I
November 30, 1967

# I. ECONOMIC GROWTH AND STABILITY

America's record of economic growth and stability has been
barely satisfactory during the past decade. The overall growth rate in
constant dollars was just about 4 percent, a growth rate Panel IV
considered inadequate to enable us to reach our aspirations. Progress
was made in using monetary and fiscal policies to combat recessions.
But, as the decade closed, it was clear that no consensus had been
developed on the appropriate means of avoiding inflation under
conditions of reasonably high employment.

Despite much talk about the New Economics, it is interesting
to note that the Panel IV Report contains all of the principles that
have been regarded as "new" in the past few years. The problem does
not lie in a lack of principles or tools. It lies rather in a lack of
agreement as to the timing and methods of using available tools.

As we have attempted to use monetary and fiscal policies in
a more flexible manner, the importance of improving the accuracy of
business forecasts has come to the fore. Indeed, the two major
blunders in economic policy during the decade can be directly
attributed to forecasting mistakes.

In 1959 the Federal Reserve tightened credit severely to deal
with the inflationary consequences of a large budget deficit. Yet,
contrary to all forecasts, the federal budget swung from deficit at an

I
November 30, 1967

- 2 -

annual rate of $18 billion at the bottom of the 1958 recession to surplus at a rate of some $4 billion by mid-1959. This budget swing of $22 billion amounted to extremely deflationary medicine. When combined with tight credit, it aborted the recovery and contributed significantly to the 1960-61 recession. Had forecasts properly evaluated the size of the swing in the federal budget, monetary policies would undoubtedly have been much less restrictive and the recovery could have persisted much longer.

The second major blunder came in early 1966. After a period of unusually well-balanced recovery and strong growth starting in early 1961, the economy achieved effective full employment (4 percent unemployment) by the end of 1965. Under the principles of the New Economics (which competent economists have been advocating for at least two decades) monetary and fiscal policies should shift to the side of restraint as the economy approaches full employment. However, the administration's economic forecast vastly underestimated the size of the defense build-up associated with Vietnam. Administration economists were actually concerned about a possible recession in the second half of 1966. Accordingly, the administration submitted another expansionary budget in January 1966. It called for no tax increase and projected a large rise in nondefense spending. Nor did the administration seek a tax increase in the spring of 1966 after it had become patently clear that a large increase in defense spending was

I
November 30, 1967

- 3 -

underway. The perfectly predictable result was an inflationary boom,
which the Federal Reserve halted temporarily by the great credit crunch
in August 1966.

Until forecasts can be greatly improved, attempts to "fine-tune"
the economy should be viewed with great skepticism. The major problem
lies in the lack of full-developed and reliable body of economic data.

The federal government spends some $150 million a year on the collection
and analysis of economic information. If this amount could be increased
by, say 10 percent per annum, over the next decade forecasts could be
made much more accurate with obvious benefits for economic policy-
making.

## Success, and Possible Failure

While it is not the present purpose to attempt a detailed review
of economic developments in the 1957-67 decade, it may be instructive
to review briefly two other periods. In one, early 1961 through the end
of 1965, the New Economics was a resounding success. In the other,
early 1966 through the end of 1967, the New Economics underwent a
severe test of its ability to reconcile the goals of high-level employment
and reasonable price stability.

The Kennedy administration came into office in early 1961, just
as the relatively mild 1960-61 recession was bottoming out. While
recovery would have come in any case, the administration proceeded to

I
November 30, 1967

-4-

stimulate recovery by applying the principles of the New Economics.
Monetary policy was kept very easy. Federal spending was increased,
initially in the defense area where our limited war capability was
improved. Significant encouragement was given to business investment
through accelerated depreciation and the 7 percent investment tax credit.

With a large amount of unused productive capacity (the
unemployment rate was above 7 percent in early 1961), these policies
worked exceedingly well. The rate of real economic growth picked up
to over 5 percent, prices were reasonably stable, and the unemployment
rate declined steadily.

In this period there developed considerable discussion of what
was termed "fiscal drag." Because of the progressive character of our
tax system, federal tax receipts tended to grow some $6 billion a year
with the normal growth of incomes at high employment. If federal
spending increased less than $6 billion, the so-called "full-employment
surplus" would grow. And the full-employment surplus was growing in
1961 and 1962. It was argued that this expanding full-employment
surplus would act as a drag on the economy, and check the recovery be-
fore full employment could be attained. To eliminate this "fiscal drag"
the administration proposed in early 1963 an across-the-board reduction
in personal and corporate income taxes. After a year's delay the
Congress approved the tax cut.

I
November 30, 1967

- 5 -

The tax cut worked well. The expansion in business continued through 1964 and 1965, and the unemployment rate was worked down to 4 percent at the end of 1965. Most economists believe that this country has effective full employment when the rate is 4 percent. The business expansion was remarkably well balanced. Inventory-sales ratios actually declined, wage rates rose in line with the advance in productivity so unit labor costs held steady. The wholesale price average was absolutely flat and the cost of living index rose only 1.2 percent per annum with the increase almost entirely in services such as medical care and rents. Profit margins improved and business investment moved ahead in strong fashion. In short, 1961-65 was the golden age of the New Economics -- the nation enjoyed the best of all possible economic worlds; prosperity and growth with reasonable price stability.

However, the New Economics ran into heavy going in 1966 and 1967. Once full employment had been attained, the basic economic problem shifted from stimulating demand to reduce unemployment to restraining the growth in demand to avoid inflation. In such a situation, the New Economics calls for restraint on federal spending if not actual reductions, a tax increase to hold back private spending, and a shift in monetary policies from ease towards restraint. Partly because of the forecasting problem mentioned earlier, the administration moved slowly in shifting the gears of monetary policy. Despite an increase in the discount rate in December 1965, which evoked protests from the

I
November 30, 1967

- 6 -

administration, the Federal Reserve continued to increase the supply of money and credit at a very rapid rate.

The result was an inflationary boom that upset the fine balance among key economic variables, which had characterized the previous five years. The increase in the cost of living accelerated to more than 3 percent per annum, and wholesale prices started to rise. The pace of inventory-building picked up to the point where business was adding to inventories at an $18.5 billion rate in the fourth quarter of 1966 -- more than 2.5 times a normal pace. Wage increases accelerated, and unit labor costs began rising. Business was expanding its productive capacity more than twice as fast as the longer term growth in demand.

In this situation, and in the absence of any fiscal restraint, the Federal Reserve moved to check the boom by tightening credit. And this action sufficed for a time, at the cost of a severe crunch on credit markets, including a squeeze on mortgage money that led to a one-third reduction in the rate of new housing starts.

However, the authorities were so concerned over a possible recession that the monetary measures were quickly reversed. Indeed, the rate of increase in the supply of money and credit in the first nine months of 1967 was the most rapid of the entire postwar period. The President asked for a tax increase in his January budget, but did not push actively for it until late fall. The budget called for a rise in

I
November 30, 1967

-7-

nondefense spending that was at least as large as that in the previous year, and no action was taken to restrain spending until late in the year.

Meantime, inflationary forces that had been quenched briefly by the Federal Reserve action in late 1966 flared up again in early 1967 and spread rapidly. Each new wage settlement came up with a higher figure -- the cost of the auto settlements late in the year approached 7 percent per annum. Experience shows that, for economic growth with reasonable price stability, wage increases should not exceed 4 percent on the average. So the wage-price spiral, which had been effectively checked in the late 1950's by policies of the Eisenhower administration, started spinning again in 1966.

All of this transpired despite the "Price-Wage Guideposts" promulgated under the Kennedy administration and continued by the Johnson administration. The guideposts are widely regarded as one of the true innovations of the New Economics of the past five years. However, they were foreshadowed by the Panel IV Report, which at one point stated: "Business and labor must exercise restraint, the former in pricing policies, the latter in its wage demands."

Very briefly, the guideposts held that the average increase in wages and salaries should be held to the long-term increase in productivity, which the Council of Economic Advisers placed at 3.2 percent. Industries where the productivity advance was greater than

I
November 30, 1967

normal were expected to reduce prices, whereas those where
productivity lagged could raise them.

In theory, the guidepost ideas are impeccable. The problem
is that they cannot be made operational in a free economy. One of
the clearest lessons of economic history is that this economy (or
any industrial economy) gets into trouble if wages begin rising faster
than productivity. The result is either inflation, if the wage-price
spiral is financed by easy money and fiscal policies, or unemployment
if the spiral is not financed.

In practice, the application of these fine principles becomes
impossible. Who is to decide which industries should reduce prices,
and by how much? How can industries where productivity lags manage
to raise prices? Who is to decide which wage increases should exceed
or fall short of the guideposts? How do you avoid making the guidepost
a target that each union must hit or exceed?

In addition to these very practical problems, it was quite clear
that the price-wage guideposts would break down if the nation pursued
monetary and fiscal policies that were generally inflationary. In the
postwar period average wages and salaries have risen almost precisely
in line with the increase in productivity plus the rise in the cost of
living. This is another way of stating the eternal truth that real wages
tend over time to rise in line with productivity.

I

November 30, 1967

- 9 -

This is precisely what happened in 1966 and again in 1967. Save for a brief period around the end of 1966, the cost-of-living index has been rising at a rate of more than 3 percent per annum. Even if monetary and fiscal policies are changed in a manner that slows the rise in the cost of living to tolerable proportions (no more than 1.25 percent), it will be impossible to avoid the current turn of the wage-price spiral that is destined to run at least through the 1968 steel settlement. The hope is that it can be checked at that time.

While the guideposts broke down in 1966 and 1967, there is need for a continuing effort to promote the idea that the general interest is best served if wages advance in line with productivity. There is a tendency in all industrial nations for wage increases to outpace productivity gains when the economy reaches full employment. Many observers have argued that, so long as this remains true, economies may have to accept either a higher level of unemployment or a more rapid rise in prices than would be the case with restraint on the wage front. However, they may be mistaken -- it may be that a gradual shift of monetary and fiscal policies to the side of restraint as the economy approaches full employment would make full employment (defined as 4 percent unemployment for the U.S.) compatible with reasonable price stability. The great mistake was in not trying such policies in the second half of 1965.

I
November 30, 1967

-10-

Appraising Panel IV

Against this background how do the general economic policy
recommendations of Panel IV stand up? The answer is: surprisingly
well. Most of the discussion in the first thirty-six pages of the
Report is as pertinent today as it was ten years ago. The Report was
published at a time of business recession so there is naturally
greater emphasis on coping with recession than would be the case
today when we face the opposite problem. Yet there will be
recessions in the future, and what was said about them in the Report
could be repeated today with no significant additions or deletions.

However, a Report written today would place greater stress
on two areas. One is the difficulty of dealing with inflation. The
other is the balance of payments, which was discussed in the Panel III
Report.

The difficulty in dealing with inflation is not basically a lack
of tools; it is rather the problem of securing agreement as to when to
use them and how to bring them to bear. There appears to be a broad
consensus that the federal government should move promptly and
aggressively to counter recession by cutting taxes, increasing spending,
and making money and credit easy. But there is a clear lack of
consensus on the use of the same tools to restrain inflation. Not
surprisingly, it is easier to cut taxes than to raise them. In a sense,

I

November 30, 1967

- 11 -

the nation appears to have learned half of the lesson of the New
Economics (or the Panel IV Report) -- how to deal with recession.
But we have not learned the other half -- how to deal with
prosperity and inflation. It is not that the precepts of Panel IV
have been found wanting in inflationary times -- they have not been
properly applied.

The balance of payments deficit has proven a more intractable
problem than the Panel III and IV Reports contemplated. A report
written today would have to place far greater emphasis on the problem
of dealing with the deficit and ensuring the integrity of the dollar.
The devaluation of sterling adds to the urgency of the problem. While
a full discussion is impossible here, it is worth making the point that
the ultimate answer lies in the strength and stability of the American
economy. If we pursue the domestic policies required for growth and
prosperity with reasonable price stability, we shall go a long way
towards making our balance of payments position a viable one.

The Panel IV Report obviously did not foresee the outbreak of
fighting in Vietnam. In many respects the $25 billion now being spent
on that effort complicates our economic problem disproportionately.
An end to the fighting there would solve the federal budget problem
and perhaps even make way for a tax cut. It would remove the excess
pressure of demand that intensifies the inflationary problem. With
reasonably good monetary and fiscal policies, the adjustment to the

I

November 30, 1967

- 12 -

end of the fighting could be handled with no more than a brief and
minor impact on the general economy.

With all these unexpected developments, the Panel IV Report
still stands up extremely well as a guide to economic policy. The
sections on economic growth remain pertinent to the problem the
nation is likely to face in the decade ahead. The attached appendix
shows how the projections made in the Report compare with what has
actually happened.

A Look Ahead

America's potential for economic growth is, if anything,
more impressive now than was the case a decade ago. The major
factors making for growth can be summed up under six main headings:
education, research and development, saving and investment,
management, broad markets, and government policies. The evolving
trends in each of these fields appear propitious for economic growth.

We are making an enormous investment in education. The
direct costs of formal education are estimated at almost $50 billion
currently. If the loss of potential earnings by students is added in,
the total rises to more than $75 billion -- some 10 percent of GNP.
Investment in education has been increasing some 10 percent per
annum. Recent research suggests that education plays a very important
role in economic growth.

I
November 30, 1967

Expenditures for research and development have more than
tripled in the past decade to a figure approaching $25 billion a year.
In industry after industry, we stand on the threshold of technological
explosions. Technology is advancing at such an accelerated pace that
it is impossible to evaluate the prospects fully. But it is possible
that, with appropriate policies, the rate of productivity advance could
accelerate, perhaps sharply, in the decade ahead.

Despite the growing tax burden, the private economy has
managed to generate a huge volume of savings. Indeed, private
savings are a slightly higher percentage of GNP now than in 1929.
Our mechanisms for channeling savings into investment have improved
steadily -- as only one example, take the growth of private pension
plans. Yet it may well be that further action, largely in the form of
tax cuts, will be needed to generate the savings required to take full
advantage of technological break-throughs.

Improved management techniques are also developing apace.
The surface has been barely scratched in developing computer use in
the management process. Management training both in the universities
and in business has multiplied many-fold. Business is paying
increasing attention to the problem of motivating people to exert their
best efforts, in large part by making jobs more interesting, challenging,
and rewarding.

I
November 30, 1967

- 14 -

Economic growth requires broadening markets. These are being provided at home by the steady upgrading of family incomes and the broadening and deepening of the great middle-income market. They are being provided abroad by the reductions in tariffs and the rapid growth in international trade which has led to the development of multi-national companies.

All of these trends point to prospects for even greater economic growth in the decade ahead than in the past decade. The problem will be to develop and put into use government policies which will enable the nation to realize on these vast potentials for growth. To summarize all too briefly, government policies need to be oriented along the following broad lines.

1. Supporting growth of the private economy in the manner set forth in the Panel IV Report must continue to be a major objective of government policy. Among other things this means that part of proceeds from the rising federal tax take which goes with economic growth needs to be used to reduce the tax rates which bear on private saving and investment. One of the lessons of recent years is that it is possible under propitious conditions to reduce *tax rates* while increasing *tax revenues*. These results show up clearly in the 1964 federal tax cut.

2. The nation must learn the second half of the New Economics -- how to manage prosperity and growth with reasonable price stability.

I
November 30, 1967

- 15 -

We must be willing to restrain government spending, raise taxes, and pay high interest rates to contain inflation. And some means must be found to keep wage increases in line with the growth in productivity.

3. In this process, government must pay greater attention to priorities, the hard problem of making choices. This point will be developed more fully in a later section.

4. While sound domestic policies are by far the most important in dealing with the nation's balance of payments problem, continuing efforts to increase international cooperation on financial matters are needed. One of the great challenges for the decade is to improve the world financial structure by devising a feasible procedure to supplement gold as a source of international liquidity.

5. One of the striking failures of the past decade was inadequate support given by industrial nations to the cause of accelerating growth in the less developed nations. This remains a high-priority problem, though new procedures may be needed to engender political support for expanding aid programs.

This very sketchy summary slides rather quickly over some quite major problems. It omits some extremely important problems, such as poverty, the cities, health, education and transportation, which will be discussed in later sections. It probably omits others

I

November 30, 1967

- 16 -

which cannot be foreseen -- such possibilities as expanding
international conflict or an era of peace, the need for a vast
anti-missile and shelter program, domestic strife or an international
financial crisis. No one can say at the moment whether these or
other developments are likely to happen in the decade ahead.

Nonetheless, this survey serves to underline one important
point -- the essential continuity of many of the nation's basic
economic problems. At the time the Panel IV Report was written,
the nation was concerned with promoting economic growth, avoiding
recession and inflation, getting the balance of payments deficit
righted, aiding growth in the less developed areas, and improving
the quality of life. While the emphasis has changed somewhat,
these are still the fundamental problems one sees in looking at the
decade ahead. If we can do a better job of dealing with these
fundamentals we will not only be able to handle more felicitously
any new problems which crop up, but we should also enhance our
prospects for making America a more rewarding and more satisfying
society.

I

November 30, 1967

- 17 -

APPENDIX I

HOW HAVE THE PANEL IV PROJECTIONS WORKED OUT?

1. The overall growth rate in constant dollars has been just about 4 percent in the 1957-67 period. This is the growth rate the report considered barely acceptable, but not high enough to enable us to reach our aspirations. For this a 5 percent growth rate was required.

2. Consumption has grown a little faster than projected; investment slower (however, this is distorted by using end year growth rates -- 1967 has a reduction in investment). Per capita consumption increased 2.5 percent per annum (population growth was lower than anticipated), against 2.1 percent projected for a 4 percent total GNP growth rate.

3. Government purchases of goods and services have expanded slightly faster than the "minimum government requirements" that were considered consistent with a 4 percent growth rate. However, if the special costs of Vietnam are deducted, government would have grown less rapidly than the "minimum" of the RBF report.

4. Total government expenditures (transfers as well as purchases of goods and services) are considerably higher than the minimum requirements projected. If Vietnam is eliminated, government expenditures fall at the minimum requirements.

I
November 30, 1967

- 18 -

(There are considerable problems involved in deciding exact magnitudes -- since you have to decide what price deflators are appropriate to use.) Transfer payments are *higher* than the high range estimated. Looking at government by sectors, *defense* after allowing for Vietnam has not increased in constant dollars at all (even when you add in the space program); *education* outlays are close to the maximum; *welfare* is near the maximum, after including Medicare, Medicaid, and economic opportunity programs (which were not considered in the earlier RBF report); *public works* are below the "minimum"; *agriculture*, *veterans*, and *all other*, which includes interest payments and the costs of running government operations, are at or above the maximum. The following tables compare RBF projections with anticipated outlays for 1967.

ACTUAL AND PROJECTED GNP

(Billions, 1957 Dollars)

<table><thead><tr><th></th><th>1957<br>Actual*</th><th>1967<br>RBF*</th><th>1967<br>Estimated</th></tr></thead><tbody><tr><td>GNP</td><td>$441</td><td>$653</td><td>$654</td></tr><tr><td>Less: government purchases</td><td>86</td><td>127</td><td>134</td></tr><tr><td>Less: gross private investment</td><td>73</td><td>123</td><td>98</td></tr><tr><td>Leaves: consumption</td><td>281</td><td>403</td><td>422</td></tr><tr><td>Annual growth per capita consumption</td><td></td><td>2.1%</td><td>2.5%</td></tr></tbody></table>

*RBF 1957 and 1967 adjusted for GNP revisions that have occurred since then. Low estimates for government purchases used. 4 percent GNP growth rate.

II-A

November 30, 1967

ECONOMIC GROWTH AND HUMAN WELFARE

As the Panel IV Report stressed, economic growth derives its
primary value by adding to individual well-being. An expanding economy
contributes to individual welfare _directly_, through increased earnings,
and _indirectly_ by enabling private and public institutions to expand
their programs aimed at improving human well-being. Over the past
decade, the nation has moved through both of these channels to improve
well-being, in many respects along the lines outlined in the Panel IV
Report. However, aspirations have been raised and frustrations have
deepened concerning the shortcomings in our society, with the result
that demands for social change have exceeded our rate of progress.

Direct Benefits of Growth

Increased earnings have been far more important than any
government social program in raising individual and family well-being.
The increase in earnings from wages and salaries -- over $180 billion
in the 1957-67 decade -- is six times larger than the increase in
government social programs. Over the past decade rising per capita
income has accounted for more than two-thirds the absolute rise in
disposable personal income. After allowing for price changes, per
capita disposable income has risen 30 percent -- or 2.6 percent per
annum (because of slower population growth the rate is higher than the

II-A

November 30, 1967

- 2 -

2.1 percent rate projected to go with the 4 percent GNP growth rate realized). Not only is average income up, but the process of income redistribution has continued. Only 15 percent of persons were living below poverty levels in 1966 against 22 percent in 1959. In 1966, about 45 percent of all families received incomes between $7,000 and $15,000 against only 22 percent in 1957 (in terms of 1965 purchasing power).

Along with higher earnings, there has been, as suggested in the Panel IV Report, an expansion of fringe benefits. Salary supplements rose from 7 percent of wages and salaries in 1957 to nearly 11 percent in 1967. An estimated 27 million workers are now covered by pension and deferred profit-sharing plans, up 10 million from a decade ago. Reserves of these plans now total $100 billion compared with $35 billion in 1957. The table below capsules the rising coverage for several types of benefits:

COVERED EMPLOYEES AS PERCENT OF WAGE AND SALARY WORKERS

<table><thead><tr><th></th><th>1955</th><th>1965</th></tr></thead><tbody><tr><td>Life insurance and death</td><td>51.0</td><td>63.4</td></tr><tr><td>Accidental death and dismemberment</td><td>28.3</td><td>43.5</td></tr><tr><td>Hospitalization</td><td>59.5</td><td>73.1</td></tr><tr><td>Surgical</td><td>54.5</td><td>70.2</td></tr><tr><td>Regular medical</td><td>36.2</td><td>58.7</td></tr><tr><td>Major medical*</td><td>4.1</td><td>26.8</td></tr><tr><td>Temporary disability*</td><td>49.3</td><td>50.2</td></tr><tr><td>Supplemental unemployment*</td><td>2.1</td><td>3.8</td></tr><tr><td>Retirement*</td><td>32.2</td><td>46.4</td></tr></tbody></table>

*Private industry only.

II-A

November 30, 1967

Finally, mention must be made of the benefits of economic growth which have been taken in the form of increased leisure rather than higher income. Although the work week has remained relatively stable -- at slightly over 40 hours -- more leisure is being taken in the form of longer vacations and more paid holidays. In 1966, 56 percent of office workers received 8 or more paid holidays against 49 percent in 1957; 61 percent of office workers received 4 weeks or more of paid vacation after 25 years service against 35 percent in 1957.

## Indirect Benefits of Growth

Social institutions, both government and private, have been expanded to fill social needs that economic growth fails to reach directly. Private philanthropy continues to play an important role. Total giving in 1966 came to about $13.5 billion, about twice the dollars contributed in 1957. Individuals -- who accounted for about $10.5 billion -- supply the bulk of contributions. Corporate giving has increased. Now close to $900 million, it is about double its 1957 level. However, the ratio of gifts to income is only 1.2 percent, up fractionally over the decade. It thus has not accelerated as much as the Panel IV Report suggested it could if full advantage were taken of the 5 percent deduction permitted by federal law.

As the United States has grown more affluent there has been a growing conviction that public action must be taken to achieve those

II-A

November 30, 1967

- 5 -

that were not fully anticipated in the Panel IV Report. From the table above, it is obvious that we have gone much further in health than anticipated, not quite so far in social insurance (in constant dollars), and finally into new ground with the special anti-poverty programs. The section below looks at the record in relation to the Panel IV recommendations. Following this, we look at some of the forces that have become dominant since the Report was written, and then at what we consider some of the future needs as they appear now.

## Social Insurance

Since the Panel IV Report, the Old-Age, Survivors, and Disability Insurance Law has been amended five times.

* Whereas Panel IV recommended reduction of the minimum age for extended disability benefits, the 1960 Act removed age restrictions completely. The 1965 Act placed an upper limit (80 percent) on combined disability and workmen's compensation benefits.

* The 1961 Act reduced optional retirement age for men to 62 (with reduced benefits). Panel IV opposed general reduction.

* The benefit structure was increased several times. Principal changes since 1957 are:

II-A

November 30, 1967

- 6 -

**tax base:** up from $4,300 to $6,600 in 1965 and $8,000 in the 1967 Act (with eventual top of $10,800 scheduled for 1972 -- Senate bill as of 11/29).

**tax rate:** up from 4.5 percent to 8.8 percent (present tax) and scheduled to go up as high as 11.6 percent in 1987.

**benefits:** minimum up from $30 to $44 at present and $70 (under Senate bill as of 11/29). Average benefit raised 7 percent in 1959, 7 percent in 1965, and 15 percent in 1967.

**earnings permitted:** up from $1,200 to $1,500 and extended to $2,400 (Senate bill as of 11/29).

Altogether in the 1957-67 decade the number of OASDI beneficiaries more than doubled, and is now over 23 million (including 2 million recipients of disability benefits against zero in 1957). Benefits paid out have gone from $7.3 billion to triple that amount and average benefits per retired worker have gone from $64.58 to $85.00 at mid-year 1967. Analysis shows that social security is playing an important role in alleviating poverty. About 32 percent of those over 65 are above poverty levels without social security benefits; 30 percent are kept above poverty by OASDI benefits, while 39 percent are classed as poor. It is estimated that recent changes in the law will reduce those in poverty by 1.6 million.

Under the changes in the 1967 law, benefit payments will rise from about $21.5 billion in 1967 (excluding Medicare) to an estimated $32 billion in 1972. Over the past decade benefit payments for the

II-A

November 30, 1967

-7-

individual retired worker did not increase as rapidly as the rise in the cost of living, but changes in the new law will more than compensate for past inflation and will leave some leeway for further price increases.

For a young family with earnings at the U.S. median, and expecting to maintain or increase those earnings, social security now insures them (even if they have no other assets) of retiring above poverty levels.

Unemployment Insurance

Unemployment insurance benefits of $2.2 billion will be paid out in 1967. With sustained economic expansion, the amount of dollar benefits has steadily declined from a high of $4.2 billion in 1961, with 1967 the first move upwards. Average weekly benefits paid come to about $41 versus $28 in 1957 -- an increase of about 45 percent. However, the range in payments remains wide -- from a low of $26 in Mississippi and West Virginia to a high of $50 in Hawaii and California (this largely reflects differences in income levels).

Although benefits for covered workers have kept pace with the rise in wage levels, there has been no appreciable increase in coverage over the past decade. Nor has federal legislation been passed, as suggested in Panel IV, to set minimum standards. A House Bill was set aside in both 1965 and 1966 which attempted to increase coverage and set federal standards for benefits (to go up to two-thirds of average weekly state wage by 1969), for duration (a maximum of at least 26 weeks),

II-A

November 30, 1967

and for qualifying (working 20 weeks in a base period). The bill also
provided for Adjustment Benefits for the long-term unemployed
exhausting their 26 weeks so that Temporary Extensions would not
have to be made (as in 1958 and 1961) when and if recession occurred.
However, as put forth in the Panel IV Report, some efforts have been
made to increase training of the unemployed in cooperation with the
Employment Service. The Manpower Development and Training Act of
1962 provides for cash allowances to unemployed workers under MDTA
training. Cash allowances are available also under ARA (Area
Redevelopment). With anticipated growth in the labor force, but with
unemployment levels kept to 4 percent, unemployment benefits will
total about $3.5 billion in 1977 after allowing for more covered
workers and benefits that keep pace with real wage increases. This
outlay would about match those in peak recession years, but would
be considerably lower in real terms if account is taken of rising prices.

Workmen's Compensation

No change in the past decade has occurred in the proportion of
workers covered by compensation -- about 80 percent of wage and
salary workers. However, benefits paid out -- now over $2 billion --
have more than doubled. Accident rates have declined, but the cost of
medical services has skyrocketed. Benefits are a larger proportion of
payroll than they were in 1957, but not as high as in prewar years.

II-A

November 30, 1967

- 9 -

Disability benefits under OASDI, now up to $2 billion since their start in 1957, and temporary disability benefits -- another $500 million (still carried only by the same four states as in 1957) -- add to the picture considerably.

## Minimum Wage Laws

The Minimum Wage Laws were amended twice since the Panel IV Report. As suggested in the Report, coverage has been widened. The 1961 amendments brought in about 3.6 million new workers largely in construction and trade. The 1966 amendments brought in nearly 8 million new workers mostly in services, trade, and government; about 500,000 each in construction and agriculture are also covered. The 1961 Act raised the minimum to $1.15 in 1962 and $1.25 by 1963; the 1966 Act raised it to $1.40 in 1967 and $1.60 in 1968 (except for the newly covered workers who start at $1.00 and gradually increase). Much discussion continues concerning the economic impact of higher minimum wages, particularly about whether it reduces job opportunities for the hard-core unskilled unemployed. Proposals have been made to make up the difference between the minimum wage and that justified by the lower productivity of the currently unskilled unemployed.

II-A

November 30, 1967

- 10 -

Public Assistance

Panel IV did not make specific proposals in regard to public
assistance -- except to stress that the assistance goal should be to
help individuals on relief rolls achieve self-support and self-care. The
history of public assistance since 1957 is the prime example of a
failure to achieve a stated goal. The public assistance laws have
been amended six times (the latest in November 1967) since the Report
was written. Most amendments were aimed at raising benefits and
increasing the federal share in order to make benefits adequate for
basic subsistence. The 1965 amendments highlighted Medicaid (to
be discussed under health), and the 1967 amendments attempted to
introduce greater work incentives into the program.

The stark truth is that in face of the longest period of unbroken
prosperity this nation has known, the number of recipients has risen --
from under 6 million in 1957 to over 8.4 million today. And the entire
rise has come under the Aid to Dependent Children Program where
recipients have more than doubled to reach 5 million. Aid to the blind,
old-age assistance, and general assistance categories have all gradually
declined. Total government outlays for public assistance and welfare
have gone from $3.3 billion to $5.7 billion in a decade (excluding
medical payments). The rise reflects an increase in the level of benefits
as well as in the number of recipients. Aid for dependent children, for
example, has gone up from $26.57 per recipient to $37.10. Even after

II-A

November 30, 1967

- 11 -

allowing for rising living costs, benefits per recipient have risen 20 percent over the decade. State by state, the range in benefits is dramatic -- going from a low of $9.35 in Mississippi to a high of $55.10 in New York (far larger than can be accounted for by regional differences in incomes).

The problem in welfare is not that benefits are too high or that they have risen too rapidly, but that the system fails to alleviate the underlying conditions. Even worse, it appears to perpetuate them by reducing work incentives and by undermining family structure. If fundamental changes are not made in our welfare system, it is conservatively estimated that outlays could reach $8 billion within the next decade.

## Health and Medical Care

Great strides have been made and new ground broken in the fields of health and medical care. Most of the changes have been in directions pointed to by Panel IV but at an even faster rate than projected. Spending by government has increased from about $4 billion in 1957 to an estimated $15 billion in 1967. However, much of the rise entails higher prices -- medical costs have risen faster than any other sector of the price index, so that outlays in real terms are about $11 billion, still $2 billion above the high projection of the Report. Private outlays have also risen rapidly, so that the total spent on health services has

II-A

November 30, 1967

- 12 -

gone up from a bit over $20 billion to close to nearly $50 billion
in a decade -- considerably faster than the rise in GNP. On the
proposals put forth by Panel IV, the following action has been taken:

*Federal scholarship programs are now available for physician, dentist, and nursing training. However, the gap between potential graduates and manpower needs still threatens to be a major bottleneck in providing adequate medical services.

*More funds have been spent on hospital facilities, but rising construction costs absorbed the increase. The physical volume of new hospital construction thus has shown little change over the decade, and is actually below the early 1950's. Expert opinion is that future emphasis will be on modernizing and enlarging existing institutions rather than building new ones.

*Large new injections of funds have gone into research. Government sponsorship of research now amounts to about $1.5 billion against only $300 million ten years ago. However, translating research findings into actual practice as well as focusing research on the technology of medicine (or in business terminology on greater efficiency and cost control) are still largely unmet challenges.

II-A

November 30, 1967

- 13 -

*Group practice has increased as suggested but still is relatively minor.

*Private insurance coverage has greatly expanded, and as put forth in the Report, increased emphasis is being placed on catastrophic (major medical) coverage. The proportion of private outlays met by insurance has risen from less than one-fourth to over one-third in the past decade.

*New programs were enacted to meet the health needs of the aged and the medically indigent under the Social Security Act of 1965. Panel IV suggested that this course "seems essential." The program for the aged is financed principally by Social Security and supplementary insurance voluntarily subscribed to. Aid to the medically indigent is financed from general revenues and works through state governments. Preliminary data for fiscal 1967 shows outlays of $3.2 billion under Medicare and $2.3 billion for medical assistance programs (most of which is Medicaid). Rough projections suggest that by 1970 Medicare will cost $5.5 billion and Medicaid $4.5 billion. By 1977, these outlays could come to $15 billion.

II-A

November 30, 1967

- 14 -

Low-Income Groups

Panel IV Report recognized that special problems center around
low-income groups, particularly those suffering racial discrimination.
The Report stressed that there was no such thing as a single poverty
problem: there were those receiving inadequate wages who could be
helped by bettering minimum wage laws; there were the aged, the rural
poor, the inadequately trained, those caught trapped in urban blight,
and those suffering racial discrimination. The Report suggested that
the economic status of these disparate groups could be raised through
"programs focused specifically on their individual problems."

Panel IV pointed to the direction of future efforts, but what Panel IV
did not foresee was the rapidity of change in attitudes towards poverty
and race that has built up throughout the 1960's.

Over the past decade, poverty was reduced, but in this longest
period of sustained prosperity, it was not reduced rapidly enough to
satisfy the aspirations of Americans. And along with improvement, a
hard-core of poor continued to exist whose conditions, particularly
in the worst urban slums, deteriorated rather than improved. During
the past decade the problems of the poor became associated more and
more with the problems of Negroes, particularly those in cities.

In point of fact there are twice as many poor white persons as
nonwhite persons, but the incidence of poverty is 3.5 times higher for

II-A

November 30, 1967

- 15 -

nonwhites than whites. One-quarter of the poor white families are headed by elderly persons, while the Negro poverty problem is almost exclusively centered in families with children under 18. Poverty has declined for both white and nonwhite groups; more families than ever before can be considered middle income, but the disparity between Negro and white incomes is still large. In fact 1966 is the first year since 1950 in which there was noticeable improvement in the ratio of nonwhite to white income and one year's findings do not indicate a trend.

The table below summarizes recent trends:

NONWHITE INCOME AS A PERCENTAGE OF INCOME OF WHITES

<table><thead><tr><th></th><th>1957</th><th>1960</th><th>1965</th><th>1966</th></tr></thead><tbody><tr><td>Median income of nonwhite families as percentage of white income</td><td>54%</td><td>55%</td><td>55%</td><td>60%</td></tr><tr><td>Percentage of families with income of $7,000 or more (1965 prices)</td><td></td><td></td><td></td><td></td></tr><tr><td>White</td><td>35</td><td>41</td><td>53</td><td>55</td></tr><tr><td>Nonwhite</td><td>11</td><td>17</td><td>23</td><td>28</td></tr><tr><td>Percentage of families below poverty levels</td><td></td><td></td><td></td><td></td></tr><tr><td>White</td><td></td><td>15</td><td>11</td><td>10</td></tr><tr><td>Nonwhite</td><td></td><td>49</td><td>39</td><td>35</td></tr></tbody></table>

Large metropolitan areas contain two-thirds of all nonwhite families but only one-half of the poor nonwhite families. Within large cities, the proportion of nonwhite families living in slums has declined.

II-A

November 30, 1967

- 16 -

Thus, for Negroes as a group, urban living, compared to rural living, has made economic sense, but the incidence of poverty is still far too large to be accepted with equanimity.

The "War on Poverty" and the _Economic Opportunity Act of 1965_ was the federal answer to the challenge of finding new ways to meet the social problems of the poor. Emphasis has been on education, job training (with antecedents in the _Manpower Development and Training Act of 1962_), and community action. Expenditures on these programs total about $2 billion during 1967. The program has passed through the first phase of enthusiasm to a present stage of dissatisfaction. Although agreement is widespread as to the basic aims of economic opportunity programs, disagreement exists concerning the appropriate dollar scale and scope of the programs. Furthermore, the proliferation of programs and their administration from Washington, with the upheaval of traditional federal-state-local relationships, has caused misgivings.

## The Challenges of the Future

This review of the past ten years within the framework of the Panel IV Report underscores a major point of the original Report. The problem of _choice_, of placing priorities on alternatives, remains of paramount importance. The nation has spent as much as the high projections called for in the social welfare field (in fact, considerably more in terms of current dollars unadjusted for inflation). Yet, today

II-A

November 30, 1967

- 17 -

we still feel dissatisfied with our success in translating economic growth into individual well-being. The demands on our resources in the future will be large. It thus is vital to reassess our social welfare programs to see where they are leading us. It is not enough to devise new programs to meet unfilled social needs; we must have the courage at the same time to reshape or eliminate those programs that are ineffective.
Since a large proportion of social welfare outlays entails redistribution of income, we must be doubly sure that the overall impact is beneficial to the nation as a whole. Three areas in particular -- social security, health, and the problems of poverty -- require careful scrutiny.

**Social Security.** The principle of social security is well-accepted, and much has been accomplished to widen coverage and increase benefits. Under the new law, those earning as much as $8,500 will be able to retire with benefits at least 50 percent of their annual earnings. And about 1.6 million older people will be lifted above poverty status though 4.5 million will still be classed poor. However, questions concerning the system still abound. Social security is a regressive tax, and rates are scheduled to rise. Maximum employee contributions have increased from $94.50 (in 1957) to $290 at present, and are scheduled to rise to $615 by 1977. (Benefit maximums have gone only from $200 up to $252 with a projected high of $393.) The system does not operate on a strict actuarial basis, and many are not fully aware of the degree of income redistribution involved. At times