem, drastic though it may appear: the submarginal farmer must be gotten out of agriculture.

[LC]

IV - Report

August 27, 1957

- 53 -

From a purely economic standpoint, this is not an insuperably diffi-
cult aim. Inefficient farmers, who so desire, should be given a cash grant
to facilitate their transfer to urban employment. A billion dollars appropri-
ated by Congress for the purpose of purchasing submarginal lands would
effect a substantial reduction in the number of unproductive farmers, in
addition to yielding side benefits by adding to the nation's open park areas
and by bringing under adequate management lands which are now badly run.

Yet the relative straightforwardness of the economic remedy conceals
the real difficulties of the situation. The agriculture problem is a social
as well as an economic one; it is tied up with the racial issue, it has roots
in low levels of education, health and social status. We are not, after all,
rooting out 3,000,000 economic statistics: we are trying to induce three
million human beings to change their way of life.

This will necessitate coordinated social programs at local, state,
and federal levels. Specifically some of the steps needed are these:
decentralization of industry to utilize the labor resources in rural areas;
information programs to inform interested individuals of job opportunities;
the redirection of present Federal agricultural agencies toward the provision
of social counselling, housing assistance for displaced farmers, and
technical training for new employments. If such a program is not undertaken
we will merely move rural poverty to an urban setting.

It would be futile to pretend that this deep-seated problem can be
substantially alleviated in a few years. Nevertheless in the time-perspective

IV - Report

August 27, 1957

- 54 -

of this report we would hope that our objectives could be well on the way to fulfillment. Certainly a major effort is needed to avoid the pockets of agricultural stagnation which would otherwise mar or impede the growth of our national economy.

In addition we should note that our suggestions make possible an estimated reduction in farm support payments from their present level of $4.8 billions to an estimated level of $2.0 billions by 1960 or 1965. Against this must be counted the capital outlays needed to repurchase submarginal lands, and the slightly higher running costs of some Federal and state agencies, charged with larger functions. There is little doubt however but that the investment would pay for itself many times over, not alone in the increased productivity of the nation as a whole, but in the increased opportunities made available to several million citizens.

## 2. Urban Development

A second segment of the economy in which social and economic problems come to a common focus is urban development. To state the crux of the issue succinctly if shockingly, the problem is this: <u>many great metropolitan areas of the United States are fast becoming Negro slums.</u>

A few figures may illustrate the trend graphically. By 1970 Negroes will almost certainly constitute more than one-quarter of the population of Chicago. In New York City Negro and Puerto Rican citizens will aggregate 28 percent of the census by 1970, and in the core center of the borough of Manhattan, 45 percent. It is highly probable that within thirty years Negroes

[LC]

IV - Report

August 27, 1957

- 55 -

will constitute from 25 to 50 percent of the total population in at least ten of the fourteen larger central cities. If our present patterns of discrimination and segregation continue this can have only one consequence: the progressive deterioration of the metropolitan area from an economic, social, and not least moral, point of view. In view of the fact that 75 percent of our population will probably be metropolitan dwellers by 1975, this poses a grave national issue. Let us briefly analyze it further.

The economic result of the Negro slum has been shown to be the destruction of the "downtown" areas of the large city. Here to an increasing extent are to be found the cheap stores, the mean hotels, the rundown and dingy office buildings; while the better business establishments and the clientele go "uptown" or out to suburban areas. The result is a drawing of economic boundaries, of the erection of city walls of color, on one side of which lies prosperity, and on the other, decay.

Socially the metropolitanization of the Negro leads to increasing social tensions as Negro neighborhoods expand under the pressure of population growth and push against the borders of white territory. Not integration but separateness and hostility follow, with threatened outbreaks of violence.

Politically, Negro ghettoes pose a similarly provoking question: what will be the effect of the election of predominantly Negro Congressmen to represent our biggest cities? What will be the temptations to gerrymander or to deny political suffrage to avoid such Negro representation?

[lc]

IV - Report

August 27, 1957

- 56 -

Morally the whole question hardly needs comment. The slum itself is an ugly phenomenon, and while it is by no means peculiar to America, its presence here, amidst so much wealth, is an acid commentary on our failure to provide one of the root essentials of life: adequate shelter. It is a terrible fact that many urban dwellers can afford to transport themselves in style, but not to live in decency. But when the slum becomes almost the enforced habitat of the Negro; when Negro attempts to break out the slum are frustrated at every turn, the situation takes on more than economic or even social overtones. It becomes -- it is -- the single gravest moral flaw in the American nation.

There is no panacea for the Negro slum problem in our great metropolitan areas. One cannot extinguish prejudice and intolerance by legislation -- although one can indeed prevent their worst manifestations by law. At best we can only strive to create conditions in which tolerance and mutual understanding can thrive. To a certain extent these conditions will result from the expansive social horizons of an economy of growth, but it would be fatuous to assume that special effort is not needed to accelerate improvement.

At one level this effort covers a variety of social activities, from the training of police officers to the establishment of special community programs for the improvement of interracial contacts, from the provision of social services to Negro city immigrants to education programs for prospective employers of Negroes; from block activity preparing the way for Negro neighbors to nation-wide civil rights programs. Every community facility --

[LC]

IV - Report

August 27, 1957

- 57 -

churches, schools, labor unions, recreation groups, economic organizations,
government -- can be enlisted in this essential effort.

At another level the problem is social and economic, for it consists
in nothing less than the planned rebuilding and re-zoning of our city slums.
This is best when not carried out on a piecemeal basis which often ends up
only with another, temporarily shiny, pocket of segregation. The rebuilding
of our cities requires large scale planning, the massive elimination of blight,
the reintroduction of green space into city areas. That this is a simple
objective would be wholly wrong to maintain, but that it is "impossible" is
also erroneous. On a limited scale such city replanning and rebuilding has
already been done in Pittsburgh, St. Louis, and in a limited way in New York,
while a few -- too few -- carefully administered interracial communities
testify that the successful existence of mixed residential neighborhoods is
not an imaginary idea. Estimates of the cost of rebuilding our metropolitan
areas and clearing them of rot, run as high as $100 billion. How much of this
can be accomplished by private funds and how much must be done by local,
state, or federal funds is a matter which cannot be clearly determined in
advance, since it depends importantly on housing legislation. For the pur-
poses of our 1965 "budget" we expect government expenditures to rise by at
least $1 billion a year for this purpose, and if private rebuilding does not
materialize in sufficient quantity it may be absolutely necessary to increase
that sum substantially.

[LC]

II - Report

August 27, 1957

- 58 -

### 3. Social Programs

It does not require much by way of explanation to describe the manner in which agriculture or urban redevelopment are related to the problem of economic and social growth. The same is not always immediately true of social welfare programs in other areas. Welfare has an unfortunately static connotation, no doubt deriving from the older conception of "charity". It should better be compared with modern philanthropy, in that it aims not merely to "help people", but to create self-generating forces which help people help themselves. Both in terms of its effect in stimulating economic activity and in its ability to stimulate personal self-realization, a vigorous welfare policy is an integral aspect of an economy dedicated to the ideal of growth.

In all likelihood the next twenty years will witness a fairly radical redefinition of what the term "social welfare" means. It will come to refer less and less to the old-fashioned concept of bailing out the individual who has fallen below economic subsistence standards (although this kind of welfare program will not cease to exist), and it will turn more and more towards affirmative and creative programs conducive to greater individual self-achievement. The gain of leisure time and wealth will bring with it rising expectations in respect to social welfare just as our first successes in coping with economic problems have brought rising expectations as to what economic welfare programs can properly do.

IV - Report

August 27, 1957

- 59 -

This does not imply a future in which we are all increasingly the recipients of public "handouts" of one form or another. Rather it implies an accepted level of public services rather considerably higher than those to which we are now accustomed. An example in point concerns our conception of the government's role in the maintenance of the nation's health. Originally organized to cope with elementary problems of sanitation or with immunization against infectious diseases, our public health services have steadily expanded to include prenatal clinics, tubercular care, and even psychiatric services. Over the long run future it is clear that the government will be held increasingly responsible for an ever wider concept of what is meant by national health, perhaps eventually including mental as well as physical well-being. The administrative techniques by which this will be accomplished may be a matter for debate, but the social concept itself is likely to be increasingly a matter of general agreement.

In the widest context in which we are now considering the problem, two matters call for attention. The first involves the *source* of welfare expenditure. Few of us realize the importance of *private* expenditures on health, education, and welfare. They total an estimated $34.4 billions today and *exceed* the government contribution in their fields by $3 billions. Although it is probable that government expenditures will henceforth rise faster than, and overtake, private welfare spending, it is important to stress the importance of the private contribution to the total picture. For example, the trend to corporate giving, if it reaches the maximum allowable figure of

[Lc]

IV - Report

August 27, 1957

- 60 -

5% of pre-tax earnings, may significantly relieve some of the pressures on the government for expanded welfare services. Similarly, improved private pension programs with earlier vesting privileges will assist in the solution of the national old age welfare problem -- a change might be encouraged by adjustment of the internal revenue laws. Certainly we must favor the growth of private health insurance plans -- possibly along the lines discussed in the next section. Expanding expectations of welfare are thus to be met not only as a government function, but importantly as a private activity as well.

A. The second general question concerns us with the problem of strengthening state and local welfare contributions. Many state and local governments have lagged in the provision of adequate health, education and welfare benefits. Partly this is a question of state and local finances, and may be expected to improve as a result of tax and fiscal reform, whose importance we have already mentioned. To a considerable degree, however, they are due to a lack of administrative efficiency and know-how at lower levels.

B. One immediately feasible action is the encouragement of stronger Federal-State relationships, by the Federal provision of technical assistance staffs available for state use or loan. We feel that this would result in a higher level of technical competence available to the locality, while retaining the administration of welfare services as close to the people it serves as can efficiently be done.

IV - Report
August 27, 1957

- 61 -

With these general remarks we turn now to a brief review of two of
the immediate problem areas of welfare in our expanding economy, the issue
of health, and that of social insurance. *

* The problem of education, although an important aspect of "welfare" is omitted here, since Subpanel V discusses it at length.

[L]

IV - Report

August 27, 1987

- 62 -

Health

A. Paying the Costs of Medical Care

It has come to be a matter of general consent that our national health
could be considerably improved by some kind of cooperative effort, and
the debate in recent years has increasingly focused on what means can best
accomplish this objective with minimal ill-effects on the quality of medical
practice.

We believe that the best prospects for efficient and relatively in-
expensive hospital and medical care appear to lie in the direction of group
practice organized around a community medical facility, offering both out-
patient and inpatient care, and paid for under family prepayment plans. Medical
care and payment organized in this way has proved highly successful where
it has been attempted and the resistance of organized medicine to group
practice combined with prepayment plans does not appear to be supported by
objective analysis. Putting a "firm" or group of professional men on the
annual retainer is the essence of group practice prepayment -- a concept
quite common in our social and economic system. The incentives on the part
of the doctors are necessarily in favor of prevention and early diagnosis, since
the utilization of hospital beds increases the operating costs for the medical
group. This is in contrast to the situation prevailing under present
hospitalization insurance plans, which are believed in many instances to
have been abused by both doctors and patients who do not have a direct stake
in preventing over-utilization.

IV - Report

August 27, 1957

- 63 -

Another type of protection which should be seriously considered is a form of Federal health "disaster" insurance, which might provide all (or a large portion) of a family's annual medical costs over and above a fixed amount, or a flexible amount based on income. The "deductible amount" should be quite substantial (such as perhaps the equivalent of two-years' income for the family) in order to minimize interference with private insurance plans. This kind of "ceiling" insurance should offer encouragement for growth of private plans below the deductible amount, and particularly the growth of so-called "major medical" expense plans.

We believe however that a Federal compulsory health insurance program -- whether initiated as a part of old-age and survivors insurance or independently -- might not now advance the cause of health care, and conceivably could retard it, until we have had far greater experimentation with various methods of organizing medical practice.

## B. Medical Research

Medical research is another indicated field for welfare advance. It has been demonstrated again and again to pay off directly, not only in human but in economic terms. For instance, it is estimated that the current annual cost to our economy because 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, $27 billion in national income lost, and $3.6 billion

IV - Report

August 27, 1957

- 64 -

in Federal income taxes not received. To indicate the extent to which relatively small expenditures in medical research provide an economic return, we may note that largely as a result of the discovery of streptomycin and the new isoniazid drugs, deaths from tuberculosis have decreased so markedly that tuberculosis hospitals in many areas are being closed or transferred to other use.

These facts alone are adequate demonstration that 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. This is a program that should properly be largely Federal in its administration, while making full use of State, local and private resources through grants and cooperative efforts.

At the same time that we step up our medical research efforts, equal strides must be taken toward putting to use more rapidly the results of medical research. It is urged that Congress authorize the U. S. Public Health Service to analyze the time lag between the acquisition of new medical knowledge and its practical availability to the general public and the causes of these time intervals.

### C. Medical Manpower and Facility

Neither health insurance nor research will meet the medical needs of a rising population unless we also achieve a greater supply and better distribution of doctors. During the next two decades the annual number of graduates of medical schools should probably be doubled. In view of the fact that

IV - Report
August 27, 1957

- 65 -

mental illness is becoming our number one national health problem, the supply of psychiatrists and psychiatric nurses should be especially encouraged. Only the inauguration of many new medical schools can achieve this. Immediate planning is essential because of the very substantial period of time required between the initial efforts to found a medical school and the time when a first class is enrolled.

In addition to better supply of doctors, we need more radical facilities of many kinds. The increase in chronic disease and the needs of an aging population highlight the necessity for a substantial expansion of facilities for long-term care, particularly high-quality nursing homes which permit the lowest possible cost per patient day. Radically new types of medical facilities should be developed with the help of Federal research -- such as hospitals permitting maximum self-help, and community care centers offering diagnostic and extensive outpatient treatment 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.

To review briefly our recommendations, we urge:

1. The expansion of group practice medical plans, organized around community medical facilities, offering both in and outpatient care, and paid for under family prepayment arrangements.

2. The adoption of Federal "disaster" health insurance, planned to encourage and supplement rather than to hinder

IV - Report

August 27, 1957

- 66 -

and displace private health insurance.

3. The support of increased medical research at Federal and local levels into new kinds of medical facilities as well as into medicine proper.

4. The inauguration of additional medical schools to increase our supply of doctors and nurses, and the modernization and re-habilitation of older hospitals.

Although the cost of such a program is difficult to estimate in fine detail, we believe it requires expenditures for health, medical care, and related items to rise from $3.8 billions in 1957 to approximately $6.6 billions by 1965. This does not include the separate item for hospitals, already itemized under our needed public assets.

## Social Insurance

The basic principle of social insurance is now firmly rooted in our national philosophy. 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..."*

*See Paper IV-6, Somers, H. and A., *Major Trends and Issues in Social Insurance*, p. 83, footnote.