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A. <u>The Problem of Motivation</u>

Nothing so dramatically illustrates the central importance of
economic motivation as our recent interest in the problems of underdevel-
oped countries. For there we often see potential growth stalled by an
absence of proper motivations. A labor force without an aspiration toward
a rising standard of living simply converts a raise in pay into more time
off. A managerial group without the motivations of enterprise or a sense
of social responsibility will be more interested in wide profit margins than
in high productivity.

The incentives which impel an industrial system are complex but
it is clear that an essential prerequisite is a quality which may be called
economic faith: a belief in a realizable future and a confidence in the
economic system as a vehicle for arriving there. Without economic faith
a people will lack the incentive for major effort; the economy will stagnate
because it will lack the leaven of creativity.

Panel V will deal with the problem of motivation in a large setting
and in greater detail. Here we will confine ourselves to calling attention
to two aspects of the problem particularly relevant to economic growth.

Our economic system has motivated people effectively to devote
themselves to increasing production and productivity in the private sphere
and to responding to social demands insofar as these were expressed through

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the private marketplace. The main motivation has been the prospect of economic reward -- income -- plus the social esteem our society has afforded to success in the private economy.

But our system has not provided comparable rewards and incentives for comparable contributions to economic growth and to the quality of American life when these are made through public channels -- of which government is most important but other nonprofit institutions are also a part. We fear that the disparity may be widening and becoming more serious. In short, we think that we are not paying enough for talent and effort in public institutions while the school teacher, the government administrator, the "pure" researcher are becoming more critical to our lives.

Part of the difficulty has been failure to appreciate sufficiently how critical the functions of the public institutions are to us. But this is only part of the difficulty, as is evidenced by our willingness to appropriate vast sums for some public functions and then leave them to be run by persons earning a small fraction of what their counterparts in private life earn.

The other reasons are numerous, some of long standing, others recent and possibly temporary. Certainly inflation has been a factor, especially in its impact on state and local governments and endowed institutions, where revenues have not kept pace with costs and earnings in the rest of the economy. The increasing feeling of security in private employment has probably reduced the relative advantage and attractiveness of the

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government position. Civil Service procedures have prevented enough differentiation of employees by quality of performance to permit salaries adequate to outstanding talents. In any case, the assignment of a dollar-and-cents value to superior performance in public service is difficult.

To some extent there is a feeling that the public servant should be "public-spirited" and not expect a large pecuniary reward.

In any case, whatever the causes, the situation is highly dangerous.

With so large a part of our national resources now being directly managed by public institutions and an even larger part of our lives being influenced by them, we must make every effort to attract talent into these functions.

And there is no reason to think that this can be done without using the motivations upon which our society in general relies.

A different kind of problem of motivation arises out of the increasing share played in our national life by large organizations. It is not that bureaucracy is in itself an evil. An increasingly interdependent society cannot run without synchronization and routine. Bureaucracy is the corollary to the specialization which has conferred such dynamism on our economy.

But the very efficiency of bureaucracies may bring about rigidity both in the discovery of talent and in dealing with new opportunities. For while the leadership at the top of these organizations requires creativity and originality of a high order, the method of conducting affairs at the middle or lower level may run counter to producing these qualities. The concern of a bureaucracy is for minimum risk: it is run by a standard of average performance. But the task of leadership is to break through routine, to galvanize

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energies for tasks of innovation. The concern of a bureaucracy is with
equilibrium; but the growth of a society depends on the ability to prevent
equilibrium from turning into stagnation. There is a danger that the quali-
ties which are encouraged on the rise to the top of large organizations are
not the qualities which are most useful when eminence is reached. The
very smoothness of operation of bureaucratic machines in many walks of our
life may tempt our most talented individuals to set their sights too low.

The relevant questions then become: What organizational patterns
and practices may be devised which are least destructive of individual initia-
tive and autonomy? How is it that with all our intricacy of social mech-
anism a good many astonishingly free, flexible, creative and autonomous
individuals exist -- some of them in the very midst of the great bureaucracies?
How may we best prepare our young people to keep their individuality, initia-
tive and creativity in an intricately-meshed society? How do we shatter
the informal "ceilings" placed upon performance in an organizational setting
in which order and harmony and predictability are more important than indi-
vidual achievement.

When we arrive at questions of this fundamental importance, we are
no longer simply talking about economic motivation but about one of the
gravest issues in the future of our society. The continuing tensions between
the needs of the organization and the creativity of the individual will unques-
tionably be one of the most fateful struggles in our future. It is all the more
crucial for being intangible and not amenable to formal solutions. The answers
we devise will reflect the quality of our society and determine its character.

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B. Agriculture -- A Case Study in the Problem of Adaptation

Agriculture is a bundle of problems. The large number of farmers with very low production are a major part of the problem of poverty in the United States. The huge federal expenditures for support of farm prices are a major part of the problem of the federal budget. The methods used to dispose of agricultural products abroad are a major part of our problem of foreign economic policy. In addition, even the most productive farmers are not sharing in the general growth of per capita incomes in the United States. And the whole nonfarm population is paying higher prices than are necessary for food and fibers.

Agricultural policy could be discussed in terms of any one of these problems. We shall discuss it, however, in different terms -- in terms of the failure of agricultural policy to promote efficient adaptation of the agricultural industry to changing techniques and demands. This is at the root of all the other problems. It also reveals some important lessons for policy in other parts of the economy.

The basic fact is that the present operation of American agriculture is not efficient for the farmer himself, for the consumer or for the taxpayer. This may seem a paradoxical thing to say when the American farmer produces wheat, cotton, corn, meat, milk, and many other things with unparalleled and unprecedented efficiency. But here we have an outstanding case of efficiency in the small and inefficiency in the large. The American farmer is so efficient that it is inefficient for most farmers to be farmers at all.

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Forty or 50 per cent of the present number of farmers could produce all of the farm commodities that could be sold at prices that would yield the farmer an income comparable to that he could earn outside of agriculture. The national income would be larger if a large proportion of the present farmers were engaged in other occupations. This loss of income is largely borne by the farmers -- both the fraction who ought to be out of agriculture and the fraction who ought to be in. Under present price-support policies this loss is shared to some extent by taxpayers and consumers.

The causes of this difficulty are clear in general, although they vary somewhat from commodity to commodity. The demand for farm products rises relatively slowly as the national income rises. But productivity in agriculture -- the amount that each farmer can produce -- has been rising very rapidly, even more rapidly than outside of agriculture in recent years. As a result the number of farmers required to meet the demand for farm products has been rapidly declining. Our economic system has a way of bringing about this adjustment. This way is to make agriculture relatively unattractive and thus impel or induce a movement out of agriculture. There are, however, two difficulties with unrelieved reliance upon this mechanism. First, if the required adjustment is great the decline in incomes may be so extreme as to retard the adjustment. Extremely low incomes create a strong incentive to move but also reduce ability to move. Second, even if the relative loss of income is not that severe it is nevertheless painful, and it would be desirable to alleviate this so far as is consistent with the necessary adjustment.

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The national decision not to leave the process of agricultural adjust-
ment entirely to the mechanism of the market has, in our opinion, been wise
and proper. It was not at this point that the error was made. The error was
made in the selection of the means by which the market process was to be
supplemented -- namely, government purchases to support the prices of
agricultural commodities above the levels they would have reached in the
market. For the poorest farmers, who produce very little, and who have the
most to gain from moving out of agriculture, this program does little. The
amount or product that they sell is so small that the higher price due to govern-
ment support adds little to their incomes. For example, it is estimated that
the benefit from price support for the 2.7 million farms that sold less than
$2500 of product each average $109 in the fiscal year 1956-57.

On the other hand, for the commercial farmers who market almost all
of the farm product, the price support program tends to retard the exodus from
the farm. While the program has increased total farm income somewhat, it
has also held up the number of farm families and on balance has probably
added little to income per farm family.

The proper approach would be to concentrate efforts and funds on
measures to assist the necessary adjustment. Most important, the farmers
with the lowest incomes, smallest resources and least product need help in
shifting to nonfarm occupations. This help needs to be envisioned on a
massive scale, commensurate with the billions now being spent on farm

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programs. Assistance to adjustment would have the great advantage over present programs of holding out some hope of solving the problem and thus coming to an end.

We should not be timid about dealing with the problem in a straight-forward way. Low-production farmers could be given a cash grant to facilitate transfer to urban employment. Purchase of submarginal lands would not only help reduce the number of unproductive farmers but also add to the nation's forest and open park areas. In addition every effort should be made to induce industry to settle in rural areas and to inform farmers of job opportunities in cities.

The withdrawal of submarginal farmers would increase the opportunity of the efficient commercial farmers to earn reasonable incomes in the market. But assistance should be provided for some of these farmers to move and in addition production should be temporarily curtailed while surpluses are washed off. Both of these ends could be sewed by federal leasing of whole farmers for a transitional period of, say, five years. During this transitional period price supports would be gradually withdrawn.

The proper objective for an agricultural support program for prosperous farmers is not to support their *prices* but to underpin their *incomes* in times of disaster. Under such a policy, payments would be made to farmers whenever prices declined to disaster levels or volume of output is reduced because of major physical causes. But the crops would move at market prices. The

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objective would thus be to insure the efficient farmer against severe economic and natural hazards, but not to induce him, by means of a fixed price umbrella, to produce beyond the capacity of the market. In addition to this major reform of the price-support program, the continuation and expansion of farm credit programs and self-financing crop insurance should be given high priority.

Any proposal for assisting movement off the farms will be criticized as a proposal to push people out of their preferred occupation and way of life.

We wish to make as clear as we can that our proposals have no such implications. A million people each year leave the farms for the cities. We believe that there are many more who would like to leave if they had funds and guidance. We propose to help them if they wish, but to force no one.

We discuss agriculture here at some length in part because it is a large and important sector of American life. But we also believe there is an extremely valuable lesson in the case of agriculture. There are other cases, and there will be more, where economic growth and economic change call for painful adjustments in particular industries and regions. There will be an attempt to cushion these adjustments, and in many cases it will be proper to do this. But there is a right and a wrong way to cushion adjustments. One is to assist and expedite movement in an efficient direction. The other is to provide relief that retards the adjustment. Down this route lie ever-mounting costs, from which those who were to be helped and the economy as a whole will suffer.

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C. <u>The Direction of Investment</u>

Basic to our past success in raising living standards through increasing output per man-hour has been the increase in the quantity and quality of the vast variety of capital goods that enter into production and distribution. For the most part, decisions as to whether capital goods should be acquired, what types shall be installed, and how they will be used, are left to the owners and managers of the firms that will use them. Opportunities for sales and for cost reduction, focussed through their expected effects upon profits, and conditioned by the firm's access to investment funds, largely control the individual firm's decisions, and for the nation as a whole the total new investment is limited by our willingness to save by foregoing consumption of current income.

In most of the broad area of business investment, this system has served us well, leading to an allocation of capital among industries that is proportioned to our needs, to a rapid increase in our total stock of capital goods, and to a satisfactory rate of replacement of outdated equipment and structures by improved types. There are, however, several sectors of the economy in which the allocation of investment is not satisfactory, to which we now turn.

1. <u>Access to Investment Funds for Growing Businesses</u>

In the United States there are some 4.3 million nonfarm business
firms exclusive of the professional services. This is the largest total in
our history. More than three-fifths of these enterprises were engaged in

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retail trade or service activities and the overwhelming proportion of them
was very small. In 1956, which was fairly typical of recent years, some
381,000 new businesses were established, 327,000 businesses were discon-
tinued, and an additional 327,000 firms were purchased, reorganized, or
otherwise transferred to new owners. Such figures indicate that there is no
shortage of firms, or of new firms, in the business population. They may also
indicate a degree of turnover, resulting from managerial inexperience or lack
of competence more than from any other single factor, that is wasteful; but
this is more of a personal than a national problem.

There is, however, ample evidence that smaller and medium-sized
businesses, and particularly manufacturing firms, that have successfully
established themselves in their industries and have solid prospects for growth
are unable to obtain financing for the increase of their plant and facilities,
inventories, and working capital that is necessary if they are to expand their
operations. The unsatisfied need is primarily for long-term equity or loan
funds, not short-term bank loans. The result of inability to obtain capital
funds too often is that the opportunity for expansion is lost, or else the firm
merges with a larger enterprise that can command the necessary resources.
The past few years have seen a wave of such mergers. The result is that
there are too few cases of independent firms newly entering the category of
"big" or even medium-sized business. This is not a condition that is con-
ducive to vigorous competition or to economic growth, and is rightly viewed
as an important problem in the allocation of capital resources.

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What chiefly distinguishes the present situation from that of an earlier day, when most of our existing large firms attained their leading positions, is the high rates of taxation on corporate and personal incomes. These greatly limit the amounts that firms and their owners can save for reinvestment from business profits. Unfortunately, so long as general tax rates remain high, it is not easy to revise the tax structure in ways that would help expanding firms to grow from internal sources of funds and yet maintain equity between the taxes levied on the incomes of their owners and those of other taxpayers.

Smaller firms clearly have difficulty in obtaining long-term investment funds from outside investors. To some extent, an unreasonable insistence that all new funds be provided on a debt, rather than an equity, basis so that the owners will not have to share control with newcomers is a contributing difficulty. Beyond this, however, are real obstacles to obtaining long-term loans, or selling stock, on terms comparable to those available to larger businesses. First, the firm, its record, and its potentialities are not known to potential investors (or to investment bankers who may act as intermediaries if a security flotation is undertaken), and outsiders will not invest their money without a special investigation that at best is costly, and will be reflected in the expense to the firm of obtaining funds, and more often will not be undertaken at all. Second, the risk of loss usually is genuinely greater than in larger and more diversified firms, and even though, particularly

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in equity investment, the potential profit if things go well may also be much
larger, there evidently are not many investors seeking such relatively specu-
lative outlets for funds and they insist upon terms favorable to themselves.
Third, there is a substantial element of fixed costs in a security flotation, so
that expense per dollar is much larger on a small flotation than upon a large or

If we are to preserve fluidity in the composition of our population of
larger firms, means must be sought to make funds for expansion more readily
and cheaply available to growing enterprises. One promising approach is the
establishment of regional investment trusts that can expertly appraise the
prospects of firms seeking funds for expansion, advise them, and make long-
term investments in them. The funds for the investment trust would be mainly
provided by the public's investment in the trusts, with the public gaining the
advantage, as compared with direct investment in the firms, of expert analysis
and diversification of risks. Experience indicates that success in this approach
requires governmental sponsorship and participation in providing at least the
initial funds for the investment trust, and possibly some special tax treatment
on retained earnings, as well as assurance that the trusts will in fact seek
out risky investment of the type intended and not turn to more conventional
outlets.

This approach, though promising if vigorously pursued, is not likely
to meet the problem fully, and additional solutions must be sought.

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## 2. The Transportation Problem

The several branches of the intercity transportation industry offer an unusual example of a situation where the existing market mechanism has not operated to allocate investment well. Instead, we have overinvestment in some industries, underinvestment in others, failure to replace obsolete facilities where replacement would far more than repay its cost, and seriously unbalanced investment within single transportation systems. The pattern of government regulation of the transportation industries, and the division of responsibility for investment decisions between government and private firms, have contributed to this result. The heart of the difficulty, however, has been in the retention of an outmoded structure of railroad rates.

No pricing structure has ever been remotely as complicated, but the railroad rate structure, adopted when the railroads had what was essentially a monopoly of internal transportation, was and is predominantly a discriminating structure based upon the value of the service. When the price pattern was adopted railroads had excessive line capacity except on very limited mileages of high density lines. Consequently it was supposed that additional traffic would occasion a direct increase in only one-third to one-half of the total expenses. Hence volume was to be sought, and volume could only be had by making it possible for low-grade commodities to move in large quantity. If, to achieve this, large volumes of bulk traffic were to be taken at less than average costs, then other traffic must pay rates

[y]

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higher than average costs. The volume of such high-value traffic was limited, so very high rates, sometimes running at six to ten times average costs, must be assessed when possible, right up to the point that the movement would "dry up." Moreover, in the absence of competition from other bulk transporters, lower rates for quantities greater than a carload were generally unnecessary and they were frowned on by public authority as likely to give an advantage to large industry. Emphasis was upon total revenue and, if need be, an upward lifting of the whole structure could be used to secure added earnings.

This was a rate structure made to order to stimulate displacement of rail traffic by the newer carriers, yet it has been little modified to the present day. The fact that the value of railroad service today is most often set by the cost of transporting by another method is only beginning to be recognized.

Trucks became an effective instrumentality of long-haul transportation in the early thirties, and could then offer service generally superior to the railroads -- door to door, often faster, more frequent and flexible, and adjusted to smaller loads. Given superior service, the trucker can secure profitable traffic at rates the same as rail, and need not carry traffic that will not be profitable to him. He therefore concentrates on securing the traffic on which rail rates are above truck cost. On the short hauls his costs are lower than rail because of the high terminal costs of the railroads, but perhaps at 50 miles on truckloads or 300 miles on less truckloads (the figures are only illustrative) his costs forge above rail costs until on very long hauls they may run four to six times as high as rail costs on truckload traffic. Given rail rates at such

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levels, and there are many, the truck can still take at least the highest rated traffic on hauls right up to transcontinental length. And this it has done with a vengeance.

On the other end of the scale, the regular sustaining big-volume movements of bulk traffic have also undergone a selective diversion to water and pipeline transportation. Certain bulk commodities moving in large and regular volume, such as coal, were profitable to the railroads. What made them so were those portions of the traffic that could be concentrated into heavy train loads for long-haul movement. Since rates were adjusted to the carload, while movement was often by the trainload, latitude was again afforded for the more profitable traffic to be drawn away -- to the pipelines and barge lines. While in most situations where traffic has been lost the latter carriers have truly lower costs, there is no question that rail movement in multiple-car lots is substantially cheaper than in single-car loads, and that some of the traffic would have been preserved under a different rate structure.

All in all, it is the rail traffic which produced the highest net revenues, apart from the very short-haul traffic, that has been lopped off. The result has been disappearing net railroad revenues leading to emergency general rate increases. Moreover, in deference to the outmoded "value of service" rate structure, rate increases on the relatively unprofitable traffic have been held down until whole commodity groups appear to be moving at less than out-of-pocket costs. Hence the increases on vulnerable traffic are made greater than

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would otherwise be necessary and fuel is added to the fire. A rate structure founded upon cost as a major determinant might have avoided the larger part of the increases in railroad rates granted since 1946. In all likelihood, the cost of transportation relative to other goods and services would have fallen, not risen.

The consequences for investment of the obsolete value-of-service rate making by the railroads have been twofold: First, billions have been invested in facilities of other carriers for hauling traffic at a cost higher than that of the rails. Second, the railroads have been deprived of earnings, financial anemia has resulted, and arrested development is a consequence. The railroads have been unable to do more than make those improvements that yield enormous savings in cost. Had not conversion to diesel power yielded such savings, it is improbable that financial failure of much of the railroad system could have been avoided. Investments in signals, sidings, yards and terminals, servicing and shop facilities necessary to enable diesel power to be used at all have been carried out. Those necessary to secure maximum economy and service from the new power have lagged badly. The nation has been deprived of the best of which railroads are capable and service has remained inferior. Yet the railroads continue to produce 42 to 45 per cent of our intercity ton miles, including coastwise and intercoastal water transportation in the reckoning. Hence it is a matter of no small concern that our railroads are in very large degree obsolescent.

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The process by which investment is allocated among the most productive users is severely upset when a significant portion of the investment in an industry becomes the responsibility of government. For such a development removes capital investment from the usual market controls. Railways and pipelines rely entirely on private sources of capital. Trucks, airlines, barges, and ships use fixed plant provided largely by government. No method has been found to keep the private and governmental investment sectors in balance. Although certain obvious controls are exercised upon the rate of government investment and certain measures of need have been developed in apportioning investment to particular projects and in determining capacity and other standards, economic analysis of proposed improvements tends to be loose if employed at all and investment in each of the three major segments - highways, airways and airports, and rivers and harbors -- tends to be dealt with in isolation. Projects rarely have to stand comparison with opportunities open in other related fields and are never, under the circumstances, subject to valid comparison with the productivity of investment in the private segment.

Provision of basic facilities by government is necessary in those cases where this method is now employed. The issues of subsidy could probably be disposed of by the assessment of properly adjusted user charges. And such charges would tend to bring the using industries into the arena in opposition to projects which manifestly lack economic merit and provide them as well with some voice in connection with project priorities in the allotment

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of funds generated by such charges. But such constructive developments
will not alter an important basic difference between transportation industries
which provide and own their own permanent way and those which do not, but
use instead governmentally provided facilities. For with governmental owner-
ship of the facilities payment for the use thereof is converted into a variable
expense subject to close control by adjustment of use, the risks of long-term
investment are avoided, and sunk costs of any consequence are rarely encoun-
tered. The industries so supplied enjoy a flexibility in the face of cyclical
phenomena of which the privately financial segments are deprived, and that
fact tends to be interpreted as enhancing the risk associated with private
investment where industries of both types are competitive. Public policy in
the regulatory realm as yet fails to take account of these phenomena just as it
ignores the absence of user charges in some instances and their uneven impact
in others.

Transportation industries provided by government with basic facilities
are not free from difficulty with respect to the rate of technological advance.
Private companies using government facilities tend to replace their equipment
with more modern equipment at close intervals. The progress of the basic
facilities which they use, particularly airways and airports and highways,
but also inland waterway channels and port facilities, is **slower, carriers**
are prevented from getting the full benefit of technology, service quality lags
and safety suffers. Railroads at least have all elements of transportation

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service -- way, power and carrying capacity -- under the control of their own managements and if available capital does not permit the whole to be advanced so rapidly as technological development occurs, then at least a compromise can be developed in the light of all the circumstances. This must be borne in mind when consideration is given to any proposals which would, in the railroad industry, separate responsibility for the permanent way from that for power, equipment and the conduct of operations.

Some of the lines along which reform must come are apparent. It is necessary to establish a greater neutrality of government policy with respect to competition among carrier types. It would be well to unify all economic regulation by government in a single regulatory agency, while bringing together the scattered promotional and administrative functions in another. Conditions should be developed that guide the shipper toward that carrier or combination for each service to be performed that can do the most efficient job, cost and service both considered. It is therefore urgent that the pricing of transportation move much more rapidly toward a reflection of the relative costs of the several agencies so that shippers, in their purchases of transportation and in their decisions whether to transport for themselves, will be apprised of the cost relationships and can weigh these against service advantages or disadvantages for the particular purpose in view. With a different distribution among agencies, the present volume of transport could be performed at an aggregate cost a number of billions annually below that

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encountered at the present time. For this, carrier initiative is paramount,
but support from regulatory commissions, removal of taxes that discriminate
against common carriage in favor of private transportation, and other adjust-
ments in government policy also are needed.

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3. <u>Natural Resources and Atomic Energy</u>

Our natural resources of raw materials and mineral fuels comprise an important part of the nation's capital stock. Natural resources differ from man-made capital goods in that metals and fuels removed from the ground and used up cannot be physically replaced. In a broader and more relevant sense, however -- enhancement of the society's ability to satisfy its needs at minimum real production costs -- the supply of raw materials can be increased, and this has in fact long been going on. It has been accomplished in several important ways. First, by more intensive effort to discover previously unknown deposits and by the development of better ways of locating deposits. Second, by discovery and application of more economical methods of mining and extraction, and by the use of more and improved capital goods that make possible exploitation of lower-grade deposits without a corresponding increase in cost. Third, by improvement of transportation facilities to make possible the use of resources that are remote from markets. Fourth, by improvements in the way that raw materials and fuels are utilized, so as to achieve the same end result with less input of materials and fuels. Fifth, and in recent decades most important of all, by development of new synthetic materials and new natural products, such as aluminum, that are relatively abundant, and new ways of using such

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materials, to diminish the need for materials that are scarce; and
by development of new energy sources. In applying all of these
methods we are not limited to the resources of the United States.
Through international trade and the interchange of information we
can, at least in time of peace, share in the use of the natural
resources and technological knowledge of most of the world.

Conservation of natural resources, in the sense of not
wasting nature's endowment, is a legitimate goal of society.
It is important to recognize that there is no general reason for
supposing that, where ownership of natural resources is in private
hands, the rate of use will differ from that which is in society's
best interests. If current production costs and prices, and the
relative valuation to be placed on current and future production
as determined by the interest rate, are determined by market
forces, the private owner has the same interest as society in
using production methods that minimize economic cost and in
balancing present production with the needs of the future. Situa-
tions, involving liquids and gases, where one owner can drain
the property of another, upset the basis for such logical calcula-
tion, and where they exist, have necessitated state regulation to
avoid a race among owners to drain the field before others do.

Two resource items that may pose the most serious problems
over the next two decades are water and oil.

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In the last half-century the number of water users in American cities has doubled, while their use of water has increased five-fold. By 1975 the increase in our population, coupled with the growth of industries which require large quantities of water, will more than double the current rate of water consumption. The enormous amounts required by industry are illustrated by the fact that it requires 300,000 gallons of water to manufacture one ton of rayon, and the rayon industry in the U.S. turns out 600,000 tons of rayon a year. The nation's water problem, already serious in important areas, may well become, in the next ten to fifteen years, one of the most difficult issues facing our economy.

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

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Of even greater immediate urgency than an improved water technology is the need for political and social action. The utilization of our water resources calls for ingenuity in devising the proper public instruments. The problems of the Connecticut River and the Colorado River are neither so similar that they can be easily handled by a single agency, nor so localized that each can be adequately dealt with solely at the state level. Typically, water problems are _regional_ problems, and can best be dealt with by specifically designed public agencies. The Port of New York Authority's handling of regional transportation problems is an example. In addition to these regional bodies, a degree of national policy formation and coordination, centralized in one federal agency, is essential for such nation-wide problems as water pollution, and for research into technological problems of water conservation.

Unlike water, present supplies of oil are ample for our current requirements. Estimates of the future oil supply vary widely: some projections indicate that we will be able to take care of our needs only for another few decades; others promise us a huge -- although yet undiscovered -- supply for indefinite future use. One immediate problem is to decide the degree to which we should rely on our known domestic fields as against oil imports. Greater reliance on imports may lessen the incentive for exploration within our own borders. Reduced reliance on imports will result

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in a quicker depletion of our known domestic reserves. Which
course would, on balance, mean larger known reserves at any
future date is not certain. However, it seems to us that the safer
policy from the standpoint of conservation is to eliminate the
quotas recently imposed upon oil from abroad and to considerably
enlarge oil imports. The ensuing benefits of lower prices to con-
sumers and strengthened international ties with friendly foreign
nations also lead us to favor this course.

The more efficient use of oil would have the same effect
upon husbanding of our domestic oil supply (as well as upon weak-
ening incentives to new discoveries) as would larger imports.
Research to this end has promising prospects. For example, better
oil and gas recovery methods could add another 10 to 20 per cent
to our domestic resources without the need to discover another new
field. The redesign of automobile and other engines could conserve
our oil resources significantly by utilizing their power more
efficiently. In addition, if the cost of extracting the oil can be
reduced, the use of domestic oil shale, which exists in gigantic
quantities, would insure us of an ample supply of petroleum.

Consideration of the adequacy of resources also highlights
the importance of research into entirely new sources of materials
and energy.

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Among the new energy sources, nuclear energy offers great promise. The atomic energy efforts of the United States thus far have been dictated by two major considerations: first, by the high priority of establishing a stockpile of weapons and, second, by the lack of incentive to find a new source of energy in a country which has today, and will have for some years to come, plentiful low cost power from coal, oil and natural gas. Until very recently such reactors as were built were called "production" reactors only because their mission was to "produce" fissionable material for use in weapons. A secondary effort, namely that of finding a new power source for our submarine fleet, resulted in the construction of a series of propulsion reactors -- at a high cost per energy unit produced, but attractive to the Navy in that it gave unlimited range to nuclear propelled units of the fleet.

The emphasis on reactors to produce heat for the generation of electric power is of very recent origin, with the first full-scale unit completed in 1957. From the standpoint of our own economy, this use of atomic energy could be approached in a somewhat leisurely fashion. Although there are some regions in the United States which might be termed relatively high-cost fuel areas, this country, unlike many abroad, will have for some years to come plentiful low-cost fuel supplies. There has been no immediate need, therefore, for a new source of fuel for power. In addition,

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there are many technical problems involved in the development of
reactors for this purpose. Further, while we know that capital
costs of such facilities are large, the life of such facilities is
unknown and, consequently, the costs of power from such facilities
are unknown.

Many efforts have been made to estimate the extent of the
construction of large nuclear power stations in the U.S. in the next
ten to fifteen years. In the absence of a considerable technological
breakthrough, it is probably fair to say that the earliest possible
date for economically competitive power in the United States is
1964, the maximum 1970, and that by 1968 we might expect that
annually there might be installed between 250,000 and 1,300,000
KW, with the number of installed kilowatts increasing annually
thereafter so that in the 1970's very large blocks of power (from
1 million to 5 million KW) would be produced in large nuclear
power stations.

It should be noted, however, that by the 1970's the signi-
ficance of nuclear power on the economy will not reside alone in
achieving costs competitive with fossil fuels, but in the conserva-
tion of what may then be a short supply of oil and a diminishing
supply of coal.

Judging by the rate at which uranium has been discovered in
recent years, there will be sufficient supplies to take care of the
world's needs for many years to come.

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Of course, the United States atomic energy program cannot be considered entirely apart from the international picture. The demand for the rapid development of atomic power is urgent in several of the industrialized countries abroad. Furthermore, the United States, having established a moral, psychological and technical lead in the "Atoms-for-Peace" program, has both an obligation and an opportunity to assist in supplying the world's requirements for power. It was concluded at the "Atoms-for-Peace" conference sponsored by the American Assembly at Arden House in October, 1957, that:

"In the United Kingdom the requirement for energy is far outstripping coal production. Anticipated increases in coal production through large investment of funds in modernization of the mines will fail to fill the gap; it can be filled only by other sources of energy -- oil or atomic energy. Increased imports of oil constitute an unacceptable strain upon Britain's international balance of payments. Moreover, recent developments in the Middle East have brought home the dangers of too great a reliance upon oil from that area. The result has been the adoption of a policy of rapid construction of large-scale power plants initially of the Calder Hall type which is in operation.

"In Western Europe comparable needs for increased power resources have been exemplified by the creation of EURATOM, which is expected to begin functioning by the first of the year and to encourage the construction of atomic power plants as rapidly as possible. In the Soviet Union there is an active reactor development and construction program. Among the other heavily industrialized countries, similar steps are planned in Japan. Even in the less industrialized areas, for example, in Latin America and in the underdeveloped countries of Asia as well as in the Middle East, atomic studies are under way."

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In the main, therefore, the American technology can be most fully used in the power-short or high-cost power countries abroad during the next eight to ten years, at which time the resources of the industry can, in all probability, be devoted mainly to production for use in the United States.

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

Another potential source of energy should be referred to at this point. It may be possible to harness for peaceful uses the so-called fusion or thermonuclear reaction -- the process by which energy is released in the H-bomb. In widely separated laboratories in many countries, research work is proceeding in this field. In 1958 one can only guess whether such efforts will be successful within a period of the next ten to fifteen years, and if successful no one can know at this point whether the costs of a thermonuclear power plant would be more or less than those from a fission reactor

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or from orthodox fuels. Significant and highly complicated
technical achievements will be necessary for success; and
rewards of success, if measured by costs, are unknown.

It seems likely that in the next ten to fifteen years
far greater utilization will be made of solar energy, and one
of its possible applications will be in the desalting of sea
water and brackish water. If sufficiently low costs could be
achieved, a great contribution could be made to solution of
the water problem of much of the United States.

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4. Government Investment

Government investment in transportation facilities, schools and public buildings, irrigation and flood control projects, parks, research facilities and many other types of public capital are as vital to economic growth and living standards as private investment.

The absence of the market determinants that guide private investment makes selection of the appropriate scale and composition of public investment inherently difficult, and in many, though not all cases, the very qualities that have helped to place certain types of investment within the sphere of public responsibility compound the difficulty. Among these may be mentioned the fact that benefits may not be easily measured in dollar terms; the expectation that benefits will be widely dispersed and the costs not easily charged to beneficiaries; and the fact that much government investment is in projects expected to yield benefits and involve costs extending into an uncertain future.

If intelligent choices are to be made, however, there is no alternative to an attempt, however difficult, to compare the benefits that will flow from each proposed expenditure with its costs.

Where beneficiaries can be identified and charged for services, the imposition of user costs may provide an appropriate means not only of assessing costs but also of obtaining a basis, through revenue estimates, of appraising the scale and composition

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of investment to be undertaken. Transportation facilities, to which reference has already been made, offer a hopeful field for extension of this technique, and the public roads legislation of 1956, providing for financing of the interstate highway system from user charges, represented a sizeable step along this course.

The benefit-cost ratios computed on proposed water-resource projects of the Bureau of Reclamation, the Corps of Engineers, and the Department of Agriculture represent another promising approach. The effort here is to determine whether, and by how much, the net additions to national income, or benefits that will result from a project, exceed costs.

As applied, these calculations appear to have suffered from certain defects. In addition to direct benefits, which correspond to market values or their equivalents, large indirect benefits are claimed. These consist in large part of the value of work that will be done in other industries, such as processing and marketing of crops to be grown on land to be irrigated, as a result of the federal project. Since the resources so used ordinarily would not otherwise be idle, there is a tendency grossly to exaggerate indirect benefits. Another difficulty is in the choice of interest rates to be used in discounting future benefits and costs to judge whether a proposed long-term investment is worthwhile.

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The tendency is to use the interest rate paid on the federal debt,
but a strong case can be made that the yield on private invest-
ments, which is ordinarily much higher, is the relevant comparitive
rate, since it indicates whether a government investment is as
worthy of being undertaken as private investment.

Such defects are remediable, however, and other fields
should be sought for extension of efforts to carefully evaluate
benefits and costs in a similar way.

The degree of success we achieve in devising ways to
improve investment decisions in the areas of governmental
responsibility, state and local as well as federal, will influence
importantly both the rate of our economic growth and the enjoy-
ment we derive from it.

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V. THE USES OF GROWTH

The possibilities for the future growth of the American economy are not limited to the 4 per cent annual rate of growth achieved in the past decade. Even if we do not fully achieve our maximum potentialities, the growth we can reasonably expect -- barring nuclear war -- is large. Thus we are entitled, in fact, obliged, to ask how we are going to use this increased product and income.

We do not ask this question in the sense in which it was asked 25 years ago. Then there were some who questioned whether we could utilize growing product of a growing economy at all -- whether there could be a demand for all that output, sufficient to keep the system running. Today we know that there is and will be a demand sufficient to take all the product, and that this demand will express itself in markets if we manage our financial affairs with reasonable sense.

The problem with which we are concerned is to determine the best way to use the much enlarged product that economic growth will provide.

With respect to the largest part of the total product, the answer, in general terms, is clear. It will be used by the people who produce it -- just as the largest part of our present output is used. In the process of production, incomes equal to the value of the product are earned, mainly by individuals and to a much smaller extent by corporations. Some of this income is taken from individuals and corporations through taxation, but most of it remains

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with them for their own use. The largest part of what remains they spend
for their own family consumption, as they wish. A smaller part they save
and invest.

This is not only how most of our national product is now used and
the way in which we expect most of it to be used in the future; it is also the
way in which it _should_ be used. There are several reasons for this. First,
as we have noted earlier, an individual's right to his product, although not
absolute, is one aspect of the idea of justice in our society. Second, the
individual's free use of his own income is an essential ingredient of indi-
vidual freedom. Third, the individual's freely chosen use of his income is,
in general and subject to some reservations, most likely to yield him maxi-
mum satisfaction. And fourth, this is the system most likely to yield a sus-
tained high volume of output.

But even for that part of the total use of the national output that is
left to the free choice of individual income earners, there is more than this
to be said. For while we recognize and insist upon the value of free indi-
vidual consumers choice, we also recognize that some free choices are
better than others. To start with a most obvious case, everyone recognizes
that some diets are better than others that a consumer might freely choose,
although the best diet will not be the same for every one. This is also true
of choices of houses, clothes, automobiles, entertainment and all the other
choices the consumer makes. Some are better than others, in the sense of
being more satisfying and contributing more to his capacity for future

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satisfaction. There is no reason to think that he will automatically make the best of free choices, even though we agree that his free choice will be better than any imposed choice.

How the free man may be induced to make the best of free choices -- by means consistent with his freedom, which excludes force and undue persuasion -- is one of the eternal problems, which appears not only in consumption but also in politics and in other aspects of life. Concern with this problem explains, in part, the critical role of education in the idea of the American system. For education is to enable the free man to choose well. And as economic growth increases the range of the consumer's choice, and his problems and opportunities with it, the need for more and better education also increases. But education is not the only external influence upon consumers' choice. Media of public information, churches, literature, arts, the example of leading individuals, as well as the activities of producers and distributors, including advertising, have great influence. And with this influence goes responsibility -- or should.

There is little that can be said about the improvement of free private consumer choices in general -- except that the maximum freedom and variety in discussion, evaluation and criticism of our ways of life must be encouraged. To discuss the problem in detail would carry us far beyond the scope of this paper. We want, however, to emphasize one point. Concern with the uses of our national output is not merely concern with public uses, and does not necessarily imply that public uses should be expanded relative to private uses.

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A. <u>Government Uses of National Output</u>

In 1957 government expenditures -- federal, state and local -- were a little more than one-fourth of gross national output. Roughly speaking, one-fourth of gross national output was bought by governments themselves or by private individuals out of incomes transferred to them by government (including social security benefits, veterans pensions, and so on). Many of the most critical and most controversial questions about the use of our growing national output are questions about the scale and character of government expenditures.

These questions will have to be answered by evaluation of particu-
lar existing and proposed expenditures of government. They cannot be
answered in general. However, certain general considerations are rele-
vant to decisions in particular cases:

1. The use of output by or through government is an alternative to other uses. Foregoing these other uses is the main cost of government uses. Government is not a means of getting something for nothing, so far as the nation is concerned.

2. There is no general rule that a private use of output is superior to a government use -- or vice versa. However, we do attach value to the free and private character of individual's uses of their own income and do not substitute public uses except for very important purposes.

3. There is no critical limit beyond which government expenditures cannot increase without catastrophic effects. The attempt to invoke

times seniority increases without corresponding effects. The attitude of the government should

3. There is no critical point beyond which government expenditure should not abate. Public debt should be very important. Suppose the free and private character of individual's race of their own income to a government use - or vice versa. However, we do attach value to it. There is no general rule that a private use of output is superior so far as the nation is concerned.

1. The use of output by or through government is an alternative to decisions in particular cases: answered in general. However, certain general considerations are relevant to existing and proposed expenditures of government. They cannot be

These questions will have to be answered by evaluation of particular character of government expenditures.

the use of our drawing national output are questions about the scale and the source of the most critical and most controversial questions about government (including social security benefits, veterans pensions, etc.) themselves or by private individuals out of incomes transferred to them by speaking one-tenth of gross national output was bought by government were a little more than one-tenth of gross national output. Roughly, in 1937 government expenditures - federal, state and local -

A. Government use of National Output

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March 15, 1938
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such a limit -- at 25 per cent of the national output, or a $70 billion federal budget -- is an attempt to invoke an arbitrary substitute for thought and decision. On the other hand, there is no reason for believing that as a general proposition the proportion of the national output used by government should increase as the national output grows -- as is frequently said.

4. Any public use of the fruits of economic growth should not be at the expense of those uses of growth -- public and private -- that make more growth possible. One implication of this is that only imperative public uses of output would be worth making at the expense of a substantial reduction of private saving.

In 1957 about 80 per cent of government expenditures went for four main functions: national security, education, productive physical assets, chiefly roads, and welfare programs, chiefly social insurance. These are all clearly appropriate, and in our opinion necessary functions of government. We have no doubt that expenditures for all of these functions should and will increase -- assuming, in the case of national security expenditures, no substantial progress in agreement on disarmament. But at what rate and in what specific directions they should increase can be answered only by detailed study of particular programs. Even with such study, answers cannot be given very far in advance.

This Panel has already issued a report, after long examination of the problem, on expenditure requirements for the military aspects of

This panel has already issued a report, after long examination of such study, assumes cannot be given very firm in advance.

be answered only by detailed study of particular programs. Even with
But at what rate and in what specific directions they should increase can
City expenditures, no material progress in agreement on disassembly.
These are all clearly appropriate, and in our opinion necessary functions
assets, chiefly roads, and welfare programs, chiefly social insurance.
Four main functions: national security, education, productive physical
In 1937 about 80 per cent of government expenditures went for
trial reduction of private saving.

Public uses of output would be worth making at the expense of a suboptimal growth possible. Our implication of this is that only imperative, at the expense of those uses of growth -- public and private -- that make it not possible for any public use of the fruits of economic growth should not be entirely said.

Government should increase as the national output grows -- as is freest
that as a general proposition the proportion of the national output used
thought and decision. On the other hand, there is no reason for believing
federal budget -- is an attempt to invoke an arbitrary substitute for
such a limit -- at 82 per cent of the national output, or a $20 billion

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March 13, 1928
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national security. We concluded that expenditures for certain phases of
our military programs must increase at a rapid rate -- perhaps $3 billion
a year -- to meet minimum requirements of our national security. We do
not regard this figure as setting the necessary rate of increase for total
national security expenditures. We called attention in our report to the
possibility of curtailing some less essential parts of our military estab-
lishment and to the need for operating the whole establishment more
efficiently. This should provide some offsets to the increases we
recommend. On the other hand our recommendations did not include the
probable need for a substantial increase in foreign economic aid and the
possible need for large expenditures for bomb shelters. Thus our recom-
mendations leave a range of uncertainty in which decisions about national
security expenditures will have to be made. However, looking to 1965,
we believe that expenditures for national security will approximate $70
billion, compared with the $46.5 billion actually spent in 1957.

The subject of education is under consideration by another Panel.
However, two points are perfectly clear. The first is that the improve-
ment of education is from every point of view one of the most valuable
uses to which we can put our growing national income. Whether we view
education as an investment in increasing productivity, or as an invest-
ment in national security, or as a means of bringing about better use of
the higher incomes we expect, or as an object of consumption, satisfying
in itself -- in whatever way we look at it, the payoff is large. The

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second point is that, while standards of desirable education will undoubtedly rise as time passes, even to meet the standards that are now generally recognized will be expensive. To provide education for a growing number of school-age children, for more average years per child, and to attract teachers of sufficient quality to make this huge investment of student-years worthwhile will cost much money. How much we shall not presume to say at this point. But it seems to us that a realistic point of departure, would be to anticipate that expenditures in 1965 will be double the $13 billion spent in 1957.

In order to have sustained high economic growth we shall require increased investment in the productive assets provided by government, just as we shall require increased private investment. In principle, and to a considerable extent in practice, decisions about the scale and character of public investments can be made by the same standards that are appropriate for private investment. That is, the benefits can be estimated in dollars and cents and compared with the cost of the investment, to find out whether the rate of return is as large as the rate of return on other investments. In many cases the value of the benefits can be estimated from the amounts recipients of the benefits would pay for them. Such a test can be applied to proposed public investments on a case-by-case basis; it is meaningless when applied to public investment in total or to large categories, like roads. The main requirement -- not well met in practice -- is that this economic test be applied as rigorously and objectively as possible.

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B. <u>Raising Minimum Standards of Living</u>

The fourth major function of government expenditure -- the welfare function -- is in a different state from the functions we have just listed -- national security, public investment and education. For these latter functions there is some accepted standard of need and some understanding of the nature of public responsibilities. And while these may not be sufficient to yield the right answers about the amount of expenditure, nevertheless a process of public discussion goes on that tends in the right direction.

But none of this is true with respect to the welfare function. We have always recognized, individually and socially, that the existence of families living below some vague and changing standard of decency and dignity is a problem. We have not always been clear about why this was a problem. There has been a tendency to be "hard-boiled" about it and find the problem in economic or political consequences for the rest of the society -- in economic waste, crime, delinquency, the spread of disease, social and political unrest and the unattractive aspect it presents to the rest of the world. All of this is true, but it tends to conceal the existence of a community conscience that is offended by extremely low incomes and regards them as wrong or, in the words of one observer, "unlovely."

The awareness of the problem has been reflected in an infinite variety of efforts to deal with it. In large part these efforts have been

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private, by individuals and philanthropic associations. But increasingly
the efforts have been governmental, at the local state and federal levels.
These efforts include the whole social insurance system, public assist-
ance programs for the aged, for dependent children, for the blind, relief
for the needy, public housing programs, and so on. Even many programs
of government which are not primarily directed to the problem of poverty
have been much influenced by its existence -- such as the agriculture
programs and the veterans programs.

These efforts, plus economic growth and the maintenance of high
employment, have done much to alleviate the problem. But they have not
constituted a systematic comprehensive approach to the problem; there is
no clear national definition of purpose and no agreement on the location
of responsibility. The problem remains, although much reduced.

The magnitude of the problem is difficult to evaluate. There are
studies that show, for example, that there are (or were in 1956) about
seven million families or single individuals with a year's income of less
than $2,000. But the significance of such a fact is not clear. The con-
tent of life permitted or required with an income of $2,000 or any other
figure varies greatly for families of different numbers, ages, locations
and other characteristics. One of the main steps needed in advancing
progress against the problems is the acquisition of more reliable and
meaningful information on the conditions in which the American people
live.

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Recent studies have revealed that almost all of the families with
very low incomes fall into one of the following categories:

The aged.

The unemployed.

Families with husband and father dead, disabled or missing.

Negro or Puerto Rican families.

Farm families with very small farms.

This is to say, the very low income families are only rarely families con-
taining a male, white urban employed worker. This evidence suggests that
for most of the people now in the very low income groups an increase in
hourly earnings in nonfarm employment would not be of great value. How-
ever, it would be wrong to conclude that higher earnings would not be a
major contribution to solution of the problem in the longer run. The higher
the incomes people earn when they work, the better able they will be
to meet old age, unemployment or disability.

The growth of productivity and production, which we confidently
expect, will help to reduce the proportion of families with extremely low
incomes. But it is also necessary to note that the total number of families
is itself rising rapidly, and even if the proportion of low-income families
declines, the number may remain large. For example in 1955 there were
42.5 million families in the United States. Nine per cent of these --
about 3.9 million -- had incomes below $2,000. It has been estimated

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that the growth of national income will reduce the proportion of families
with incomes below $2,000 to seven per cent by 1965. But there would
still be 3.3 million families in this category.

We believe that it would be highly desirable for the nation to
undertake a systematic and comprehensive effort to raise the minimum
standards of living in this country. Leadership in the effort might be
taken by the Federal Department of Health, Education and Welfare, but
certainly the cooperation of other federal agencies, of state and local
government and of private institutions would be essential. The methods
to be employed would be varied, as the discussion below will indicate.

The effort should have a fairly specific goal, as a guide to action
and test of achievement. The specification of this goal would itself be
a complex matter. Allowances would need to be made for differences in
family composition and location; moreover the goal could probably not be
specified in terms of income alone. However, as a rough indication of
what we have in mind we would suggest the following goal: That no family
in the United States should have an income of less than $2,000 in any
year and that no unattached individual should have an income below
$1,000. We believe that in a country as rich as ours, even when bearing
the burdens imposed by the threat to our national security, it is a worthy
and feasible goal to be able to say that no one lives below these income
levels.

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That this is a feasible goal, in over-all economic terms, may be
seen from a little arithmetic. We estimate that in 1965 the 3.3 million
families with incomes under $2,000 will have an aggregate income of $4.3
billion. An additional income of $2.3 billion would be required to bring
them all up to the $2,000 figure. To bring all unattached individuals up
to the $1,000 figure would require $1.1 billion. Thus about $3.4 billion
of additional income would be required to meet the goal. This is less than
one per cent of the gross national product we may expect in 1965. We are
not suggesting that the problem should be met entirely by the transfer of
income from persons with incomes above the specified levels to persons
below, although we cannot escape the fact that some of this will be
involved, as it is in present programs. There should be fullest develop-
ment of methods more satisfying to the recipients and less burdensome to
the rest of the community than this. We are only pointing out that even
in these terms the burden need not be great.

A comprehensive attack upon the problem would include four main
elements:

1. Increasing the ability of more people to earn income above the minimum.

2. Developing more economical and inclusive means by which people may insure themselves, out of their earnings, against major hazards of indigent old age, unemployment, disability and costly illness.

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3. Providing supplementary income assistance where earnings and insurance are inadequate.

4. Providing certain essential services -- notably housing and medical care -- through public or private group action where this is more economical than individual purchase of the service in the market.

C. Increasing Earnings

In a large proportion of the cases, inability to earn even a minimum income must surely be due to immobilities, rather than to lack of capacity, either innate or otherwise. The obstacles to movement into better paying jobs -- in times of normal high employment when such jobs are available -- are varied, but the following are probably the most important:

1. Discrimination against minority groups, especially Negroes, Puerto Ricans and Mexicans. The limitation of job opportunities for this cause is one among many evil consequences of a very difficult problem, and solution of the employment discrimination aspects of the problem will probably have to go hand in hand with solution of its other aspects.

Experience in federal employment, in federal contracting and with some state fair employment practices legislation indicates that where there is strong leadership progress can be made. Many unions and employers have also played a constructive part. But much remains to be done. A strong combination of economic advantage and moral responsibility calls for unremitting and intensified efforts of both public and private institutions to meet this problem.

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2. Costs of geographical movement to better jobs. This obstacle is probably most significant where the movement is from farm to city or out of chronically depressed mining and industrial areas. We have already mentioned some of the things that might be done to facilitate the movement of farmers. Probably the greatest help to movement out of depressed nonfarm areas would be to provide loans to finance the cost, to be paid back out of earnings in new employment. Consideration should be given to investing part of the reserve funds of the state unemployment compensation systems in such loans. This seems a peculiarly appropriate use for these reserve funds.

In some cases the appropriate solution is not to assist the move-
ment of workers out of depressed areas but to attract new industries to
those areas. To discover the industries for which the particular location
would offer the greatest advantages, to find the firms willing to make the
move and to finance the investment in new facilities -- these require-
ments call for much local leadership, energy and specialized talent.
Some communities have such resources; others have not. The work of
the Department of Commerce, and of such private groups as the Committee
for Economic Development, in providing technical assistance to the pro-
cess can be most valuable.

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3. The improvement of education, essential on so many other grounds, will also increase the productivity and mobility of workers. Probably the most important contribution of education -- in the formal sense of the school system -- is not vocational training -- usually better done on the job -- but an increase in educability and adaptability. A technologically advancing economy is always making jobs obsolete at the same time that it opens up new job opportunities. People who are not flexible enough, psychologically, and do not have enough capacity to learn are in danger of being left stranded by the process.

D. <u>Social Insurance</u>

The greatest advance in maintaining minimum living standards in the past generation, aside from the consequences of high employment and economic growth, has been made through social insurance -- the big programs being the Federal Old Age and Survivors' Insurance system and the State Unemployment Insurance systems. These programs involve some subsidy, in the sense that the covered workers with the lowest wages do not pay the full actuarial cost of the benefits they receive. But this subsidy is not the essence of the systems. The important point is that workers are enabled, indeed required, to set aside part of their current income to protect themselves against some major hazards. This brings about a much better distribution of the individual worker's income over

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the entire period of his life and the pooling of some risks among all the
workers in the nation or the state. Given the income that a worker earns
over his lifetime, the chance that he or his dependents will fall below a
minimum standard of living is minimized.

Essentially similar functions are performed by private insurance,
by employee pension plans and by the new, and still largely untested,
supplementary unemployment benefit systems of some industries. The
government unemployment and old-age insurance systems have played an
extremely valuable role in stimulating the development of private income
-- insurance systems for workers, but there is nothing in the nature of the
problem that requires innovations to come from this source.

No major change in the concept of our governmental social
insurance plans seems indicated, but a number of improvements of the
present structure would be very useful. Two of these concerns our
Federal Old Age Survivors' and Disability Insurance. The first involves
the eligibility age for totally disabled persons. Our experience in regard
to this kind of claim has only begun in the last few years. However, the
present age of eligibility, 50, tends to exclude from benefits precisely
those younger workers who because of dependent children most badly need
assistance. Our goal should be the reduction in the age of disability
eligibility, by successive steps if necessary. This should be combined
with an intensification of vocational rehabilitation programs aimed at
self-support.

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

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

Workmen's compensation has also been a static field of social
insurance in recent years, and is often out-of-date in its awards and
administration. Our best estimates of its coverage range from two-thirds
to four-fifths of employees, and some of the omissions are serious. For
example, agricultural workers who are not covered have higher than
average injury rates as well as higher than average unemployment rates.
In short, there has been conspicuous indifference to workmen's compensa-
tion, and there is a need for renewed state legislative interest in the matter.

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

We shall consider below the problem of meeting the basic needs
of medical care, which is more than an insurance problem. However,
there is one phase of health costs to which the concept of insurance is
more pertinent. These are the extraordinary costs attendant upon a very
serious accident or illness, with a long recuperation period. Here the
newer private "catastrophic illness" plans, covering a high percentage
of all costs over and above those covered by a comprehensive basic medi-
cal care plan, can meet an important need. The cost of this protection,
when spread over a large group, is relatively small -- provided that there
is an underlying <u>basic</u> plan that is broad in the scope of services covered
and that encourages rather than discourages early use of diagnostic ser-
vices and facilities. The rapid growth of private "catastrophic illness"
plans should be encouraged.

E. <u>Supplements to Income</u>

Diligent efforts on many fronts to raise minimum earnings, plus
the continued development of social insurance, public and private, to
make the best use of earnings, will substantially reduce the number of

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families and individuals with extremely low incomes. But it will not reduce the number to zero, at least not in any foreseeable period of time. This fact requires us to think about public assistance -- the granting of public money to people because they are poor. We say "requires" us to think about it because as a nation we do not like to think about "relief," just as we do not like to give it or receive it. But if we seriously want to see that no American family has an income below a fixed minimum such as $2,000, we must consider public assistance, for this could not be assured without some residual assistance.

We do have a public assistance program now. The states have been paying out about $2.5 billion a year in direct relief, over half of which they receive in grants from the federal government. Almost all of this goes for so-called categorical assistance -- for the needy aged, blind, dependent children and the permanently disabled. Very little goes to people simply because they are poor, in the absence of other qualifying conditions.

Despite this large expenditure, the program is clearly not adequate. This is evidenced by the numbers of families and individuals with incomes, including assistance, below any minimum figure however low it may be set. The scale of benefits is not high enough and too many needy people fall outside the categories entitled to help.

We are not prepared here to spell out a program of public assistance. The possibilities of action in the American context, on the scale

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of the American economy and consistent with the individualistic and social
values of the American society, are still unexplored. It seems to us that
the first requirement is a new attitude to the problem. Oddly, in view of
the nature of the problem, the attitude should be more hard-boiled and
impersonal. We should not feel guilty about the fact that some small
fraction of people in our economy earn inadequate incomes -- assuming
that we have taken such constructive steps as we can to avoid that. And
the recipients of assistance should not feel guilty about requiring it.

A person with a low income does not feel either guilty or an object
of charity because he pays a low income tax. Insofar as he has any deal-
ings with the government about it, they are quite impersonal and matter-
of-fact. Moreover, he is not ashamed to produce evidence to show what
his income is. We would like to see the same conditions exist when a
family with still lower income pays a negative income tax -- i.e.,
receives a payment from the government.

Even though we cannot recommend a specific program we would
like to indicate the kind of possibility that needs investigation. Suppose
it were adopted as public policy that any family with income below some
figure -- say $2,000 if there were dependent children -- and any unat-
tached individual with income below some other figure -- say $1,000 --
would receive a grant equal to the difference from the government. There
would be no condition for receiving the grant except that able-bodied

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adults if not employed should be registered with the employment service
and willing to accept suitable employment. What would such grants
cost? Could the states run such a program, which would have advantages
because of the differences in living costs and standards among the states?
How much federal aid would be required? What would be the effect on
willingness to work? What would be the psychological effects upon the
recipients, and especially upon their children?

Undoubtedly there are many other possible approaches to the prob-
lem. We do not mention this one in order to recommend it. Our main
point is to urge more systematic analysis, uncomplicated by sentiment
and tradition, of the costs and benefits of conceivable ways of establish-
ing a national minimum standard of living.

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F. Urban Renewal

There are two additional major areas in which collective action -- public, private or mixed -- will be needed to achieve satisfactory standards of living, even if minimum levels of income are significantly increased. One is the improvement of housing and other conditions of life in congested urban areas. The other is better and more economical organization for medical care.

The city-belts which stretch in almost unbroken lines along our coasts, and the city-states which mushroom from Chicago, Pittsburgh and similar centers are becoming our typical habitat -- 75 per cent of our population will be found there by 1975. Most of the growth in the metropolitan areas, however, has taken place in the suburban fringe rather than in the core city. Of the estimated 50 million population increase expected by 1975, 45 million will be located in these suburban areas. The central cities themselves are increasingly becoming the home of the very rich and the very poor, of whom the latter are much more numerous. The participants in the move to the suburbs are overwhelmingly the middle and upper-income groups. They leave behind in the core cities the economically underprivileged.

The blight of slums is spreading through our metropolitan areas and particularly in the central cities at a rate far in excess of our programs to remedy it. An indication of the extent of the decay is given by

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the following quotation from a recent report by the Twentieth Century Fund:

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

While housing decay is the most obviously observable symptom that all is not well in our cities, it is only a symptom of more deep-seated dislocations. Urban transportation is approaching the chaotic. Basic community facilities such as parks and schools are inadequate. The decline or leveling off of the tax base which accompanies the process of urban blight jeopardizes the financial stability of central cities throughout the country. At the same time, the concentration of low-income groups in the central city is imposing increasing costs for health service, welfare, and fire and police protection. Arbitrary and outmoded political and administrative boundaries complicate or prevent decisive community action.

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

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

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

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

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

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

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

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

Until a long delayed revolution in building techniques and practices breaks this bottleneck we must pay much more attention to the preservation of existing housing plants. This provides another example of the need of an over-all approach to the urban problem. By enforcement of realistic sanitation

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and housing codes, provision of adequate financing programs, public education, community planning, and perhaps most important of all, by the restoration of confidence that blight *will* be stemmed, the decline of many areas could be arrested and other areas would be rehabilitated.

3. Even with an increased dynamism of the private housing industry, and with an effective rehabilitation program there will remain a segment of the community now living in slums which will require public housing. Again, however, our efforts at public housing have been conducted without sufficient regard to their repercussions on the urban problem as a whole. Public housing has tended to become self-contained and racially distinct low-income islands, producing inevitable friction and social stigmas.

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

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

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

G. Medical Care

Among the areas included in our new definitions of welfare, our national health bulks large. For despite the radical advances of medical science -- and partly because of them -- we are becoming aware that in our national health lies a prime national resource. Hence our public health ser-vices, which were originally organized to cope with elementary problems of sanitation or with immunization against infectious diseases, have steadily expanded to include prenatal clinics, tubercular care, and even psychiatric services. It is clear that government, local, state and federal, will be held increasingly responsible for an ever wider concept of what is meant by

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national health, including mental as well as physical well-being. Governmental concern has necessarily been heightened by the rapidly rising costs of health services, which have far outpaced the general rise in the consumer price index.

Nevertheless, there is no reason why the organization and financing of health services cannot remain on essentially a private basis if in the next decade we, as a nation, recognize the necessity of experimentation and change in patterns of providing and paying for health services.

As medical practice has become more complex and specialized, it has become apparent that cooperative efforts among practicing physicians can enhance the quality of care given. The first question is how best to achieve this. The second is how to pay for high quality medical care so as to spread costs widely, over years of high and low health costs.

Efficient and relatively inexpensive medical care has been achieved in many communities through group practice, affiliated with a common hospital, and with prepayment of costs, through health insurance premiums paid periodically and covering family units. These premiums can be paid to the medical group either for services when rendered or in regular installments as received. The range of physician services covered by the fees is comprehensive in scope. The remuneration of the physicians is derived from the prepayment pool. The resulting incentives tend to emphasize preventive care and early diagnostic services; and to minimize unnecessary hospitalization.

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

Irrespective of the form through which physicians' services are pro-
vided, a major objective of health insurance over the next decade must be
the coverage of care _outside_ the hospital. It is evident that confining the
coverage of medical services to those provided in the hospitals tends to
result in greater hospital utilization and hence higher costs. The coverage
of home and office care including diagnostic and preventive services under
so-called "comprehensive" plans can serve as a real encouragement to early
discovery and treatment of physical defects and illness, thereby resulting
in better health and lower costs. Also, hospitalization insurance should be
broadened to cover various types of home nursing care, to encourage shorter
periods of hospitalization. New administrative mechanisms will be needed
to achieve this, but at least for nursing and auxiliary services provided in
the home in conjunction with the hospital the problem seems readily
surmountable.

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VI. A TRIAL BALANCE

In the preceding chapter we have looked at some of the things we
want out of our economic system. We want:

a. National security,

b. Rising standards of living, with special attention
to increasing minimum standards of living,

c. Improved education,

d. Reconstruction of our cities,

e. The investment, private and public, necessary to
maintain the rate of economic growth that will
satisfy these wants.

In this chapter we try, as a first approximation, to strike a balance
between these wants and the resources, the output, likely to be available for
meeting them. We look ahead to 1965 as a year not so far away as to be
entirely speculative and not so close as to be entirely determined.

We use the weaker word "wants" rather than needs or requirements.
None of these is an absolute except national security, and even that comes in
degrees of greater or less security. Even the investment, which looks like an
imperative, is so only as a means to get things we want, rather than need.

Moreover, it is impossible to say how much we want in any specific
way. Probably the only true answer is either "more" or "as much as we can
get."

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When this is said it is clear that no great significance attaches to
the mere fact that the wants exceed the resources. Failure of the wants to
exceed the resources would only indicate a lack of imagination.

What we shall be trying to do is to set down those magnitudes of wants
that we regard as important to satisfy, and that we think the community regards
as important. And we shall be trying to answer three questions:

1. Are the wants that we shall be <u>unable</u> to satisfy, if we achieve the "reasonably expectable" rate of growth, so important as to justify strong efforts to get a faster rate of growth?

2. Are the wants that we shall be just able to satisfy, or unable to satisfy, so important as to give us a serious problem of choice, in the sense that satisfaction of trivial wants will prevent the satisfaction of important wants?

3. Are the important wants of a kind that must be met by government expenditures so large as probably to require continuation of the present aggregate burden of taxes (leaving aside questions of tax structure)?

We believe that the answer to each of these questions is "Yes."

This conclusion follows mainly from the increase in the rate of
government expenditures that we estimate would be required to satisfy important
wants. The estimates are summarized in Table I, page 103. The reasoning
underlying these estimates is essentially as follows:

1. National security expenditures would be $70 billion in 1965, following the estimates of our previous study of this subject and assuming no

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major disarmament but no major shelter program. The estimate includes
atomic energy development and foreign economic aid.

2. Government expenditures for *education* are almost doubled, from $11.9 billion in 1957 to $22.0 billion in 1965. This would be the result of raising average expenditure per school age child in the whole country to the amount now spent in the communities with the best school systems.

3. *Social insurance* benefits and public assistance grants would rise from $15.5 to $29.0 almost entirely as a result of an increase in the number of old people who have been fully covered by the Old Age and Survivors' Insurance and are entitled to maximum benefits. *Other welfare expenditures* would rise from $4.1 to $7.0 billion, mainly to cover the costs of enlarged programs of public health, hospital construction, medical research, and medical education.

4. The increase of *road expenditures*, from $5.6 to $10.0 billion reflects existing government plans. The increase in *other public works* is kept roughly proportionate to the growth of the economy.

5. Expenditures for aids to *agriculture* and for *veterans' benefits* are assumed to be substantially reduced by the policies recommended earlier in this statement. Cost of *administration* and *operation* would rise by about the same proportion as the total of other government expenses.

These estimates include no provision for enlargement of public assistance or urban renewal beyond the scale of present programs.

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Adding up these rough guesses -- they can hardly be called more -- gives an increase in total government expenditures from $112.3 billion in 1957 to $169.0 billion in 1965. Not all of these expenditures are for direct government purchase of goods and services. Some, such as the social insurance benefits, are transfer payments -- i.e., unilateral payments of money to individuals whose expenditure is counted as private purchase of goods and services. The amounts in each of these two categories are shown below:

<table><thead><tr><th></th><th>1957<br>Billions of Dollars</th><th>1965<br>Billions of Dollars</th></tr></thead><tbody><tr><td>Government purchase of goods and services</td><td>$ 86.4</td><td>$130.0</td></tr><tr><td>Transfer payments</td><td>25.9</td><td>39.0</td></tr><tr><td>Total government expenditure</td><td>$112.3</td><td>$169.0</td></tr></tbody></table>

The key fact is that the government purchase of goods and services would rise by 50 per cent in this period, or at an average annual rate of 5.25 per cent. Now this is considerably more than the rate at which our economy has ever grown over any extended period. The long term average rate of growth has been 3 per cent and the postwar rate about 4 per cent.

One conclusion follows arithmetically. If government purchases rise as estimated, the share of private purchases in the total product will have to decline, unless the total product rises significantly faster than in the past. For example, in 1957 and in other recent years of high employment, private purchases for consumption and investment have been about 80 per cent of the

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gross national product. If government purchases are $130 billion in 1965 the private share will be 76 per cent if the national product rises 3 per cent per annum and 78 per cent if the national product rises 4 per cent per annum.

To appraise the significance of this fact we must look at the two main categories of private expenditures -- investment and consumption. In recent years of high employment gross private investment -- for business plant and equipment expenditures, for housing and other private construction, and for inventories, has stayed consistently close to 15 per cent of the gross national product. This offers a crude indication -- but one that could probably not be improved much by more complicated calculations -- of the proportion of the national output that must be invested in order to maintain recent rates of growth.

This leaves the problem of consumption, which may be illustrated as follows:

<table><thead><tr><th rowspan="3"></th><th colspan="3">Billions of Dollars</th></tr><tr><th>1957</th><th colspan="2">1965</th></tr><tr><th></th><th>GNP at 3% Growth Rate</th><th>GNP at 4% Growth Rate</th></tr></thead><tbody><tr><td>Gross National Product</td><td>$434</td><td>$550</td><td>$594</td></tr><tr><td>Government Purchases</td><td>86</td><td>130</td><td>130</td></tr><tr><td>Gross Private Investment</td><td>67</td><td>82</td><td>89</td></tr><tr><td>Available for Consumption</td><td>281</td><td>338</td><td>375</td></tr><tr><td>Annual Growth Rate of Consumption</td><td></td><td>2.3%</td><td>3.6%</td></tr></tbody></table>

<table><thead><tr><th></th><th colspan="3">Dollars</th></tr><tr><th></th><th>1957</th><th colspan="2">1965</th></tr></thead><tbody><tr><td>Per Capita Consumption</td><td>$1638</td><td>$1770</td><td>$1963</td></tr><tr><td>Annual Growth of Per Capita Consumption</td><td></td><td>1.0%</td><td>2.3%</td></tr></tbody></table>

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In the period 1952 to 1957, the annual rate of growth of total
consumption was 3.7 per cent and the growth rate of per capita consumption
was 2.2 per cent. These rates are therefore very close to the rates that would
be possible from 1957 to 1965 if GNP grows at 4 per cent per annum. They
are much above the rates that would be possible if the GNP grows at 3 per cent
per annum.

Now it would be perfectly possible for someone sitting outside the
American society to say: "So what! The American people already have the
world's highest and history's highest consumption per capita. It's not impor-
tant for them to have more."

Fortunately we do not live in the kind of society where someone can
tell us what we need and should want. The simple fact is that the American
people do want higher consumption, as is evidenced by their willingness to
work so hard for it. This is a worthy objective, not only because the desires
of individuals count in America but also because increasing consumption stan-
dards has a valid place in the American ideology.

We believe that the American people would regard a rise of their per
capita consumption at least as fast as in recent years as an important objective.
Therefore we are justified in regarding it as an important want to be satisfied
out of the nation's growth.

The arithmetic we have been through suggests that if our total output
grows at 4 per cent per annum we shall be just able, with one exception, to

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meet our most important national wants -- as reflected in government programs, the continued increase of consumption at recent rates, and the volume of investment necessary to bring about the growth. The exception is an important one. We have not included an accelerated attack upon the problem of urban renewal, which we regard as deserving high priority, simply because the costs are so difficult to estimate. But if we do face this need seriously, as we should, we are going to have to cut down on the satisfaction of some other important wants -- unless we can exceed the 4 per cent growth rate.

A 3 per cent growth rate would naturally leave us in a more difficult position. We would be unable to accommodate our government and investment wants without holding the growth of per capita consumption to a rate -- 1 per cent per annum -- that would surely be regarded as insufficient.

Our conclusions from this we have noted earlier:

It is necessary for the satisfaction of visible important wants to maintain at least a 4 per cent annual growth rate. We have achieved this for some periods in the past, but it exceeds our average long-run achievement and it will be difficult.

Even at the 4 per cent growth rate we shall be just at the margin of being able to satisfy important wants. We shall have to choose wisely to make sure.

The possible consequences of disarmament are worth noting here. Suppose, for example, that national security expenditures -- which include atomic energy development and foreign economic aid -- were to be $35 billion

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instead of $70 billion in 1965. If the whole benefit of this were concentrated on consumption the rate of growth of per capita consumption would be 2.3 per cent if the growth rate were 3 per cent. This is approximately the rate of increase of consumption enjoyed in recent years. If the growth rate were 4 per cent, per capita consumption would grow by 4.6 per cent per annum. We see no reason to think that this would be unwelcome or difficult to absorb -- even leaving entirely aside the many valuable public uses of the output.

One last point needs to be considered. As we have previously indicated, the increase of government expenditures that we regard as necessary to satisfy important wants would be 50 per cent from 1957 to 1965. (We talk here of total expenditures, including transfer payments.) This is considerably more than the growth of the gross national product, even at the 4 per cent growth rate. However, tax revenues will rise somewhat faster than the gross national product if tax rates are kept constant, because our present tax system as a whole collects higher percentages from higher incomes. At the 4 per cent growth rate the present tax rates would yield just about enough revenue to cover the projected expenditures, but at a 3 per cent growth rate there would be a substantial deficit unless new or increased taxes were levied.

At best, therefore, a decision to adopt the government expenditure programs we have outlined is a decision to forego general and permanent tax reduction. And unless we maintain a high rate of growth, additional taxes may be necessary. This is only a corollary of the point made earlier, that unless we maintain a high rate of growth the increase of consumption would have to slow down.

IV - Report Revision

March 21, 1958

STAFF MEMORANDUM FOR MR. McCABE

Subject: **Revisions of Social Objectives Section (V)**

**Attachments:**

1. Mr. Perkins redraft of the section.

2. January 31 draft as edited by Mr. Wilde.

**Comparison of the Two Revisions**

A. **Group practice prepayment approach to medical care**

Drafts not far apart. Wilde simply edited the January 31 text, suggested that these plans should be "experimented with" (rather than adopted), and added the stipulation that they be under physicians' direction and control.

**Perkins:** "One approach, adopted effectively in some communities is group medical practice, affiliated with a common hospital, and with essentially all costs prepaid by the subscribers through family health insurance premiums. These premiums can be paid by the insuring organization to the medical group either as fees for services when rendered or in regular installments as the premiums are received. The range of physicians' services covered by the fees is comprehensive in scope. The resulting incentives tend

- 2 -

to emphasize preventive care and early diagnostic services;
and to minimize unnecessary hospitalization. **This group practice prepayment approach should be adopted in more communities so as to determine its effectiveness under many differing circumstances.**"

Wilde: "Blanket resistance to group practice prepayment plans does not appear to be based upon objective analysis. Putting a "firm" or group of professional men on an annual retainer is the essence of group practice prepayment -- a concept quite common to other personalized service professions in our social and economic system. **We believe that the group practice prepayment approach should be experimented with more widely so as to determine its effectiveness under differing circumstances. Properly handled under physicians' direction and control, the approach should contribute valuable results.**"

## B. Health prepayment plans

Both agree on the elimination of some material on page 57-rev., of the January 31 draft which suggests that health prepayment plans are more in the nature of organized budgeting than insurance in the traditional sense.

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C. <u>Catastrophic illness insurance</u>

They are in agreement on the discussion on catastrophic illness
insurance plans.

D. <u>Unfavorable risks</u>

On problems created by unfavorable risks -- the infant population,
the very old, and women in child-bearing years:

<u>Perkins</u> devotes approximately a page to these special risks,
spelling out in some detail how they can be helped, and mentioning,
among other possibilities assistance from general tax revenues
and increased funds for child health and welfare services.

<u>Wilde</u> would limit this discussion to two sentences: "Special
problems are created by the unfavorable risks such as (etc.,).
Much study and experimentation is being undertaken with respect
to these problems, and both should be encouraged and accelerated."

E. <u>Social insurance (OASDI)</u>

<u>Perkins</u>: Suggests a number of improvements in the present system,
including lowering the age of eligibility for disability insurance,
now fixed at age 50, intensifying vocational rehabilitation pro-
grams, and keeping the retirement age fixed under OASI at 65
and perhaps encouraging postponement of retirement.

**Wilde:** Would merely point to the disability benefit program and say it should be studied over a period of years, before considering further changes. He would also urge intensification of rehabilitations programs.

## F. Unemployment insurance

**Perkins:** Dwells in some detail on the unemployment insurance program, pointing out its inadequacies in coverage, benefit levels, duration of benefits and administration, all of which should be remedied.

**Wilde:** Would say merely that "Another broad area in need of concentrated study is unemployment insurance. About 12 million workers are still excluded from this kind of protection, nearly 40 per cent of them employees of state and local governments. Furthermore, the duration of benefits varies greatly between states. These matters are badly in need of attention."

## G. Workmen's compensation

**Perkins:** Deals concretely with gaps in workmen's compensation, says there has been "conspicuous indifference" to it, and calls for renewed state legislative interest.

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**Wilde:** Would limit comment on it to: "Workmen's compensation has also been a static field of social insurance in recent years. It has made an important contribution to our social welfare, but it is in need in its turn of study for possible improvement."

## H. Disability insurance

**Perkins:** Calls it "unfortunate" that only four states have adopted plans of this nature and says: "We believe that such plans are an integral part of adequate social insurance coverage, and that all states should adopt some such plans within the next decade."

**Wilde** would substitute: "A great deal of income insurance has been developed on a voluntary basis over the years. Four states have adopted compulsory programs of temporary disability or 'sick pay' insurance. Voluntary programs have been with us for a long time and have operated most successfully. It is important that encouragement and incentives be provided for extending these benefits more widely."

Hartford 11, Connecticut

CONNECTICUT GENERAL
LIFE INSURANCE COMPANY

Fruzar B. Wilde, President

March 18, 1958

Miss Nancy Hanks
Rockefeller Brothers Fund
22 West 55th Street
New York 19, New York

Dear Nancy:

We haven't been successful in revising the section on Social Objectives to the extent I had hoped; my ambition was to eliminate at least ten pages.

The following suggestions are made for consideration and because they shorten and clarify the section:

* Page 56, last paragraph - Reword this paragraph to read: "Blanket resistance to group practice prepayment plans does not appear to be based upon objective analysis. Putting a 'firm' or group of professional men on an annual retainer is the essence of group practice prepayment -- a concept quite common to other personalized service professions in our social and economic system. We believe that the group practice prepayment approach should be experimented with more widely so as to determine its effectiveness under many differing circumstances. Properly handled under physicians' direction and control the approach should contribute valuable results."

* Page 57, second paragraph - Eliminate.

* Page 57, last paragraph - Delete the first two sentences beginning, "However, there is one phase of health costs..." and extending to "...with a long recuperation period."

* Page 57a, first sentence - Eliminate the word "Here" and begin the sentence, "The newer 'catastrophic illness' plans..."

* Page 57a, last two paragraphs - Replace with "Special problems are created by the unfavorable risks such as the infant population, the very old, and women in

Miss Nancy Hanks

- 2 -

March 18, 1949

child-bearing years. Much study and experimentation is being undertaken with
respect to these problems and both should be encouraged and accelerated."

Page 57b, paragraph at top of page - Delete.

Page 62, last paragraph - Reward to read, "No major change in the concept of our social insurance plans seems indicated. We have recently undertaken the experiment of adding a disability benefit to the Federal Old-Age and Survivors' insurance program. Our experience in this regard should be observed carefully over the next succeeding years, before we consider further changes. Concurrently, however, there should be an intensification of vocational rehabilitation programs aimed at self-support."

Page 63, first paragraph - Begin the first sentence with "Another important social insurance question..." instead of "The other important social insurance question..."

Page 63, second paragraph - Should be revised to read: "Another broad area in need of concentrated study is unemployment insurance. About 12 million workers are still excluded from this kind of protection, nearly 40 per cent of them employees of state and local governments. Furthermore, the duration of benefits varies greatly between the states. These matters are badly in need of attention."

Page 63, last paragraph - Should be changed as follows: "Workmen's compensation has also been a static field of social insurance in recent years. It has made an important contribution to our social welfare but it is in need in its turn of study for possible improvement."

Page 64, first paragraph - Beginning, "The newest area of income insurance at the state level..." and ending with "...such plans within the next decade." should read, "A great deal of income insurance has been developed on a voluntary basis over the years. Four states have adopted compulsory programs of temporary disability or 'sick pay' insurance. Voluntary programs have been with us for a long time and have operated most successfully. It is important that encouragement and incentives be provided for extending these benefits more widely."

Sincerely yours,

FBW-fkp

Mr. Kissinger

March 21, 1958

Dear Mr. McCabe:

In line with my conversation with Miss Bruestle enclosed are:

1. The final sections of Mr. Stein's draft which we received today.

Copies have also been sent to all persons who previously received the first sections: Messrs. Burns, May, Butler, Rockefeller, Kissinger, Ruebhausen, and Wilde.

2. A comparative analysis of the revisions of the social objectives section received from Mr. Wilde and Mr. Perkins, which are also attached.

NOTE: with the exception of Mr. Kissinger no distribution will be made of these until and unless we hear from you.

The meeting has been arranged for 4:00 p.m. until 10:00 p.m., Tuesday, March 25. It will be held in the Private Suite, Hotel St. Regis. The following will attend:

Dr. Burns, Mr. Stein, Mr. May, Mr. Butler, Mr. Rockefeller, Mr. Kissinger, and Mr. Ruebhausen.

Mr. Kissinger's attendance is not definite and in any case he cannot arrive before five p.m.

With best wishes,

NH:ku; cc to Miss Bruestle at McCabe office with Stein draft.