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ROUTES TO GROWTH Speech by Darryl R. Francis, President Federal Reserve Bank of St. Louis Before the Midwest Agribusiness I n s t i t u t e S h e r a t o n - J e f f e r s o n Hotel, St. Louis, M i s s o u r i September 5, 1968 In t h i s discussion I s h a l l go beyond the specific area of agribusiness and review some aspects of the overall problem of economic g r o w t h . There seems to be no simple s o l u t i o n to the orderly accomplishment of economic g r o w t h . Our efforts to enhance the welfare of other less developed nations have met w i t h only moderate success in most cases. In some instances we admit almost total f a i l u r e despite the expensive programs u n d e r t a k e n . Nevertheless, we are reasonably sure of some factors which are associated with economic growth. Those w h i c h are very general and of l i t t l e application to specific conditions in M i s s o u r i I s h a l l b r i e f l y enumerate and dwell more completely w i t h growth factors that f a l l d i r e c t l y w i t h i n the scope of your general discussion and w h i c h are not so well recognized by the general p u b l i c . Generally recognized conditions for growth include such well-known factors as (I) the maintenance of law and order, (2) the assurance of property r i g h t s to - 2 e n t r e p r e n e u r s and prospective e n t r e p r e n e u r s , (3) the provision of incentive for e n t e r p r i s e , and (4) health and energy of the people. These growth requirements .are so obvious that no f u r t h e r comment is necessary. There are many less obvious factors c o n t r i b u t i n g to growth, and education and t r a i n i n g head the l i s t . I refer to education in its broadest sense including education in our school systems, o n - t h e - j o b and apprentice t r a i n i n g , t r a i n i n g through adult education programs, general education of the public through the news media, demonstrations of more efficient practices, and the dissemination of printed i n f o r m a t i o n . It is the capacities of the human agent of production that explain the rapid recovery of Germany and Japan following World War I I . A large portion of the physical capital in each nation had been destroyed. In fact, they had little more left than some of the so-called u n d e r developed n a t i o n s . Yet, w i t h i n a decade of the close of the war, both nations were quite prosperous. The factor which war could not destroy and which permitted rapid recovery was the t r a i n i n g and "know-how" of the people of Japan and Germany. With some aid toward r e p l e n i s h i n g - 3 t h e i r physical capital stock, both were shortly back in production and w i t h i n a few years were exceeding pre-war levels of output. Our own production revolution in a g r i c u l t u r e can be largely explained by new technology rather than t h r o u g h new capital inputs. Farm employment in the nation declined, from 10 m i l l i o n workers in 1930 to, less than 4 m i l l i o n in 1967. The physical volume of farm production, however, increased sharply during this period. . In fact, farm output almost doubled, rising from 60 per cent of the 1957-59 base in 1930 to 118 per cent last year. The physical volume of farm output per worker rose fivefold d u r i n g the period. Some new capital was added to a g r i c u l t u r e . in farms rose 7 per cent. Acres The number of livestock on farms rose about 75 per cent and the number of tractors tripled. The gains from new c a p i t a l , however, were less than the gains in farm output per worker. The worker productivity gains can be attributed largely to t e c h n i c a l t r a i n i n g , which is the result of research both on and off the f a r m . It is in the area of manpower t r a i n i n g for the nation as a whole that I believe we have been least successful. We have been especially lax in the t r a i n i n g - 4 of inner city y o u t h . Our early school courses are designed p r i m a r i l y to prepare students for f u r t h e r education. The pattern leads on t h r o u g h college and ultimately to graduate school. Those who don't fit into the p a t t e r n , and especially those who do not f i n i s h high school, are known as " d r o p - o u t s . " U n f o r t u n a t e l y , we know very little about our "drop-out" population except for the fact that it is quite large in the inner core of our large c i t i e s . With this small amount of knowledge, or lack of knowledge, however, we have organized major drives to prevent drop-outs and get the drop-outs back in school. We have deemed it s u f f i c i e n t just to get the drop-outs back on the track from which they have jumped and eventually get a diploma into t h e i r hands on graduation day. Few have considered the possibility that drop-outs were not interested in a standard high school education, and perhaps many did not have the capacity to complete the regular c u r r i c u l u m in the f i r s t instance. I want to emphasize the fact that we are not all equally endowed for educational achievement. drop-outs back on the t r a c k , T h u s , instead of getting I suggest greater use of schools that do not necessarily point to four years and a diploma, but point p r i m a r i l y to preparation for a job as mechanic, plumber, c a r p e n t e r , e l e c t r i c i a n , office machine - 5 operator, or any other job in which ordinary literacy plus the specific job skills will meet the essential job requirements, I recognize the possibility that some compulsion may be necessary to get the job of t r a i n i n g in our inner cities completed, because many do not c u r r e n t l y have the necessary i n c e n t i v e . Compulsory education, is not an unknown t h i n g in the United States. however, In fact, that is the way u n i v e r s a l public education was o r i g i n a l l y established in most c o u n t r i e s . I would even go so far as to suggest that students be required to continue t h e i r t r a i n i n g u n t i l a job is found for t h e i r services. It is also possible to use such schools to r e - t r a i n older u n employed workers on a massive scale. The t r a i n i n g program w i l l probably work much better if success in t r a i n i n g is linked to any unemployment compensation a v a i l a b i l i t y to the student. This massive t r a i n i n g program would not only improve the t e c h n i c a l skills of our labor force, but would in all probability reduce crime and the cost of crime prevention and control measures. It is d i f f i c u l t to quantify the gains to national welfare r e s u l t i n g from education and t r a i n i n g . While we have much data on the gains in a g r i c u l t u r e , other segments of the economy have likewise moved forward. The gains - 6 per worker in the nonfarm sector, plus the output from new workers released from the farm sector, have greatly increased total output per worker for all sectors. Because a g r i c u l t u r e employs such a small portion of the labor force, the rate of total growth r e s u l t i n g from gains there w i l l be less in f u t u r e decades. farms The nation's c u r r e n t l y employ only about 5 per cent of all workers. F u r t h e r reductions in this area w i l l thus ac- count for relatively small gains in the other 95 per cent of the labor force. Thus we may be approaching the end of our major growth push r e s u l t i n g from the revolution in f a r m i n g . On the other hand, we are probably only beginning a revolution in the nonfarm sector. We already have the urban "know-how" just as we did in a g r i c u l t u r e in the 1920's and early 1930's. Now our problem is to organize producers and firms and to t r a i n urban people so as to put the "know-how" into p r a c t i c e . Now the job lies with the educators, the motivators, and the market. other words, we need the same type of job undertaken in the nonfarm sector that was performed in the farm sector during the past three decades. The gains from a f u l l y productive labor force are not only measured in dollars of increased product but in In - 7 reduced welfare rolls - an important end product. Each person removed from the welfare rolls into a productive job means lower t r a n s f e r payments by the government and lower taxes to the working force. The vision and willingness to let market forces work in the allocation of resources as it did in a g r i c u l t u r e is a prerequisite for maximum growth. For example, a g r i c u l t u r e would not have made its vast c o n t r i b u t i o n to economic welfare had we not found employment in the nonfarm sector for the released w o r k e r s . It is possible that we may have similar releases in offices, in t r a n s p o r t a t i o n , or in r e t a i l i n g during the next few decades. If we can send tons of explosives around the world in unmanned v e h i c l e s , i see no reason why we cannot find low-cost means of transporting consumer goods between domestic cities with greatly reduced human effort. If benefits are to be gained, however, we must let market forces adjust our labor force and other resources. This brings me to the next factor for growth, namely, willingness to permit change. To obtain maximum gains from new technology and from job t r a i n i n g , we should keep to a minimum all obstacles to resource adjustments. are readily apparent. Some of the obstacles internationally For example, the farm protectionist policies of Western Europe which limit imports of our farm - 8 products in order not to disturb t h e i r i n e f f i c i e n t farming operations are readily observable. Our local and national obstacles are less noticeable, yet no less r e a l . Monopolistic practices of businesses and professions which limit entry can be just as brutal as i n t e r n a t i o n a l trade b a r r i e r s . Trade union practices which discourage apprenticeship t r a i n i n g through illegal racial practices and unduly d i f f i c u l t or lengthy t r a i n i n g periods are equally i n e f f i c i e n t . Such practices limit numbers employed to levels below those warranted by supply and demand conditions. are obstacles to growth, These practices i suggest that a major portion of all apprenticeship t r a i n i n g be under the supervision of public school officials so that freedom of entry is assured and all prospective workers, regardless of race or other c h a r a c t e r i s t i c s , can get an equal chance. Some of our obstacles to a more workable market are even imbedded in the legal framework of state and national governments. Included in this category are obstacles to the free movement of goods and capital at market rates. Minimum wage laws which set wages above marginal r e t u r n s for some workers contribute to permanent unemployment. I suggest that it is better to have people working at lower than c u r r e n t minimum ceilings than to have a large number unemployed because they cannot earn the legal m i n i m u m . - 9 Nonsensical health regulations often hamper the free movement of dairy products and other foods from low-cost to high-cost areas. Excessive interest rate restrictions have, in some instances, hindered normal flows of capital and even now limit the sale of certain government s e c u r i t i e s . My last condition or route to maximum growth is stability of values. Although not more applicable to M i s s o u r i than to any other state, a stable price level is important to a l l . I don't have to dwell on the damage caused by recessions and depressions. Most of us know about the lost effort caused by unemployment and idle resources in the 1930's. Fortunately, we have had a relatively small amount of such loss since World War I I . Nevertheless, the possibility of such loss should be constantly guarded against. It is to the danger and loss due to price i n f l a t i o n that I want to direct most of my remaining remarks. This is an area not well understood by the public and one in which the "experts" often disagree. Yet excesses here may be just as damaging to growth as recessions and depressions. As an approach to the problem, I might ask the q u e s t i o n , "What would you do with your savings if you knew that we would have a price increase of 15 - 20 per cent next y e a r ? " (about the rate in Brazil last y e a r ) . I think that you would search for some opportunity to maintain - 10 the purchasing power of your savings. You would not necessarily be interested in a n n u a l dividend payments or c u r r e n t interest r e t u r n s . You would be much more interested in m a i n t a i n i n g the purchasing power of your o r i g i n a l stock of money. You would thus tend to bypass our savings i n s t i t u t i o n s such as banks and savings and loan associations and place your funds in areas where capital gains are more likely to be achieved. of the problems of i n f l a t i o n . This is one The usual sources of funds tend to dry up, and we move back to i n e f f i c i e n t modes of saving and i n v e s t i n g . Yet savings and efficient savings i n s t i t u t i o n s are important determinants to growth in some industries such as home b u i l d i n g . T h u s , growth is hampered when savings i n s t i t u t i o n s fail to f u n c t i o n properly. We all know of the damages to welfare from price inflation. Such damages include loss of real income to all fixed income participants such as pensioners, those receiving Social S e c u r i t y benefits, disabled veterans and others. In addition, all creditors are damaged while most debtors benefit. I find very few overall benefits from i n f l a t i o n , and those that exist are greatly outweighed by the disadvantages. Studies at the Federal Reserve Bank of St. Louis, which involved only moderate excesses in total demand, indicate that in the long r u n increases in - II total demand for goods and services do not lead to any predictable increase in real output as some have suggested. However, in all cases, such excess demand is reflected in price increases. Total demand is affected by both monetary and fiscal policies. In recent years both have tended to be excessively expansive. Thus prices have trended upward. I believe that such price increases contribute to i n e f f i c i e n c y , especially in the f i n a n c i a l sector, and thereby retard growth. T h u s , one means of achieving greater growth is to achieve general price s t a b i l i t y .
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