Full text of Housing, Social Security, and Public Works
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POSTWAR ECONOMIC STUDIES
No. 6, June 1946
HOUSING, SOCIAL SECURITY,
AND PUBLIC WORKS
RAMSAY WOOD
ELIOT J. SWAN
WALTER F. STETTNER
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON
Published June 1946
CONTENTS
PAGE
PREFACE
HOUSING NEEDS AND THE HOUSING MARKET.
Inside Front Cover
.RAMSAY WOOD.
1
Housmg Conditions and the Housing Market
Magnitude of the Problem
Prospect for Meeting the Need
Experience of the 1920's
The Market in Which Houses are Built
Need for a Housing Program
The Setting for a Housing Program
Improvement of Housing and the Stimulation of Activity
Reasons Commonly Advanced for the Existence of Poor Housing..
Nature of the Solutions Proposed
General Solutions
Owner-Occupied and Rental Housing
Housing in Suburbs and in Cities
Housing for Different Income Groups
Analysis of Proposed Solutions
The Role of Capital Values
Reduction of the Cost of Building
Reduction of the Cost of Maintenance and Operation.......
Reduction of Interest Rates
Monopolistic and Restrictive Practices
Urban Redevelopment
To Sum Up
Elements in a Housing Program
Objectives of a Housing Program
The Kind of Market to be Achieved
Approaches to the Objectives..The Role of Local Governments
The Role of State Governments
The Role of the Federal Government.:
Specific Steps toward the Objectives
National Housing Agency
Federal Housing Administration
Federal Home Loan Bank System
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CONTENTS
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HOUSING NEEDS AND THE HOUSING MARKET {Cont)
Elements in a Housing Program {Cont.)
Specific Steps towards the Objectives {Cont.)
Federal Public Housing Authority
Housing Loans for Veterans
Problems Remaining
ECONOMIC ASPECTS OF SOCIAL SECURITY...
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.ELIOT
J.
SWAN.
Present and Proposed Social Insurance Protection
Unemployment Compensation
Old Age and Survivors Insurance
Disability and Medical Care Insurance
Economic and Fiscal Aspects of Social Insurance
The Contributory Principle
The Reserve Problem
Government Financial Participation and Economic Policy
Fiscal and Economic Effects of the Existing Insurance System
Effects of Pay-Roll Taxes
Unemployment Compensation
Experience Rating
Old Age and Survivors Insurance
The Cost of Social Security
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PUBLIC WORKS AND SERVICES IN THE POSTWAR ECONOMY
WALTER F. STETTNER 63
The Place of Public Works and Services in the Economy.:
Public Works and Services—A Reflection of Changing N e e d s . . . .
Public Activity and Private Enterprise
Public Works and Employment
Public Works and Cyclical Fluctuations
Paying for Public Works and Services
An Inventory of Needs
Transportation
Urban Redevelopment
Agricultural Needs, Forests, and Recreation
Regional Resource Development
Public Health and Medical Care
Education
Recapitulation in Terms of Annual Outlays
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CONTENTS
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PUBLIC WORKS AND SERVICES IN THE POSTWAR ECONOMY
(ConL)
Prerequisites of an Effective Program
Advance Planning
Adjustability to Changing Needs
Functional Balance
Effective Intergovernmental Relations
An Illustration—Urban Redevelopment
Prospects for Expansion
Congressional Reports
Federal Legislation
State and Local Preparations
Conclusion
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HOUSING NEEDS AND THE HOUSING MARKET
by
RAMSAY WOOD
Division of Research and Statistics, Board of Governors
Different people look forward to a large volume of residential building
in peacetime with different objectives in mind. Some see in it an avenue
for the investment of savings; some see the employment of labor; some
see markets for the products of the industrial system; and some see the
provision of decent and wholesome living conditions for the families
which make up the population of the United States.
To bring our housing up to decent levels for the middle and lower income groups, as well as to meet the demands of those who have always
been able to afford good housing, will require a good deal of new building.
It will thus provide a great amount of employment at the site, open a large
market for industrial products, and engage the services of the various
groups concerned with the transfer of real estate. To get this building
done and the new houses occupied, credit will be needed—credit both to
builders and contractors, and to the owners who occupy or rent out the
structures built.
Housing is needed primarily, however, not to provide employment to
workers, profits to businessmen, or fees to professional groups, but rather
to supply a basic service. The primary purpose of a housing program
should be to see to it that an adequate supply of housing that meets recognized standards of health and decency is available at charges commensurate with family incomes.
Such a housing program, directed chiefly at the conditions of housing,
is perfectly consistent with programs looking to the maintenance of full
use of resources in the economy. Indeed, a definition of consumption
goals is necessary before full use of resources itself can be defined. The
goal which we must set for housing, as one part of the consumption goal
of the economy, is that, within a reasonable period of time, every American family shall have living space which meets accepted standards—
standards not only for structures, but also for occupancy and environment. To achieve this we must build housing on a sustained scale such as
we have never approached before. How this housing is to be provided
depends on how much we want, what kind we want, how much we want
1
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
to pay for it, and the resources, techniques, institutions, and organizations which we have available, or can make available, to provide it.
The provision of new housing has varied widely in the past. In the
period between the two world wars, the number of new nonfarm dwelling
units built rose from 247,000 units in 1920 to 937,000 in 1925, fell to
93,000 in 1933, and then rose again to 515,000 in 1939. New nonfarm
residential building has consequently represented a varying proportion
of total economic activity; it averaged about 3 per cent of the gross national product in the interwar period, but varied from 1 per cent in 1920
to 5 per cent in 1925 and less than 1 per cent in 1933.
The relative importance of expenditures for the use of existing housing
—which averaged close to 12 per cent of gross national product between
the wars—is greater and has not been subject to such wide changes.
Between 1929 and 1941, about one dollar out of every seven spent by
consumers for goods and services was spent for house space, counting the
use of owner-occupied houses at market rental value. This proportion
has varied somewhat over the period, being about one dollar in six in the
depths of the depression, and about one in eight in 1940. In 1944 the
proportion was lower—only about one dollar in twelve of consumption
expenditures went for house space—largely because rent controls were
imposed before rents had risen markedly.
What particular families spend for housing depends largely on the size
of their incomes. In general, families with smaller incomes spend less for
housing than do families with larger incomes, but at the same time, devote
a somewhat larger proportion of their expenditures for goods and services
to housing. For example, in 1935-36, non-relief urban families with incomes between $500 and $1,000 spent on the average about $182 for
housing, while families with incomes between $2,000 and $3,000 spent
about $406, or somewhat more than twice as much. The $182, however,
represented 22 per cent of the entire expenditures of the lower income
group for goods and services, while the $406 represented only about 19
per cent of the expenditures of the higher income group. Because the
more prosperous were able to add to savings while the lower income group
had deficits, the $182 spent for housing represented 24 per cent of income,
and the $406 only 17 per cent.
The quality of housing obtained by lower income families is much
lower than that obtained by higher income families. In 1940, two-thirds
of the houses occupied by nonfarm families whose incomes in 1939 were less
than $1,000 had gross defects—such as lack of sanitary facilities and need
HOUSING NEEDS AND THE HOUSING MARKET
3
for major repairs—which could be observed by Census enumerators, while
only about one-eighth of the houses occupied by families with incomes
between $2,000 and $3,000 had such defects. Of all the houses occupied by
families with incomes below $1,500 (somewhat more than half of all
families) only about 40 per cent were free of gross defects. For families
with incomes above $1,500, almost 85 per cent of the houses were free of
gross defects.
In a measure, therefore, the problem of assuring decent housing for
every family, which is part of the general problem of maintaining adequate
consumption, is one of assuring sufficient income to every family. There
are special problems in the field of housing, however, which have to be
considered and solved within the framework of a plan for a high level of
employment and income and high living standards in the economy as a
whole. These special problems arise from the nature of housing and of the
housing market and from the way people react to their housing conditions
and changes in their incomes. The significance of these elements can be
better appreciated after we have examined housing conditions and needs
and the way in which housing has customarily been provided.
HOUSING CONDITIONS AND THE HOUSING MARKET
The housing problem is often discussed mainly in terms of eliminating
slums, but in reality it is much wider than this. So long as the bulk of the
middle class is only indifferently housed, relatively little headway can be
made in improving conditions for the lowest income groups. In other
words, a large part of the problem is to devise ways of raising the quality
of housing available to those in the middle income groups to a level consistent with the capacities of the modern American economy. If we can
do this, slums and substandard housing will appear clearly as the anomaly
they are; if we cannot do this, there is little likelihood that public opinion
will support programs of the kind and scope needed for the elimination
of archaic housing. This is not to say that slum-clearance and the provision of subsidized housing should be stopped until the housing of the
middle classes is perfected—on the contrary, both goals must be sought
together; but the success of programs to improve housing conditions for
the lowest income groups will depend more on the improvement of housing
conditions in general than on convincing the public that bad housing
costs the community money or on devising techniques which make the
financing of public housing easier.
Nevertheless, we can obtain an idea of the magnitude of the housing
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
problem if we look first at the amount of substandard housing in existence.
Magnitude of the Problem. The National Housing Agency, using
Census data, has estimated that 7 million of our 30 million, nonfarm
houses, or close to one-fourth, were substandard in 1940.1 If we apply
somewhat lower standards to farm housing, we find that about 2.5 out of
7.6 million, or one-third, were substandard.2 The number in both categories has no doubt increased since then.
Precisely what is adequate housing can be debated at great length,
but most of the debate is over details of more and less. On the major
elements essential to adequate housing there is little disagreement. Houses
must be substantially built, safe against fire, tight against the weather
and vermin, and provided with at least elementary equipment and facilities. They must be of a size, in both area and number of rooms, appropriate to the size and composition of the families which are to occupy them;
they must be located on suitable land in neighborhoods and communities
which offer the services and facihties needed in modern society; they
must be available on a tenure adapted to the circumstances of the families
which are to occupy them; and they must be available at costs which the
occupants can calculate and pay. The criteria for essential sanitary equipment and other facilities in houses may vary from place to place, but
they should always be sufficiently exacting to safeguard the health and
decent comfort of the occupants.
Because the 1940 Census of Housing took account of only a few of
these elements, the NHA estimate of the amount of inadequate nonfarm
housing in the United States in 1940 must be regarded as a minimum. It
seems likely that if we were to examine our nonfarm housing with the
idea of eliminating all that cannot economically be made to conform to
the community's sense of what is at least adequate, we should find the
count of substandard units to be at least half again as high as was found
by the National Housing Agency. In other words, substandard housing
probably makes up more than one-third rather than one-fourth of the
nonfarm supply.
There are several reasons for the existence of substandard housing.
Much of the housing built in our great seaports for immigrants at the
1
National Housing Agency, Housing Needs: A Preliminary Estimate {National Housing
Bulletin i), Washington, D. C, November 1944.
2
This paper is concerned with nonfarm housing generally, and does not deal at all with
farm housing, which presents quite different problems. In a more detailed treatment, distinctions would also be made between urban and other nonfarm housing problems and markets.
HOUSING NEEDS AND THE HOUSING MARKET
5
end of the nineteenth and beginning of the twentieth centuries was substandard, even in terms of the standards which existed then. This is true
also of the housing built for miners in many areas. Houses that were substandard 50 or 25 years ago almost certainly violate municipal building,
health, and housing codes today. One of the reasons the local governments
have not removed such houses is that other housing has not been
available.
Some substandard housing was good in its day, but age and neglect have
worn it out; part of this housing can be brought up to our present standards of adequacy by repair and modernization. Still other housing is substandard, not because the structure itself has run down, but because the
area in which it is located has run down. Industry has come in, commercial
activities have grown up, or the area has become overcrowded. Generally,
the occupants of such quarters should be housed somewhere else and the
areas developed for other purposes.
The National Housing Agency has estimated that, if we want to eliminate substandard housing in 20 years, we will need to build 12,600,000
houses in the first 10 years after the war. About half of this number
would be needed to take care of the normal growth in population, and of
returned veterans, and to permit those families now sharing units in
existing structures to have quarters of their own; the other half would be
needed to replace half of the substandard housing standing in 1940 and
all of the units becoming substandard currently, as well as the relatively
small number of dwellings destroyed by fire, storm, and other disaster.
But even at this rate of building, at the end of the first decade 3.5 million
nonfarm families would still be living in substandard houses. If, on the
basis of the discussion above, we raise the number of substandard units
standing in 1940 to 11 million, we could build between 14.5 and 15 million
nonfarm units in the next 10 years and still end the decade with 5.5
million families living in substandard houses.
Is the building of between 1.2 and 1.5 million new nonfarm units a
year within the capacity of the economy and the construction industry?
In the best year we ever had—1925—we produced only 937,000 units,
and in the bestfiveyears—1923 to 1927—we averaged only 872,000. Today,
however, the economy is much larger and more productive than it was 20
years ago, and the record of the past makes an inadequate goal for the
future. We shall require time to overcome difficulties arising out of the
war and to start new houses at an annual rate of even 900,000 units;
but once these difficulties are met, there will be nothing—at least in
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
terms of available resources and organization—to prevent our building
at the rate needed.
Lest it be argued that the low quality of our present housing is an indication that people do not want good housing, it may be noted that there
is substantial evidence against such a thesis. We know that the kind of
housing people have depends largely on what their incomes are—the
higher a family's income, in general, the better the housing it has—and
when there is a choice available, people move out of poorer housing into
better housing. Part of the wartime shortage of housing is attributable to
the fact that many families became financially able to obtain more suitable quarters. We need not fear that a program of raising the quality of
housing in the United States would run counter to the wishes of the
people whose living conditions would be improved. And we have ample
resources for such an increase as well as for considerable increase in the
consumption of many other goods and services.
Prospect for Meeting the Need. What is the likelihood that we shall
build 1.2 or 1.5 million housing units each year for even a decade after the
war? A number of influences will make for a large volume of building
during the next four or five years: after the United States entered the
war, there was very little residential building except in war production
areas, and even there the amount of housing provided was the minimum
necessary to house the increased population under more crowded conditions than would be acceptable in peacetime, even if family incomes were
considerably smaller; many families have built up savings which can be
spent rapidly when goods and services become available; special financing
facilities have been made available to returning veterans for the acquisition of homes; and a relatively short time will suffice for house builders to
get into operation.
These influences may be offset by several other factors. Rapid restoration of supplies of goods which consumers have gone without in recent
years may result in a decline in prices, curtailment of production, and a
substantial amount of unemployment; if this happens, many individuals
will be forced to spend their savings for living expenses and many others
will prefer to keep their savings rather than spend them on durable goods,
and especially on houses, which require long-term commitments, and
there will be some sharing of quarters by families whose incomes decline.
If war workers migrate in force from war production areas, the shortage
of housing which has developed may be reduced in these areas, though
it may be increased in the areas to which families move. Values of existing
HOUSING NEEDS AND THE HOUSING MARKET
7
houses have risen substantially since the war began, and, if we have
further marked price advances in the immediate future, costs may rise
to a point where workers cannot afford to buy or rent new houses.
Even if these unfavorable elements do not turn out to be important,
the prospect, for reasons that are developed in the following sections, is
for a postwar residential building boom of perhaps four or five years duration, rather than for a sustained high level of residential building, unless
basic conditions in the housing market are considerably improved.2*
Experience of the 1920's. Our experience in the 1920's offers some clues
to what is likely to happen in the next few years. After the last war there
was an acute shortage of housing, partly because there was relatively
little residential building during the war, partly because the increase in
the number of families and the migration of families from farms to cities
were both great during the war, and partly because high incomes during
the war accustomed many families to quarters of their own. Rents and
prices increased rapidly after 1918 when most of the wartime controls
were removed, and the building of houses got under way quickly. Twice
as many nonfarm houses were built in 1919 as in 1918, and, after the
depression of 1920-21, building increased until 1925 when it reached a
peak of 937,000 units. Thereafter, building activity declined as rapidly
as it had risen; by 1931 the number of units built was down to 250,000—
about the same as in 1920. In 1933 only 93,000 were built—the smallest
number since the turn of the century.
The boom of the early 1920's was a response to the high rents and prices
brought about by the housing shortage, but it was helped along by other
23
As this note is written (May 6, 1946), there is a strong likelihood that the residential
building boom which is now under way will collapse within perhaps 15 or 18 months. Prices
of existing houses advanced during the war, and the advance has continued, apparently at a
more rapid rate, since the end of the war. The cost of building has risen in roughly the same
proportion as the prices of existing houses.
There are probably enough families who have savings and borrowing capacity to form a
market for new houses, as far as down payments are concerned, even at higher prices than now
prevail; but the current payments required to carry the large mortgages with which houses
are being bought are a serious charge on income. Every further increase in prices will reduce
the number of families able to meet the current charges, and any decline in incomes, even if
it is temporary, will leave many owning families unable to fulfil their mortgage contracts,
and would-be buyers unable to assume mortgage obligations. In these circumstances, prices
are likely to decline.
If prices turn down before costs have overtaken them, building may be sustained, but if,
as seems more likely, costs are as high as prices when the decline comes, building will be curtailed.
Whether such a decline would be followed shortly by the boom referred to in the text
would depend almost entirely on the measures taken between now and the decline, and
on the steps taken to protect the victims of the collapse.
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
developments. The movement to the outskirts of cities, which had started
before the war with the coming of the interurban streetcar, was greatly
stimulated by the growing use of the private automobile and the motorbus. After the depression of 1920-21, as great new industries and markets
developed, the United States looked forward with growing assurance to
the "new era." By 1923 optimism was widespread, and people were
eagerly buying the new houses that builders had to offer. Some bought to
avoid high rents, some because housing could not be obtained otherwise,
and some in the belief that real estate was a good investment.
Building and real estate transactions took on a speculative character.
Houses were sold for what the market would stand, which, for a time at
least, was far in excess of the cost of building. Thin equities were encouraged to "broaden the market," and were supported by appraisals
which anticipated the "new era." Mortgages were written at interest rates
which now would seem fantastic and, with the widespread use of unamortized short-term first mortgages and junior liens, many buyers became committed to obligations they later found they could not meet.
In the later stages of the boom, apartment building was important.
Here, new construction was financed in large part by speculative investment of a small and sometimes fictitious equity, and by the issue
of mortgage bonds to a public which had already started to turn from
real estate speculation as such to speculation in securities. The results
were such as to discourage apartment construction for a long time.
The prosperity of the 1920's was not sufficient to maintain the high
level of building for long. The whole rent, price, and cost structure for
housing was so high, even in relation to the advanced income levels,
that there were not enough families who could afford new houses. Although the prices of houses stayed up, the volume of sales of both old and
new houses declined, and vacancies began to increase. By the time of
the stock-market crash in 1929, residential building had declined 45 per
cent from the peak of 1925, and over 40 per cent from the average of the
five years 1923-27.
Further declines in volume after 1929 were accompanied by reductions
in prices and rents. By 1933, in cities generally, rents had fallen by more'
than a third, all the way back to the 1919 level, and a fair number of the
tenants were delinquent in their rent payments. Building costs, too, had
dropped after considerable delay; but the depression forced families to
double up to reduce expenses and there was little demand for new houses
HOUSING NEEDS AND THE HOUSING MARKET
9
at any price. New building was at a standstill and activity in the industry
was limited mainly to repair and modernization work.
Later in the 1930's rents advanced gradually and markets revived,
partly because of Government action in assuming distressed mortgages
and introducing a system of mortgage insurance, and partly because of the
business recovery. Government intervention helped to maintain the
prices of houses and also made it easier for families to pay the prices; the
business recovery raised incomes and put more families in a position to
buy. Costs were at a lower level than in the 1920's, and, with prices stabilized and the market enlarged, building became more profitable. In the
late 1930's there was a steady and substantial recovery of residential
building, but even in 1939 only 515,000 units were started.
The Market in Which Houses are Built. Although the period of the
1920's was unique in some respects, it holds several lessons for us in showing why high building activity, once achieved, is not sustained.
Because the number of new houses available at any one time is very
small compared with the existing supply, prices of new houses are determined to a very large extent by the prices of existing houses. New houses
can be sold when they are more attractive to consumers than existing
houses in that their prices are lower or they have more desirable features:
that is, the upper limit to the prices of new houses is, as a rule, the prevailing prices of existing houses which buyers regard as equally desirable.
The lower limit to the prices of new houses is the cost of building: new
houses are built when there is an expectation that the prices they will
bring will cover the costs of building, including a profit to the builder.
If the prices of existing houses fall below the cost of building comparable
new houses, or if the cost of building new houses rises above the price
which comparable old houses command, building will stop. On the other
hand, the prices of new houses cannot fall far below the prices of old
houses, for, if new houses could be obtained for appreciably less than old,
speculative buying for resale would develop. In practice, in such a case,
the builder sets a price which is "in line" with the prices of competitive
houses. Homer Hoyt tells us, for example, in his exhaustive study of real
estate cycles in Chicago, that during the boom of the 1920's bungalows
costing $5,000 to build sold for $7,500.3
3
A more recent example of this is furnished by Mr. Frank W. Cortright, Executive VicePresident of the National Association of Home Builders of the United States. During the war,
priorities assistance was extended by the War Production Board to the builders of housing for
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
The cost of building houses, moreover, is not fixed. It is especially sensitive to the possibility of upward adjustments in periods of strong demand.
As many observers have pointed out, no one element is an obviously large
part of the cost of a house. When business is good, each supplier—either on
his own initiative, or by accepting premiums offered by builders for
prompt delivery, maintenance of grades, and similar factors—can raise
his price a little without seeming unreasonable. Thus, when the price that
can be obtained for the finished product exceeds the cost of building at
the existing prices of the resources used, these prices tend to rise; in a
relatively short time, total cost, including land, equals selling price, and
then exceeds it. When the cost of building exceeds the price of existing
houses which consumers regard as comparable, however, cost does not
decline rapidly enough to prevent almost complete cessation of building.
This is partly because even a large reduction in the price of one item has
relatively little effect on the total cost, and such collusive arrangements
as exist in the industry do not often extend to coordinating price reductions.
New houses are not built when prices are below the cost of building,
but the levels of prices and costs are not the only factors which determine
whether building will take place. Changes in incomes, vacancies, prices,
and costs are also important; if costs are stable, for example, more building is likely to be done when prices are rising than when they are declining,
even though prices stay above costs.
Changes in incomes, vacancies, prices, and costs are closely related.
Old houses advance in price chiefly from two causes, which may act either
independently or together, but almost always operate by producing a
in-migrant war workers ("H-1 housing"), on condition that specified maximum prices would
be observed. When controls were removed from building on Oct. 15, 1945, the price controls
were also removed. Mr. Cortright reported in the Washington Letter of the Association for
Nov. 3, 1945 that "Builders . . . have recently sold H-1 housing at the priority level and have
seen this housing immediately resold at profits of $1,000 to $2,000
" In the issue of Nov. 10
he said: "Disillusioned by the highly improper action of some home purchasers, members in a
number of cities are seeking legal advice as to methods by which this practice can be prevented.
. . . Restrictions being written into the agreements vary considerably. Some builders require
that purchasers will not resell within a stipulated period of time without [giving the builders]
the opportunity of buying back the property at cost plus legitimate charges. Others require
that resale cannot be made within one year at a profit. Herein lies an opportunity for all sellers
including builders, owners and banks to make an extremely important contribution in the fight
against inflation in real estate.''
The difficulty of this fight should be apparent. Sellers who forego profits of from $1,000
to $2,000 can be excused for becoming discouraged if they see other sellers accepting all that
buyers will pay.
HOUSING NEEDS AND THE HOUSING MARKET
11
reduction in vacancies. First, an increase in the number of families in an
area results in reduced vacancies and competition for existing quarters;
in such a market, landlords and owners raise rents and prices. Second, a
rise in family incomes causes families to cast about for better quarters,
which results in reduced vacancies in the higher priced quarters, and a
consequent rise in rents and selling prices. Both of these factors were
in operation in the 1920's. Incomes were rising during most of the 1920's
and by 1925 the number of families living in cities was much larger than
before the war, both because many of those who moved to the cities
during the war stayed, and because after 1921 the new employment
opportunities in the cities attracted many more people from rural areas
and small towns.
Thus, houses are built under a highly selected set of circumstances:
building will not take place at all unless the prices of existing houses are
above the cost of building comparable new houses; and it goes on most
vigorously when the difference between prices and costs is large, prices
are rising, and vacancies are declining. In addition to this, the markets
for which building is done are limited, both in composition and in duration. Builders cannot supply houses for families in the lowest income
groups, even though these families are being compelled to double up,
because houses conforming to local codes cannot be built under certain
minimum costs which vary from place to place and from time to time.
People's incomes enable them to pay only so much for housing, and more
and more families must drop out of the market as prices go up. Both rising
prices and the new houses produced in response to rising prices tend to
cause vacancies to increase, and, although the prices and rents of old houses
may not drop immediately as a result of an increase in vacancies, building
will stop if costs continue to rise or the margin between prices and costs is
small, or if the number of families who can pay the prices declines. By
1928, vacancies had reached a "normal" level—partly because the building boom had added many houses to the supply, and partly because rising
prices had forced many families to share quarters—costs had reached a
high level which left little margin of profit to builders, and the families
which could afford new houses at the going prices had, for the most part,
been supplied.
Need for a Housing Program. In the next few years the housing market
will be similar in several respects to that of the early 1920's. There will be
a shortage of housing; many families will have ready money; and the production of goods which consumers and others, both here and abroad, have
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been without during the war is likely to provide considerable economic
activity for some time. There will also be some differences. Governments
are more aware of problems in the housing field and better equipped to
restrain unwise borrowing; cities are more aware of the tragic effects on
their own finances of uncontrolled land development; and individuals
may be less willing to believe that fortunes can be made over-night. We
may therefore be able, by taking precautions, to avoid some of the speculative aspects of a residential building and real estate boom.
A boom need not be speculative in character, however, to be undesirable, and even without the gambling in capital values which characterized the 1920's, we can have a boom and collapse in residential building.
During the war, rent control kept rents from rising appreciably, but the
prices of houses, which were not controlled, have risen substantially—in
general, probably as much as 40 or 50 per cent over 1939. The cost of
residential building has increased by at least a third. Even if rent controls
are retained for some time, a substantial amount of building will be
undertaken in many areas because housing will be scarce and the prices
of existing houses high. There will be buyers as long as incomes are reasonably high for a large group of families and not so low for others that
they have to give up their own quarters and share quarters with friends
and relatives, or move very far down the rent scale. Veterans are likely
to be an important part of the market because they will have their separation allowances and a certain amount of employment preference, and the
Government has made special provision to guarantee or insure their
mortgage loans.
From this boom we cannot expect that more than from 3.5 to 5 million new dwelling units will be built in the next five years, or that a high
volume of building will be maintained much beyond 1950. If family
incomes are maintained during this period, rents and prices will advance,
and the boom may continue longer than five years even though costs also
advance. If incomes decline substantially, the families able to afford new
houses will be completely supplied sooner, and the boom will be cut off
sooner. Whether incomes are maintained or not, it is very unlikely that
we shall obtain sustained production of houses at the rate needed to bring
our housing up to standard in a reasonable time unless the housing market
can be made to respond better to long-term needs than it has heretofore.
There is no evidence today that the market will, of itself, respond more
to long-term forces and less to a narrow and very unstable set of condi-
HOUSING NEEDS AND THE HOUSING MARKET
13
tions. If such a change is to come, it must come in large part from a
housing program undertaken by the community.
THE SETTING FOR A HOUSING PROGRAM
In some recent discussions, the stimulation of economic activity has
been confused with the improvement of housing conditions. The two
things are not the same, though each is a valid object of social policy.
Discussion of the connection between the two may be helpful in indicating
the framework within which housing policy must be formulated and
carried out.
Improvement of Housing and the Stimulation of Activity. There is a
very direct and necessary relationship between achieving the goals of a
program whose object is to raise the quality of the housing available in
the market and the amount of economic activity carried on. I t is not
necessarily true in any such direct sense, however, that in carrying out a
program of stimulating or maintaining economic activity we shall produce
improvement in housing conditions. Indeed, if housing standards are
sacrificed for objectives such as full employment or a high level of expenditures on construction, we may wind up with worse housing than we would
have had without a program for maintaining activity. Incentives to build
poor housing are fairly easy to create, but incentives to build good housing
are somewhat more difficult.
In an economy as complex and as unstable as ours, the community
must take action to see that resources are fully used; but full use of
resources cannot be obtained directly, partly because the economy does
not operate in comprehensive totals, but also—more important—because
full use of resources cannot be defined except in terms of the values which
people as individuals and in groups place on the end products of economic
activity, and on the processes by which activity is carried on. Economic
activity might be maintained at a high level for a long time if we undertook to fill in the North Pacific Ocean, but, though everyone in the labor
force might be continuously employed, and all "savings" might easily be
"invested" as a result of this project, there would not be full employment
of resources if people preferred schools and rubber bands to a land link
between North America and Asia.
The goals of a housing program, then, must be established, in large
measure, independently of the goal of full use of resources. The amount by
which goals exceed the prevailing state of affairs at any given time, the
14
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
period allotted for attaining the goals, and the techniques to be used in
carrying out the program will all be influenced by the resources available
to satisfy all wants. But fundamentally the goals must be a statement of
the preferences people show for the satisfaction of various wants.
Reasons Commonly Advanced for the Existence of Poor Housing. A
great many different courses of action have been advocated for raising
the quality of housing available to families, and most of them are founded
on the propositions, first, that what is needed is a large increase in the
number of units available, and second, that the cost of housing—both
new and existing—is too high in relation to incomes to permit the required
supply to be built.
With this part of the diagnosis, however, general agreement stops.
Many different reasons for high cost are advanced: monopolistic practices
and obsolete techniques in building, the high cost of mortgage loans, the
high costs of operation, and the inequitable taxation of real estate are
some of the most common. Diverse courses of action are recommended
by those who agree about the reasons for high cost. For example, some
who attribute high cost to unduly high interest rates recommend that the
Government take direct steps to reduce mortgage interest rates, or rates
in general; others recommend that the Government guarantee certain
classes of mortgage loans in one way or another and thus force selective
reductions in the mortgage rate; others recommend that the Government
itself make mortgage loans at attractively low rates; others recommend
that housing be financed by bonds issued by large builders or real estate
companies; and still others recommend that equity capital be substituted
for borrowed capital. And the specific techniques which are to be used to
carry out these recommendations vary from one observer to another.
It is not the purpose of this paper to review all the reasons advanced
for high costs and other impediments to the provision of housing, or to
appraise all the techniques suggested for correcting these conditions.
Rather, this paper attempts to bring out some of the characteristics of
housing and of the housing market, so as to distinguish, in a general way,
those lines along which action will be worth while from those which hold
little promise. To this end, some of the factors to which difficulties are
attributed and some of the proposed remedies are discussed in the light
of the physical and economic nature of housing, the organization of the
building and real estate market, and the incentives to real estate transactions, all of which have been described in general terms in earlier sections.
HOUSING NEEDS AND THE HOUSING MARKET
15
Most of the proposals discussed here have been selected to represent
important approaches offered in current discussions of solutions, and
some have been selected to represent approaches which, though they
receive relatively little attention, seem promising. No attempt has been
made to cover all proposed solutions or all the variants of the general
solutions dealt with.
Nature of the Solutions Proposed. In practically all discussions of "the
housing problem," the proposed solutions are aimed at increasing the
supply or reducing the cost of one or another of the different kinds of
housing. In general, various parts of the supply are distinguished by the
tenure on which the housing is occupied, the areas in which it is located,
and the prices at which it is available. A further distinction, which cuts
across these lines, arises out of the way in which costs are paid—that is,
whether the public subsidizes the housing.
Not all observers grant the need for specific action to make available
each kind of housing. For example, some claim that there is no need—or
even that it is undesirable—to encourage the building of new housing to
be available at low prices, since higher priced housing, as it becomes older,
will decline in value so that families of low income can afford it; and it is
also maintained by some that the encouragement of rental housing is
similarly unnecessary since those who wish to rent are generally in the
lower income groups and that, as owner-occupied houses lose their value,
they are turned into rental properties.
In the same way, action proposed to encourage the provision of one
kind of housing is frequently held to encourage all kinds, as when the
insurance of mortgages on new owner-occupied houses is regarded as
reducing interest rates for mortgages on all types of housing.
Despite such cross-currents of objectives and analysis, we may separate
proposals in a general way according to the part of the market which they
are designed to help.
General Solutions. The broadest proposals, which are aimed at providing the setting in which the total supply of housing, of whatever type,
can be increased most easily, are that we take steps to raise family incomes and to lower housing costs.
The proposal to raise incomes, of course, involves problems which, in
the main, are beyond the scope of a housing program or policy as such.
The approaches and techniques which may be advocated are many, ranging from a guarantee of "full employment" or of a minimum income to
16
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
each family, through unemployment insurance, the provision of dependency benefits, and minimum wage laws, to a flexible or progressive
tax system.
The proposal that costs be reduced is usually made more specific in
terms of particular costs and particular types of housing; but the general
solutions that are commonly advocated for the general problem are the
elimination of monopolistic and restrictive practices in the building business, the elimination of obsolete materials and techniques, and the reduction of mortgage interest rates.
Proposals for stimulating the provision of particular kinds of housing
are many, sometimes contradictory, and often overlapping.
Owner-Occupied and Rental Housing. Different measures for stimulating
the building of owner-occupied houses are advanced by different groups.
Builders, their organizations, and their suppliers seem to favor modifying
building and housing codes and reducing the periodic capital charges, the
initial equity required of purchasers, local real estate taxes,1 and wage
rates. Some large builders also advocate that local governments install
utilities and community facilities, and assess the costs against the properties after they are sold rather than before. Observers outside the business
are likely to advocate, in addition, that the cost of building be reduced
by the adoption of more efficient techniques or new materials and that
builders acquire more capital so that "construction money" can be obtained without mortgage credit. Mortgage lenders generally resist the suggestion that changes be made in the prevailing terms of mortgages, and
tend to emphasize the revision of building codes, the adoption of more
efficient techniques of building, the reduction of the cost of materials and
labor, and the lowering of real estate taxes.
Suggestions for increasing the volume of rental housing include some
of those advocated in connection with owner-occupied housing. To these
are added reduction of the cost of land as well as encouragement of equity
financing by the elimination or substantial reduction of the corporate
income tax on rental housing enterprises and by a Government guarantee
of a certain yield on invested capital.
Housing in Suburbs and in Cities. During the past 25 years, most residential building has been done outside the main built-up areas of cities—
in small towns, metropolitan suburbs, or outlying districts within cities.
Suggestions for stimulating the building of owner-occupied houses are
generally made with the idea that building will continue to be done, in
large measure, outside the built-up urban areas.
HOUSING NEEDS AND THE HOUSING MARKET
17
In recent years, increasing support has been given to the proposition,
formerly voiced mainly by city planners, that the steady movement of
population to the outskirts of cities should be reversed, and "urban redevelopment" is now an important subject in discussions of housing
programs.
A great many different plans have been offered for bringing about the
reconstruction of run-down sections of cities, from the voluntary pooling
of property rights by the owners of the property concerned to outright
purchase by the Federal Government of the areas to be redeveloped and
the resale of these areas to private developers at substantially lower prices.
Although many who advocate large-scale urban redevelopment insist
that housing is not the only—or even the main—use to which redeveloped
areas should be put, those who wish to see more residential building inside
the cities look to reduced land cost and the provision of utilities and
facilities by the local governments to provide the stimulus.
Housing for Different Income Groups. The great bulk of the housing
which has been built in recent years has been built for owner-occupancy
and has been available only to families with high incomes.
There is a substantial body of opinion which holds that this is the only
way housing can be provided; lower income families and those who want
to rent can be provided for only in housing which has "filtered down"
through successive income groups as it wears out and loses value. Those
who take this approach hold that if better housing is to be available to
low-income families, more housing must be built for upper income families
so that there will be enough housing to "filter"; and some hold that if
there is not enough housing at the low end of the scale, poor families
should be aided, by ordinary relief payments, to pay for their accommodations.
Another large body of opinion says that reliance on the "filtering"
process has resulted in housing conditions as they are today—that is,
that by the time housing filters down, even to income levels considerably
above the bottom, it is no longer fit to live in, either because the houses
themselves are in such bad condition, or because the neighborhood has
deteriorated. In addition, this group points out, housing has frequently
increased in value rather than declining, especially in cities, because the
land is valued at what it might bring in commercial development, or
because, as they grow older, the buildings are made to accommodate
more families.
Among this group, several types of solution are to be found. Some hold
18
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
to a modified thesis of "filtering" and urge that steps be taken to build
housing that will wear well, in communities that can be expected to last.
Some urge that costs be reduced by the adoption of new techniques and
materials, that financial charges be reduced, and that tax concessions be
granted for low-priced housing. In the main, both these groups would
also provide incentives for the rehabilitation of existing housing which can
be made over into decent quarters available at low cost.
Others who reject "filtering" as an adequate process for housing lowincome families hold that these families will not obtain decent housing
unless the community itself builds housing and runs it at a loss. They
therefore advocate a public housing program large enough to provide
housing for all families who cannot find acceptable housing in the private
market on terms within their means. By and large, this group also urges
that steps be taken to lower the costs at which private housing can be
made available.
Analysis of Proposed Solutions. Advocates of these various solutions
seem to feel that, if their solutions are adopted, all conditions except
those they aim to change will remain unaffected. I t is pointed out, for
example, that if, by means of new techniques and materials, the cost of
building the "shell" of a house can be reduced by 50 per cent, the cost
of the house will be reduced by 30 per cent since the cost of the shell is
now about 60 per cent of the total; thus a contribution will have been
made, it is believed, to the provision of low-cost housing.4 The same sort
of reasoning has been applied in the past 15 years to show that reductions
in interest rates, labor costs, material costs, and the price of land would
have similar effects.
The Rdle of Capital Values. Proposals to reduce cost to the occupant by
reducing particular component costs overlook the important role played
by capital values in regulating the amount and kind of new housing added
to the supply. I t has already been pointed out that new building takes
place when the prices of existing houses are higher than the cost of building
new houses which consumers regard as comparable, and also that, when
building is under way, costs tend to rise to absorb the difference between
the market value of existing houses and the sum of the prices of the component resources used in building comparable new houses. This behavior
of the market, it has been shown, stops building fairly soon because, when
4
See, for example, National Housing Agency, Bousing Costs: Where the Housing Dollar
Goes (National Housing Bulletin 2), Washington, D. C, December 1944, p. 22.
HOUSING NEEDS AND THE HOUSING MARKET
19
values have risen as high as incomes will permit, and costs have caught
up with values, builders cannot operate profitably.
This process goes on whether the techniques of building and the conditions on which houses are bought and paid for are changing or standing
still. The introduction, at strategic times, of techniques and conditions
which enable builders or landlords to make new housing available at
lower prices than would otherwise be possible may give rise to building
which would not have taken place under the earlier circumstances, but
the very process of making use of these advantages tends to eliminate
them. The market evaluates such advantages against the existing stock
of housing and the incomes prevailing in the community; comparable
houses command comparable prices; and the cost of building approaches
market value. This process may be illustrated by a discussion of what
happens when particular costs are reduced by one method or another.
Reduction of the Cost of Building. Houses which are judged by a substantial number of people in a community to be of comparable desirability take on comparable value. A house which costs $5,000 to build but
which is judged to be the equal of existing houses which bring $7,500 will,
in a very short time, command $7,500 even if the builder, aware of the
desirability of low prices, sells it originally for $5,000. The influence of old
houses in the market is so great that, even if costs are reduced substantially, there is an overwhelming pressure to price new houses only just
so far below comparable old houses that all will be sold.
Intermittent reductions in cost, if they occur at the right times, can
be passed on to consumers in the existing market. If a building boom is
approaching its end, either because costs are overtaking prices or because
the number of buyers at going prices is being exhausted, a builder who
can reduce costs may be able to broaden his market by selling his houses
for less than he has been charging, thus reaching a lower income group.
The influence of such a cost reduction on the market depends on how
much it adds to the supply of housing relative to the whole market. If it
should result in a large enough number of houses being built and sold,
prices of existing houses would be brought down substantially, but this is
not likely to occur. To have this effect, the cost reduction would have
to appear at the proper time, and it would have to be large enough to
make the resulting price attractive to a large number of people who had
not been reached by the high-pressure salesmanship of the boom.
It is much more likely that the effect of a reduction in cost toward the
20
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
end of a building boom would be to enable the builder who enjoyed the
reduction to offer a bargain, in terms of alternative houses, to people who
were almost persuaded to buy but were reluctant at the going prices.
The builder could thus continue building for a time after he would otherwise have stopped, but the additional houses built would probably be
negligible in the market. The benefit of the low price would therefore be
confined in the main to those who bought the bargain houses from the
builder, because, by the time these buyers were ready to sell, prices, costs,
and incomes would have gone through a period of adjustment and the
bargain houses would reflect the market for generally comparable houses.
Similarly, if, when building is depressed, a builder can make savings in
cost, he may be able to provide houses at prices which are attractive to
consumers and thus add to supply, but he is likely to be confronted very
soon with rising costs, either because other builders copy his innovation
and bid up the prices of materials, land, and labor, or because his suppliers
raise prices on their own initiative.
Intermittent cost reductions might conceivably be made from time to
time in such a way that building would be continuous at declining costs.
If we could have this situation we should be able to look forward to lower
costs which would endure, and to the prospect that the upper limit of
residential real estate values would be established primarily by minimum
cost of reproduction. The organization and functioning of the real estate
market, unfortunately, hold out little promise that such a state of affairs
will come about.
Reduction of the Cost of Maintenance and Operation. The level of current costs, in relation to income, which a family must pay for housing and
housing facilities is important in determining the quality of housing which
it can enjoy, and attention has properly been given to finding ways in
which these costs can be reduced. But just as high incomes and low construction costs of new houses tend to be translated into high market
values, reductions in carrying and maintenance charges also tend to be
taken up in higher capital values. A house is valued higher if it has a
heating plant which is more economical—either in money cost of fuel or
in personal attention required—than the general run of heating plants
in the community. Insulation, brass or copper water pipe, hardwood
floors, a generous supply of electrical outlets, and metal casement windows all add more to the value of a house than the additional cost of
installing them, and thus the saving in operating expense or the addi-
HOUSING NEEDS AND THE HOUSING MARKET
21
tional convenience which can be expected over the life of the house from
such items is capitalized so that the advantages of this house, compared
with others in the market, disappear.
Reduction of Interest Rates. Federal intervention in mortgage financing,
aimed at making home ownership easier, had a good deal to do with the
revival of residential building after 1935. In the refinancing operations
of the Home Owners' Loan Corporation and the insuring operations of
the Federal Housing Administration, interest rates considerably below
those prevailing generally were offered, and great emphasis was placed
on regular amortization of the debt. Much of the effectiveness of these
operations flowed from the fact that both programs supported the residential real estate market: the refinancing of existing mortgage debt
under Government auspices through both HOLC and FHA reduced the
need for foreclosures and forced sales, and the insurance of long-term,
low-interest-rate, amortized mortgages on new houses increased substantially the number of people who could afford to buy new houses.
There is no clear evidence that this reduction of mortage interest rates
and general adoption of the direct-reduction loan has enabled families
of a given income status to obtain appreciably better houses; nor is
there convincing evidence, despite the reduction in interest rates, that
current costs have declined. To be sure, the average price of houses
bought with the aid of FHA-insured mortgages was declining before the
war, but so too were the average size of the houses and the average income of the buyers. It is impossible, of course, to separate the effect
of the rate reduction from the effect of the rising incomes of the late
1930's, and the changes in the equipment of the houses over the years,
but it seems clear that the difference between the higher and the lower
rates has not all been passed on to the consumer of housing. Builders
themselves seem* to have no illusions about the process. Many of them
advocate further reductions in the interest rate and further lengthening
of terms of mortgages, but they advocate these changes quite frankly
not to reduce prices and costs, but to reduce the current charges per
dollar of debt and thus to increase the size of the market at existing
costs. Some of them do believe that, if the market can be increased
sufficiently, costs can be reduced through sustained building. But easy
terms are an advantage of the house that can be bought under them, and
are consequently capitalized in the market to a large extent.
A seller expects a higher price for his house if he offers to take a mort-
22
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
gage from the buyer as part payment than if he demands all cash; and the
house sold on a 25-year mortgage at 5 per cent tends to bring more than
the same house sold on a 5-year mortgage at 6 per cent.
These examples are probably sufficient to show why manipulation of one
element of cost alone is not enough to reduce the cost of housing substantially or to bring about the large, sustained volume of building for a
long period of time which we must have if housing conditions are to be
greatly improved. This is not to say that improved practices and materials, lower costs of upkeep, lower interest rates, and the like are of no
value; on the contrary, they are essential. The point is that if we are to
have better housing, we must find ways of modifying the operation of the
housing market so that improved techniques and the like will show up in
much more housing and much lower costs rather than in a little more
housing and unchanged or higher costs.
Monopolistic and Restrictive Practices. Some observers may insist that
monopolistic and restrictive practices in building are responsible for high
costs and that they account for the dissipation of increased incomes and
cost-reducing innovations into higher capital values. It seems likely that
the cost of housing could be reduced—perhaps reduced substantially—
even with our present state of technology if various restrictive practices
did not prevail, and if the market operated in a different way; and there
is some indication that technology could be improved rapidly in a more
favorable setting. There are severe limitations, however, to what a frontal
attack on restrictive practices can achieve.
The first, and perhaps most serious, limitation arises from the nature of
the market in which residential building is done. As long as additions to
the supply of housing are so small in relation to both the existing supply
and the current need, cost reductions are likely to result initially in windfall gains to those who participate in the building, and, in the longer run,
in the money costs of producing new housing rising to meet the prices
which old houses command in the market.
The second limitation arises out of the fact that not every monopolistic
or restrictive practice which raises or maintains costs and prices is illegal.
Despite the seemingly broad, definite, and all-inclusive language in which
the Sherman Act, before the addition of the Miller-Tydings Amendment,
forbade combinations in restraint of trade, many practices with restrictive
results are perfectly legal. The exclusive agency, for example, which
insures that a buyer must obtain a given product from one dealer, chosen
by the manufacturer, is perfectly legal and respectable (unless its effect
HOUSING NEEDS AND THE HOUSING MARKET
23
is, in the judgment of the court, "to substantially lessen competition").
There is an over-riding legal doctrine that a seller has the right to choose
his customers.
The third limitation arises from the control of supplies by producers.
Almost 75 per cent of the enameled iron bathtubs produced in the United
States in
were produced by four companies, and the other 25 per
cent by nine companies. The four largest producers turned out 97 per cent
of the asbestos shingles, and the remaining 3 per cent were produced by
four small companies. The four largest companies produced 85 per cent
of the window glass, and five other companies produced the remaining
15 per cent. Even more striking concentrations of sellers confront builders
and consumers in given markets.5
Such concentration of production is not itself illegal, and not every
practice on the part of producers which would result in such concentration
would be condemned by the courts. Furthermore, practices which arise
out of the fact that production is concentrated in a few companies cannot
. easily be reached by legal action, and, in some measure, the recent policy
of the Anti-Trust Division of the Department of Justice has been directed
to rationalizing such practices if business necessity can be shown for them.
This approach was dubbed by Mr. Thurman Arnold, then Assistant
Attorney General in charge of Anti-Trust, the "doctrine that you can't
unscramble eggs."6 A taste for scrambled eggs is thus assumed, and
attention is focused on how they shall be seasoned. It is difficult to see how,
given the framework of public policy toward private economic activities,
the solution could be very much different.
Practices which are in fact restrictive must be expected to persist if the
conditions under which economic groups operate make them feel that
they cannot continue without such practices. Where two brick producers
supply all of the brick used in an area, for example, it is futile to try to
prohibit one from cutting his price when the other does so. Similarly, it is
futile to expect that, when one feels that prices can be raised to advantage,
he will not try—by devious means if direct means are effectively illegal—
to be sure that his competitor is of like mind before he raises his prices.
Neither is it realistic to expect that, when builders offer premiums for
5
See, for example, Temporary National Economic Committee, The Structure of Industry,
(Monograph No. 27), Pt. V, "The Concentration of Production in Manufacturing," App. B,
pp. 420-81; and Hearings, Pt. 11, "Construction Industry," testimony of Dr. Willard Thorp,
particularly pp. 5220-27.
9
P. 5157 of Hearings cited in footnote 5,
24
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
prompt delivery, one producer will accept and the other reject them for
long, or to expect that when a premium has been paid for a period, the
sellers will not regard it as part of the basic price.
The product of the building industry is at best expensive, and its production requires a multitude of different components and skills. The
market for construction work is highly irregular and segmented, and the
intricacies of the process of assembling materials and skills at the proper
place and time are such that conventions must be established and maintained subject to relatively little or very slow change if anyone is to
operate at all. And the law, being adaptable to the felt needs of time and
circumstance, makes its concessions in terms of the alternatives which
are offered.
Like others in the building business, workers try to protect themselves
against the hostile nature of the market, and, with a few notorious
exceptions, the measures of protection they invoke have become recognized by the community as legitimate means of collective bargaining
in an unstable world. Labor unions are criticized for refusing to handle
certain materials, or materials in certain conditions, and in certain respects building practices could be improved if these restrictions were
removed. But in general labor unions come in for a larger share of criticism than is warranted; manufacturers of materials are seldom criticized
for following price and merchandising policies which may interfere quite
as seriously with the adoption of new materials and techniques.
The restraints in building are reactions to the nature of the market—
the market in which materials are sold as well as the market in which the
final product is sold—and to the complexity of the process required to
build a house. Unless we are willing to substitute, in the operation of the
building business and its suppliers, some system of public judgments for
private judgments based on desire for gain, there is little that can be done
through direct attack on restraints. The development of a stable, adequate market for building would probably go far, not necessarily to eliminate all restraints, but to make those that remain less objectionable in
their effects.
Urban Redevelopment. There can be little doubt that American cities,
in the main, have been unable to adapt themselves rapidly enough to the
changing and increasing demands made upon them, but it is unfortunate
that the problem is discussed increasingly in terms of "blighted areas."
Those who advocate programs of "urban redevelopment"—and these are
the only programs of assistance to cities which are being discussed widely
—envisage the rebuilding of cities in their physical aspects. Yet in large
HOUSING NEEDS AND THE HOUSING MARKET
25
measure the present physical inadequacies of cities are attributable to the
fact that cities do not have adequate legal and economic powers and
resources with which to protect themselves and meet their problems as
they arise. Some of the programs of urban redevelopment, if adopted,
could add substantially to these difficulties if they were not accompanied
by increased capacity of the cities to take care of themselves. In the next
section a few suggestions will be made about the relation of these problems to housing.
To Sum Up. The conclusion to be drawn from this discussion is that,
though total costs cannot be reduced except through the reduction of
specific costs, the reduction of particular costs will be of only temporary
and very limited value unless we can somehow prevent changes in capital values from cancelling advances made on other fronts. This merely
emphasizes what has been recognized by some observers for a long
time—that the solution of the housing problem can be found only in
comprehensive and painstaking attacks along many fronts at once. All
of the attacks must be coordinated, and they must be modified from
time to time in the light of the results they produce. The problem can
be solved, but only through a much more comprehensive approach than
we have ever taken in the past.
ELEMENTS IN A HOUSING PROGRAM
It is clear that if housing conditions are to be improved substantially
in the near future, the community, acting through its various governmental units, will have to take a hand all along the way. It is also clear
that what is needed for the future is not a boom in the building of one or
another type of housing, but a sustained high level of building, for a great
many years, of a supply of housing which is balanced in terms of the needs,
desires, and means of the families which will use the housing. It is also
clear that measures of the type usually proposed will not, by themselves,
produce a sustained volume of building of this balanced supply.
Objectives of a Housing Program. There are, in general, three goals for
a comprehensive housing program: first, to assure that every family has,
or can obtain, quarters which permit its members to live under acceptable
conditions, as the community defines acceptable; second, to assure that
as few families as possible have to live under merely acceptable conditions;
and third, to assure that new supplies of housing come on the market on
terms which make possible the improvement of housing for all, as well as a
rising standard of what is acceptable to the community.
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
Such a program must be formulated and carried out within a framework
which includes, on the one side, the resources we have available to meet
all wants, and on the other side, the preferences people show for the satisfaction of various wants. This means that the standard of adequacy must
not be fixed so high that it can be met only by diverting resources from
uses which the individuals or communities concerned feel are more urgent,
and that, in deciding to have progressively better housing above the
minimum, families should have a reasonable opportunity to choose between purchasing housing and using their incomes in some other way.
These conditions do not imply any reduction of prevailing housing
standards, which in a great many cases are not now met. The general
nature of commonly accepted housing standards has already been indicated, but the precise content of the standards which each community is
prepared to enforce must be determined locally. If consumers could constantly express their preferences freely, the exact content of these standards would vary in detail from time to time and place to place.
The Kind of Market to be Achieved. Attainment of these objectives
implies a certain kind of market; and, unless the measures we adopt tend
to produce this kind of market, they will be unsuccessful in improving our
supply of housing materially.
In the ideal housing market there must be no houses occupied or offered
for occupancy which are structurally inadequate by the standards of the
community; and in this market there must be available to each family a
unit of proper size, in a suitable location and environment, under a convenient tenure, and at a price which the family can pay.
Moreover, there must be enough vacant units of each size, environment, tenure, and price so that any family can move freely for its own
good reasons. There must be enough vacancies in each type of housing
so that the community can absorb normally predictable increases in population without discomfort and so that families can improve their housing
conditions as their incomes rise. Incentives to build must be such that
vacancies will always be maintained close to this level; there must be
provision in the market for eliminating housing which has worn out or
become obsolete; and it must be possible to remove housing when the
development of the community requires that the land should be used for
other purposes.
Approaches to the Objectives. It should be clear that, if we are to bring
about a market of this character, we need a great deal of new building; it
should also be clear that, in the market as we know it today, there are not
HOUSING NEEDS AND THE HOUSING MARKET
27
the incentives necessary to provide this volume of building or to maintain
vacancies at the required level.
The Role of Local Governments. The housing market is exceedingly local,
and for this reason local governments must take an important part in any
housing program. What they can do varies with the powers they receive
from the States, their financial resources, and the nature of their communities. If progress is to be made, local governments must have the authority
and the money they need to direct the development of their own housing
markets.
Local governments already have what appear to be substantial legal
powers over housing. Municipalities have endeavored to establish certain
types of housing standards through laws designed to safeguard health,
prevent fire, and assure sound building. Most large cities, many smaller
cities and towns, and some counties have zoning ordinances and land-use
regulations which, though they may have been adopted originally to safeguard the values of the real property affected, operate in a measure to
improve the conditions of housing. Probably the main shortcoming of
these existing local laws is that they have been adopted to regulate particular conditions and activities related to housing but not to regulate
housing conditions as a whole. A few cities—all too few—do have housing
codes which prescribe the minimum conditions of housing under which
people may live.
The actual power of municipalities over housing is generally much le ss
extensive than it appears on the statute books, partly because the legal
power to close illegal housing is hedged about with qualifications, partly
because the power is exercised by many different departments of government without much coordination, partly because the expense of condemning property is greater than municipalities can meet, and partly because
the municipalities have no authority to provide alternative housing if
illegal property is closed.
Local governments must extend and strengthen their powers, both by
exercising more fully those they now have and by obtaining further powers
from the States. Perhaps the first step that each community should take
is to work all its pertinent regulations for building, fire control, health
conditions, public morals, land use, and the like into a code of housing
standards for the community. Most communities now have many of the
powers of prescription needed for the construction of an adequate housing
code of this nature, but almost all of them will need additional powers
from the States on some points.
28
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
Powers of prescription, however, are not sufficient. Practically all communities will need to obtain supplementary powers from their States in
order to enforce a housing code. Most localities now have the power to
condemn unsafe and insanitary buildings, for instance, but in many cases
action is impeded by procedural difficulties. The standards for determining the compensation to be paid to the dispossessed owners are too
high, or the power of the municipality to raise the money is restricted.
If municipalities are to regulate the housing conditions in their jurisdictions, their powers of enforcement must be adequate for their powers of
prescription; in other words, the consequences of violation must be obvious, and they must follow certainly.
While the adoption of sound housing codes, backed by adequate powers
of enforcement, would place municipalities in a position to improve housing conditions substantially, strong powers of prescription and direct
enforcement may become completely ineffective if municipalities have no
power for constructive action. Any municipal government would be voted
out of office promptly for enforcing ordinances which demolished even the
worst slums if the displaced families had no alternative but to crowd into
the somewhat better slums. Along with suitable powers to prescribe and
enforce housing standards, the power to provide housing, either by
their own enterprise or by their direction, is thus an important part of the
whole group of powers which municipalities need if they are to do their
part in any sound program for improving housing conditions.
But these are only part of the augmented powers which communities
need over their own fortunes. The legal capacity for action by communities has not kept pace with the rapid expansion of the problems which
communities are called upon to meet. Improper land use (and housing is
a major user of land), especially in densely populated areas, gives rise to
many problems which are of overwhelming importance to local governments. In the United States of the twentieth century, the most effective
way to meet these problems is to control the use of land so that mistakes
which can be foreseen may be avoided and those which are not foreseen
may be remedied promptly.
Regulation of land use through zoning ordinances and land-use plans
has not been outstandingly successful. Communities have found it difficult
to establish the most desirable patterns of land use in the original plan
because of the rights which property owners have in the existing uses.
As time goes on and development takes place more or less in conformity
with the compromise plan adopted, changes to meet changing conditions
HOUSING NEEDS AND THE HOUSING MARKET
29
become more and more difficult to make. At the present time, it is proposed in most urban redevelopment plans to counteract the past inability
of communities to protect themselves against improper land use by buying
up present rights, rubbing the slate clean of past errors, and returning the
land to private development, subject only to regulations of the kind
which have proved ineffective in the past, with the hope that slight extensions and more effective administration of the regulations will overcome the inherent weaknesses of this approach.
If local governments are to be able to regulate land use successfully
and avoid the need to bail out periodically the owners of unsuccessful or
obsolete developments, they must obtain a great many of the rights of
ownership over large blocks of the land in their jurisdictions. The present
state of legal doctrine does not promise that the most important of these
rights will be upheld under the police power or the accepted interpretations of public welfare. It is hard to escape the conclusion, therefore, that
communities need the power to own as much of the land within their
boundaries (and, in some cases, outside their boundaries) as they feel
necessary, and to use all the rights of disposition or development of such
land which go with ownership.
With such powers, communities would be able to regulate the more
important uses of land. They would be able, at the time a lease is written,
to specify the uses to which the land may be put and to enforce the specifications under the laws of contract. At the same time, they would retain
a large measure of control over the future by writing leases for periods
during which events can reasonably be predicted, and errors of prediction
could be erased fairly quickly. Furthermore, by exercising the power to
develop land on their own initiative, communities would be able to insure
that desirable land use is not hindered or distorted by the failure of private
developers to provide one or another necessary service.
This interpretation of the role of the community in a housing program
may seem too broad, and to imply a greater departure from tradition
than is warranted. Part of the danger for the near future, however, is
that we shall tackle problems which seem to be relatively easy to solve
and find that our solutions only complicate broader and more difficult
problems. Current urban redevelopment programs promise to be of this
nature. What seems to be most needed at the present juncture is a
thorough study of the land and housing problems of urban communities
and a reasonable consensus of qualified opinion on the changes we must
make in established ways of working.
30
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
The Role of State Governments. State governments are less intimately
concerned with the problems of housing and land use than are local
governments, but their importance is great. Communities derive all of
their powers and privileges from the States, either in constitutional provisions or in legislation; and the States regulate the conditions of land
tenure and the terms on which real estate may be financed by lending
institutions within their boundaries. The sanction and support of State
governments must therefore be obtained for a great many elements in a
housing program.
The States have an interest in the problems of their communities, the
housing of their citizens, and the solvency of their financial institutions,
if for no other reason than that they find it necessary to foot many of the
bills presented by distress; but in the main, the States are better equipped
to lay down broad policies for communities and to supervise the activities
of financial institutions than to administer detailed programs.
Perhaps State governments would make their greatest contribution to
a sound housing program by sponsoring studies of the problems of their
urban communities and working with the local governments to develop a
set of powers with which the communities can take care of themselves,
under the general supervision and with the active aid of competent State
departments.
The Role of the Federal Government. In the decade and a half since
the Federal Government seriously entered the housing field, the tendency
has become increasingly strong to lay the responsibility for housing
reform and progress on the shoulders of the National Government. To
the extent that much that is valuable has been done, and attention has
been focused on the problem, this has been good; but there is a danger that
too heavy reliance on the Federal Government will result in neglect of
aspects of the problem with which the Federal Government is unable to
cope effectively.
High on the list of Federal housing activities should be continuous,
active, and detailed cooperation with State and local governments with
the object of defining more clearly the roles to be played by each type of
government and developing a consistent set of relationships for carrying
out and modifying programs decided on cooperatively. The Federal
Government should also help stimulate groups of citizens who have enduring common interests, such as trade-union members, to experiment
with new or relatively untried methods of providing housing, along the
lines of limited dividend housing corporations and mutual ownership
associations.
HOUSING NEEDS AND THE HOUSING MARKET
31
There is need for a reappraisal of Federal policies now in effect and an
examination of those proposed for the future in the light of the implications of these policies and the limitations on Federal action. Since the
magnitude of the problem of doing anything significant about housing
has become apparent among large groups of people in the past 10 years,
and it is now proposed that the Federal Government do vastly more about
the problem than it has ever done before, it is essential that any contradictions inherent in past and proposed programs be discovered and dealt with.
Three contradictions may be pointed out here as illustrative:
(1) The Federal Housing Administration has assumed large obligations through
the insurance of mortgages, on the assumption that the mortgage debt bears a reasonable relation to "long-term stabilized values," and this program will continue. It is
now proposed that the Federal Government take an active part in reducing the cost
of housing, including the capital cost. But capital cost cannot be reduced and market
value maintained at the same time on any scale that gives real meaning to the ideas
as parts of a major policy.
(2) Along with the proposal to reduce capital cost goes a proposal to reduce interest rates on mortage debt still further. Unless steps are taken to reduce the
market rental value of mortgaged property, a reduction in the interest charge will
increase the return on the equity, and thus—if alternative yields remain unchanged—the value of the property will be likely to rise because of an increase
in the value of the equity.
(3) The proposal to reduce the capital cost of housing seems to be inconsistent with
the proposal that a large volume of building be maintained for a decade or more, for
reasons which have been set forth at some length earlier in this paper. Briefly, a large
volume of building is done when market values are rising (or at least not falling), and
when vacancies are low; but reduction of capital cost to the consumer, by definition,
means a decline in market values, and this takes place most readily when there is at
least a comfortable number of vacancies.
So long as the scale of intervention by Government is small, these contradictions are not serious, though they may offset a great deal of effort,
but they may become very troublesome as the scope of Government
intervention increases. Moreover, the pressing problem now is how to
prevent both costs and values from increasing still further in response to
the acute housing shortage. Although costs and values could be reduced
substantially from present levels without endangering mortgages written
during the 1930's, the mortgage transactions of the immediate past and
the near future may exercise a powerful restraint on cost reductions.
There is also a real danger that we shall try to overcome the housing
shortage in part by inflationary measures such as easier credit terms
and reduced standards of housing and construction.
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
To a degree, in the first two cases cited, the present programs do resolve
the contradictions. The Federal Housing Administration pays practically
all of the losses which the lender may suffer from all causes, including a
decline in the value of houses because of a decline in costs. Investors'
funds are attracted into low-rent housing at low rates because the income
from local housing authority bonds is tax free. But the reconciliation is
only partial: mortgage insurance does not compensate the borrower for
his losses, and it is doubtful that mortgage insurance could be written
economically if it were certain that values would decline continuously;
tax exemption of income from housing authority bonds is a deviation
from the general policy of reducing exemptions from taxation which the
Treasury Department and Congress have indicated is desirable on other
scores, and tax exemption probably cannot be justified for returns from
investments in housing in general.
The Federal Government can avoid such inconsistencies, either by
abandoning part of its program or by enlarging its program to prevent
the inconsistencies from becoming effective. If it chooses to abandon
enough to eliminate all inconsistencies, however, it will find itself with
little more of an interest in the field than it had IS years ago, and this is
hardly a practical alternative. If it chooses, as it apparently must, to stay
in the field, it will have to enlarge its role even beyond what is now contemplated. If its activities are not to become too unwieldy, however, it
must formulate its policies with discrimination and enlist aid from many
sources.
Specific Steps toward the Objectives. The general approaches discussed
in the preceding pages imply a great many specific steps which must be
taken if we are to evolve a comprehensive and consistent housing program.
At many points it is not clear what these steps should be since we do
not know enough about some of the problems involved. At some other
points it is fairly clear what steps should be taken now, but it is also clear
that the measures we adopt should be reappraised from time to time and
modified or abandoned as experience improves our understanding.7
National Housing Agency. The first essential step is to establish a
7
On Nov. 14, 1945, Senator Wagner introduced in the Senate, for himself and Senators
Ellender and Taft, the bill cited as the "General Housing Act of 1945." This bill is a revision of,
and replaces, S. 1342, introduced by Senator Wagner on Aug. 1, 1945. The main outlines of
this paper had been established before these bills were introduced, and, although several of
the proposals discussed here are to be found in S. 1592, usually in slightly different form, no
attempt is made here to analyze the bill.
HOUSING NEEDS AND THE HOUSING MARKET
33
Federal agency whose responsibility it would be to investigate continuously the nature of the problems which confront us, to formulate for the
consideration of Congress consistent and comprehensive programs to
deal with the problems, to coordinate the activities of Federal agencies
established to carry out the programs, and to work with State and local
governments and private groups to assure the success of the programs.
The National Housing Agency, established as a temporary, wartime organization, has had some of these responsibilities during the war, and it
might well be made permanent, with somewhat broader functions.
The housing activities which the Federal Government has engaged in
during the past 15 years should, in the main, be continued, but serious
consideration should be given to the contradictions and inconsistencies
inherent in these activities at the present time.
Federal Housing Administration. The present home ownership program of the Federal Housing Administration should be continued. It
would be improved substantially if it offered more protection to the home
owner who is not now protected against loss except as he may be discouraged from making unwise commitments and as the FHA program
has raised the quality of construction and land development. One desirable
improvement over the present arrangement would be that the Administration insure the buyers of houses built under FHA inspection against
any defective workmanship which comes to light within five years, perhaps
by requiring builders to post bonds to guarantee their work.
A worth while supplement to the program of mortgage insurance would
be a program for insuring to the buyer a minimum (but gradually declining) resale value for his house, whether it is mortgaged or not. Such
minimum resale values, it may be noted, are implied in the present program of mortgage insurance, although they are lower than what would be
required in the suggested program by the amount of the depreciated
equity which the borrower risks. If this insurance carried with it the right
of the insurer to the first chance to buy, at a price perhaps 10 or 15 per
cent above the insured value, it could be a powerful influence in preventing both serious losses to owners and harmful rises in values. With such
a protective device, the Federal Government could proceed with a clearer
conscience to stimulate reductions in the cost of housing.
Two plans currently proposed for extension of the program of the
Federal Housing Administration are worthy of adoption. Under the
first plan, the Administration would issue to builders commitments to
insure the mortgages on a specified number of houses of approved types
34
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
to be built and sold over a period of from one to three years. The object
of this program would be to obtain sustained mass building of houses, at
the lowest possible cost, for families in lower income groups than have
been provided for traditionally by private builders. This plan seems sound,
provided the houses covered by the plan and their costs are determined
separately for each locality; and in such a program, a guarantee of workmanship would be particularly desirable.
Under the second plan, the Administration would insure a stipulated
return on the equity invested in rental housing. This plan, too, seems
sound, provided some standard of management policies is established so
that a certain degree of occupancy must be maintained before the insured
return will be paid; in other words, the insurance of returns must not be
allowed to act as an incentive to the landlord to maintain rents in the
face of a declining market. On the other hand, the degree of occupancy
required must not be so high as to discourage new building, when
vacancies have reached comfortable levels in the community. It would
also be desirable for the insurance contract to stipulate that if the insured
wants to sell his property, the Administration shall have the first chance
to buy it, for the amount of the equity on which insurance is in force;
this would protect against the speculative recapitalization of rental
properties on a rising market which has had such an evil influence in
this field.
Federal Home Loan Bank System. The operations of the Federal
Home Loan Bank System should be continued substantially as they are.
It would be desirable, particularly in view of the probability of a rising
real estate market in early postwar years, to require that all members
of the System use a uniform technique of appraisal. This technique should
be consistent with standards approved by the National Housing Agency,
and the valuation staff of the Federal Housing Administration might be
made available to make appraisals for members of the Home Loan Bank
System, whether the mortgages are to be insured or not. An alternative
would be to have the Federal Savings and Loan Insurance Corporation
or the System establish an adequate appraisal service for members.
Federal Public Housing Authority. The program of the United States
Housing Authority (now the Federal Public Housing Authority) should
be revived and extended so that much more low-rent housing may be
built. Through this program there have been developed worth while
techniques of cooperation between the Federal Government and local
governments in the provision of housing for those who cannot obtain
HOUSING NEEDS AND THE HOUSING MARKET
35
decent private housing on terms which they can meet. The approximately
200,000 units built to date under all Federal and Federal-aid low-rent
programs cannot be called more than a beginning, but it is at least a
promising beginning.
Congress should consider the advisability of divorcing the program
for provision of low-rent housing for low-income groups with Government assistance from the program of eliminating existing slums. It is desirable, of course, that slums be eliminated as a result of public low-rent
building, but the present law insures that there will be no addition to
the number of units in the market as a result of the public housing program. It would be much better if local governments were enabled to add
to the supply of housing as part of their programs for eliminating substandard housing. A sufficiently large supply of decent housing is the
only sound protection we can ever have against slums.
The financial program of the United States Housing Authority and
the local housing authorities operating with its assistance is built on the
assumption that the housing constructed under the program will have a
useful life of 60 years. There is little doubt that the buildings will stand
for 60 years, and it seems probable that some of the housing will be physically desirable and located in attractive environments 60 years hence.
But social change has been rapid in the United States, and the likelihood
is that it will continue to be rapid. It would be wise, therefore, to allow
for a somewhat shorter useful life for these projects—say 40 years—but
without reducing greatly the permanence of construction. Annual payments of debt under a 40-year schedule would be somewhat higher than
under the 60-year schedule, but less of the total payment would go for
interest. If we frankly recognize that housing costs money and that long
amortization periods merely spread out the original cost, at interest, we
may be willing to pay more per year for capital cost in the near future,
when operating costs and occupancy are fairly predictable, and reduce
our payments later, when these factors are very uncertain.
Housing Loans for Veterans. An important element in the Federal
housing program of the next few years will probably be the guarantee
and insurance of veterans' mortgage loans under the Servicemen's Readjustment Act of 1944, commonly known as the G. I. Bill of Rights.
Under this Act, as amended in 1945, the Government will guarantee the
repayment of one-half of an eligible veteran's mortgage loan, but not
more than $4,000, provided the price paid for the mortgaged property
does not exceed its "reasonable value." The interest rate on the loan may
36
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
not exceed 4 per cent and the veteran may take advantage of the Act
at any time within 10 years after the end of the war. A loan which is
supplementary to a loan made, insured, or guaranteed by a Federal
agency may also be guaranteed provided the amount of the supplementary loan does not exceed 20 per cent of the purchase price of the
property, and the total amount guaranteed does not exceed $4,000.
Instead of having particular loans guaranteed to the extent of 50 per
cent or $4,000, a lender may elect to have loans which are eligible for
guarantee insured in a group. In this case, the Government will reimburse the lender for all losses suffered on these loans up to 15 per cent
of the amount of loans made.
This program undoubtedly offers advantages to veterans, but at the
same time it strengthens materially the sellers' market which would
probably prevail in the next few years even without the program. The
pressure on buyers was lessened somewhat by the amendment which
extended from two years to ten years the period within which the veteran
may make use of the program. At the same time, the substitution of
"reasonable value" for "reasonable normal value" as the definition of
the maximum price which the veteran may pay for the property mortgaged under the Act removed a protection which is sorely needed at the
present time.
Perhaps the program would offer more protection to the veteran, the
lender, and the Government, as well as to the housing market in general,
if it were administered by the Federal Housing Administration under a
new title to the National Housing Act. The FHA has experience in underwriting private mortgage loans and has, in its established appraisal procedures, the facilities for safe-guarding the interests of veterans in real
estate transactions.
Problems Remaining. This paper has dealt with only a few of the
questions surrounding housing needs and the housing market, and the
suggested approach to a housing policy has probably raised more problems than it has solved. But in human affairs we seldom solve problems;
at best, we find ways of living agreeably with them. An important step
in reaching amicable relations is to recognize the problems as fully as we
can and to remember that, as we find new ways of living with them,
the problems themselves change, and we must make new adjustments.
Even so, it is apparent that the suggested approaches to the problems
have not pointed very strongly to ways of achieving the kind of market
which was set up as ideal. Two questions in particular have not been
HOUSING NEEDS AND THE HOUSING MARKET
37
answered: how to obtain sustained building in a market characterized by
vacancies so plentiful and so well balanced that families have a free
choice of their quarters; and how to reduce the costs of housing progressively. Some of the measures proposed, both in this paper and by others,
may provide part of the answers, but they will not provide complete
answers.
Curiously enough, the first question appears to be the more important
for the long-run. So long as building goes on sporadically in response to
scarcity as it is reflected in inflated values, our inventive energies—
whether directed to improving the processes of assembling materials, to
reducing current charges, or to any of the other traditional subjects of
cost reduction—will be dissipated in attempts to prolong the duration
of booms by keeping costs from rising as far as values. If we can devise a
housing market in which new houses are built and old houses are retired
fairly continuously in response to long-run developments, reductions in
cost will be both easier to achieve and less important in their effects than
they appear to be today. It is to the problem of devising this kind of
housing market that the attention of citizens and students must be
directed if we are to have a meaningful housing program.
High costs of housing may be regarded as unmitigated evils, to be attacked in their own right wherever and whenever they are encountered;
or they may be regarded as a manifestation of interrelated evils which
must be attacked in coordinated fashion, and not necessarily for their
own sakes. If we take the second view, high costs represent an opportunity as well as an obstacle. In the immediate future, we can obtain a
great deal of help from the fact that, as matters now stand, there are
many costs which can be reduced. We have the conditions necessary for
a residential building boom, but we do not have the kind of market which
will transform this boom into the sustained provision, year after year,
of the housing needed to raise our standard of living steadily. Not only
can the coming boom be moderated and lengthened by reducing costs—
it can be made the opportunity for developing the kind of housing market
in which housing will be provided continuously in response to long-run
needs, if a selective, consistent, and well-conceived program of cost reduction is followed. The most challenging problem of cost reduction is
not to discover how to reduce particular costs; rather, it is to determine
which reductions in costs can be made and maintained without producing serious conflicts in other parts of the economy, and how these
reductions can be used most effectively in the development of a better
38
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
housing market. If we obtain a more suitable market, even if we must be
content with moderate, but effective, cost reductions, we shall have done
much; but if we lose the opportunity to reform market processes, high
costs will continue to be an obstacle to the improvement of housing conditions, even though we adopt cost-reducing innovations on a substantial
scale.
The kind of market we need is one in which the building of houses takes
place to a greater extent in response to long-term needs and less in response to short-term lack of balance. In this context, "needs" is not to
be contrasted with "demand," in the sense that "demand is need backed
by ability to pay." Here, "long-term needs" is used in the sense that a
public utility might use the term in forecasting the changes it will be
called on to make in its plant over a period of time. Many of the changes
that will be needed in our housing supply in the future are at least as
predictable as the number of new telephone installations that will be
required.
In the development of this more suitable market, the roles of risk and
incentive must be re-examined. Some of the risks now borne by those who
participate in the buying and owning of real estate and the building of
houses can be foreseen, and many of these could be eliminated with advantage to everyone; many of the losses which were suffered in the late
twenties and early thirties in speculative subdivisions arose out of risks
of this character. Other risks can be foreseen in a general way, but, because they are the consequences of the desirable or unpredictable adaptations people make in the process of living, cannot be eliminated or avoided,
except at the expense of regimenting and stultifying our society. We may
wish to minimize, but we should not try to avoid completely, for example, the possibility that, before new houses have worn out, the industry on which a community depends may become obsolete, or that
people will prefer to live somewhere else. While such risks must be borne
by someone, we must devise a more efficient system of apportioning necessary risks, and a more satisfactory system for rewarding those who control or minimize these risks.
Steps have been taken in recent decades to minimize and redistribute
some of the risks in the real estate market. Municipalities have largely
eliminated the possibility that buildings will collapse by adopting and
enforcing building codes, and they have reduced some of the risks arising
out of uncontrolled changes in land use by the application of zoning
ordinances. Several different risks have been both reduced and reappor-
HOUSING NEEDS AND THE HOUSING MARKET
39
tioned by the Federal Government in its program of insuring mortgages.
These measures are only partial, but they are a good beginning for a
more comprehensive and consistent attack on the problems of risk and
incentive. Until we have attacked these problems of risk and incentive,
we shall not be able to develop the kind of housing market which is necessary if we are to have the kind of housing we deserve.
ECONOMIC ASPECTS OF SOCIAL SECURITY
by
ELIOT J. SWAN
Assistant Director of Research, Federal Reserve Bank of San Francisco
The goal of social security is the universal maintenance of individual
and family income at at least a socially acceptable minimum. In modern
industrial society social security is unquestionably a matter of public
concern and an accepted aim of public policy. The very forces which by
raising the productivity of labor have accounted for the high standard of
living of Western society have at the same time decreased the control of
the family over its own fortunes.
In a broad sense, all public programs directed toward maintenance of
adequate incomes are social security measures. This paper is primarily
concerned with social insurance, that is, with protection in the form of
cash payments, when earning power is interrupted or lost, provided as a
matter of right to those in the plan. Eligibility for benefits usually, but
not necessarily, includes contributions made by or for members of the
system and no test of need is required. Although compulsory social insurance has come to be generally accepted as the principal instrument
through which the problem of income loss can be dealt with, public assistance to those in need is a necessary supplement. The more comprehensive
a social insurance program becomes, the less public assistance will be
necessary, but some individuals and families will fall outside of the insurance system and special circumstances will prevent insurance benefits
from being adequate for others.
To deal with the situation after theflowof income has been interrupted,
however, will not achieve social security. A comprehensive program including other public measures related to the problem of adequate income
is necessary. First, unemployment and disability must be prevented
through positive action so far as possible. Cash benefits do not protect
the individual from the destructive effects of continued idleness or sickness nor the economy from the waste represented by idle workers.
—income security which is all that can be given by social insurance is so inadequate
a provision for human happiness that to put it forward by itself as a sole or principal
measure of reconstruction hardly seems worth doing. It should be accompanied by an
40
ECONOMIC ASPECTS OF SOCIAL SECURITY
41
announced determination to use the powers of the State to whatever extent may prove
necessary to ensure for all, not indeed absolute continuity of work, but a reasonable
chance of productive employment.1
Second, incomes actually being earned are not always adequate to maintain minimum standards. Such devices as minimum wage legislation and
children's allowances provide an approach to this aspect of the problem.2
The basic purpose of social insurance is security for the individual and
his family. In providing partial replacement when wage income is involuntarily interrupted or terminated, an adequate social insurance program
alters the distribution of income among individuals and among income
groups. Complete individual equity, in terms of premiums or contributions equated to the degree of risk and the amount of benefit, is inconsistent with adequate protection. The collection and disbursement of
social insurance funds affects the size of the income flow as well as its
distribution. A properly financed insurance program will help to maintain
high levels of employment and income by raising and at least partially
stabilizing consumption expenditure.
Any social insurance program, then, must be evaluated in two ways.
First, what protection does it afford the individual; how completely does
it express the responsibility of society toward its members? Second, what
is its effect upon the economy; does its financing promote output and
employment to the fullest extent?
In the following pages, existing protection for the individual is briefly
described and proposals for more adequate coverage presented. This section is followed by a discussion of certain economic and fiscal aspects of
social insurance. In this area considerable misunderstanding and consequently barriers to expansion are found. In brief, the thesis of this paper
is that a comprehensive and unified plan of income maintenance through
social insurance is desirable, and should be financed in large part from
general revenues. The existence of such a program would itself encourage
production and employment and, by increasing the national product,
would lighten the burden upon the active working force of maintaining
those who from causes beyond their control have become nonproducers,
either temporarily or permanently.
1
Sir William Beveridge, Social Insurance and Allied Services (1942), p. 163.
* Insurance against the cost of medical care logically falls in this category of social security
measures, but it is ordinarily considered in conjunction with social insurance.
42
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
PRESENT AND PROPOSED SOCIAL INSURANCE PROTECTION
The major threats to income that should be provided against through
social insurance are the unemployment, disability, old age, and death of
the earning family members, and the cost of medical care. The loss of
earnings from old age, permanent disability, and death are sufficiently
recognizable for all members of the labor force and their dependents to be
protected against them. Unemployment and temporary disability compensation should be available to all with the possible exception of the selfemployed. For them, the fact of loss may be too difficult to establish. The
cost of medical care may fall on anyone, whether employed or not, and
universal coverage would be desirable.
Because of the wide variation among both occupations and regions in
wages and living standards, benefits should probably continue within
limits to be related to previous earnings. The emphasis belongs, however,
upon the adequacy of minimum benefits, including dependents' allowances. At the same time, benefits should not be so generous as to discourage the search for employment.
Some distinction should be drawn between unemployment and temporary disability benefits on the one hand and those paid in the remainder
of the system on the other. Unemployment and temporary disability
interrupt, rather than destroy, earning power, and benefits could be so
high, in relation to wages, that they could conflict with the willingness to
work. In occupations where benefits that would provide for some sort of
basic minimum would approach or exceed the wages paid to workers,
there is a strong presumption, however, that correction of the wage level
should be sought through minimum wage legislation.
Dependents' allowances also raise the danger of unemployment and
temporary disability benefits in excess of earnings. In fact, the size of the
family may itself make it impossible for adequate living standards to be
maintained, apart from any interruptions in earnings. These factors, together with the extreme importance to the nation that children receive
adequate care, suggest that a national system of children's allowances
should also be given consideration.3
Although social insurance in the United States has advanced substantially during the past decade, it is far from complete. The Social Security
Act, adopted in 1935, established unemployment and old age insurance *
for the industrial and commercial labor force and provided for Federal
9
Great Britain and Canada now provide children's allowances to all families.
ECONOMIC ASPECTS OF SOCIAL SECURITY
43
financial participation in three types of public assistance administered
by the States. All of these—old age assistance, aid to dependent children,
and aid to the blind—are available only to those who can establish need
on the basis of a means test. Major amendments in 1939 added dependents' and survivors' benefits to the Federal old age insurance plan. Even
though this significant legislation provides the keystone, protection varies
among occupations and localities, and there are separate systems at different levels of government.
Unemployment Compensation. Although the general conditions for unemployment compensation are outlined by Federal legislation, the industrial and commercial labor force is protected under the 51 separate systems of the States and territories. Federal plans cover railroad employees
and veterans, regardless of occupation. The plan for veterans is temporary, however, in that benefits are available only within a given period
after discharge from military service. The self-employed, agricultural and
domestic workers, and seamen are excluded from all these unemployment
compensation plans, as are employees of governments, nonprofit establishments, and small firms in covered industries in some States. 4 I t is estimated that less than three-fifths of the nation's jobs are covered by State
unemployment compensation plans.
Benefit provisions are far from uniform. Eligibility for benefits depends
upon involuntary unemployment within the meaning of the law, which is
much more restrictive in some States than in others, 5 and upon varying
requirements as to previous earnings. Benefits nominally approximate
SO to 65 per cent of wages, and in four States they include allowances for
dependents, but they are subject to minimum and maximum limits. The
maximum limits, which range from $15 in ten States to from $24 to $28 in
six States, 6 keep weekly benefits of many recipients well below 50 per cent
of their weekly wages. In 1945, the average weekly benefit paid under
State programs for total unemployment was $19, and ranged from $11
to $13 in seven States to from $21 to $23 in four. Under the Federal plan
provided by the Servicemen's Readjustment Act of 1944, weekly unem4
The tax provisions of the Federal act apply to employers of eight or more, but many States
have extended insurance coverage to those in firms employing less than eight persons.
5
Involuntary unemployment implies that a worker did not quit without good cause, did
not lose his job for misconduct, and did not refuse suitable work. These requirements are
variously interpreted and carry penalties, in the form of postponement or disqualification of
benefits, of varying severity.
6
Including dependents' allowances in three States.
44
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
ployment benefits of $20 are paid to veterans, irrespective of their past
earnings.
In the State plans, the maximum duration of benefits in any one benefit
year varies from 14 to 26 weeks, and in 37 States it may be reduced by
insufficient amounts of previous earnings. In contrast, unemployed veterans may draw benefits for a maximum of 52 consecutive weeks within
two years of their discharge or release from the service, or of the termination of the war, whichever is the later date, regardless of their previous
employment experience.
It is evident that adequate protection against unemployment does not
exist for many workers. Unemployment compensation should be available
to all persons in the labor force, with the possible exception of the selfemployed, for whom the fact of unemployment may be too difficult to
establish. Benefits should not be expected to compensate whdlly for loss
of income, because of the adverse effect upon the willingness to work, but
they could be increased before that point is reached. Dependents' allowances should be adopted. Benefits should be of uniform duration;
if a worker has satisfied the test of attachment to the labor market, by
having earned sufficient wages in the base period to qualify for benefits,
the duration of his benefits should not be affected by the size of his past
earnings.
Unwarranted variations in eligibility requirements and size of benefits
should be eliminated by the establishment of national minimum standards—or better by Federalization of the entire system. Dollar benefits
need not be uniform; regional differences in living costs and living standards are reflected in wage rates so that such differences would continue to
be reflected in benefits. A national program would also eliminate the discrimination sometimes experienced by workers who have been employed
in more than one State, although interstate cooperation has already solved
many problems arising out of this situation.
Cash benefits do not meet the problem of unavoidable idleness as such,
and unemployment compensation should attempt to deal only with relatively short-run unemployment. Benefits should not be unlimited in duration, but they could well be extended to at least 26 weeks. Continued
unemployment beyond that point should be dealt with through public
employment and occupational retraining programs. At present, a worker
who exhausts his benefit rights before obtaining other employment has no
recourse except his own resources or local relief.
It should be noted that a strong and efficient employment service, to
ECONOMIC ASPECTS OF SOCIAL SECURITY
45
which most job openings are referred, is essential for satisfactory operation of an unemployment compensation system. Willingness to work cannot be tested unless job openings are at hand. Some employers who are
most disturbed about the adverse effects of unemployment compensation
upon the desire to work inconsistently fail to utilize the public employment exchanges.
Old Age and Survivors Insurance. Unlike unemployment compensation, old age and survivors insurance for industrial and commercial
workers is established on a purely Federal basis by the Social Security Act.
Eligibility requirements, benefit payments, etc. are uniform in all the
States. Employment covered is the same as that covered by unemployment compensation, except that employees of small firms in covered
industries are also included. Some 30 million of the 52 million persons
employed in an average week in 1944 were in jobs subject to old age insurance, and some 40 million persons are now insured.7 In addition, some 4
million railroad workers and Federal employees have their own Federal
retirement systems and about half of 3 million State and local government
employees are members of separate retirement systems. Other occupational groups are excluded from public plans and perhaps 8 million aged
are not eligible for compensation, whether or not they formerly engaged
in employment now covered.
Under the Social Security Act, old age benefits and dependents' allowances are paid to those insured upon retirement at age 65. Upon the death
of an insured worker, benefits are paid to the surviving children under
18 and mothers, to aged parents if there is no widow or child, and to
widows when they reach 65. Monthly benefits range from a minimum of
$10 to a maximum of $85, based upon past earnings, length of employment, and number of dependents. Few families are eligible for maximum
amounts, however. The average monthly benefit received by a retired
male worker in 1943 was $25; the average retired worker and his wife
received $39.
The principal gaps in old age and survivors insurance are lack of coverage for many persons and inadequate benefits. Protection should be extended to all the gainfully occupied and their dependents. Large numbers
of persons least able to provide for their old age or for their survivors,
including agricultural and domestic workers, are outside the system.
7
That is, they have had sufficient wages in covered employment for survivors insurance
to be in force.
46
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
Many who worked in covered employment during the war will lose their
insured status after they return to other peacetime occupations. Some
persons previously insured who are in the armed forces or in Federal civilian employment may lose their insured status. The magnitude of the
shift from covered employment to other employment or out of the labor
force and back again is indicated by the fact that 74 million persons have
some wage credits in covered employment, although only 40 million are
insured.
Old age and survivors benefits purport to provide basic protection for
their recipients.8 If an adequate minimum is actually to be afforded,
it would seem that a minimum benefit of at least $20 to $30 and a general increase in benefit scales through the lower levels are necessary.
Present benefit schedules were hardly adequate when they were set up
in 1939, and price increases in recent years have lessened their adequacy
considerably. Higher wages have increased benefits only slightly during
this period; they have had no effect upon payments to those previously
receiving benefits and little effect upon new claims since benefits are
related to past average earnings.
If past earnings within a specified period are a necessary condition for
benefits, as in the existing plan, those already past working age pose a
special problem. Complete coverage of the present labor force would
afford them no protection other than public assistance.9 Even though
their numbers will ultimately diminish, compensation for all persons
past working age comparable to that available to insured workers should
be given serious consideration.10
Disability and Medical Care Insurance. Social insurance in the United
States deals with disability and the cost of medical care to a very limited
extent. All States save one require some insurance protection against
occupational injuries or disease, but it is estimated that substantially less
than one-tenth of all disabling illnesses of persons in the labor force fall
8
The age requirements attached to the receipt of both old age and survivors benefits
eliminate the possible danger in unemployment compensation of benefits exceeding wages.
Here a possible danger is rather that the system could be used to force withdrawal from employment, as a means of reducing unemployment. Old age compensation should be sufficient
to enable the aged worker to retire if he wishes, but he should not be penalized by having
future benefits reduced or denied if he wishes to work.
9
Those permanently disabled at the time permanent disability insurance is adopted would
be in a similar position.
10
Benefits would obviously have to be paid at flat rates.
ECONOMIC ASPECTS OF SOCIAL SECURITY
47
in this category. Railroad employees have some coverage against permanent disability along with old age insurance under the Railroad Retirement Act, and some protection is afforded Federal employees and
veterans. Two States have adopted temporary disability insurance for
those insured against unemployment. Otherwise, no public action has
been taken except for war veterans.
In terms of risks, the most significant omission in the existing social
insurance system is the lack of protection against the loss of income and
the expense of medical care associated with sickness and disability. All
members of the labor force face the risk of income loss through disability,
and the risk of medical expense is universal. The loss of earning power
because of disability and the inability to obtain sufficient medical care
are serious causes of dependency. Illnesses are more prevalent and more
severe the lower the family income. It is estimated that some 7 million
persons, half of whom would normally be in the labor force, are disabled
at any one time. Of the total, little more than half have been disabled
less than six months.
Compulsory disability insurance is the only means through which loss
of income from disability can be adequately offset. The permanently
disabled worker and his dependents are in a position similar to that of a
family in which the wage earner is incapacitated by age, and their need
is likely to be greater. Similarly, the temporarily disabled worker is in
a position analagous to that of the unemployed worker. Permanent
disability insurance could readily be added to old age and survivors insurance and compensation for temporary disability incorporated into the
unemployment compensation system.
Social insurance is well suited also to meet the expenses of medical
care. The adequacy of medical care for many families is in part a matter
of the distribution of medical and hospital facilities. Hospitals tend to be
established and doctors to be located in relation to financial resources
rather than in relation to need. However, a fundamental cause of inadequate care—and the major cause of the maldistribution of medical resources—is simply individual inability to pay for needed services.
Families in low-income groups have a greater need for medical care
but obtain much less than those in higher income brackets. The proportion of unattended illnesses varies directly with family income. To be
sure, medical services for the poor are considered a public responsibility,
but a means test deters many from seeking necessary attention and pre-
48
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
vents others who are not eligible from obtaining care that they need but
cannot afford.
Voluntary prepayment plans for medical and hospital care have expanded in recent years, as the medical profession has shifted from opposition to support of such schemes, but they provide adequate coverage for
only a small part of the population. Adequate medical care can best
be assured through compulsory insurance against its cost. With such a
plan in conjunction with disability insurance, families would be protected
from the adverse economic effects of sickness and accident, doctors and
hospitals would be assured of more secure incomes, and the nation would
gain from a healthier and more efficient population.
ECONOMIC AND FISCAL ASPECTS OF SOCIAL INSURANCE
Social insurance financing is not simply a matter of making benefit
payments out of a solvent fund built up and maintained by premiums
collected from those participating, assessed according to the degree of
risk and the amount of benefit payable if loss occurs. Because this is
the essence of private insurance financing, and exists to a considerable
degree in the present unemployment and old age insurance systems, it
does not follow that social insurance should be financed in this fashion.
In fact, individual equity in terms of premiums equated as nearly as
possible to the degree of risk and the amount of benefit, comparable to
the equity necessary in private insurance, is inconsistent with adequate
social insurance. That lower income groups cannot afford to pay in full
for the protection they receive is one of the principal reasons that voluntary social insurance is inadequate.
More important, it would be an undesirable and short-sighted policy
not to consider the effects of social insurance financing upon employment
and spending and not to finance the insurance system so that its operation would contribute to high and stable employment. Social insurance
expenditures, properly financed, can be a significant part of a fiscal policy
directed toward full employment. Benefits tend to be promptly and
wholly spent by their recipients. Largely but not wholly on account of
unemployment compensation, social insurance benefits in the aggregate vary directly with unemployment. Payment of benefits is a form of
Government action that does not intrude significantly upon the province
of private enterprise. Since the longer run problem of our economy appears
to be to develop and maintain, within the framework of a free society,
ECONOMIC ASPECTS OF SOCIAL SECURITY
49
sufficient demand for goods and services to utilize fully our productive
capacity, social insurance is an apt governmental weapon. It should not
be financed in such a way, however, that consumption expenditures will
be simply shifted among individuals and left unchanged in the aggregate.
If the ultimate liability of the Government to provide benefits is admitted, separate insurance funds are no longer necessary. Benefits may
be met in whole or in part out of general revenues. Contributions need
not be directly related to benefits. The choice of sources of funds over
and above those provided by contributions becomes a part of the problem
of general fiscal policy and problems of insurance reserves do not exist.
If social insurance benefits are to be paid entirely from funds contributed by or for those insured,11 however, a choice must be made between a pay-as-you-go plan, in which rates are adjusted to meet current
expenditures, and a reserve plan, under which level rates provide reserves
to meet the increased future liabilities of an old age and permanent
disability plan and the potentially fluctuating liabilities of unemployment
insurance.
The Contributory Principle. The use of earmarked funds from pay-roll
taxes and some attempt to relate contributions and benefits were probably necessary to obtain public acceptance at the inception of unemployment and old age insurance in the United States. It was felt that
separate funds fed from particular taxes would provide greater assurance
that benefits would be available to claimants, on the one hand, and that
excessive benefits would be checked, on the other, than if congressional
appropriations were continually necessary. In addition, the fact that
only certain groups were included made it difficult to justify the use of
general revenues. Contributions meet the definite desire on the part of
those insured to pay for their protection. They also provide a wage
record against which claims can be checked and benefit amounts
determined.
It would probably not be desirable to abandon the contributory principle entirely, but in a comprehensive system, benefits could be met in
large part from general revenues. The wider the insurance coverage and
the more general the understanding and acceptance of social insurance
as a necessary public responsibility that, like public education, conveys
indirect benefits to all members of the community, the more appropriate
it becomes to draw upon general revenues. The right of individuals to
11
With or without a fixed Government contribution.
50
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
benefits and the guarantee that future obligations will be met do not rest
on the fact that claimants have a previous contribution record nor on
reserves built up from such contributions, but on the harmony of social
insurance with the economic and social desires of the nation.
The Reserve Problem. There is a great deal of misunderstanding about
Government insurance reserves. Regardless of the financial methods
adopted, the output of the economy at the time social insurance benefits
are paid must furnish the goods and services consumed by beneficiaries.
The real burden of maintaining the aged in the future cannot be placed
upon the present generation by currently accumulating dollar credits.
The real, as opposed to the dollar, burden cannot be shifted over time. 12
A private insurance company must provide in the present for future
liabilities by building reserves which are invested in claims against others
in the economy. Financial solvency is meaningful and necessary. The
Federal Government, however, cannot practicably create a reserve in
any form except its own obligations. The claim has been made that, in
so doing and then spending the proceeds upon ordinary Government
expenses, contributors' funds are being dissipated, rather than conserved,
and the reserve is worthless. Although this position is meaningless in so
far as it suggests insolvency of the insurance system, it illustrates the
confusion arising from the existence of a large public reserve for which
there is no alternative except investment in Government securities.
There is no point in collecting pay-roll taxes and burying the receipts
in a public vault. This would only necessitate higher taxes or more borrowing from other sources to meet general Treasury expenditures. A
more efficient procedure is to make the cash receipts of the reserve fund
available for general budget expenditures or for the redemption of public
debt, and to credit the fund with Government bonds. But even then
the fact remains that the existence of a reserve in Government bonds to
meet future obligations does not alter the problem of meeting those obligations. When it is necessary for the insurance fund, in order to make cash
outlays, to draw upon its reserve or even upon current income fiom interest, the Government must tax or borrow to obtain the money that is
transferred to the insurance fund. The same amount could be raised in
12
Only if a reduction in consumption expenditures, caused by contributions in excess of
benefits, should result in increased production of capital goods with resources that would
otherwise have been used in consumption, might there be a greater future output of consumer
goods than would have occurred had reserves not been created.
ECONOMIC ASPECTS OF SOCIAL SECURITY
51
the same way and transferred to the insurance fund as a Treasury expenditure if the reserve did not exist.18
With only particular groups covered, a reserve gives some appearance
of equity between those covered and those outside. The covered group
exercises a claim against the remainder of the population when the reserve
is drawn on, just as it would through a direct Government contribution
to the fund. The justification for this, when a reserve exists, is the fact
that the covered group has previously restricted its expenditure by providing more in contributions than it received in benefits. Whether the
uncovered group has actually benefited from the previous decline in
expenditures of the covered group or has been adversely affected by the
deflationary effect is another matter. With comprehensive coverage, even
this justification disappears. To meet increased liabilities can be a matter
of choice between increased contributions by participants and general
Treasury revenues.
Government Financial Participation and Economic Policy. The necessity of the use of general revenues depends upon the degree of income redistribution necessary to provide adequate benefits and upon the extent
to which the nation wishes to integrate social insurance financing with
general fiscal policy. It is often suggested that equal amounts of revenue
be obtained from employers, employees, and the Treasury.14 A superficial
appearance of equity seems to be its only basis. The responsibility of the
13
Since the excess of contributions over benefits represented by a reserve account is "lent"
to the Government for general use, it is sometimes argued that this process tends to reduce
the privately held Government debt and its interest burden. It is said to be easier, therefore,
for the Government at a later date to raise funds for insurance benefits than it would have
been had the reserve not been created. Since at a future time a substantial part of the benefits
will be financed from interest payments on the bonds held in the reserve fund, it will be
possible later on to continue a relatively low rate of pay-roll taxation even though benefit
payments have increased. This argument assumes that, in the absence of pay-roll tax revenues
sufficient to create a reserve, total tax revenues over the period would have been lower. Certainly this does not necessarily follow; other taxes could have been higher. During the war,
for example, the Victory tax rate and subsequently the normal income tax rate might very
well have been higher had it not been for pay-roll taxes. In the late thirties, on the other
hand, it is quite likely that Treasury borrowing from the public would have been utilized in lieu
of pay-roll tax revenues, but this would have represented a fiscal policy decision to avoid the
deflationary effects of additional taxation. The especially deflationary effects of pay-roll
taxation could even have indirectly increased the necessity for Government borrowing during
that period. At least, it is reasonable to assume that incomes and employment were reduced
because of the restrictive effect of pay-roll taxes on consumption expenditure.
14
This is the approximate ultimate division suggested by the Social Security Board and
by Senator Wagner in their proposals. It has also been the nominal, but not the actual, division of the cost of unemployment insurance in Great Britain.
52
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
population as taxpayers rather than as covered workers would better be
expressed in a fluctuating Treasury contribution based indirectly upon
the level of employment.
For example, aggregate contributions might be equated to benefits at
full employment, allowing for frictional unemployment. Under such employment conditions, the effect on consumption would be more or less
neutral.15 Contributions would exceed benefits with over-employment
such as existed during the war and benefits would exceed contributions
in periods of under-employment. This relationship would be in accord with
a general fiscal policy which sought to restrict aggregate expenditure
when inflationary pressures exist and to encourage it when deflationary
forces threaten.
The stimulating effect of social insurance upon consumption could
be increased by establishing contribution rates that would provide less
than sufficient funds to meet benefits at reasonably full employment. The
extent to which general revenues should be relied upon at such an employment level depends upon the longer run aspects of many factors: the
distribution of income, savings habits, investment outlets, other sources
of Treasury revenues and objects of Treasury expenditures, and the like.
The important thing is that above a minimum which would piovide
recognition to the contributory principle, the sources of funds for social
insurance benefits should be a matter of fiscal policy, not of social insurance. The greater the margin between contributions and benefits, the
more effective social insurance can be in terms of economic policy.
Some attention should be given at this point to another proposal for
increasing the effects of the social insurance program upon the level of
monetary demand; namely, that of providing rates of contribution
which would vary inversely with the level of employment.16 This procedure
might tend to increase consumption in depression and check it in prosperity more effectively than would constant rates, but it has several disadvantages. To vary frequently the rate of employees' contributions
would obscure the contributory principle still more, and might well
provoke confusion and uncertainty among both employees and employers.
The fact that contributions would go down might tend to create unwarranted demands for further reductions, and increases in contributions
15
See pp. 54-55 for a brief discussion of the effects of pay-roll taxes on consumption.
Among others, the British Government proposed this in its White Paper on Employment
Policy.
18
ECONOMIC ASPECTS OF SOCIAL SECURITY
53
might be effectively opposed, no matter how definite the previously agreed
upon schedule of rates might have been. There would be political opposition to increases in employers' taxes as well. There is serious question in
any case about changing rates of employers' contributions according to
a criterion which cannot be anticipated very far in advance. Rate changes
based on unemployment would tend to make business decisions as to
future events more difficult, and not enough is known about the incidence
of pay-roll taxes paid by employers to indicate at what levels of employment such taxes should rise or fall. A simple inverse relation between rates
and employment might be inimical to the progress of business recovery
in its early stages. On the other hand, a decline in contribution rates when
unemployment is rising might result only in an increase in profits that,
because of its source and presumably temporary character, would have
little or no salutary effect upon business activity. On the whole there is
much to be said for stability of pay-roll tax rates.
Even if frequent rate adjustments were not made, the proportion of
expenditures to be met from other than pay-roll taxes at high employment, once determined, would not necessarily be permanent. It would be
subject to revision when underlying changes in the factors listed above
seem to be sufficient to require a reappraisal of general fiscal policy. In
addition, the changing age distribution of the population over the next
four decades would increase expenditures, even in a comprehensive system, quite apart from changes in employment. Periodic reconsideration of sources of funds would be necessary on this account alone.
This approach would retain the contributory principle to some degree,
but benefits would not be limited by contributions and the collection of
revenues would be directly related to other Government finances. This
does not mean that contributors would have no other financial burden
related to social insurance. Manifestly, Treasury expenditures would
affect them as taxpayers. The extent to which this burden would differ
from the added burden of higher pay-roll taxes would depend upon the
other tax sources utilized. Other public measures dealing with unemployment would be encouraged, as their success would be directly reflected
in a reduction in the Government contribution to the insurance fund.
The social insurance system should be designed to promote a generally
high level of consumption expenditure and to increase such expenditure
when employment declines. The role of unemployment compensation in
maintaining consumer expenditure in depression is limited, however, by
necessary restrictions upon the duration of benefits and by necessary
54
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
limits upon benefits as a proportion of wages. Fiscal aspects of social insurance should be consistent with general fiscal policy, something that
has not been true under existing programs. No attempt has been made
in this paper to deal with the general problem of Government fiscal
policy,17 however, except by implication.
FISCAL AND ECONOMIC EFFECTS OF THE EXISTING
INSURANCE SYSTEM
Both unemployment and old age insurance are now financed in a
manner more or less analogous to private insurance. The cost of benefits
is met by pay-roll taxes paid by and for those in covered occupations.
Contributions bear some relation to benefits, but no adjustment is made
in contribution rates paid by those eligible for dependents' allowances or
by those now in the older age groups, who receive considerably more
generous old age benefits relative to their contributions than will younger
contributors. On the whole, beneficiaries in lower income groups are
treated more generously, in terms of their contributions, than those
with larger incomes. An attempt has been made to meet the problem of
fluctuation in costs over time by the creation of reserves, rather than by
variations in the rates of contribution, although this continues to be a
disturbing element in the old age insurance plan.
Effects of Pay-Roll Taxes. Pay-roll taxes on employees are restrictive
in their effects upon consumption since they are borne by wage earners,
most of whom have little margin for saving under ordinary conditions.
The effects of pay-roll taxes paid by employers are less clear, but their
burden probably also falls on wage earners in considerable part, whether
it is shifted to them through higher prices or lower wages.18 Consequently
employers' taxes also restrict consumption over the longer run. In the
short run at least, changes in employers' contributions probably affect
profits as much as or more than wages or prices.
In the aggregate, the payment of insurance benefits out of pay-roll
taxes tends merely to redistribute, not to increase, consumption expenditures.19 If benefits equal pay-roll taxes, total consumption may be somewhat increased, however, since benefits are likely to be fully spent, while
17
See the various essays in Public Finance and Full Employment, No. 3 in this series of
pamphlets.
18
To the extent that employers' taxes are reflected in higher prices, those outside covered
employment are also affected.
19
The restrictive effects of existing pay-roll taxes on consumption are increased by the fact
that they are levied only on the first $3,000 of total annual wages.
ECONOMIC ASPECTS OF SOCIAL SECURITY
55
contributions may not be provided entirely out of funds that would
otherwise have been spent on consumption. This effect is offset to some
extent by the fact that consumption expenditures made out of benefits
probably do not wholly represent a net increase in spending. To some
extent they replace spending by or for beneficiaries out of their savings or
those of their relatives and out of public or private relief. We may conclude that, if the outflow of funds through benefit payments equals the
inflow of contributions through pay-roll taxes, aggregate consumption
expenditures tend to remain unchanged or to increase only slightly; if
contributions exceed benefits, spending on consumption will be reduced;
if benefits are larger than contributions, spending will be increased. The
extent of the increase will depend, however, upon the alternative revenue
sources that are drawn upon.
Pay-roll taxes are an accepted and productive source of revenue. Taxes
on employees give them direct participation in the system, and provide
useful administrative records. Contributions from employers in the form
of pay-roll taxes do not appear to have as much justification, apart from
their revenue producing ability, except in the case of occupational accident
and disease. Over this risk, the employer has some control, and to tax him
on the basis of rates adjusted to the degree of risk provides an incentive
to the employer to eliminate this risk as far as possible.20 Otherwise, there
is serious question about the desirability of a business tax measured by
employment. Nevertheless, the tax on employers would be difficult to
eliminate, as long as the tax on employees is continued, especially if under
an expanded program employees' taxes are raised above current rates.
Unemployment Compensation. Pay-roll taxes for unemployment compensation are levied almost entirely on employers.21 Only four States add
a tax on employees.22 There is no attempt made to balance current contributions and benefits; balance is supposed to be attained over the period
of the business cycle. Unemployment is so unpredictable, however, that
20
Experience rating in unemployment compensation is discussed on pp. 57-58.
Employers are subject to a Federal pay-roll tax of 3 per cent, which may be offset up to
90 per cent by corresponding State taxes. In effect, the proceeds of a 2.7 per cent tax are
credited to State accounts in the unemployment trust fund and the yield of 0.3 per cent tax
accrues to the Treasury for expenses of administration of the plan. All but four States have
taken advantage of Federal permission to reduce tax rates paid by individual employers, however, depending upon their loss experience. The actual average rate of employer taxes is currently about 2 rather than 3 per cent.
22
In two of these States, Rhode Island and California, the existence of employee contributions is now related to temporary disability insurance programs.
21
56
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
such a balance, if it were attained, would be the result of fortuitous
circumstances.
Benefits exceeded current contributions for brief periods in a few States
in 1938 and 1940 and in a number of States in the latter part of 1945. Total
collections consistently exceeded total benefits, however, until the last
quarter of 1945, when benefits were about 125 per cent of collections.
From the inception of the system through December 1945, less than 30
per cent of the contributions collected were paid out in benefits. No
benefits were payable during the first two years of operation; benefit
scales were more illiberal than at present; and, though many persons
were unemployed prior to the war and after benefit payments had
begun, a substantial proportion were outside the system or eligible only
for brief periods. The effect of the war on unemployment, together with
these factors, resulted in State unemployment funds that totaled 6.8
billion dollars at the end of 1945.
The incidence of unemployment in the near future is likely to differ
markedly among States and not in accordance with the adequacy of their
separate reserves. The Social Security Board states, however, that accumulated funds should be "sufficient for any foreseeable unemployment
in the future, even if all States provide protection as great as that in the
most liberal States."23 States may also obtain interest-free Federal loans
out of that portion of pay-roll taxes received by the Federal Treasury
but not spent for administration of unemployment compensation.
Since its inception, the operation of the unemployment compensation
plan has been deflationary. Most of the excess of contributions over
benefits represents a reduction in consumption expenditure. To be sure,
these accumulated funds have been exchanged for Government securities
and the proceeds expended by the Treasury in its ordinary operations.
But had they not been available, the Treasury would have obtained
funds elsewhere, in all probability from less deflationary sources.
Nevertheless the system does have a degree of sensitivity to changes in
the level of unemployment. Expenditures increase and collections fall as
unemployment rises and pay rolls shrink. Experience rating provisions
tend to make rates of contribution vary directly with unemployment,
however, and consequently lessen the extent to which total collections
vary inversely with unemployment. If the present system is to make a
M
Social Security Board, "Ten Years in Review," Social Security Bulletin, August 1945,
p. 21.
ECONOMIC ASPECTS OF SOCIAL SECURITY
57
significant contribution to consumer expenditure on the down-swing,
however, excluded occupations should be covered promptly and benefits
liberalized and extended.24
Also, pay-roll taxes should not be expected to balance benefits at some
presumed average level of employment over the cycle. The two should
come into balance at reasonably full employment with allowance for
frictional unemployment, and less deflationary sources of benefit payments should be drawn upon during periods of severe unemployment.
This would necessitate Federal participation in financing.
Experience Rating* One type of variation in employers' unemployment
compensation tax rates is found in their relation to the loss experience of
the individual employer. Individual employers' rates of contribution
(or premiums) are directly related, within certain limits, to their losses
under workmen's compensation and, in most State plans, under unemployment compensation. Reductions in rates for employers whose losses
are small are supposed to provide incentives for preventive action by the
employer that will diminish the causes of industrial accidents or unemployment. Experience rating has operated successfully in workmen's
compensation. Industrial accidents and disease are controllable to a
considerable degree by safety devices, inspection, education, and the like.
The major causes of unemployment, however, are not within the control of individual concerns to any significant degree. Some regularization
of casual or seasonal employment might be possible in a relatively few
concerns, but even in these instances, other and greater advantages than
pay-roll tax reductions would probably attend the regularization of
employment. Although unemployment cannot be appreciably reduced
by experience rating, its widespread adoption attests to its popularity;
the difference between the statutory rate of 2.7 per cent and the actual
national average rate of employer contributions of about 2 per cent
attests to its effectiveness in reducing tax bills. Most employers could
qualify for tax reductions under wartime conditions, but the low level
of unemployment had nothing to do with efforts of individual employers. Ten States have required additional so-called war-risk contributions from employers whose pay rolls have expanded markedly. Such
employers are not the only ones, however, whose unemployment record
was improved by the war. In addition, experience rating schemes do
u
To broaden coverage after widespread unemployment appears could even have restrictive
effects, since those already unemployed would receive no benefits, and a net inflow of funds
might result from the contributions of those still employed in the newly included occupations.
58
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
not differentiate among industries. An employer in an unstable industry
who does his utmost to regularize employment within his plant may not
obtain as great a rate reduction as one in a more stable industry who takes
no steps whatever.
A serious objection to experience rating is the employer pressure it
develops to obtain lower rates, not by lessening actual unemployment but
by reducing the benefits charged against particular employer accounts.
It is sometimes possible to spread work excessively to avoid layoffs and
to lay off workers in relation to their eligibility for benefits. Legislative
restrictions on qualification for benefits have been obtained, and increasingly severe disqualification for benefits appears to be directly associated
with the spread of experience rating. Experience rating in the State programs has also led to competition among States in lowering employers'
taxes, which has probably intensified benefit restrictions. The doctrine
emerging in many States that unemployed workers should be denied
benefits when their unemployment is not attributable to the specific
action of their employers is a more limited concept than the basic one
that workers should be denied benefits only when they are at fault. The
employer has a similar financial incentive to oppose liberalization of
benefits.
Finally, the effects upon aggregate contributions are exactly contrary to
good fiscal policy. Rates tend to fall when employment is high and to
rise when employment declines. Whether these short-run changes are
reflected in corresponding changes in prices or in profits, they tend to
discourage outlays when employment is low and to encourage them when
employment is high. These considerations point to the conclusion that
experience rating should be abolished in unemployment compensation
taxes. The reduction of risk associated with the financial incentive is so
slight that it is outweighed by the unfavorable developments associated
with such provisions.
Old Age and Survivors Insurance. Pay-roll taxes for old age and survivors insurance are collected from both employer and employee in
covered industries. Contributions tend to fluctuate with employment,
since they are based upon wage payments, and benefits are affected to the
extent that retirement is postponed when job opportunities are prevalent.
Contributions have exceeded benefits by a wide margin, and the reserve
fund now totals over 7 billion dollars. The reserve is invested in
Government obligations; net receipts are borrowed by the Treasury and
used for general expenditures, just as are net unemployment compensation
tax receipts. Like unemployment compensation, old age insurance has
been deflationary to date. Unlike unemployment compensation, the
ECONOMIC ASPECTS OF SOCIAL SECURITY
59
growth in the fund may be expected to continue, although at a diminishing rate, well into the future under rates now in effect.
Old age insurance involves definite and growing future liabilities. For
some time to come, an increasing proportion of those in covered employment will attain insured status. The average length of service of claimants
will increase. The proportion of the population in the older age brackets
is steadily rising. These factors will increase total benefit payments for
half a century, without any change in wage levels or benefit provisions.
The extent to which this increasing future liability can and should be
provided for currently has been the subject of much debate and confusion,
and is directly related to the effects of the system upon levels of expenditure and employment. Proposals have ranged from pay-as-you-go plans,
in which current revenues would be related to current benefits and rates
of contribution would steadily increase, to level premium rates, which
would result in the accumulation of a full actuarial reserve.
The plan originally adopted called for rapidly rising rates of contribution in the early years up to a level rate and the creation of a large reserve.
It was hoped that no contribution from general revenues would be necessary. Opposition to the proposed reserve accumulation and to increases
in pay-roll taxes soon developed. Adherents of deficit financing in depression pointed to the deflationary effects of contributions substantially in
excess of benefits. Business interests objected to the increase in pay-roll
taxes as such. This opposition, together with pressure for more liberal
benefits, brought a revision of the system in 1939. Benefits for those near
retirement age and for those with lower incomes were liberalized, and dependents' and survivors' payments were added. Scheduled increases in
contribution rates were suspended. As a result of these changes, much
smaller reserves were expected to accrue, and revenues from other sources
will be necessary to supplement pay-roll taxes, assuming that present
rates of contributions and benefits are unchanged. It has been estimated
that, for the present system to be self-supporting, pay-roll taxes would
have to be from 4 to 7 per cent. The current rate for employer and employee is 1 per cent each, with the rate scheduled to rise by 1949 to 3 per
cent each.24a
Rate increases were suspended until 1943 in 1939 and have been suspended annually since that time. Many who opposed rate increases before
the war because of their deflationary effects have favored increases in
S4a
A bill introduced recently by the Ways and Means Committee but not as yet considered
by the House proposes to increase the rate from 1 to 2 J per cent as of Jan. 1, 1948, and to
continue that rate until Jan. 1,1952, when it would be raised to 3 per cent.
60
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
recent years for the same reason, but opposition, largely from employers,
has prevailed. Also, there is some indication that labor unions may be
turning toward the position that general budget revenues rather than
pay-roll taxes should be the main reliance for financing.
It would seem that, within the framework of the existing system, a
pay-as-you-go plan with a small contingency reserve to take care of
short-run fluctuations in receipts and benefits should be used. This would
mean continuing the current rates of contribution until expenditures
equal receipts. From that point on, a Government contribution from
general revenues would probably be preferable to increases in pay-roll
taxes.
THE COST OF SOCIAL SECURITY
No detailed estimates of the dollar outlays involved in a comprehensive
social insurance plan have been attempted in this paper. Very rough indications of possible dollar amounts may be given, however. It has been
estimated that a quite comprehensive system (the Wagner-MurrayDingell Bill of 1943) could, with high employment, be financed in the
immediate future with pay-roll taxes of 5 to 7 per cent.25 This would
amount to perhaps 8 billion dollars. Those already past retirement age
would not have insurance coverage but would have to rely, as now, on
old age assistance by the States. Over the next four or five decades, as an
increasing proportion of the aged became eligible and as their numbers
increased, costs would rise. The cost of a still more comprehensive plan
which would include all of the present aged, as measured by an applicacation of the Beveridge plan to the United States, has been estimated at
13 billion dollars in 1945 and 16 billion in 1965.26
Eight billion dollars is less than 5 per cent of total income payments at
full employment, and 13 billion is about 8 per cent. Considered in relative
terms, the cost does not loom quite so large as in dollars. But neither
the dollar nor the percentage figure accurately describes the real cost of
social insurance and related measures. The nature of social insurance
expenditures and the effect of the system on the economy must be considered.
25
S. J. Mushkin and Anne de Scitovsky, "A Formula for Social Insurance Financing/
American Economic Review, September 1945, pp. 650-51.
28
L. R. Klein, "The Cost of a 'Beveridge Plan' in the United States," Quarterly Journal of
Economics, May 1944, p. 423. These estimates, however, assume something less than full
employment.
ECONOMIC ASPECTS OF SOCIAL SECURITY
61
Almost all social security outlays are transfer payments; that is, they
do not use up labor or other productive resources as do expenditures for
goods and services. To build a dam involves a real expenditure in terms of
labor and cement; less labor and cement is available for other uses in the
economy. A similar money expenditure for old age benefits does not
directly use up any resources; it is a transfer of resources from the working
population to non-producers, but total resources of the economy are not
directly affected. In these terms no real cost to the community is involved,
but only a change in distribution.
The real cost of social security to the nation must be sought in its
indirect effects upon resources and output. Social security may affect the
level of production in two ways: (1) It may alter the willingness or ability
of people to work (because of the tax liability incurred or the receipt of
benefits), and (2) it may affect the level of total expenditures on consumption or investment in the economy.
Transfer payments are not accomplished without friction; taxes are
not painless. If too high, taxes may diminish incentives to enterprise and
effort by the working population and consequently lessen total available
resources. The burden upon producers of additional taxes for social security purposes is lightened, however, by the reduction in direct demands
upon them for dependents' support and for contributions to private and
public relief. Some goods and services must be made available to nonproducers, in whatever manner.
The effect of social security benefits upon recipients whose earning
power is only temporarily interrupted or has not yet come into existence
is also important. Too liberal benefits may diminish incentive and effort
by weakening the willingness to work. Adequate benefits, on the other
hand, will increase the present and future labor supply by maintaining
incentive and protecting the health of those of working age and their
children. Poverty may on occasion mother invention, but it more often
breeds illness and dependency.
Unemployment is the great barrier to individual security, and it brings
with it a smaller national output and an increased need for social security
expenditures. An effective antidote for most—but not all—unemployment
is increased outlays for goods and services. The transfer of funds to nonproducers, whose consumption needs are great, will increase aggregate
consumption expenditures, if funds are not wholly obtained from those
who would otherwise have spent them—and they need not be. There may
be some upward shift in consumption and a reduction in savings on the
62
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
part of the working population as well, by virtue of the insurance protection afforded them. Some believe that insurance against the cost of medical care is especially likely to have this effect. With a small margin for
saving, old age may seem far away and other demands much more
immediate, unemployment and permanent disability may appear to be
hazards that confront the other fellow, but illness and medical expenses
are an ever present threat to every individual.
Increased demand for consumption goods and services has a favorable
effect upon investment expenditure, as does the increased social stability
resulting from adequate income protection. Inadequate living standards
and insecurity of earning power hardly create an atmosphere conducive to
a stable and prosperous economy. Against these factors must be set the
possible adverse effects upon investment decisions of the taxes and public
borrowing necessary to make social security payments. On balance, it
seems reasonable to conclude that adequate and properly financed social
security can help to increase aggregate expenditure and, under most conditions, by so doing to increase employment and real output.
PUBLIC WORKS AND SERVICES IN T H E
POSTWAR ECONOMY
by
WALTER F.
STETTNER
Division of Research and Statistics, Board of Governors
With the end of the war, full employment and production with rising
standards of living has become our foremost economic goal. It should be
achieved within the framework of a competitive private enterprise system,
but this requires that public policy assume its share of responsibility. The
development of a broad public works and service program will be an important factor in this task. This paper deals with the proper scope of public
works and services in the postwar period and their contribution in attaining economic objectives.
THE PLACE OF PUBLIC WORKS AND SERVICES IN THE ECONOMY
The economic importance of public works and services is twofold. They
satisfy certain needs of the community which cannot be met as well in any
other way and they may also be used at times to ameliorate fluctuations
in the volume of employment. Until the thirties, the first of these aspects
dominated public works planning.1 During the depression the employment
and income-creating aspects of public expenditures came to receive more
prominent, if not always favorable, attention. Now, in the postwar economy, it will be necessary to set both the need and the employment aspects
of public works in proper perspective if effective and beneficial planning is
to be carried out.
Public Works and Services—a Reflection of Changing Needs. The conservation and development of our human and natural resources for the
benefit of the community as a whole is an accepted goal of economic and
social policy and establishes the framework and the limits within which a
program of public works and services has to be developed.
At any particular time the content of a public works and service program depends on the economic and cultural progress of a nation. At an
early stage of economic development when capital is scarce, only the most
urgent economic needs can be satisfied. These are primarily the ones felt
1
Both in this country and in Europe the possibility of using public works as a stabilizing
factor in the economy had been recognized by the early part of this century, but the lack of
properly planned public works in sufficient amounts made it impossible to carry out this
principle.
63
64
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
by the people as individuals and provided for by private enterprise. With
an increase of wealth, the desire to satisfy community needs increases, and
the allocation of a growing portion of the country's resources to community purposes becomes possible.
The steady rise in the general standard of living, for example, has been
accompanied by a growing awareness of social responsibility for the assurance of minimum living standards. The need for expanded community
facilities and services, such as health and education, is widely accepted.
Sanitary housing and other needs which formerly had been thought to
concern the individual only are becoming vested with public interest.
A rising national income, however, is no assurance that needed public
projects will be undertaken. In this respect the relationship between the
level of national income and the satisfaction of public needs differs from
the relationship between individual incomes and the satisfaction of
individual needs. Despite prosperous business conditions during the
twenties, the nation emerged with serious deficiencies of such basic
requirements as housing, schools, and medical facilities. In appraising
economic well-being, it is not the position of the most fortunate members
of the community which is decisive, but the kind of life which our economy
affords to those who are least able to share in its wealth. Thus, the general
level of health, education, and living conditions should weigh heavily in
the final appraisal.
Other factors leading to an increase in public activity relate to the growing complexity of the economy. Heavy concentration of population in
urban centers has created a host of new needs for public works and services. Technological changes such as the growing importance of electric
power have created new responsibilities for resource development. Intensive exploitation of our best agricultural and forest lands has created
a need for large-scale irrigation and flood-control projects. The increase in
ability to pay for public works, therefore, has been accompanied by a
closely related, though not always equivalent, growth in the need for
them.
The term public works has been traditionally applied to public construction projects only. However, public construction projects frequently
are only a part of broader public functions. To carry on education and
public health functions, schools and hospitals are needed, but so are the
services of teachers and doctors. Public services must thus be considered
jointly with public works. A discussion of public works, furthermore, cannot be limited to public construction projects of the more traditional type,
PUBLIC WORKS AND SERVICES
65
such as highways and postoffice buildings, but must also include broad
improvement projects, such as urban redevelopment or the development
of river valleys. Actually, these are not new types of public activity, but
the modern counterpart of Federal participation in canal and highway
construction dating back to the early part of the last century. Individual
projects, moreover, must be considered as parts of a comprehensive program and planned on a broad basis with the cooperation of public and
private agencies and public bodies at the various government levels.
Notwithstanding the gradual expansion of public works and services,
modern civilization has been characterized by a lag in the satisfaction of
community needs.2 While the general need for increased public activity is
recognized by large parts of the community, different groups disagree on
the relative urgency of particular projects. The projects finally undertaken
usually reflect compromise on many issues, and thus often fall short of the
community need.
Public inertia, lack of information, disagreement on financial issues, and
legal or administrative obstacles also cause delay. These conditions account in part for the fact that public works and services undertaken in the
past are not necessarily indicative of the extent of past needs or of what
people at large would consider a desirable program. Extensive investigation of community needs and problems at various government levels will
prove helpful in providing the necessary background for informed community discussion.
Public Activity and Private Enterprise. An objection frequently made to
public works and services is that they represent a less efficient use of resources than would be achieved in alternative private uses. One reason for
this may be the difficulty of obtaining full agreement on the desirable
scope of a public program. The disparity of interests represented and the
diversity of needs to be served in any community often lead to a compromise that is completely satisfactory to no one. Private action often leads
to similar results, as the failure of many a business venture attests; but
since the desires of the community are seldom consulted in advance the
disappointment is less vocal and less evident.
There is also a difficulty in comparing the relative returns from public
and private enterprise. Business calculations, for instance, are concerned
with demand in money terms only. They cannot deal with needs which
* Needless to say, the backlog of public works grew larger during the war when all public
construction not immediately connected with the war effort was postponed for the duration.
66
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
may be supported by inadequate purchasing power but which are nevertheless economically and socially important. Moreover, they do not take
account of many costs which are borne by the community as a whole, but
do not show up as business expenses. Balance sheet profitability, therefore,
does not always indicate whether the benefits of a private undertaking
outweigh its cost to the community. The maintenance of urban slums, for
instance, may be profitable to the landlord while most costly to society.
The contention that public works and service outlays should be limited
because they represent a less efficient use of resources is thus not a valid
general principle. Alternative public and private uses of resources must be
considered on their specific merits.
No clear-cut line of division can be drawn between exclusive spheres of
public and private activity. Both are closely related and dependent upon
each other. The important fact, historically, has been the growth of both
private and public functions, which supplement each other in meeting new
needs and providing more adequately for existing needs. Indeed, new
public works are often a necessary condition for private expansion. The
development of the automobile industry, for example, went hand in hand
with the construction of a hard-surfaced highway system, and the provision of public airports may be expected to parallel the growth of the aircraft industry.
An expanded public works and service program to meet existing needs
does not mean infringement upon private economic activity. On the
contrary, it means that private enterprise is certain to benefit. It will
benefit, for instance, from the increase in labor productivity resulting
from adequate public health and hospital care, from the preservation of
resources through flood-control measures, and from the supply of cheaper
power through the development of river valleys.
Public initiative, moreover, often stimulates business enterprise by
creating entirely new opportunities for private investment. Regional development programs, for example, make available for private exploitation
land and power resources that formerly were undeveloped or inaccessible;
roads, sewers, water works, schools are necessary to bring urban fringe
areas within the orbit of expanding private business activity; and urban
redevelopment revitalizes dead areas by removing obsolete structures
which block new enterprise on potentially valuable land. Public works like
these induce population shifts, open up new markets, and create new combinations of labor and natural resources to attract the enterprising manu-
PUBLIC WORKS AND SERVICES
67
facturer, retailer, and builder. More than is generally realized, private
business follows the public dollar.
Compared with the large area of mutual support, the points of conflict
between public and private activity are few. They are based largely upon
misapprehensions. An expanded public works and service program, for
instance, need not mean "more government in business." Most public
works and development projects, though financed by the Government, are
actually planned and carried out by private engineers and contractors.
Similarly, the goods and services provided by public programs are often
of a kind for which there are no private suppliers. Even in those areas
where public programs furnish goods similar to those traded in private
markets—as in the field of housing—the public program will aim at sectors of the market, such as low-cost dwellings, which are unprofitable to
private enterprise.
Some public works and services may, to be sure, be designed to compete
with private enterprise. This may be the case where publicly owned institutions are established as competitive yardsticks to combat monopolistic
practices and assure more effective services to the consumer. In such
instances, they must be run according to the principles of private profitability and their cost accounting must provide a fair standard of competition. The problem of public enterprise or ownership is thus a separate
issue, without direct relation to an expanded public works and service
program.
Public Works and Employment. Public works and service programs
contribute to employment and national income in several ways. Expenditures for goods and services in connection with the execution of the program, first of all, result in a direct addition to demand. If highways are
constructed, jobs for highway workers are created and the products of the
construction industry have a new market. The additional income paid out
will raise the total income received by the community. Accordingly, the
level of private expenditures will tend to rise and this in turn will result
in increased demand, output, and employment. An over-all increase in income, however, will come about only if the projects are financed in a way
which does not involve a corresponding reduction in the level of expenditures on the part of those who supply the funds. The way in which the
programs are financed is, therefore, of vital importance for their employment effects.
There is a further and perhaps more important way in which public
68
HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
works and services may affect the level of employment and output. A
broad program of public works and services will, in the course of years,
develop the nation's natural and human resources, add to its productive
capacity, and create new opportunities for business enterprise. Whereas
the income and employment effects mentioned in the preceding paragraph
will continue only while the program is maintained, the latter type of contribution will be of a permanent nature. Once markets for new industries
are developed, these industries will continue to operate and provide employment. Once the working efficiency of the population is raised, a permanently higher level of output can be expected. There is nothing transitory about these factors; they are designed to give a permanent lift to the
economy.
Public Works and Cyclical Fluctuations. Neither of the two aspects of
public works and services—satisfaction of community needs and creation
of employment—provides by itself a sufficient guide to planning. Extensive public works and service programs are needed aside from their effect
on employment. But program timing must allow for fluctuations in the
general level of income and employment. With public works and services
composing a substantial part of Federal and non-Federal government
budgets, their role in a policy of cyclical stabilization cannot be overlooked.
Clearly, expenditures on public works and services should not be reduced when private investment falls and raised when private investment
increases. A policy of this kind accentuates cyclical fluctuations and is
altogether unsound. As a minimum requirement, public works and service
programs should be maintained at a stable level over the cycle. The resulting stability in an important segment of total economic activity will place
a floor under national income in times of depression. At the same time continuity in the development of an effective public works and service program will be possible.
Recently, however, this argument has been expanded into a rigid principle of counter-cyclical timing. According to this principle, public works
and service expenditures should be increased when private investment
falls off and decreased when private investment rises. The difficulty is that
the rigid application of such a principle might involve a conflict between
the need and the employment aspects of public programs. If the level of
income and employment in the post-transition period should remain high,
for instance, public works and services would not be a necessary part of
employment policy. Yet a substantial volume of such expenditures will
PUBLIC WORKS AND SERVICES
69
still be required to meet continuing needs even though employment is at a
high level. If the program were postponed until some future depression
occurred, the development of essential community functions would be
delayed.
It is true, of course, that during a period of depression the community
is in a better position to afford extensive works and service programs than
in times of prosperity when full employment of resources is assured with
or without such programs. At such times, therefore, programs can well be
expanded to include useful public works and services which could not be
afforded during periods of full employment because of competitive
demands upon our resources.
In either case it is well to remember that the level of public works and
service programs is only one of the instruments of fiscal policy. If a high
level of public works is necessary during a prosperity period, possible
inflationary effects may be mitigated by a proper financing policy. Similarly, the problem of a depression cannot be solved by public works alone;
full employment must also be approached through other channels such as
tax reductions.
Some special considerations are relevant during the immediate period
of reconversion from a war to a peacetime economy. The competition of
public works and services for limited resources is likely to be small at this
time since an extensive program cannot be started on short notice and
plans and preparations at the present time are largely nonexistent or in a
preliminary stage. A large number of public projects, furthermore, make
only an insignificant demand upon the resources needed for private construction. To the extent, however, that public projects during this period
would compete with urgent demands, such as for housing, their postponement is obviously justified.3
If after a few years unemployment should again assume considerable
proportions and be of a less transitory character, the execution of public
works and service programs could be speeded up. The current backlog of
needed public works is so enormous that there is a considerable margin
between the rate at which projects can be initiated and the rate at which
8
On Feb. 12,1946 the Federal Works Administrator reported that the Interdepartmental
Committee on Construction had agreed to defer those types of Federal construction which
would compete for men and materials with the demands of the housing program for veterans.
However, the Committee also recommended that the construction of highway projects,
reclamation projects, river and harbor improvements, and flood-control projects should go
forward. The Committee, furthermore, pointed out that the construction of certain community facilities such as streets, sewers, and water works was essential to the construction of
housing.
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
they are needed. So long as this margin exists and projects are planned
sufficiently in advance, their execution may be accelerated when conditions require, without reaching into projects of dubious social value or
make-work character.
Once the most urgent needs for public works and services are met, the
possibility of postponing certain parts of the program during business
prosperity is likely to become greater.
Paying for Public Works and Services. In any one year the financing of
public works and services will have to be planned in accordance with
general fiscal policy considerations which apply equally to the other items
of the budget. In this respect the financing of public works and services
does not differ from other budget expenditures and depends altogether
upon the requirements of the economic situation. 4
To the extent that it is compatible with general budget considerations,
however, the character of the public works and service expenditures itself
may determine whether preference should be given to taxation or borrowing. Where recurrent expenditures on public services are involved,
taxation would appear the more appropriate way of financing. In the
case of larger capital outlays on construction and public improvement
programs, on the other hand, preference may be given to borrowing, and
the annual interest and amortization payments could be distributed over
the period of the services rendered by these structures. Irrespective of
general economic conditions this method would hold particularly for small
government units whose financial resources are limited. During a
budget period in which their expenditures reach a temporarily high level,
due for instance to the construction of a schoolhouse in a small community, reliance on outside sources will be necessary. By repaying the
debt in gradual instalments the cost to the local community may effectively be spread over time.
As distinct from matters of financing technique, a second issue dealing
with the broad economic cost involved has to do with the question
whether the community can afford an expanded public works and service
program. Public works and service programs involve an economic cost
because the resources thus applied cannot also be used for the satisfaction
of other needs. By the same token, no direct cost to the community is
4
For further discussion of this point see Richard A. Musgrave, "Fiscal Policy, Stability,
and Full Employment," in Public Finance and Full Employment, Pamphlet No. 3 of this
series.
PUBLIC WORKS AND SERVICES
71
involved where the resources used would otherwise have been unemployed.5 The public works programs of the thirties largely fall into this
group.
Where a high level of employment is maintained independently of the
public programs, the question is one of choosing between the satisfaction
of alternative needs. To repeat, there is no a priori reason for assuming
that one or another use of resources should be more or less desirable,
merely on the grounds that it is aimed at the satisfaction of public or private wants. If the people feel that the construction of a public hospital is
to be preferred to an expansion of private plant, additional public expenditures "can be afforded;" if the plant is preferred, they cannot. As will be
shown in the subsequent discussion, the United States not only can
"afford" an expanded public works and service program, but is urgently in
need of it.
This presentation of the issue, however, tends to overstate the cost impact of a public program on the economy. It makes no allowance for the
fact that the public works and improvement programs themselves will
contribute to a permanent increase in the economy's output and hence in
the level of national income. Outlays for public services furthermore will
be reflected in greater health and efficiency of the population, and increase
its ability to produce and to earn larger incomes. Thus the competition for
resources even over a short period of time will be reduced. An increase in
the public debt will involve no additional burden if it results in a corresponding expansion of the national income. The charges can then be financed from the increased yield of the existing taxes. Debt financing of
public works and service programs therefore is sounder in the long run
than debt financing of current outlays which induce no permanent rise in
income.
In many cases the original money cost of a public works and service program results in corresponding savings to the community, without increasing total outlays. Highway construction expenditures, for instance, reduce
transportation costs to individuals and business. Flood control projects
reduce the annual losses of life and property. Improved health of workers
lowers labor costs at any given level of wage rates.
Finally, public works and service programs have direct repercussions
on the public budget itself. Soil irrigation programs may greatly increase
6
This, of course, provides no excuse for inefficient program planning.
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
agriculture's productivity in certain regions and reduce the need for subsidies. A vigorous program of slum clearance will raise budget expenditures
temporarily, but as a result other cost items, such as fire and police protection, health and hospital care, may be greatly reduced in the longer run.
The merits of public works and service programs and the magnitude of
the projects which the community can afford, therefore, must be appraised
not on the narrow basis of direct cash outlays or profitability, but in the
broader framework of economic welfare and development. In cases where
an immediate increase in national income and tax revenue cannot be expected, longer range programs may still be eminently desirable in the
interest of economic and social development. Only the Government is in a
position to take account of these longer range needs and does not have to
be limited by the prospects of immediate monetary return. However,
until the full results of the program become effective, existing taxation
may have to be increased. The question therefore arises how this affects
the income of the individual.
The increased tax payments of the individual will not necessarily affect
his real income. If in return for additional taxes he receives from the Government goods and services which were not otherwise available, his real
income will be roughly unchanged. If he is in a lower income group which
is exempted from the additional tax payments, any benefits he enjoys from
the public outlays will increase his real income. If he is in a higher income
group where he pays more in additional taxes than he receives in direct
benefits from the public expenditures, his real income will decrease; nevertheless, even in thiis case, he is likely to benefit from the increase in social
stability and opportunity for private investment brought about by the
public projects.
A more specific question of financing technique arises with regard to
self-liquidating projects, that is, projects financed not out of general revenue but from fees paid by the users of the services. While fee finance is useful in some cases, it is clearly no criterion for the desirability of specific
public works projects. The contribution which public works and services
may render to economic welfare and development, as has been pointed out,
cannot be judged on these grounds. For a large number of highly useful
improvement projects, specific allocation of benefits is quite impossible
and fee finance therefore not feasible. Even where financing on a selfliquidating basis is technically possible, its application may frequently be
undesirable because it would interfere with the purpose of the project.
Outlays for child welfare, for instance, might conceivably be financed on a
PUBLIC WORKS AND SERVICES
73
fee basis, but this would undermine their objective which is in part to provide free services to people not in a position to pay on a cost basis. In other
cases some fee financing may be called for, but it may be undesirable to
defray the entire cost in this manner.
The case for fee finance, on the whole, is stronger for State and local
governments than it is at the Federal level. State and local governments
are more limited in their taxing and borrowing capacity, and often can
finance needed services only through the issue of bonds to which the project receipts are pledged as collateral. Parking lots or swimming pools are
examples. The possibility of paying for such projects without having to
increase tax loads furthermore gives an incentive to States and localities
to provide the needed services.
AN INVENTORY OF NEEDS
The importance of a comprehensive program of public works and services to the economy and its role in achieving high levels of employment and
rising standards of living will be brought out more fully by surveying
briefly the more important areas where public action is urgently needed.
The estimates given are rough approximations only and do not purport to
be all-inclusive estimates of the total cost of a complete program. The purpose is to convey an idea of the order of magnitude of the need in important areas. All cost estimates are at 1940 prices. As is indicated in the table
on page 84, they would be appreciably higher at 1945 prices.
Transportation. The urban and rural highway transportation system
was greatly improved during the two decades before the war, but it is still
far behind the requirements of modern traffic. Since all road work not
directly connected with the defense and war effort has been suspended for
several years, the war has added a heavy backlog of repair and maintenance work to prewar deficiencies.
In the rural sections, deficiencies consist primarily of too narrow roads,
excessive curvature and grade, poor surfacing, and too many crossings at
grade level. These shortcomings are reflected in high operating costs and
wear and tear on vehicles, delays in transportation, and accidents resulting
in a heavy annual toll of lives and property. A considerable part of the
rural road mileage, including farm-to-market routes, needs to be improved
for year-round service. A program to provide a satisfactory system of
rural roads would improve the economic condition of many rural areas
and provide farm families with better access to schools, hospitals, and
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
medical care. As has been indicated before, these social and economic gains
must be considered in appraising the total cost of road improvement. More
tangible and direct savings would also result. There would be a saving of
about 2.5 billion dollars annually in operating costs, which are more than
twice as high on earth roads as they are on paved roads.
In many respects the urban transportation system is in worse condition
than the rural, for several reasons. Urban rights-of-way are often costly
and difficult to obtain, and improvements are relatively more expensive on
urban streets than on country roads. More extensive and coordinated
planning is required for urban than for rural areas. Furthermore, until
recently, the Federal-aid program has favored rural highways and roads.
The chief urban transportation problem is traffic congestion. In many
big cities the time needed for traveling in certain sections has actually
increased since the horse and buggy era. The transportation system has
not kept pace with the development of our cities and the inclusion of suburban residential areas in the metropolitan system. One of the main problems is to facilitate the traffic flow between the central business district
and the outlying areas during the daily peaks.
In improving urban transportation, account has to be taken of the fact
that the heaviest traffic is to and from the center of cities. Express highways with limited access provide the best answer to this problem. They
relieve city streets from through traffic and preserve the residential character of many neighborhoods. Separation of transit routes for public and
private conveyances also adds to the speed and efficiency of the transportation system. Radial thoroughfares and circumferential highways feed
traffic to express highways and distribute it between the residential and
outlying areas. Used in conjunction with by-pass routes, they enable
through traffic to avoid city streets. Several studies of the traffic situation
and the needs for improvement were made during the war, both by private
organizations and government agencies. The estimates presented here are
based mainly on these studies.
The cost of merely correcting the accumulated deficiencies of our rural
and urban transportation system has been estimated at between 25-30
billion dollars. Somewhat more than half of this amount would be spent
for the improvement of the main State highway systems and other rural
roads. Approximately 1.2 million miles of the latter would have to be improved for year-round traffic. Somewhat less than half of the 3.3 million
miles of highways (including city and town streets) are still unsurfaced,
and most of them should be surfaced over a reasonable period of time.
PUBLIC WORKS AND SERVICES
75
In addition to these outlays the National Interregional Highway Committee, appointed by President Roosevelt in 1941, recommended in 1944
the establishment of a limited system of approximately 34,000 miles of
greatly improved interregional highways connecting the principal geographic regions of the country. The cost of this improvement (probably
between 7 and 10 billion dollars) would be divided approximately equally
between the urban and the rural sections of the system. In the FederalAid Highway Act of 1944 legal endorsement is given to this recommendation, and a national system of interstate highways is included in the
Federal-aid highway system.
On an annual basis the average outlay for construction, replacement,
and maintenance of city streets and thoroughfares and of rural highways
and roads over the next 20 years is here estimated at 3 billion dollars. Expenditures in 1941 for the same purpose amounted to about 1.7 billion
dollars. The American Road Builders' Association has recommended new
highway construction in the amount of 3 billion dollars a year. This
amount includes about 1 billion dollars each for State highway systems
and metropolitan area highways, and about half a billion each for city
streets and county and local roads.
Improvement of highways and streets is only part of the urban transportation problem. Better parking facilities for private vehicles and a consolidated terminal for different types of public transportation are urgently
needed in most cities. The cost of both passenger and freight transportation is greatly increased by the time and effort consumed in movement
between terminals. This in turn adds considerably to traffic congestion on
city streets. Discharge of passengers and freight at a central terminal
having facilities for efficient transfer from one line to another would be a
major improvement in urban transportation systems.
Air routes and terminals are an important and expanding part of modern transportation. If air lines are to give maximum service to the public,
their terminals must be located within easy access to supplementary rail,
water, and highway transportation. Otherwise much of the time saved in
rapid transit over long distances will be dissipated in making local connections.
Urban Redevelopment. Blighted areas and slums are the result of many
factors, including the haphazard way in which our cities have grown.
Other factors have been the rapid economic changes of recent decades, the
great movement of population to industrial centers, and the consequent
high density of population in many residential areas. Added to this is the
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difficulty of devising and enforcing police and zoning regulations and
housing and sanitation codes that will protect the health and morals of
city families.
Comparatively recent investigations have revealed that slums and
blighted areas are heavy economic liabilities to municipalities as well as
social hazards and human wastes. One Middle Western city has found that
the per capita cost of police protection is three times higher in its slum area
than in the city as a whole, and that fire protection is seven times as
costly. The social findings are also appalling. Juvenile delinquency is approximately three times as frequent in these areas as elsewhere, murder
eight times as frequent, and deaths from tuberculosis five times as
frequent.
A Southern city has found that the cost of supporting certain slum areas
is over five times the tax revenue they yield. These decadent sections are of
course a financial burden on the commercial and industrial districts and
better residential areas. Furthermore, their existence is a threat to the
economic health of neighboring commercial and residential districts and
lowers the real estate values in the adjacent areas.
Two major difficulties have interfered with urban redevelopment on a
large scale.6 One is that the cost of acquiring and improving slum areas is
very high in relation to the monetary returns to be expected from the investment. Land tends to be overvalued in slums because of the relatively
high income that can be obtained by overcrowding poorly maintained and
congested buildings. With redevelopment in accordance with decent
standards, however, this source of profit disappears. Limitations imposed
upon population density and the higher percentage of acreage devoted to
public purposes, although of advantage to the community, result in lower
revenues from the redeveloped property unless the area is no longer expected to house lower income families.
A second difficulty in the way of urban redevelopment has been the lack
of suitable housing into which displaced slum dwellers could move. In the
past the housing market has provided an ample supply of new dwellings
for the upper income groups only. Thus, because of the pressure of demand
for lower income dwellings, there has been overcrowding in buildings that
have been occupied long beyond their useful life. According to the Housing
Census of 1940, about one-third of all dwellings in urban areas were substandard and almost half were over 30 years old.7
8
For an illustration of the factors involved in urban redevelopment, see pp. 88-89.
For further discussion of the housing problem, see "Housing Needs and the Housing
Market" by Ramsay Wood, pp. 1-39 of this pamphlet.
7
PUBLIC WORKS AND SERVICES
77
Private enterprise alone cannot be expected to clear away urban slums
and blighted areas. The process involves temporary financial losses that
will result in social and economic gains for the community, and the shouldering of these losses is a function of Government. The cost of a nationwide urban redevelopment program commensurate with existing needs
has been tentatively put at 20-25 billion dollars at 1940 prices. This includes the cost of site acquisition and improvement, and of nonresidential
facilities, but it does not include the cost of housing for the lower income
groups which cannot afford to pay commercial rents at present levels.
A frequent estimate puts the need of our population for additional
housing at a million and a quarter dwelling units a year for the next two
decades. Over a third of the total demand is for houses costing less than
$30 a month, which is a lower figure than the private housing market can
meet. Consequently there is need for public action to provide from 300,000
to 500,000 low-cost housing units a year. A housing program of this magnitude would require an annual outlay of about 1.5 billion dollars. By
comparison, the number of publicly financed dwelling units constructed in
1940 was about 73,000.
Agricultural Needs, Forests, and Recreation.8 Even before the war the
long-range productivity of land, our most valuable natural resource, was
badly impaired, and vigorous public measures to conserve and improve
the soil were urgently needed. Erosion due to soil washing and blowing had
damaged and impoverished over half our agricultural acreage. Lack of
rainfall interfered with the development of some 40 per cent of the land,
and only about 3 per cent of the acreage affected was being irrigated. For
want of maintenance and improvement, the grazing capacity of range
lands and the productivity of cultivated fields had been depleted. The war
aggravated these difficulties by emphasizing the necessity of immediate
large yields.
The National Resources Planning Board estimated in 1943 that approximately 40 million additional acres of cropland were needed by 1960 to
provide the prewar diet for the expected increase in population. This estimate was based on the 311 million acres devoted to domestic food production shortly before the war, and on a yield per acre equal to the 1936-40
average. In view of the known deficiency of this diet for a considerable
part of the population, the estimate appeared conservative.
The wartime expansion of acreage and especially the great increase in
8
For a full discussion of postwar agricultural problems, see Arthur C. Bunce, "Our Agricultural Policies/ 2 in Agricultural Adjustment and Income, the second pamphlet of this series.
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yield per acre would seem to justify a downward revision of this estimate.
Exceptional weather, mechanization, improved seed, and better feeding
methods and farm practices have produced record crops. However, about
45 million acres at present devoted to crops should be retired eventually
to grass or forest because of destructive erosion. Also, the National Resources Planning Board estimate should be raised by approximately 5
million acres to provide for an adequate diet for our population.
There is no doubt that the long-run economic use of our land requires
the conversion of considerable marginal crop land to more suitable uses,
and the improvement and reclamation of other land that can be worked
effectively by modern methods. In view of this fact, a rough estimate of
the cost of making necessary improvements and adjustments in our agricultural resources, based primarily on the study made by the National
Resources Planning Board, is still relevant. The estimate of 13 billion
dollars includes approximately 6 billion for soil erosion control, 3 billion
for drainage and clearing projects, 3 billion for irrigation and 1 billion for
the conservation and improvement of range land.
Our forest lands have also been impaired by uneconomic use. While a
growing need for timber products is anticipated for building and the
manufacture of plastics, paper, textile fibers, and other industrial products, the yield of our timberlands has long been decreasing. Too rapid and
wasteful use of mature timber, together with large-scale neglect of reforestation, has left large areas of denuded forest lands. Not only are these
tracts unproductive in themselves but through their effect on rainfall and
erosion they threaten the productivity of large surrounding areas. The
cost of a forest conservation program which would achieve balance
between yields and requirements has been put at about 4.5 billion dollars.
It would include planting, stand improvements, additional forest roads
and trails, and control of fire, destructive insects, and water shed.
Forest areas within relatively easy reach from urban centers might well
be developed as part of a recreational program which would also provide
for greater public use of lake and sea shores. The social and economic
value of recreation areas is well recognized, and the preservation of natural
beauty and historic sites has long been considered a function of public
authorities. From either the recreational or cultural point of view, much
remains to be done. According to recent estimates approximately 5 billion
dollars would be required to make the necessary additions to our State
and national parks, scenic highways, and other rural recreation areas.9
• Based on preliminary and confidential estimates prepared by the Twentieth Century
Fund in connection with its forthcoming study entitled America's Needs and Resources.
PUBLIC WORKS AND SERVICES
79
Regional Resource Development. The economic progress achieved in a
decade by the Tennessee Valley Authority illustrates the possibilities of
regional development.10 Throughout the United States, many river
valleys are in need of development, including those of such major arteries
as the St. Lawrence, the Ohio, the Missouri, the Mississippi, the Columbia, and the Colorado. The major purpose of regional development is to
raise the income and standard of living of people within the region. This
result is achieved in many ways. Flood control reclaims fertile lands for
agriculture by preventing periodic inundation of some areas and relieving
drought in others. It helps farmers to increase yields even while they
retire land of marginal productivity. In many instances it makes possible
a better diversification of crops. At the same time it prevents the heavy
loss of life and property which uncontrolled rivers too frequently exact.
The erection of dams and reservoirs for flood control offers the opportunity to develop power for rural electrification and industrial expansion.
The possibilities of rural electrification can be seen from the fact that over
a third of the rural dwellings in this country are still without electricity.
The availability of power at reasonable rates combined with easier river
navigability improves the competitive position of industries within river
valleys and stimulates new industries that can process local raw materials
to advantage. River development programs thus contribute to economic
diversification within regions and greater economic equality between
various regions.
While traditional public construction projects are part of a river valley
development, they must be so coordinated and integrated that they will
reconcile divergent needs within the region and serve the best interest of
the area as a whole. Irrigation needs of upstream areas must be dovetailed
with the need for flood control and improved water transportation of the
lower regions. Dams and reservoirs must be so planned as to prevent floods
and also to store and supply water for irrigation. Power plants at the site
of these dams should be capable of serving the area as a whole and of
expanding as needs increase.
Development of the economic potentialities of our river valleys is a
long-range project, and programs must be adjusted continuously to
growing needs and changing conditions. It is therefore hard to estimate
10
See, for instance, David E. Lilienthal, TVA "Democracy on the March (Harper & Brothers,
1944).
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HOUSING, SOCIAL SECURITY, AND PUBLIC WOKKS
eventual costs. With these limitations, a recent estimate believed to be
conservative puts the total at 25 billion dollars.11
Public Health and Medical Care. Since the turn of the century the
death rate in the United States has been steadily declining—from 17.2
deaths per 1,000 persons in 1900 to 10.5 per 1,000 in 1941. The leading
causes of death in 1900—influenza, pneumonia, and tuberculosis—have
been cut down by more than two-thirds. Typhoid fever and diphtheria
now account for a negligible fraction of deaths. Yet the Interdepartmental
Committee to Coordinate Health and Welfare Activities reported in 1939
that with more adequate medical care the pneumonia death rate could be
further reduced by more than 25 per cent and tuberculosis could be made
a negligible hazard to life and health. The Committee also reported that a
more aggressive application of present knowledge to cancer—the second
leading cause of death in 1941—would save a considerable proportion of
the patients.
The national health survey undertaken by the United States Public
Health Service in 1935 revealed that over 23 million people in this country
—nearly one-sixth of the population—had some chronic disease or physical impairment. The findings were further supported by experience under
the Selective Service Act. According to Selective Service records about 40
per cent of the men who reported for physical examination, or between 8
and 9 million men, were physically unfit for general military duty, and well
over half of this number were not acceptable for rehabilitation and had to
be rejected entirely.
An additional fact brought out by the national health survey is the
deficiency in medical care among the poor and low-income families.The
death rate from tuberculosis was seven times higher among unskilled
workers than it was among professional workers. The close relation between low income and inadequate health care results in a vicious circle
which it is beyond the power of the individual to break. In 1942 the
average amount spent for medical care by families with incomes under
$2,000 was less than half of that spent by families with incomes over
$3,000, but it was almost twice as large a proportion of the family income.
In 1935 wage earners in families with incomes under $1,000 suffered about
twice as many days of disabling illness as did workers in families with
incomes over $3,000.
Another striking fact is the wide disparity in the health record of
11
For source, see footnote 9 on p. 78.
PUBLIC WORKS AND SERVICES
81
various parts of the country. According to Census figures for 1941, for
instance, the maternal death rate is about twice as high in the South as it
is in the North, and is considerably lower in urban than in rural communities. In 1941 the infant mortality rate was 97.5 per 1,000 in one State and
29.7 in another, while it was about 45 for the United States as a whole.
I t is clear that all parts of the country have not benefited equally from
the medical progress which reduced the infant mortality rate from 100 to
45 within 25 years.
The distribution of public health and medical care facilities is very
uneven. In 1935, little more than a fifth of the counties had full-time
public health agencies and two-fifths of the counties, having a combined
population of 15 million, had no registered hospital. Since the proximity
of a hospital strongly influences the location of physicians, areas far from
hospitals are usually also greatly deficient in physicians. Counties with
hospitals are known to have two and one-half times as many physicians
as have counties without hospitals.
Two hospital beds per annual tuberculosis death and 4.5 general
hospital beds per 1,000 of population are considered reasonable minimum
standards. Yet before the war the number of beds per tuberculosis death
was less than one in 27 States and as high as two or more in only 8 States.
Ten States had less than two general hospital beds per 1,000 of population. Furthermore, lack of funds on the part of patients or potential
patients interfered with the optimum utilization of existing facilities
in many areas where hospitals were inadequate in terms of minimum
standards.
A public program of health improvement involves several important
steps. Effective public health service can be provided by establishing
district health centers to serve each 50,000 of the population. The important functions would be the control and possible eradication of contagious diseases, and the development of more effective programs for
mental and industrial hygiene. Hospital facilities for about 500,000
additional beds are needed to assure adequate hospital care and to replace
obsolete facilities. This number pertains to both general hospitals and
tuberculosis and mental hospitals. Special programs of maternal and child
care are needed to reduce the incidence of infant mortality. According to
the Interdepartmental Committee the lives of more than 70,000 mothers
and children could thereby be saved annually. Until a nation-wide health
insurance system is established, more public funds are needed to provide
adequate medical care. These programs have to be supplemented by
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continuous and expanded research in health and medical science and the
training of medical personnel. Since defective diets are one of the main
causes of ill health, for some time a nutritional program may have to
supplement the health program.
Another important but preventable health hazard is the pollution of
our rivers. It also threatens the destruction of aquatic life, and makes
many streams unsafe for recreational purposes. Municipal sewage and
industrial and mining wastes are known to be the major sources of contamination, and yet approximately 10,000 communities have deficient
sewage systems or none at all. About 20 million people are consequently
exposed to a special and preventable health hazard. Equally great is the
need for new and improved systems to furnish safe water. Over 10,000
communities need new water supply systems or extensions and improvements of existing systems. In addition, 5 million of our rural homes lack
sanitary privies and an equal number lack proper water supplies.
On an annual basis, needed public expenditures for health and medical
care are estimated at 2.5 billion dollars. They include capital outlays and
current expenditures for increased public health services and maternal
and child care, as well as expenditures for hospital construction and replacement, more adequate medical care for the lower income groups, and
adequate sanitation facilities. Comparable expenditures in 1941 amounted
to slightly less than one billion.
Education. During the last 50 years educational opportunities and standards have been greatly improved in this country. Eighty-five per cent
of the population between the ages of 5 and 14 attended school in 1940
as compared to 64 per cent in 1890. Nevertheless, the 1940 Census revealed that 2 million children between the ages of 6 and 15 had never
been in school. At the same time there were 3 million adults who had never
been to school and almost 11 million who had not gone beyond the fourth
grade. Serious educational deficiencies are also revealed by Selective
Service records. Up to December 1944, the combination of illiteracy and
failure to meet minimum intelligence standards caused the rejection of
620,000 registrants. In addition there were 150,000 illiterates whom the
Army accepted between 1943 and 1944 and gave instruction in reading
and writing before assignment to regular duty.
Deficiencies in our provision for education are also reflected in low
salaries for teachers and inadequate school plant and equipment. In 1942
the average annual salary of teachers, principals, and supervisors of
public schools was about $1,500 and of rural teachers only about $900.
PUBLIC WORKS AND SERVICES
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Several thousand teachers were receiving less than $300 a year. Of the
240,000 elementary and secondary school buildings in 1940 almost half
were one-teacher schools, and the same proportion of the total were
substandard and poorly located. About 5 per cent, which accommodated
1.4 million children, were unsafe for use. One million children attended
school in temporary structures and 600,000 children attended school only
part time because of a shortage of school buildings.
In general, children in urban areas and in the wealthier States have the
best chance of obtaining adequate schooling. Although the lower income
States spend on the average a much higher proportion of the income
received by the people for educational purposes than do the more prosperous States, they are unable to finance the necessary educational improvements. In 1941-42 the annual expenditure per pupil in one State
was more than five times as high as in another, yet outlays of the latter
State in relation to its income were one-third higher than in the former.
This is in part due to the fact that the birth rate is much higher in rural
areas and in some of the poorer States. The attendance rate of children
of school age is furthermore much higher in urban areas and in the wealthier States. A higher attendance rate in the poorer States would further
increase the cost of education to them.
Achieving adequate minimum standards of education involves the
relief of overcrowded buildings, replacement of outworn buildings, and
the consolidation of small schools. It means increasing the school equipment per pupil, lengthening the school term in many areas, and raising
the salaries of teachers. In many areas the teaching staff is heavily overburdened; to equalize their pupil load would mean an increase of at least
50 per cent in teaching staff.
To attain a desirable minimum level of education of 10 years of schooling for each child, the enrollment in elementary and secondary schools in
1950 will have to be about 20 per cent greater than it was in 1940. An
adequate outlay for plant and equipment would mean an annual capital
expenditure of $400 per pupil. Total annual public outlays needed for
education have consequently been estimated at 5.5 billion dollars in the
postwar period, including approximately 200' million dollars for public
libraries. This compares with an expenditure of less than 3 billion dollars
in 1940.
Recapitulation in Terms of Annual Outlays. The preceding inventory
was intended to give a general idea of the kind and volume of public works
and services needed to achieve goals generally recognized as desirable and
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
attainable. In the table below the various items are estimated on an
annual basis. This facilitates comparison with similar outlays in past years
and also with other budget items.
A N ANNUAL PROGRAM OF NEEDED PUBLIC WORKS AND SERVICES
(In billions of dollars)
Type of outlay
At 1940 prices
Transportation (highways and streets)
Airports, waterways, and ports
Housing and urban redevelopment
Conservation, reclamation, recreation, and regional resource development
Public health and medical care
Nutrition
Education
Public buildings
y.o
Total.
At 1945 prices
0.3
2
2.0
4.0
0.4
2.5
1.5
2.5
1.0
5.5
0.2
1.8
3.0
1.3
6.8
8
0.2
16.0
20.0
1
Includes maintenance.
Includes site acquisition.
* Owing to rounding, the increase is not shown.
Both current needs and accumulated deficiencies are included in the
estimates, with the assumption that the deficiencies will be met within
approximately 20 years. Some arbitrariness is unavoidable in deciding
on any particular span of years and trying to reconcile the urgency of the
need with the magnitude of the program. To take care of accumulated
deficiencies and develop projects fully is likely to require different amounts
of time for various component parts of the program. The expenditure
estimates should therefore be interpreted as averages of the annual outlays
during the next two decades. It seems likely that the outlays will be
unevenly distributed throughout the years because of the initial delays in
planning and getting programs under way and because parts of the program must be held in abeyance until other parts have been completed.
The figures are based on present estimates of needs and make no allowance for additional needs which may develop during the 20-year period.
Slightly less than half of the total, or about 7.5 billion dollars at 1940
prices, are outlays for new construction and replacement, while the
remainder represents service programs and the acquisition of necessary
sites and rights-of-way.
I t is difficult to evaluate these outlays on the basis of relative, urgency.
They are all intended to satisfy basic needs and, so far as possible, they
PUBLIC WORKS AND SERVICES
85
should be initiated without delay and carried out simultaneously. From
the point of view of government economy this would be particularly
desirable in the case of related needs, since it probably would reduce total
costs.
Actually, at the present time the preparation and planning is in a
more advanced stage for some projects than others and their execution is
likely to be pushed. Also, the inauguration of some programs may be
delayed by the necessity of recasting financial arrangements. Unfortunately, it is exactly in those areas in which the need is most urgent from a
welfare point of view that the greatest obstacles will have to be overcome.
Plans and preparations for enlarged health and educational programs, for
instance, are lagging far behind those for highway or airport programs.
In the immediate future, therefore, the state of present preparations will
largely determine the speed with which various parts of the program can
be carried out. While these projects are getting under way, however, it
will be important to concentrate on the preparation and planning of those
public works and services which are relatively new or which require a
considerable additional outlay as compared to the prewar period.
In appraising the contribution of the program to cyclical stability,
short-run and long-run considerations must be distinguished. For the near
future, the most important feature will be gradual growth with the
increase centering mainly on construction projects, partly because they
are the ones whose plans are in a relatively more advanced stage and
because they are, in part, prerequisites to more extensive service programs. Once the foundations for the latter and for development and improvement programs have been laid, a larger part of the program could
be made responsive to changing economic conditions.
PREREQUISITES OF AN EFFECTIVE PROGRAM
The effectiveness with which a public works and service program will
meet the needs of the people and of the economy in the postwar period
will depend to a considerable extent upon the care with which the program
as a whole is prepared and carried out and the extent to which its various
parts can be coordinated. Close cooperation between the various government levels will further contribute to smooth execution.
No rule-of-thumb methods can be expected to insure the success of
all types of public projects. In order to be most useful, each project must
be adjusted to the special needs of the region and population it is to serve,
and to the inevitable changes in requirements that are introduced by
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
economic, social, and in some instances physical developments. All this
must be accomplished within the limits set by financial arrangements,
multiple jurisdictional participation and control, and available professional knowledge and skill. A few indispensable prerequisites are common
to all successful public programs, however, and meticulous care in meeting
them will smooth the way to effective and economical execution of individual projects.
Advance Planning. A considerable amount of time necessarily elapses
between the time a project is decided upon and its actual execution.
Even after the necessary funds have become available, the project has
to pass through several stages of planning and blueprinting before contracts can be let. Even then, some time may elapse before the project is
well under way and exerts its full impact on employment. One important
function of all planning is, therefore, the elimination of delay in making a
thorough appraisal of the needs to be met and the best means of meeting
them. This will include investigation of ways to avoid possible legal and
financial obstructions and other impediments to prompt action when the
blueprints have been completed.
In a broad national program, advance planning will include coordination and integration of related projects as well as determination of the
proper sequence in which to undertake complementary parts of single
projects. It will also include decisions concerning the relative urgency
of many different projects and the possibility of dovetailing the program
as a whole with other economic activity. These decisions are indispensable,
not only to efficiency in providing necessary public works and services
but also to the usefulness of the program in strengthening other efforts to
maintain a high level of production and employment.
Adjustability to Changing Needs. Estimates of future requirements
as well as knowledge of past deficiencies should serve as the basis of
blueprints, and even then the way must be left open to change during
execution of the project. It may be necessary to prepare several alternative
or successive blueprints before the work is completed. Considerable flexibility in planning is particularly important in the case of State and local
projects, since the public works and services they provide must be closely
geared to private residential construction and the location of industrial
activity.
functional Balance. Judicious appraisal of the relative importance of
physical plant and operating personnel to the functioning of the completed
PUBLIC WORKS AND SERVICES
87
project is the third prerequisite of effective planning. In the field of
education, for instance, the construction of schools would be of little
advantage to pupils unless good teachers and equipment were made
available. Similarly, hospitals and clinics can contribute little to the health
of the nation unless they are competently staffed. Past emphasis on
public construction enhances the danger that the growing importance
of public services will not be fully reflected in public projects.
Effective Intergovernmental Relations, Recent emphasis on public
works and services as an instrument of national policy has somewhat
obscured the fact that the greater part of most programs will be carried
out by State and local governments. The resulting wide dispersion of
responsibility and points of view is a challenge to ingenuity and diplomacy. A regional development project, for instance, enters the jurisdiction of many local political units, and urban redevelopment may affect
a metropolitan area which includes several municipalities and lies within
more than one county and State. The problem is to devise a harmonious
working arrangement that will reinforce the strengths of all units and
overcome their weaknesses.
Local governments are intimately acquainted with the special requirements and resources of their communities and are thus better qualified
than is the Federal Government to execute programs within their jurisdictions. They seldom have the legal powers and financial resources to undertake advance planning, however, and they are in no position to carry out
the intensive research required to formulate satisfactory standards.
Moreover, local governments are not in a position to coordinate and
synchronize all parts of a regional or national program or to adjust them
to general economic conditions.
With regard to all these aspects, the Federal Government can make an
important contribution to the execution and ultimate usefulness of the
project as well as to the economic health of the nation. Surveys of need on
a national level, establishment of minimum standards, expansion of
research, and collection of pertinent data provide helpful information
and guidance for State and local governments in the preparation of their
own plans. The need for nation-wide minimum standards in health and
educational services requires Federal participation in their financing.
Federal grants for advance planning can overcome local difficulties as
well as contribute toward cyclical timing of public works on a nation-wide
scale. The effectiveness of this aspect could be increased if congressional
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
authorizations of national public works and services allowed for greater
flexibility in the initiation and timing of projects and in the use of the
funds made available.
The possibilities of intergovernmental cooperation in the execution of a
public works program are illustrated by a recent proposal made by the
Canadian Government to the Provinces.12 It is part of a comprehensive proposal to adjust the financial relations between the Dominion and
the Provinces to peacetime conditions. Its purpose is to influence the
timing of local projects so that they will supplement other efforts to
achieve economic stability. The Dominion Government proposes to
grant financial assistance to the Provinces for the planning and execution of useful but postponable public projects, provided that the projects
have been fully planned prior to the time of execution and that they
are executed in a period designated by the Dominion Government.
An Illustration—Urban Redevelopment. Most of the important
general considerations in planning and executing a program of public
works and services are illustrated by urban redevelopment. It requires
coordination of many related needs, integration of several individual projects into a master plan, and attention to relative timing. It involves
the cooperation of various government units at the same and at different
levels, and depends to a considerable extent upon Federal financial
participation. Both the Government and private enterprise are participants in its execution, and the benefits accrue not only to the community
at large, but also to commercial, industrial, and real estate interests.
The first step in a program of urban redevelopment is a survey of existing conditions and preparation of a master plan which takes account of
present needs and foreseeable developments. Residential sections and
commercial and industrial districts are clearly separated and provision
is made for adequate community facilities. Housing projects to supply
standard dwellings for low-income groups are laid out so as to prevent
the recurrence of overcrowded and insanitary conditions. Plans are made
to improve the transportation system by eliminating bottlenecks, reducing
hazards, and assuring rapid transit between different districts.
Execution of the master plan involves careful timing and dovetailing
of many projects. The improvement of the transportation system will
involve the enlargement and relocation of certain arteries. This cannot
be done without tearing down some buildings and demolition cannot
begin before provision is made for rehousing the displaced occupants.
12
Proposals of the Government of Canada, Dominion-Provincial Conference on Reconstruction, August 1945.
PUBLIC WORKS AND SERVICES
89
This may involve the construction of low-cost housing units to avoid
overcrowding of existing facilities and to offer suitable living quarters at
prices which the former slum dwellers can afford.
Although the city has to be considered as one redevelopment unit,
several local jurisdictions are often involved. The preparation of the
master plan therefore involves agreement among the participating units
and reconciliation of divergent interests. This becomes particularly
important in deciding on financial arrangements. Large expenditures of
public funds are involved in the initial acquisition of land. A considerable
part of these outlays may be recouped later in selling or leasing the land
to private builders. However, a net loss may be unavoidable because in
the process densities will have to be reduced, existing inflated land values
will have to be written down, and a larger proportion of the area will be
converted to streets, parks, and other public purposes. Provision will also
have to be made for the financing of low-income housing. In most cases
the local community alone will not be able to shoulder the losses involved
and make the necessary financial arrangements. The Federal Government will have to participate through low-interest loans, loan guarantees,
and annual subsidies. Until the exact form of participation by the Federal
Government has been decided through appropriate legislation, action
on urban redevelopment is likely to be delayed.
PROSPECTS FOR EXPANSION
The right of every family to a decent home and the right of every
individual to adequate medical care and a good education were among
the principles of the Economic Bill of Rights enunciated by President
Roosevelt in his message to Congress on January 11, 1944. They were
emphasized by President Truman in his message of September 6, 1945,
in which he also asked for early action to check the depletion of our
natural resources by reclaiming and rebuilding land, harnessing our
waters, and initiating regional development programs. President Truman
suggested that an agency be set up to make an inventory of our national
wealth and basic resources and to formulate a consistent public works
and development program. Later, he recommended early congressional
approval of the Agreement of 1941 between the United States and
Canada for the development of the St. Lawrence Basin. A further recommendation for congressional action was contained in President Truman's message outlining a comprehensive national health program.
Establishment of separate authorities to deal with the comprehensive
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
development of the economic resources of our river valleys has been an
accepted goal of national policy ever since the launching of the TVA
experiment. By September 1944, President Roosevelt had recommended
to Congress the creation of additional authorities for the Arkansas,
Columbia, and Missouri Rivers.
Congressional Reports. A report of the Subcommittee on Wartime
Health and Education of the Senate last year discussed the urgent need
for medical care of our population and recommended Federal grantsin-aid to the States to assist them in postwar construction of hospitals,
medical centers, and health centers. It also recommended Federal scholarships or loans for medical and dental education to overcome the acute
shortages of doctors and personnel with training in psychology and
psychiatry.
On August 1, 1945, the Special Committee on Postwar Economic
Policy and Planning of the Senate issued a report on postwar housing in
which it accepted the principle that "the Federal Government has an
interest in seeing that minimum standards of housing, food, and health
service are available for all members of the community." In recommending
a program of urban redevelopment and public housing construction, the
Committee recognized the need for Federal participation, but stressed the
importance of assigning to the Federal Government a role "subordinate
and supplementary" to the part played by the States, localities, and
private institutions.
In a recent report the Special Committee on Postwar Economic Policy
and Planning of the House of Representatives considered the role of
postwar public works in maintaining a high level of construction activity.
It stressed the need for advance planning of a reserve shelf of useful
public works, and of timing the execution of both Federal and non-Federal
projects. It recommended the establishment of a Construction Policy
Board to guide the public works program and work closely with the
construction industry as a whole. For the longer run, the Committee
recommended Federal advances to State and local governments to encourage their planning of a shelf of public works sufficiently large to have
at any time a 5 billion dollar backlog of construction projects.
Federal Legislation. Congressional action does not as yet measure up
to the needs of the situation and their reflection in official recommendations. The only important laws enacted in the field of postwar public
works and services are the Federal-Aid Highway Act of 1944, the Flood
Control Act of December 1944, and the Rivers and Harbors Act of
PUBLIC WORKS AND SERVICES
91
March 1945. To these has been recently added the Federal Airport Act
passed by the Congress in April 1946.13
The Highway Act provides for a three-year highway construction
program of 3 billion dollars to be financed through equal contributions
by the Federal Government and the States. The Federal grant is to be
allocated between the Federal-aid highway system, principal secondary
and feeder roads, and highways in urban areas. The Flood Control Act
authorizes public works projects amounting to one billion dollars and the
Rivers and Harbors Act authorizes an additional 500 million dollars. The
Airport Act provides for Federal aid to States and localities for the development, construction, improvement, and repair of public airports.
The Act authorizes the expenditure of 500 million dollars over a period
of seven years, beginning July 1, 1946, as grants for the construction of
airports in conformity with a national airport plan. In most cases the
Federal grants are to be matched by States and localities on a 50-50 basis.
Only a small proportion of the contemplated projects is ready to be
initiated promptly, however, and many of them will take years to complete. It is expected that not more than 25 per cent of the highway program provided for the first year can be carried out. In a recent statement
before Congress, the Federal Works Administrator testified that Federal
public works construction is unlikely to amount to more than 500 million
dollars during the current year.14 Federal expenditures on general public
works based on existing legislation are estimated in the latest budget at
585 million dollars for fiscal 1946 and 860 million dollars for fiscal 1947.
This amount includes outlays for highways and airports, river and harbor
work, flood control and reclamation, but does not include expenditures for
the construction of veterans' hospitals and housing. Almost one-third of
the outlay for fiscal 1947 is for the Federal-aid highway program.
Important legislation for a broad public works and service program is
now pending in Congress. In December 1945, the Senate passed a Hospital
Survey and Construction Act providing 75 million dollars annually for
the next five years to assist States in the construction of public and nonprofit hospitals. In April 1946, the Senate passed the comprehensive
General Housing Act of 1946 which contains provisions for Federal aid
to urban redevelopment, low-cost public housing, and farm housing. A
bill authorizing the establishment of a Missouri Valley Authority is
before the Committee on Agriculture and Forestry of the Senate after
13
This paper does not cover events later than May 1, 1946.
Full Employment Act of 1945: Hearings before a Subcommittee of the Senate Committee
§n Banking and Currency on S. 380 (79 Cong. 1 sess.), p. 866.
14
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
having been reported adversely by the Senate Committees on Commerce and on Irrigation and Reclamation. Other bills dealing with
Federal grants for health services and medical education, the construction
of educational facilities, the control of water pollution, the provision of
recreational facilities, and with the stabilization of construction are pending before various committees of the Senate and the House. Should these
bills be passed in the near future, it would still take considerable time for
the programs to become effective.
State and Local Preparations. State and local governments likewise
have no extensive completed plans for public works and services. Two
surveys recently undertaken by the Federal Works Agency give a good
picture of the present status of State and local planning of public works.15
Both surveys indicate that the public works for which plans are completed, without Federal assistance, amount to less than one billion
dollars. This figure excludes Federal-aid highway and State highway
programs. About 80 per cent of this amount is the estimated cost of
construction, the remainder being divided between the cost of land acquisition and rights-of-way, equipment, and other cost. Less than half of
the programs in the completed stage could be constructed within one year.
The estimated cost of State and local public works in the design stage
more than doubled between July 1944 and January 1946, and amounts to
4.4 billion dollars. Many of these plans, however, have not progressed far
and cannot be completed without Federal aid. Sewer, water, and sanitation projects comprise more than one-fourth of the plans in the completed
and design stage. Next in importance are schools and other educational
facilities. Over 10 per cent of the plans are for highways, roads, and
streets.
Considerable inequality exists with regard to the geographical distribution of such projects as have been prepared. Two-thirds of the completed plans are concentrated in four States: New York, California,
Pennsylvania, and Ohio. New York State alone accounts for nearly half
of all completed planning in terms of estimated construction costs. The
same four States, together with Illinois, account for two-thirds of the
plans in the design stage.
Similar inequality exists in the distribution of plans among cities of
15
The first survey was made in collaboration with the [Bureau of the Census on the "request
of the Special Committee on Postwar Economic Policy and Planning of the House of Representatives, and includes projects planned up to July 1, 1944. The second survey includes
plans up to Jan. 1,1946.
PUBLIC WORKS AND SERVICES
93
various sizes and between rural and urban areas. Almost 50 per cent of
the completed plans are for cities having populations of over 500,000.
Of these, New York, Philadelphia, San Francisco, Los Angeles, and
Detroit account for over 45 per cent of the total.
Even among the larger population centers, however, 12 cities of over
100,000 and 20 cities between 50,000 and 100,000 reported having no
plans in either the completed or the design stage. Plans are lagging even
more among the smaller government units. Over one-third of all the
counties reported no plans in either the completed or the design stage,
and the same situation prevailed among two-thirds of the reporting
cities and towns with populations of less than 10,000.
Less than half of the funds needed by the States and localities to carry
out the completed plans are available at the present time or obtainable
through authorized bond issues and anticipated tax revenues. For most
of the remainder, reliance is placed on Federal subsidies. While the
financial position of States and localities improved during the war, the
main result has been a reduction of their indebtedness. Their financial
problems are by no means solved. Many non-Federal government units
are still unable to finance needed public works programs and are furthermore hampered by legal restrictions forbidding the accumulation of
surplus funds or the appropriation of money in advance of construction.
Many are waiting for the establishment of a clear Federal policy on public
works before embarking upon their own programs.
Title V of the War Mobilization and Reconversion Act of 1944 authorized the Federal Works Administrator to make loans and advances to
the States and their political subdivisions for the purpose of planning the
construction of public works. Congress thus far has appropriated 30
million dollars for this purpose. At least 150 million dollars would be
required to build up and maintain a 5 billion dollar reserve of planned
public works construction projects on the non-Federal level. By December 31, 1945, the Federal Works Agency had approved applications for
advances amounting to slightly over 13 million dollars. These plans
represent public works with an estimated total cost of 565 million dollars.
This amount is in addition to the estimate of public works planned without Federal assistance.
In his recent testimony, the Federal Works Administrator stated that
execution of completed plans by Federal, State, and local governments
would result in a public works program amounting to not more than
2.5 billion dollars in the first postwar year. This is only half of the annual
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HOUSING, SOCIAL SECURITY, AND PUBLIC WORKS
amount allocated to public construction by most programs for full
employment in the post-transition years. If the prewar relation between
construction and national income prevails in the postwar economy, full
employment will mean that construction work, excluding maintenance,
will total about 15 billion dollars annually. One-third of this volume, or
5 billion dollars, would be devoted to public works, in line with past
relations. In planning a flexible program of public construction, however,
this figure should be considered the lower level of annual activity. Whenever private activity slackens, a larger volume of public works would be
needed to offset the decline in private construction. Advance planning
for a larger shelf of public works is essential to the prompt introduction
of such projects as can be timed to offset declines in private construction.
This point was again brought out in the latest Budget Message of the
President, transmitting the budget for fiscal 1947.
CONCLUSION
Public works, public services, and development projects are important
to the economy because of their immediate usefulness. They are not primarily an instrument of fiscal policy and are no substitute for other
government economic policies for full employment. However, a comprehensive program is likely to make an important contribution toward
economic stability and social progress.
A review of present plans for public works and services indicates that,
although a beginning has been made, preparations on a much broader
scale are urgently necessary to meet the deficiencies existing at the present
time. Such a program is fully compatible with, and indeed very important
to, the maintenance of the private enterprise system.
@FedFRASER