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Business and

t o t h e PRESIDENT b y



ADVISERS • December



Additional copies of this report are for sale by the Superintendent of Documents,
U . S. Government Printing Office, Washington 25, D . G.

Price of single copy 15 cents


Letter of Transmittal
C O U N C I L OF E C O N O M I C A D V I S E R S ,

Washington, D. C., December 27, 1949.
The President.
SIR : The Council of Economic Advisers herewith submits its Fourth
Annual Report in accordance with the requirements of Congress as set
forth in the Employment Act of 1946.

Acting Chairman.








Communism, socialism, and the American system . . .
A new generation needs new ideas



From theory of stagnation to practice of growth . . .
From "more for some" to progress for all
From social theory to economic "balance55 . . . .
Toward mutuality of interests
Regarding business size and practices
From mere policing to affirmative facilitation . . .
Away from specific controls
From "compensatory55 theory toward more reliance on
enterprise. And a word about Keynes






Gains through businessmen in public service . . . .
Improved appreciation of public policy
Rejection of mere slogans—the pension example
. .
Enlarged understanding of world conditions . . . .







Need for further harmony and consistency
. . . .
Need for more stability
Need for correlation of welfare programs, especially social
security, with general economic policy
Coordination of national economic policy is not "central









The processing of facts
Defining objectives
Policy making



Work with private economic groupings
Work with governmental agencies
Relations with the Congress


Further acceptance of "maximum55 objectives . . . .
Further realization that public sentiment affects the
New business attitude toward "politics55
Can business action achieve sufficient concert to promote
















J. he Council's First Annual Report to the President discussed the
political philosophy of the Employment Act of 1946 and the economic
philosophy of sustained employment. The second dealt with the meaning of maximum production and the means of attaining it, and the third
considered the environment within which the Council operates. These
three efforts brought indication that revelation of our general economic
thinking was appreciated.
They also provided background for the
Economic Reports of the President and the Economic Reviews by the
Council, which appear in January and July of each year. In this
Fourth Annual Report, we discuss the relations between business and
government because we find this subject of significance at all times and
close to the forefront of general interest now.
We use the term "business" to refer to business management, recognizing that our system of free enterprise includes also workers, farmers,
consumers, and their organizations. They equally are confronted by
the system's problems; they too are responsible for its achievements; they
too have dealings with government and are concerned about public
policy. Before long we hope to discuss their relations with government.

I Free Enterprise and Free




The balanced emphasis which the Employment Act places upon the
merits and responsibilities of free enterprise and free government is
typically American and yet of universal import at this midpoint in the
twentieth century. In the last century the philosophic base was laid
for extremist doctrines that these two freedoms were irreconcilable, and
that one or the other would give way under the impact of industrial
concentration, disparate wealth, and popular communication. More
recently, these extremists rose to command in many lands. On the right,
powerful economic groupings allied themselves with counterrevolutionary
movements to destroy free government. On the left, powerful statist
revolutions swallowed up free enterprise. We now know how similar
are the weeds growing from these different seeds, and how their pollen
stifles genuine economic progress, intellectual inquiry, and spiritual
aspiration. These manifestations create international problems. But
they do not require much analytic annihilation because they make no
appeal to the minds or hearts of the American people.


Then there are the current efforts by other peoples with a long tradition of democracy to combine free government with very substantial
diminution of free enterprise. In our view these other free peoples will
approach their own special problems according to their own needs or
beliefs; but our problems are not theirs and we have different methods
which are all our own.
During the nineteenth century there were many thinkers even in the
United States who, appalled by the prevalence of poverty in a land of
plenty and by the crude manifestations of industrialism in the raw,
argued sincerely that neither our people nor their government could
remain truly free so long as business enterprise remained free. But
there are powerful reasons why this thesis is no longer given serious
consideration. Although many of our problems remain unsolved, our
unique combination of free enterprise and free government has moved
so rapidly toward raising the general standard of living that the fair
hope of more progress by the same methods immensely outweighs the
costs and risks, the divisions and tensions, and above all the uncertainties,
of radical change. All history shows that freedom in the long run may
best be safeguarded through moderation in the adjustment of seeming
conflicts. And the American system is so fortunately situated that it
furnishes to the world a beckoning example of this kind of moderation.
The case for moderation grows in appeal because, whatever the situation in other lands, the only conditions which could seriously undermine free enterprise here would also jeopardize free government and
possibly do it irreparable damage. In sober retrospect, not even the
great depression of the 1930's altered the basic character of our economic
system or reduced the commitment to it by the people and also by our
most "advanced" philosophers, economists, preachers, and other social
thinkers. It follows that nothing less than another depression even
more devastating could break us away from this basic commitment.
And any such economic convulsion could unleash forces of social tension,
domestic friction, and pure political adventuresomeness which might
leave us for a time without the essence of free government. Thus, those
whose concentration of interest is upon free enterprise and those whose
concentration of interest is upon free government are held together by
unseverable bonds. No genuine liberal—and most Americans call themselves that—would welcome an economic crisis in order to have a chance
to remold the economic system nearer to his heart's desire. We all know
what happened to the liberals elsewhere who waited for or courted that
opportunity and got totalitarianism instead.
Many of our domestic problems revolve around the application of
moderation, compromise, and reconcilement in defining the respective rights and responsibilities of free enterprise and free government
under a popular democracy. There are many ways of stating this root
issue. How can enterprise remain free enough to be dynamic without


moving from freedom to license? How can government be strong
enough, as Lincoln said, to maintain the essential interests of the people
without invading their liberties? How can stability be equated with
growth? Liberty with law? Individualism with cooperation? How
can we steer between the dangers of absolutistic freedom and the deadliness of absolutistic security? However put, these questions involve
business and government and seek to broaden their areas of agreement
and to strengthen their complementary interactions.
Nobody can resolve this omnipresent issue with a single formula, symbolism, or definition. But there is room for a broad effort to formulate
or restate a philosophy of the relationship between business and government. A philosophy voices that agreement on a few fundamentals,
alive in the minds of the people, without which there can be little unity
or progress. Without universal accord in America about free speech,
for example, we could not benefit by debating our disagreements
about so many other things. In our economic life no less than in
our political, there is need for some common philosophy to hold us
together; and since constitutions and courts are not so well suited to this
purpose we must resort to the voluntary projection and constant crossfertilization of ideas.
Economists may take some initiative here because economic problems
occupy or even overcrowd the stage on which the drama of adjustment
between business and government is going forward. And this Annual
Report of the Council to the President is a convenient location for such
discussion, in contrast with the Economic Report of the President and
the Annual Economic Review by the Council (both scheduled for early
January) which must necessarily be steeped in facts and particularistic
points of policy.
What we now say is by definition general. Logical deductions from
it will not reveal the content of specific programs which may be proposed in 1950 or any other year. Nonetheless, it is our earnest desire
that this report will have some influence upon attitudes both in business
and in government, and that it may uncover the solid ground on which
they can deal with each other in ever-increasing harmony and trust.

The particular urgency of this subject exists because there has now
grown to maturity a whole generation of Americans touched by the influence of extremists who look upon conflict between business and government as normal. Conditioned by the depression era, extremists on
one side have said that our business system broke down through fatal
defects and that government took the whole leadership in putting it
together again; while extremists on the other side have blamed government for all the tribulations of business. The new generation of Ameri867899—49



cans should always remember that the breakdown resulted from errors
on the part of both government and business; that both joined in
forging some of the most practical measures for recovery; and that both
must admit imperfection because the recovery was incomplete until
the war restored maximum production and employment.
This new generation of Americans has also observed that some of
the national programs directed toward economic change have initiated
from government and been opposed by some spokesmen for business.
But the extremists on either side should not overplay this observation
to range either government or business along with the angels or the
devils. Rather it should be recognized that it is a primary function of
government, representing the whole people, to view the economy as a
whole and to propose general measures. It is the function of business,
as the main operators of the going economic system, to be conservationist if not conservative and to be wary about discarding workable
machinery before better machinery has been clearly tested. In the
interaction between these two functions, which is essential if we are to
preserve both free enterprise and free government, the clash of viewpoint and the reconciliation of means to ends are in themselves beneficial, particularly when undertaken in good spirit.
We have now moved far enough away from the depression of the
early thirties to start looking ahead, and to appraise the heartening
evidence that free enterprise and free government have blended their
varying strains into a rewarding effort. The conduct of the war was
an example never to be forgotten. The moderate character of
the 1949 recession, and the upward turn which followed, would have
been impossible without business policies as well as public policies based
upon greatly increased understanding of economic affairs.
The time has come to develop the prospects of the American economy
for further economic progress and human happiness. Unlike other
countries we were not decimated by war; we do not suffer from underdevelopment or impoverishment of basic plant and equipment; and
we have the operational and financial skills, the splendid labor force,
and the solid institutional structure to realize in full the promise of
The only thing that could stand in our way—provided that lasting peace is achieved—would be excessive internal discord. This
would not stop our economic progress in the long trend, but it could
slow it down greatly and leave us subject to costly fluctuations which
we probably have the technical know-how to avoid or mitigate.
At this juncture, there may be value in a candid stocktaking of current relations between business and government. We shall place the
greater emphasis upon the vast progress which has already been registered and upon the assets which have consequently accrued. But
we cannot neglect some of the problems yet unsolved.


II. Trends in Governments
Attitude Toward Business
The attitude of government toward business has always been favorable, in the sense that responsible public servants have always wanted
our free enterprise system to thrive and prosper. The course of events
shows that many of the public policies adopted over the years have contributed toward the strength of the economy, although they are always
subject to refinement and improvement. Governmental thinking has
never been static, and it may be helpful to try to discern recent trends
under the impact of experience.
No one person can speak with absolute certainty or comprehensiveness about these trends. The minds of various men and women
in our public service are not melted down and fused into a single instrument. Policies and pronouncements, even when by the President or
by the Congress—and many others decide issues and make statements—
reflect a range of training, temperament, and viewpoint as wide as those
in any other sector of our national life. However, while the Council
can speak only for itself, we believe that from our strategic point of
observation we can detect a prevailing trend of thinking about our
business system and its problems.

The first trend in the attitude of government toward business seems
to the Council to be this: the doctrine of secular stagnation no longer
finds place in any important public circle with which we are familiar.
During the depression years, a significant body of thought held that
the forces of business expansion had spent themselves and that government must provide the dynamic force for renewed growth. The
thought may have had some relevance then; and the persons who held
it developed some useful devices. But today the doctrine of secular
stagnation has been replaced, in our judgment, by the firm conviction
that our business system and with it our whole economy can and should
continue to grow. This is illustrated by the statement of President
Truman that we can achieve a 300 billion dollar economy within a
very few years. We regard it as an historic event when the occupant
of the most persuasive office in the world acts upon the proposition
that our business system has further opportunities which transcend even
those it has seized upon in the best previous decades. A member


of the Cabinet, the Secretary of Commerce, has recently applied the
same realistic approach over a longer time span.
This sentiment on the part of important officials would be significant
without independent verification, because it would have a controlling
effect upon their attitude toward the business world. But we also
note the recent corroboration of these growth assumptions by nongovernmental economists who are highly regarded by businessmen as
being unusually conversant with their problems.

The second important trend which the Council senses in the attitude
of government toward business is the realization that efforts to promote expansion of the total production and income of the economy
are more significant than measures to "redistribute" the current product.
In an economy foredoomed to inability to provide an adequate or rising
standard of living for all industrious families, there might be some reason
for according the resharing of output priority over efforts to increase
output. The rationing resorted to by people in time of famine is an
extreme illustration. But the notable expansion in production which
our economy has achieved in the past and can certainly repeat or excel in
the future, coupled with the observed fact that this so much lifts the
general standard of living, should receive foremost consideration in
economic programs and policies.
Of course, we cannot postpone efforts to improve the lot of the underprivileged until they can be lifted to reasonable levels by the lever of
general growth. And measures directed specifically toward improving
the productivity and incomes of low-income groups have favorable impact upon the whole economy. At the same time, primary emphasis
upon general growth offers a more workable formula not only for the
business community but also, the Council believes, for other groups as
well. For once it is appreciated that the general growth of the American
economy can create within less than a generation a truly good standard of
living for all, then there is reduced to manageable proportions the ancient
conflict between social equity and economic incentives which hung over
the progress of enterprise in a dynamic economy.


The third important trend in the Government's attitude toward
business, as viewed by the Council, arises from fuller realization that
the flow of income to different parts of the economy should be viewed
as an economic no less than a social problem. Certainly a people's ultimate objectives are social, being concerned with well being, and social
thinking will never lose its utility. But the application of more precise


economic analysis to problems of income flow will yield benefit to all by
reducing the problems of ways and means to soluble terms.
The use of economic analysis to refine and sometimes reformulate
social theory will help to broaden the areas of understanding and agreement, without which the tensions and conflicts in a free economy of
large organized groups might in the end become unbearable. That
unsocial socialist George Bernard Shaw argued in one of his famous
books written for American women that the only sound income distribution was absolute equality, since nothing else could be called "fair"
in the absence of any precise measurement of the relative productivity
or relative need of everybody in the community. While this is a
reductio ad absurdum, it illustrates that contending individuals or groups
in a free society could never arrive at viable agreements as to what share
of national income each should get by the unalloyed application of
social principles. Any effort to apply such principles fully or even
excessively would involve the whole nation continuously in fracas and
Concentration upon the central objective of a stable and expanding
general economy identifies more manageable although still difficult approaches to the problem of income flow. It then becomes possible, albeit
not easy, for businessmen, workers, and farmers to seek that share of
the total product which is most conducive to the progress of the whole
economy and thus to their own best interests in the long run. The same
approach should be used to evaluate those government programs which
channel the flow of income from one spot in the economy to another,
to test whether these programs promote general stability and expansion
or rob Peter to pay Paul.
The nub of the problem of economic "balance" is to encourage
sufficient funds and incentives for the growth of productive facilities
which fully absorb our technology and manpower, while promoting
sufficient flow of income to ultimate consumers to clear the markets of
goods and thus to avoid periodic "overproduction." The Secretary of
Commerce has put forward this idea of "balance" so cogently that it
deserves repetition:
As we look down the road ahead, what do we see?
Standing squarely and
obstinately ahead of us on the road to a richer America is one great question mark.
H o w shall we divide equitably among consumers, labor, management, capital,
agriculture, and government their shares of our production?
People are called
liberal, radical, conservative, or reactionary depending upon the way they approach
this most difficult of all our economic problems.
Some pessimists say that there is
no solution to this problem but the one resulting from the struggle between organized
They say that capital always wants more than its fair share of production,
that labor will never be content until it takes all of the profit out of business, that
farmers will not rest until all other groups are supporting them, that government
officials will not be happy until they manage the whole economy and become the
only privileged class in America.
I am not so pessimistic.
Many businessmen
understand that business success depends upon well-paid, self-respecting workers and
upon the ability of the public at large to buy what business produces. Many workers
understand that business cannot operate at a loss, and that some return on capital


investment is proper.
Many farmers realize that other groups are entitled to
consideration and that the farmer is not cultivating a fenced-off lot.
W e have not yet reached the time when these groups forget their special interests
and talk out their differences in a spirit of sweet reasonableness.
However, we have
made and are continuing to make progress.
Most Americans now understand the
importance of business investment as well as the importance of mass purchasing
power. W e have passed the time when intelligent Americans use the word "profit"
as a curse.
I believe all of us can agree on the fundamental principle that profit is
good when it is reasonable and when it is used to produce more of the things we need.
T o this problem we must apply the idea of balance.
W h a t division at any given
time will promote the smooth operation and further the balanced growth of our
T o answer this question we must know as much as possible about our
economy and we must also be willing to abide by the facts. In other words, we
should bring to the solution of our problem scientific analysis and a scientific attitude
of mind.

When this general idea of economic "balance" is translated into the
factual analysis which alone can give it practical significance, it becomes
crucial that the business world appreciate the motivation underlying such
analysis. We may illustrate by citing some of the previous work undertaken by the Council. During the postwar inflationary boom between
1946 and 1949, we took the position that the bunching of unusually high
profits and an unusually high level of business investment, accompanied
by price-income developments which did not seem to promise sufficient
consumer demand to maintain maximum employment and production
when certain temporary props were removed, should not be viewed with
equanimity. This did not mean that we were adverse to profits or
profit-makers or were throwing partisan weight on the side of the consumer or wage earner.
Such was not our position. We simply foresaw in 1947 and 1948
that the "balance" between investment and consumption, while compatible with a very high level of activity in 1947 or 1948, could not be
sustained indefinitely and that a new "balance" would need to be struck
for a growing peacetime economy. We were concerned that, as profits
declined during the transitional striking of this new "balance," business
might have become fearful and contracted investment and employment
unduly. This would have accentuated the downward spiral. Instead,
we urged recognition that a temporarily lower level of return than the
1947 or 1948 level was inescapable for a while. If this was recognized,
then, when the economy had passed safely through the adjustment tests,
profits and investment along with consumption could again resume an
upward course as the economy in general moved upward on a noninflationary basis.
Nor were our comments about the relationship between prices and
consumer incomes during the inflationary boom intended to suggest
that consumption between 1946 and 1949 should have been higher
when there were no more goods to consume. The point rather was
that looking forward to 1949 and succeeding years, when bottlenecks
would be broken, productivity increased, and the plant and equipment improvements of the reconversion period fully felt, the priceincome structure would have to readjust to the expanding volume of

consumption needed for maximum production, employment, and
business opportunity. We advised business that some of these priceincome adjustments should be started early and made gradually, for
experience indicated that if too long delayed and then subsequently
bunched over too short a period of time the consequence would be a
dangerous decline in business activity. This in turn would cause profits
and investment, the most volatile parts of the structure, to decline even
more rapidly.
Fortunately, the practices of more and more representatives of the
business community are coming to conform more closely to the tenor
of what we have said. In the early 1949 recession, the majority of
businessmen did not react to lower profit margins or prospects by the
erstwhile traditional acceleration of cutbacks, rapid price deflation, wage
reductions, and layoffs. Some occurred, but they generally took place
with moderation and discernment. Many businessmen realized that
we were working our way toward a better "balance," and that if they
maintained steady nerves through a short but perilous phase the fundamental strength of the economy would turn us again upward. This
does much to explain what transpired during the second half of 1949,
although the march to maximum production and employment is still
to be completed.
Our conclusion that in the long run a "balanced" economy would
require the expansion of consumption opportunities at an even more
rapid rate than the expansion of investment—although both should
grow—has been matched by the similar findings of many nongovernmental economists. It is not the Council's purpose here to vindicate
its own specific conclusions. We merely point out that our approach
departs from the earlier and narrower perspective sometimes applied
by economists; and that many of our profession are now in accord
with our views.

The fourth advance in the attitude of government toward business,
as appraised by the Council, derives from the three already listed.
The problems of our economy appear no longer primarily as problems
of protecting the shippers of the West from the "interests" of the
East, or the farmers of the South from the bankers of the North,
or the workers in general from the industrialist class, or the consumer
from the farmer. To be sure, government still has the function of preventing any one group from taking unfair advantage of another, and
laws and administrative devices are necessary for this purpose. But
national economic policy should center mainly upon the basic interdependence of the long-range interests of various groups. If we are to
endure and grow as a nation, the things which unite us must become
infinitely more important than those which divide. The function of gov-


ernment is, without favor or preference, to test each of its own actions by
the long-run common good. Moreover, government should stimulate
that thinking and analysis by business and other elements in our freeenterprise system which will help them to advance the general economic
welfare and thus to reduce the requirements for public supplementation.
In an expanding economy, the lifting of low-income families to a far
higher standard of living, the improvement of agricultural programs
consistent with the needs of urban consumer incomes and also promoting
parity of income for the farmer, the provision of adequate funds for a
rewarding level of business investment and profits, and the meeting of
our domestic welfare and international security requirements, are not
incompatible objectives. Attainment of each objective is inseparable
from attainment of the others.

The Council finds the fifth trend in the attitude of government toward
business related to the size, structure, and behavior of business organizations. No thoughtful person within government wants to abandon or
vitiate the "antitrust policy." The stultifying results of excessive cartelization in some other lands gives renewed evidence of the prescience of
those who wrote the Sherman and Clayton Acts and established the
Federal Trade Commission. Still, it is important to realize that our
industrial problems have changed continually and require recurrent
examination. Under our system of law and administration, many
adjustments to new situations are made interstitially without organic
reconstruction of the legal framework. These adjustments have been
going forward over the years. The process is never finished.
In a stable and expanding economy, there is room both for well conducted big business (with its unique facilities for scientific and developmental experimentation) and for small business with its display of
individualism and self reliance. Small business should be protected from
any predatory practices by its larger neighbors, and all business should
be protected against unfair competitive practices by units of any size.
Yet the truth at least in part is that small business is threatened not
primarily by big business but rather by big instabilities in the economy.
When the economy attains full prosperity and is moving upward, small
business in general does very well; but when the economy hits the toboggan many small businessmen are ruined not because they are less efficient
than big business but because they are weaker and have fewer sustaining resources. An economy that grows steadily, as our economy can,
would provide manifold opportunities for small business. Small business has some unique problems of obtaining financing, and more efforts
should be directed toward solving these problems.
We are still a long way from having completed the necessary rethinking of problems involving business size and practices.
Much more


work needs to be done. It should proceed in a spirit of fair objectivity
toward business both large and small.



The Council would describe the sixth trend in the attitude of government toward business as being away from the purely negative or
policing function and toward the affirmative or facilitative approach.
Our economy has become too complicated for government to function
best simply by placing "don't" signs all over the lot. Some things, of
course, the government must continue to prohibit or regulate—and
regulation may be focused in part upon affirmative objectives. But the
central problems of economic "balance" require adjustments which
cannot be achieved mainly by regulation. For example, regulation is
inadequate to correct an economic situation in which business might
not receive the incentives to stimulate a high enough level of investment.
Yet an inadequate level of investment can probably wreak economic
havoc. Consequently, the fiscal, credit, monetary, and other facilitative
operations by which government may promote an environment conducive to business expansion are at least as important as the more traditional
watchdog functions. Those government policies and programs which
affect farm income, industrial wages, or consumer incomes are also of
prime importance and call for increasingly thorough and objective

The seventh trend which the Council observes in the attitude of
government toward business relates to specific controls. The war made
these controls necessary. In our judgment, they were abandoned too
soon and could have been helpful in curbing the inflationary boom, and
rent control is still necessary. A better understanding between business
and government might even make it possible to have a broader range
of restraining measures available in reserve without concern that they
would be used prematurely or excessively. However, in the current
and foreseeable economic situation, it is far less important even to contemplate the restoration of the specific controls than it is to realize that
they do not for the long pull answer the basic economic questions confronting the American economic system. In peacetime, the mere authority to fix prices or wages does not in itself answer the question of what
relationship between prices and wages will be fair to all concerned and
most conducive to economic stability and growth. The answer resides
in improved economic understanding rather than in fiat. Nor, in peacetime, does the mere presence of control authority upon the statute books
obtain the popular understanding of price-wage problems essential for
their workable adjustment; and if this popular understanding exists, we
should in peacetime find better ways than specific controls to translate



it into action. The Government should use its fiscal and monetary
powers to promote economic "balance," and supplement these with such
well accepted programs as farm price supports, social security, minimum
wage legislation, developmental programs, etc. The other phase of the
task of promoting "balance"—which resides in the continuing adjustment of prices and wages and profits—should be left to the actions of
managers and workers within our business system itself.


The eighth, and in the Council's judgment the most important trend in
economic thinking within government as we observe it bears upon the
respective scope and weight of public action and private action in promoting stability and growth. During the mid-1930's particularly, there
grew up an influential school which held that our free enterprise system
was necessarily subject to violent fluctuations which could not be ameliorated substantially within the system. It held that only government
action, mainly through enlarging or contracting the volume of taxation
and public spending, could fill in the gaps in employment and production when these became large or curb inflation when it became dangerous.
The experience in the 19305s, however, demonstrated that when the
private economy ran sufficiently far downhill "compensatory" action by
the government became entirely necessary but was not alone sufficient
to restore and maintain satisfactorily high levels of general economic
activity. The reason for this was not simply that the "compensatory"
action was not big enough. The fact was—and still is—that the range
of useful projects susceptible to undertaking by government cannot be
sufficiently voluminous to counteract fully a general depression—even
when coupled with tax reduction. Further, public action beyond certain
levels or in certain fields may be offset by declines in private spending
and investment, so that the net gain is not equal to the total number
of public dollars spent. Similarly, in fighting inflation, mere increases
in taxation and reductions in public spending, while useful weapons, are
difficult to employ fully enough to curb inflation without bringing on
an excessive deflation. Nor do these fiscal measures alone deal adequately with the internal maladjustments in the price-income structure
which are primary sources of danger in the kind of inflation that we
have recently witnessed.
This leads to the conclusion that "compensatory" public action can
help to iron out minor fluctuations of the business cycle and must indeed
be used if big ones develop, but that complete recovery from a substantial downswing depends primarily upon the revival of private investr
ment. And because that revival becomes progressively harder to
accomplish as the economy moves further downward, the main concentration of economic policy should be upon encouraging stability and


growth within our free enterprise system itself. This is doubly true
in a prosperous period like the present, when action is feasible before
the eleventh hour.
Many government policies, if appropriately designed, can place foremost emphasis upon encouraging steady business expansion and thus
minimizing the fluctuations in business activity. This approach is sometimes referred to as creating a climate favorable to business. This is
true although the responsibility does not lie wholly with government.
Within enormous areas of action and decision, business holds within its
own hands the factors which condition its course. This is the essential
nature of a free enterprise system, and business should be encouraged
when government recognizes this cardinal fact.
Despite all efforts by business and government to promote steady
growth, "compensatory" policies form an important part of the techniques to be used for stabilization purposes. The difference between
the exaggerated use of the "compensatory" approach and the Council's
approach is a matter of degree or emphasis. This problem is further
treated in a later section of this report which stresses the need for somewhat more stability in national economic policy.
Sometimes the purely "compensatory" approach is referred to in
popular discussion as "Keynesian economics." In fact, Keynes placed
more emphasis upon structural problems than upon the cycle. Lord
Keynes was too sizable an economist and too enterprising a technician
for us to attempt to evaluate his great work in a report of this kind.
We shall content ourselves here with saying that, insofar as any popular
version of the "Keynesian economics" identifies it with the school which
placed exaggerated stress upon "compensatory" action, that school is
neither representative of our own thinking nor in our opinion characteristic of any important segment of government thought today.


Ill Trends in the Attitude of
Business Toward Government
As government economists, it would be presumptuous for the members of the Council to attempt a description of business thinking as fully
as we have attempted an appraisal of the prevailing government attitude
toward business. But it may be helpful to sketch briefly our own impression of business attitudes, particularly because public appraisal of these
attitudes obviously interacts upon government's attitude toward business. We discern a trend which is distinctly propitious to mutual
accommodation and adjustment.

American business is highly pragmatic, and its point of view has been
vitally affected by the war effort which brought to countless businessmen a new experience in public service. There they observed at close
range the operations of the whole economy, the interdependence of its
parts, and the common problems of all. True, the war economy and
its problems, as well as the solutions devised, were drastically different
from anything wanted in peacetime. Yet many businessmen in Washington during the war developed points of view which have immensely
influenced their subsequent thinking.
The net result has been an increased appreciation by business that
business and government are not enemies but friends; and that persons
permanently in the public service have the same virtues and faults as
Americans elsewhere and are equally committed to free enterprise as
well as free government. The government service needs additional inducements to bring more skilled businessmen into that service in
peace no less than in war. The idea that a businessman working for
government is "serving two masters" (even when he has divested himself
of private interests which might conflict with his public duties) is a relic
of the earlier thought that the sole or main purpose of government is to
police business. The problems of economic policy have shifted their
center of gravity away from this earlier concept toward an area where
the problems of business and government interpenetrate and require
complementary action. It is therefore desirable that the most practiced
exponents of industrial management should participate in government.
This is equally true of the practiced exponents of American trade and
industrial unionism, as well as of those who have been closest to the problems of the farmer.



Through the war experience, and in other ways, businessmen have
come increasingly to realize the immense influence of public policy upon
the American economy. The prevalent view that government should
adopt policies which "create a favorable environment" for business is a
far step from the earlier notion that government should just "let business
alone." For that could happen only if government had no policies
which affected the business environment. In addition, there is an
increasing measure of agreement about many policies now in effect.
Farm price supports, social security, Federal Reserve operations, and
Treasury debt management, to mention a few, have passed into the
realm where the debate is no longer at the central core but instead on
the periphery—dealing with improvements or modifications in detail.
This realism on the part of businessmen about the role of government
in modern economic society is accompanied by a mature view concerning
the need for a variety of policies blended in just proportion. This has
replaced an earlier view that some one trick or gadget would maintain
the economy in good health. Very few businessmen now believe that
the whole answer lies in some minor change in interest rates, in whether
the Government supports its bonds at par, in whether some particular
tax reform is adopted, in whether the labor laws are amended or
repealed. Instead it is recognized that big government is even more
complex than big business, and that the same skepticism of panaceas
and the same balanced judgments on a wide range of problems and
procedures which characterize the successful business manager are equally
necessary on the government scene.


Recognition by businessmen of the complexity of the modern economy
has made a majority of them increasingly distrustful of mere slogans or
shibboleths as a guide to the relationship between enterprise and
By way of example, mere slogans would lead all businessmen to believe
that privately negotiated pension systems are preferable to the expansion
of Federal old-age security because the former is "free enterprise" and
the latter involves "government." But this is not happening. Many
businessmen, on entirely unselfish grounds, are questioning whether the
random development of unequal pension systems in scattered industries
would really leave the business system more truly free than the systematic
development of uniform old-age security. And they are asking other
questions. If thoughtful business and labor have both been concerned
about the wide disparities in the wage structure, will this problem be
lessened as an equal or greater disparity arises in business costs for pension
plans developed sporadically? If labor mobility is a prime characteristic


of dynamic free enterprise, will business or workers have more freedom
when nontransferrable pension benefits weld particular workers to particular jobs? If business success depends upon flexible adjustment to
changing circumstance, should business entangle itself in cost ventures
which necessarily project a generation or longer into the future?
The Council is certainly not prepared to censure the drive toward
privately operated old-age security, which has arisen from delay in
enactment of changes in the Federal system. It seems to us that many
workers and employers have had no choice but to do what they have
done. Nor do we take the doctrinaire position that some thoughtful
combination of public and private insurance against old age may not
usefully emerge, although we incline strongly toward immediate expansion of Federal old-age security as the more urgent requirement. Our
main purpose is to illustrate that certain functions performed by government may be more consistent with the practical welfare of free enterprise—including both management and labor—than excessive efforts
by private business to perform those particular functions. And because
more businessmen are adopting this pragmatic view, the prospects are
increasingly bright for workable alignment of the functions of business
and government.



There are also general forces of compelling magnitude which contribute toward a better understanding by the business community of
the problems of government. This is evidenced in a statement made
by Mr. J. Cameron Thomson (on behalf of the Research and Policy
Committee of the Committee for Economic Development) before the
Joint Congressional Committee on the Economic Report on November
23 of this year. Mr. Thomson said:
The idea that great economic instability is inevitable in a free society is one of the
most dangerous ideas at large in the world today.

Most businessmen in recent years have not denied that great instability
could be avoided. The debate raged only as to whether such instability
was not preferable to even the minimum amount of government action—
in addition to extensive private action—conceded to be necessary for its
avoidance. We think that this debate is receding, with so many businessmen sharing the viewpoint expressed by Mr. Thomson that we cannot
confront the world with another American depression and still maintain
our position or security in the world of the future.
The informed businessman of today is acutely aware of the menacing challenge to free enterprise and free government which confronts
the West. He knows that this challenge must be met by firm and
comprehensive countermeasures, largely in the area of our international
economic policy.
He knows that the United States must take the
leadership in these measures, which are fundamentally economic in


character. He knows that for both historic and practical reasons
government must help to mobilize and give leadership to the programs
involved. Thus the businessman appreciates that perhaps the most important phase of public policy today is directed toward the literal salvation of the one kind of world in which the businessman can breathe.
In the struggle to preserve freedom, the businessman needs government; and government needs the help of businessmen in the development of practical programs. These are no times for bickering or prejudice. Ironically, the actions of those who believe that free enterprise
and free government are incompatible, and that one or the other or
both must be destroyed, are prompting free enterprise and free government in America to close ranks and to work together in the supreme
cause of human freedom.


IV. Further Needs in Government Economic Policy
Despite much progress in the relations between business and government, there are still some gaps in national economic policy as viewed
by the Council. The word "gaps" is used advisedly to indicate our
belief that improvement in current operations should proceed at least
apace with ventures into new fields. This does not mean that no new
programs are needed, or that the nation can pause in building upon solid
foundations. While this report is not the place for specifics, we have
said that measures such as social security should now be expanded. But
one way to safeguard progress is to consolidate the gains which have been

A cardinal task, as the Council sees it, is to achieve even more harmony and consistency among those outstanding programs of government which greatly affect the whole economy. During the critical midthirties, when some of the structure of current national policy was built,
there was no time to develop symmetry for the various wings of the
structure or to connect them with the center. This was inevitable during an economic emergency, but there is no such emergency now. The
privilege of men and agencies within a free government to give differing
advice should be cherished. But this does not mean that the final execution of public programs touching upon the whole economy should not
achieve that internal consistency and that harmonious relationship to
defined common objectives which any large undertaking demands.
In the context of this problem, much good may be derived from the
comprehensive work of the Hoover Commission and from the steps which
the President and the Congress have already taken to implement it in
part. More efficient use of personnel and of instrumentalities can
register great gains for the taxpayer and for the country. But administration is an arm of policy, not the heart. For every dollar affected
by the use of personnel, there may be a hundred or a thousand dollars
affected by basic economic policy. It is here that the most costly mistakes could be made or the most useful services rendered. Here also
manifold gains have already been affected, but there is need for still
more progress.
This progress toward still further harmony and consistency in governmental economic policy does not in the judgment of the Council call
for the establishment of more agencies or committees. It calls instead


for a unifying framework within which each separate economic policy
may be tested against its effect upon the general economy and upon the
promotion of maximum opportunities for employment and production
in free; competitive enterprise. This depends in turn upon the further
use of machinery which the Congress has already made available and
which the President has always been ready to use—the machinery of
the Employment Act of 1946. Progress in this direction is reviewed
later in this report.

As government economic policy becomes increasingly consistent, it
should also become somewhat more stable. The prudent American
family makes some arrangements lasting 20 or 30 years; a moderately
large business may look 50 years ahead; and a local government sometimes looks a century ahead. The biggest venture of all, our Federal Government, should strive gradually to modify its habitual practice of carrying almost all of its major policies and programs on a year or year and
a half basis. The credit and spending and regulatory and tax policies
of the Government are so highly conditioning to the whole economy that
the degree of stability of these policies affects the degree of stability
throughout the whole business world.
Some short-run shifts, indeed, are necessary to enable the Government
to alter its position and thus to "compensate" for changes in the private
business situation. But we have already in this report indicated that
if the Government moved gradually toward placing somewhat more of
its own activities on a somewhat more stable and longer-range basis, this
might add greatly to the stability of the whole economy. The placement of some public programs primarily upon this basis rather than
upon a "compensatory" foundation would also hold these programs truer
to their intrinsic purposes. The intrinsic purpose of public works is not
to take up slack in employment, but rather to build up our national
wealth by procuring certain end products which the country needs but
which cannot be produced in any other way. Similarly, a decision to
expand our educational facilities should be related closely to the priority
value which we place upon education, rather than to the usefulness of
school construction in taking up a business slack. All or some of these
programs may to a degree be expanded and contracted in response to
variations in private business. But the variation should not be carried
so far as to interfere with the primary purpose of these programs.
Our public programs are supported out of the production record
achieved by the economy as a whole. We should ask ourselves
what is the productive potential and capacity for growth of our economy
over a reasonable span of years, assuming that we are fairly successful
in maintaining full utilization of our material and human resources.
We should then ask ourselves what part of our output of materials,


money, and effort—over a similarly reasonable span of years—we want
to devote to specific purposes such as public improvements and education.
The Council admits that this involves social as well as economic judgments; but nonetheless the problem has elements which prompt economists to suggest an orderly method of arriving at results although they
do not presume to dictate what these results should be.
The Council thus leans toward some further development of reasonably stable policies, in a few major conditioning areas, to cover a moderate span of years. Allowance should be made for the growth potential
of the economy, instead of basing policy upon the assumption that the
economy will linger indefinitely near a point reached after a half year
of recession or fail to move again toward maximum levels of employment and production.
This stability and confidence, displayed by
government at so important a sector of the economy, might favorably
condition also the free enterprise sector.
The argument may be advanced that more stability in some public
policies is impractical because "we cannot see that far ahead." The
problem is admittedly one of degree. But it is easier to predict safely
that our economy will grow in the long run than that it will grow in
1950, although we believe the latter also to be true. This is not to say
that short-range adjustments have no place in a rounded economic
policy; some of these short-range adjustments may now be needed, but
they should not be asked to carry too heavy a load. If, despite the effect
of some reasonably constant public policies, serious downturns in general
economic activity should occur, it may still be practical to readjust public
policy upon observation of the event. Economic downturns do not
progress so rapidly that they leave no time for effective changes in policy.
However, we repeat the more important consideration that temperate
progress toward somewhat more stability in government policy would
promote more confidence and stability throughout the whole economy
and thus help to hold the manifestations of instability to manageable
One caution is called for. The foregoing discussion develops principles for gradual application, but it cannot be accepted as a necessary
guide to specific policies during the coming year. For example, while
we should aim in the long run for reasonable stability in tax policy, the
great changes in the tax structure over the most recent years and the
double reversal of economic trends in 1949 may make it necessary to
alter the tax structure somewhat before a basis for stability in future
years will have been laid. But this does not vitiate the principles which
we have set forth; it simply proves that the objective cannot be fully
accomplished overnight. The Council hopes that the specific policies
soon to be announced for 1950 will show some progress toward the goal
of improved stability and that this goal will be increasingly pursued in
subsequent years.






The need for still more harmony and consistency in national economic
policy, and for its placement on a somewhat more stable basis, has cogent
applicability to programs such as social security. A still better understanding between business and government would result if the excessive
separation were lessened between "economic" and "social" programs—between a government interested in encouraging the growth of
the economic system and a government interested in "welfare." Those
who quite appropriately raise the question of how much "welfare" is
going to cost, or whether our economy can stand that cost, clearly recognize that programs of social security which involve billions of dollars in
taxes and in public outlays cannot be divorced from economic
The support of people who are too old to work or who are unemployed
or ill does not create wealth. It is not like the production of goods and
services. For the most part, it enables certain individuals to consume
wealth which is being currently produced by others. The real question
is how much of current production may be diverted to support this particular type of consumption (above a base subsistence level, for that level
of support the economy must bear in any event) without sacrifice of
relatively more important objectives. This makes social security an
economic problem in the same degree as striking an appropriate balance
between business investment and ultimate consumption, or between
defense and foreign aid programs and the requirements of our domestic
Sometimes it is said that, whatever amount of income may be flowing
to the old or to the unemployed, it is economically desirable because it
creates purchasing power and thus provides demand for the products of
industry. But no additional purchasing power is created if this income is
simultaneously taken in equal amount from those who are still employed.
In fact, there might be future deflationary elements in a social security
system which for too long provided a large excess of forced savings going
into reserves over current payments to the aged. Payments to the old
or the unemployed which resulted from deficit financing would create
purchasing power of a sort. But purchasing power generated in this way,
while it would be better than no purchasing power at all, would not
have equivalent economic value to purchasing power generated by production efforts. For similar reasons, cutting the workweek simply to
provide jobs for more people—which is a form of sharing unemployment—would never be as beneficial as obtaining the full use of our productive resources, even though it might be a necessary expedient if we
failed egregiously in the more important task. Likewise, the age at which
workers retire or the size of the benefits they receive should not be determined by the fallacious idea that this is a good way to create more pur-


chasing power by adding the purchasing power of those who are not
working to the purchasing power of those who are working. We should
start with the assumption that our economy will be most productive by
providing useful jobs for as many people as are able and willing to work.
In that event the national policy with respect to the general age of retirement would be based not upon an artificial method of leaving more job
opportunities for others, but rather upon a decision that the functioning
economy can afford to support people who have reached a certain age
without requiring that they work further.
Social security programs are viewed in a distorted perspective unless it
is realized that their justification rests upon two grounds. First, that the
cost of caring for the old, the unemployed and the sick always falls upon
the economy; and that bearing this cost in a systematic way is more
efficient than bearing it through charity or improvisation. Second, that
as an enlightened nation we are willing and even eager to divert a portion
of our annual output away from capital replenishment and away from
consumption by current producers in order to make life more livable for
those who are unable to produce through no fault of their own. The
appropriate test for the size of a social security program is how much of
our resources on balance we wish to devote to this humane purpose,
taking into account all the competing purposes and needs of our kind of
economy. It is true that the social insurance programs make our economy somewhat stronger by cushioning it against fluctuations by their
"built-in stability" effects. But the larger question is how much of these
programs a strong and rich economy can and should afford.
The true nature of the social security problem being what it is, the
concept of "saving" for social security is in one sense useful and in another
sense misleading. It is useful to recognize that we must save in order
to enlarge our productive equipment. Without such enlargement, our
economy would not be able to turn out more goods from year to year
and therefore would not be able to afford the progressive expansion of
social security. But it is misleading to assume that through any process of
bookkeeping, either personal or national, millions of people can "save"
the food, and clothing, the medical care and recreational allowances
which they will be consuming 30 years from now when they retire. What
they consume when they retire will be produced not by themselves but
by the working force at that time, and what they save now should be
channeled insofar as feasible into current investment opportunity.
Tlie Council strongly favors the national system of social security
which involves contributions from employers and from workers on a
systematic basis, and which also involves contributions by government.
This is the best way to protect people in their old age as a matter of right,
and not to leave what may happen to them them later on subject to
unforeseeable policy decisions in the future. Yet our discussion of the
social security problem implies that gradual efforts should be made to


Improve the contributory system so that at least part of the contributions
would be more nearly on a "pay as you go" basis. By this, we mean the
gradual development of a closer balance between social security receipts
and payments from year to year. The ultimate objective should be
toward making withdrawals from the economy for the purpose of social
security roughly balance the contemporary cost of benefit payments,
although it might always be desirable to maintain some "reserves" of
significant size. We also believe that, as coverage becomes more general, a larger part of social security receipts should be obtained through
general revenues rather than payroll taxes.
This gradual development would be sound economics for reasons
already given; and it would also provide a better gauge as to the magnitude of future social security benefits which we can afford to enact into
present legislation. For if enactment of legislation now involves the commitment that X number of people who will not be working 30 years from
now will receive Y number of dollars of old age benefits per month, the
real test of whether the nation can afford such a program is not X Y
dollars per month measured against the current size of the economy
but X Y dollars per month measured against the productivity of the
economy 30 years from now. Social security expansion now, insofar
as it applies to persons who will not retire for many years, should make
considerable allowance for an assumption of continuing secular economic growth. Almost all of our national policies in the long run
depend upon the validity of this assumption. For otherwise we face
continually rising unemployment, under-utilization of our resources and
technology, and increasing disturbance to our whole economic system.
The Council's main reason for offering this analysis is to promote the
application of sound economic principles to social security matters. It
is not our function in this report to argue for a social security program
of any particular size. Yet it seems clear to us that the application of
sound analysis reveals that our nation can afford a considerably expanded
social security program without impairing our economic stability or
weakening our growth potential.

The Council's interest in the orderly evaluation and systematic reconciliation of public policies should not be misconstrued as any leaning
toward "blueprinting the economy" or "central planning." Except for
the reference to social security to clarify certain points in our analysis, we
have not here dealt with any specific additions to governmental programs. We have only stressed that, whatever the scope or extent of government programs, there should be applied to them those principles of
consistency and harmony which are valid in the case of any material
undertaking of business as well as government. The use within gov-


ernment of that "budgetary" concept which is applied by any large
corporation in the measurement of its competing needs and prospects
is compatible with the maintenance of a flexible and pragmatic spirit
in government as well as in business.
In the long run, this approach should lead to the simplification rather
than to the proliferation of public programs. For the more successful
government becomes in weeding out inconsistencies and adapting means
to valid ends, the more the taxpayer will be saved in direct administrative costs. And the more effectively government weighs the effect
of its established programs upon the whole economy and upon the
course of business development, the more confident and prosperous our
business system should become. This, in turn, may help to protect us
against those serious economic downturns which provide the main
impetus for certain types of public intervention in response to public need.


V. Further Needs in Business
Preparation for Stability and
Along with further progress in those government policies which affect
business, the record of recent years leads the Council confidently to
anticipate further progress in business thinking and practices. This will
help our business system to maintain that major responsibility for the
condition of our economy which is ascribed to it under the American
combination of free enterprise and free government.


First of all, our business system needs to embrace even more fully—
as its enlightened leadership has already done—the goal of continuous
maximum production and employment. This is not to say that so high
a goal is readily obtainable. Possibly some periodic setbacks of moderate
size are the price we must continue indefinitely to pay for the freedom
and flexibility which make our system so dynamic in the long run. But
this is entirely different from saying that the setbacks are desirable as
well as difficult to avoid. Very few businessmen really believe that the
drop in the industrial production index by about 16 percent, and the
increase of unemployment by about lJ/2 million, which took place in
1949, left them with a more confident feeling than if a better balanced
expansion in 1948 had prevented this decline. We are recovering from
that downturn because of the strong elements in our economy, and not
because of the deficiencies which generated the downturn. As our
system learns to develop still stronger elements, even if it does not succeed
in maintaining continuously maximum levels of activity, the downturns
can become more moderate and the upturns can become more certain.
Nobody should confuse the classic theory of how downturns occur
with the erroneous belief that they are helpful. Saying that a downturn
in production and employment is an adjustment of supply to demand
may be true; but supply and demand were thus "adjusted" even in 1932.
Saying that a downturn is inevitable, when backlogs of demand accumulated during a war period are worked off, may be a correct observation about the past; but it is simply another way of saying that we have
not yet learned how to make full use of our productive capacity in
peacetime. It is better to aim constantly toward maximum production and employment, because this will in the long run make our think-


ing clearer and our achievements greater, even though we have not yet
learned enough to reach this objective fully every year.

Occasionally it is said that a level of employment below the maximum
is desirable because it makes workers more efficient and improves productivity. Quite aside from the lack of scientific verification of this proposition, the Council feels that even more businessmen will come to recognize—as so many now do—that public sentiment toward mass unemployment is just as much a part of our economic life as the public's attitude
toward buying particular goods or spending particular portions of its
earned income. And whether unemployment is "too high" depends
as much upon what the unemployed think as upon what business thinks,
just as whether prices are too high depends as much upon what the buyer
does as upon what the seller says. Social and psychological considerations will come to enter more and more into business action because they
are a part of the environment in which business is done.
Since mass unemployment tends to build up resentment (whether
rightly or wrongly) against free enterprise, it injects a threatening element into business life and prospects which is enormously important.
Efficiency, even if it could be purchased at the price of so vast a danger
to our business system, would not be worth the buying. Our economic
system is strong enough to be sufficiently efficient without undergoing this
oppressive risk. And because every mass increase in unemployment
tends to shift the location of authority and decision from business toward
government, business has additional cause to strain every effort towards
its prevention.


Of course, government is a "political" process, just as the Constitution of the United States is a "political" document. But no businessman should resignedly take the position that it is futile to attempt to
influence public policy because he is outnumbered by workers and
farmers and "the government counts instead of thinks." Neither business nor any other group can offer any workable substitute for the
processes of democracy, because there is none. Further, democracy is
the system which affords the best opportunity for those with the qualities
of thinkers and leaders to make their weight felt although they are outnumbered. These qualities exist in abundance in the business world.
Some of the best friends of business, who are neither in government
nor in business, are now urging businessmen to assume increasing responsibility for participation in public affairs. This is a good thing.



Successful efforts to combat serious economic downturns must be
concerted. They must be on a massive scale, because the economy is
huge and acquires tremendous momentum when it starts definitely
upward or downward. The main advantage offered by government
policy in resisting economic fluctuations is that government can act
on this massive scale. The extent to which free enterprise can enlarge
its necessary contribution to economic stability hinges upon methods
whereby business itself may act more effectively and thus deliver a more
massive blow against the forces of deflation.
The dilemma is this: businessmen individually and separately may
react to the beginning of a downturn, or even to its prediction, in sufficient numbers cumulatively to accentuate the downturn. But no sufficiently satisfactory way has yet been found for businessmen individually
and separately to respond to the beginning or prospect of a downturn
in a manner which cumulatively holds the economy stable or propels
it upward. This is the real meaning of the importance of "business
psychology.55 Businessmen at certain stages in the economic process
take so seriously the first signs or predictions of a downturn that the
prediction may become, as the Council said in its First Annual Report,
"the engine of its own verification.55 If businessmen under such conditions could follow in sufficient numbers policies contributory toward stability or growth, or at least act in a manner consistent with the proposition that the long-range trend of the economy is upward, this might
provide a key to the dilemma.
There are two lines along which such action by business may be facilitated. The first is by more common study and education of how the
economy works and what policies may be most salutary at various
stages in the economic process. If the results of such inquiry were
sound and obtained sufficient acceptance, individual businessmen might
act (without the kind of concert which could be against good policy)
to cumulate the forces of stabilization and growth instead of cumulating the forces of downturn.
That this is not too much to work toward is demonstrated by the
economic history of 1949. The Council finds one explanation of why
the recession of the first half-year was so contained in size and duration in this fact: businessmen all throughout the postwar period, and
particularly during 1949, exhibited far more economic understanding
translated into practice than in those past periods which presented them
with somewhat comparable difficulties. To be sure, there were mistakes of price policy and other policy during the inflationary boom. But
in contrast with the period following World War I, the management by


business of its inventory and pricing policies was definitely superior.
Similarly, the fact that business knew enough not to react to the first
signs of the downturn by wage cuts or by layoffs (beyond the minimum
in the face of dwindling markets) was a sustaining factor along with the
sustaining influence of many public policies. There is no reason why
this behavior pattern exhibited in 1949 cannot be accentuated in future
However, the Council does not feel that the forces making for a
downturn in early 1949 were sufficiently powerful to put our business
system or our government policies to as severe a test as may occur at a
later period. Consequently, we feel that in order to be safeguarded
against the possibility of more ominous danger at some time in future,
the process of study and education and understanding needs to be carried much further by every feasible means.
Moreover, we feel that such study and education and understanding
may not be enough—even when added to vigorous public policies—
unless it is accompanied by improved institutional arrangements which
will come nearer to assuring consistent and massive private action on a
much broader scale than was exhibited even in 1949. Therefore, as a
second line of action, we favor further exploration of how these institutional arrangements may be developed and made most effective to expand business activity without that kind of collaboration in restraint
of trade which the Sherman Act wisely condemns. In the final section
of this report, we make some reference to meetings of management,
labor, and others to explore some guiding principles for private economic
policy on a voluntary basis.
These considerations, and in fact all that we have said in this report,
shape our thinking about the kind of fundamental study and analysis
most relevant to foreseeable economic problems in the United States.
We now turn to a somewhat more detailed description of the kinds of
economic study which we believe should engage economists, businessmen,
labor and farm organizations, and all those most deeply concerned about
economic stability in the months and years ahead.


VI. Focal Points for Economic
In carrying out its own responsibilities under the Employment Act,
the Council has found itself of necessity the carrier and purveyor of the
kind of improved economic analysis to which reference has been made
throughout this report. We have also been acutely aware of the gaps
and deficiencies, because we have been challenged to arrive at judgments upon matters where current facts and analysis have provided only
a very partial guidance. Our desire is to stimulate individual and
organized research through every available means.
By stating with some definiteness the difficulties which we have encountered or anticipate, we hope to provide further stimulus to those
lines of study and education which may be helpful to both business
and government. Those who have read the various reports under
the Employment Act will have identified some of these difficulties.
But many of them are in the future, since the life of the Council has thus far largely coincided with a period of high employment
achieved by war-initiated momentum. This period, it is true, has
presented serious problems concerned with inflation and its aftermath.
But for the problems of the future, these earlier reports have been only
trial runs. Largely concerned with immediate problems of postwar
adjustment, they have not adequately explored the long-run problems
of stability and growth.

Our economy consists of myriad interacting elements. The problem
of analysis is to reduce them to manageable categories of thought, to
trace the paths of interaction, and to identify strategic points at which
particular actions will lead to desired results.
At the base of the pyramid lie numberless facts. The principal way to
impound economic facts is through statistics. The effort to carry forward our work would have proceeded in darkness and disorder had it
not been for the tremendous programs of collecting statistical data
which have been put into effect over the past generation. Many private
organizations—business, labor, universities, research institutions—have
participated in this development. But in very large measure it has
been and must be the statistical activities of the Federal Government
which provide the necessary data. The cost and complexity of adequate statistical services far exceed the resources of any private agency.


As soon, however, as our work was initiated, it became clear that
existing statistical services although extensive were inadequate. This
was indicated in a committee print of the Congressional Joint Committee
on the Economic Report, Statistical Gaps, issued in 1948. It presented
a series of recommendations concerning the need for more complete
Federal statistics in several fields, summarized as follows:
( 1 ) Periodic surveys of consumer purchasing power and demand, sufficient to
(a) the distribution of income and saving available for expenditures by
geographic areas and among various consumer groups and income brackets, and
(b) current and prospective patterns of consumption and expenditures.
( 2 ) Collection of information on wage earnings of employees in activities not
covered by our social security system.
( 3 ) Improvement of the information on returns to capital and management of
unincorporated businesses.
( 4 ) Collection of more information on employment and unemployment, adequate
to reveal geographic differences in employment trends and unemployment rates, and
to provide data on occupational and other characteristics of the unemployed.
( 5 ) Development of more complete and current information on financial trends
in business, providing industry totals, data on business operations by size of business,
and information on business concentration.
( 6 ) Taking of an up-to-date census of wholesale and retail trade and services by
means of which the current statistics on business and distribution may be improved
and made more reliable.
( 7 ) Development of adequate concepts for measuring productivity and the collection of data to supply information on the course of changes.
( 8 ) Development of data on costs of construction and improvement of data on the
volume of new housing and nonresidential construction.
( 9 ) Improvement of inventory statistics by covering a larger and more reliable
sample which would permit a break-down of inventories at the various stages in the
industrial process.
( 1 0 ) Collection of detailed information on the relationship of requirements for
materials, capital equipment and energy to the volume of production, to permit
evaluation of the industrial consequences of production programs.
( 1 1 ) Collection of fuller information on business intentions with regard to capital
expenditures and related data.
( 1 2 ) Collection of more current and detailed information on expenditures of State
and local governments, for use in preparing estimates for the Nation's Economic

This list is merely illustrative of the wide informational base upon
which broad economic policy must be built.
Statistical facts, however, are just the beginning—the raw materials.
They must be made to mean something. Thus, the next great step lies
in the field of analysis. What relations between particular sets of facts
are of strategic importance? How do we relate the past relations to
future relations? How should we try to shape the collection of future
In attempting to answer such questions, we come squarely to the functions of economic analysis. And oddly enough, much of the most useful economic analysis is not based upon detailed facts. It is concerned
with the molds, or schemes of relationships, into which facts should be
poured. A concept of national income, of consumer income, of savings, of investment, of economic input and output—all these and others
are necessary before statistical facts can be made to mean anything
in relation to one another. We need a clear conception of the nature
and role of credit, of the impact of wage changes upon costs, prices,


and incomes. We need clearly to see why a scheme of competitive
enterprise works, and wherein its problems lie. The analytical framework can be, and has been, expanded and improved by economic
statisticians. But it is largely economists who have devoted themselves
to the broader framework of economic relations. Creative scientific
thought and investigation precede the ability to build a radio, a bridge,
or a bomb. And so it is with economics. In order to be more explicit,
and to identify certain respects in which further economic analysis is
needed, we shall now consider certain broad areas within which the
Council's work falls.

The first of these areas is the appraisal of current and foreseeable
trends, commonly called forecasting. The immediate past is always
fairly well visible to the naked eye with the aid of existing, though still inadequate, statistical data. The course of employment, business activity,
credit, investment, consumption, etc., can be discerned, and their shifting
relations followed for a past period of time. But what of the future?
What is to be anticipated? And if the outlook is not satisfactory, with
what confidence can preventive remedies be put into effect prior to the
event? This is the rock upon which many people have foundered in
their effort to see how any generalized economic policy might be made
to work.
While it cannot be denied that the art of economic forecasting is far
from well developed, this shortcoming may easily be exaggerated.
Expert attention to the course of events can give an informed opinion of
where they are tending. On this basis, preparation can be made for
meeting developments which lie within the range of probability. This
is what the Council now has to do, and all those responsible for the
development of private or public economic policy cannot avoid formulating some view of the probabilities in the case. Nevertheless, the
deficiencies are real and every effort needs to be made to diminish them.
Various useful experiments are now under way. One of the most
promising is the wide sampling of business anticipations and of business
intentions with respect to investment. Fluctuations in business investment have in the past been very marked and are breeders of instability
elsewhere. Knowledge of the prospects in that direction is one of the
most important keys to the short-run outlook. It is, of course, true
that business plans can be changed rapidly, and prospects as seen by
private firms must be checked against all other indicators of trends.
But the possibility of a much improved approach to forecasting is undeniable. The Department of Commerce and the Securities and Exchange Commission are jointly engaged in developing improved procedure in these fields, as are also several private agencies, particularly
Dun and Bradstreet and the McGraw-Hill Publishing Company. They


promise to become increasingly useful as techniques are perfected and
statistical samples broadened.
Another promising type of inquiry is that which samples the financial
position and anticipated purchases of consumers. The principal pioneer
in this field is the Survey of Consumers' Finance sponsored by the
Federal Reserve Board. From it may be inferred changes in the intensity of consumer demand in different directions as, for example,
toward housing, automobiles, and other durable consumer goods. As
with business investment, consumer plans can change rapidly if income
prospects change, that is, if the whole economic situation changes. But
in conjunction with other indicators, such information is extremely
enlightening. The techniques which are being developed are likely to
be found useful by private market research agencies, bringing a marked
increase in the available information.
There are a good many types of statistical forecasting systems being
experimentally used by private agencies, particularly financial and investment houses. Some of them may be very imperfect, but in the
aggregate they include a large amount of intelligent effort to assess the
factors which are shaping the future. The more widely such intelligent
attention is directed to these factors, the greater will be the opportunity
for well informed business decisions.

The second broad category of work identified by the Employment
Act, and certainly central to economic policy, has to do with defining
objectives. The Act calls this setting "needed levels of employment,
production, and purchasing power" in order to promote maximum
levels. The fields of inquiry implicit in these simple words are so
numerous as to be almost beyond description. But what is involved
may be indicated by selective examples.
One group of subjects may be called the institutional structure of the
American economy and the means to its improvement. This may be
illustrated by the structure of the investment markets. One overall fact
that seems reasonably clear in regard to the sources of funds is that business and social evolution has wrought some irreversible changes in the
mechanism of private investment. The role of the wealthy independent
investor is diminished, while the importance of business savings and
indirect institutional investment of individual savings is increased. Constructive effort to meet the problems involved in this adjustment calls
for intensive research into existing and potential new means by which
the savings of the security-minded small saver can be made available for
business investment without excessively burdening risky enterprises with
The central importance of this problem is apparent on its face, since
one of the surest ways to halt progress and magnify unemployment is


for a large part of the saving of the people to fail to find an outlet in
new productive capital. The study of this problem is one which deserves
wide attention by economists and by those agencies engaged in administering the people's savings. Such studies can broaden out to include
the whole credit structure of the country, including that part which is
directly administered by the Government, with a view to adjusting it
to the expanding and changing needs of the country.
Problems of institutional structure arise in many other fields, for
example, in the labor-management field. The whole economic well
being of the country is closely related to the outcome of collective
bargaining agreements. The basis for decisions compatible with the
public interest, under modern conditions, requires continuing intensive
study by economists, by government, and by the parties to the bargaining
process. Similarly challenging problems arise also in the field of market
structure where the price and production policies of large-scale business
have a very direct bearing upon the health and progress of the economy.
Institutions exist for a purpose. One way of stating the purpose is that
they are for achieving goals. The primary goal under the Employment
Act is that our working population and other resources should be as
fully and efficiently employed as possible. But this goal embraces in fact
many goals. It comprises all the conditions which are significantly relevant to the central purpose. Consequently, in addition to concern with
the improvement of institutional structure, economic study and policy
should concern itself with another group of subjects under the broad category of goals, or needed rates of growth in various directions. There are
various ways of approaching this subject, and one of them is to assume
that, if things can be kept going well in the short run, the long run will
look after itself. There is some point in this thought, but not so much
that the Council has thought it proper to forego all inquiry into the
capacity of the economy for growth. On the contrary, we have felt it
important that explorations be made, in quantitative terms, into the
productive potential of the economy as time goes on, and into some of
the interior adjustments within the economy which that development
will entail.
The Council's own experiments in this field have been conducted in
the form of hypothetical projections of the Nation's Economic Budget.
But they can be conducted in other ways, and the more ways the better.
In any case, they all involve an advance estimate of our productive
resources at various stages of development and the amount and character
of their productive yield, upon certain stated assumptions. A pathbreaking contribution to studies of this sort was the comprehensive
volume, America's Needs and Resources, prepared by the Twentieth
Century Fund.
In a way, it is not entirely satisfying to call the outcome of such
projections "goals." They are not like the goals of a Russian five year


plan. They are not "plans" toward the achievement of which every
resource of public authority will be directed, and for failure of which
heads will fall. In one sense, they are bench marks of progress, evidences
of the attainable. But in another sense they are simply an instrument
through which we can more carefully study the conditions of progress.
Does one anticipate a growing or declining relative place of government
in the economy? And why? What factors suggest a changing proportion between the production of capital goods and consumer goods?
Is it possible to measure the levels of investment needed to support stable
progress? The mere effort to make the projections leads the mind to
ask fundamental economic questions. While some of the answers are
necessarily very general or tentative, they are not without meaning
or utility.
But more is accomplished by this occupation. It moves us toward
a closer inspection of the logic of various public programs of a developmental character. Upon what assumptions is the size of programs of
resource development based, and how are they related to other assumed
developments in the economy? With what state of economic development is a housing program equated? Upon what base of national
income can social security obligations be projected? Such tests of relevancy are presented to public programs reaching far into the future.
One further purpose is served. The American economy cannot reach
its potential unless its possibilities catch the imagination of those who
plan for the future and invest in it. If investment decisions are made
on the basis of "experience" alone, the backward view, they may not
adequately correspond to what the future can support. The possibilities are not infinite but they are great, and numberless farsighted
private decisions will have to be made to capture them.
The adequate exploration of the future calls for the best talents of
many minds. Economists and statisticians can work out the models
and fill in many details, but the attention of experts in many fields is
needed. The improvement of our economic institutions, the patterns
of growth in our resources—these are subjects which will repay dividends
to detailed analysis in the form of a more comprehending approach
over the years.


The third broad category of tasks falling to the Council is that of
appraising and recommending policies and programs. The two other
categories of our work, as discussed above, are technical in character.
While they give rise to disagreement, it is disagreement mainly on technical questions of analysis. But this third category is in vital respects
of a different sort. It is public action that is under discussion. These
actions in some measure affect everybody, in their self interests, in their
most deep seated ideas of what is good and what is not. Economic action in a democratic society is distilled out of varied viewpoints.


The work of the Council necessarily involves controversial issues. But
in this report we deal with that primary aspect of the Council's concern
with policy which is technical in character. The process of arriving at
informed judgments concerning measures which will contribute to economic stability is to a high degree an objective process. It involves
economic analysis of the consequences of various lines of action. It
requires the choice between alternatives on the basis of that analysis.
The pattern of sound economic policy is not easily discerned. There
are other ends of national policy besides economic stability and growth.
Some of these have to be accepted as data. The size of the defense
program required for national security, for example, involves factors
which the economist cannot even weigh, although it involves other
factors where his techniques may be useful. Yet even within these
bounds the task is complex. Particular measures may have short-run
effects of one character and long-run effects of another. Or they may
have conflicting types of short-run effects. In an inflationary period the
building of more houses may force prices up by competing for scarce
materials, but it may also relieve a critical housing shortage. Which
consideration has the greater weight? A blend of judgment is constantly needed.
The problems of practical economic evaluation extend even further.
How is it best to do the things which ought to be done? Means and ends
are almost inseparable in their impact upon economic activity. Enough
has been said to suggest, though only broadly and with little detail,
that there are almost endless spheres in which the talents and skills
of economists and other experts could be brought usefully to bear upon
the problems of economic stability and growth. We hope that both
with and independently of our stimuli there will be much more effort
by others in many fields, and that the results of their work will flow
freely for the benefit of all.
The task, however, goes further. Economic policy is not the exclusive
province of economists, or of the Council or the Congressional Joint
Committee. The impress of facts and of acute and disinterested analysis must be widely felt. It must be felt in the Congress, throughout the
executive agencies, in the circles of business and farm and labor leadership, and out into all the byways of the country. The problems must be
widely known; technical foundations of policy must be widely understood; the disinterested and professional character of the underlying
analysis must be established. If this foundation can be built, economic
measures designed intelligently in the public interest should increasingly
find their way into the stream of public and private action.


VII. Recent Developments in
Council Operations
This report has already made it abundantly clear that work under the
Employment Act is a cooperative venture in the broadest sense. It
involves business and government because both have basic responsibilities for the stability and growth of our economy in a free society.
It involves organizations of workers, farmers, and consumers, which are
of equal importance to business management although in this particular
report we have stressed the functions of the latter. (On later occasion, as we have said, we may deal in equal detail with the relations
between government and these other organizations in our private
economy.) It involves the interplay of numerous agencies and instruments of government. It involves the President and the Congress. It
implicates the economics profession, whose members prepare so much
of the resources of scientific research underlying the practical tasks of
the Council. Perhaps the hardest task of the Council as a small body
is to develop relationships between itself and others which will keep
moving in both directions a constant flow of information, stimulation,
and improved thinking. The best way to describe the progress in our
operations, therefore, is to outline some of the recent trends in these



The Council has continued during the year its frequent meetings with
representatives of business, labor, agriculture, and consumers. During
our first years, these meetings were devoted mostly to general discussion
of the economic outlook, supplemented by somewhat random consideration of specific problems which our visitors might raise with us around
the conference table. But beginning with the last quarter of this year,
we have instituted a new idea for which we have high hope. We have
suggested to our conferees that together we undertake to designate one
or two special problems for consideration at our next succeeding quarterly meeting, and that in the interval their staff resources as well as
ours undertake to work up specific studies which might be circulated in
advance of discussion. In addition to the manifest merit of this pooling of resources, we hope that the psychological advantage of working
together as well as talking together will intensify the realization that the
purposes of the Employment Act involve the whole nation and certainly
cannot be furthered in an ivory tower.


In the course of our development of this plan, some of our conferring
groups have suggested that, instead of meeting separately with representatives of various sectors of the economy, we should undertake joint
meetings and perhaps joint studies with representatives of industry, agriculture, labor, and consumers functioning as a single team. There are
some practical difficulties involved in this method of approach, but the
Council does not deem them insurmountable. Certainly the argument
that such meetings lead to hot disputation instead of calm analysis can
carry little weight among those who realize—as this report has sought
to stress—that the reconciliation of conflicting views and seemingly conflicting interests is the hallmark of free enterprise and free government.
We hope that procedures along these lines may be perfected, and that
one of the most important collateral benefits will be the encouragement
of mutual efforts along the same pattern but on a more decentralized
basis throughout the nation. In such efforts the Council will not generally be able to join because of limitations of time and staff, but it is
encouraging to note that already in some states agencies somewhat similar to the Council are being considered or have already been established.

The network of the Council's relationships with other agencies of government has been described rather fully in previous reports. Particularly
during the latter part of this year, these arrangements have been carried
further. In the preliminary development of materials for the forthcoming January reports, members of our staff assigned to specific topics have
initiated working committees tying in with other parts of the government
devoted to research or operations in the various fields. Different groups
have been studying the requirements for and the impediments to a high
level of business investment; the interrelationship between international
and domestic economic policy; the progress of the program for treating
spot areas of unemployment; the relationship between agricultural adjustment and the general economy; the coordination and timing of the
wide range of public works and developmental activities in the perspective of economic trends both secular and cyclical.
The Council should not be simply a reviewing body which looks over
the proposals made by operating agencies and recommends to the President how these proposals may be fused into a consistent and sound economic policy. Our work to be effective must commence at a much
earlier stage in the process. It should include participation in the developmental thinking about those policies and programs which are of
central concern to the whole economy. Only thus can other agencies
receive our assistance at an early enough stage for it to be fully effective;
and only thus can we be brought in contact with their work at an early
enough stage for us to comprehend it fully and be benefited fully by
their thinking and experience. We feel that during the course of the


coming year, encouraged by the splendid cooperation thus far received,
we shall be able to move toward the fuller professional service which the
reading of the Employment Act and of its legislative history shows so
clearly to have been the expectation of the Congress.
Practically every program and policy of government passes at some
stage through the Bureau of the Budget; and those matters which importantly affect economic affairs channel also through the Council.
This does not involve duplication, because the functions of the two
agencies are manifestly different although closely interrelated. Yet the
problem of adjusting other economic policies to the hard facts of the
budget, and the correlative problem of adjusting the budget to the hard
facts about the economy, mean that the Council must maintain closer
year-round contact with the Bureau of the Budget than with any other
agency. This contact has been greatly facilitated by the cooperation
which the Bureau has extended to the Council.

The signatories of this report have never found any reason to believe
that our special service to the President under the Employment Act could
be inconsistent with that degree of cooperative servicing of Congressional
Committees—particularly the Joint Committee on the Economic Report—which has become the traditional practice of policy advisers to
the President who are set up under law, entrusted by law with a specific
field of study and advice, and responsible under law for explicit participation in reports and recommendations transmitted to the Congress.
The "problems" which such advisers face in occupying a confidential
relationship to the President while cooperating with the Congress have
been exaggerated, and in any event are not peculiar to economists; and
it is less important that the Council be spared these "problems" than that
the Congress, at least as much as the economic groups with whom we
deal, have access to our open and full discussion of economic fact,
outlook, and policy.
Our most recent discussions with members of the Joint Committee on
the Economic Report have strengthened our belief in this principle and
practice. We look forward to exerting every effort toward making our
best contribution to the furtherance of one of the most important objectives of a free government—mutual respect and common purposes between those who serve in the executive and those who serve in the legislative branch. The only way to further these ends is to work together
on problems confronting both.