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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 not have increased proportionately: due to the age-groupings of population there is even the prospect of a temporary immediate *decline* in the numbers between age 25 and 45. Hence for the next ten years, 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 not only courses of expendiency, but measures dictated by our underlying moral criteria of the maximization of individual opportunity.

The first of these policies in 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 later consideration of social insurance 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

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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.

Much of this retraining and rehabilitation may require government
support. But a substantial -- and in the end a more enduring -- contri-
bution 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
indirect 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 in-
telligence needed to maintain, adjust, and administer an automated plant

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at the factory floor level. This in turn will require a substantially in-
creased common level of electronic, electrical, and mechanical knowledge
and this degree 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. There is as well another
and yet more profound problem here to which we can only allude. This
is the problem of the incentives and values by which a society of high
living standards and high leisure preferences can attract its needed
talents, adduce the necessary degree of dedication to work, encourage
the willingness to undergo long and arduous training for delayed rewards.
We note that this is a problem to which Subpanel V has given considera-
tion, but we cannot refrain from mentioning its connection with economic
growth in our present context.

This brief survey of the problem of resources, human and material,
highlights an essential consideration for all economic prognosis and
planning -- 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 presume an underlying impetus, a framework of drives and
restraints. Thus the state of American resources which we have found to be,

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all things considered, 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 economic 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.

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# 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 of dissatisfaction not with the monetary rewards of work, but with its content. A number of recent studies have brought to light the fact that what most

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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. As far back as the 1920s, when the now-famous experiments with workers' morale were made at the Western Electric Company, it has been known that productivity was importantly associated with the sense of personal *participation* felt by the worker in his task. This has been frequently re-confirmed by industrial psychologists, but as yet 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 or production (for this is a problem which every successful mass production society must eventually face -- 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 a new

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job opportunities of higher inherent skill and interest, such as those associ-
ated with automation.

2. <u>Incentives</u>

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 not
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
many forward-looking businesses have begun to explore this problem.
Executive decentralization, a higher level of personal responsibility, rewards

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in prestige 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 continued serious attention of the business community.

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, 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 eventu-
ally contribute to a high state of economic morale; once again we see here
a junction of many social forces. Government welfare programs, enlightened
labor union activities, management practices; these and many other policies
all can serve to increase the motivation of the individual. Our purpose here
is not to specify the means, but to stress the importance of this end as an
active contributor to growth.

## The Problem of the Role of Government

### 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 so-
ciety. 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.

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

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It is one of the evidences of the pragmatism and adaptability of American capitalism that this rift of views is now virtually healed. There continues to be, and there will quite properly continue to be, divergencies 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 reverse any major recession, and maintain a stable price level.

c. It is further agreed that the methods which the government must employ for this general purpose are, in normal times, in direct 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

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

What follows is a discussion of some of the opportunities and prob-
lems for growth connected with the exercise of government power in this con-
text.

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

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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 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 the high-consumption tendencies of its rapidly growing middle-income market -- a pattern which creates an environment exceptionally favorable to private business growth. Thus, while we recognize that a recession may temporarily change our premises, we begin

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with the assumption that government spending should 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. Private investment must be backed up
by public investment in assets needed to support economic growth. Recently
we have been falling behind in the provision of these public facilities.
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 and rendered more pressing by the increasing urbanization
of our society. But rather than undertaking a review, item by item, of our
needed public assets, we shall illustrate the issue with mention of but three
of the more 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. This is clearly a government responsibility, and its
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 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.

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A second area for immediate stepping-up of public assets is the expansion of our school plant. As we have already seen in discussing our human resources, the provision of facilities for educating our citizenry is manifestly a matter of direct concern for growth, and equally patently a public rather than private undertaking. 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 whose importance is discussed at greater length in a later section on social welfare. Here we may note that the need for expenditures on hospitals should rise from a total of about $0.3 billions today to $0.9 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<br>billions of dollars</th><th>1965<br>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>0.9</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

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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 of 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 -- shipping, airlines, produced of non-ferrous metals, and certain large postal users -- also warrant re-examination.

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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 outlines 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' tades 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.

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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, and we must continue to spend what is needed to insure our capacity for defense and to deter aggressive action elsewhere.

The appropriate policy here would therefore seem to point to intensified efforts to reduce organizational overlaps and inefficiencies and to insure the continued relevance of expenditures to our strategic aims.

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 government expenditures should be increased (or taxes cut) to combat a serious slump.

2. Despite this objective we must recognize the need for higher government expenditure in the provision of certain essential public assets, to support general economic growth.

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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 the direct encouragement of private investment 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?

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

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 continued world tensions. The second is the need for a substantial overhaul of our present tax structure.

These conclusions do not mean that no tax reduction is possible, but they point out that reductions must be carefully selective, and that any loss in revenues must be amply compensated by a significant contribution to our economic vigor. In this connection it must be borne in mind that the impact of taxes is often a mixed one: our high rates of individual taxation, for instance acting both as a deterrent to the provision of venture capital, and as a stimulus

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to investment in venturesome equities (where the chances for capital gains are higher). Similarly, the need for tax reform does not imply the abandonment of our present basic tax policy. Although our structure of taxes is today unwieldy and onerous, it has not proved itself unworkable or positively incompatible with growth. Rather, its deficiencies stem from the fact that our tax system has not been carefully planned to _promote_ growth.

In the light of these considerations, we recommend the following areas of taxation policy as those most imperatively demanding correction and reform:

1. Present tax rates make the expansion of _small business_ extremely difficult. It is an unhealthy effect of our tax system that if often 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 the sake of expediency.

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4. The high level of individual and corporate rates 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.

5. The present complexity and high marginal rates of the tax structure virtually enfoce a dubious standard of morality upon taxpayers. 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.

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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.

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4. What Should Be Our Fiscal Policy For Growth?

Government fiscal policies also importantly influence private investment through this 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, if properly used, 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 1953-54 -- and in both cases government fiscal and monetary policies operated to cushion the decline and to create conditions that favored reexpansions. 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 record in combatting inflation is less reassuring. This needs a word of comment. In point of statistical fact, our experience with inflation has not been intolerably severe. From 1948 to 1957, the prices of all consumer items rose approximately 18%, and if we include only the years 1952 through 1956, the rise was less than three percent. In view of the fact that our national output rose at the rate of four percent a year over

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this period, and taking in consideration the distortions (such as rent freezes) inherited from the war periods, the record does not seem unduly bad.

However it has not been the *pace* of our inflation which has given us concern so much as its endemic character. What is especially disturbing about the slow, but relentless rise of prices, has been its roots in the very characteristics of a growth economy itself. There may well be 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 its "built-in" character. If inflation is the undoubted enemy of growth, it is also to some extent the product of growth.

Whatever the causes of inflation 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

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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 and
the more courageous use of existing powers. Our present anti-deflation
and anti-inflation measures are often too broad in 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 _local_ and _regional_ anti-recession _correctives_. The apparently limitless needs of urban rehabilitation which we will discuss in a later section, suggest themselves as ideally suited for the purpose. It has also been cogently pointed out that the mere presence of such a stockpile of public works would be a salutary demonstration to the neutralist nations of the world that our economy does not depend on defense outlays and is indeed only prevented by them from undertaking a vast reconstruction program.

2. The examination of _flexible contra-cyclical devices_, such as variable depreciation allowances, variable withholding taxes

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and perhaps variable unemployment benefits. The purpose
of such measures is, of course, to stimulate expenditures
in recession periods, and to restrain it in inflationary times
by leaving more or less money in the hands of business and
consumers. This is identical in theory to the suggestion we
have already advanced that individual and corporate income
tax rates also be subject to cyclical adjustment. Canadian
and British experience with flexible contra-cyclical measures
should be studied.

3. Exploration of the use of industrial productivity indices as a guide to wage increases. There is no doubt but that wage raises in our pace-setting industries are regularly passed on in whole or part to the consumer and are an important source of inflation. Insofar as wage raises exceed productivity increases, business firms have no alternative to such behavior, short of dangerously impairing their margins of profit. We believe that the preparation of productivity indices for key industries might provide a needed cautionary ceiling against unwarranted wage demands. However, there is no simple solution to the exercise of massive economic power, whether corporate or union, in a free economy, and there is disturbing evidence that in a tight-market, booming

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economy, the normal restraining influence of the market
may be ineffectual against such power. This re-empha-
sizes the need for a fearless use of monetary and fiscal
anti-inflation devices to restrain the over-all pace of ad-
vance when it reaches the economic boiling point.

4. Exploration of means for raising the rate of consumer
saving. The single greatest pressure on the price level
comes from the single greatest source of expenditure --
the consumer. This rising consumer expenditure flow
provides a powerful incentive to growth, and it would be
foolhardy to attempt to strait-jacket it. Nonetheless, a
campaign to induce greater voluntary saving would un-
doubtedly exert a useful counterpressure against too fast
a rate of increase. In this regard, suggestions to make
government bonds a more attractive (and perhaps "inflation-
proof") avenue of saving, would appear worthy of serious
consideration.

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:

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1. The broadening and deepening of our flow of economic statistics. Despite the very considerable improvement in this field, much vital information needed to control economic fluctuations is still lacking. The Federal government now spends about $40 million 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 million a year are needed to improve our knowledge of such items as inventories, 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.

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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. These problems concern us for two reasons. One is their connection with the problem of growth itself -- distress areas are frequently bottlenecks which need special attention in order to avoid a distorted pattern of growth. But over and above the need to stimulate growth, many of the problems of distress concern us simply because they run counter to the moral and social ideals of our nation. They are imperfections in our social fabric which we wish to mend for their (and our) own sake.

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. 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

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States, 3,000,000 are superfluous. Current estimates show that the more productive 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 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 dole.

This correctly suggests 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.

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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 induced to leave his occupation.

From a purely economic standpoint, this is not an insuperably difficult aim. Inefficient farmers, who so desire, could be given a cash grant to facilitate their transfer to urban employment. A billion dollars appropriated 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

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of present Federal agricultural agencies toward the provision of social coun-
selling, 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
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 agri-
cultural 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 agen-
cies, 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 oppor-
tunities made available to several million citizens.

2. <u>Urban Development</u>

A second sector of the economy in which social and economic problems
come to a common focus is urban development. We should be less than candid

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if we did not forcefully state that we view the urban problem as perhaps the
single most disturbing, and resistant question which America will face during
our lifetimes. To pose the issue succinctly, there is a danger that many of
our great metropolitan areas are fast becoming slum centers, and that this
terrible urban decay will be made yet more ugly by virtue of the racial problem
which it entails.

Let us very briefly set out some of the facts which force us to this
conclusion. To quote from a recent report by the Twentieth Century Fund:

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

This in itself is a serious failure of the American economy. While
the slum is by no means peculiar to or at its worst in America, its presence
here, amidst so much wealth, is an acid commentary on our economic system:
what are we to make of the fact that many urban dwellers can afford to transport
themselves in style but not to live in decency, because we have solved
the technological and economic problems of the car, but not of the house?

This general area of failure is made yet more grave by our movement
toward the metropolitan areas. Only fifty years ago we were predominantly
a rural people; today we are an urban people; tomorrow we shall be
overwhelmingly a metropolitan people. The great city-belts which
stretch in almost unbroken lines along our coasts

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and the huge city-states which mushroom out from Chicago, Pittsburgh and similar centers are becoming our typical habitat -- seventy-five percent of our population will be found there by 1975. Overspreading city, country, and even state lines, posing new problems and meanings for "local" government, these metropolitan complexes constitute the new living environment of America.

While they are growing, however, their cores are rotting away: the greater metropolis prospers, but its vital center decays. In the core cities themselves are to be found the cheap stores, the mean hotels, the rundown and dingy office buildings, the impossible traffic and transport problems, the slums -- all juxtaposed with the richest and most luxurious stores, service establishments, apartment houses. But while the city becomes polarized into the abode of Very Rich and Very Poor, the enterprising and civic-minded young middle class moves to the suburbs. The result is a line of demarcation which can be found in nearly every great city today: in the center extreme contrasts of luxury and decay; on the periphery growth and orderliness of environment.

This decay of the inner city does not only involve economic losses of staggering magnitude; it also has its terrible social consequences in the lives which slum surroundings permit and encourage. And this social problem in turn is given a special urgency by the fact that so many of our decayed districts are fast becoming exclusively Negro slums. For just as the young

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middle classes are deserting the city, so the underprivileged Negro migrants are seeking the city, and once there, are soon entrapped within its worst slum districts. It has been estimated that if present Negro migration rates continue and if our segregation patterns do not change, within thirty years Negroes will constitute from a quarter to half the population of ten of our fourteen largest central cities. The implications of this problem in political, economic, and social terms are serious enough to warrant heroic measures to relieve it.

We regard existing racial intolerance as the gravest single moral flaw in the American nation, but we do not delude ourselves that it will disappear overnight. Insofar as the problem is one of irrational prejudice, legislation can do little more than curb its worst manifestations. In the longer run we are hopeful that present attitudes of suspicion, fear, and hostility will give way, as they have in a few -- too few -- carefully administered interracial communities, to an atmosphere of mutual respect in which violence and savage intolerance are simply unknown. For the moment we must work patiently toward this end, utilizing every social means at our disposal from the training of police officers to the establishment of special community programs for the improvement of interracial contacts; from the provision of services to Nego city immigrants to education programs for prospective employers of Negroes; from block activity preparing the way for Negro neighbors to nation civil-rights programs. Every community facility -- churches, schools, labor

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unions, recreation groups, economic organizations, government -- can and
should be enlisted in this essential effort.

But it is not enough to concentrate solely on the problem of prejudice.
For this in turn is embedded in and fostered by the physical characteristics
of the city itself. Our "black-belts" are not only the result of intolerance,
but breeders of further intolerance. We can begin to alleviate this cancerous
situation by replanning and rebuilding our cities themselves.

This does not mean just a piecemeal slum-clearance which often
ends up only with another, temporarily shiny, pocket of segregation. The
rebuilding of our cities requires large scale planning and rezoning, 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
New York.

Estimates of the cost of rebuilding our metropolitan areas and clearing
them of rot run as high as $100 billions. But it is not alone the sum which
is gigantic: it is the complexity of the problem. The necessary focus on
racial integration, the maze of housing and zoning laws, the special consider-
ations of local finance, of state and federal aid, all point to the need for
some sort of coordinating and counseling center. The entire national effort
to rebuild our urban centers must be given unified focus, and this might well
merit the importance of a Cabinet post.

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More pressing is the question of how much we should spend for urban redevelopment. We certainly approve legislative action designed to expedite slum clearance on a private basis, but we must recognize that this cannot attack the core of the problem. We therefore recommend:

1. The mapping out of a unified local-state-federal program, designed to eliminate the worst slum districts by 1975.

2. The assignment to the federal government of those portions of the program which can presently best be deferred to serve as part of our anti-recession armory of public works.

3. The immediate increase of public expenditures by $1 billion a year, with the understanding that this sum will be increased if the trend to erosion is not checked, or if budget considerations allow a larger amount to be spent.

### 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 connection, no doubt deriving from the older conception of "charity." It should better be compared with modern philanthropy, in that it aims not merely to

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"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.

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

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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 expendi-
ture. 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 cor-
porate giving, if it reaches the maximum allowable figure of 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 further 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.

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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.

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.

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.

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Health

1. 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 ac-
complish this objective with minimal ill-effects on the quality of medical
practice.

We believe that the best prospects for efficient and relatively inex-
pensive hospital and medical care appear to lie in the direction of group
practice organized around a community medical facility, offering both out-
patient and in-patient care, and paid for under family prepayment plans.
Medical care and payment organized in this way has proved highly success-
ful where it has been attempted and the resistance of organized medicine to
group practice combined with prepayment plans does not appear to be sup-
ported by objective analysis. Putting a "firm" or group of professional men
on the annual retainer is the essence of group practice prepayment -- a con-
cept quite common in our social and economic system. The incentives on
the part of the doctors are necessarily in favor of prevention and early diag-
nosis, 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

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to have been abused by both doctors and patients who do not have a direct
stake in preventing over-utilization.

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 insur-
ance 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.

## 2. 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 hu-
man but in economic terms. For instance, it is estimated that the current
annual cost to our economy because of heart disease disability alone is

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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 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.

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### 3. 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 mental illness is becoming our number one national health program, 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 hospital 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.

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To review briefly our recommendations, we urge:

1. The expansion of group practice medical plans, organized around community medical facilities, offering both in- and out-patient 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 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 billion in 1957 to approximately $6.6 billion by 1965. This does not include the separate item for hospitals, already itemized under our needed public assets.

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## 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 . . ."*

Income insurance of various sorts has now penetrated our economy in many ways, from the basic "social security" provisions to the new and yet untried attempts to supplement unemployment insurance with "guaranteed" annual wages. As a generalization it appears likely that the importance of income insurance will continue to increase, covering more citizens more fully, with consequent individual and public economic benefits -- provided that the plans are financially sound.

As a first approach to the problem, there appears no need for fundamental changes in our existing social insurance programs. In particular cases however, revampings and modernizations are in order.

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

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Unemployment insurance now covers approximately 80% of wage and salary workers. About 12 million workers are still excluded, nearly 40% of them being employees of state and local governments. Here is an area for indicated action, although it may have to wait on a much-needed improvement in the administrative aspects of the program. In addition, state employment services also require substantial overhauling and coordination and considerable educational effort will be required to bring the business community to rely upon and cooperate more actively with them.

Workman's compensation has been a static field of social insurance in recent years, and is often out-of-date in its awards schedules and administration. Our best estimates of its coverage range from two-thirds to four-fifths of employees, and some of the omissions are serious. Agricultural workers, for example, have higher-than-average injury rates as well as higher-than-average unemployment rates. In short, there has been conspicuous indifference to workman's compensation, and there is a need for renewed interest in the matter.

In the social security field, our Federal Old-Age, Survivors and Disability Insurance system is maturing and expanding rapidly. The law as presently enacted will call for increases in benefit payments of ____% by 1965, from $____ billion to $____ billion. Any changes which would increase these vast expenditures must be considered with the utmost care. Nevertheless,

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continuing attention is needed to keep benefit payments adjusted to changes
in price levels and to reflect in some degree increased levels of real wages.

Two further matters bear consideration in regard to our Federal Old-Age, Survivors and Disability Insurance. One is the eligibility age for totally disabled persons. We have only begun to have experience in regard to this type of claim, since the law was amended to cover disability only recently. However, the present age of eligibility, 50, tends to exclude from benefits precisely those younger workers with dependent children who most badly need assistance. It is recommended that as our cost experience allows us to do so, we reduce the age of disability eligibility by successive steps and that we combine with this an intensified effort at vocational rehabilitation programs aimed at self-support.

The other important social insurance question is that of the retirement age itself. Particularly in view of the demand for employees in a growing economy -- but not less importantly in view of the psychological and economic injuries of premature retirement -- we urge that every encouragement be given to the continuation in employment of those workers who can and wish to work past age 65. In the circumstances, a firm policy should be maintained against general reduction of the present social security retirement age, and study should be devoted to means of adjusting it to encourage postponement of retirement.

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Once again we recapitulate the recommendations of this section:

1. Additional coverage by unemployment insurance of as many as possible of our 12,000,000 presently uninsured workers.

2. Updating of our workman's compensation program in terms of benefits and coverage.

3. Simultaneous or prior thorough overhauling of state administrative machinery for these and related programs.

4. Review of the eligibility age for disability benefits under our Federal Old-Age, Survivors and Disability Insurance law, with the aim of lowering the age limit as costs permit. Coupled with this is the need for increased efforts to retrain the disabled for self-support.

5. The encouragement, if need be by legislation, of higher retirement ages, and a firm policy against lowering the retirement age for OASDI.

We estimate the total cost of government welfare plans to rise from $15.5 billion today to $29 billion in 1965, most of which is due to present legislative requirements, and to rising eligible age groups.

With the conclusion of this examination of some of our problems of social and economic distress, we have brought our analysis of growth and

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social policy to its next but last step. It must be clear from the brevity of
the preceding pages that our object has not been to enumerate every prob-
lem which complicates our objective of growth, not to mention every recom-
mendation which might facilitate it. That would require not only far greater
length of exposition, but a degree of omniscience which we hastily disavow.
Rather, our purpose has been to clarify the main <u>areas</u> of the problems of
growth, to illustrate the nature of these problems with one or two specific
examples of each, and to suggest such courses of action as seem to us best
suited to further our basic purposes.

Starting with an outline of our objectives and philosophy, we have
now traced through the main currents of and obstacles to economic and social
development. It remains for us only to examine the compatibility of the claims
advanced not only by this, but by other subpanels with the Gross National
Product which we hope to achieve for 1965, and to this important task we
now turn.

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III

The Problem of National Priorities

We are now ready to take up the final problem which our task involves
-- that of reconciling and adjusting the claims of the many sectors of our
economy. Here we must alter our focus, which has hitherto been concerned
with the stimulation of growth, to a consideration of the _use_ to which growth
shall be put. Having heretofore directed our attention to maximizing the possi-
bilities before us, we now must determine what can be accommodated within
this "best of all possible worlds."

Two notes of caution properly precede our discussion. First, it must
be strongly emphasized that the picture which emerges in the following pages
is to be viewed only as an indication of general orders of magnitude; economic
projection is not an exact but an approximative procedure. Therefore we have
limited ourselves to a projection only to the year 1965 -- the longer twenty-
year range of our Report being too out-of-focus for analysis of a fairly precise
budgetary kind. Even within the shorter period with which we are concerned,
allowances must be made for inevitable errors of any projection of the kind
we are attempting. Nonetheless, the basic magnitudes themselves are large
enough, and their trends strong enough, to enable us to arrive with reasonable
certitude at conclusions of importance for our economy not quite a decade
hence.

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A second note of caution calls attention to the unavoidable element of personal judgement in our conclusions. In preceding questions we have dealt with matters about which we could arrive at more or less of a consensus; in this section we are forced to consider and adjudicate among competing claims, each of which has been advanced and can be defended persuasively by thoughtful men. Nevertheless in the nature of our task we have the unavoidable necessity of allowing some claims and disallowing others. At most we can hope that our selection of priorities will appear a reasonable one. In the end, of course, these choices will have to be made by the American people themselves.

## How Large Will Our Economic Output be in 1965?

We have already acquainted the reader, at the very outset of our report, with a general projection into the future. Let us now return to that projection, at the risk of some small repetition, in order to begin our task with a clear picture of the framework of possibilities in mind.

For the past decade our physical volume of total national production has grown at the rate of four percent a year. This compares with a general growth trend of three percent a year in the period 1870-1930. Although accompanied by a degree of inflation averaging about 1.5% a year, our recent rise in output has been the longest and most impressive sustained economic effort our economy has ever displayed.

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Despite the fact that our Report has heretofore dealt with the problems which may complicate our future growth, there seems to be no reason why we cannot reasonably look forward to a continuation of a growth rate of 3%-4% per year over the next decade and beyond. If the problems are formidable, we have also found the impetus of our economy tremendous. This conclusion does not, of course, represent a forecast but an attainable goal which, with reasonable intelligence in handling the factors contributing to economic expansion, we should be able to achieve. The balance of this Report is therefore based on that assumption. It deals with the capacities of an economy which has fulfilled its growth potential.

Thus we begin with a potential economic volume of output of the following magnitude:

<table><thead><tr><th></th><th colspan="5" style="text-align: center;">Billions of Dollars</th></tr><tr><th></th><th style="text-align: center;">1957</th><th style="text-align: center;">1958</th><th style="text-align: center;">1960</th><th style="text-align: center;">1965</th><th style="text-align: center;">1975</th></tr></thead><tbody><tr><th scope="row" style="text-align: left;">GNP 4% growth</th><td style="text-align: right;">432</td><td style="text-align: right;">449</td><td style="text-align: right;">486</td><td style="text-align: right;">591</td><td style="text-align: right;">814</td></tr><tr><th scope="row" style="text-align: left;">GNP 3% growth</th><td style="text-align: right;">432</td><td style="text-align: right;">445</td><td style="text-align: right;">472</td><td style="text-align: right;">546.9</td><td></td></tr></tbody></table>

It may be helpful in lending a concrete meaning to these figures to look at their annual rates of increase. Thus at a 4% growth rate we will experience an *increase* of $17 billion a year in total output in 1958. By 1965 the *annual* growth increment would be up to $24 billion a year. Over the entire 1957-1965 period we would have available a "growth margin" totalling $159 billion. At

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3% a year our growth margin would equal $115 billion. These margins repre-
sent the added capacity which is available to us to satisfy the demands of a
growing population, a rising standard of living, and the increased burdens
placed on our national government.

How Shall We Utilize Our Output in 1965?

The problem we now face is how best to allocate the nation's total
production, including its growth margin, among competing demands. The
next step, therefore, must be to attempt to draw up the requirements which
may be anticipated for the United States in 1965. Many of the figures which
follow are drawn from the recommendations of other subpanels and represent
their considered "claims" against our total available resources. The projected
claims required for private investment, consumer expenditures and government
expenditures for social programs, however, have been developed by Subpanel
IV, and it is to these that we first direct our attention.

1. Private Investment

Business investment in new plant and equipment is the key element in
economic growth. Over the past decade our 4% growth rate has been accom-
panied by -- and has largely sprung from -- a plowing-back of an average of
10.7% of GNP into plant and equipment and other investments and 0.7% into
enlarged business inventories. In view of the stable relationship between
business investment and GNP, we regard this volume of gross business
investment as necessary if we are to continue a 4% annual growth in GNP.

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This investment figure, it should be noted is for _gross_ business investment, and includes items such as depreciation, which make it considerably larger than the _net_ new plant and equipment expenditures -- the heart of the expansion process -- with which we illustrated our growth potential in the opening section of this Report.

In addition to business investment, if we are to house our growing population adequately, we shall have to increase the share of private residential construction in GNP from 3.4% now to 4.1% in 1965. This estimate provides for an increase in single family homes in line with the trend in family formation plus an estimate of $3 billion a year for _private_ investment in urban renewal projects (which would be supplemented by at least $1 billion of government expenditures).

Private foreign investment is projected to rise to $3 billion in 1965 or 50% above the 1957 figure. However, the current year's total is distorted by the back-wash of the Suez shutdown. If this adjustment is made, the projection calls for a doubling of private foreign investment by 1965. Granted the proper incentives in the form of tax abatement, the increase could be even greater.

The figures for "Other Private Investment" cover schools, hospitals, churches and other private institutions. It is assumed that such expenditures will rise 75% by 1965 to cover needs in these areas.

This gross flow of investment is divided, as we have seen, into many channels -- plant and equipment and the replacement of depreciated machinery

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accompaniment of a growing economy as any other single item. We shall
therefore treat the total investment claim as "fixed" and concern ourselves
with the disposition of the remainder of our economic product.

2. <u>Consumer Requirements</u>

The "next" claim to be considered is that of consumer demand. How
many consumer requirements be projected? In a controlled economy, or in a
state of national emergency, the consumer may be considered as the residual
claimant against the economy; he gets what is left over after the business
investment and government requirements have been met. In other periods,
however, consumer decisions about spending and saving play a significant
role in a private enterprise economy. A steadily rising flow of consumer out-
lays is not only a result of growth, but a vital stimulus to further growth. In
recent years consumer expenditures (which stood at about $281 billion in
1957) have been rising by roughly 4% per year, or about in line with the
growth in GNP, and it is this figure which we shall deal with as the most
realistic for the future.

Unlike investment, there is no hard and fast requirement that con-
sumption must grow at 4% per annum in the future. The figure simply provides
a datum for a calculation of the general rate of improvement of material stand-
ards of living which the American public has come to accept as normal.
Hence, for purposes of comparison the following table illustrates alternate
total claims of consumer expenditures against the economy. First it is

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assumed that consumer expenditures continue to grow at 4%, second that they
grow only at 3%. These figures, of course, reflect the projected increase in
population over the period in question.

<table><thead><tr><th colspan="3">Consumer Expenditures<br>Assuming<br>(Billions of Dollars)</th><th colspan="3">Consumer Expenditures<br>Per Capita Assuming<br>(Dollars)</th></tr><tr><th>Year</th><th>4% Per<br>Annum<br>Increase</th><th>3% Per<br>Annum<br>Increase</th><th>Population<br>(Millions)</th><th>4% Per<br>Annum<br>Increase</th><th>3% Per<br>Annum<br>Increase</th></tr></thead><tbody><tr><td>1957</td><td>280.9</td><td>280.9</td><td>170</td><td>1645</td><td>1645</td></tr><tr><td>1958</td><td>292.0</td><td>289.3</td><td>172</td><td>1681</td><td>1665</td></tr><tr><td>1960</td><td>315.7</td><td>307.</td><td>178</td><td>1760</td><td>1716</td></tr><tr><td>1965</td><td>384.2</td><td>355.</td><td>191</td><td>1986</td><td>1848</td></tr></tbody></table>

It is to be stressed that the figures listed above do no more than set general limits within which the magnitude of consumer expenditures can be appraised. In purely abstract terms consumption could be kept at its 1957 levels by an appropriate combination of heavily increased consumption taxes and increased savings. But any sort of realistic projection must take into account that such a holding-down of consumption against its natural propensity to rise involves a host of exceedingly difficulty problems. A substantial reduction in the rate of growth of per capita consumption would have far reaching and serious implications for general economic growth and private investment, much of which is geared to a continuing steady growth in consumer expenditures.

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If we now deduct from our previous figures a realistic projection of
consumer outlays rising at 4% a year we have the following results:

<table><thead><tr><th></th><th colspan="4" style="text-align: center;">Billions of Dollars</th></tr><tr><th></th><th style="text-align: center;">1957</th><th style="text-align: center;">1958</th><th style="text-align: center;">1960</th><th style="text-align: center;">1965</th></tr></thead><tbody><tr><td>GNP (4% growth rate)</td><td style="text-align: right;">432</td><td style="text-align: right;">449</td><td style="text-align: right;">486</td><td style="text-align: right;">591</td></tr><tr><td>less Private investment</td><td style="text-align: right;">67</td><td style="text-align: right;">70</td><td style="text-align: right;">76</td><td style="text-align: right;">91</td></tr><tr><td>available for other uses</td><td style="text-align: right;">365</td><td style="text-align: right;">379</td><td style="text-align: right;">410</td><td style="text-align: right;">500</td></tr><tr><td>less consumption at 4% growth rate</td><td style="text-align: right;">281</td><td style="text-align: right;">292</td><td style="text-align: right;">316</td><td style="text-align: right;">384</td></tr><tr><td>Net available for government use</td><td style="text-align: right;">84</td><td style="text-align: right;">87</td><td style="text-align: right;">94</td><td style="text-align: right;">116</td></tr></tbody></table>

We have now allocated the product of our economy to its business and consumer sectors -- with the understanding that the consumer figure is somewhat flexible in a downward direction, and we are accordingly ready to match our remaining available resources with the demands of the policy-originating sector of our economy -- the government.

### 3. Government Programs

The following recapitulation seeks to combine the conclusions of other subpanels and our own respecting urgent needs for greater Government spending. The listing which immediately follows makes no effort to accommodate these recommended programs to the scale of the nation's economic potential. It is merely a totalling of these claims. The following paragraphs will outline the nature and costs of these programs.

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**Total National Security Expenditures*** would have to rise by $1.8 billion each year between now and 1965 to meet stated requirements. This will give us a necessary "security budget" of $58.5 billions in 1965. The increases by departments follow.

**Defense Department** spending would go up from 36.6 billion in 1957 to $45 billion in 1965, including $ ? billion for Air, $ ? billion for Navy, and $ ? billion for the Army. These increases are held to be essential to cover the cost of new weapons, as well as to keep us ahead of the Russians.

**Civil Defense** expenditures would increase from $0.4 billion in 1957 to $2.4 billion in 1965 to cover the government's share of the $32 billion program prepared by ODM.

**Military Aid** would increase by $1.6 billion (from $2.4 billion in 1957 to $4 billion in 1965) to cover the cost of equipping allied forces with new weapons.

**Atomic Energy** expenditures would continue to rise while **stockpile** purchases would be ended.

footnote * For full development of these figures, see Report of Panel I ?

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**Economic Aid** which now runs to about $1.6 billion a year (of which 1/2 to 2/3 goes for "Defense Support"), would rise by $1-1/2 billion, or as rapidly as it could be effectively used by recipient nations.

The next large group of government expenditures comprise the government **Welfare** requirements. Many of these figures have been developed in the course of this report, and will be only briefly summarized here:

Total Welfare expenditures can be expected to rise from present levels of $28.5 billions to $53.6 billions by 1965. Most of this increase lies in Social Insurance and will take place under existing legislation. Increases for health and education programs proposed by our panel are itemized on the following table.

**Public Works** Expenditures can be expected to rise from $13 billions today to 22.9 billions in 1965. This is a **minimum** estimate, following the lines of our earlier consideration of the question.

**Other** expenses include the necessarily growing item of interest, and also cover the costs of administration and operation which have been calculated at a conservative rate of increase to cover expanded activities.

This category also makes allowance for projected economies, as recommended by this Report -- in agricultural support payments and in non-service veterans' disability payments.

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It should be noted that these figures for total government cash expenditures are slightly in excess of the tax receipts which can be expected from a growing economy <u>without</u> increases in tax rates. The figures (which assume a growth increment of about $5 billion a year in tax receipts) are given below:

Government Expenditure Requirements
Compared to Revenues

<table><thead><tr><th></th><th colspan="4">Billions of Dollars</th></tr><tr><th></th><th>1957</th><th>1958</th><th>1960</th><th>1965</th></tr></thead><tbody><tr><td>Government Cash Expenditures</td><td>110.0</td><td>115.4</td><td>128.4</td><td>158.9</td></tr><tr><td>Revenues</td><td>113.2</td><td>117.6</td><td>127.3</td><td>154.8</td></tr><tr><td>Surplus (Deficit)</td><td>3.2</td><td>(2.2)</td><td>(1.1)</td><td>(4.1)</td></tr></tbody></table>

The totals, which indicate that the proposed scale of government expenditures would not quite be met by the yields of our existing tax structure, reinforce our earlier conclusion that a <u>large-scale</u> reduction of tax rates is clearly not warranted.

However these total figures for government expenditures are not yet <u>net</u> claims against the resources of the economy. They include transfer expenditures, such as social insurance, which do not result in the appropriation of resources in exchange for payments. Therefore we must reduce Cash Expenditures by transfer payment amounts to arrive at the net figure we need. Projecting these transfer payments on the basis of past trends, we arrive at the estimates that follow:

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The conclusion is obvious. <u>Under our assumptions we are not quite able to accommodate the requirements which a minimum forecast of government responsibilities thrusts upon us.</u> If we enlarge the government expenditure claim to include many <u>desirable</u> as well as necessitous obligations--such as urban rehabilitation--the stringencies of our future economic potential are still more obvious. If we are not able to effect certain economies, such as the the $45 billion savings in veterans and agriculture payments, the gap is more difficult yet. <u>And if our growth rate does not realize the four percent goal we have set for it, the accommodation of these claims will be entirely impossible.</u> Let us remember that we have made no allowance whatever for a slackening, however temporary, in our rate of growth. Should our economy expand at what might otherwise be considered the very adequate pace of three percent a year, our projection for 1965 would look like this:

<table><thead><tr><th></th><th>Billions of Dollars</th></tr></thead><tbody><tr><td>Gross National Product Available</td><td>547</td></tr><tr><td>Private Investment</td><td>85</td></tr><tr><td>Consumer requirements (at 4% growth)</td><td>384</td></tr><tr><td>Available for Government</td><td>78</td></tr><tr><td>Government Demands</td><td>120</td></tr><tr><td>Deficit</td><td>42</td></tr></tbody></table>

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The first basic conclusion which emerges from our analysis is there-
fore a renewed concern for the importance of growth **which we now see in its**
**proper perspective as the key to our future state of affairs.** With due allow-
ance for imprecision of all projections, we can reasonably anticipate that
a four percent rate of growth will give us essentially what we need; it will
come extremely close to meeting our most vitally required (but not all our
desirable) government programs, it will make possible a rapidly rising level
of living standards, and it will permit us to come within a very close degree
of balancing our budget without recourse to additional taxation.

Yet even with a four percent growth rate the situation does not allow
of easy unconcern. An economy of optimum growth will so barely contain the
demands made upon it that any faltering in the rate of growth would quickly
turn a small deficit situation into a severe one. Thus it appears that at best
we shall be pressing against the margin of our capacities for at least the next
ten years. This reemphasizes the warnings which we have earlier made in
regard to the continuing threat of inflation and the need for vigorous anti-
inflation measures.

To be sure, the hingepin of our analysis is the assumed increase which
will be necessary in our security expenditures. If a *modus vivendi* is
finally attained with the Russians under which our expenditures could be
safely cut, the margin for alternative uses of resources becomes considerably
wider. In this case, however, we will undoubtedly turn with renewed activity

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to fuller expansion of desirable public works and to the full task of urban
rehabilitation, with the consequence that our economy may very well again
be pushed to the inflation brink.

What Can We do if Growth is not Maximized?

But suppose our desired four percent growth rate is not achieved?
Suppose we have a minor recession -- of little importance in itself but
enough to rob of a percentage point of average growth? How shall we fare
with a three percent rate of advance?

There are two principal ways in which an accommodation of claims
could be attained under a slower rate of growth. Neither of them is pleasant,
but one -- or more probably a combination of both -- would be unavoidable.
The first method is by rolling back the demands of the consuming sector and
thus releasing resources for government use. By means of consumer taxes,
for example, we might attempt to reduce the rate of consumer increase to
3% per annum, which would result in a total demand for goods almost $30
billions less than at 4%. However as we have cautioned before, such a
reduction of the rate of growth of consumer spending might have serious
repercussions on private investment, particularly when our overall growth
rate was laggard. A campaign to increase voluntary saving would seem to
be the limit to which we could safely go with this remedy for an excess of
claims over resources.

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A second accommodation measure to a less than maximum rate of
growth would be to cut back government programs *below* the levels suggested
by our panels. Let us see how such an accommodation might be made.

| | 1965 |
|:---|---:|
| National Security | 44.0 |
| Public Works | 20.0 |
| Welfare | 43.6 |
| Other | 23.9 |
| Total Government Expenditures | 131.5 |
| Transfer Payments | 38.6 |
| Total Government Demand | 92.9 |

Since our resources available for Government (under the 3% assumptions for GNP) are 79 billions, it will be noted that we cannot even cover our requirements in this fashion. And we should note as well the cost of trying to do so:

1. We should have to limit our security expenditures to present levels, despite the urgent advice of our subpanels to expand them.

2. We could undertake only a 4% yearly increase in public works, except for roads.

3. We should be able to add no new welfare measures.

In other words, if we succeed in averaging a growth rate of only 3% per annum -- and let us remind the reader that this was the growth rate evidenced by our economy from 1870 to 1930 -- we will be able to accommodate our total of claims only by reducing government expenditures below

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even this "subminimum" and by partially restraining consumer increases
from the attainment of their normal growth trend.

The signal importance of growth for the American future could
scarcely be made more dramatically apparent.

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IV

The Economy of 1965 in Perspective

At the conclusion of this survey of the prospects for American social
and economic development over the next twenty years, it is well that we
seek a renewed perspective on the problem as a whole.

We began our report with a projection of the economy of relative
abundance which awaited Americans at the end of twenty more years as
productive as those of the past decade. We end our report with a warning
that we may not be able to do all the things we must do -- much less all
the things we want to -- despite our growth. How can we reconcile these
ideas?

To begin with we must remember that our economy of well-being
concerns itself with 1975; our economy of stringency with 1965. At the
conclusion of our report we are but half way to the destination marked out
in its beginning.

Secondly we must view the "inadequate" economy of 1965 in a proper
light. We have assumed for 1965 a total increase in consumer expenditures
of nearly 40% -- an increase which, allowing for our rise in population,
gives us a per capita increase of one-fifth. A one-fifth increase in family
consumption implies that our typical (metropolitan) family income will have
risen very close to $6,500. Our economy of 1965, in other words, will be
well along the road to the economy of well-being.

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Thirdly, we must realize that we are asking of the economy of 1965 more than we are asking -- or could realistically ask - of the economy of 1957. Not only is to support us as a nation in a style to which we have yet to become accustomed, but it is also to defend us, educate us, insure us, and provide us with public services on a scale considerably larger than today. It is to be an economy of guns and butter and social betterment as well. The tightness of our economy of 1965 reflects the magnitude of our demands more than the inadequacy of our resources.

Thus there is not a basic incompatibility between the grandiose scale on which we projected the American opportunity for 1975 and the need for restraint, patience, and deferment of some desirable objectives which we see for 1965. The economy of 1965 will be only a partial realization of economy of 1975, and one could indeed be encouraged at the opportunities which it will promise rather than discouraged by the economies which it will still impose. For all the sense of strain, of desires in excess of capacities which rightly occupies our immediate attention, we should not lose sight of the fact that we can accommodate a larger number of richer desires than ever before, and that the outlook, at the end of our next ten years, should be one of very great -- indeed, unprecedented -- abundance. If we manage our affairs now with prudence and foresight we shall accelerate the transition to that economy of opportunity to which we aspire.

Yet the very magnitude of the opportunity must give us a deeper sense of the need for prompt, intelligent, and far-sighted action today. Our transition

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to an economy of well-being--indeed even our evolution into the economy
we have projected for 1965 -- will not just happen. We shall have to make
it happen by applying ourselves to those measures which will serve to bring
it about. Without wishing to review here what has been said many times
in our Report, it is clear that the recommendations for an economic and
social policy of growth take on an added urgency when we realize how slim
a margin separates the possible and the impossible. To lose sight of the
overwhelming importance of growth is to allow a rich prize to escape us by
sheer lack of intelligence.

A final word concerns the nature of that prize itself. We have found
ourselves rapidly moving along a current of economic progress which, given
a firm hand at the tiller and a sharp eye at the bow, bids fair to carry us to
a new kind of social environment -- an environment characterized not only
by an end to poverty but by the mass enjoyment of moderate wealth and
well-being. It is a very necessary companion for our buoyant and hopeful
economic expectations to have a chastening sense of the finitude of material
achievement, and to remind ourselves that our final goal can be measured not
in the easy calculus of dollars but only in the incalculable qualities of human
existence itself. It is to the improvement of this quality of life -- partly not
but by no means wholly attainable by an improvement in the quantities of life's
goods -- that we must ultimately address our deepest efforts. It is to the extent
that we are a spiritually, intellectually, artistically, morally richer nation,
rather than the extent to which we are simply a wealthier one, that history will
judge the use we have made of the opportunity before us.