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86th Congress!
1 st S e s s io n
J
JO IN T CO M M ITTEE PRIN T
STAFF REPORT
ON
EMPLOYMENT, GROWTH, AND PRICE LEVELS
FREPARED
FOR CONSIDERATION BY THE
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
DECEM BER 24, 1959
Printed fo r the use o f the Joint Economic Committee
UNITED STATES
GOVERNMENT PRINTING OFFICE
48795
WASHINGTON : 1959
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington 25, D.C. - Price $1.50
JO IN T ECONOMIC COM MITTEE
(Created pursuant to sec. 5( A ) of Public Law 304, 79th Cong.)
PAUL H. DOUGLAS, Illinois, Chairman
WRIGHT PATM AN, Texas, Vice Chairman
HOUSE OF REPRESENTATIVE
SENATE
RICHARD BOLLING, Missouri
JOHN SPARKM AN, Alabama
HALE BOGGS, Louisiana
J. WILLIAM FULBRIGHT, Arkansas
H ENRY S. REUSS, Wisconsin
JOSEPH C. O’MAHONEY, Wyoming
FRANK M. COFFIN, Maine
JOHN F. K ENNEDY, Massachusetts
THOMAS B. CURTIS, Missouri
PRESCOTT BUSH, Connecticut
CLARENCE E. KILBURN, New York
JOHN MARSHALL BUTLER, Maryland
WILLIAM B. W IDNALL, New Jersey
JACOB K. JAVITS, New York
Study
of
E
m ploym ent,
(Pursuant to
S.
Grow th,
and
P r ic e L e v e l s
Con. Res. 13, 86th Cong., 1st sess.)
Otto Eckstein, Technical Director
John W . Lehman, Administrative Officer
James W . K now les, Special Econom ic Counsel
II
This staff report is part of the materials being prepared for
consideration by the Joint Economic Committee in connection
with its “ Study of Employment, Growth, and Price Levels.”
The committee neither approves nor disapproves of the find
ings of this report. The staff report is being presented in this
form to obtain the widest possible comment before the com
mittee prepares its own report.
hi
L E T T E R S
O F
T R A N S M I T T A L
D
ecem ber
1 7 ,1 9 5 9 .
To Members of the Joint Economic Committee:
Submitted herewith for the consideration o f the members o f the
Joint Economic Committee and others is the comprehensive staff
report on the “ Study of Employment, Growth, and Price Levels,”
which the Joint Economic Committee is conducting under Senate
Concurrent Resolution 13,86th Congress, 1st session.
A number of aspects of the problem as it relates to particular subject
fields have been examined, largely by outside scholars, and reports of
these studies have been released by the committee for review and com
ment. This comprehensive report, which I am transmitting today, is
based on findings and recommendations o f the separate reports,
as well as additional analyses in special subject fields by individual
members o f the committee staff. The report, as noted in the tech
nical director’s transmittal letter, also makes wide use of the excellent
materials and comments which were received during the committee’s
extensive hearings and additional statements submitted by invited
groups. Nearly 100 witnesses were heard at these hearings which were
held in nine groups covering 40 separate days.
With the completion of the committee’s hearings, the printing o f the
individual subject reports, and the submission of this staff document,
the careful, thoroughgoing, factual background which the committee
has sought to lay for its own report is now largely completed. Some
additional individual subject reports, details, and supplemental mate
rials which have formed the basis for sections in the main staff report
will be released over the next 4 or 5 weeks in order to make them
available for public use, but this will not delay the committee’s prep
arations and deliberations on its own report.
The staff report, as in the case o f the previous separate reports, is
being printed and distributed not only for the use o f the committee
members but also to obtain the review and comment of other experts
during the committee’s final consideration of these materials. The
findings are entirely those o f the technical director of the study staff
and the staff members indicated by him, and the committee indicates
neither approval nor disapproval by this publication.
P a u l H. D o u g l a s ,
Chairman, Joint Economic Committee.
D
Hon.
Paul
H.
D
ecem ber
15, 1959.
ouglas,
Chairman, Joint Economic Committee,
V.S. Senate, Washington, D.C .
D e a r S e n a t o r D o u g l a s : Transmitted herewith is the staff report on
the “ Study of Employment, Growth, and Price Levels.” This report
has been prepared in accordance with the committee’s desire for a
LETTER OF TRANSMITTAL
VI
broad-gage, factual, and analytical examination o f the problems and
possibilities of reconciling the national objectives of providing sub
stantially full employment and achieving an adequate rate o f economic
growth, while maintaining substantial stability of the price level.
The staff has proceeded as far as possible, within the limits of time
and data, to carry out the plan for the study which was outlined to
the committee and approved at its meeting on July 30,1959. W e have
drawn heavily on the special reports from outside experts, on
the materials and analyses supplied by the nearly 100 witnesses in
the committee’s hearings, and on the contributed statements. The
overall responsibility for the character and conclusions of this report
must necessarily rest with the Technical Director.
Individual chapters of the report have been developed by members
of the staff as indicated at the beginning of the chapters. The findings
and conclusions in those chapters are shared by the director and the
individual authors, but are not necessarily concurred in by the other
members of the staff.
I have incurred more debts in preparing this report than I can hope
to acknowledge. John Kareken has significantly improved portions
o f the report. Thomas A. Wilson carried out the machine compu
tations.
I am also grateful for the cooperation shown to the study by several
Government agencies. The Board of Governors of the Federal Re
serve System and the Bureau of Labor Statistics made their comput
ing installations available. Special statistical tabulations have been
prepared by several agencies.
John W. Lehman, administrative officer, and James W. Knowles,
special economic counsel for the study, have facilitated the report at
every stage.
Our excellent staff of research assistants and secretaries has con
tributed greatly to the work of the study. Other office services have
been effectively provided by the permanent staff of the committee,
augmented for this purpose.
O
tto
E
c k s t e in
,
Technical Director, Study of Employment, Growth, and Price
Levels.
C O N T E N T S
Letters of transm ittal______________________________________________________
Page
V
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
C hapter S ummaries
1. Introduction_______________________________________________________
xxi
2. Economic growth in the long run________________________________
x x iii
3. The slowing down of the economy during recent years_________
xxv
4. Potential growth__________________________________________________
xxvi
5. The postwar inflation_____________________________________________
xxvi
6. The problem of unemployment__________________________________ x x v i i i
7. The problem of American agriculture___________________________
x x ix
8. Fiscal policy_______________________________________________________
xxxi
9. Monetary policy and debt management________________________x x x m
10. Public policy and market power______________________________ x x x v n
11. America’s role in a changing world economy________________ x x x v m
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
C hapters
1. Introduction_______________________________________________________
2. Economic growth in the long run________________________________
3. The slowing down of the economy in recent years_____________
4. Potential growth__________________________________________________
5. The postwar inflation_____________________________________________
6. The problems of unemployment_________________________________
7. The problems of American agriculture__________________________
8. Fiscal policy_______________________________________________________
9. Monetary policy and debt management________________________
10. Public policy and market power________________________________
11. U.S. position in the World economy___________________________
1
33
67
97
103
161
189
205
315
431
441
C hapter 1. I ntroduction
I. Our economic objectives_______________________________________________
A. Economic growth______________________________________________
1. W hat is economic growth?___________________________
2. How is economic growth used?_______________________
(a) Rising standards of living___________________
( b) Public responsibilities_______________________
1. The military security of the American
people______________________________
2. Economic aid to underdeveloped
countries___________________________
3. Domestic public responsibilities_____
B. The importance of high-level employment___________________
C. The importance of price-level stability_______________________
II. The American growth potential_______________________________________
III. The recent record_______________________________________________________
IV . Economic growth and price stability__________________________________
A. Three theories of growth and prices__________________________
1. Promoting growth by fighting inflation______________
2. Fighting inflation by promoting growth_____________
3. Growth and inflation as separate problems_________
B. Inflation and growth in recent years: An analysis__________
1. Causes of the recent inflation_________________________
(а) Inflation and economic in sta b ility ,-.______
(б) The exercise of market power______________
(c) Inflation in the services sector______________
2. The slowdown in economic growth: Its causes_______
(а) Economic instability____________________________
(б) Inadequate growth of demand_________________
(c) Trouble in the goods sector_____________________
3. The causes of economic instability______________________
VII
1
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VIII
CONTENTS
Page
V. Economic policies for growth and price-level stability_______________
A. Economic policy in recent years______________________________
1. Monetary policy_______________________________________
2. Fiscal policy___________________________________________
B. Monetary and fiscal policies to reconcile price level stability
and economic growth_______________________________________
C. Debt management_____________________________________________
D . Policies to reduce the inflationary effect of the exercise of
market power________________________________________________
(a) An annual labor-management conference__________
(b) Direct intervention in key price and wage decisions.
E. Increasing the supply of services_____________________________
F. Improvement in the price indexes____________________________
G. Policies to strengthen long-term growth_____________________
V I. The problems of American agriculture________________________________
C hapter 2. E conomic G rowtth
in the
of the
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33
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65
E conomy D ur in g R ecen t Y ears
I. Introduction____________________________________________________________
II. The magnitude and cyclical characteristics of the decline in growth - _
III. Further evidence of weakness: underutilization of labor and capital.
A . Capital_________________________________________________________
B. Labor___________________________________________________________
C. Underutilization of labor and capital in the 1958-59
recovery______________________________________________________
26
27
L ong R un
I. The measurement of economic growth________________________________
II. The long-run record of growth________________________________________
A. The growth of output_________________________________________
B. The growth of consumption___________________________________
C. The rate of growrth of output has been uneven______________
D . The allocation of growth: Uses of G N P _____________________
III. Factors in our growth__________________________________________________
A. The growth of supply versus demand________________________
IV . The long run growth of supply________________________________________
A. Expansion of labor force______________________________________
B. Shortening number of hours of work_________________________
C. Rising productivity____________________________________________
D . Capital_________________________________________________________
E. The rising quality of the labor force_________________________
1. Education______________________________________________
2. Increasing skills_______________________________________
3. Improving health______________________________________
F. Technological progress________________________________________
G. Resources______________________________________________________
H . Interindustry shifts____________________________________________
I. Concluding comment on the long-run increase in the
supply of output____________________________________________
V. The longrun growth of demand_______________________________________
V I. Longrun policies for growth___________________________________________
A. Provision for an adequate growth of demand_______________
B. Improvement of the labor force: The potential of education.
C. Improvement of the labor force: Health_____________________
D . Maintaining the rate of productivity advance: Facilitating
the introduction of new technology________________________
E. Maintaining the rate of productivity advance: Raising
skills__________________________________________________________
F. The promotion of science and technology____________________
G. Accelerating the accumulation of capital____________________
H . Resource policy________________________________________________
I. Strengthening the competitiveness of the economy and
improving the allocation of resources______________________
J. Preservation of a stable political and economic system ------K . Encouragement of individual initiative______________________
L. Provision of public services and investments________________
C hapter 3. T he S lo w in g D o w n
21
22
22
24
67
67
70
70
71
74
CONTENTS
IX
Page
IV . Causes of the decline: Trouble in the goods sectors_________________
A. W hy growth slowed down at the end of 1955_______________
B. The shift toward service______________________________________
1. Demographic changes_________________________________
2. The erosion of the growth of consumers purchasing
power________________________________________________
(a) The growth of disposable income has
slowed down_______________________________
( b) Service expenditures as family overhead
costs__________________________________________
C. Summary of trouble in the goods sectors____________________
V. Results of the trouble in the goods sector: Underutilization and
slowed growth of productivity______________________________________
A. The absorption of labor by the services and trade sectors. _
1. Was labor pulled into services and trade by demand.
2. Services as a sponge for labor________________________
3. Meaning of shift for growth__________________________
B. The decline in the growth of aggregate productivity_______
1. The effect of labor shifting between sectors________
2. The behavior of productivity between sectors_____
C. Summary of analysis of productivity growth________________
V I. Summary and policy implications_____________________________________
A. Summary_______________________________________________________
B. Policy implications____________________________________________
74
74
79
79
80
81
81
82
83
83
85
87
88
88
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90
93
94
94
95
C hapter 4.— P otential G rowth
The determinants of potential economic growth_____________________________
1. Labor___________________________________________________________________
2. The stock of capital___________________________________________________
3. The age of capital______________________________________________________
4. All other variables_____________________________________________________
The potential economic growth to 1975______________________________________
97
98
98
99
99
100
C hapter 5.— T he P ostwar I nflation
The historical record___________________________________________________________
Some problems of the price indexes___________________________________________
The gains and losses from inflation___________________________________________
The distribution of income_______________________________________________
The distribution of wealth_______________________________________________
The volume of real output and its rate of growth______________________
Theories of the inflationary process___________________________________________
Demand-pull inflation____________________________________________________
Market-power inflation___________________________________________________
Structural inflation________________________________________________________
The complex real world___________________________________________________
The Product market___________________________________________________________
Manufacturing____________________________________________________________
Steel___________________________________________________________________
Machinery____________________________________________________________
Other manufacturing_________________________________________________
Construction_______________________________________________________________
The Service industries_________________________________________________________
The diverse nature of the Service industries____________________________
Medical care__________________________________________________________
Unskilled services____________________________________________________
Skilled services_______________________________________________________
Summary_____________________________________________________________
The labor market:
The movement of industrial wages______________________________________
The structure of wages___________________________________________________
Wage trends in nonmanufacturing industries___________________________
Wage “ patterns” in the postwar period_________________________________
Developments during 19 55 -5 8______________________________________
General conclusions_______________________________________________________
Summary__________________________________________________________________
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149
150
154
156
158
CONTENTS
X
C hapter 6.— T he P roblem
of
U nemployment
Page
Introduction____________________________________________________________________ ___ 161
The historical record___________________________________________________________ ___ 162
Long-term trends_____________________________________________________________ 162
Postwar experience___________________________________________________________ 162
Effect of recessions________________________________________________________ ___ 162
Unemployment in prosperous tim es____________________________________ ___ 165
Unemployment of long duration_________________________________________ ___ 167
Who are the unemployed_________________________________________________ ___ 167
By age________________________________________________________________ ___ 167
By sex________________________________________________________________ ___ 168
By major occupation group_________________________________________ ___ 168
Unemployment a growing problem___________________________________________ ___ 170
Structural unemployment rising_________________________________________ ___ 170
Characteristics of areas with persistent labor surplus_____________ ___ 176
Chronically depressed areas___________________________________________________ ___ 178
Major areas with chronic labor surpluses_______________________________ ___ 179
Causes of chronically depressed conditions_________________________________ 179
Outlook for depressed areas______________________________________________ ___ 180
Difficulties of business revival_______________________________________________ 181
Long-term unemployment not merely a problem of depressed areas_______ ___ 182
Policies for dealing with unemployment______________________________________ ___ 183
Reduction of frictional unemployment__________________________________ ___ 183
Policies for cyclical unemployment______________________________________ ___ 183
Policies relating to structural unemployment___________________________ ___ 184
(a) Relocation of workers___________________________________________ ___ 184
(b) Training and retraining workers________________________________ ___ 185
(c) Income maintenance for persistent unemployment___________ ___ 185
(d) Aid for chronically depressed areas____________________________ ___ 185
Federal policy: What has been done?_______________________ ___ 185
State and local efforts________________________________________ ___ 186
Outlines of Federal policy for depressed areas______________ ___ 186
C hapter 7. T he P roblems
of
A merican A griculture
Introduction------------------------------------------------------------------------------------------------------------- 189
I. The problems of overproduction___________________________________ ___ 189
II. Falling farm incomes_______________________________________________ ___ 191
III. The stability of farm incomes______________________________________ ___ 195
IV . Poverty in agriculture______________________________________________ ___ 195
V. The accumulation of surpluses and the drain on the Federal
budget________________________________________________________________ 196
V I. Agriculture and the price le v e l_ _ _________________________________ ___ 198
V II. Policies for American agriculture__________________________________ ___ 200
Policies to deal with overproduction and falling farm in
comes____________________________________________________________ 200
Policies for low-income farmers_______________________________ ___ 203
C hapter 8. F iscal P olicy
I. Fiscal policy and the Employment Act’s objectives_______________________ 205
A. Dimensions of fiscal policy______________________________________ ___ 207
1. Short-run economic stabilization_______________________ ___ 207
2. Secular focus on economic growth______________________ ___ 208
B. Constraints against the use of fiscal policy to achieve the E m
ployment A ct’s objectives____________________________________ ___ 208
C. The mechanics of fiscal policy__________________________________ ___ 210
(1) Basic budget-income relationships____________________ ___ 210
(2) Differences in effects on income of different types of
expenditures and revenue sources__________________ ___ 211
(3) Built-in fiscal stabilizers_______________________________ ___ 212
(4) Repercussions of fiscal developments on monetary
conditions____________________________________________ ___ 212
(5) The impact of Government orders on economic activ
ity _____________________________________________________ ___ 213
CONTENTS
XI
Page
II. The record of postwar fiscal policy_______________________________________
A. The stabilization record_________________________________________
1. Postwar reconversion and expansion: 19 46 -4 8 ________
(a) Reconversion: 1946____________________ ._______
(ib) Expansion: 1947_______________________________
(c) The 1948 boornlet and tapering off___________
(d) Overall appraisal of fiscal policy, 1 9 4 6 -4 8 ___
2. The recession of 1949____ ______________________________
3. Recovery and Korea: 19 50 -5 3_________________________
4. The 1953-54 recession___________________________________
5. Recovery and boom: 1 9 5 4 -5 5 ________________________
(a) Recovery in 1954______________________________
0b) The 1955 boom ________________________________
6. Inflation on the level: 1 9 5 6 -5 7 _________________________
7. Recession again: 1957 -5 8_______________________________
8. Recovery and expansion, m id-1958 and m id -1959____
B. Secular changes in the Federal fiscal framework______________
1. The decline in fiscal restraint___________________________
2. The change in mix of fiscal and monetary policies____
3. Secular trends in the Federal tax structure-___________
4. Implications of secular trends in Federal expenditures
for economic stability________________________________
III. Improving Federal fiscal policy for economic growth and stability___
A. Increasing the contribution of Federal fiscal policy to economic
stability________________________________________________________
B, Changes in the framework of Federal fiscal policy in the inter
est of a higher rate of growth________________________________
C hapter 9. M on etary P olicy
and
262
263
263
268
D ebt M anag em en t
I. Monetary policy and debt management since 1946____________________
A. Preaccord monetary debt policy________________________________
The wartime background___________________________________
The immediate postwar situation__________________________
Monetary-debt policy in 1 9 4 7 -4 8 __________________________
The 1949 recession__________________________________________
Recovery and the beginning ot the Korean wTar___________
The Treasury-Federal Reserve controversy and the
Douglas committee report______________________________
The Treasury-Federal Reserve accord of March 1951____
B. Monetary-debt policy since the Treasury-Federal Reserve
accord__________________________________________________________
Immediate postaccord policies_____________________________
The 1950 boom in residential construction________________
Monetary policy in 1 9 5 1 -5 2_______________________________
The 1953 changes in open-market policy: the adoption of
bills only__________________________________________________
The new administration’s attitudes toward debt manage
m ent______________________________________________________
Monetary-debt policies in the first half of 1953__________
The recession of 19 5 3 -5 4 ___________________________________
D ebt management during the recession___________________
Easy money and the expansion in residential construc
tion________________________________________________________
The beginning of restrictive monetary policy in earlv
1955________________________________ __________ ___________ 1
Residential construction in 1955-57_______________________
Consumer credit and the automobile boom in 1955______
Monetary and economic developments during 1 9 5 5 -5 7 -_
Commercial bank adjustments, 1955-57__________________
Fiscal policy and debt management in 1955-57__________
The recession of 1 9 5 7 -5 8 ___________________________________
The beginning of recovery in 1958_________________________
Debt management in 1957-58_____________________________
The speculative episode of m id-1958______________________
Interest rate adjustments in 1958-59______________________
Monetary policy in 1 9 5 8 -5 9 _______________________________
Summary of monetary-debt policy since the accord_____
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xn
CONTENTS
P ag e
II. Some limitations on the overall effectiveness of monetary policy_____
A. The effects of commercial bank portfolio adjustments________
B. Adjustments in corporate liquidity_____________________________
C. Effects of financial intermediaries on velocity_________________
D . Changes in holdings of Treasury securities by investor groups.
E. Other offsets to monetary controls______________________________
F. W hy can’t induced velocity changes be offset?________________
1. Need to keep the financial market on an even keel____
2. D ebt management problems____________________________
3. Uncertainty______________________________________________
4. Uneven incidence of monetary policy__________________
Summary of limitations on overall effectiveness of monetary
policy_______________________________________________________________
II I . The effect of general credit controls on the major sectors of the econ
o m y_____________________________________________________________________
A. Residential construction_________________________________________
B. Business plant and equipment expenditures: General________
C. Plant and equipment: Public utilities__________________________
D . Effects on small versus large firms______________________________
E. State and local government expenditures______________________
F. Consumer durable goods________________________________________
G. Inventory investment____________________________________________
H . Lags in monetary policy_________________________________________
I. Concluding comment____________________________________________
Summary_____________________________________________________________
IV . Possibilities of making monetary policy more effective________________
A. Policies directed at stable growth of output___________________
Plant and equipment_______________________________________
1. Increasing the influence of the interest rate______
2. Other possibilities___________________________________
Consumer durable goods___________________________________
Inventory investment_________________________________
Residential construction____________________________________
Summary____________________________________________________
B. Monetary policy and inflation__________________________________
C. Alternative proposals for monetary policy_____________________
1. Steady growth of the money supply____________________
2. Continuation of present policies________________________
I). Techniques and administration of monetary controls_________
The discount rate___________________________________________
Reserve requirement changes______________________________
Open market operations____________________________________
Administrative arrangements______________________________
Summary of suggestions for making monetary policy more effec
tive__________________________________________________________________
V. Debt management_________________________________________________________
The size of the debt__________________________________________________
Interest cost of the debt_____________________________________________
Volume of debt operations___________________________________________
Composition of the debt_____________________________________________
Ownership of the debt_______________________________________________
1. Investors whose holdings have declined steadily__________
2. Investors whose holdings have increased steadily_________
3. Investors wiiose holdings have fluctuated substantially___
The competitive position of Government securities_______________
Principles of debt management_____________________________________
1. Interest-rate effects__________________________________________
2. Liquidity effects_____________________________________________
Interest cost of the debt as a policy consideration_________________
Combining economic stabilization and cost minimization_________
Present debt management techniques______________________________
Bill financing____________________________________________________
Fixed-price issues________________________________________________
Underwriting of short-term cash offerings_____________________
Refunding operations___________________________________________
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X III
CONTENTS
V. D ebt management— Continued
A program for improved debt management________________________
Reducing the magnitude of the problem______________________
1. Less restrictive monetary policy______________________
2. A better “ mix” of monetary policies__________________
3. Greater reliance on selective credit controls__________
4. Open market operations versus reserve requirement
changes_______________________________________________
Possible improvements in debt management______________________
1. Auctioning of longer term securities_______________________
2. Frequent small offerings____________________________________
3. Regularizing debt operations_______________________________
4. More effective underwriting________________________________
5. Better selling organization__________________________________
6. Elimination of erratic fluctuations in bond prices_________
7. Advance refunding__________________________________________
8. Call features_________________________________________________
9. Purchasing-power bonds____________________________________
The interest-rate ceiling_____________________________________________
Summary concerning debt management___________________________
C hapter 10.— P ublic P olicy
and
in
the
432
432
432
433
434
434
436
437
439
W orld E conomy
Introduction____________________________________________________________________
The postwar behavior of the U.S. balance of payments_____________________
1. The accounting framework____________________________________________
2. An overall view of the postwar record 1946—58______________________
The U.S. overall payments balance_____________________________
The gold drain____________________________________________________
The export balance_______________________________________________
Net governmental expenditures abroad_________________________
Private capital balances__________________________________________
Errors and omissions_____________________________________________
Net private capital flows_________________________________________
Net Government capital outflows_______________________________
Summary of changes in the items in the balance of payments, _
Some relationships among the items in the balance of pay
ments______„ _________________________________________________ 448
The U.S. trade position in the postwar period_______________________________
1. The overall behavior of the trade balance___________________________
2. The U.S. share of world trade________________________________________
3. Distribution of U.S. merchandise trade by area, 19 46-58__________
4. Distribution of U.S. merchandise exports by kind, 1946-50________
5. Changes in the market shares of U.S. exports_______________________
Wage-price comparisons_______________________________________________________
The special case of steel_________________________________________________
The financial structure of U.S. private foreign investment, 19 46 -5 8_______
U.S. foreign investment in the postwar period_______________________________
The value of U.S. direct foreign investments; 1950-58______________
U.S. Government foreign expenditure balances____________________
Economic grants________________________________________
Government net capital outflow_________________________
U.S. military expenditures abroad_______________________________________
Defense expenditures abroad for goods and services by major category,
423
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425
426
426
426
427
427
427
428
M ark et P o w er
Three alternative approaches__________________________________________________
Policies to reduce market power and increase competition__________________
Antitrust action________________________ __________________________________
Recommendations for strengthening antitrust_____________________
Reductions of tariffs______________________________________________________
The antitrust laws and labor unions_____________________________________
Policies to encourage businessmen and labor to restrain their use of market
power_________________________________________________________________________
Greater Government participation in the price-wage setting process______
Sum m ary,___________________________________________________________ ________
C hapter 11. U.S. P osition
Page
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X IV
CONTENTS
The impact of inadequate international liquidity upon the U .S. balance of
payments______________________________________ ______________________________
The impact of transitory factors upon the U .S. balance of payments,
19 47 -5 8___________________________________________________________ I . ! ______ 48O
Other special factors of major importance_______________________________
The growth of regionalism_____________________________________________________
A. Review and discussion of the findings____________________________________
1. The gold outflow___________________________________________________
2 . U.S. export competitiveness_______________________________________
3. The problem of international liquidity___________________________
4. The alternative_______________________ *_____________________________
5. The functions and problems of a key currency nation__________
6 . The problem of international liquidity______ 1 ___________________
7. The problem of regionalism__________________________________ _____
8 . Conclusions_________________________________________________________
Page
475
482
482
486
486
486
487
487
487
488
488
489
C harts
Chart 2-1 Aggregate gross national product— Current and constant
(1929) prices_________________________________________________________________
Chart 2 -2 . Real gross national product (1929 prices)— Aggregate and
per head______________________________________________________________________
Chart 2 -3 . Personal consumption expenditures (1929 prices)— 'Aggregate
and per full consumer_______________________________________________________
Chart 2 -4 . G N P and its allocation___________________________________________
Chart 2 -5 . Persons engaged, 1 9 2 9 = 1 0 0 _____________________. _______________
Chart 2 -6 . Average weekly hours— Production workers, manufacturing. _
Chart 3 -1 . G N P in constant (1954) dollars, index numbers________________
Chart 3 -2 . Capacity and output in manufacturing, 1 9 4 8 -5 9 _______________
Chart 3 -3 . Unemployment rate, 1946-59 (quarterly, seasonally adjusted).
Chart 3 -4 . Consumer durable expenditures, and housing starts (seasonallyadjusted at annual rates)___________________________________________________
Chart 3 -5 . G N P components, in constant dollars (1954)___________________
Chart 3 -6 . Nonagricultural employment— Analysis of increase by industry,
1953-57 and 19 53 -5 9___________ ‘____________________________________________
Chart 3 -7 . National income per person participating in production— in
constant dollars— Services, 1929-58 (selected years)— Trade, 1 9 2 9 -5 7 -.
Chart 5 -1 . Wholesale Price Index, 1720-1958, and Consumer Price Index,
1 8 00 -1 958____________________________________________________________________
Chart 5- 2 . Rates of unemployment, major sectors, 1946-58_________ ______
Chart 5 -3 . Relationship between percentage changes in earnings and rates
of unemployment, 1947 -5 8__________________________________________________
Chart 5 -4 . Distribution of industries, by amount of wage increases, selected
periods, 19 47 -5 8_____________________________________________________________
Chart 5 -5 . Negotiated settlements, first 6 months 1955 and 1959_________
Chart 6- 1. Unemployment as a percent of the civilian labor force,
seasonally adjusted, 1948-50, 1953-55, and 1957 to date_________________
Chart 6—2. Comparison of actual and projected total labor force, annual
average, 1 9 5 0 -5 9 ____________________________________________________________
Chart 6 -3 . Employment in three postwar recessions, selected industries,
seasonally adjusted__________________________________________________________
Chart 6 -4 . Long-term unemployment in three recessions— persons unem
ployed 15 weeks or more____________________________________________________
Chart 6 -5 . Employment in goods-producing industries compared with
employment in service industries, annual averages, 1919 -5 8_____________
Chart 7 -1 . Productivity of farm labor_______________________________________
Chart 7- 2 . Persons supported by one farmworker__________________________
Chart 7 -3 . U.S. population and farm output___________________ ____________
Chart 7 -4 . Parity ratio________________________________________________________
Chart 7 -5 . Net income per farm, 1947-59 (current dollars)________________
Chart 7 -6 . Price support holdings— -Owned, under loan and purchase
agreements___________________________________________________________________
Chart 7 -7 . Food prices and Consumer Price Index_________________________
Chart 7 -8 . Price of wrheat (average, 1954-55 and 1955-56) received by
farmers________________________________________________________________ ______
Chart 9 -1 . Excess reserves, discounts and advances, and free reserves,
1 9 5 1 -5 9 ________________________________________________ _________ - _______ 330
Chart 9 -2 . Selected interest rates, 1 9 5 1 -5 9 __________________________________
35
36
37
39
42
43
69
72
73
75
77
84
92
107
140
142
146
156
164
166
171
172
174
190
191
192
193
194
197
199
202
335
CONTENTS
Chart 9 -3 . Private nonfarm housing starts, financed by conventional,
FHA-insured, and VA-guaranteed mortgages, 1951-59 (seasonally
adjusted annual rates)______________________________________________________
Chart 9 -4 . Differential between yield on high-grade corporate bonds and
ceiling interest rates on FHA-insured and VA-guaranteed mortgages,
1 9 51 -5 9______________________________________________________________________
Chart 9 -5 . Expenditures on plant and equipment, 19 47 -5 9________________
Chart 9 -6 . Yields on outstanding and newly issued high-grade corporate
bonds, 1947 -5 9______________________________________________________________
Chart 9 -7 . Expenditures on plant and equipment by public utilities and
railroads, 19 4 7 -5 9 -----------------------------------------------------------------------------------------Chart 9 -8 . State and local government construction contracts awarded
(centered 12-month moving averages, 19 47 -5 9)___________________________
Chart 9 -9 . Consumer expenditures on durable goods, 19 47 -5 8____________
Chart 9 -10 . Consumer installment credit outstanding, 19 47 -5 9____________
Chart 9 -1 1 . Percentage distribution of publicly held marketable debt, by
maturity, fiscal years 1 9 4 6 -5 8 ______________________________________________
Chart 11-1. The relationship between U.S. net capital export and the U.S.
trade surplus, 1 9 4 6 -5 8 ______ ________________________________________________
Chart 11-2. Rates of direct U.S. private investment to total U.S. private
investment, 19 46 -5 9_________________________________________________________
XV
Page
364
366
369
370
377
384
386
388
413
449
465
T ables
Table 1-1. Selected indicators of economic growth potentials, 1 9 5 9 -7 5___
Table 1 -2. Growth of output and changes of prices, successive decades, in
some advanced countries____________________________________________________
Table 1 -3. Average annual changes in per capita output and prices, by
country, 1 9 4 9 -5 8 ____________________________________________________________
Table 1-4. Growth of gross national product and its components— Con
stant dollars, selected periods, 1953-59-------------------------------------------------------Table 2 -1 . Trend of gross national product and personal consumption,
1839-1959____________________________________________________________________
Table 2 -2 . Gross national product rates of growth, peak to peak_________
Table 2 -3 . Average rates of productivity before and after 1919, private
domestic economy___________________________________________________________
Table 2 -4 . Educational attainment of the adult population 25 years old
and over, by year of school completed_____________________________________
Table 2 -5 . School enrollment as a percent of school-age population_______
Table 2 -6 . Length of school term and student absenteeism________________
Table 2 -7 . Occupational distribution of experienced civilian labor force,
1940-57, and gainful workers, 1910-30, as a percent of total labor force._
Table 2 -8 . Resource trends in the United States, 18 70 -1 954_____________
Table 2 -9 . Differences in education expenditures, amount of schooling___
Table 2-10 . Funds for research and development performance financed by
the Federal Government, by industry, 1957_______________________________
Table 2 -11 . Funds for research and development performance, by industry,
1 9 56 -5 7_______________________________________________________________________
Table 3 -1 . Indexes of production and capacity in manufacturing_________
T a ’ )le 3 -2 . Average annual increase in civilian labor force, selected periods,
19 47 -5 9______________________________________________________________________
Table 3 -3 . Growth of gross national product and its components in
constant dollars, selected periods, 1 9 4 7 -5 9 ._______________________________
Table 3 -4 . Growth of goods and services compared, selected periods,
19 09 -5 8_______________________________________________________________________
Table 3 -5 . Civilian population by age groups_______________________________
Table 3 -6 . Inflation in prices of “ overhead services” _______________________
Table 3 -7 . Nonagricultural employment, industrial composition of in
creases during selected periods, 1925 -5 9 ___________________________________
Table 3 -8 . Increase in average annual earnings, 19 53 -5 7___________________
Table 3 -9 . Average annual earnings and value added per person engaged
in production: Services and trade compared with other private nonagri
cultural sectors (1958)______________________________________________________
Table 3-10 . Ratio of part-time to full-time employees, by industry_______
Table 3 -11 . Comparison of growth in private gross national product with
real product per man-hour__________________________________________________
Table 3-12. Indexes of real product per man-hour for private economy,
1947-58______________________________________________________________________
8
12
13
19
34
38
44
46
46
46
47
49
54
60
61
70
71
78
79
80
82
85
86
86
87
88
90
XVI
CONTENTS
Table 3-1 3 . Growth of real product per man-hour: Sectors of the private
Pag®
economy, 1947—5 7 ___________________________________________________________
90
Table 3-1 4 . Service and trade: National income originating per person
participating in production, 19 29 -5 8_______________________________________
93
Table 3 -15 . Average annual rates of growth in productivity in service and
trade__________________________________________________________________________
93
Table 4 -1 . Selected indicators of economic growth potentials, 1 9 5 9 -7 5 ___
101
Table 5 -1 . Changes in the price level, 19 45 -5 9______________________________
104
Table 5 -2 . Percentage change in prices in selected sectors, 19 47 -5 8_______
105
Table 5 -3 . How family income was shared by income tax and by the top
5 percent, 1935-36, 1944, 1954, 1957_______________________________________
112
Table 5 -4 . Trends in output, prices, profits, wages, and employment in
manufacturing, 19 4 7 -5 8 _____________________________________________________
119
Table 5 -5 . The rise in industrial prices, a component analysis of change in
122
the wholesale price index, excluding food and farm products_______________
Table 5 -6 . Value added price indexes in manufacturing industries, 1947-58_
123
Table 5 -7 . Trends in manufacturing industries, 1947-57__________________
126
Table 5 -8 . Price and output trends in construction, 19 47 -5 8________________
127
Table 5 -9 . Output trends in the service industries, 19 47 -5 8_________________
131
Table 5 -1 0 . Price trends in the service industries, 1947-58___________________
132
Table 5 -1 1 . Percent increase in wages in selected service and manufactur
ing industries, 1 9 4 7 -5 8 ______________________________________________________
135
Table 5 -12 . Employment, unemployment, and earnings in the entire
136
economy and in selected major sectors, 19 45-58____________________________
Table 5-13 . Changes in earnings, profit rates, concentration ratios, and
estimated union strength, 1947-53 and 19 53 -5 8____________________________
148
Table 5 -14 . Cross-section correlation coefficients between changes in
straight-time hourly earnings, profits, concentration ratios, and produc
tion worker employment in manufacturing industries, 19 4 7 -5 8 __________
149
Table 5-15 . Wage and fringe adjustments in selected industries, 1946-58___
151
Table 5 -1 6 . Profits in the steel and automobile industries, 19 4 7 -5 8 _________
154
Table 6 -1 . Increase in rates of unemployment during business declines,
1900 -1 958_______________________________ I ___________________________________
163
Table 6—2. Persons unemployed 15 weeks or more by major occupation
group, March 1958 and 1959_____ _________________________________________
167
Table 6 -3 . Unemployment by age and sex, March 1957, 1958, and 1959____
168
Table 6 -4 . Unemployment by major occupation group. March 1958 and
1959______________________________________________________ ____________________
169
Table 6 -5 . Unemployment by color and sex, March 1957, 1958, and 1959__
169
Table 6 .-6 . Selected measures of the duration of unemployment, 1948,
173
1952, and 1956_______________________________________________________ ______ _
Table 6 -7 . Changes in unemployment between 1948 and 1956, by major
175
industry group for wage and salary workers________________________________
Table 6 -8 . Unemployment by labor market area group, by age and sex,
April and M ay 1959__________________________________________________________
177
Table 6 -9 . Unemployment by labor market area group, by duration of
unemployment, April and May 1959________________________________________
178
Table 6 -1 0 . Unemployment and unemployment rates, major areas with
chronic labor surpluses, September 1959 and annual averages 1 9 5 4 -5 9 ___
181
Table 7 -1 . Reduction in number of farms, selected periods________________
192
Table 7 -2 . Relation of farm size and output share__________________________
195
Table 7 -3 . Expenditure for stabilization of farm prices and income,
1 9 5 4 -5 9 _______________________________________________________________________
196
Table 7 -4 . Price support holdings, owned under loan and purchase agree
ments, United States, by quarters, June 1948 to June 1959______________
198Table 8 -1 . Unemployment as a percent of the civilian labor force, by
quarters, seasonally adjusted annual rates, 19 46-59______________________
275
Table 8 -2 . Gross national product or expenditure, seasonally adjusted
quarterly totals at annual rates, 1 9 4 6 -5 8 _______________________________ 27 6 -2 7 9
Table 8 -3 . Gross national product or expenditure, seasonally adjusted
quarterly totals at annual rates, in constant dollars, 1 9 4 7 -5 8 _ ________ 2 8 0-28 3
Table 8 -4 . Defense obligations for hard goods and new and unfilled orders
and inventories in durable goods manufacturing industries, quarterly,
1 9 4 6 -5 9 ____________________________________________________________________ 2 8 4 -2 8 5
Table 8 -5 . Government receipts and expenditures, seasonally adjusted
Quarterly totals at annual rates, 1 9 4 6 -5 8 _______________________________ 286-293
Table 8 -6 . Implicit price deflators for seasonally adjusted quarterly gross
national product or expenditure, 19 4 7 -5 8 _______________________________ 294-297
CONTENTS
XVII
Table 8 -7 . Personal income and its disposition, seasonally adjusted
Page
quarterly totals at annual rates, 1 9 4 6 -5 8 _______________________________ 298-301
Table 8 -8 . Consumer and wholesale price indexes, all items, quarterly,
1 9 4 8 -5 8 ____________________________________________________________________ 302
Table 8 -9 . Expenditures for new plant and equipment (excluding agri
culture), seasonally adjusted quarterly totals at annual rates, in current
prices and constant (1954) dollars, 1 9 4 7 -5 8 ----------------------------------------------303
Table 8-1 0 . Selected items of Federal expenditures and purchases,
304
seasonally adjusted quarterly totals at annual rates, 1 9 4 6 -5 8 ____________
Table 8 -11 . Corporate profits before and after tax, seasonally adjusted
quarterly, totals at annual rates, 1946-59_______________________________ 305-306
Table 8-12 . Employment as percent of civilian labor force, and Federal
surplus or deficit on income and product account as percent of gross
national product, quarterly, seasonally adjusted at annual rates,
307
19 4 6 -5 8 _____________________________________________________________________ Table 8-13. Employment as percent of labor force, and excess of Federal
cash receipts from the public over payments to the public as percent of
gross national product, quarterly, seasonally adjusted at annual rates,
19 46 -5 8__________________________ ____________ - ______________________________
307
Table 8-14 . Relationship of Federal surplus on income and product account
as percent of G N P to seasonally adjusted rate of unemployment, 1946,
third quarter, to 1951, second quarter, and 1954, first quarter, to 1958,
third quarter_________________________________________________________________
308
Table 8-15. Relationship of Federal “ cash budget” surplus as percent of
G N P to seasonally adjusted rate of unemployment, 1946, third quarter,
to 1951, second quarter, and 1954, first quarter, to 1958, fourth quarter __
308
Table 8-16. Federal cash receipts from and payments to the public,
quarterly, 1947-59, before and after seasonal adjustment______________ 309-310
Table 8-17 . Gross and net national saving related to gross national
product, seasonally adjusted quarterly totals at annual rates, 1946-58__
311
Table f - .18. Percentage distribution of Federal, State, and local govern
ment receipts by source, 19 4 6 -5 8__________________________________________
312
Table 8-19 . Percentage distribution of total (Federal, State, and local)
313
taxes by quin tiles of personal money income______________________________
Table £-20 . Effective rate of tax (combined Federal, State, and local) by
auintiles of personal income m oney________________________________________
313
Table 8-21. Dollar limits of quintiles of personal money income__________
313
Table 8-22 . Relative weights of Federal compared with State and local
taxes__________________________________________________________________________
313
Table 8 -23 . Estimated relative weight of Federal taxes on saving and
consumption, 1946-57____________________________ __________________________
314
Table 8-24 . Measures of stability in broad categories of Federal expendi
tures, selected periods, 1946-58_____________________________________________
314
Table 9 -1 . Factors affectirg money supply, December 31, 1941, to Decem
ber 31, 1945_____________ 1______ 1 ______‘ ___________________________________
316
Table 9 -2 . Composition of the publicly held federal debt, 1 9 4 6 -5 9 _______
328
Table 9 -3 . Major debt-lengthening operatior s by the Treasury, October
1953 to February 1955______________________________________________________
331
Table 9 -4 . Changes in selected interest rates, 1 9 5 "-5 7 _____________________
336
Table 9 -5 . Factors affecting the money supply, December 31, 19~4, to
September 25, 1957___________________ *_____________________________________
337
Table 9 -6 . Major debt-lengthening measures bv the Treasury, September
1957 to June 1958____________________________ ______________________________
340
Table 9 -7 . Comparison of changes in money supply and in income velocity
during upward and downward movements of gross national product
since the first quarter of 1947______________________________________________
345
Table 9 -8 . Factors responsible for changes in money supply during periods
of monetary ease and restriction, November 26, 1952, to September 30.
1959_____ _v__________________________________________________________________ '
347
Table 9 -9 . Sources and uses of funds for nonfinancial corporations by sub
periods, June 30, 1954, to March 31, 1959_________________________________
350
Table 9-10. Sources of funds supplied to the private sector by financial
institutions other than commercial banks during periods of monetary
ease and restriction, December 31, 1952, to December 31, 1958_________
355
Table 9—11. Average interest rates paid on various types of fixed-value
redeemable claims, 1 9 46 -5 8________________________________________ _________
355
48795— 59------ 2
XVIII
CONTENTS
Table 9 -1 2 . Changes in holdings of Treasury securities during periods of
Page
monetary ease and restriction, November 30, 1952, to August 31, 1959_
357
Table 9 -13 . Expenditures on fixed capital investment by the corporate and
unincorporated business, 1952-58___________________________________________
379
Table 9 -1 4 . Sources and uses of funds, State and local governments,
19 5 4 -5 9 _______________________________________________________________________
382
Table 9 -1 5 . Increments on the school-age population, 1 9 5 0 -5 9 ____________
385
Table 9 -16 . Relation between different concepts of the public debt, fiscal
years 1946-59________________________________________________________________
410
Table 9-1 7 . Ownership of the publicly held Federal debt, fiscal years
19 46 -5 9_______________________________________________________________________
415
Table 11-1. Summary of the U.S. balance of payments____________________
442
Table 11-2. Major elements within U.S. balance of payments_____________
445
Table 11 -3 . U.S. exports and imports, 19 46 -5 8_____________________________
451
Table 11 -4 . Ratios of the merchandise export balance to the merchandise
export, 1 9 4 6 -5 8 ______________________________________________________________
452
Table 11-5. U.S. exports as share of wrorld total, selected vears and
1 9 5 0 -5 8 ___________________________________________________________ 1 _________
452
Table 1 1 -6 . U .S. imports as share of world total, selected vears and
1 9 5 0 -5 8
1 _________
453
Table 11 -7 . Share of countries and groups of countries in world exports,
1 9 5 1 -5 8
453
Table 11 -8 . U.S. exports and imports of merchandise, by continent,
selected years, 1 9 4 6 -5 8 ______________________________________________________
454
Table 1 1 -9 . Percentage distribution of U.S. exports and imports, by kind:
455
Averages for 1946-50, 1951-55, and selected years________________________
Table 11-10. Absolute and percentage changes in U.S. commodity trade,
1 9 5 4 -5 8 ______________________________________________________________________
456
Table 11-11. The U.S. share of totals of exports from the United States,
Western Europe, and Japan to the nonindustrialized nations, 1954-56
458
and 1958. _ _ _ ___________________________________ _______ ____________ _
Table 11-12. U.S. share of total chemical exports by Western Europe, the
United States, and Japan into the nonindustrialized nations— 1 9 5 4 -5 6
and 1958_____________________________________________________________________
459
Table 11—13. U.S. share of total machinery and transport exports by
Western Europe, the United States, and Japan to the nonindustrialized
nations— 1954-56 and 1958_________________________________________________
460
Table 11-14. U.S. share of total miscellaneous manufactures exports by
Western Europe, the United States, and Japan to the nonindustrialized
nations— 1954-56 and 1958_________________________________________________
460
Table 11-15. Percentage changes in hourly earnings in the United States
and five European nations, 19 50 -5 8________________________________________
462
Table 11-16. Ratios of 1958 indexes of percent increases in wages and
prices to average indexes for 1954-56______________________________________
462
Table 11-17. Wholesale prices of steel: five countries, 1 9 50 -5 8____________
464
Table 11 -1 8. U.S. net capital outflow, 1 9 4 6 -5 8 ____________________________
465
Table 11 -1 9. Total of U.S. private investment, direct investment, and
ratios of direct to total investment by groups of years, 1 9 4 6 -5 8 _________
466
Table 11 -2 0. Value of direct private investment of U.S. investment abroad
by industry groups__________________________________________________________
467
Table 11-21. Percentage distribution of direct private investment of U.S.
investment abroad by industry groups and areas_________________________
468
Table 11-22. U.S. direct investments by areas, selected years, 1 9 5 0 -5 8 -_
469
Table 11-23. Distribution of book value of U.S. direct investments in
Western Europe_____________________________________________________________
469
Table 11-24. Economic grants of the U.S. Government, by regions, 19461958__________________________________________________________________________
471
Table 11-25. U.S. Government net capital outflow, 19 46 -5 8______________
472
Table 11-26. U.S. military expenditures abroad, by regions, 19 4 6 -5 8 ____
473
Table 11-27. Defense expenditures abroad for goods and services, by major
category, January 1953 through June 1959________________________________
474
Table 11-28. Defense expenditures abroad for goods and services, by major
country, January 1953 through June 1959__________________________________
474
Table 11-29. Gold, dollars, gold plus dollars, and imports for the world, the
United States, and the world minus the United States____________________
476
Table 11-30. Annual rate of change__________________________________________
477
Table 11-31. Ratio of reserves to imports____________________________________
477
C H A PT E R SUM M ARIES
CHAPTER
Sum m ary
of
S U M M A R IE S
C hapter I :
I n t r o d u c t io n
The slow growth of the American economy of the last 6 years,
which coincided with a rise in the price level, has caused concern
about the performance of the American economy.
T h i s s tu d y o f e m p lo y m e n t , g r o w t h , a n d p r ic e le v e ls w a s u n d e r
ta k e n to d e te rm in e w h e th e r it is p o ssib le f o r o u r e c o n o m y t o r eso lv e
th is a p p a r e n t d ile m m a , to see i f m o r e v ig o r o u s g r o w t h can o ccu r,
w ith o u t th e k in d s o f p r ic e in creases w h ic h b eset th e la s t b o o m .
To determine the growth potential of the economy, a statistical
analysis was made of the historical record, and projections were pre
pared on the basis of increases in the supply of labor and of capital,
as well as of continued improvement of productivity and technology.
It is clear from this analysis that the potential rates of growth of the
American economy, without use of regimentation or any fundamen
tal changes in our economic system, can be substantially higher than
they have been, and could accelerate during the next 15 years.
Three views of the relation between growth and the price level are
not substantiated by this report:
We find that policies designed to stabilize the price level do not
automatically promote economic growth. In fact, the present set of
policy tools, applied with the objective of keeping prices stable, have
been the major cause for the slowdown in growth. Second, we find
that the promotion of growth will not suffice to halt the inflation.
While it is true that an increase in final demand would have raised
productivity in 1956 and 1957 and would have allowed the increase in
productive capacity to be more fully utilized, it would have been im
possible with the policy tools available to manage this increase in de
mand in such a way that it would not have added to the pressures on
demand in those sectors in which prices were already rising. How
ever, it does appear, with the benefit of hindsight, that the amount of
growth that was surrendered for what at best was a small gain to
ward stabilizing the price level, was very large. Third, we find that
inflation and growth are not separate problems, that inflation cannot
be defeated by policies to improve the market structure of the economy
alone, while leaving fiscal and monetary policies free to promote
growth.
T H E CAUSES OF IN FL A T IO N
Our studies suggest that the recent inflation cannot be explained
by a single hypothesis. Rather, there were at least three sources of
inflationary pressure:
1.
The instability of output caused inflationary pressures. The tre
mendous upswing of 1955, supported in part by a rapid increase in
consumer credit, led to very high profits in some industries and re
sulted in long-term wage settlements. This upswing also contributed
XXI
X X II
CHAPTER SUMMARIES
to the spectacular capital goods boom which produced excess demand
in the machinery industries and thereby an increase in machinery
prices. It also caused rising prices in construction. When total de
mand failed to grow in accordance with the rosy expectations estab
lished in 1955, businessmen found themselves with higher increases in
overhead costs which served to raise unit costs, and in some instances,
prices. Thus, the die for the inflation in 1956 and 1957 was cast in
1955.
2. In many industries, a small number of firms account for more
than one-half the sales, and so at least the potential of market power—
that is, the power to raise prices in the absence of excess demand— is
widely prevalent. Market power appears to have added substantially
to the inflation in three ways: First, the extraordinary behavior of
steel prices, which rose by 29 percent from 1954 through 1958, far
more than any other important price in the economy, and which
served to drive up costs in many steel-using industries, must at least
in part be attributed to this factor. The rise in steel prices was a
classic illustration of the profit-wage process. High profits caused by
the upswing of 1955 and early 1956 led to large wage settlements; the
companies, determined to maintain their profit margins, passed on the
higher labor costs with a markup of their own.
Second, the ability of some industries to pass on their higher unit
overhead costs in the face of falling demands is another instance of
the exercise of market power. Finally, the failure of prices to fall
in recession, while not wholly due to this factor, must at least in part
be attributed to it.
3. The prices of services, which loom particularly large among con
sumer prices, rose substantially. This is a very diverse group of
items with no one single explanation. Among the most rapidly in
creasing components was urban mass transit, which suffered from
rising unit costs because of falling demands; medical care prices,
which rose because of the worsening imbalance between supply and
demand, repair services, which moved in response to manufacturing
wages, and rent, which has continued to drift upward throughout
the period because of its slow response to changing conditions, and
because of the higher construction costs.
Policies to reconcile growth with stable prices
The policies designed to reconcile economic growth at levels close
to our potential with reasonable stability in the price level are out
lined in detail in the sections below. They are broadly designed to
accomplish the following objectives:
First, the instability of the economic system must be reduced, be
cause it adds to inflation and retards growth. Improvement in our
budgetary policies, particularly reduction in the unpredictable and
not wholly necessary volatility of orders for durable goods by the
Defense Department, is the single most important contribution which
the Federal Government could make to economic stability. A greater
willingness to make discretionary changes in taxes, consumer credit
controls and strengthening of the unemployment insurance system
are some of the other maj or changes that we recommend.
Second, since market power is an important element in inflation,
some beginning steps toward making the private organizations who
X X III
CHAPTER SUMMARIES
exercise this power more responsive to the public interest should be
taken. A series of measures of increasing severity is available, and
the Federal Government must adopt them to the extent that the actions
of these centers of private power require.
Third, the Federal Government must take steps to increase the
supply of those services which threaten to continue to increase in
price for a long time to come. An increase in the effective supply of
medical services, studies to raise the productivity in some of the
low-wage, low-productivity fields, and other steps should be taken.
With the inflationary bias of the economy reduced, we shall be in
a position to pursue policies designed to stimulate growth. Policies
designed to accomplish that objective include : a growth of demand
sufficient to induce a high level of investment and increases in pro
ductivity; a Federal program of aid to education to assure that our
entire labor force develops its potential talents fully; improvement in
the institutions of collective bargaining to strengthen the processes
which facilitate the introduction of new techniques into American
industry and which assure that the social cost of technological change
are borne equitably; continued high and rising support for research
and development activities to hasten technological progress; and when
the need arises, fiscal measures to raise the supply of funds for private
investment.
Sum m ary
of
C hapter 2 : E
c o n o m ic
G row th
in th e
L
ong
Run
A. ECONOMIC GROWTH ! ITS CAUSES AND CHARACTER
1. No economy can match the record of growth of the American
economy over the past 120 years. It has been estimated that real
gross national product grew 4.3 percent per year from 1839 to 1879;
3.7 percent per year from 1879 to 1919; and 3 percent per year from
1919 to 1959. Consumption increased at similar, though slightly
lower, rates.
2. The growth of the labor force and of the capital stock partly
explains our economic growth. In addition, more than half the
growth is accounted for by improvement in the factors of production
and in technology.
3. Improving health and education of the labor force has made a
considerable contribution to increasing labor productivity. Overall,
the labor force has become more skilled—the amount of education
received by the typical worker has risen and the educational level of
new entrants into the labor force has also increased.
4. As the economy has grown, our resource needs have been met
by a falling fraction of the total labor force. As American industry
has expanded, however, a rising share of resources has come from
abroad.
5. An examination of the movements of gross national product in
the past 60 years reveals long stretches over which demand rather than
supply has determined the level of output. Periods of recession and
depression account for 24 years, and even in some prosperous years
output fell short of potential supply. Since World War II there have
been no depressions; but recessions account for a total of 14 quar
ters, or roughly 23 percent of the total period.
X X IV
B. R E C O M M E N D A T IO N S
CHAPTER SUMMARIES
FOR
P R O M OT IN G
L O N G -T E R M
E C O N O M IC
GROW TH
1. The maintenance of high-level demand must be a goal of economic
policy; for, without continuing high-level demand, other attempts to
increase the rate of growth will surely be frustrated.
2. It is essential that the Federal Government invest in education
programs. Some form of Federal aid to education for those States
with large school-age populations and few financial resources is re
quired. This is the single most important recommendation for
strengthening our economic growth.
A national scholarship program, based on merit, but with a geo
graphical distribution that insures that talented youngsters from in
ferior school systems are given an opportunity, is desirable. So is a
continuation of programs designed to identify scientific talent. Exist
ing vocational training programs should be examined, and, where
necessary, strengthened by Federal aid.
3. To insure an adequate supply of trained individuals, the Govern
ment should encourage unions to expand their apprenticeship pro
grams. In this connection, it may be that the Bureau of Apprentice
ship of the Department of Labor should be expanded. Entry into
high-skill trades should be facilitated.
4. Without indorsing any specific proposals, it is recommended that
a program be developed and adopted which will make special pro
vision, within the unemployment insurance system, for workers who
are laid off because of technological change. Benefits should, under
5. Special programs for adjustment in depressed areas should be
introduced.
6. The institutions of collective bargaining which facilitate the in
troduction of new techniques must be strengthened.
7. Serious study should be given to the possibility of setting up na
tional productivity centers of the type which the United States en
couraged other countries to set up. Such productivity centers might
well put special emphasis on the development of new techniques for
low-productivity industries, many of which are made up of small,
highly competitive units too small to support research programs of
their own.
8. Programs for Federal support for medical research should be ex
panded, just as should vocational rehabilitation programs.
9. The Federal Government must assure continued adequate sup
port for scientific research, even in the event the national security
stimulus to succeed becomes less urgent.
10. Ways must be found to make the patent system a more effective
tool for technological progress.
11. The Federal program for abstracting and translating foreign
scientific and technical journals should be expanded and more widely
publicized. Abstracts and translations should be made available at
low cost.
12. The level of public services must keep pace with private eco
nomic development. All levels of Government must do their part,
but the Federal Government, with its greater financial strength, must
plav a key role.
XXV
CHAPTER SUMMARIES
Sum m ary
of
C h a p t e r 3 : T h e S l o w in g D
R e c e n t Y ears
own
of t h e
E
coxomy
in
A. TH E RECORD ON GROWTH
1. The growth rate in the postwar period tapered off substantially
after 1953. Not only was recent history marred by two recessions;
a period of low growth during prosperity also occurred. This low
growth during prosperity was due primarily to the slowing down of
the rate of growth of demand, particularly the demand for goods.
The declines in residential construction and Federal Government
purchases were the primary causes of the trouble in the goods sectors.
The resulting decline in disposable income, by eroding the growth
of consumers’ purchasing power, further retarded the demand for
hard goods.
2. That the supply of labor and capital did not limit growth during
this period is revealed by: (a) Higher unemployment rates, even dur
ing the prosperity phase 1956-57; (b) the higher percentage of the
labor force which was working part time; (c) the low and falling rates
of capital utilization; (d) the increasing absorption of labor by the
low productivity sectors of services and trade.
3. The record of productivity in the postwar period was influenced
by: (a) The shift of labor into services and trade which tended to
slow down the rate of increase of productivity in those sectors; (&)
the slackness of demand for goods which held productivity advances
down in the goods sectors, because utilization rates were lower than
normal for the expansion phase of the business cycle.
B. LESSONS OF TH E RECENT EXPERIENCE
4. Had these factors not operated, the growth rate after 1953 would
have been substantially higher. The blame must fall primarily upon
the behavior of the Federal Government. The private sector behaved
optimistically, but their decisions were made unwise in hindsight
by the unduly restrictive behavior of the Federal Government.
Whereas private industry was making large investments during 1956
and 1957 in order to meet high anticipated levels of output, these
anticipations turned out to be overly optimistic primarily because
the Government stepped too hard on the fiscal and monetary brakes.
5. Had the Government’s policies been aimed at maintaining the
growth of total demand, our growth rate over the 1953-59 period
would have compared favorably with the early postwar growth rate.
It is highly unlikely that such a set of policies would have involved
much additional inflation. Some intensification of the capital goods
inflation and the inflation in certain areas of services might have oc
curred, but this would be offset, to some extent, by the increases in
output per man-hour that would have resulted from the stimulation of
demand. A considerable amount of growth was sacrificed in order
to prevent inflation; and as will be shown in subsequent chapters,
the policies pursued were not capable of containing inflation either.
CHAPTER SUMMARIES
XXVI
Summary
of
C hapter 4 : P
o t e n t ia l
G row th
1. In recent years, the total output of the economy has been well
helow its potential output.
2. So long as a major depression, like that of the 1930’s, is avoided,
the economy will probably grow in the future at a rate somewhat
higher than the average rate for the past five decades. Making the
least favorable assumptions about the future behavior of the factors
determining growth, but still assuming no depression, it turns out that
the economy will probably grow at a rate of 3.4 percent per year. If
somewhat more optimistic assumptions are fulfilled, the growth rate
is likely to be 3.9 percent per year. But to repeat, achievement of
either rate requires that growth not be interrupted by severe or too
frequent slumps in economic activity.
3. Actually, we can enjoy an even higher rate of growth, 4.5 per
cent per year, if we try. Achievement of this rate of growth, which
is considerably higher than the average of the past 50 years, requires
no change in our economic way of life. It does, however, require that
the Government actively pursue growth-facilitating policies, that it
continually maintain an adequate level of aggregate demand, and that
it promote increased resource mobility and competition.
Summary
of
C hapter 5 : T
a
.
the
he
P ostw ar I n f l a t io n
record
1. The greatest increases in prices occurred during the post-World
War II boom from 1946 to 1949 and the Korean war period from mid1950 to 1953. Taken together, they accounted for over 75 percent of
the total postwar inflation. These increases were primarily caused
by high aggregate demand in both the product and the labor market.
A third period of inflation, from 1955 to 1959, accounted for the
remaining 25 percent of the postwar inflation. This rise in prices,
however, was largely concentrated in a few important sectors of the
economy, particularly steel, machinery, construction, and Government
services.
2. Because the existing price indexes do not adequately reflect qual
ity improvements or productivity increases, these indexes tend to over
state the amount of inflation we have experienced, particularly since
1955. Nevertheless, some inflationary pressure has occurred.
3. The major burden of inflation has fallen on groups whose in
comes are relatively fixed and who are unable to supplement their
incomes by finding employment. By far the greatest losses of real
income have been suffered by older persons living on their past sav
ings or on pensions.
4. S in c e 1955, a p p r o x im a t e ly th r e e -fo u r t h s o f th e to t a l r ise in th e
w h o le s a le p r ic e in d e x , e x c lu d in g f a r m a n d fo o d p r o d u c ts , w a s a c
c o u n te d f o r b y th e “ m e t a ls ” a n d “ m a c h in e r y ” c o m p o n e n ts o f th e in d e x .
A d e ta ile d a n a ly s is o f th e fo r c e s u n d e r ly in g th e in fla tio n in th ese sec
to r s in d ic a te d th a t in th e case o f steel, th e d o m in a n t fa c to r s w e re h i g h
a n d r is in g p r o fits a n d e x c e p tio n a l in creases in w a g e a n d f r i n g e b en efits,
b o th o f w h ic h w e re r e la te d to s tr o n g m a r k e t p o w e r in th e la b o r a n d
p r o d u c t m a r k e ts , in itia te d in th e c o n te x t o f a fa v o r a b le sta te o f
dem and.
I n th e case o f m a c h in e r y , th e d o m in a n t u n d e r ly in g fa c t o r
CHAPTER SUMMARIES
xxvn
was the pressure of excess demand on productive capacity. In most
other manufacturing industries, the rate of increase in prices was
due to several interrelated factors, particularly the degree of competi
tion in the product market and trends in output.
5. Another important trend in manufacturing was a remarkable
shift in employment away from production workers and toward non
production workers. This has resulted in a considerable increase in
the proportion of fixed labor costs, thus accentuating the degree of
downward rigidity during recessions.
6. The rising price of construction, both residential and nonresidential, can be explained by a combination of a strong demand
throughout most, of the postwar period, probably combined with the
exercise of some market power by the strong construction unions.
7. The inflation in services has been the result of several independ
ent developments. The rise in the price of medical care is attribut
able to a great increase in demand without an equivalent rise in supply.
In the case of unskilled services, the primary cause has been a low rate
of increase in productivity combined with a rise in wage rates some
what less than the rise in manufacturing. Primary emphasis should
be placed, therefore, on methods of increasing the supply of medical
services and on raising the productivity in the unskilled areas.
8. In general, the degree of demand pressure in the labor market
does have an important effect on the rate of change in wages. Never
theless, wages showed a high degree of downward rigidity in reces
sions. This rigidity, however, was more a reflection of the absence
of any prolonged declines in business activity than a manifestation of
strong unionism.
9. It is unlikely that a secular upward trend in wages and prices
can be avoided with an average level of unemployment which is con
sidered socially tolerable, given our present anti-inflation weapons.
10. No significant relationship was found between changes in earn
ings and changes in employment, in output, or in man-hour produc
tivity in the manufacturing, mining, or railroad industries.
11. Within manufacturing, the most important factors which were
related to wage changes were (1) the level of profits, and (2) the
degree of competition in the product market, as measured by concen
tration ratios. This relationship was not evident in mining or rail
roads.
12. There was no generally applicable relationship between wage
changes and union strength.
13. From 1946 to 1949, most collective bargaining settlements in
manufacturing followed the “pattern” usually established in the auto
mobile and steel industries. After 1950, however, those manufac
turing industries in which competition in the product market was
severe and in which profit levels were seriously curtailed did not match
the pattern established in the more concentrated and more profitable
industries. This was not true in coal mining and railroads, however,
where wages continued to rise despite adverse profit and employment
conditions. In these industries, union power was a dominant factor.
14. The initial impetus for the inflationary trend from 1955 to 1959
developed out of the very rapid recovery from the 1954 recession,
centering in the automobile and residential construction industries
and spreading from there into steel, rubber, building materials, and
X X V III
CHAPTER SUMMARIES
others. These increases led in turn to a substantial capital goods
boom in 1956-57, extending particularly into the machinery and nonresidential construction sectors. Within this favorable economic en
vironment, important key bargains were negotiated by strong unions
in the automobile and steel industries, both of which were enjoying
very high levels of output and near record postwar profits. These
collective bargaining contracts contained liberal provisions extending
over a 3-year period to 1958 and 1959. These provisions, in turn,
became the pattern for several other important industries in which
profits and product market conditions were also favorable. As
a result o f these long-term contracts, wages continued to rise dur
ing 1957 and 1958, after the postwar boom had leveled off and
the economy had entered into a recession. In addition, the continuing
shift from production to nonproduction workers caused unit labor
costs to rise sharply in 1957 and 1958. These factors contributed to'
the rise in prices during 1958 in those industries which had a con
siderable degree of market power.
B. THE GENERAL SIGNIFICANCE OF THIS RECORD FOR POLICY
The most significant point to be stressed again in concluding this
summary is that no one “ theory” is adequate to explain the inflation
o f the postwar years, particularly since 1955. Rather, a number of
varied and interrelated factors have been involved. It also follows,,
therefore, that any public policy designed to deal with the problem
must itself be diverse and flexible. Such a public policy should in
clude three basic approaches:
1. A program to deal with the problems of severe instability aris
ing out o f aggregate or sectoral excess demand.
2. A program designed to reduce the undesirable effects of excessive
market power.
3. A program designed to increase the supply of medical personnel,,
and to raise the productivity of services in general.
Sum m ary
of
C hapter 6 : T
he
P roblem
of
U
nem ploym ent
A. THE POSTWAR RECORD
1. Experience with unemployment in the postwar period has not
been appreciably different from that of preceding decades in this cen
tury, other than the depressed thirties. Nevertheless, there is evidence
that unemployment is a growing problem. The reduction in unemploy
ment since the trough o f the 1957-58 recession has not been as rapid
as in the preceding two recessions. In mid-August of this year, prior
to any large-scale layoffs as a result of the steel strike, the
seasonally adjusted unemployment rate was still 5.5 percent, consid
erably above the rate o f 4.3 percent achieved in the period 1955-57.
It was only one-half of a percentage point below the rate of 6 percent
obtaining at the trough of the recession of 1953-54.
2. An increase in unemployment of relatively long duration has ac
companied the rise in overall unemployment rates. In March of 1959,
35 percent o f the unemployed had been unemployed 15 weeks or
longer; 18 percent had been unemployed more than half a year.
3. A ll of the moderate increase in unemployment between the years
1948 and 1956 was accounted for by the proportionately much greater
X X IX
CHAPTER SUMMARIES
rise in long-term unemployment— unemployment lasting for at least
15 weeks.
4. The increase in unemployment rates between 1948 and 1956 ac
companied a relative decline in employment opportunities in manu
facturing, a tendency which has persisted since that time. Factory
workers now account for about 32 percent of long-term unemployment,
a rate which is disturbingly high, considering that the trough of the
business cycle was a year and half ago and that industrial production
has averaged higher in 1959 than it did in 1956 or 1957.
5. There are a number of chronically depressed areas in the country
which have had unemployment rates averaging about twice as high
as those in the rest o f the Nation in recent years. These areas, with
two or three exceptions, are recovering more slowly than the national
economy from the recession, and have poor prospects for prosperity in
the foreseeable future.
6. Even in prosperous times, such as 1957, only about half the unem
ployment can be attributed to seasonality of industry operations, vol
untary quits, or recent entry into the labor force. About half the un
employment arises from separations, layoffs, or long-standing failure
to find a job.
B. SOME POLICY RECOM M ENDATIONS
1. Unemployment well in excess of the frictional minimum should
not be regarded complacently even though the country is generally
prosperous. Measures to reduce the frequency and severity of busi
ness cycles and to insure an adequate secular growth in demand should
be supplemented by efforts to increase the employability and efficiency
o f the labor force, and to attract new^ industry into areas o f chronic
labor surplus. Greater efforts should be made toward training young
workers and retraining workers displaced through technological prog
ress or relocation of industry. A program looking toward relocation
of workers from some of the areas of persistent labor surplus should be
undertaken.
2. Adjustments should be made in the unemployment compensation
system. Extended benefits should be paid to workers displaced in a
recession, adjusted upward to a reasonably high percentage of average
wages. A Federal-State aid program should be worked out to main
tain income for persons suffering from long-term unemployment who
cannot qualify for unemployment benefits.
3. Federal leadership is needed to assist the recovery o f a number of
the chronically depressed areas. Both technical and long-term finan
cial aid will probably be required. Assistance programs should be of
sufficient scope to justify the expectation that the areas will become
self-sustaining within a reasonable period. While some nonrecoverable costs may be incurred by the Federal Government in this effort,
a well-planned program for reviving the chronically depressed areas
should result in a net economic and social gain to the country.
Sum m ary
of
C hapter 7 : T
he
P roblem
of
A
m e r ic a n
A
g r ic u l t u r e
A . TH E PROBLEMS
1.
The situation of American agriculture has continued to deterio
rate in recent years. Production has outrun demand, prices have
XXX
CHAPTER SUMMARIES
fallen, and farm incomes have dropped. Overproduction has been
due to the dramatic upsurge in productivity that has taken place
since 1942, combined with a growth of demand which has been low
because of the small response of sale of farm products to rising per
capita incomes. The imbalance has persisted because of the Gov
ernment price support program, the cost of which has been mounting
rapidly.
4. Rural poverty continues to constitute an important social prob
lem. Many farms are too small and have too little capital to support
a family. They have been bypassed by technological progress and
receive little benefit from the price support program.
5. The behavior of farm prices has served to moderate the increase
in the price level in recent years.
B. POLICIES FOR AM ERICAN AGRICULTURE
1. Policies to deal with overproduction and falling farm incomes:
(a) The only ultimate solution to the surplus problem is to stop
the increase in production, or at least to slow down the rate of growth,
so that farm output can be brought more closely into line with the
growth in demand for farm products. Since the fruits of technology
will continue to be reaped, this will require a transfer of resources out
of agriculture. Human costs and economic costs will be incurred
in this process.
(b) The first prerequisite to successful agricultural policy is a
high level of employment in the rest of the economy.
(c) Continued retirement of land from use through the soil bank
program will effectively reduce output.
(d) With an excess of arable land clearly evident, the Federal
Government should cease to add to this excess through reclamation,
except where other pressing social purposes are served, or where
economic feasibility can be clearly demonstrated.
{e) As long as there are price supports, there must be production
controls and these should be strengthened through greater use of
cross-compliance provisions.
( / ) The feasibility of a program of income payments, based on the
net incomes that farmers would have earned, given recent levels o f
production and prices, should be explored.
(g) The emphasis in agricultural research should continue to be
shifted away from increasing output toward increasing the use of
farm products.
(A) The program for disposal of surpluses overseas should be con
tinued on as vigorous a basis as possible, though the interests of other
traditional export countries should be kept in mind. These programs
should be put on a longrun basis and not made dependent on shortrun
fluctuations in our own stocks.
(i) In executing American foreign trade policy, particularly with
regard to Western Europe, effort should be made to reduce agricul
tural protectionism in potential customer countries.
(j) Since mobility of people and of resources out of agriculture into
other industries is the only ultimate long-term solution to the prob
XXXI
CHAPTER SUMMARIES
lem, the Federal Government should take all reasonable measures to
facilitate this process: special aid to education in rural areas to provide
skills usable in other industries; relocation allowances; and strength
ening of employment service facilities.
C. POLICIES FOR T H E LOW -INCOM E FARMERS
{a) The rural development program, which is particularly aimed
at farmers who do not produce for market, should be carried through
on a more substantial scale.
( b)
Technical assistance in developing more effective farms and in
improving marketing facilities should be expanded in order to fur
ther reduce rural poverty.
Summary
of
C hapter 8 : F
is c a l
P
o l ic y
A. T H E RECORD OF POSTWAR FISCAL POLICY AND ECONOMIC STABILITY
1. Changes in the volume and character o f Federal Government de
mands, particularly for defense purposes, have been an important
source of economic instability.
With the single exception of the Korean war, changes in defense
demands have not been accompanied on a timely basis by discre
tionary fiscal action to compensate for their disturbing impact.
2. Except during the Korean war period, Federal postwar fiscal
policy has relied almost exclusively on discretionary changes in ex
penditures and on built-in stabilizers for purposes of achieving eco
nomic stability.
3. Although the automatic stabilizers served to moderate both eco
nomic declines and booms once underway, they have not been ade
quate to prevent major fluctuations in rates of employment and out
put.
4. The effectiveness of stabilizing fiscal action, either discretionary
or automatic, is significantly affected by monetary conditions.
5. So-called traditional fiscal policy, relying on broad changes in
the relative levels of receipts and expenditures, is poorly suited to
deal with inflationary pressures orginating in strong shifts in demand
among sectors of the economy rather than in excessive total demand.
B. SECULAR TRENDS IN FEDERAL FISCAL POLICY SINCE WORLD WAR H
1. Federal fiscal policy has tended to become less restrictive with
respect to the expansion of total demand.
2. The trend toward a less restrictive fiscal policy has been accom
panied by a secular movement toward a more restrictive monetary
policy.
3. The changing mix of monetary and fiscal policies has, on the
whole, been unfavorable to private investment.
4. For the postwar period as a whole, no major change has occurred
in the distributional impact of the Federal tax structure.
5. Federal expenditure trends have been in the direction of encour
aging increases in productive capacity and in productivity.
X X X II
CHAPTER SUMMARIES
6.
Changes in Federal expenditures have contributed to economic
instability; continuation of post-Korean trends in the composition
o f Federal outlays suggests an increased tendency toward economic
fluctuation.
C. RECOM M ENDATIONS FOR IM PROVING FEDERAL FISCAL POLICY
1. More rapid growth, if it is to be maintained, increases the desira
bility of prompter and more effective stabilization policies. A t the
same time, achieving a higher rate of economic growth may involve
greater tendencies toward economic instability.
2. Under some circumstances, public policy may have to choose be
tween the price level and the rate of employment as the stabilization
objective. In such circumstances, greater emphasis should be placed
on stabilizing the rate of employment.
3. Tax policy should be used more promptly and more vigorously to
offset economic fluctuations than it has throughout the postwar period.
4. Automatic fiscal stabilizers should be strengthened, particularly
with a view toward increasing their sensitivity to changes in em
ployment.
5. Decisions with respect to the volume and character of defense
procurement should be made on the basis of judgments about long
term military posture. They should be divorced from short-run
budgetary considerations and prospects concerning the level o f eco
nomic activity. On the other hand, these decisions should be a major
consideration in formulating stabilization policies.
6. Reducing the information lag is an important condition for in
creasing the speed and vigor of discretionary fiscal responses to eco
nomic fluctuations.
7. Federal fiscal policy should aim at substantially greater surpluses,
for any given level of desired restraint on demand, than have been
realized during the post-Korean period, leaving less of a burden for
other policies.
8. I f a higher rate of capital formation in the private sectors of the
economy is desired, then over the long run tax burdens may have to
be shifted to bear less heavily on investment and saving and more
heavily on consumption.
9. Reform of the Federal tax structure, particularly the income and
estate and gift taxes, is essential if there is to be a shift in the policy
mix toward higher levels of budgetary surpluses.
10. Government expenditure programs should be revised to place
greater emphasis on activities which increase productivity and make
possible increases in productive capacity and to reduce outlays sup
porting inefficient use of resources.
11. Accurate appraisal of long-term trends in Federal expenditures
requires reform of budgetary accounting. Such reform is also neces
sary if the short-term impact of Federal fiscal activities on levels of
activity throughout the economy is to be accurately appraised. Pri
marily this reform requires halting the erosion of the conventional
budget and restoring it to accounting for procedures and receipts now
set apart in fiscal accounts.
12. To reduce the destabilizing effects of the budget, the ceiling on
the national debt should be abolished.
X X X III
CHAPTER SUMMARIES
Summary
of
C hapter 9 : M
a
.
onetary
P
m o n e t a r y p o l ic y
o l ic y a n d
:
D
ebt
M
anagement
t h e record
1. Increasing reliance has been placed on monetary policy as a
means o f maintaining economic stability in recent years, especially
since 1953.
2. Interest rates have exhibited an upward drift due to the fact that
the effects o f tight money in early 1953, 1955-57, and 1958-59 have
greatly overbalanced the effects of easy money in the recessions of
1953-54 and 1957-58.
3. The Federal Reserve System has relied almost entirely upon socalled general credit controls, including changes in discount rates,
changes in member bank reserve requirements, and open market op
erations. Reserve requirements have been gradually lowered in sev
eral stages in the recessions of 1953-54 and 1957-58, and have not
been raised since 1951. Since early 1953, the Federal Reserve has con
fined its open market operations almost entirely to short-term secu
rities—the so-called bills-only policy. The System has shown a de
cided antipathy for selective credit controls.
4. General credit controls have been rather slow to exert their ef
fects on aggregate demand, even in dealing with inflation, the job
for which they are alleged to be most suited. When credit is tightened
by reducing the money supply or slowing down its rate o f increase,
as in 1955-57, the income velocity of monetary circulation tends to
rise, as existing cash balances are dishoarded to finance increased
spending. Much of the tendency for changes in velocity to offset the
effects of changes in the money supply seems to be due to various
financial adjustments. These include shifts in the composition of
bank portfolios from Government securities to loans, which tend to
increase velocity as the buyers of the securities sold by banks release
idle cash balances which are then loaned to active spenders by the
banks. Other adjustments include changes in holdings of liquid as
sets by business corporations and to some extent activities on the part
o f financial intermediaries, such as life insurance companies, savings
banks, and savings and loan associations, which result in the activation
o f money balances. Various other financial devices for economizing
the use of cash balances have also contributed to the tendency for
velocity to rise as credit has tightened. It has proven difficult for the
Federal Reserve to act with sufficient speed to overcome these offset
ting tendencies, because expenditures of most groups have proven to
be relatively insensitive to changes in interest rates and credit avail
ability and for other reasons.
5. The impact of monetary controls has varied greatly from one
sector of the economy to another. The greatest impact has clearly
been felt by residential construction, due mainly to the presence of
ceilings on FHA-insured and VA-guaranteed mortgages. As a re
sult of its sensitivity to monetary policy, residential construction has
behaved in a distinctly contracyclical fashion. It appears that mone
tary policy has also had a noticeable effect on expenditures of State
and local governments for schools and other public improvements.
There is some evidence that smaller business concerns have been dis
proportionately affected due to the fact that the sources of funds avail
48795— 59------ 3
CHAPTER SUMMARIES
X X X IV
able to them are limited, but the evidence on this is not entirely clear.
Investment in plant and equipment by larger firms appears to have
been affected very little for a number of reasons. Consumer credit has
probably been affected somewhat, but the impact has not been strong.
Business investment in inventories does not seem to have been in
fluenced noticeably. Such impacts as monetary policy does appear
to be felt only with substantial lags.
6. Much of the inflation of the last few years was due to sudden
shifts in demand among sectors, the exercise of market power which
both raised some prices and kept others from falling, and inadequate
supplies of some services. Monetary policy is not effective in dealing
with this kind of inflation. The sectoral impact o f monetary policy
does not coincide with the sectoral occurrence of inflation, and does
not deal with market power or with shortages of supply. Therefore,
it relies heavily on the indirect effects of reducing total demand.
With prices rigid and resources immobile in the short run, monetary
policy of the present type applied to a degree that would suffice to stop
inflation, would lead to great unemployment and ultimately to
recession.
7. While the short-run effects of monetary policy on business invest
ment in plant and equipment do not appear to be very great, we cannot
be sure that the upward drift of interest rates does not gradually
reduce the incentive to invest and affect growth.
8. General credit controls have proved to be selective in their
effects; in fact generality in stabilization policy is an illusion. More
over, in the kind of economy we have today with its price rigidities and
immobility of resources in the short run, effective stabilization should
be selective in an intelligent way. The trouble with general monetary
controls, in addition to the fact that they are relatively weak and slow
to take effect, is that they are selective in a way that would be appro
priate only under very special— and unlikely—circumstances.
B. RECOM M ENDATIONS FOR IMPROVING M ONETARY POLICY
1. The problem of achieving stable growth of output should be
distinguished from the problem of controlling inflation. The main
tenance o f stable growth of output is a question of maintaining a bal
ance between the growth of capacity and the growth of demand.
2. The development of selective controls over fixed investment might
be desirable, because rapid increases in investment, as in 1955-57, have
resulted in rapid growth of capacity, have created difficulties in keep
ing demand growing in pace with capacity, and have added to infla
tion. However, while the possibility of developing controls over in
vestment should be studied, the prospects of effective control do not
seem very promising, and there is danger that in attempting to pre
vent instability in investment, we might reduce its average level and
thus slow down the rate of growth.
3. Consumer credit and inventory investment have been destabiliz
ing influences, and serious thought should be given to the development
o f effective controls in these areas. More effective control over bank
loans might help to stabilize inventory investment. Residential con
struction has been subject to control as a result of the interest rate ceil
ings on FHA-insured and VA-guaranteed mortgages. Selective con
CHAPTER SUMMARIES
XXXV
trols are needed in this area, but the interest rate ceilings should prob
ably be removed and replaced by other kinds of controls. To the ex
tent that the volatile behavior of consumer credit, inventory invest
ment, and residential construction is responsible for rapid shifts in
the composition o f demand, effective controls over these sectors would
help to minimize inflation, as well as maintain stable growth.
4. Except to the extent that selective controls can prevent shifts in
demand by regulating unstable sectors, monetary policy cannot deal
effectively with inflation resulting from the exercise of market power
which keeps prices and wages from falling or forces them up unduly.
I f we really want to deal with this kind of inflation, we should strike
at market power directly.
5. General controls can exert some influence in preventing aggre
gate demand from growing too rapidly and in providing a monetary
environment in which other policies can work effectively. Conse
quently, we will need to use them even if we decide to make greater
use of selective controls.
6. Some changes in the use of the present general credit control
weapons would probably be desirable. Discount rate changes are a
source of uncertainty and subject to misinterpretation. Consideration
should be given to the adoption of the Canadian system under which
the discount rate is tied to open market interest rates, or perhaps to
doing away with member bank borrowing entirely. The Federal Re
serve should either justify the practice of lowering reserve require
ments to supply reserves for growth or else abandon it. The use of
open market purchases of Government securities for this purpose
would have the advantage of reducing the Treasury’s interest cost in
managing the public debt. The Federal Reserve should abandon the
“ bills-only” policy in its present rather doctrinaire form and be pre
pared to deal in long-term securities whenever the economy would
benefit from it.
7. The administration o f the Federal Reserve System should be
streamlined by reducing the cumbersomeness of the present Open
Market Committee and perhaps turning over the entire administration
o f monetary policy to a Board of Governors reduced in size. Such
streamlining is especially necessary if any effort is to be made to im
plement a more selective monetary policy.
C. DEBT M ANA G EM ENT : SOME PRINCIPLES
1. The publicly held debt, which does not include the debt held by
Government agenices and trust funds or the Federal Reserve System,
is the proper concept to use in the analysis of debt management. It
is substantially smaller than the gross public debt. The magnitude o f
the debt management problem is frequently exaggerated because im
proper statistics are used.
2. Debt management may be defined as all operations by the Treas
ury (and the Federal Reserve) which affect the composition o f the
publicly held debt.
3. The net effects on the level of expenditures resulting immediately
from debt management operations (essentially selling securities o f
one maturity and using the proceeds to retire securities of another
maturity) due to the changes they produce in the structure of interest
rates and liquidity are probably not great.
XXXVI
CHAPTER SUMMARIES
4.
Changes in the structure of interest rates may be regarded as a
selective control device, although our knowledge concerning the precise
effects of such changes is not very extensive.
D< RECOM M ENDATIONS FOR IM PROVING DEBT M ANA G EM ENT
1. To the extent that changes in the rate structure are desired for
their selective stabilization effects, the responsibility for bringing
them about should lie with the Federal Reserve, which can use open
market operations in various maturity sectors for this purpose.
2. Debt management operations by the Treasury should be directed
at achieving and maintaining a debt structure which is desirable in
the longrun. A debt consisting predominantly of long-term securities
would be less readily shiftable and capable of facilitating the dishoard
ing o f idle cash balances when the financial system and economy are
subjected to external disturbances. Under present circumstances, the
Treasury should direct its efforts toward the lengthening of debt
maturities with due consideration for the interest cost on the debt.
This suggests that efforts to sell longer-term securities should be em
phasized in periods when interest rates are low. In addition to
tightening up the financial system somewhat, lengthening of the debt
will also permit a better distribution of maturities and thus minimize
interference with the Federal Reserve’s freedom of action.
3. The cost and difficulty of managing the debt in an effective way
would be reduced if (a) monetary restrictions were relaxed some
what; ( b ) fiscal policy were tightened and monetary policy relaxed
still more, thus producing a policy mix more conducive to grow th;
(c) more reliance in monetary policy were placed on selective con
trols which work directly on credit rather than by pushing up inter
est rates; and (d) the Federal Reserve stopped lowering reserve re
quirements to supply reserves needed to support economic growth
and used open market purchases instead. Most of these measures
would be desirable on other grounds; they would encourage growth
and might increase our effectiveness in dealing with economic
instability.
4. The Treasury should explore various methods o f improving the
debt management techniques, including the auctioning of long-term
bonds, more frequent small offerings of securities, improved methods
o f underwriting its offerings, an improved selling organization, and
the judicious use of advance refunding. The Federal Reserve should
abandon the “ bills-only” policy for a number of reasons, one of which
is that such a step would permit the System to reduce erratic fluctua
tions in the prices of Government securities which have made these
securities less attractive to investors. It might be desirable for the
Treasury to introduce purchasing-power savings bonds in order to
supply the small investor with protection against inflation.
5. The concern about high interest rates has its basis in disagree
ment about the appropriateness of policies for achieving our economic
objectives. The 4^4 percent ceiiing on interest rates on Government
securities with an original maturity of more than 5 years is an arbi
trary limitation which complicates the problem of debt management.
But, though the interest rate ceiling should be repealed, modification
X X X V II
CHAPTER SUMMARIES
of the policies that led to the present situation is a matter o f much
more pressing importance. Whether it wants to repeal the interest
rate ceiling before basic reforms in monetary, fiscal and debt manage
ment policy are put into effect, is a matter for Congress to decide.
Sum m ary
of
C h a p t e r 1 0 : P u b l ic P
o l ic y a n d
M
arket
P ower
1. A vigorous antitrust program is the most preferable method for
reducing the impact of market power. By making the economy more
competitive, antitrust activities serve not only to reduce inflation;
they also help encourage a more rapid rate of growth.
2. I f the antitrust approach is to be relied on, it must be consider
ably strengthened. The professional staff of the Antitrust Division
should be expanded, with a salary scale sufficient to attract and retain
able personnel.
In addition, Congress should give serious consideration to several
other aspects of our present antitrust enforcement procedures. Pre
notification of proposed mergers would be desirable; greater power to
subpena records in civil cases should be provided; and finally, a more
effective method for dealing with market power which is not based
on overt collusion should be developed.
Finally, the present policies of our regulatory agencies should be
reevaluated with particular regard to the effect of these policies on
competitive practices within their respective jurisdictions.
3. We also recommend, as part of an overall program to limit and
possibly reduce market power in the American economy, that tariffs
be steadily reduced.
4. The antitrust approach to the problem of union market power is
neither feasible nor desirable, except in instances where there is col
lusion between unions and firms to fix product prices. Making indus
trywide bargaining unlawful would be unwise; nor would it be sound
policy to prevent national unions from participating in collective
bargaining. This is not to say that union market power has not con
tributed to the inflation problem, it has. But increased competition
in product markets, as the result of tariff reductions and a vigorous
antitrust program, can do much to check the exercise of this power.
5. We do not believe that moral suasion can be relied upon to check
the exercise of market power. We do believe, however, that an annual
conference for business and labor leaders, at which they can be ap
prised of the economic outlook and the implications of their actions
for this outlook, would yield some benefits and should therefore be
instituted.
6. We believe there should be a presumption against Government
intervention in wage and price determination, unless the circum
stances involved make it necessary. I f this approach were to be
utilized, several alternatives are available, reflecting increasing de
grees of intervention. These would include establishment of a study
group to advise the President on important price and wage changes;
the use of factfinding procedures, with or without the issuance o f a
report and recommendations; the requirements of prior notification to
the Government of proposed price or wage increases in certain key
industries; the power to suspend such increases; and finally, direct
price and wage controls.
XXXVIII
CHAPTER SUMMARIES
A t this stage of our knowledge and experience, we believe that if
such an approach were to be utilized, it should be limited to the estab
lishment of factfinding procedures to be invoked at the discretion of
the President and to result in the issuance of a report and recom
mendations regarding the justification and desirability of price or
wage increases. In the coming years, the historical record will deter
mine the extent to which further measures are necessary.
S um m ary
of
C hapter 1 1 : A
m e r i c a ’s
E
R
ole i n
a
C h a n g in g W
orld
conomy
1. In the past 9 months, the U.S. balance-of-payments position
interpreted solely in terms of U.S. gold plans appears to have im
proved substantially. This may, however, be only appearance.
Analysis suggests that the U.S. position may actually have worsened,
for there has been an acceleration in the accumulation by foreigners
o f liquid dollar holdings.
2. The growth of liquid foreign claims against the United States
creates problems for U.S. policy which cannot be evaded indefinitely.
The position of the dollar as the dominant key currency, as the major
supplement to gold stocks in providing international liquidity, cannot
but create periodic U.S. payments problems. And, similarly, for the
stability o f the American balance-of-payments position.
3. This suggests that the problem of international liquidity, and
not the problem o f American export competitiveness, is the real
threat to the American balance of payments. Indeed, the data ex
amined in our study of the international situation do not on their face
justify the conclusion that the current U.S. balance-of-payments posi
tion is primarily due to a decline in the export competitiveness of
American industry.
4. The development of economic regionalism—which may ultimately
prove to have been a good thing, but which also may prove to have
been a harmful development—is in part due to the international
liquidity problem.
5. It would be unwise for the United States to move hastily in
adopting policies intended to solve what are fundamental problems.
Lasting solutions will come only as a result of free world cooperation.
C H A P T E R S 1 -1 1
E M P LO Y M E N T,
G R O W TH ,
A N D
P R IC E
LE V E LS
CH A PTER 1. INTRODUCTION
The tempo o f the American economy slowed in the last 6 years.
Simultaneously, prices rose. And although the economy remained free
o f severe depression, two recessions occurred which caused considerable
unemployment.
This is a record which warrants concern. Not that 1953-58 was a
period of economic disaster. The recessions were brief, and the in
flation mild; moreover, real output continued to increase, if at a slowTer
rate than before. Yet, if the American economy performs no better
in the coming decade, we shall not have an easy time of it. We shall
have to accept lower standards of living, or else give up the full
attainment of essential national objectives. Similarly, we shall have
to continue to accept less than full employment, and, at the same time,
continue to live with the injustices of inflation.
There is nothing inevitable in these prospects. W e can achieve a
greater rate o f economic growth and a lower average level of unem
ployment with little inflation. But to do this, an overall economic
policy different in important respects from that o f the past several
years will have to be utilized. I f we keep on with the present ap
proach, we shall also keep on having to choose between sufficient eco
nomic growth and more inflation and insufficient economic growth and
moderate inflation.
This, then, is the theme of this staff report. It is a theme which
emerges from all of the research studies we have undertaken. Indeed,
this report is largely a summary of these studies. It will therefore
include analyses of the process of inflation and of the process of eco
nomic growth, as well as of economic policy in the postwar period. In
addition, however, this report contains recommendations—intended
to serve as a background of the committee’s own deliberations—for an
economic policy which will promote the attainment of economic growth
with a minimum of inflation.
I. O
ur
E
c o n o m ic
O b j e c t iv e s
A. ECONOMIC GROWTH
1. What is economic growth?
Economic growth is the expansion of a nation’s capability to pro
duce the goods and services its people want. Productive capability
depends on the- amount of available resources and their productivity—
upon the size of the labor force and the skills and know-how it has
acquired through education, training, and experience, upon the physi
cal stock o f capital, upon the availability of natural resources, and
upon the state of technology. Economic growth, therefore, is the
process of expanding and improving these components of productive
EMPLOYMENT, GROWTH, AND PRICE LEVELS
2
capability. It is accomplished by increasing the labor force, by educa
tion and training, by adding to the stock of physical capital, by re
search and development activities which advance technology, by the
discovery o f new resources, and by improving the effectiveness with
which all o f these components are organized in productive effort.
A perfect measure of economic growth, so defined, has not yet been
developed. Instead, we rely on measures of output, potential and
actual, to indicate how much our economy could produce and how
much of our productive capability is in fact being used. Comparing
the increase in output which in fact occurs with potential output
measures how fully and effectively we are using our expanding pro
ductive capability.
Economic growth, as we have defined it, is not a simple process
which depends only on increasing any one of the components of pro
ductive capability. I f these components are in substantially full use,
applying more of them to, say, increasing the stock of physical assets
means that less of them will be available during the same period of
time for satisfying current consumption demand or for increasing or
improving other components of productive capacity.
The private and public sectors of the economy have responsibility
for the rate and character of the Nation’s economic growth. With an
ever more complex technology, increasing the productivity of the labor
force demands better basic education and increased effort to provide
specialized skills and knowledge. Assuring continued technological
progress demands that resources be devoted to basic research and to
determining how these findings may be most efficiently applied to
improve production methods, and to develop new products and
devices to meet ever-expanding and more diversified demands.
Achievements in these fields increase the opportunities for profitable
rivate investment, without which, very often, these gains could not
0 fully exploited.
E
2. How is economic grow th used?
The fundamental purpose served by the Nation’s economic growth
is to increase the welfare of its people. Increasing production poten
tial does so in two ways: It makes possible an increase in the total goods
and services available to individuals in private consumption, and it can
increase the capability of the Federal, State, and local governments
to discharge the responsibilities assigned to them. In our economy,
individuals make their desires for different kinds of consumer goods
and services felt in the market through their willingness to purchase at
a price. The direction and magnitudes of public undertakings in a
democracy are determined through the political process. Thus, for
economic growth to be meaningful to individual welfare, there must
be free markets to determine the composition of private spending
and a democratic political process to determine the activities of
government.
(a) Rising standards of living
The American average standard of living is the highest in the his
tory o f the world. The average American family of 3.6 persons had
an annual income before Federal income tax of $6,220 in 1958. High
as this level, there is no question that individual welfare would be im
proved by a broadly based increase in average income. Our society
EMPLOYMENT, GROWTH, AND PRICE LEVELS
3
has become accustomed to rising standards of living. Should our
living standards fall or even fail to rise over any extended period,
social strife and group conflicts over the division of available goods
and services would be intensified. Economic growth, therefore, has
an important bearing on the political and social stability o f the Nation
as well as on improving the material well being of the people.
(b) Pub lie responsibilities
Rarely has a democratic nation been confronted by such great
public responsibilities as the United States is today. It is beyond
the province of this staff report to set forth programs in the various
areas o f these responsibilities. To sharpen our focus on the impor
tance o f economic growth, however, we must at least outline the public
responsibilities which confront the Nation, the fulfillment of which
will absorb rising amounts of economic resources.
1.
The military security of the American people.— Our national
security policy has four main objectives:
( a ) To deter direct attack on the United States;
(b) To limit damage to the United States if deterrence fails
and to come out of a war in as favorable a position as possible;
(c) To deter attack on our major allies, especially in Western
Europe, and to help defend them if deterrence fa ils;
(d) To aid in the defense of other allies and in the defense o f
the free world.
Each of these objectives places great demands on our economic re
sources. The rapid progress of Soviet military technology increases
our peril and requires us to accelerate our own advances if the present
delicate balance of military capability which keeps the nuclear peace is
not to be lost. I f we cannot, thereby, deter nuclear war, we must be
in a position to strike back. For this purpose, we need effective civil
defense programs and immunity of our retaliatory forces from enemy
attack.
In addition, we must maintain the ability to fight and to win
limited wars without thermonuclear weapons. All-out nuclear war
fare is not the sole threat to world peace. Piecemeal weakening of
the free world through limited territorial aggression remains a threat.
W e must be ready at all times to engage in limited skirmishes
wherever they may arise to protect the free world. As nuclear weap
ons become ever greater in destructive power, the possibility o f using
them to achieve limited military objectives diminishes. Maintaining
our strength in nonnuclear arms, therefore, is essential to the safety
o f the free world. Finally, we must provide military aid to our
allies, enabling them to resist external aggression and internal
subversion.
We now devote a little over 9 percent o f our gross national product
to the military objectives described above. Our N ATO allies are
spending about 5 percent. The Soviet Union, on the other hand, in
addition to supporting its large nonmilitary investment program, is
devoting about 15 percent of its resources to defense. The military
power she has procured with these resources is impressive. In some
important categories, her arms capabilities substantially exceed that
of the West. Much of this power has been created within the last few
years. Within the next 10 years or so, we can expect to observe a
growth in Communist military power on a scale which reflects the
rapid growth o f the Soviet economy.
4
EMPLOYMENT, GROWTH, AND PRICE LEVELS
In the modem world, it is impossible to buy 100-percent protection
against military threat. All that the heavy commitment o f economic
resources can do is to keep high our chances of ultimate success in
protecting the free world against aggression. Despite the current
relaxation of tensions, Soviet military technology continues to ad
vance. The Soviet economy is growing at an annual rate of 7 per
cent, and its allocation of resources to the objectives of Russian inter
national policy is apparently undiminished. The United States must,
therefore, look ahead to rising demands on its own economy arising
from this expanding challenge.
By 1970, when the Soviet Union will probably have doubled her
output, the resources she is likely to devote to her drive for military
and political hegemony are likely to be far greater than they are
today. Should we grow at, say, 3 percent, while her expenditures
remain a fixed share of her output, we will have to increase our
own military effort from 9 to 14 percent of our output. This would
be a heavy burden, corresponding to national security outlays today
of over $65 billion. It is a burden we could carry, and is far lighter
than the fraction we devoted to military purposes in World War II
or even during the Korean war. But it is a steadily rising burden,
both absolutely and relatively, and as it becomes heavier, our will
ingness to let ourselves slip behind may become greater.
Economic growth will not suffice to assure an adequate military
effort. Only the willingness of the American people to bear the bur
den can do that. But growth can make it easier, and keep us in a
position of being able to match Russian and Chinese efforts at what
ever level of resource commitment they choose to pursue the cold war.
2. Economic aid to underdeveloped countries.—The United States,
as the richest country in the world, has assumed a substantial respon
sibility for providing economic aid to accelerate the economic devel
opment of the many countries that are trapped in the vicious circle
o f poverty. The United States has always extended a helping hand
to poorer countries, for humanitarian reasons. In addition, it must
be expected that the Communist countries will intensify their own
programs of economic aid. Should we succeed in maintaining
the military stalemate, more of their efforts will go into the
economic sphere. As their total output grows and as the number of
skilled technicians which their educational system produces rises, they
(the Soviet Union and other Communist countries) will increase the
amount of their development aid. I f the uncommitted nations of the
world, particularly in Asia and Africa, are to pursue their economic,
social, and political goals without adopting the Communist system,
our own efforts must increase. This aid can take the form o f private
investment, public investment, or technical assistance. In any event,
the demands on our production capabilities will increase.
3. Domestic public responsibilities.—Increasing demands will be
placed on our economic capabilities by domestic public undertakings.
A rapidly growing, increasingly wealthy population, devoted to polit
ical and economic freedom, will necessarily require more of the serv
ices and goods which can only be, or are most effectively, provided by
government. W e cannot maintain our advance in economic well
being if we fail to educate better our young people. As our liv
ing standards rise, our responsibility to reduce poverty rises. As
EMPLOYMENT, GROWTH, AND PRICE LEVELS
5
urbanization proceeds, basic public services must expand if living
standards are not to fall; slum clearance and improvement and ex
pansion o f public utilities become increasingly the means to greater
well-being. The expansion of the civil functions of government has
been an important element of economic progress throughout the Na
tion’s history.
Some o f the major areas that will require increased investment over
the next few years are:
(a) Education.— Our total school population will continue to in
crease rapidly in the coming years. A study paper prepared for this
committee concludes that the total cost of education by 1970 will equal
$17.4 billion, but that with present methods of financing, no more than
$15.3 billion will be available. In addition, there is widespread belief
that the quality of our educational system is not rising fast enough.
There are also enormous differences in the expenditures per pupil in
different parts of the country, with the graduates of the poorest school
systems handicapped in later life.
(b) Research.—The amount of scientific research in which the
country engages will have to continue to increase. Today, the Federal
Government supports half of all the research of the country; this sup
port has been the main factor in the acceleration of our scientific
efforts. Much of this Federal support has been induced by the race in
weapons technology. Besides the military accomplishments, it has led
to the development of important advances that have benefited the
civilian economy. In addition, the opportunities for medical research
have widened, and increasing resources can be effectively employed in
this field.
Thus, execution of the public responsibility in this area of invest
ment for growth, both through accelerating the rate of technological
progress as well as improving our medical knowledge, will require
additional economic resources in the coming years.
(c) Health.— The economic output devoted to improving the quan
tity and quality of health services will also have to increase greatly
in the coming years. Besides the improvement of medical care
which we take for granted as a part of a rising standard of living,
the very large increase in the older population results in a need for
more medical facilities and personnel. Much of this need will be met
privately, but as one of our study papers points out, public responsi
bilities will also rise.
{d) The improvement of our cities.— Our cities, which have been
the centers of commerce and culture of the country, and which even in
this age of suburbia continue to play a focal role in our way of life,
have been deteriorating greatly. Slums have become more and more
widespread. Transportation facilities have deteriorated, as have com
munity services. With the financial base of our cities weak and with
political leadership frequently wanting, only a national effort can hope
to reverse the accelerating decline of our cities.
(e)
Public works backlogs.—During World War I I and the Korean
war investment in public works was cut. Large backlogs were newly
created, and while our efforts of recent years have been increasing,
particularly in connection with highways, far more remains to be done.
The road program has just reached high gear. Investment in water
supply and pollution control and in conservation and natural resource
development will have to increase in coming years.
6
EMPLOYMENT, GROWTH, AND PRICE LEVELS
( / ) The reduction of the poverty that remains in the United
States.—Despite the high average levels of income, poverty still re
mains an important problem. A study paper finds that 19 percent of
the population receives less than $2,500 a year for a family of four,
and that the incidence of poverty is particularly high among the aged,
non whites, those with less than 8 years of schooling, and family units
headed by women.
To reduce this poverty, social security and public assistance pro
grams must continue to be improved. But, in addition, the country
must seek to equip the affected people to play a more productive role
in our economy. Much of our poverty is concentrated in certain
special groups that have been bypassed by economic progress, such
as farmers in areas where the resource base cannot support the present
population, the American Indians, and the physically handicapped.
W ith skillful effort, including the investment of economic resources,
many o f these people can be put into an economic position in which
they can earn an adequate living.
Economic growth will not in and of itself guarantee the fulfillment
o f our public responsibilities. Thus, in addition to encouraging eco
nomic growth, we must, particularly in the near future, take other
steps. First, we must reconsider the priorities of present public ex
penditures. Much of our budget is now devoted to various subsidies
which favor special groups, and from which large savings could be
realized. Second, we must direct to the public sector, through taxa
tion, any additional resources that will be needed. Any attempt to
increase the level of tax revenues should be begun by strengthening
and broadening the tax base by reducing the favoritism extended by
the tax laws to some individuals and groups. But if we find that
even with an overhaul of the tax system and elimination o f present un
economical public programs, the level of revenues is inadequate to sup
port the expenditures required to meet these public responsibilities,
we must raise tax rates to levels appropriate for a responsible fiscal
policy. Third, having made the resources available, government must
effectively utilize them to accomplish its objectives.
In the longer run, however, economic growth must play a crucial
role in the achievement of our goals.
As the Communist economies expand rapidly, our own accomplish
ments must keep pace. We must have an economy which can support
a foreign policy sufficient to keep the Western world advancing to
ward an ever more democratic way of life and the uncommitted na
tions of the world outside the Communist sphere of influence. A t
home, we must continue to have rising consumption standards and
we must carry on our public activities at a level appropriate to a
country o f our wealth.
B. T H E IM PORTANCE OF H IG H -LEV EL EM PLO YM ENT
H igh rates of employment are important not only as a means to
economic growth, but as an important goal o f policy in itself. Unem
ployment is a serious social problem. In our society, work for those
physically able is a prerequisite for self-respect; the ability to find
work is thus an essential characteristic of the good society. Unem
ployment is also an important cause of poverty, and because of the sud
EMPLOYMENT, GROWTH, AND PRICE LEVELS
7
den loss o f income which it entails, disrupts the plans and aspirations
of those affected.
In recent years, unemployment has become an increasing problem.
The rate o f unemployment in the last recession was considerably
higher than in the two preceding postwar recessions. In the present
recovery, unemployment is still running at a rate of 5.6 percent, con
siderably above the average rate of 4.3 achieved in the period 1955-57,
and only one-half percent below the rate which prevailed at the trough
o f the recession of 1953-54. There has also been a substantial increase
in unemployment of long duration, much of it originating in goodsproducing industries, and involving heads o f households. There has
also been an increase of involuntary part-time employment.
A part of the unemployment is concentrated in chronically depressed
areas which have had unemployment rates averaging about twice as
high as those in the rest of the Nation in recent years. Generally, these
areas have recovered more slowly from the recession, and some have
poor prospects for future prosperity.
C. TH E IM PORTANCE OF PRICE-LEVEL STABILITY
Stable prices are a desirable attribute of the American economy.
When inflation occurs, some groups gain and others lose in a pattern
which is unjust. On the whole, those individuals in the most vulner
able economic position suffer the greatest losses. Retired persons par
ticularly, who receive little earned income and who frequently rely on
fixed interest incomes and transfer payments which are only slowly
escalated, are much the most important group who suffer from infla
tion. Inflation has led to little shift in the distribution of income be
tween property and labor.
Inflation, if it becomes severe enough, can also seriously interfere
with the efficiency o f the economy. Management may become care
less in its investment decisions and in watching its costs. So far, there
is little evidence that the United States has been affected in this way.
Policy is also confronted with difficult choices in times of inflation.
Growth and employment cannot be promoted as effectively if rising
prices circumscribe policy actions. This has probably been the heav
iest cost that inflation has placed on the American economy in recent
years.
II. T h e A m e r i c a n G r o w t h P o t e n t i a l
In order to determine the growth potential of the American econ
omy, members of our staff undertook a statistical analysis of the
historical record. This analysis was then used as a basis for the alter
native projections of future growth which are presented in table 1
below. These alternative projections, which, of course, are based on
different assumptions about the future behavior o f those factors
which determine the rate of economic growth, provide a realistic
range of possible future growth rates.
Projection A is based on the assumption that our economic affairs
are managed in such a way that a high level of prosperity is main
tained. Thus, it is assumed that unemployment averages only 3 per
cent by the mid-1970’s, and that job opportunities are sufficiently
abundant to attract a relatively large proportion of the population
EMPLOYMENT, GROWTH, AND PRICE LEVELS
8
into the labor force; capital accumulation and the composition o f out
put are assumed to follow the historical pattern established in past
periods o f prosperity. On these assumptions, the growth rate is 4.5
percent i f measured from the output potential for 1959, and 4.9 per
cent if measured from the preliminary estimate of the actual output
for 1959. Both of these rates exceed the average rate for the past
50 years.
Projection B is based on somewhat more modest assumptions:
specifically, that unemployment averages about 4 percent, that the
recent trends in labor force participation rates continue, and that the
rate o f capital accumulation and the mix o f output follow the pattern
o f previous periods when growth was occasionally interrupted. As
table 1-1 indicates, these assumptions, when applied to the 1959 output
potential, yield a growth rate of 3.9 percent; when applied to the pre
liminary estimate of actual 1959 output, they yield a growth rate of
4.3 percent.
Finally, projection C is based on the assumption that public and
private policies continue as in the recent past, and that therefore
growth is frequently interrupted. Unemployment is assumed to
average 5 percent, and the labor force is assumed to grow more slowly
than was assumed for projection B, because, with high unemployment,
labor force participation rates are lower. Continued inadequate
mobility of labor and capital is assumed, and capital is assumed to
accumulate at a lower rate than was assumed for projection B. The
resultant projection is 3.4 percent, measured from potential output
for 1959, and 3.8 percent, measured from the preliminary estimate
of actual output for 1959.
None of these projections, then, is based on the assumption of a
radical change in our economic way of life or economic circumstances.
Thus, no major depression, like that in the 1930’s, is assumed. Nor is
it anywhere assumed that the Government imposes an elaborate sys
tem of controls designed to force a certain rate of saving or pattern of
consumption. This last point is of particular importance, for it
means that without relinquishing our cherished freedoms we can
nevertheless enjoy a rate of growth of output substantially higher than
that experienced in the past. What is required, however, is that the
T a b le
1—1 . — Selected indicators o f econom ic growth 'potentials , 1 9 5 9 -7 5
[P e r c e n t in crease per ye a r] i
P r o je c te d
p o te n tia l
g r o w t h r a te s for 1959
to 1975
Indicator
A
T o t a l la b o r fo r c e __________________________________________________
T o t a l e m p l o y m e n t , in c lu d in g th e A r m e d F o r c e s ________
A v e r a g e a n n u a l h o u r s o f w o r k ________________________________
T o t a l m a n -h o u r s __________________________________________________
S to c k o f p r iv a te p l a n t a n d e q u ip m e n t in c o n s ta n t price:
A v e r a g e a ge o f c a p it a l s t o c k ____________________________________
G r o s s n a tio n a l p r o d u c t , in c o n s ta n t p r ice s:
F r o m 1959 a c tu a l (p r e lim in a r y e s t i m a t e ) _____________
F r o m 1959 p o t e n t ia l _________________________________________
1 C o m p u t e d b y a c o m p o u n d in te r e st fo r m u la , u sin g
2 A s s u m e s 97 p e r c e n t o f th e la b o r force e m p lo y e d in
3 A s s u m e s 9 6 p e r c e n t o f th e la b o r force e m p l o y e d in
4 A s s u m e s 95 p e rc e n t o f th e la b o r force e m p lo y e d in
B
1.9 1.7
2 1.9
3 1.7
-1 .4
.5
1. 5 1 . 2
3.2 2.7
-.2
-.1 5
4.9 4.3
4.5 3.9
th e in itia l a n d te r m in a l y e a r s.
1975.
1975.
1975.
C
1.5.
1.5
.9
2.2
—. 1
3.8.
3.4
*
-.6
EMPLOYMENT, GROWTH, AND PRICE LEVELS
9
Government pursue growth-facilitating policies: by monetary and
fiscal measures, aggregate demand must be kept sufficient to insure a
high level of prosperity and employment; and increased resource mo
bility and competition must be actively encouraged. If the Govern
ment does not make economic growth an explicit objective, economic
potential will not increase as rapidly as it might. Even so, it will con
tinue to outrun actual performance.
III. T he R ecent Record
In the last few years, total output has been growling at a rate sub
stantially less than the potential rate at which it could have grown.
From 1953 through 1959 the average rate of increase of output was
only 2.4 percent. In contrast, the average rate of increase of the poten
tial of the economy was about 4 percent. Had full potential been
realized over this period, gross national product would today be
greater by from 5 to 7 percent.
Several other symptoms of weakness in the economy have become
evident. Unemployment has been increasing. For the years 1946 to
the 3d quarter of 1959, unemployment has averaged 4.5 percent of the
labor force. This is greater than the long-run average.
Unemployment during periods of prosperity lias also been increas
ing. The rate of unemployment was 3 percent in 1947-48, 4.2 per
cent in 1956-57, and now, in the present boom, is 5.1 percent. Some
of the recent unemployment is, of course, related to the steel strike,
but, even allowing for this, the rate is alarmingly high for good times.
Nor is the prospect for the remainder of the present boom favorable:
at best, unemployment will probably not clip below the level of 4 per
cent for more than a few months during the current boom.
Similarly, the recession unemployment rate has increased. In 1949
it was 5.9 percent, and in 1954, 5.6 percent; in 1958, however, it was
6.8 percent,
During this period of weakening booms and deepening recessions,
the price level rose. Consumer prices are 9.7 percent higher now than
in 1953. Wholesale prices are higher by 8.3 percent, and the GNP
deflator, the most comprehensivej)rice index, by 13.9 percent.
IV. Economic G row th and Price S tability
This is not an encouraging record. But could we have done better ?
Could we have had greater growth and less unemployment without
more, or perhaps with even less, inflation? And can we do better in
the future ? Answers to these questions are not easy to come by. At
a minimum, some knowledge of the relationship between economic
growth and the behavior of the price level is required. Accordingly,
we have spent much time and energy investigating this relationship.
Before turning to a review of our findings, however, we must consider
briefly three widely held theories about this relationship, theories
which wTe believe to be incomplete and, therefore, inadequate as bases
upon which to construct a satisfactory economic policy. These three
theories, while different in some ways, are alike in one very important
respect: each, in its own way, supports the view that any conflict
between economic growth and a stable price level is readily resolvable.
48795— 59------- 4
10
EMPLOYMENT, GROWTH, AND PRICE LEVELS
A . T H R E E THEORIES OF GROW TH A N D PRICES
1 . Promoting growth by -fighting inflation
The first of these theories, which appears to be the foundation of
our present economic policy, argues that growth is stimulated by tak
ing the most vigorous measures to stop inflation. This theory, which
has never been presented in detail, appears to have the following com
ponents: (1) inflation disrupts the growth process by reducing the
individual’s incentive to save, by leading to the senseless hoarding of
goods, and by causing carelessness in business investment decisions in
plant and equipment and in inventories; (2) for these and other rea
sons any inflation will inevitably accelerate from creep, to trot, to
gallop; (3) stable prices are assured provided the Federal budget
is balanced, preferably at constant or falling levels, and if the supply
of money is managed with the primary objective of stabilizing prices;
(4) given an environment of price level stability, the economy will
experience sustainable, healthy, growth.
The theory is fallacious because it overlooks these points: First, it
assumes that all inflation is a classical demand inflation in which “too
much money chases too few goods,” that prices are determined
smoothly and quickly by the relation between supply and demand,
with decreases in prices and wages occurring as rapidly and easily as
increases, and that the monetary authorities can control the sup
ply of money and credit quickly and effectively, and can moderate
demands in all or most of the sectors of the economy. Our studies
indicate that these assumptions are not warranted. At least in some
parts of the economy, there are sufficient concentrations of market
power to permit prices to be raised even in the absence of excess
demands. In a wider portion of the economy, prices and wages fail
to fall when supply exceeds demand. Moreover, monetary policy
works more slowly and more selectively than this view suggests.
Given rapid shifts in demand, with an excess now in one sector,
now in another, but with total demand not in excess, and the preva
lence of market power and downward rigidities, monetary policy
can stabilize the price level only if used in such drastic measure that
a high level of unemployment is also generated.
Second, some portion of the recent inflation, particularly in medical
services, was caused by shortages of supply in the face of rising
inelastic demands; if inflation is to be defeated in the longrun, these
supplies must be substantially increased. But this will cost budget
money, and the unwillingness to incur these particular increases in
public expenditures will inexorably worsen the inflation problem in
the future.
Third, maintenance of a continued adequate rate of growth in the
longrun requires that investment by Government in education con
tinue to raise average education levels of the labor force, that invest
ments in public works keep pace with the growth o f the private
economy, and that public services be provided at adequate levels. A
constant or falling budget without a reranking of the priorities o f ex
penditures, will preclude adequate public investments for growth.
Fourth, and most important, the severe restrictive application o f
present monetary and fiscal tools which would be necessary to halt
the increase in prices would keep the economy in a perennial state of
EMPLOYMENT, GROWTH, AND PRICE LEVELS
11
slack. With private capital accumulation heavily dependent upon
the state of demand in product markets, and with the advance in
productivity influenced by the need for output, the rate of growth
of the economy would be cut by a substantial amount.
It is true that inflation can have adverse effects on economic growth;
if the inflation is severe enough this is a certainty. In the United
States, in recent years, there is no evidence that this occurred. The
rate of private saving has continued undiminished, though the form
in which the savings are held has been changed; similarly, the rate of
business saving has not been reduced. Nor is there any evidence that
rising prices have led to the hoarding of goods, either by households
or by business in the form of inventories. Probably, rising prices
during the last capital goods boom did lead to some carelessness in
business investment; but that many investments turned out to be un
sound is more the result of policies which did not let demand grow
with productive capacity and which finally led to recession.
The hazard of a creeping inflation turning into a gallop is truly
perennial, and requires constant anti-inflationary efforts. Monetary
and fiscal authorities must be continuously vigilant against this con
tingency. But this does not mean that growth is thereby promoted;
nor does it follow, assuming policy continues as in the past, that if a
creeping inflation is brought to a halt, the creep will not renew as
soon as policy allows for more growth.
The historical record, which is summarized in tables 1-2 and 1-3,
easts considerable doubt on the view that inflation and growth are in
compatible. Table 1-2 gives changes in output and prices, decade by
decade, for several countries. Similarly, table 1-3, which covers the
postwar period only, gives annual average changes in prices and output
for the United States and Western Europe. The data in both tables
point to a single conclusion: there is no simple relationship between
changes in output and changes in prices. Rapid economic growth has
at different times been associated with rising, constant, and falling
price levels, just as periods of slow growth, or, indeed, of no growth,
have been marked by every manner of price behavior.
12
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T a b le
1 -2 . — Growth o f output and changes of prices, successive decades, in some
advanced countries
Output
growth
(percent)
Change from pre
ceding decade
Price change
(percent)
Change from pre
ceding decade
UNITED STATES
UNITED STATES
1 8 6 9 -7 8 ___________________
1 8 7 9 -8 8 ___________________
1 8 8 9 -9 8 ___________________
1 8 9 9 -1 9 0 8
_______
1 9 0 9 -1 8
_________
1 9 1 9 -2 8
__________
1 9 2 9 -3 8
________
1 9 3 9 -4 8
__________
1 9 5 0 -5 4 1__________________
1 8 7 4 -8 3 ___________________
1 8 8 4 -9 3 _________________
1 8 9 4 -1 9 0 3 ________________
1 9 0 4 -1 3 ____
1 9 1 4 -2 3
______
.
1 9 2 4 -3 3 _
_______
1 9 3 4 -4 3 - .
__________
1 9 4 4 -5 3
__________
88.0
38 2
5 6 .4
3 9 .2
.2
7 1 .7
2 9 .0
6
— 1 9 .5
-1 2 .9
+ 9 .3
+ 3 4 .6
+ 4 6 .3
-1 8 .0
+ 3 4 .2
+ 3 4 .5
Output
growth
(percent)
5 4 .8
45. 2
5 0 .6
2 9 .0
2 9 .1
2 6 .0
5 2 .0
Price change
(percent)
-1 6 .0
— 7 .1
+ 2 0 .7
+ 6 4 .0
0
-7 .1
+84. 8
ITALY
UNITED KINGDOM
1 9 6 5 -7 4 _
.......... ..
1 8 7 5 -8 4
____________
1 8 8 5 -9 4
_ ____________
1 8 9 5 - 1 9 0 4 ._
__________
1 9 0 5 -1 4
____
1 9 1 5 - 2 4 - - - _ __________
1 9 2 5 -3 4
1 9 3 5 -4 4
1 9 4 9 - 5 3 ___________________
21 2
.
37.
2 9.
16.
6
2
5
-.8
21.1
30. 2
22. 7
-1 5 .0
-.9
+ 9 .6
+106. 0
— 16. 6
+ 1 7 .1
+ 5 1 .3
1 8 6 4 -7 3 ___________________
1 8 7 4 -8 3
_
__________
1 8 8 4 -9 3
_
________
1 8 9 4 -1 9 0 3 __________
1 9 0 4 -1 3 _
_ ________
1 9 1 4 -2 3
1 9 2 4 -3 3 ___________________
1 9 3 4 -4 3
_______
1 95 0 -5 4
_
4. 2
1 9 .4
30. 7
9 .3
40. 6
.8
2 3 .9
+13. 1
-.8 7
-2 .6
+ 1 1 .4
+260. 0
+ 3 5 .0
+ 1 8 .5
+ 4 , 442. 4
30. 6
. 7
40. 5
4 0 .3
2 5 .1
2 3 .2
3 6 .3
6 0 .1
+ 7 .5
-1 2 .0
+2. 7
+ 1 3 .9
+ 9 9 .2
-1 1 .3
+ 1 3 .0
+ 6 2 .4
24. 3
3 8 .4
41. 9
35. 8
3 6 .7
1 6 .1
2 8 .5
+ 3 .5
+126. 5
-2 6 . 7
+ 2 5 .6
+ 1 1 9 .3
11.8
8
SW EDEN
JAPAN
1 8 8 3 -9 2
_____________
_______
1 8 9 2 -1 9 0 2
1 9 0 8 -1 2
____ 1 9 1 3 - 2 2 ___________________
1 9 2 3 -3 2
____
1 9 5 3 - 4 2 ___________________
1 9 5 0 -5 4 1
i
6 4 .8
3 4. 7
4 5 .3
67. 4
5 2 .1
10.6
+35. 4
+ 3 8 .2
4 - 8 6 .5
-7 .1
+ 2 8 .6
+ 1 ,8 5 6 .3
1 8 6 4 -7 3 ___________________
1 8 7 4 -8 3 ___ _______________
1 8 8 4 -9 3 _ _ ____________
1 8 9 4 -1 9 0 3 ________________
1 9 0 4 -1 3 ___________________
1 9 1 4 -2 3 ___________________
1 9 2 4 -3 3 ___________________
1 9 3 4 -4 3
1 9 5 0 -5 4 1_________________
21
NORW AY
DENM ARK
1 9 0 0 -1 9 0 8
1 9 0 9 -1 8
1 9 1 9 -2 8
1 9 2 9 -3 9
1 9 5 0 -5 4
_____________
- - - ____
________
__________
3 3 .0
2 9 .1
3 8 .1
3 3 .5
+ 7 1 .9
+ 6 0 .8
-3 7 . 5
+174. 6
2 5 .1
4 0 .1
.2
3 3 .7
+ 5 8 .3
-1 2 . 7
-7 .1
+145. 4
NETHERLANDS
1 9 0 4 -1 3
___________
__________
1 9 1 4 -2 3
1 9 2 4 -3 3 - _ ____________
1 9 3 4 - 4 3 ___________________
1 9 5 0 -5 4 »________ _______ _
1Last
1 8 7 4 -8 3 ___________________
1 8 8 4 -9 3 - . _
. _______
1 8 9 4 -1 9 0 3 ________________
1 9 0 4 -1 3 ___________________
1 9 1 4 -2 3 ___________________
1 9 2 4 -3 3 ___________________
1 9 3 4 -4 3 ___________________
1 9 5 0 -5 4 ___ _______________
— 6. 2
0
figure fo r all countries is not a decade by decade comparison.
Source : Computed from data appearing in S. Kuznets, Quantitative Aspects o f the E co
nom ic Growth of Nations, Econom ic Development and Cultural Change, vol. V, No. 1.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T a b le
13
1 -3 .— Average annual changes in per capita output1 and prices,2 6y
country, 1949-58
[Percent]
1949-58
Output
Austria ___ _______ __________________
Germany (F. P .)______________________
Italy______ ___ _____________________
France________________________ _______
Switzerland___ ______ _ ______ ___ _
Netherlands__________ ____ ____ _______
Belgium___ _ _ _ ______ _ __________
Sweden____ ________ _
Norway ____________ ______________
Denmark ... _ ____________ _____ ___
United Kingdom _______ _ __ _____
United States___ ____ ______
.5
6.3
5. 5
4.0
3. 5
3.2
2.6
2. 5
2. 5
2.1
1.9
1.9
6
1953-58
1949-53
Price
7.2
3 3.3
2. 9
7.0
5 1.2
4.3
* 2. 5
5.1
5. 4
4.0
4. 5
2.4
Output
5.8
5.8
4.2
3.9
2. 7
3.0
2.1
3. 6
10.0
2.8
2.2
4. 5
Price
11.9
4 4.8
4. 5
9. 9
1.1
4.9
2.3
7. 5
7.4
5. 5
5.1
2.7
Output
6.9
5.4
5.3
3.9
3.2
3.6
2.4
2.9
1.6
1.6
1.8
( - 0 . 1)
Price
3.4
2.3
1.7
4.6
6 1.2
3.8
6 2.7
3.2
3.8
2.9
4.1
2.3
Real gross national product per capita.
Price indexes of gross national product.
s 1950-58.
* 1950-53.
* 1949-57.
« 1953-57.
Source: OEEC, “ General Statistics.” Cited in M. Leiserson, A Brief Interpretive Survey of WagePeace Problems in Europe, Steady Paper No. 11, p. 36.
1
2
Let it be emphasized, however, that to deny the validity of this
theory is not to deny that a condition of excess demand is a danger
to be avoided. Nor is it to deny that monetary and fiscal policies, even
when designed to influence only aggregate demand, have an impor
tant role to pla}^. What is denied is the idea that to promote economic
growth it is sufficient to restrict aggregate demand to a level such that
the price level does not rise.
#. Fighting inflation by promoting growth
Others have argued that inflation is sometimes the result, not of
excessive demand, but of insufficient demand. In such situations,
policies aimed at rapid economic growth would at the same time serve
to check upward pressures on prices, if not actually to reduce them.
How is it possible that an increase in aggregate demand can result
in a fall in prices? Assume for the moment that wages increase
at some more or less fixed rate. The objective, then, is to force in
creases in productivity in excess of this rate of increase in wages so
that unit labor costs will fall. The available evidence suggests that the
rate of increase of productivity is greater when output is expanding
than when it is not. Similarly, fixed costs which include capital
charges and nonproduction worker salaries are favorably affected
by increasing the level of output: unit fixed costs will fall as output
expands. Again, an expansion of demand, and hence of output, is
seen to put downward pressure on prices.
It is clear, of course, as the proponents of this theory would agree,
that it is applicable only when excess capacity is widespread; it obvi
ously cannot apply when aggregate demand is nearly or actually
excessive. Furthermore, an expansion of demand may not reduce
upward pressure on prices even when there is excess capacity in some
(or even many) sectors of the economy. The rate at which wages
increase is influenced by the level o f demand. Also, it is doubtful
14
EMPLOYMENT, GROWTH, AND PRICE LEVELS
that, with present monetary and fiscal policies, any increase in demand
can be directed to only those industries faced with excess capacity.
This theory does, however, raise an interesting question. I f there
is a genuine dilemma between growth and price level stability with
the given policy weapons, how much growth would have been gained
at the expense of how much of an increase in prices? The evidence,
for recent years at least suggests that a somewhat faster increase in
demand would have led to a significantly higher rate of growth of out
put, while having only a minor impact on prices. The choice that was
actually made appears to have cost a lot of output both through slow
growth and recession, without cracking the inflation.
3. Growth and inflation as separate problems
It has also been argued that the behavior of the price level and the
behavior o f real output are largely independent of each other. The
rate o f economic growth, in this view, is determined by the level of
aggregate demand; when growth is slight, it is because aggregate de
mand has been unduly restricted. O f course, excessive aggregate de
mand can cause the price level to increase. Often, however, as in recent
years, inflation is the result, not of excess demand, but of concen
trations of market powder. Thus, to check inflation, the Govern
ment must either destroy these concentrations of market power, or to
take a less favorable alternative, control prices directly. But once
having gotten to the heart of the inflation problem, the Government
will be free to employ less restrictive monetary and fiscal policies in
the interest o f more rapid economic growth.
This view, like the other two reviewed here, contains an important
element o f truth. Market power is a part of the inflation story. But,
again, it is not the whole story. It can account for little of the inflation
in the nonmanufacturing sectors of the economy; and even in the
manufacturing sector, other causes, for example, the existence o f
bottlenecks, and increases in material and labor costs, must be given
their due.
B. IN FL A T IO N A N D GROWTH I N RECENT YEARS : A N A N A LY SIS
As the foregoing discussion indicates, the three theories reviewed
here must be rejected as being insufficient portrayals of the relation
ship between the behavior of prices and output. This is not to say
that the individual messages of these theories can be disregarded.
Quite the contrary; the special emphasis of each has relevance for the
developments of recent years, as our own analysis of the record, to
which we now turn, will show.
1 . Causes of the recent inflation
The postwar inflation did not end with the Korean truce. In fact,
roughly one-quarter of the post-World War I I price inflation took
place after mid-1955. Nor has this latest round of inflation gone un
noticed; if anything, it has occasioned more comment than the two
previous rounds (1946-48 and 1950-53). The former were more
readily understood, within the framework of traditional economics,
as the usual economic heritage of war and reconversion. Not so,
however, for the “ creeping inflation” of the post-Korean period.
In some measure, the recent inflation is undoubtedly a statistical
EMPLOYMENT, GROWTH, AND PRICE LEVELS
15
fiction. That is to say, onr price indexes are biased in an upward di
rection. Most serious, perhaps, is the fact that changes in the quality
of products are not adequately reflected in the indexes. Since adjust
ments for quality changes must, to some extent anyway, be a matter of
judgment, it may well be that they cannot be made in such a way that
the objective nature of the indexes will not be compromised. But
granting that our indexes are not perfect measures, it does not follow
that the post-Korean inflation is entirely appearance. It would be
pleasant if this were so; unfortunately, it is not likely.
Before turning to the specific causes of the recent inflation, one more
general observation must be made. The inflation which did occur was
not spread evenly through the economy. Rather, it was concentrated
in relatively few sectors: in certain of the consumer services, that is,
medical care, personal care, and rent; in steel and machinery; in
Government; and in construction.
(a)
Inflation and economic instability.—The recent inflation can
to a very considerable exte1^ h e traced directly to economic instability.
The pace o f recovery from the 1954 recession low was extremely
rapid. Consumer spending on automobiles and, to a lesser extent,
housing, made possible by the extension of consumer and mortgage
credit, led the way back to prosperity. Later on in 1955 other indus
tries— steel, other consumer durables, machinery— also caught fire.
The rapid expansion of activity in the auto industry is of particular
importance, however, for as a result the auto companies realized un
usually large profits. Even though the share of value added
received by labor fell during 1955, the auto wage settlement of that
year was considerable. Moreover, this wage settlement was a key
bargain: it influenced settlements in other industries, particularly that
in steel, during 1956.
The spectacular capital goods boom which got underway in mid1955 can also be largely explained by the sudden surge of economic
activity earlier in the year. O f course, once started, the boom in a
sense explained itself; businessmen, that is, get caught up in their own
optimism. And undoubtedly only a portion of the fixed investment of
1955-57 is to be related to an immediately previous expansion of con
sumer demand. In any event, the boom was sufficient to produce ex
cess demand in the machinery industries, and, as a result, marked in
creases in machinery prices. Similarly, the pressure of demand for
factories and other forms of commercial construction pushed up
profits, costs, and prices in this segment of the construction industry.
In addition, it drove up costs and prices in the residential construc
tion industry, where output was actually falling.
As expenditures on plant and equipment increased, so did other
types of business spending. Research activities were expanded. A d
vertising budgets were increased. Generally, there was a considerable
rise in the employment of administrative personnel. To a certain ex
tent, this was but a continuation of a trend, an expression of changing
technology. Also, businessmen may not have figured their costs as
closely as they should have; such carelessness, however, is a characteris
tic of all booms. Here again, though, one cannot escape the
conclusion that the increase in the sort o f spending men
tioned above was related to the sudden return to prosperous condi
16
EMPLOYMENT, GROWTH, AND PRICE LEVELS
tions. But when total demand failed to grow in accordance with
expectations established by the rapid growth of early 1955— real out
put expanded no more than 1 percent per year from the last quarter
of 1955 through the third quarter of 1957—businessmen wTere stuck.
Expenditures for plant and equipment and other fixed-cost commit
ments had been based on a greater rate of increase of output. Over
head costs thus turned out to be higher than had been expected. In
many instances these increases were passed on in the form of higher
prices.
It would certainly appear, then, that insofar as the price level was
concerned, the die was cast during 1955. The initial upsurge in profits
gave rise to large wage settlements in autos and subsequently in steel;
these long-term settlements, in turn, influenced other industries’ wages,
at least in those industries which were enjoying prosperous conditions.
Then, too, the suddenness o f the economic upswing helped to trigger
the inflationary plant and equipment boom. Finally, once the boom
began to fade and the pace of economic expansion slowed, businessmen
found themselves in an awkward position. Because they had been
overly optimistic about the future, and had on that basis incurred addi
tional overhead costs, they saw their unit costs rise. Where they could,
therefore, they increased their prices.
(b)
The exercise of market power.—In many American industries,
a small number of firms account for well over half of all
sales. Potential market power—that is, the power to raise prices
in the absence of excess demand—is therefore widely dis
tributed through the economy. There are always limits to the exercise
of market power, in the form of new entrants into the industry, price
cutting to gain a larger share of the market by existing firms, the
substitution o f products of other industries, and the increase of im
ports. Because of the uncertainties in such situations, including the
unknown degree of effectiveness of these limiting factors, as well as the
possibility of antitrust prosecution, market power is rarely exercised
to the fullest possible extent. Thus, at any one time, the potential
inflationary influence of market power is likely to be quite large, and
the extent to which it is exercised dependent upon specific historical
circumstances, including the attitudes and ideals held by the wielders
of this power, the leaders of particularly powerful corporations and
their opposing unions.
It is impossible to assign a precise estimate to the contribution
which the exercise of market power made to the recent inflation. Our
study did not undertake a systematic, industry-by-industry survey
o f this problem. Nor would such research have yielded exact answers
in many instances, since several industries in which market power is
strong also experienced strong demands. Conversely, several o f the
industries that are most competitive fared quite poorly in the last
business cycle. The influence of market power could, however, be
clearly identified in at least three instances in our analysis of the
historical data.
First, the extraordinary behavior of steel prices must at least in
part be attributed to this factor. In the inflation in the hard goods
sector of the economy, the price of steel provided a central thrust,
rising by 29 percent from 1954 through 1958, serving to drive up costs
in the many user industries, and adding to the inflation psychology
EMPLOYMENT, GROWTH, AND PRICE LEVELS
17
which was one of the characteristics of the capital goods boom. The
very large profits earned in the upswing of 1955 and early 1956 helped
produce the large 3-year wage settlement of 1956. The companies, in
turn, seeking to pass on the unit labor cost increases and widen
the margins allowed for profits plus depreciation, raised prices. As
the automatic wage increases of the contract occurred, the companies
continued to raise prices, finally producing a total price increase far in
excess of other price increases in the economy. The level of demand,
while high during large parts of the period, was clearly lower than in
previous booms, and no higher than in many other industries which
had much smaller price increases. The state of demand in the labor
market was clearly quite unfavorable.
The experience in the steel industry was a classic illustration of
the profit-wage spiral at work. There is no point in allocating blame,
since both sides gained at the expense of the rest of the economy.
A t the time that key bargains are made, each side is convinced that
it is seeking to do no more than maintain its proper share of the
total income. Analyzing ti e business cycle, trough to trough, profits
rise first— which is certainly very strong evidence against adopting
a pure wage-push view. But if one breaks into the spiral at a subse
quent stage, the companies appear to be doing no more than seeking
to maintain their margins, including the rising depreciation allow
ances. It should be added, however, that in the last boom, the price
leader of the industry, United States Steel Corp., appears to have
increased its profit target, a move which is partly the reflection of
the improvement of its relative cost position within the industry.
This profit-wage spiral could not have occurred if the demand for
steel had been weak. Some of the consuming industries, including
the capital goods industries, were faring very well and were able to
absorb the cost increases. In the longer run, the rising competition
o f foreign steel also limits the spiral. But given the conditions of the
last boom, the increase in the price of steel would clearly have been
less if the industry were competitive.
A second instance of the exercise of market power is the ability
of many industries to pass on their higher unit overhead costs. In
a strictly competitive system, companies would have absorbed the losses
caused by overinvestment and overcommitment in nonproduction per
sonnel. But, in fact, the influence of costs on prices, particularly when
similar costs are experienced by all the firms in the industry, is greater
than one would expect under strict competition.
A third influence of market power is the failure of prices to fall
when demand falls in recession, or for many of the sectors which expe
rience unfavorable shifts of demand during prosperity. In the case of
wages, where downward rigidity in times of unemployment is almost
universal except in really disastrous circumstances, this pattern was
found even before American workers were widely organized. But in
the case o f prices, the phenomenon appears to be becoming more wide
spread. The experience of the recession o f 1958 was clearly worse in
this respect than the recessions of 1954 or 1949.
(c)
Inflation in the services sector.—The increase in the Consumer
Price Index was due more to increases in the prices of services than
to increases in the prices of goods. No single explanation can account,
however, for the various increases in service prices, although the fail
18
EMPLOYMENT, GROWTH, AND PRICE LEVELS
ure of productivity in selected service industries to increase at a rate
even closely approximating the increase in the average for the economy
as a whole undoubtedly accounts for some of the price increases which
did occur.
In the case of urban mass transportation, the price o f which rose
very sharply over the period considered here, the explanation appears
to be a decline in demand which resulted in an increase in costs. An
unfortunate dynamic process is at work here; as price increases, the
share o f public transportation in total transportation falls, so that costs
and hence prices are further increased. To halt the rise in the price of
urban public transportation requires therefore that in one way or an
other this circular process be broken. It should be noted, though,
that urban transportation is currently overweighted in the Consumer
Price In dex: the quantity purchased has declined relatively since the
last revision of the index.
Medical care prices also rose rapidly. The inflation was most acute
in the case of hospital services, so that the cost of hospital insurance
also increased dramatically. This part of the inflation is attributable
to a tremendous increase in demand which was not offset by a similar
increase in supply. Nor is it at all likely that the rising cost of medical,
particularly hospital care will be checked until supply is increased by
additional public programs and an improvement in the organization of
the services is effected.
The explanation for the increase in the prices o f repair services,
which was considerable, is largely to be found in the movement o f
wages in manufacturing industries. Our studies indicate that mechan
ics’ wages are closely related to wages in manufacturing; this is true
both of the longrun level o f these wages and o f shortrun rates of
increase. That personal care prices (that is, for haircuts, beauty
parlor services, etc.), rose is probably to be explained in part by the
fact that relatively few people entered some of these fields; in other
instances, it appears that an exercise of market power explains the in
creases. In the case o f services such as laundry and drycleaning, the
low wages in which rose less than wages generally, the failure of pro
ductivity to increase appears to be the answer. The wages of the
unskilled workers employed in these trades fell relative to wages in
manufacturing, but not by as much as the productivity differential be
tween these sectors widened.
Kent, a particularly important component of the service price index,
continued to drift upward during the post-Korean period. In part,
this was a lagged response to the abolition of rent control. Also, con
struction costs were increasing. And, in some sections of the country,
there was a continuing imbalance between the supply of and demand
for housing.
2. Causes of the slowdown in economic growth
Just as with the inflation of the last few years, several reasons must
be given to account adequately for the recent slowdown in the rate
of economic expansion.
(a) Economic instability.—The single most important cause of the
slowdown was the instability o f the economy. During the 6 years,
1953-59, second quarter to second quarter, there were two recessions,
accounting for 10 out of a total of 24 quarters. Economists
have not so far been able to quantify the extent to which
EM PLOYMENT,
19
GROW TH, AND PRICE LEVELS
recessions result in a loss of capacity, that is, give rise to a loss
of growth which is not made up in the subsequent boom. It does
processes which drive the economy upward. Investments are put off;
the rate of increase of research budgets is slowed ; and resistance to
technological change stiffens. Of course, recessions also promote
greater efficiency of operations, although the postwar evidence sug
gests that small recessions are just as effective in this respect as larger
ones.
Losses of output during recessions, the result of idle men and ma
chines, are not made up in subsequent booms. For the past 6 years,
this loss is the equivalent of a loss of 1.0 percent in total output.
(&)
Inadequate growth of demand.—If total output is to grow at
a rate approximating its potential, demand must grow at that rate as
well. In recent years, however, total demand has not grown at an
adequate rate. Table 4 shows the rates of growth of the several
components of final demand over the interval from the second quarter
of 1953 through the second quarter of 1959, and the seven quarters of
low growth during the last boom, that is, from the fourth quarter of
1955 through the third quarter of 1957. It can be seen that the demand
for goods and services by the Federal Government fell at a rate of
1.6 percent a year during the briefer period, and at the rate of 4.9
percent a year during the period 1953-59. The decline from 1953,
which was concentrated in 1954, was doe to the desirable reductions in
military spending at the end of the Korean war. But if a decline in
Federal Government purchases is not to serve as a depressant on the
growth of the economy, other components must grow at sufficiently
high offsetting rates. The growth of purchases by State and local
government did partially serve this purpose, but the rate of growth
of demand of the private economy was not great enough to fill the
remainder of the gap. Consumption grew at 3.4 percent per year over
the longer period, and 2.4 percent per year during the long plateau of
the boom.
T a b le
1-4.— Growth of gross national product and its components'. Constant dollars,
selected periods, 1953-59
[Average annual percentage rates]
Personal consumption
expenditures
Period
Total
GNP
Total
1953 2d quarter to
1955 4th quarter __
1955 4th quarter to
1957 3d quarter...
1957 3d quarter to
1959 2d quarter. __
1953 2d quarter to
1959 2d quarter...
Dura
bles
Non
dura
ble
Gross private domestic
investment
Government
purchase of
goods and
services
New construc
tion
Serv
ices
Non
farm
resi
dential
Pro
ducers
State
durable Federal and
equip
local
Other ment
3.9
4.2
7.3
3.2
4.3
10.2
6.4
3.9
-12.0
7.2
1.3
2.4
-1 .5
2.2
4.3
-8 .3
1.8
1.2
-1 .6
4.1
3.1
3.1
3.9
2.2
4.2
17.7
-6 .9
-6 .6
3.6
8.1
2.5
3.4
3.5
2.7
4.3
6.6
1.3
-.7
-4 .9
6.4
Source: “ U.S. Income and Output” table 1-5. Rates are compound interest computed from base and
terminal values.
20
EMPLOYMENT, GROWTH, AXD PRICE LEVELS
There is no reason why each of the components of gross national
product should grow at the same rate. From the point of view of
keeping the growth of the economy close to its true potential, it is
only the growth of total demand that matters. Thus, it would be in
correct to blame excessively tight monetary policies alone. Nor, for
that matter, can an excessively restrictive fiscal policy be singled out
as the villain. It is the overall impact of all Government policies
affecting demand which must be judged. Specifically, in the name of
economic policy, an all-out effort has been made in recent years to
keep Government expenditures down. In retrospect, the degree of
severity actually exercised was too great from the point of view of
economic growth. The economy was capable of supplying more Gov
ernment services. Some may have felt that extra Government expendi
tures were not desirable. But then monetary policy should have been
easier or, alternatively, taxes should have been lower, so that the
economy could have grown at its potential rate.
Rising prices immensely complicated the task of managing the
total level of demand by fiscal and monetary policy. But, as has been
argued above, the amount of growth that was given up for what was
at best a very minor contribution to the control of inflation, was large.
(c)
Trouble in the goods sector.—The goods-producing sector of the
economy was especially hard hit by the failure of demand to grow
sufficiently. From 1953 through mid-1959, the entire increase in the
labor force was absorbed by services, trade, Government, and related
industries. Employment in manufacturing, public utilities, and trans
portation grew not at all. Yet, by and large, the latter are the highproductivity sectors, and the sectors in which the rate of increase of
productivity has been large.
Four developments help to explain the lack of growth of demand in
the goods sector. First, Federal purchases fell drastically in the first
year and moved sideways thereafter. Second, consumers voluntarily
chose to spend a larger fraction of their incomes on services. The
huge backlog of demand for durables which had provided such a large
impetus to the economy in the latter half of the 1940’s had disappeared.
The backlog demand for housing had shrunk. With many of these
needs met, consumers spent more on restaurant meals, vacations, the
upkeep of their homes, and durables, and other services.
Third, while there was a shift in the pattern of consumption, it is
also true that the relatively small increase in consumer purchasing
power resulted in a squeeze on the demand for goods, particularly
durables. There is a strong upward trend element in the demand for
services. As standards of living rise, consumers become accustomed
to more and more services. So, when incomes fall, they are very re
luctant to cut back on their consumption of services; since purchases
of durables and some nondurables can be postponed, consumers can
spend a greater fraction of their incomes on services without difficulty.
Moreover, in the last few years, this upward trend in the demand
for services was reinforced by the increase in service prices; with
higher prices, that much more of total consumer purchasing power
was absorbed by the service sector.
Finally, over the longer interval, the behavior of foreign demand
contributed to the failure of the goods sector to grow.
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
21
S. The causes of economic instability
Since both the inflation and the slowdown of growth were partly
the result of economic instability, it is important that this latter
phenomenon be understood. The four most important sources of
instability are discussed briefly here.
First, business investment in plant and equipment continued, as
all through our modern history, to come in sharp spurts. Second,
and somewhat less understandable, were the gyrations in the budget
of the Federal Government; the placement of new orders for major
procurement was extremely volatile, and led to severe disturbances
m the hard-goods sector of the economy and to large-scale inventory
fluctuations. Available data do not permit a ranking of these two
influences in terms of their relative importance in bringing on the
1957-58 and earlier recessions. But both were clearly of great
significance.
Third, fluctuations in spending for consumer durables, made pos
sible by the availability of consumer credit, added considerably to
economic instability. The rate of spending on durables which occurs
in the first year or two of recovery is often unsustainable; this was
certainly the case in 1954—55, particularly in automobiles. As the
stock of durables increases, and as more and more consumers find
themselves saddled with larger repayments, the market for durables
inevitably weakens. This is not to say that the longrun expansion
of consumer credit has proceeded at an unsustainable rate; such an
expansion can continue for many more years. But rapid shortrun
expansions have proved to be unsustainable.
Fourth, inventory investment has been the most volatile compo
nent of total demand, and has accounted for a large fraction of the
total cyclical variation in demand. In recent years, however, it ap
pears that inventory fluctuations have been a result rather than a
cause of instability, although, of course, the evidence on this point is
not completely unambiguous. Fluctuations in orders and sales, in
duced largely by fluctuations in Government, plant and equipment,
and consumer durables demand, have triggered inventory movements.
It must be stressed, however, that all of the types of demand enu
merated above interact with each other and with the remainder of
the components of total demand. Fluctuations in plant and eouipment
spending are partly the result of fluctuations in demand for other
goods. Variations in consumer durables spending and consumer
credit are a part of the mechanism of recovery from recession. Even
fluctuations in Government purchases are, in some degree, the result
of fluctuations in Government revenues, at least when budget bal
ancing is a major concern.
V. E conomic P olicies
for
G rowth
and
P rice-L evel S tability
The tasks of economic policy are very difficult to achieve. So
much is evident from the foregoing analysis, which indicates that the
inflation, the slowdown in growth and the considerable economic in
stability of the last several years were all parts of a complicated
process. Clearly, then, perfection is impossible. It cannot be ex
pected that the price level will remain precisely constant, and that
economic growth will proceed smoothly and at a high rate.
22
EMPLOYMENT, GROW TH, AND PRICE LEVELS
The behavior of the American economy is the product of millions
of individual decisions, and so is not easily predicted. Moreover,
the present tools of economic policy have an impact at only a few
points in our predominantly private economy. Nor is such a private
economy a machine which, once understood, can be managed in some
simple best manner. The characteristics of the economy are contin
ually changing: no two business cycles follow an identical course;
successive inflationary episodes do not follow the same pattern; eco
nomic growth does not proceed according to a simple exponential
formula. It is impossible, then, for all these reasons, to devise a
blueprint which will guarantee the accomplishment of all of our
economic objectives.
Nevertheless, there is reason to believe that the performance of the
economy can be improved. But this means that economic policies
must be continually reexamined in the light of whatever new under
standing we gain about the functioning of the economic system; only
in this way can economic policies be adapted to the changing character
of the economy.
A. ECONOMIC POLICY I N RECENT YEARS
A full account of the many actions of Government, both large and
small, which have influenced the economy in the past several years
cannot be attempted here. But at the risk of some oversimplification,
the major policies which affect the level of employment and prices
and the rate of economic growth, that is, monetary and fiscal policies,
can be characterized— at least in broad outline.
1. Monetary policy
For several years now, monetary policy has emphasized control of
the money supply. During the period 1953-58, changes in the
money supply were accomplished by purchases and sales of very
short-term Government securities, and, in recessions, by reductions
in legal reserve requirements. The hope was that by limiting inter
vention in the money and credit markets to short-term open market
operations and changes in reserve requirements, the goal of economic
stabilization could be made most consistent with f ree-market resource
allocation. The degree of monetary restraint achieved was consid
erable. Between 1953 and 1959 the money supply rose at a rate of
only 1.9 percent per year. The growth of the money supply shows
an approximately countercyclical pattern. But the postrecession re
turn to tight money was much faster and more pronounced in 1958
than in 1954—55. Interest rates are much higher today than at any
time since World War I.
In determining specific policy actions, particular, though not ex
clusive, emphasis was placed on price level stability. The results,
however, were not all that might have been hoped. Although money
supply was not allowed to grow at the same rate as output, individuals
and businesses found many ways of utilizing their money balance
more effectively, thereby permitting the money supply to accommo
date a rising volume of transactions. Commercial banks, by selling
Government securities, were able to expand their loans. Financial
intermediaries other than commercial banks also assisted in this
process.
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
23
Of course, monetary restraint did affect the total level of spending.
The impact on spending occurred, however, only after considerable
time had passed, and was extremely selective among the sectors of the
economy. During recessions, corporations accumulate cash as they
reduce their inventories and fixed investment outlays, and pay less
taxes. Individuals reduce their average level of consumer debt. Gov
ernment deficits lead to an increase of the volume of short-term liquid
assets in the hands of the public, and to some extent in the hands of
the banking system. In the first years of recovery, such as 1954^55
and 1958-59, the Federal Eeserve System is unable to make its policy
of monetary restraint felt. The volume of bank loans rises very
sharply; consumer credit rises at an unsustainable rate; and even
the supply of mortgage funds remains quite ample for a period. Yet
this early phase of the business cycle is particularly crucial for the
subsequent behavior of the price level. Profits reach very large levels,
inducing large wage settlements. Business optimism, based on the
very high rate of expansion, helps to trigger the capital goods boom.
And the surge in consumer durables borrows from durable sales sub
sequently in the boom.
This weakness of monetary policy is appreciated by the Federal
Reserve System. After the experience of 1954-55, the Federal Reserve
sought to tighten credit much more quickly in the most recent upswing.
Still, the increase in bank loans in the current boom is just as great
as the last time. Consumer credit has risen somewhat more slowly,
but the rise will continue for a longer period. The lag in affecting
residential construction has recurred. And while the plant and equip
ment boom has been more moderate, this is probably explained by the
memory of the bad experience in the last boom.
When the signs of recession become clear and monetary policy
loosens, similar lags occur before spending is affected. After money
for investment becomes available, a number of months go by before
the loans are made and result in economic activity.
To the extent that we could determine, it appears that much the
major impact of monetary policy is on residential construction. In
this sector, the impact is so large that the level of activity is substan
tially greater in recession than in prosperity. With other types of
investment, inventories, plant and equipment, and other commercial
construction, the effect seems to be much smaller. This is partly be
cause the motivation to invest is extremely strong in good times when
profit expectation are high and internal funds ample.
Consumer credit is also affected in only a minor way. Interest
cost is a small part of the total charges to consumers; and the securi
ties issued by the consumer credit companies are of such high quality
and are managed wTith such skill, that the supply of funds to them is
cut back very little. Borrowing by State and local governments and
by small business may be somewhat more affected, but to a far lesser
extent than residential construction, judging by the behavior of real
investments made by these sectors over the business cycle.
The impact on residential construction is so large both because in
terest charges are such a large part of total costs and because the
statutory ceilings on Government-guaranteed mortgages dry up the
supply of funds as soon as effective long-term market rates rise above
the statutory ceilings. Some investments of State and local govern
ments are similarly affected by legal interest limits.
24
EM PLOYMENT, GROWTH, AND PRICE LEVELS
The maximum potential effectiveness of traditional monetary pol
icy, even ignoring the inevitable mistakes of prognosis, is limited.
Confronting the sources of inflation with the impacts of monetary
policy, it can be seen that there is very little coincidence. On the one
hand, the inflation is due to the instability of output of the economy,
the exercise of market power, excess demands in the capital goods in
dustries, and to various longrun imbalances between supply and de
mand in the services sector. On the other hand, monetary policy pri
marily raises and lowers the volume of residential construction. This
sector, while it has experienced rising prices, has not been a prime
source of inflation, but has largely reflected rising cost patterns estab
lished in commercial and factory construction. Insofar as the costs
of materials for residential construction have risen as a result of
high activity in this industry, they have risen during periods of easy
money.
This is not to say that monetary policy has been wholly ineffective
in containing inflation. Had monetary policy been much looser, even
the resulting small increases *in investment in plant and equip
ment and other fields would have resulted directly in additional
inflation in the capital goods industries, and perhaps, indirectly, in
other areas of the economy as well. A reduction in residential con
struction cuts back the total national money income and thereby
reduces the demand for all commodities and services. Thus, through
this indirect route, the entire economy is affected.
However, because the direct impact of monetary policy on the in
flationary process is small, thereby forcing a heavy reliance on income
effects, the intensity of monetary policy that will be required to sta
bilize prices is very great. And because prices are rigid downward
and resources immobile, the amount of unemployment that would
have to be induced would be large, much larger than the country is
willing to allow. A policy of such tightness would probably result in
recession or depression, and would halt economic growth.
Two important qualifications should be added. First, the effective
ness of monetary policy depends in part on the fiscal and other policies
that are being pursued. If steps had been taken to minimize the
inflationary impact of the exercise of market power, if the Federal
budget had been in substantial surplus during the interval of high
prosperity, and if the economy had been more stable, the task remain
ing for monetary policy would have been smaller. Perhaps it then
could have been more effective in stabilizing prices. Thus the com
ments of the preceding paragraphs assumed the totality of conditions
which prevailed during recent inflationary spells. Second, it must
be emphasized that a monetary policy which does not move in a coun
tercyclical fashion will gradually increase the liquidity of the economy
and will accelerate inflationary trends. While monetary policy is not
sufficient to defeat inflation, it must create a monetary and credit en
vironment in which other policies can operate effectively.
2. Fiscal policy
Fiscal policy, which includes variations in both Federal revenues
and expenditures, is the most important economic policy for achieving
our economic goals. In principle, taxes should be increased relative
to expenditures rise in periods of inflation, while revenues should be
reduced relative to expenditures in recession. By the resulting coun
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
25
tercyclical swings in the budget surplus or deficit, and in the level of
the budget, the total national money income is to be stabilized.
Fiscal policy can be divided into two components, automatic policies
and discretionary policies: The former, often referred to as automatic
stabilizers, include automatic changes in the budget which occur over
the business cycle, such as variations in tax revenues at given rates,
in unemployment insurance payments, in social security and in vari
ous other transfers payments. Discretionary policies require explicit
action.
The automatic elements in fiscal policy have, on the whole, func
tioned well in recent recessions. As production fell, the impact on
purchasing power was dampened. For each dollar of decline in total
output and hence in total payments to factors of production, changes
in taxes and transfer payments provided an offset of about a third of a
dollar. In addition, financial policies of corporations, which result in
the maintenance of dividend payments even in the face of declining
profits, have provided an important element of private automatic
stabilization. As the economy slides into recession, real purchasing
power falls by less than one-half as much as total output. This offset
has been sufficient to prevent any of our recessions from turning into
depressions. It would take a very large and continued decline in pro
duction to plunge the country into depression today. Automatic stabi
lizers do not, however, lead to the reversal of a recession. They slow
down the decline but provide no upward stimulus of their own.
The record of discretionary fiscal policy is much more disappoint
ing. A detailed analysis of the entire record of discretionary actions
taken since World War II discloses that on only one occasion, at the
outbreak of the Korean war, were major, active steps taken on the
revenue side for countercyclical purposes. As for discretionary ex
penditures, the acceleration of outlays in recession, while having some
beneficial effect, in large part only had an impact after the recovery
was well under way.
An examination of the overall record of fiscal policy over the last 14
years shows that the size of the surpluses, relative to GNP, occurring
in good times declined; the size of deficits, relative to GNP, occurring
in bad times also declined. Thus, over all, fiscal policy became less
and less effective.
In judging the effect of fiscal policy on the attainment of our eco
nomic objectives, several conclusions emerge. First, as long as discre
tionary changes in taxation are stalemated, the contribution of fiscal
policy will be severely circumscribed. Second, the decline of fiscal
policy has put an excessive burden on monetary policy, a burden
the latter cannot carry effectively. Third, during prosperity fiscal
policy has relied primarily on efforts to restrain the increase in ex
penditures. Given the nature of the inflationary process, this policy
can at best have only limited effectiveness in moderating price increases.
Fourth, the fluctuations in Government orders for defense hardware
have been an important source of instability.
48795— 59-------5
26
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
B. MONETARY AND FISCAL POLICIES TO RECONCILE PRICE LEVEL STABILITY
AND ECONOMIC GROWTH
On the basis of our analysis of the workings of the economy, we
believe that the following steps, if taken, will substantially reduce the
present impasse between price level stability and a rate of growth
commensurate with our true potential.
(1) The perverse destabilizing effects of the Federal budget must
be eliminated. In all three of the postwar recessions, changes in the
Federal budget were an important contributing cause. The impact
of Federal spending on the economy occurs before actual purchases
are made. The most important often is the issuance of orders which
leads to private investment, particularly in inventories. This process
could be much better managed. If changes in Federal Government
orders, particularly Defense obligations for hard goods, are war
ranted, compensating stabilizing action, particularly in the form of
tax changes, should be undertaken.
The ceiling on the national debt, which has been one of the causes
of budgetary disturbance, should be repealed.
Statistics on obligations, which reflect orders, should be collected on
a current basis and projected. Detailed analyses of the impact of
Government purchases on different sectors of the economy should be
undertaken. With better information in hand, the Federal Govern
ment, which is the largest purchaser of goods and services in the econ
omy, could cease to add to the instability of the economy.
This policy reform is particularly important today because there is
at least some slight possibility that substantial disarmament will
occur in the near future. Should the opportunity arise for reducing
our armaments burden, we should be ready with plans to manage
the transition successfully. The economy does not need the stimulus
of armaments expenditures. But care must be taken if disarmament
is to bring an increase in spending on nonmilitary public needs and
private consumption and investment goods instead of a recession.
(2) Our antirecession arsenal must be strengthened:
(a) Prompt and substantial changes in tax rates should be
used to combat recession and to check inflationary pressures
which stem from generally excessive demand. Without a greater
willingness to change personal tax rates in recession, policy
again recession is bound to be weak, and prompt recovery de
pendent on chance factors. Completely automatic countercycli
cal variations in tax rates should not be relied upon, since no two
recessions are exactly alike and stabilization requirements are
likely, therefore, to differ from one recession to another.
(b) Unemployment insurance benefits must be improved; both
the level of payments, in relation to wages, and the duration of
benefit payments must be increased.
(3) To achieve any given level of restraint, relatively more fiscal
policy and less monetary policy should be used.
(4) To strengthen the effectiveness of monetary policy, consumer
credit controls should be enacted. A slower rate of increase of con
sumer credit in the first years of a boom would eliminate one important
source of economic instability.
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
27
(5) To increase the effectiveness of monetary policy further, the
Federal Reserve System should abandon its policy of confining its
open markets transactions to bills only, and should assume direct re
sponsibility for the overall availability of funds in the long-term
capital market. This could be accomplished by the purchase and
sale of long-term Treasury securities.
(6) The interest ceilings on mortgages should either be recognized
as a selective credit control device and co-ordinated with other policy
measures or be repealed and replaced by authority to set minimum
downpayment and maximum repayment terms on mortgages. The
latter alternative would be preferable since it would result in a more
efficient allocation of credit. However, the interest ceilings should
not be removed unless they are replaced by the other type of selective
controls, since the existence of these ceilings explains in large part
why monetary policy has been so effective in controlling residential
construction, and the Federal Reserve can ill afford to be without
power to affect this sector.
Whichever form of selective controls is relied upon, the adminis
tration of the controls should be placed in the hands of the Federal
Reserve. Selective controls over mortgage credit permit monetary
policy to be applied to the long-term market without wide swings in
long-term interest rates and increase the effectiveness of monetary
policy above the level which could be attained by bank-reserve manip
ulation alone.
(7) Serious study should be given to the possibility of imposing a
more effective form of control over bank loans. Present techniques,
which operate on reserves, and which can be offset by the sale of Treas
ury securities, may not be sufficient. Such a measure would reduce, at
least, somewhat, the violence of inventory fluctuations.
(8) Serious study should also be given to both fiscal and monetary
devices which would serve to stabilize plant and equipment outlays.
Revision of the corporation income tax to allow a deduction for divi
dend distributions would force corporations to rely more heavily on
external financing, and hence would make these investments more sub
ject to influence by monetary policy.
Foreign experience with a wide range of devices has not been wTholly
satisfactory. It may well be that little can be done to stabilize plant
and equipment investment directly and that this is a source of insta
bility which is an inevitable part of a free economy. If this is so, it
further emphasizes the importance of effective stabilization policies.
It should also be added, however, that if the economy as a whole be
comes more stable, plant and equipment investment wTill also become
more stable. Similar reasoning applies to inventory investment.
C. DEBT M ANAGEM ENT
Debt management, as we think of it, includes all operations by the
Treasury (and the Federal Reserve) which affect the composition of
the publicly held debt. It is the publicly held debt—that is, gross
public debt less debt held by Government agencies and trust funds
and by the Federal Reserve System—which is relevant for debt man
agement. It is substantially smaller than the gross public debt.
28
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Debt management, so defined, influences the structure of interest
rates and of liquidity. It is in this way that debt management in
fluences the level and composition of spending. Changes in the struc
ture of interest rates and liquidity should be regarded as a selective
control device affecting different parts of the capital market. Our
knowledge concerning precise effects of such changes is not exten
sive ; it does not appear, however, that these effects are of great sig
nificance.
It is our opinion that responsibility for changing the structure of
interest rates to achieve stabilizing effects should lie with the Federal
Reserve. The Federal Reserve, using open-market operations, can
bring about such changes more sensitively than can the Treasury,
and has prime responsibility for credit policy for economic stabiliza
tion.
The Treasury, in managing the debt, should aim at achieving and
maintaining a desirable long-term debt structure. Refunding, and
other debt operations, should not be managed with an eye to shortrun economic stabilization. Under present circumstances, the Treas
ury should direct its efforts to lengthening the average maturity of
the debt. Since the interest cost of the debt should not be disre
garded, efforts to sell longer term securities should be greatest in pe
riods when interest rates are relatively low.
The Treasury should further explore the various possibilities for
improving the techniques of debt management. In particular, it
should consider introducing the auction techniques for longer term
securities and making more frequent and smaller offerings of securi
ties. Improved methods of underwriting and an expanded market
ing setup might also make debt management an easier task. A ju
dicious use of advanced refunding would also make the job easier.
There are a number of reasons why the Federal Reserve should
abandon its “bills only” policy. At least one is relevant in the context
of debt management. Were the Federal Reserve to abandon this
policy, it could reduce the erratic fluctuations in the prices of Gov
ernment securities which have made these securities less attractive to
investors.
The concern about high interest rates is at heart a concern about
the appropriateness of present policies for achieving our economic
objectives. It is in this light that the question of the interest ceiling
must be viewed. The present 41/4-percent ceiling on interest rates for
Government securities with an original maturity of more than 5 years
is arbitrary and complicates debt management. While the interest
rate ceiling should be repealed, modification of the policies that led
to the present situation is a matter of much more pressing importance.
Whether the Congress will want to repeal the interest ceiling without
basic reforms in fiscal, monetary, and debt-management policy is a
matter for it to decide.
D. POLICIES TO REDUCE THE INFLATION ARY EFFECT OF THE EXERCISE
OF M ARKET POWER
(1)
In the long run, the most effective policy to reduce this source
of inflation is vigorous antitrust action. By making the economy
more competitive—by eliminating restrictive practices, by breaking up
monopolistic concentrations of market power, by preventing mergers,
etc.— the inflationary bias of the economy is reduced. The exercise
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
29
of market power having inflationary implications should be considered
as a basis for antitrust prosecution.
However, even the most vigorous antitrust policy will not eliminate
the prevalence of very big business and unions. Therefore, this
policy alone will not eliminate the problem.
(2)
One of the most effective checks on the exercise of market power
in recent years has been the rise of imports. For example, in the auto
mobile industry, in electrical equipment, and now in steel, the prices
of foreign products are competitive with our own and make it much
less attractive for domestic companies to raise their prices. If tariffs
are not raised, and even lowered in exchange for tariff concessions
from other countries, the inflationary potential originating in market
power will be substantially reduced.
Taking for granted the continuance of concentrations of economic
power, a series of steps of ascending severity is indicated, which seeks
to inject a public viewpoint into key price and wage decisions. These
proposals are advanced to indicate how this particular inflation prob
lem can be dealt with. The injection of the Government into these
decisions can have serious side effects, however, and we do not pro
pose that this be a road traveled with enthusiasm.
{a) An annual labor-management conference: This proposal, if
put into effect, would bring together leaders of business and labor so
that they could be apprised of the statistical evidence on the recent
and expected behavior of such factors as productivity, prices, profits,
wages, and so forth. Such a conference, at which these private wielders of economic power would be given the benefit of the thinking of
responsible officials in Government, would also provide an opportu
nity for a useful interchange of views. It would be the hope that at
such a conference the public viewpoint would be thoroughly con
sidered.
(b) Direct intervention in hey price and wage decisions: The im
position of price and wage controls would clearly be undesirable in
peacetime, and would be wholly unjustified by the small increases in
the price level which have occurred. The choice, however, is not be
tween an elaborate system of wartime controls and a complete handsoff policy. If antitrust measures are inadequate to reduce substan
tially inflationary price increases resulting from the exercise of market
power, more direct measures may be the only effective means of limit
ing its adverse impact on the economy as a whole. There is a spec
trum of moderate measures which appear to be feasible. The extent
to which these measures are invoked by legislative action in the future
should depend upon whether the industries with market power limit
the exercise of that power in the interest of the entire economy.
The mildest approach would be to set up a study group to advise the
President on key price and wage changes that threaten economic sta
bility. Such a study group could recommend hearings when it felt
them to be desirable. A somewhat more drastic step would require
certain clearly defined key industries to notify the Government when
they raised their prices. An agency set up to deal with this problem
could then decide whether or not to hold hearings. A further and
much more drastic step would give such an agency the power to sus
pend price increases for a brief period. In addition, should any new
machinery be set up for the handling of emergency disputes, stability
of the price level could be specified as one of the criteria to be supplied.
30
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
111 considering legislation for dealing with an inflation originat
ing in market power, the nature of that process must be kept clearly
in mind. It will be futile and unfair to invoke price level stability as
a principle when wages are considered while ignoring it when prices
are set. If, in new wage negotiations, appeal is to be made through
hearings to the weight of public opinion, then the public point of view
must be applied equally where key prices are concerned. Especially
during the period of rapidly rising profits in the early stages of the
business cycle is this important. With profits typically rising first
in recovery, the subsequent call for wage restraint is likely to fall on
deaf ears. If the inflationary spiral is to be broken by voluntary
restraint, business must cut prices either in the recession or in the
early stages of recovery when rising production makes unit costs fall.
Conversely, there is little point to exhorting for price restraint with
out considering wages.
E. INCREASING THE SUPPLY OF SERVICES
Much of the recent inflation was due to a longrun increase in the
costs of services which cannot be easily reversed. None of the policies
so far discussed will have much of an effect on the rise in medical
costs, in rents, and in personal care. In order to check the rise in
prices that will continue to emanate from this source, several steps
should be taken: First, an increase in the supply of medical services
must be effected. The total number of doctors must be increased;
hospitals must be expanded; and the availability of nonhospital
medical facilities, such as nursing homes, must be vastly increased.
Equally important, strenuous efforts must be made to improve the
organization of medicine, to raise productivity in medical care. Simi
larly, in other service fields, in which productivity is low, efforts should
be undertaken to raise productivity. Serious study should be given
to the possibility of setting up national productivity centers, of the
type that United States encouraged other countries to institute after
World War II. Perhaps in this way, some improvement could be
effected in the low-wage, low-productivity sectors of the economy.
F. IMPROVEMENT I X
THE PRICE INDEXES
With price level stability an important objective, with some wages
mechanically tied to a price index, and with an increased public con
cern about inflation spurred by influential public and private groups,
it is particularly important that the indicators of inflation, our price
indexes, be as accurate and unbiased as possible. There is reason to
believe that there are some upward biases in all three of the indexes
now in common use. In addition to the restudy of the consumer price
index which has already begun, the other two price indexes,
the wholesale price index and the gross national product deflator,
should also be reexamined and improved even at the cost of some extra
money. While we urge reexamination of the indexes, we also wish
to stress that their objective nature must be preserved. We reject
arbitrary quality adjustments. The indexes should continue to be
an average of actual, observable prices.
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
31
G. POLICIES TO STRENGTHEN LONG-TERM GROWTH
The long-term rate of growth of the American economy is deter
mined by the security of our political institutions, the attitudes of the
American people, the increase in the size and quality of the labor force
and capital stock, the abundance of resources, the advance of tech
nology, and the general level of prosperity. To maintain a high rate
of growth, we recommend the following steps:
1. A high level of prosperity must be maintained. The level of
prosperity influences longrun growth through its influence on total
output, the level of investment, the length of the workweek, the size
of the labor force, the rate of productivity increase, and the advance
in technology.
2. In order to maintain the increase in the quality of the labor force,
educational levels and standards must continue to increase. The re
maining potential contribution of education to growth is still large;
a significant fraction of our labor force is the product of poor school
systems. A program of Federal aid to education, designed to help
the poorer school districts, is the single most important step that can
be taken to raise our longrun economic growth.
3. To promote a continued high rate of increase in productivity, the
introduction of new technology must be facilitated. The inevitable
social costs of technological change must be borne equitably. Col
lective bargaining, which is the institution through which much of
the cost and gain is allocated, must be adapted to fulfill this task more
effectively. Recent examples in several industries illustrate the insti
tutional arrangements which can facilitate the adoption of new tech
niques. In addition, productivity can be increased by strengthening
apprenticeship programs, by reducing barriers to high-skill occupa
tions, and perhaps by instituting national productivity centers.
4. More resources should be devoted to promotion of scientific and
technological progress. The Federal Government today supports
more than half of all the research and development conducted in the
United States. Much of this is a byproduct of the race in weapons
technology. In the event that the opportunity for reducing expendi
tures for defense should materialize, the Federal Government must
continue to exercise financial responsibility for our scientific establish
ment. Much of the scientific progress from which civilians production
has benefited has originated in military research. If disarmament
should come, the Federal Government must find other channels
through which it keeps the scientific establishment advancing our
scientific knowledge and our technology. In addition, with Federal
support such a large part of the total, the Government must make
sure that sufficient scientific resources are put into basic, rather than
applied, research.
5. Numerous programs of the Federal Government have as their
purpose subsidizing uneconomical uses of resources. These programs
not only slow growth by diverting resources to relatively low-productivity uses, but also contribute to inflation by supporting prices of
commodities and services above the level they would command in a
free market. Reducing these expenditures can be a major means of
financing expansion of those Government programs which will con
tribute significantly to the Nation’s economic progress.
32
EM PLOYMENT, GROWTH, AND PRICE LEVELS
VI. T he P roblems
op
A merican A griculture
Overproduction is the most important of our agricultural problems.
It is the result of a rapid advance in technology and a relatively slow
growth in demand, and the Government price support program. The
latter has prevented an adjustment of prices and a movement of re
sources sufficient to correct the persistent supply-demand imbalance.
The price support program has not reduced the instability of farm
incomes greatly. Nor has it resulted in an elimination of rural pov
erty, which is even today a serious social problem. In fact, the benefits
of this program tend to accrue to the larger commercial farms which
produce market crops in quantity rather than to the smaller subsistence
farms which produce little or nothing for sale on the market.
Yet the cost of the price support program is enormous, and keeps us
from meeting other responsibilities. Policies which we think would
better serve the interests of farmers and the general public—includ
ing greater emphasis on income payments rather than price supports,
on special programs for the low-income portion of the farm com
munity, and on an expanded export program— are detailed in
chapter 7.
C H A P T E R
2. E C O N O M I C
G R O W T H
I. T he M easurement
of
IN
T H E
L O N G
R U N 1
E conomic G rowth
We have defined economic growth as the expansion of a nation’s
capability to produce the goods and services its people want. Pro
ductive capability depends on the amount of available resources and
their productivity—upon the size of the labor force and the skills
and know-how it has acquired through education, training, and experi
ence, upon the physical stock of capital, upon the availability of
natural resources, and upon the state of technology. Economic
growth, therefore, is the process of expanding and improving these
components of productive capability. It is accomplished by increas
ing the labor force, by education and training, by adding to the stock
of physical capital, by research and development activities which
advance technology, by the discovery of new resources, and by im
proving the effectiveness with which all of these components are
organized in productive effort.
Recognition of these long-run influences on economic growth is
essential if we are to avoid an overly mechanistic view of the growth
process and of the influence of public policies on the Nation’s eco
nomic development. On the other hand, this recognition should also
emphasize the importance of providing the best possible framework
of public policies in which the forces making for economic growth
will be most encouraged.
Numerous measures of growth are commonly used. Most of these
imply the growth of productive capacity by explicably measuring
the growth of output. Throughout this staff report, these conven
tional measures of growth are widely used. It is recognized, how
ever, that these measures, particularly for short-run changes, are only
proximate.
1. Gross national product in current dollars measures the dollar
value of the total volume of goods and services produced by the econ
omy. Because price changes influence this statistic, it is of limited
usefulness as an indicator of economic growth.
2. Gross national product in constant dollars is the value of total
output adjusted for changes in prices. It is the most comprehensive
measure of real output for the economy as a whole. The total does
not show what is done with that output, though the component figures,
which constitute the gross national product accounts, reveal the divi
sion of output among consumption, investment and public services.
3. Gross national product per capita, in constant dollars, shows
the growth of goods and services produced per person. It reveals the
extent to which output is rising faster than population.
4. Consumption shows the total amount of goods and services ab
sorbed by households. Consumption per capita shows the amount of
goods and services purchased per person. It is a good indicator of
1 Miss Katherine Dolfis assisted in the preparation of this chapter.
33
34
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
the average standard of living being enjoyed in the economy, and its
rate of growth reflects the rate of improvement in the standard of
living.
5. There are subsidiary measures of growth, the detailed produc
tion indexes of the Federal Reserve Board, employment and output
per man-hour figures, and many others, which are useful for the study
of specific facets of the problem of growth.
II. T he L ong-R un R ecord
A. THE
GROW TH
of
G rowth
OF O U T P U T
No economy can match the record of growth of the American econ
omy over the last 120 years. The data in table 2-1 and in charts 2-1
to 2-3, which were presented before this committee by Prof. Raymond
Goldsmith, show that real gross national product rose at a substantial
rate in each of the three 40-year subperiods. From 1839 to 1879,
Goldsmith estimates the growth of output to have been 4.31 percent ;
from 1879 to 1919, 3.72 percent, and from 1919 to 1959, 2.97 percent.
T a b l e 2 - 1 . — Trend
of gross national product and personal consumption,
1839-W 59
[Percent increase per year
Entire
period,
1839-1951
Gross national product:
Price level- _ ______ __________ ___ __
Aggregate, constant prices___ _ _ _____
Population. _ _
_
_ ___ _
Per head, constant prices.._______ ___ ____
1.15
3. 66
1.97
1.64
40-year subperiods
1839-79
1879-1919
-0.16
4.31
2. 71
1.55
1919-59
1.91
3. 72
1.91
1.76
1.40
2. 97
1.30
1.64
1 Calculated from values in first and last year of period.
While this may suggest a slowing down of the rate of growth, this
appeared to be largely due to the slower growth of population. In the
earlier periods, immigration added substantially to population
growth. Adjusting for population growth, the growth of output per
head seemed to move much more uniformly, 1.55 percent in the first
40 years, 1.76 percent in the middle period, and 1.64 in the most recent
40 years.
B.
THE
GROWTH
OF
C O N S U M P T IO N
Consumption increased at similar rates over the last two subperiods;
at an annual rate of 3.7 percent from 1879 to 1919, 3.2 percent from
1919 to 1959. Adjusting for the increase in the number of consumers,
Goldsmith finds that the rate of growth of per consumer consumption
was 1.64 percent from 1879 to 1919, and 1.85 percent from 1919 to
1959. Thus, there has been no retardation in the rate of advance of
our standard of living, in fact there has even been some slight ac
celeration.
C.
THE
RATE
OF
GROWTH
OF O U T P U T
HAS
BEEN
UNEVEN
Recurrent business cycles temporarily halted growth, and in some
cases even reversed it, every few years. But even apart from that
AGGREGATE GROSS NATIONAL PRODUCT
CURRENT AND CONSTANT (1929) PRICES
BillionD
ollars
/ ~1500
-i 400
300
400
300
50
40
30
GROWTH,
60
50
EMPLOYMENT,
AND
20
PRICE
LEVELS
Chart 2-1
J___
1039
1849
J_____ I_____ I_____ I
|859
1869
1879
1889
I
S899
1909
1319
1929
1939
1959
CO
Oi
05
REAL GROSS NATIONAL PRODUCT (1929 PRICES)
AGGREGATE AND PER HEAD
BillionD
ottors
500
400
300
- 1000
- 800
- 600
- 500
- 400
AND
20 ICO
LEVELS
80
60
PRICE
10
0
6
5
GROWTH,
100 ■
80 60 80 •
40 ■
30 ■
4000
3000
EMPLOYMENT,
w
Chart 2-2
PERSONAL CONSUMPTION EXPENDITURES (1929 PRICES)
AGGREGATE AND PER FULL CONSUMER
BillionD
oftors
EMPLOYMENT,
GROWTH,
AND
PRICE
LEVELS
Chart 2-3
CO
38
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
source of disturbance, the rate of growth from one peak of a business
cycle to the next shows a wide range. Table 2-2 shows the average an
nual rate of increase of gross national product from one business cycle
peak to the next. These growth rates have had a very wide range and
while some of the extreme values are related to the economic changes
associated with war and with conversion to a peacetime economy, wide
variation remains even in peacetime. Some observers have classified
business cycles into major and minor cycles. The peak-to-peak growth
rates of major cycles, while not as variable as for the shorter intervals,
still range from 0.1 percent from 1929 to 1937 to as high a rate as 6.4
percent from 1873 to 1882 and 7.2 percent from 1937 to 1945.2
Table 2-2.— Gross national product rates of growth, peak-to-peak
[Percent per annum]
Dates
1873 to
1882 to
1887 to
1890 to
1893 to
1895 to
1899 to
1902 to
1907 to
1910 to
1882 .
1887. .
1890_________________________
1893___
1895 ..
1899
.
1902____
1907________________
____
1910_________________________
1913 .
Rates of
growth
6.4
4.0
3.4
2. 7
4.3
4. 4
4.9
2.2
4.2
2.1
Dates
1913 to
1918 to
1920 to
1923 to
1926 to
1929 to
1937 to
1945 to
1948 to
1953 to
1918___
1920 .
.
. .
1923_________________________
1926 .
___________
____
1929.. ____ _______ __
___
1937_________________________
1945_________________________
1948_________________________
1953_________________________
1957_________________________
Rates of
growth
6.9
—9.3
6. 5
5. 6
3.1
.1
7.2
-3 .0
4.9
2.4
D. THE ALLOCATION OF G R O W TH : USES OF GNP
As real GNP has grown, its allocation among various uses has
changed (see chart 2-4). The shares of GNP created and ab
sorbed by Government have risen, primarily due to the greater
cost of national security, secondarily due to higher costs and
higher standards providing for civil public services. National se
curity absorbed only 1.5 percent in 1939, reached a peak of 45 percent
in 1944, fell to 5 percent after the disarmament of the late 1940'S, rose
to 14 percent in 1953 at the end of the Korean war, and since then has
been falling pretty steadily, running at 9.6 percent in the first three
quarters of 1959.
The civil functions of all levels of government absorbed 7.5 per
cent of GNP in 1929. Following the antidepression measures of the
1930’s the figure rose to 13.2 percent in 1939. With the outbreak of
the war, expenditures for civil purposes fell, reaching a low point of
3.3 percent in 1945. From 1945 until the Korean conflict, civil ex
penditures rose continuously, reaching a peak in 1949 of 10.5 percent.
The recent low point of 8.1 percent was reached in 1951. Since then,
new construction expenditures (which had lagged in the prior dec
ade), particularly education and highways, have raised the civilian
public share of GNP back up to 10.9 percent (1958), with most of it
still at the State and local level.
Investment in plant and equipment, representing modernization
and expansion of business productive capacity, amounted to 12.9 per2 For a mucli more detailed analysis of rates of growth from one business cycle to the
next, see the testimony of Moses Abramovitz ; hearings, pt. 2, “ Historical and Comparative
Rates of Production, Productivity, and Prices,” pp. 411-466. Abramovitz analyzes the
long swings among business cycles.
C h a r t 2 -4
GNP AND ITS ALLOCATION
100
90
80
70
60
0
40
30
20
10
0
in KpndJiS
5 +?
i ^
Productivity Trends in the United States,” a study by Dr.
P
National Bureau of Economic Research, now in process of preparation. Data
.o /ftKo^tT
tP the Bureau.
1 9 2 9 -1 9 5 8 , U.S. Department of Commerce.
P
liJnS, U.S. Department of Commerce.
40
EMPLOYMENT, GROWTH, AND PRICE LEVELS
cent in the years 1926-29, 9.5 percent in 1956-59. Residential con
struction has decreased from 6.9 percent in the period 1926-29 to 4.1
percent in 1956-59. Inventory investment, a very unstable element in
the short run, absorbed only 0.6 percent over the period 1926-59 as a
whole; and net foreign investment another 0.2 percent.
Consumption absorbed the remainder, a slightly falling share of
GNP. Even in recent years, after the rise of Government expendi
tures, the share of GNP going to consumption remained relatively
high.
III.
F a c to r s in O u r G r o w th
No one simple theory will explain the continued successful growth
of the American economy. At the top of any list of factors con
tributing to the growth, four elements must be mentioned. The first is
the opportunity for individuals to exercise their initiative, to organize
new enterprises, to effect changes in old-established ways. Second,
many Americans have possessed the enterprising, risk-taking attitudes
which are the essential driving force of a capitalistic system. Third,
the American people have a healthy attitude toward work wThich has
resulted in a high and rising productivity for the labor force. Fourth,
a stable political environment, with private property secure from
government seizure without due process of law, has given individual
initiative a setting in which it can function successfully. These fac
tors cannot be expressed in numbers, yet they are the foundations of
American economic growth. The remainder of this chapter is devoted
to the more narrow economic elements; yet they would never func
tion effectively without these prior personal qualities and political
institutions.
A. THE GROWTH OF SUPPLY VERSUS THE GROWTH OF DEMAND
In order for real gross national product to grow at some rate for
an extended period of time, both the potential supply and the actual
demand must grow at that rate. At some times it is supply which
primarily determines growth; at other times, demand. The growth
rate will equal the lower of the two.
In defining demand, we mean effective demand, i.e., demand backed
by purchasing power. The desires of consumers for goods can, for
all practical purposes, be considered as unlimited, given the vast range
of products and services available.
The relation between supply and demand will differ among indus
tries. At any one time, some fraction of industries will have sellers’
markets, other buyers’ markets. The overall relation for the economy
as a whole can be described in terms of the wider prevalence of the
one kind of market or the other. If supply grows faster than demand,
unsold inventories rise, excess productive capacity develops, in sector
after sector more markets become buyers’ markets and, finally, general
unemployment results. If demand rises faster than supply, prices
are bid up and inflation results.
Because of the crucial relation between the growth of supply and
demand, and because the factors behind them are quite distinct, we
shall analyze these two elements separately.
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
IV. T he L ongrun G rowth or S upply
A . E X P A N S IO N
OF LABOR FORCE
The expansion of the labor force accounts for a substantial part of
our growth (chart 2-5). It has grown at an average of 1.5 percent a
year since 1890 although there was considerable variation within the
period. Generally it grew more rapidly in good times than in bad,
as abundant job opportunities drew women into the labor force. The
slowdown in its rate of growth in the 1920’s and 1930’s is partly due
to the decline of immigration, in the 1940’s and 1950’s due to the low
birth rates in the interwar period.
B . S H O R T E N IN G N U M B E R
OF H O U R S OF W O R K
Over the same period, the average workweek shrank from 46.3
hours (1920) to 39.2 hours (1958). Since the beginning of this cen
tury, average weekly hours have declined by about 0.9 percent per
year. To some extent this offset the rise in the labor force and in
productivity by cutting the total number of hours worked. But it
also served as a stimulus to raise productivity as management strove
to offset the loss of hours and keep unit costs down, and as workers
performed more efficiently during the shorter workday.
Chart 2-6 shows the movements in the workweek. It can be seen
not only that the workweek shrinks in recessions and expands in
booms, but also that it is in periods of unemployment that the largest
[structural] changes in the workweek are effected. Unions, workers,
and Government place much more emphasis on shorter hours when
there is not enough work for everybody at previously prevailing
standard hours.
to
P E R SO N S EN G A G ED
1929=100
EM PLO YM EN T,
GROW TH,
AND
PRICE
LEV ELS
Ch a b t 2 - 5
EMPLOYMENT, GROWTH, AND PRICE LEVELS
43
Chart 2-6
AVERAGE W EEKLY H O U R S - Production Workers Manufacturing
Source: Employment ond Earnings - U.S. Department of Labor, Aug. 1959
(July)
A desire for more leisure has also been a motivating force in this
trend. However, the large and increasing amount of multiple-job
holding, particularly in industries with short workweeks, as well as
the rising participation of married women in the labor force suggests
that where families have a choice between more leisure and more
money income, many of them choose more income.
While increased leisure is a part of a rising standard of living, the
size of the future workweek is much more likely to shrink substan
tially if unemployment should be high.
The reduction in the annual hours worked by the average person
engaged in productive employment has been greater than that ac
counted for by the reduction in the length of the workweek. Parallel
to the reduction in the number of hours per day and in days per week,
there has been an increase in the time off from work as a result of holi
days and vacations. The practice of providing workers with increased
leisure through these devices has greatly increased, particularly in the
past two decades.
Some part of the decline in average hours of work, whether per
week or per year, has resulted from the shift of employment from
occupations and industries with relatively longer hours— for example,
agriculture—to those in which hours have tended to be shorter.
It seems probable that our data on hours of work understate the in
crease in leisure or reduction in average annual hours of work since
they have not made adequate allowance for reductions due to wider
adoption of vacations, holidays, etc., which have spread through
industry, trade, finance, government, etc.
44
EM PLOYMENT, GROWTH, AND PRICE LEVELS
C. R ISIN G PR ODU CTIVITY
The productivity of labor, as measured by output per man-hour, has
risen steadily and has been an important component of growth. Table
2-3 summarizes the evidence submitted by Solomon Fabricant, Direc
tor of Research of the National Bureau of Economic Research. Physi
cal output per unweighted man-hour rose at an annual rate of 2.4
percent from 1889 to 1957. The rate of increase after 1919 was greater
than before, 2.6 percent as compared with 2.0. In the postwar period
the rate of increase was particularly large, 3.3 percent. Output per
weighted man-hour, in which highly paid man-hours are weighted
more heavily than others, rose at somewhat lower rates but in a similar
pattern over time. Output per unit of weighted labor and capital
combined rose at a somewhat lower rate, since the rate of growTth of
capital was considerably greater than the rate of growth of labor.
Over the entire period, this measure of the combined productivity of
labor and capital rose by 1.7 percent. In the postwar period, it rose
by 2.1 percent, a rate no higher than the long-term rate of the last
40 years, because the rate of increase in tangible capital was so great
that output per unit of capital alone actually fell.
T able
2 - 3 . —Average
rates of increase in productivity before and after 1919t
private domestic economy
A v erage annual percentage rate o f change
1889-1957
1889-1919
2.4
2.0
1.0
2.0
1.6
.5
2.6
2.3
1.3
-.5
1.7
1.3
2.1
2.1
__
P h ysical ou tp u t per un w eigh ted m an-hour ___
P h ysical ou tp u t per w eighted m a n -h o u r-.- _ __________
P h ysical o u tp u t per w eighted un it o f tangible ca p ita l___
P h ysical ou tp u t per unit of labor and capital com bin ed
( w e i g h t e d ) .. .- ___________________________ _____ ________
1919-57
1945-48 to
1953-57
3.3
2.9
D. C A P IT A L
The total amount of capital in the U.S. economy has grown more
rapidly than the labor force, or about 2.6 percent per year. The
amount of capital per worker has been rising at about 1.0 percent
per year, therefore, providing more tools, machinery, buildings,
power, transportation, and equipment, and serving as a part of the
process of technological change.
While the rising amount of capital per worker has served to raise*
output per man-hour, recent researches suggest that the simple in
crease of the quantity of capital accounts for no more than a modest
fraction of the total increase.3
Solow's analytical technique, by which he computes what output
would be if the additional capital were applied without technological
3 Robert Solow, “ Technical Change and the Aggregate Production Function,” Review of
Economics and Statistics (August 1957) ; Moses Abramovitz, “ Resource and Output Trends
in the United States Since 1 8 70,” National Bureau of Economic Research, occasional paper
52 (1 9 5 6 ), p. 11 ; Solomon Fabricant, “ Basic Facts on Productivity Change,” N B ER ,
occasional paper 63, p. 23, reprinted in Joint Economic Committee hearings on Employ
ment, Growth, and Price Levels, pt. 2, “ Historical and Comparative Rates of Production,
Productivity, and Prices,” p. 3 1 2 ; F. Massell, “ Capital Formation and Technological
Change,” Cowles Foundation Discussion Paper 58.
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
45
progress, suggests that no more than 13 percent or so of the increase
in output per man-hour in the nonfarm private sector between 1909
and 1949 can be explained by this factor alone. Massell, applying
Solow’s method to productivity data for manufacturing prepared by
the staff of the Joint Economic Committee, for 1919 to 1955, finds
almost identical results. Because these analyses assume that tech
nological progress occurs independently of capital accumulation, they
understate the total contribution of capital to the growth in output
per man-hour. Solow has also made some crude estimates of the
combined effect of capital and of the share of technological change
associated with capital accumulation. He finds this total contribu
tion of capital to output per man-hour to be about twice as large.
These results are confirmed by studies conducted by our staff.4
Thus, while capital plays an important role in economic growth,
it is far from the sole factor. In particular, it would be a serious mis
take to assume that the growth of output or the growth of output
per man-hour would increase proportionately with an increase in the
rate of capital accumulation. Other things being equal, a higher rate
of capital accumulation will lead to more growth, but any program to
hasten the process of economic growth must combine an increase in
capital accumulation with other equally important policies.
The same general conclusions are reached by Fabricant and Abramo
vitz. Fabricant finds that increases in labor and capital account for
1.0 percent of the total 3.1 percent of average annual growth in
physical output, 1919 to 1957, and that increases in capital account
for an even smaller share of the rise in output per man-hour.
Abramovitz, in interpreting these data, writes:
When all due allowance for the concealed increase in resource expansion has
been made, however, there will remain a huge area to be explained as an in
crease in productivity. Our capital stock of knowledge concerning the organ
ization and technique of production has grown at a phenomenal pace. A portion
of this increase—presumably an increasing portion—is due to an investment
of resources in research, education, and the like. This part we may possibly
be able to attribute accurately to the input of these resources insofar as we
learn to trace the connection between such investment in knowledge and its
marginal social contribution, as distinct from those small parts of its value
which can be privately appreciated. Beyond this, however, lies the gradual
growth of applied knowledge which is, no doubt, the result of human activity
involving costly choice which we think of as economic input. To identify the
causes which explain not only the rate at which our opportunities to raise
efficiency increase but also the pace at which we take advantage of those op
portunities will, no doubt, remain the central problem in both the history and
the theory of our economic growth.
E. T H E R IS IN G Q U A L IT Y OF T H E LABOR FORCE
1. Education
Over the years the amount of education received by the typical
worker has risen a great deal. Table 2-4 shows that whereas only 39.6
percent of people in the age brackets 25 years and over had more than
9 years of schooling in 1940, this number had risen to 52 percent by
1957. At the other end of the scale the number of people with less
than 5 years of school has fallen from 13.7 percent to 9.1 percent.5
* See a forthcoming paper, by Thomas A. W ilson.
5 Because women have scored larger gains in schooling, but constitute less than half the
labor force, the gain in the cited figures overstates the gain in the labor force.
46
T a b le
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
2-4.—Educational attainment of the adult population 25 years old and
over, by years of school completed
Percent of population
Years of school completed
1940
1950
1957
Percent Percent Percent
13.7
18.5
28.2
15.2
14.3
5.5
4.6
Less than 5 years.
5 to 7 years_____
8 years_________
9 to 11 years____
12 years________
13 to 15 years____
16 years or more..
11.2
16.4
20.8
17.4
20.7
7.3
6.2
9.1
13.0
18.2
18.1
26.5
7.4
7.7
Source: Status and Trends: Vital Statistics, Education, and Public Finance, NSF research report
1959—R13.
The amount of education received by new entrants into the labor
force has also been rising rapidly. The percentage of the popula
tion in the age brackets 14 to 17 who are in high school has risen sub
stantially as shown in table 2-5. Similarly, the percentage attending
college has risen even more dramatically. The number of days in the
typical school year has been increasing, while the amount of absentee
ism in school has fallen (see table 2-6).
Table 2-5.— School enrollment as a percent of school-age population
Percent total Percent total Percent total
public school secondary
higher edu
enrollment is school enroll cation is of
of popula
population,
ment is of
population,
tion, 5-17
18-21 years
years
14-17 years
Year
1900_._
___ _______
__________________________
1910___________ __________________________________________
1920
_____________
______________________
1930_____________________________________________________
1940_________ _______ _______________________________
1950_____________________________________________________
1959 ______ _______________________________ ____ _______
78.3
79.9
83. 2
89.6
94.1
94.3
96. 7
11.4
15.4
32.3
51.4
73.3
76.5
82.8
4.01
4.84
8.14
12.19
15. 32
130. 20
39. 97
1 Including veterans. These figures do not indicate the percent of the population in
these age brackets in school, since people in other age brackets also receive higher education.
Source: Research Division, National Education Association, research report 1959— R13, ‘Status and
Trends: Vital Statistics, Education, and Public Finance.”
Table 2-6.— Length of school term and student absenteeism
School year ended
Average
length of
school term
in days
Average
number of
days absent
by pupils
enrolled
1900________________
1910________________
1920________________
1930________________
1940________________
144.3
157. 5
161.9
172.7
175.0
45.3
44.5
40. 7
29. 7
23.3
School year ended
1950________________
1952 _ ___________
1954 . _
1956
.................
Average
length of
school term
in days
177.9
178. 2
178. 6
178.0
Average
number of
days absent
by pupils
enrolled
20.0
22. 2
19. 7
19.5
Source: “ Status and Trends: Vital Statistics, Education, and Public Finance NEA.
1959-R 13.”
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
47
The effect of education on productivity is not readily quantifiabla
The incomes paid to people with more schooling are higher; but innate
ability, family position, and income from personal wealth associated
with education make it difficult to separate the influence of these
factors.5a
2. Increasing Skills
The labor force has also become more skilled, and has adapted to
the change in technology (table 2-7). Unskilled workers, who were
36.0 percent of the labor force in 1910, represented only 19.9 percent
in 1957. While the percentage of semiskilled workers rose from 14.7
to 20.1 percent, the percentage of skilled workers rose only from 11.7
(1910) to 13.9 (1957). Professional and technical workers exhibit a
marked increase over the period, 4.4 percent to 9.9. In addition
the percentage of clerical and administrative workers has risen from
10.2 percent to 21.8. This growth in professional and clerical em
ployees has easily absorbed the rising number of high school and
college graduates. In recent years employment experience in the
white-collar fields has been better than in blue-collar jobs.6
T able
2-7.— Occupational distribution of experienced civilian labor force, 194057, and gainful workers, 1910-30, as a percent of total labor force
Years
1910____________
1920____________
1930____________
1940____________
1950____________
1957____________
Proprietors,
managers,
and officials
as percent of
labor force
23.0
22.3
19.9
(18 0)
(17. 4)
(14. 5)
Clerks and
kindred
workers as
percent of
labor force
Skilled
workers and
foremen as
percent of
labor force
11.7
13.5
12 9
(11.7)
(13. 0)
(13.9)
10.2
13.8
18.3
(16. 3)
(18.9)
(21.8)
N
Semiskilled
workers as
percent of
labor force
14. 7
16.1
16 4
(18. 7)
(20. 8)
(20. 1)
Unskilled
workers as
percent of
labor force
36.0
29.4
28.4
(28. 3)
(22. 7)
(19. 9)
Professional,
technical,
and kindred
as percent of
labor force
4.4
5.0
6.1
(7. 0)
(7. 3)
(9. 8)
otes
1910-1930: “ Economic Forces in the United States,” Facts and Figures (June 1957).
1940-1950: Current Population Reports, June 1959, table f.
1957: The 1957 figure was found by taking the average of the ratios 1940 and 1950 of: Current population
figures to Facts and Figure estimates and adjusting the Facts and Figures estimate for that year.
S. Improving health
The improving health of the labor force has also made a consider
able contribution to output, with less man-hours lost through illness
and death. Mortality rates have fallen, particularly in the working
years. Many of these gains are behind us, with mortality rates in the
working years already quite low. Cancer remains as the major cause
of death during working lives. Mental illness also cuts deeply into
productivity and output, with 574,000 people (1955) completely out of
the labor force in mental institutions.7
5a For some interesting pioneer work on the effect of education on income, expressed as a
rate of return on the investment in education, see Gary S. Becker’ s “ Evidence of Under
investment in Education,” a paper to be presented at the annual meetings of the American
Economic Association, December 1959.
6 The Extent and Nature of Frictional Unemployment,” by B LS, study paper No. 6.
7 In his recent study, “ Economics of Mental Illness,” sponsored by the Joint Commission
of Mental Illness and Health, Dr. Rashi Fein points out that private psychiatric and gen
eral medical care of the mentally ill costs over $1 billion a year, not counting loss o f
income, which more than doubles this figure.
48
EM PLOYMENT, GROWTH, AND PRICE LEVELS
F . TE C H N O L O G IC A L PROGRESS
Continuous technological progress has pushed output per man-hour
up steadily. Better plant layouts, more efficient machinery, and new
processes have been devised, both through formal research and through
many small cost-cutting innovations devised directly in the plants.
Foreign students of American industry are struck by the many small
ways in wThich the American factory produces more output. This
know-how, which is the product of innovation-minded management
and alert, cooperative workers, is as much the secret of American pro
ductivity as any other single factor. Our system of collective bar
gaining, which permits workers to share in the benefits accruing from
these advances, facilitates the steady introduction of new methods.8
G.
RESOURCES
The United States has been extremely fortunate in the abundance
and variety of natural resources 9 which it possesses. The abundance
of land, forests, fisheries, and wild game, provided the basis for our
early growth. The many energy resources, minerals, including iron
ore and coal, and the rich land for agriculture stimulated our subse
quent development in the 19th century, and has proved more than
adequate up to the present. As the economy has grown, our resource
needs have been met by a falling fraction of the labor force, particu
larly in agriculture. However, as American industry has expanded,
a rising share of resources has come from abroad.
8 See the testimony of John T. Dunlop and George W . Taylor, hearings, pt. 8 , pp. 2 7 4 1 2742, 2 5 9 2 -2 5 9 3 .
9 This section draws heavily on Study Paper No. 13, “ The Adequacy of Resources for
Economic Growth in the United States,” by Joseph L. Fisher and Edward Boorstein,
Table 2-8 .— Resource trends in the United States, 1870-1954
Consumption of resources (1947-49=100)---------------------- ------------- ------Agriculture____________________________________________ ________
Timber products__________________________ ____ ____ _______ ____
Minerals_______________________________________________________
Per capita resource consumption (1954 dollars)_______________________
Agriculture____________________________________________________
Timber products_____________________________________ _________
Minerals_________________________________________________ _____
Output of resources (as percent of GNP in 1954 prices)------------------------Agriculture____________________________________________________
Timber products___________________________ ___________________
Minerals_______________________________________________________
Price of resources (deflated by BLS general wholesale index, 1947-49=100) Agriculture____________________________________________________
Timber products_______________________________________________
Minerals_______________________________________________________
Net resource imports (1947-49=100)__________________________________
Agriculture____________________________________________________
Timber products_______________________________________________
Minerals *_____________________________________________________
Employment in resource industries as percent of total employment_____
Agriculture____________________________________________________
Timber products_______________________________________________
Minerals______________________________________________________
1 1879 nearest year.
2 1889 nearest year.
3 1869 nearest year.
* Including gold (of which there were large movements in some years).
1870
1880
1890
1900
1910
1920
1930
17
19
23
27
i 50.0
6.4
191
138
i 12
14.8
32
25
3.7
2.0
66
69
29.3
66.4
-75
-394
30
32
2 73.6
12.9
195
132
2 14
23.8
29
21
3.9
2.8
66
68
35.9
64.7
-77
-371
7.8
51.9
49.5
.3
1.8
-1 .9
45.4
42.3
.4
2.4
41
43
113.3
19.7
221
147
18
30.1
27
19
3.9
3.4
68
68
39.7
72.9
-107
-495
-27. 7
-6 .3
40.5
36.9
.4
2.9
53
54
121.7
37.9
237
152
16
47.6
22
15
2.8
4.2
76
83
40.6
64.2
-69
-285
-28.0
-14.2
33.9
30.4
.4
2.9
62
63
102.2
52.4
238
152
12.0
57.1
21
14
2.0
4.9
83
78
62.1
105
-56
-310
8.0
8.4
28.5
25.2
.4
2.7
68
70
81.0
60.5
226
148
7.9
56.9
17
11
1.2
4.3
85
82
53.8
98.4
16
-113
-5 .0
24.2
25.2
22.6
.3
2.1
3.0
174
125
3 11
8. 72
36
27
4.0
1.5
78
69
26.6
119
-31
-148
-1 .2
51.9
49.9
.2
1.5
1940
86
92
87.4
73.4
266
179
8.0
64.4
16
10
1.0
4.1
78
72
70.5
97.7
294
482
35.2
266. 7
21.4
19.0
.3
1.9
1950
103
100
113.0
108.8
279
171
9.0
83.1
13
8
.77
3.6
96
92
108.5
103
76
120
204. 6
51.6
14.6
12.5
.3
1.6
1954
110
108
113.7
116.8
279
172
8.5
83.4
12
8
.69
3.3
90
82
104.2
107
88
96
177. 2
75.5
11.8
10.1
(5)
1.2
8Not available.
Source: Neal Potter and Francis Christy, Jr., “ U.S. Natural Resource Statistics,
1870-1955,” Resources for the Future, Inc., preliminary draft.
i4^
CO
50
EM PLOYMENT, GROWTH, AND PRICE LEVELS
In the coming years, “resources are not likely to restrain growth in
any general way,” according to the study paper by Joseph L. Fisher
and Edward Boorstein. There will be specific resource problems and
shortages of some raw materials as demand shifts suddenly. Re
liance on imports will probably increase. But over all, we can look
ahead to continued benefit from the ample resource base with which
this country lias been endowed.
II.
IN T E R IN D U S T R Y
S H IF T S
A significant share of the gain in output per man-hour has been
achieved by transferring workers from fields in which the level of pro
ductivity was fairly low to the technically more advanced sectors.
Fabricant’s measures of productivity shed some light on the contribu
tion of interindustry shifts to the total rate of increase. While
physical output per unweighted man-hour rose at a rate of 2.4 per
cent from 1889 to 1957, physical output per weighted man-hour rose
at 2 percent, the difference being due to shifts among industries.
Thus, they appear to have accounted for one-sixth of the total gain
in productivity.
Less gain can be expected from these shifts in the future; employ
ment in services is rising, a sector with only slowly rising produc
tivity, while employment in manufacturing, the most important highproductivity sector, appears to have leveled off at least for the present.
I.
C O N C L U D IN G C O M M E N T O N T H E L O N G -R U N IN C R E A S E I N
THE
SUPPLY
OF O U T P U T
Several factors have been enumerated as determining the growth of
long-run supply. Economic science cannot yet give us firm estimates
of their relative significance. This task is particularly difficult be
cause the factors are not independent. For example, the effect of an
increase in the rate of capital accumulation depends on the quality
of the labor force and the rate of progress of technology. Nor does
economics reveal the contributions at the margin. Would an addi
tional expenditure on education yield a higher growth return than
the same amount spent on health, on research, on private capital, or
on public works? It is to be hoped that in the coming years our
knowledge will improve with research. In the meantime, we know
that these factors are the ingredients of growth; to accelerate the
expansion of our economy, policy must promote these factors.
Fortunately, in the United States, health, education, technological
progress, and private and public capital formation need not be com
petitive wTith each other. By promoting all of them, even in the ab
sence of knowledge about the exact best combination of policies, we
can accelerate the growth of supply of output.
V . T h e L ong -R u n G row th
of
D em and
The movements of the gross national product over the last 60 years
reveals long stretches over which demand rather than supply deter
mined the growth of output. Periods of recession and depression
alone accounted for 24 years, and even in some of the years of pros
perity output fell short of potential supply. Since World War II,
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
51
when depressions have no longer occurred, recessions accounted for
a total of 14 quarters. No study of potential growth can, therefore,
proceed very far without considering the demand side of the equation.
In the late 1930’s, there was considerable fear that private demands
alone would not be sufficient to permit high employment. Since then,
Government expenditures have remained so high that this hypothesis
has never been put to the test.
More important, we have learned that the total level of demand
can be managed by fiscal and monetary policies, and even if Govern
ment does not choose to manage demand (perhaps using other objec
tives to determine economic policy), its operations are so large that,
willy-nilly, it drastically affects it. Our shortrun capability to set
total demand equal to supply is still quite limited, particularly once
the economy is sliding into recession. Also, our forecasting skills
fall far short of perfection. But as a longrun phenomenon, the
Government is capable of preventing a shortage of purchasing power
by fiscal and monetary policy.
Whether maintenance of total demand will require Government
stimulation through budget deficits depends on the willingness of
consumers and of business to spend, rather than to save, the additional
incomes they will be receiving in coming years. On the consumer side,
there appears to be no tendency for the proportion of income saved
to rise over long periods. Goldsmith in his classic study of saving
finds little change in the saving-income ratio; in the three postwar
cycles, the ratio including consumer durables was about the same as in
the 1920’s, a little lower excluding them.10 The rise in wants matches
10 Goldsmith summarizes his evidence as follows:
During the entire period covered by this study, i.e., from 1897 through 1949, households—including
farms and unincorporated business enterprises—saved on the average a little more than one-eighth of their
income. This figure is unfluenced by the extraordinarily high saving ratios during war periods. If these
years as well as the particularly low ratios of the great depression are excluded, the average personal savings
ratio for what may be called the “ normal” period (1897-1916, 1919—
29, 1934-41, 1946-49) amounts to approxi
mately one-ninth. In periods of practically full employment during peacetime (1902, 1905, 1929, 1929, and
1948), the ratio has been substantially higher, savings averaging approximately one-seventh of personal
income after taxes. These ratios include saving through consumer durables. Without it, all ratios are
between one-tenth and one-fourth lower. For example, the personal saving ratio excluding consumer
durables averages approximately one-twelfth for the normal period. Raymond Goldsmith, “ A Study of
Savings in the United States,” vol. I, pp. 6-7.
The relevant data are summarized in the following table:
Cycle averages of personal saving-income ratios 1
Personal saving ratio
Cycle reference trough to reference trough
1896-1900
_________ _________________________________________
1900-04__________________________________________________________
1904-08-. _______________________________________________________
1908-11
_______ . .
____________________________________
1911-14
.
______ _____________________
1914-19.. _______________________________________________________
1919-21_______________________ __________________________________
1921-24__________________________________________________________
1924-27.. ______________________________________________________
1927-32__________________________________________________________
1932-38__________________________________________________________
1938-46 ___________________________________________ ____ ____
1946-492_________________________________________________________
1 Source, Goldsmith., p. 76.
2Subsequent figures are not available.
Including
consumer
durables
9.4
10.5
12.0
10. 5
10.3
16.1
8.8
11.0
13.9
7.4
2.0
19.4
13.4
Excluding
consumer
durables
8.1
9.0
10.4
9.1
9.0
15.2
8.4
9.0
10.6
7.1
2.0
18.5
8.5
52
EM PLOYMENT,
GROWTH,
AND PRICE LEVELS
the rise in incomes. As our society becomes wealthier, our standards
rise. The vast effort devoted to research and development of new
products is also some assurance that total demand will not prove in
adequate because of consumers’ unwillingness to spend their incomes.11
As for the willingness of business to spend the funds it accumulates
from depreciation allowances and the retention of earnings, as a longrun phenomenon investment outlays have at least equaled and typical
ly exceeded these cash flows. Business has been a net borrower,
though only to a small extent. The main outlet for personal savings
has been Government borrowing to finance deficits, and mortgage
loans to other households.
Thus, there is presently little evidence that the spending tendencies
of income recipients will lead to any shortage of demand. Short-run
fluctuations will continue to occur, of course, and stabilization policies
must seek to offset them as much as posible.
VI. L ongrun P olicies
for
G row th
What would it take to raise our longrun rate of growth in output by
1 or 2 percent ? A rate of growth of 2y2 to 3 percent will mean a very
slow advance in our standard of living, continued severe, though selfimposed financial limits to the accomplishment of public responsibili
ties in the domestic field, and most important of all, a level of invest
ment of economic resources for the duties of free world leadership
which is likely to prove inadequate. To raise the rate of growth of the
American economy to 7 or 8 percent, the current Russian rate, is im
possible without revolutionizing our system, and is probably unneces
sary. As the gap between the levels of per capita output in the two
countries narrows, the rate of growth of the Russian system is likely
to decrease. The possibilities of imitating more advanced technology
diminishes; the effectiveness with which capital can be used will fall,
and gradually, as more of the labor force is drawn out of agriculture
into industry, the rate of growth of the industrial labor force will fall
and will set some limit to their growth. A deliberate stunting of the
growth of services might leave industry with a continued large influx
of workers, but the overall increase is likely to fall.
It would be quite unfounded optimism to envisage that the Russian
rate of growth will fall to the levels of 2 to 3 percent that has character
ized the American economy in recent years. Our rate of growth was
accomplished with no gains in the size of the industrial labor force
whatever (manufacturing, mining, public utilities, and transporta
tion), a state of affairs the Russian Government is hardly likely to
tolerate for many years to come.
Were the American rate of growth in output to reach levels of 4 to 5
percent, rates that are absolutely feasible, the gap between the two
economic systems would close very slowly—so slowly that with an ac
celeration of effort in a few crucial fields, such as military technology
for the strategic deterrent mission, an increase in limited war capa
11 See James S. Duesenberry, “ Income, Savings, and Consumer Behavior,” Harvard University Press,
1949, for the significance of rising standards; see Franco Modigliani, “ The Income-Savings Ratio,” in the
National Bureau of Economic Research, “ Studies in Income and Wealth,” where the significance of new
products is stressed. Also see Sumner H. Slichhter’s contribution in National Science Foundation,
“ Report of a Conference on Research,” May 1958, where these and other impacts of research and develop
ment are set forth.
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
53
bility, space exploration, and development assistance to backward
areas— and the longrun Russian challenge could be met successfully.
In this section, some of the essential policies are outlined.
A . PR OVISIO N FOR A N AD E Q U A T E G R O W T H OF D E M A N D
The single most important requirement for successful expansion of
the economy is the growth of demand at a rate equal to the expansion
of productive capacity. Other efforts to raise output will be frustrated
if demand is not growing at the same rate.
Fiscal and monetary policies are the means by which government
influences demand. Prior to the growth of government of the last 30
years, fiscal policies had little influence. Today, the very size of gov
ernment makes its actions important. Further, the automatic stabili
zers which cushion declines in the economy in recession by maintain
ing purchasing power, limit the expansion of purchasing power in
periods of growth. Monetary policy, the effectiveness of which had
been limited by the great liquidity put into the economy by World
War II and its aftermath, today also lias become somewhat more
powerful again and can check demand, at least in some sectors.
In chapters 8 and 9 below, the workings of these policies are pre
sented in detail, and specific policy recommendations in these fields are
presented there. Here, only the importance of the total impact of the
entire set of demand policies is stressed.
The growth of demand is important not only to avoid short-term
stagnation and recession, but also as a continuing stimulus to the un
derlying long-run forces in the economic system.
Strong demand will have the following important results:
(1) The shrinkage in the workweek will be smaller;
(2) Productivity will advance more rapidly;
(3) The level of investment will be greater, and
(4) There will be less restrictive practices such as protection against
free competition, government-backed price maintenance schemes, and
subsidies of various sorts.
B. IM P R O V E M E N T
OF T H E
LABOR F O R C E ! T H E
P O T E N T IA L OF E D U C A T IO N
Rising educational levels have kept productivity advancing. While
American workers are better educated than others, continued im
provement in the quality and quantity of education is an essential in
gredient of further productivity gains. Even today many individuals
terminate their education long before reaching the full development
of their talents. Also, a large fraction of our labor force is trained
in schools of poor quality. Table 2-9 summarizes some of the more
significant evidence of differences in the quality and quantity of edu
cation in different parts of the country. Whereas 14 percent of the
population aged 14 to 17 do not attend high school in the top 12 States,
22 percent do not attend in the bottom 12.12 Also, the high school
completion rate is much lower in the bottom 12. The number of stu
dents going on to college is much higher in the top than in the bottom
States.
32 Criteria for determining State rankings based on expenditures per pupil per average
daily attendance.
54
EM PLOYMENT, GROWTH, AND PRICE LEVELS
T able
2 -9 .— D ifferen ces in education expenditures and am ount o f schooling
among S ta tes
Estimated current expend
iture
per pupil
in
average daily attend
ance, 1958-59
Percent in
crease 1948-49
to 1958-59
Percent of
population
25 years old
and older
with 4 or
more years
of college,
1950
535
520
463
435
420
413
410
410
390
390
380
87.8
64. 7
69. 2
86. 6
88. 7
69.1
53.4
66. 7
52. 5
91. 7
59.8
7.4
7.3
6.8
7.1
7.3
6.6
5. 9
7.3
8.1
6.9
5.8
12.4
n.a.
13.7
14. 6
18. 2
8. 6
12.9
10. 8
9. 5
19. 2
18.6
11.5
_____ _________
___ _ ________
429
340
70. 7
67.4
7.0
6.0
13.5
16.3
Bottom 12 States:1
Idaho ____________________ ________ ______
Maine __ ______________________ _____
Virginia_______________ _________________
West Virginia. ......... .
___________ ___
North Carolina ________ _______ ____
South Carolina____________ _____________
Georgia...... ........ ... __ ___ ------------------------Kentucky _____________ ______ _____ _
Tennessee_________________ ________ ____
Arkansas _______________ _______ ______
Mississippi______ ____ __ ______________
_________
Alabama_________ ______ __
270
255
245
225
220
215
208
205
205
201
181
164
68.0
71.4
82.6
54.1
73.3
87.6
94. 7
76. 5
76.1
101. 4
135.1
53.2
4.3
6.3
4.8
5. 5
5.0
5.4
4.5
3. 8
4.1
3.1
3.8
3.6
11. 5
17.2
22.4
21.3
21. 9
28.0
26.6
30. 1
22.6
22. 5
22. 1
22.0
Average__________________ _____________
216
81.2
4.5
22.4
Dollars
Top 12 States: i
New York______________________ ________
Alaska,-- ______________ ________
.
New Jersey.-- _________ __ _______ _____
Wyoming____________________ ____ __ __
Delaware ___________ ________ _____
Oregon _________________ _________ ___ ___
Illinois _______________ _________________
Nevada________________________ _________
California __ _______ _________ _________
New Mexico ___ ______________ _____ ___
Connecticut_______________ __________ ___
Michigan 3 _____________________________ _
Average___ ____________
U.S. average..- ___ _
Percent of
population,
14 to 17, not
attending
high school,
1950
i Criteria for determining the ranking of the States was the estimated current expenditure per pupil in
average daily attendance 1958-59.
3 Where data for Alaska was not available, Michigan, the 13th top State, was used.
Sources: “ Rankings of the States,” Research Division, National Education Association, 1959-R4;
Gaumnitz, “ High School Retention by States,” U.S. Department of Health, Education, and Welfare
circular No. 398.
Differences in expenditures per student are also very large. In
the top 12 States, expenditures per pupil per day in the years 1957-58
were $429 as contrasted with $216 in the bottom 12 States. Differences
in the length of the school year varies from 180 days in the top States
to 175 in the bottom group. Teachers’ salaries average $5,405 in the
top States and only $3,546 in the bottom. To some extent this reflects
differences in regional incomes, but there are also differences in quality.
For example, 92.1 percent of elementary school teachers in the top
States have had 4 years of college, while only 40 percent had similar
qualifications in the bottom group. These differences in expenditures
are not due to differences in financial effort. The schools in the bottom
group have a much larger fraction of their population enrolled in
school because of differences in the age structure of the population,
197 in the top 12, as compared to 236 in the bottom. There are also
enormous differences in per capita disposable personal income, with
the top 12 States receiving an average or $1,879, while the bottom
States had an average income of only $1,183. Because the poorer
States have relatively more children, the differences in personal income
per student are even greater than the differences per capita, making
for an even wider range of financial capacity in relation to need.
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
55
A continued increase in educational standards in the coming years
will have to occur in the face of rising enrollments. According to
projections prepared for this study by Prof. Werner Hirsch,13 total
education costs wTill rise from $11 billion in 1958 to about $17.4
billion in 1965, an increase of 58 percent. With present financing
efforts, no more than $15.3 billion is likely to be available, suggesting
that unless new sources of funds are found the rise in standards which
has occurred over the past 50 years will slow.
We therefore recommend that a program of Federal aid to education
be enacted which woidd provide substantial financial assistance to
those States which have the largest school populations and the least
financial resources.
From an economic point of view such aid should be for teachers
salaries or be on some per pupil basis, but in order to prevent Federal
control of educational policy it may be more desirable to give the aid
in the form of construction grants. Whatever the form of the aid,
it should come in such a pattern that it puts the money where it is
needed.14
Diversity and local initiative and control are traditional in Ameri
can education and should be preserved. But many of these differences
are simply due to lack of financial resources, and are a part of the
general problem of financing the services of State and local govern
ments. By one means or another, funds collected from the lucrative
Federal tax base must be funneled into education, particularly in lowincome States and school districts, whether this is done by grants-inaid for construction, or by some other method.
This recommendation is the single most important policy step which
would promote the economic growth of the country in the long run.
If we are serious about growth, we must be concerned with the tre
mendous underdeveloped potential of our labor force in those parts
of the country where school systems are substandard.
Education beyond the high school, which bears critically on the per
formance of managerial, technical, and professional tasks, is another
area of necessary investment for growth. Here too, rising numbers
will necessitate large efforts just to hold standards constant. But, in
addition, full utilization of the potential of our population requires
that the present large educational attrition of talented individuals be
reduced. Recent studies 15 found that at least 60 percent of students
in the top quarter of ability of high school classes do not go to college.
Economic factors play an important role in determining who will at
tend college. Recent nationwide figures show that about two-thirds of
high school graduates whose fathers were in professional and semiprofessional occupations, one-half whose fathers were in managerial
and white collar categories, and one-fourth of those whose fathers
were farmers or manual workers continued their education. Other
factors such as religion, race, geographical locale, and age at the time
of high school graduation also played a determining role.
Education must also be strengthened to accomplish the very specific
13 Werner Hirsch, “ Analysis of the Rising Costs of Public Education, Study Paper No. 4 .”
14 This view is also expressed in the hearings by Richard A . Musgrave and others. See
hearings, pt. 9, p. 2763.
15 See Charles C. Cole, Jr., “ The Identification and Encouragement of Scientific T alent,”
a report to the National Science Foundation.
56
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
national objectives of free-world leadership, the East-West techno
logical competition for military, civilian, and symbolic purposes re
quires full development of the best potential scientific talent of our
population. The recently enacted National Defense Education Act
does much to solve this problem, though the failure to include a schol
arship program hurts its effectiveness. Technical assistance programs
require an abundance of trained and dedicated technicians.
The Soviet Union has staked its future on education. As Commis
sioner L. G. Derthick writes in his recent report on his trip to Russia:
The one fact that most impressed us in the U.S.S.R. was the extent to which,
the nation is committed to education as a means of national advancement. In
the organization of a planned society in the Soviet Union, education is regarded
as one of the chief resources and techniques for achieving social, economic, cul
tural, and scientific objectives in the national interest. Tremendous responsi
bilities are therefore placed on Soviet schools, and comprehensive support is
provided for them by all segments and agencies of Soviet society.16
The Soviet Union is devoting 10 to 15 percent of its gross national
product to investment in education, while the United States is content
with 3.2. Much of their expenditure has to be devoted to training the
technicians necessary to staff the modern economy they are building,
and is a form of catching up. Nevertheless it is pretty clear that our
efforts in this area are inadequate, both in facilitating a high rate of
productivity advance and in meeting the technological competition.
To assure maximum development of talent, we recommend a national
scholarship program, based on merit, but with a geographical distri- ,
bution that assures that talented youngsters from inferior school sys
tems are given an equal opportunity. The programs to identify talent,
which are a part of the National Defense Education Program, should
be continued. In addition, whatever steps would encourage talented
students to attend college, by providing motivation, making informa
tion available, etc., should be taken.
C. IM P R O V E M E N T OF T H E LABOR FORCE I H E A L T H
The largest economic gains to be realized from improving health
standards have already been scored. Nevertheless, much remains to
be done. General measures to improve mental and physical health
will have effects both on the size and the productivity of the labor
force.
We therefore recommend that the programs of support of medical
research by the Federal Government be advanced as rapidly as is
feasible. We also recommend continued expansion of the programs
to promote vocational rehabilitation which restore individuals to
active participation in the labor force.
D. M A I N T A I N I N G T H E RATE OF P R O D U C T IV IT Y AD V A N C E : F A C IL IT A T IN G T H E
IN T R O D U C T IO N OF N E W
TECHNOLOGY
New technology leads to severe problems of human adjustments:
jobs long held are destroyed; work crews change in size; workloads are
changed, and work rules are modified in many other small and large
ways.
16 “ Soviet Commitment to Education,” report of the first official U.S. Education Mission
to the U .S.S.R ., U.S. Department of Health, Education, and W elfare Bulletin 1959, No. 16,
p. 1 .
EM PLOYMENT,
GROW TH, AND PRICE LEVELS
57
In much of American industry, work rules have come to be deter
mined by negotiation in collective bargaining.17 By this process, the
social costs of change have come to be balanced off against the gains
and have been borne in a more equitable manner. With some excep
tions, this system has worked extremely well. The American worker
is probably more willing to accept changes in work rules than workers
in any other free country.
The degree of workers’ resistance to technological change depends
on the outlook for alternative employment. One witness, who saw
increasing rigidity against changed work rules in the mass production
industries traditionally relatively free from such resistance, attributes
it to the general decline in production worker employment in recent
years.18 To prevent acceleration of this trend, means must be found
quickly to fit the worker for another job, and to have the economy
prosperous so that jobs are plentiful. In addition to the piecemeal
unemployment generated by technological advances in existing plants,
the changes in products demanded and the shifts in geographic pat
terns of location lead to layoffs. The human adjustments that must
be made are part of the cost of rising national productivity. Some
resistance to such changes, reflected in demands for protection from
foreign competition, in restrictive labor-management agreements, and
in other ways, is inevitable since there are serious human dislocations.
To keep the economy moving forward, the sting must be taken out of
these adjustments.
Several witnesses recommended that special provision be made in
our employment compensation system for workers laid off by techno
logical change.
For example, our unemployment compensation system might be modified to
provide that men who had 15 years’ seniority—I am not going to quarrel about
the particular number of years—in a plant who are displaced for technological
reasons shall be entitled to double benefits for a period twice as long, provided,
however, they shall make themselves available for retraining programs and
retraining skills.19
Despite the most imaginative efforts of public and private agencies to avoid or
shorten the duration of structural unemployment, however, we can be sure that
some families will always be subject to its effects. In particular, it will always
prove more difficult to retrain or relocate older workers. Youngsters caught by
structural economic changes can be expected to make the adjustment on their
own, with relatively little assistance, perhaps only a little guidance. But the
older the worker the less adaptable is he likely to be to changes thrust on him.
For those who are in the clutch of such circumstance, a longer period of transi
tion is necessary— transition either to a new, probably less desirable, employ
ment situation, or to new financial arrangements, probably involving a lower
standard of living and a dependency relationship. These adjustments, even if
they may be ultimately inescapable, should be cushioned by a longer period of
preparation for them. Some form of income support of longer duration than un
employment compensation programs usually provide is needed.
I suggest the following simple formula as one possible approach. Recognizing
that whatever is done in this area will have to be undertaken by the Federal
Government if it is to apply uniformly throughout the Nation, we might consider
Federal continuance of unemployment compensation—at State levels—past the
date of their normal exhaustion. To take account of the age factor, I would
suggest additional benefits at the rate of 1 week for each year o f employment
for those up to age 40; for those in the age bracket 40 to 50, 1% weeks of addi
17 See the testimony of George W . Taylor, “ The Economics of W orking Conditions” in
hearings, pt. 8 , p. 2591.
& Testimony of Jack Stieber, hearings, pt. 8 , p. 2600.
19 John T. Dunlop, hearings, pt. 8 , p. 2746.
48795— 59-------7
58
EM PLOYMENT, GROWTH, AND PRICE LEVELS
tional benefits fo r each year of em ploym ent; and for those older than 50, 2 weeks
o f benefits for each year o f employment. Thus, for example, assuming a benefit
duration o f 26 weeks under a State unemployment compensation plan, a man
displaced at age 35 after having worked for 15 years would receive 15 weeks’
additional benefits or a total of 41 weeks. At age 45, after 26 years o f employ
ment, he would receive an additional 39 weeks o f benefits or a total o f 65 weeks
o f income support. And at age 55, after 35 years o f work, he would be entitled
to an additional 70 weeks or a total o f 96.
I f these totals sound high, may I remind you that they would be paid only
i f the individual remained unemployed. And I would argue the case that it is
not excessively generous to allow a person who has had a work career of 25
to 35 years, after which his job has been shot out from under him, something
less than 1 to 2 years to make a difficult adjustment to a less desirable economic
status.20
1. Without endorsing any specific proposal, me recommend that a
program be developed and adopted which would make special provi
sion icithin the unemployment insurance system for markers who are
laid off by technological change, with benefits related to seniority.
2. W e also recommend a special program for problems of adjust
ment in depressed areas. This program is discussed below in the
chapter on employment.
Recently, new institutions have begun to be developed, which should
further facilitate technological change. In the West, Coast long-shore
industry, an agreement has been signed which sets aside a fraction
of any savings caused by new technology to be allocated among the
workers; in meatpacking, the Armour Co. has agreed to set up a fund
to be devoted to retraining, relocation, and other adjustments for
workers displaced by technological change.21
The contract between the United Steel Workers Union and the
Kaiser Steel Co. provides for a study to devise similar institutions.
Private collective bargaining is bringing about these advances. We
must continue to rely on this institution as the main method of “greas
ing the way,” in the words of Dunlop. Government policy can prob
ably have little impact on this process. But insofar as public policy
deals with labor-management relations in the coming years, it should
seek to encourage, not discourage, the development of these new
agreements which serve to ameliorate the human impact of changing
technology.
E . M A I N T A I N I N G T H E R ATE OF P R O D U C T IV IT Y A D V A N C E I
R A IS IN G S K IL L S
In the coming years, the potential use of a continued rise in skill
levels is very great as automation and other complicated technologies
spread through industry. The large number of new and untrained
entrants into the labor force, coupled with a particularly low level of
male workers in the high-skill ages of 25-44, will make it difficult to
provide the economy with a sufficient number of highly skilled
workers.22
To increase the supply of skilled workers, several steps should be
taken :
1.
Unions should be encouraged to expand their apprenticeship
programs.
20 Neil W . Chamberlain, hearings, pt. 8 , pp. 2 7 0 5 -2 7 0 6 .
21 See testimony of John T. Dunlop, hearings, pt. 8 , p. 2741.
2a See testimony of John T. Dunlop, and U.S. Bureau of the Census, Population Reports.
EMPLOYMENT,
GROW TH, AND PRICE LEVELS
59
2. The work of the Bureau of Apprenticeship of the Department of
Labor should be expanded.
3. Policies should be devised which discourage union restrictions
to entry into apprentice programs for skills that are scarce.
J+. Vocational training programs in schools should be examined and
strengthened both by an expanded Federal program and by intensified
efforts of State and local governments. The cooperation of industry
in pointing out future skill needs is essential in meeting this problem.
5. Some of the skills that are going to be needed to man the new
technology will be of a highly technical and semiprofessional nature.
Junior colleges will be the institutions in which this training can be
given. With the enormous groivth of these institutions just ahead,
studies which explore their potential role in the area of technical
training are desirable.
6. Serious study should be given to the possibility of setting up
national productivity centers 23 of the type that the United States
encouraged, other countries to institute as part of the Marshall plan.
Such productivity centers might particularly emphasize the develop
ment of new techniques in the loio-productivity industries of the
economy, many of lohich consist of small highly competitive units,
too small to support research programs. The success of Federal
research for agriculture suggests the great potential of Federal re
search for industries unable to support their own research.
F . T H E P R O M O TIO N OF SCIEN CE A N D T E C H N O L O G Y
To keep the scientific foundations of economic progress advancing,
Government’s most important duty is to create a favorable environ
ment for science. The Government can promote this objective by
encouraging the free exchange of ideas and the unfettered pursuit of
knowledge. The Government should also, by its own actions and pro
nouncements, promote public understanding of the work of scientists.
In addition to these very general responsibilities, the Federal Gov
ernment today plays a critical role in maintaining our scientific estab
lishment. Total research and development expenditures in the econ
omy amounted to about $10 billion in 1957.24 At least half of the
expense was met by the Federal Government. Of all the research and
development conducted by private industry, which amounted to $7.2
billion, the Federal Government provided 52 percent of the money.
23 See the testimony of Solomon Barkin in the Joint Economic Committee hearings on
the January 1959 Economic Report of the President, p. 308, and his further evidence to
appear in hearings of this study.
24 “ Reviews of Data on Research and Development,” National Science Foundation.
NSF—5 9 -4 6 .
60
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Table 2-10.—Funds for research and development performance financed by the
Federal Government, by industry, 1957
Federal funds
Federal funds as percent of
(millions of total research
and develop
dollars)
ment 1
Industry
All industries 2______________________________________________
_____
Industrial chemicals______________ ______________________________________
Drugs and medicines and other chemicals ____________________ _____ ______
Petroleum refining and extraction 3___ _______________ __________ ___ _____
Stone, clay, and glass products_____________________________________________
Fabricated metal products_________________________________________________
Machinery, except electrical___ ___________________________________________
Electrical equipment_______ ______ ________________________________________
Motor vehicles and other transportation____________________ _____ _________
Aircraft and parts____ ________ _____ __ ______ ________________________
Scientific and mechanical measuring instruments_____________________
Optical, surgical, photographic, and other instruments............ ..........................
Other manufacturing 4______________________________ _____ ________________
Communications.-____ _______________________________________________ _
Other nonmanufacturing ®_____ ____ ___________ _______ __________________
3,741
52
33
1
9
1
42
260
717
212
2,165
38
33
110
112
8
9
1
4
1
38
38
61
30
85
30
29
23
54
6
1 Percentages are based on unrounded figures.
2 The industries are listed in order of their standard industrial classification; e.g., food and kindred prod
ucts SIC 20, paper and allied products SIC 26, etc.
3 Geological and geophysical exploration activities of petroleum companies are presently excluded from the
definitions of research and development.
4 Includes an estimate for food and kindred products, paper and allied products, primary metal products,
ordnance, tobacco manufactures, textile mills products and apparel, lumber and wood products, furniture
and fixtures, printing and publishing, rubber and plastic products, leather, and miscellaneous manufactur
ing industries.
6 The 1957 figures for certain nonmanufacturing industries are estimates rather than reported amounts.
Source: “ Reviews of Data on Research and Development,’' National Science Foundation, August 1959.
This high level of Federal support and activity is largely due to
the race in weapons technology. It is clear from table 2-11 that the
industries with the largest and most rapidly rising expenditures are
aircraft, machinery, and electronics, which are doing the bulk of their
research for the Defense Department. The other great researchminded industry is the chemical industry, including pharmaceuticals,
which is almost wholly based on industry financed research.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T a b le
61
2-11.—Funds for research and development performance, by industry,
1956-57
Industry
Funds for research and de
velopment performance
(millions of dollars)
1956 2
Percent
change,
1956-57 »
1957
All industries 3_________________________________________
6,018
7,155
19
Food and kindred products__________________________________
Paper and allied products
__
- ______ _____________
Industrial chemicals ________________________________________
Drugs and medicines _______________________________________
Other chemicals'
__
_ _ _ __________________
Petroleum refining and extraction * _________________________
Stone, clay, and glass products ______________________________
Primary metal industries
_________________________________
Fabricated metal products ___ ____________________________
Machinery, except electrical
______________________________
Electrical equipment
_____ __ _________ ________________
Motor vehicles and other transportation___________ __ ____
Aircraft and parts
_____
__ _ ____________________
Scientific and mechanical measuring instruments
__ ___ Optical, surgical, photographic, and other instruments __
Other manufacturing5 _ __ _
_ ____ __________ _
__
Communications
____
____________________
Other nonmanufacturing6
___
_____
__
____
58
44
338
94
89
187
51
93
92
562
941
666
2,109
97
103
209
177
107
68
50
334
109
102
230
61
113
110
688
1,170
708
2, 544
126
113
246
206
126
16
13
14
16
15
23
19
22
19
22
24
6
21
30
10
18
16
18
1 Percentages are based on unrounded figures.
2 Statistics for research and development performance by private firms were also collected by the Bureau
of Labor Statistics for 1956. The total performance figure reported by BLS was $6,231,000,000 or 4 percent
larger than the Bureau of Census figure. The percentage differences between the 1956 figures for the 2
agencies were significantly larger for a number of separately reported industries.
3 Same as footnote 2, previous table.
* Same as footnote 3, previous table.
5 Same as footnote 4, previous table.
« The 1956 and 1957 figures for certain nonmanufacturing industries are estimates rather than reported
amounts.
While the primary purpose of most Government-financed research
is military, it has also been an important source of civilian tech
nology. Developments in electronics, including modern computers,
of iet airliners, of nuclear power, have lamely been byproducts of
military research.
^The Government also makes the market for scientists and engineers,
since it directly and indirectly employs almost half of them. More
people are being drawn into science and engineering as compared
with a few years ago; this is largely in response to the improved op
portunities, and to increased attractiveness of a career which so clearly
constitutes a national service in the context of the East-West struggle.
Given this situation, the Federal Government has a heavy respon
sibility to the country’s scientific establishment. The following
recommendations are designed to meet this responsibility.
1 . There rrmst be assurance of continued adequate financial support.
The Government cannot abandon the vast research programs it
has stimulated. Even in the unlikely event that the need for mili
tary research diminishes, nonmilitary research in the physical
sciences should be supported heavily. The increasing opportunities
in space research, in nuclear power and in many other fields offer
great scope for future activity. As more scientific resources are re
leased for civilian efforts, they will generate their own research op
portunities, provided there are no severe disruptions in the transi
tion period.
62
EM PLOYMENT, GROWTH,
AND PRICE LEVELS
2.
Any economy tvaves in the budget should be executed in a man
ner that do not disrupt research and development programs in
government, industry, and universities.
S. There must be adequate provision for sufficient basic research.
Since Government programs have absorbed so much of the scien
tific resources of the country, including the services of many scien
tists in universities, basic research will be stinted unless there is basic
support for it. The National Science Foundation, the National Aero
nautics and Space Administration, the Department of Defense, the
Public Health Service and other agencies do support and undertake
considerable basic research.25
4- There should also be studies of the appropriate methods of
administering publicly supported scientific research efforts.
Recent studies26 suggest that flexible, decentralized, on-the-spot
authority to choose methods to accomplish general objectives, and
competitive pursuit of alternative research strategies, yield better
results than monolithic central specification of a detailed research
plan.
There should also be some reexamination, without ideological pre
conceptions, of the proper division between publicly financed con
tract research in private industry and work in Government installa
tions.
5. The supply of scientists, engineers and technical personnel
should be increased.
Much is already being done at the graduate level through fellow
ships. The major remaining opportunities for developing the scien
tific potential of the country lie in a general program to cut the at
trition rate in the education of talented youngsters between high
school and college. As pointed out above, a scholarship program is
needed and should be instituted. The supply of subprofessional
technicians, which is particularly short in this country, could be
increased through junior college programs. Finally, the progress
now being made in strengthening the science curricula in our schools
should be encouraged and efforts made to have the weaker school
systems share in the advance.
It should be stressed that all these efforts wTill come to naught if
Government support of research slackens, since employment oppor
tunities in industry and education will not grow fast enough to offset
a substantial decline in the demand for scientific effort now generated
by Government.
Besides these direct responsibilities, the Federal Government,
through its policies, affects the productivity, scope, and direction of
private research.
6. There should be further study to find ways of making the patent
system a more effective tool for technological progress.
The patent system has proved to be an important incentive to the
conduct of research in private industry. At the same time, it has
25 See the Budget of the United States for Government. 1960, p. 989. It is estimated
that a total of $500 million is being spent for basic research out of a total research budget
of $ 1 ,3 0 0,000,000 and a total research and development budget of $ 5 ,500,000,000. More
funds should be allocated to basic research.
26 For example, Burton H. Klein, “ A Radical Proposal for R. and D .,” F ortu n e, M ay
1958.
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
63
also been a frequent device for monopolistic practices, retarding the
introduction of new test products and processes.
7.
While, as the world leader in research and technology, the United
States can gain less from imitation of foreign techniques than other
countries, the rapid advances being scored abroad, particularly in
Western Europe, in the Soviet Union, and in Japan, create new
opportunities for the United States. We have probably been less
alert to progress abroad than any other advanced country. Rela
tively few companies in few industries have conducted systematic
surveys of foreign developments.
The Federal program for abstracting and translating foreign sci
entific and technical journals should be expanded and publicized, and
the results made widely available at low cost. This would be a par
ticular boon for the smaller companies and would have some beneficial
effects both on the rate of technological progress and on the com
petitiveness of industry.
G, A C C E L E R A T IN G T H E A C C U M U L A T IO N
OF C A P IT A L
Since the amount of capital used by each worker affects his pro
ductivity and since new investment is the vehicle for the introduction
of much of new technology, a higher rate of growth requires a higher
rate of capital accumulation. The share of output ploughed back
into investment—excluding housing, which should probably be con
sidered a form of consumption—has been relatively low in the United
States, compared to other countries. Simply increasing the amount of
investment is not likely to produce as dramatic results as the use of
simple capital-output ratios would suggest.27 The magnitude of the
influence on output of any given increase in capital depends in large
part on the age distribution or average age of the existing capital
stock, which reflects the extent to which the latest technology has or
has not been incorporated in productive facilities. And a mechanical
increase in the supply of investible funds may lead to more mischief
than good, as the liberalization of depreciation allowances in 1954
and the subsequent abortive investment boom suggests. But an accel
eration of the growth process in the U.S. economy will undoubtedly
involve some increase in the absolute rate of capital accumulation, and
possibly in the fraction which it constitutes in GNP.
The major factors which determine the level of investment are the
following: 28
1. The degree to which the demand for output utilizes the al
ready existing capacity.
2. The expected profitability of new investment.
3. The magnitudes of the internal cash flows of corporations
from profits and depreciation allowances.
27 In a country in a stage of development similar to that of the Soviet Union, a very high
rate of capital accumulation is more likely to yield a high rate of growth. This is because
the capital is applied to a large backlog of technology developed in more advanced countries
and because there is still an abundant labor supply in farm ing which can be drawn into
industry to use the extra capital.
28 A forthcoming study by Sidney S. Alexander will deal with this question.
64
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
4. The availability and cost of capital to borrower-investors.
5. The prices of capital goods and their relation to the prices of
other inputs.
6. The state of business confidence.
In the long run, these factors determine the general level of invest
ment opportunities:
1. The rate of technological progress, including the advances in
developing new products.
2. The vigor of the entrepreneurial spirit and the effectiveness
of competitive pressure to cut costs, develop new products and
develop and meet new markets in the economy.
3. The stability of political institutions and the security of pri
vate property.
The first four factors hinge on the state of the product market;
profit levels will be high and the need for new capacity strong when
demand for output is strong. The cost of borrowing, a factor that
is of importance primarily in public utilities, because of the long eco
nomic lives of equipment and the use of external financing, depends on
money and credit policies.29
To raise the rate of capital accumulation, the following steps are
necessary: (1) Technological progress must be continued vigorously
and a competitive business environment maintained; (2) demand must
be allowed to grow and keep the rates of utilization of capacity high;
(3) in the event that the supply of investible funds becomes a serious
limit to investment, fiscal measures, such as further liberalization of
depreciation allowances, should be enacted, provided the demand for
capital goods does not promise to outrun the capacity of the capital
goods industries. At the present time, there is no evidence of any
need for such steps; (4) the interest cost of borrowed money should
be kept as low as is possible, consistent with other objectives, particu
larly price stability.
H . RESOURCE P O L IC Y
In this report, no attempt is made to develop a Federal resource
policy and only the following general observations are made:
While the United States does not face any general shortage of
resources, the Federal Government must have continued concern with
those specific items which threaten to be in short supply. Water pre
sents the most serious problem, and its supply and control has tra
ditionally been a public activity. Federal water resource policy must
continue to be adapted to the changing needs of the economy, includ
ing particularly ample supplies for industry and for domestic use.
Research programs for finding new supplies, and programs for more
economical use of water should also be strengthened.
Continued studies, seeking to anticipate emerging resource scarcity,
should also be conducted, and policies devised to deal with it.
I.
S T R E N G T H E N IN G
THE
C O M P E T IT IV E N E S S
IM P R O V IN G T H E
A L L O C A T IO N
OF
THE
ECONOM Y
AND
OF RESOURCES
An improvement in the competitiveness of the economy would lead
to an acceleration of the dynamic processes of growth and to a better
29 See ch. 9 below.
65
EM PLOYMENT, GROWTH, AND PRICE LEVELS
allocation of productive resources. This would lead not only to a
one-time gain in the real value of output but would also lead to a
subsequent higher rate of advance. In a subsequent chapter, policies
designed to affect the structure of American industry are examined
in more detail. In addition to directly affecting the structure of in
dustry, the Federal Government can strengthen the forces of compe
tition and improve the allocation of resources by the following steps:
(1) Reductions in Government subsidies consistent with their objec
tives, particularly in agriculture and mining; (2) reduction in tariff
and quota protection from foreign competition.
J . PR ESER VATION OF A
STABLE P O L IT IC A L A N D E C O N O M IC
SYSTEM
The political and legal system must be stable and provide a depend
able framework for the economy. If capital is to be accumulated pri
vately, there must be assurance that there will be no loss of property
without due process of law. In some underdeveloped countries, the
greatest obstacle to economic progress is political instability. The
stability of our political system has been an important factor in our
growth, and we should be ever watchful to preserve it.
EL. E N C O U R A G E M E N T OF IN D IV ID U A L IN IT IA T IV E
American growth has been based on individual initiative, on new
ideas carried out by venturesome people who were free to promote new
enterprises, products, processes. The rise of large organizations,
private and public, which reward on “organization man” criteria, has
diminished the scope of individual initiative. Nevertheless, even to
day our economy has more room for the individual with ideas and
drive than any other economy. In the coming years, we must count on
the continued evolution of organizational arrangements which will
permit large organizations to utilize the creative spark of their
many members.
Public policy can promote individual initiative only indirectly.
It can do so by:
(.1) keeping business free from unnecessary external interference,
so that creative energies will not be diverted to coping with Govern
ment regulations; (2) keeping the forces of competition strong, so
that organizations that have become rigid and stifled individual ini
tiative will decline as they are left behind by more creative competi
tors; (3) keeping the supply of capital as abundant as is consistent
with other objectives, so that the cautious attitudes of financial limi
tations will not receive excessive weight in key production and
investment decisions.
L . PR O VISIO N OF P U B L IC SERVICES A N D IN V E S T M E N T S
If the private sector of the economy is to be able to accelerate its
growth, certain public services and investments must grow along with
it. The transportation system must continue to be strengthened,
66
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
responsibility for large portions of which, including roads, airports,
and waterways, rest with the several levels of Government. Public
policy toward the railroad system, which is still much the most im
portant mover of goods, must face up to the changing problems be
setting that industry. These systems which are important to the
mobility of the labor force within the large labor markets of our
metropolitan areas, must be provided with the capability to carry the
rapidly rising loads which are in prospect. Water supplies for homes
and industry must be increased. Police, fire and flood protection,
public health activities, and many other large and small public pro
grams, will have to increase as the economy expands. The large
geographic shifts that characterize a dynamic economy will also gen
erate needs for social overhead investments in the rapidly expanding
communities.
Inadequate provision for these investments and services can be a
serious drag on growth. All levels of government, Federal, State, and
local, will be faced with extra costs as part of the price of growth.
Extra revenues will be generated as well though not necessarily in the
same pattern as costs. While there can be much honest debate about
the level of government at which these services are to be provided,
from the point of view of the country’s growth, the issue is clear:
some level of government must do the job.
CH A PTER 3. THE SLOWING DOWN OF THE ECONOMY
DURING REC EN T Y E A R S 1
I . I n t r o d u c t io n
Recently, the economy has slowed down. The chief manifestations
are:
(1) The growth of real gross national product has decreased
since 1953.
(2) Unemployment rates in recent years have been higher than
those of the early postwar period.
(3) Productive capacity has been increasingly underutilized.
(4) An increasing proportion of the labor force is being ab
sorbed by low-wage sectors.
(5) The rate of increase of productivity has slowed.
Other chapters of this report contain discussions of the need for
high rates of economic growth, and analyses of the determinants of
growth over the long run, including policy recommendations for in
creasing long-run growth. The aim of this chapter is to provide an
explanation of the recent slowdown in the economy.
The conclusions reached have an optimistic implication: The
national output could have grown considerably more during the
postwar period if a proper set of demand policies had been pursued
by the Federal Government. This means that our market economy
is capable of achieving and sustaining a high rate of advance without
new forms of government regulation.
This is not to deny the crucial importance of supply factors over
the long run. The potential growth of the economy over any period
is limited by the growth of capital and labor resources and by the rate
of technological advance. From the point of view of maintaining a
high growth rate, however, it is just as important to realize the grow
ing supply potential by letting demand grow as it is to speed up the
growth of that potential. In our failure to realize the growing supply
and productivity of our resources since the Korean war lies the root
cause of the low growth achieved over the past 6 years.
II.
T h e M a g n it u d e a n d C y c l ic a l C h a r a c t e r is t ic s o f t h e D e c l in e
in
G rowth
While most other industrial countries have been enjoying rapid
rates of economic growth in recent years, our own economy has grown
very slowly. From the second quarter of 1953 to the second quarter
of 1959, our real gross national product increased by only 2.2 percent
per year. This is below our longrun historic rate of 3 percent, and
1 Main responsibility for the drafting of this chapter rested with Thomas A. Wilson and
George W. Bleile.
67
68
EMPLOYMENT, GROWTH, AND PRICE LEVELS
substantially lower than the rate of 4.6 percent achieved during the
earlier part of the postwar period. Even if the economy follows the
more optimistic forecasts, the growth rate from the second quarter
of 1953 to the second quarter of 1960 will be no more than 2.7 percent.
Some insight is gained by looking at the cyclical patterns con
tained within the 1947-53 period of rapid growth and the 1953-59
period of slow growth of output. Chart 1 compares the growth of
real gross national product from its peak value in the fourth quarter
of 1948 with its growth from the peak value in the second quarter
of 1953. Some striking differences emerge:
(1) The growth of real product since the 1953 peak has twice been
interrupted by recessions. The 1954 recession held up the growth
process for seven quarters, the 1958 recession for five quarters.2 For
fully half of the period—second quarter 1953 to second quarter 1959—
the economy marked time in recessions.
During the earlier years, the 1949 recession interrupted growth
for five quarters, which was less than one-third of the period fourth
quarter 1948 to second quarter 1953.
(2) Although the growth rates following each recession have
been quite large, the period of rapid growth was shorter after the
1954 recession. The current recovery already has faltered at least
briefly, because of the steel strike. Real gross national product
declined during the third quarter of 1959. The highest estimate
for the fourth quarter, if achieved, would yield a growth rate over the
year of only 4.6 percent. This is much below the 1950 and 1955 growth
rates of 13.2 and 8.4 percent. Since real product in the last half of 1959
has been affected by the steel strike, no firm conclusion can be drawn
as yet.
(3) The rise in output was much slower during 1956 and 1957
than it was during 1952 and 1953. Whereas the output rose at an
annual average rate of 4.4 percent between the third quarter of 1951
and the second quarter of 1953, the rate between the fourth quarter
of 1955 and the third quarter of 1957 was a mere 1.3 percent. Of
course, growth in output during the former period was spurred by
the extraordinary stimulus of the Korean war demands upon the
economy.
These observations suggest that the advance achieved after 1953
was substantially less than the rate of the earlier postwar years
because:
(1) The later period was marred by two recessions, and
(2) The recovery from the 1954 recession aborted near the end of
1955, with a consequent drastic reduction in the growth rate. The
causes of and cures for the postwar recessions are discussed elsewhere
in this report. The next section marshalls the evidence of the ex
tensive underutilization of labor and capital during the more prosper
ous months of the 1953-59 period.
2
Real product did not surpass its previous peak until the first quarter of 1955, which
was 7 quarters after the previous peak.
In the latest recovery, real product surpassed
the previous peak in the fourth quarter of 1958, 5 quarters after the previous peak.
Chart 3-1
GNP IN CONSTANT (1954) DOLLARS, INDEX NUMBERS
EM PLO YM EN T,
GROWTH,
AND
PRICE
LEV ELS
QUARTERS FROMPREVIOUS PEAK
S ou rce: U.S. Income and Output, table 1 -5 .
05
70
III.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
F u r t h e r E v id e n c e o f W e a k n e s s : U n d e r u t il iz a t io n o f L abor
and
C a p it a l
The period since the end of the Korean war has been marred by two
recessions. During these recession periods, potential supply in the
aggregate was, of course, higher than actual demand. Labor and
capital were both being underutilized, as is revealed by the aggre
gate unemployment rates and capacity utilization rates. Both of
these recessions were worse than the 1949 recession—the 1954 recession
was longer, and the 1958 recession deeper.
As has been noted above, the period between these two recessions
contained a phase of rapid rise in output and a longer phase of very
little rise. Since the Federal Government's policies during the period
of low growth were restrictive, it is of importance whether or not
labor and capital were being fully utilized during that period.
a
. c a p it a l
Six different measures of the utilization of capital in manufactur
ing during the postwar period are shown in table 3-1. Basically each
is a comparison of manufacturing output with a measure of manu
facturing capacity.
T a b le
3-1.— Indexes of production ayid capacity in manufacturing
[May 1953=100]
Production
indexes:
(1) Federal
Reserve
production.
(2) Value added
in constant
dollars
(Schultze)
Capacity indexes:
(3) Net value of
equipment. . .
(4) Depreciation
of equipment.
(5) McGraw-Hill
index________
Utilization rate:
(1) as a percent
age of (3)--------(1) as a percent
age of (4)______
(1) as a percent
age of (5)______
(2) as a percent
age of (3) ---------(2) as a percent
age of (4)______
(2) as a percent
age of (5)----------
Julv
1948
Dec.
1949
Jan.
1951
Dec.
1952
May
1953
Dec.
1953
Dec.
1954
Dec.
1955
Dec.
1956
Aug.
1957
Dec.
1957
Dec.
1958
75
71
88
97
100
91
94
105
106
106
99
104
75
75
86
90
100
96
97
104
105
103
101
98
C1)
Aug.
1959
110
75
82
87
98
100
103
106
109
116
120
122
122
74
83
87
97
100
104
107
113
118
120
121
129
0)
0)
73
77
85
94
100
101
106
115
121
125
127
131
0)
100
87
101
99
100
88
89
96
91
88
81
85
(9
101
86
101
100
100
87
88
93
90
88
82
81
0)
103
92
104
103
100
90
89
91
88
85
78
79
(9
100
91
99
92
100
93
93
95
91
86
83
80
(!)
101
90
99
93
100
92
92
92
89
86
83
76
0)
103
97
101
96
100
95
93
90
87
82 j
80
75
0)
i Not available.
Source: “ United Nations World Economic Survey, 1957” revised and extended as follows:
Capacity A and B: Estimates of net value of equipment and depreciation at 1947 prices from “ Survey
of Current Business,” November 1956, were extended using revised data from “ US Income and Output.”
Capacity C: From the “ 12th Annual McGraw-Hill Survey,” April 1959.
Output A: Federal Reserve Board production index for manufacturing, seasonally adjusted.
Output B: Estimate of real value added in manufacturing from forthcoming paper by Charles L.
Schultze. Linear interpolations from annual averages.
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
71
By the most conservative of these estimates, the utilization of capital
in December 1956 was 91 percent, and by August 1957 had fallen to
88 percent of the May 1953 utilization rate. These data strongly sug
gest that capital was not being fully utilized during the period of
slowdown. Chart 3-2 uses the data in this table to show a similar
picture.
B . LABOR
The labor force continued to grow at about the same rate after 1953
as before. (See table 3-2.) However, the utilization of the labor
force was lower during the 1954-57 expansion than during the 1949-53
expansion.
T a b le
3-2.— Average annual increase in civilian labor force, selected periods,
1947-59
Percent
rate of
P eriod:
increase
1947-59____________________________________________________________
1. 52
1947-53____________________________________________________________ 1. 46
1953-59____________________________________________________________
1. 55
N o te .— 1959 figure is for June.
Source : “ Employment and Earnings,” Bureau of Labor Statistics.
The evidence of this underutilization can be summarized as follows:
(a)
Aggregate unemployment rates were higher during 1956 and
1957 than during earlier prosperity periods. Whereas the lowest
monthly unemployment rate achieved during 1956-57 was 4.1 percent
of the labor force, in 1953 levels of 2.7 percent were achieved, and dur
ing the immediate postwar period levels of 3.7 percent were reached.
Undoubtedly, part of the difference can be explained by the effects of
the Korean war, especially the drawing off of people into the Armed
Forces which somewhat reduced unemployment—this being highest
in the age brackets drawn on by the Armed Forces. Chart 3-3 pre
sents this picture graphically.
-<r
CAPACITY AND OUTPUT IN MANUFACTURING
10
1948-1959
EMPLOYMENT,
GROWTH,
AND
PRICE
LEVELS
Ch ar t 3 -2
1947
1948
Source: Table 8-1.
1 949
1950
1951
1 952
1953
1 954
1955
1956
1957
1958
19 5 9
C h art
UNEMPLOYMENT RATE 1 9 4 6 - 5 9
(quarterly, sea so n a lly ad justed)
EMPLOYMENT.
-
48795— 598
GROWTH,
AND
PRICE
LEVELS
3-3
74
EM PLOYMENT, GROWTH, AND PRICE LEVELS
(b)
The percentage of the labor force composed of part-time work
ers who preferred full-time work has increased. Whereas in 1948
and 1952 levels of about 2.0 to 2.5 percent were reached, during 1956
and 1957 the average level achieved was about 3.0 percent.
C. U N D E R U T IL IZ A T IO N OF LABOR A N D C A P IT A L I N T H E
19 5 8 - 5 9 RECOVERY
The latest capital utilization rates for manufacturing available are
those for December 1958. These reveal that capital utilization was
lower than in December 1954, a comparable month of the previous
recovery. Subsequent movements in output suggest that this under
utilization of capital has remained at high levels throughout 1959.
The percentage of the labor force unemployed in the second quarter
of 1959 was much higher than in the thircl quarter of 1955. (Both
dates are about 5 quarters from the previous output trough.) The
number of part-time workers who preferred full-time work has
continued to rise relative to the labor force.
If this increased underutilization of resources continues through
out the current expansion, the economy will forgo even more growth
than was lost in the last expansion.
IV. C auses
of th e
D e c l in e : T rouble
in
the
G oods S ectors
A . W H Y G R O W T H SLOW ED D O W N A T T H E E N D OF 1 9 5 5
The movement of the components of the real gross national product
provides some clue as to the cause of the aborted recovery. The period
of rapid growth following the recession (fourth quarter 1954 to fourth
quarter 1955) was generated primarily by the upsurge of residential
construction and purchases of consumer durables, particularly auto
mobiles. Housing starts had been encouraged by the easy money
policy and loose mortgage terms available during 1954, and a large
backlog of housing demand existed on which to draw. The expansion
of housing stimulated an expansion of purchases of complementary
durable goods such as furniture. Automobile purchases rose dra
matically in 1955 primarily because of style innovations and the rela
tively easy consumer credit conditions that prevailed.
EMPLOYMENT,
GROWTH,
AND
PRICE
LEVELS
C h ar t 3 -4
CONSUMER DURABLES EXPENDITURES, AND HOUSING STARTS
Sources : Housing Starts : “ Business Statistics.”
Durables Purchase : “ U.S. Income and Output,” table I I - 6 .
«<j
Cl
76
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
As charts 3-4 and 3-5 reveal, housing expenditures and automobile
purchases fell sharply after 1955. Nothing appeared to take their
places as the primary demand forces stimulating the growth of
output. Purchases of plant and equipment and State and local
government purchases expanded, to be sure, but these developments
only served to keep the economy moving sideways. The high level
of plant and equipment purchases was unsustainable when consumer
and Government purchases did not grow sufficiently.
The automobile boom could not have been long sustained at its 1955
level; its collapse was, therefore, not unusual. Given the large back
log of housing needs, however, residential construction could have con
tinued at high levels for a much longer period if monetary and credit
policy had not been so rigorously tightened.
Government purchases was another possible area of expansion.
State and local government purchases in real terms did continue to
rise, though the rates slowed in 1957. Federal Government purchases
in real terms fell between 1955 and 1956, then expanded to mid-1957,
after which a renewed decline set in. (See table 3-3.) The Federal
Government’s revenues exceeded its expenditures each quarter during
the period of sideways movement (fourth quarter 1955 to third quar
ter 1957) .3
8 See Table I I I - 3 in “ U .S. Income and Output.”
Chart 3-5
GNP COMPONENTS, IN CONSTANT DOLLARS ( 1 9 5 4 )
Billions of Dollars
EMPLOYMENT,
GROWTH,
AND
PRICE
LEVELS
Source : “U.S. Income and Output,” Table 1-5.
M
00
3-3.— Growth of gross national product and its components in constant dollars, selected periods 1941-5\9 1
[Average annual percentage rate]
Personal consumption expenditures
Total gross
national
product
Government purchases of
goods and services
New construction
Durable
goods
Nondurable
goods
Services
Residential
nonfarm
PRICE
Rates are compound interest computed from base and terminal year values.
- 0 .1
1. 4
- 4 .0
1.2
7.6
10. 5
0.9
- 1 .6
LEVELS
7.8
9.4
4.0
- 8 .3
3.4
5.8
—2.2
1.8
State and
local
AND
Source: Data from “ XJ.S, Income and Output” table 1-5.
4.1
4.0
4.2
4.5
Federal
1 Net exports are not include! in the table because average annual rates cannot be computed when the series swings from positive to negative values.
3.7
4.3
2.1
1.3
2.3
2.3
2.3
2.2
Producers
durable
equipment
6.2
6.4
5.3
4.1
1947 2d quarter to 1959 2d quarter__________ _____
1947 2d quarter to 1955 4th quarter.______________
1955 4th quarter to 1959 2d quarter_____ __
1955 4th quarter to 1957 3d quarter,_ __ ___
4.9
6.6
0.9
- 1 .5
Other
GROWTH,
Period
Gross private domestic investment
EMPLOYMENT,
T a b le
79
EM PLOYMENT, GROWTH, AND PRICE LEVELS
The decline in housing and in automobiles after 1955, coupled with
the 1955-56 decline of Federal Government purchases, held the econ
omy to a snail’s pace of growth.
These growth-inhibiting declines in demand were not offset enough
by increases in other components of the gross national product. The
impact fell primarily upon the goods sector, since consumers’ pur
chases of services rose relative to their purchases of goods.
B. T H E
S H IF T TOW ARD
SERVICES
If the trouble in the goods sector and the increasing proportion of
services in consumers’ budgets are an inevitable concomitant of our
maturing economy, the prospects for reasonably rapid growth would
be slim indeed.
The shift of consumer purchases in favor of services was not in
considerable. Between 1947 and 1959, the services components of
gross national product grew at an average annual rate of 4.1 per
cent in constant dollars, whereas the private domestic goods com
ponents only grew at 2.7 percent per year. Most of the disparity
between the rates of growth of the two components came about during
the period after 1955.
It has been contended that a rising proportion of money is
spent on services as incomes rise. If this were the explanation of the
shift to services since 1955, one would have to acknowledge that the
slower growth rate was in part a result of changing consumer
preferences arising from an increase in incomes. The fact that the
shift to services since 1955, one would have to acknowledge that the
come began to slow down suggests that this hypothesis could hardly
explain most of that shift. Such a trend would also be contrary to
the longrun historical evidence. Between 1909 and 1958, consumer
purchases of goods grew 2.7 percent per year and consumer purchases
of services 2.5 percent per year. (See table 3-4).
T a b le
3 - 4 .— Growth of goods and services compared, selected periods, 1909 -5 8
[Average annual percentage rates]
Goods
Services
Goods
Services
Total
Consumer
private
sector
domestic 1
Private
domestic
economy 2
Period
Period
Total
Consumer
Drivate
sector
domestic 1
1909-58______
1919-25______
1919-29______
2.4
5.8
4.3
2. 7
5.1
4.5
Private
domestic
economy 3
2. 5
2. 3
3.4
1947-55______
1955-59______
1947-59.. . .
3.3
1.5
2.7
3. 2
23
2.9
3.9
4.4
4.1
1 The sum of consumer goods and gross private domestic investment, in constant dollars.
2 Consumer services in constant dollars.
Source: Data, 1929-58 “ U.S. Income and Output” table 1-5; 1909-29, based on unpublished estimates
consists with 26 GNP in 1954 dollars published in “ U. S. Income [and Output” , U. S. Department of
Commerce, table 1-16, pp. 138-9. Compound interest rates computed from base and terminal year values.
The next section will attempt to show that the consumer shift to
purchases of services is primarily a result of two factors: (1) certain
demographic changes, and (2) the slowed growth of consumer income.
1 . Demographic changes
The age structure of the population has been changing during the
postwar period. Table 3-5 illustrates that the extreme age groups—
80
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
those under 14 and over 65 years of age— account for a larger part of
the population than previously. Furthermore, the most marriage
able portion of the population, the young adults, accounted for a
shrinking portion of the population.
T a b le
3-5.— Civilian population by age groups
[Percent distribution]
1950
1953
1955
1957
Under 14 ________________________ ______ ______________ _______ 23.2 25.4
14 to 24___________________________ ______________________________ 20.1 16.1
25 to 34__________________________________________________________
f15.7
35 to 44__________________________________________________________ )30.1 114.2
45 to 54___
___________________________ ___________ ________
I'll.
7
55 to 64__________________________________________________________ }l9.8 I 8.8
65 and over_________ ____ _________________________________ _____
6.8
8.1
27.0
15.2
15.2
14.1
11.4
8. 8
8.4
28.0
14.9
14.6
13.8
11.4
8.8
8.5
28.8
14.9
13.9
13,6
11.5
8 7
8.6
Age group
1940
1959
29.6
14.6
13.2
13.5
11.7
8.8
8.7
Source : “ Statistical Abstract of the United States,” 1959 and 1950.
These demographic factors have affected the relative demand for
services and goods, directly because of the special needs of the young
and old, and indirectly through a reduction in the rate of increase in
household formation.
The number of households has increased about 30 percent since
1947. However, the average rate of net increase in households has
dropped from around 3 percent per year in the late 1940’s to about
2 percent in the late 1950’s.4 This is mainly a result of the very high
marriage rate immediately after World War II, and of the low birth
rates of the 1930’s.
Surveys of consumer buying habits show that people between the
ages of 20 and 30 buy more appliances, automobiles, furniture, and
housing than the average for all ages. Persons 65 and over typically
spend considerably less than the average on these goods. They spend
more than the average of all age groups on food, drugs, and home
improvement materials for example.
These changes in the structure of our population doubtlessly ac
counted for some of the rising importance of services in the consumer
budget. However, it is unlikely that most of the shift can be ex
plained by these demographic changes since these changes occurred
gradually throughout the period, whereas the shift to services began
rather suddenly after 1955. Other changes in the structure of the
community have also occurred which have tended to increase the pur
chases of durable goods. Namely, the rise in home ownership and the
movement to the suburbs.
In view of these considerations, demographic changes alone cannot
account for the increasing importance of services after 1955. Since
the shift to services increased when the growth of disposable personal
income slowed, an examination of the income position of consumers
after 1955 is necessary.
2. The erosion of the growth in consumers’ purchasing poioer
Consumers were squeezed between the slowed growth of disposable
income and the rising expenditures required to maintain basic patterns
of consumption.
Source: “ Statistical Abstract of the United States,” 1955 and 1959.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
81
When the growth of family income slows, consumers postpone pur
chases which they might have made if income had grown faster. Dura
ble goods feel the greatest impact, since much of the consumer’s budget
for nondurable goods and services is very difficult to curtail or post
pone. Food must be purchased, the rent and doctor’s bills paid.
There is little opportunity to substitute these purchases for a new
appliance or car. When incomes do not grow fast enough, the de
mand for hard goods languishes.
Consumer demand for goods is not unimportant. About three quar
ters o f the total goods produced in the economy are purchased by
households. The ability of households to maintain and increase their
consumption is not only desirable from a social standpoint, but is also
vital to the maintenance of the growth of the economy. A major
determinant o f the size and rate of growth of consumption expendi
tures is the rate of growth of consumer purchasing power.
(a) The growth of disposable personal income has slowed down
Real disposable personal income is the means consumers have at
their disposal to purchase goods and services. During the period
from 1947 to 1959 total real disposal personal income grew at 3.7
percent per year. However, that growth was not uniform throughout
the whole period. From 1955 to 1959, the average annual rate was
3.2 percent; from 1947 to 1955, it was 3.9 percent.
The contrast is hightened if real disposable income per person is
used: this grew at 2.2 percent per year before 1953, and only at 1.4
percent per year thereafter.
(b) Service .expenditures as family “overhead costs.”
While some types o f service expenditures are sensitive to changes
in current income and while there is evidence of some shifts in the
demand for services—for example, from movie admissions to T V re
pair—outlays for many services are virtually fixed costs to the family.
Rent, utilities, cleaning and laundry, automobile repairs and opera
tions, household and automobile insurance, and medical and hospital
care are family expenses which are probably more sensitive to the
size and age composition o f the family than to short-run changes in
income.
In fact, when a comparison is made between the annual percentage
change in spending for services 5 and for food, services show less
sensitivity than food to the fluctuation of disposable income.
5 From the figure, for total consumer, service expenditures, imputed value of owner
occupied housing was deducted. This was done because the imputed item never enters the
stream of current market purchases.
82
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T a b le
3 -6 .— Inflation in prices of “Overhead services”
Item
“ Overhead services” -- ______
Rent
Gas and electricity.
__
_ ___ __
Water _______
Property irisiirELiicB
L a u n d r y ___ . _______
C le a n in g ____ __
___
Weight
1953-59 i
percent
increase
19.4
5. 6
1.9
.3
.2
.8
1.2
20. 5
12. 8
14.1
39.8
9.9
18.2
13.8
Item
Weight
“ Overhead services” — Con.
Transportation service___
Medical care
____
All other items
__
_ _
Total all items
.
__
1953-591
percent
increase
3. 7
4.2
80.6
32.3
27. 5
6.7
100.0
9.4
1 1959 based on third quarter average.
Source : Computed from Bureau of Labor Statistics data.
Prices of items of family “ overhead cost” have risen faster than all
items in the Consumer Price Index in the period 1953-59. Cus
tomary overhead items represent a prior claim on the consumer’s
income. I f the prices of these items rise faster than the prices of
other goods in the consumer’s budget, he must use more dollars of his
income to cover these “ overhead costs,” and will have less left over
for discretionary purchases.
From 1953 to the third quarter of 1959, the prices of the “ overhead
services” shown in table 3-6 accounted for 42.8 percent of the total rise
in the Consumer Price Index. The prices o f these items increased
on the average 20.5 percent while all the prices of other items increased
only 6.7 percent, Durable goods prices actually declined 1 percent
in the period 1953-58 and by third quarter 1959 were within one
index point of the 1953 level.
c. s u m m a r y o f t r o u b l e i n t h e g o o d s s e c t o r s
( 1 ) The primary source of the slow- growth o f the demand for goods
after 1955 was the decline in residential construction and the fluctua
tions and decline in Federal Government purchases.
( 2 ) The resulting trouble in the goods sector was further worsened
by a shift of consumer purchases from goods to services.
(3) Although demographic changes may have caused some of this
shift, it appears to be mainly due to the erosion of the growth of con
sumers’ purchasing power. This phenomenon was due to the slowed
growth o f consumer income and the absorption of purchasing power
by “ overhead” service outlays that rose in price.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
V. R
esults of th e
and
83
T r o u b l e i n t h e G oods S ec to r : U n d e r u t il iz a t io n
S l o w e d G r o w t h o f P r o d u c t iv it y
The trouble in the goods sector had ramifications upon the growth
o f the economy in two main ways:
( 1 ) By decreasing the degree of utilization of both labor and
capital.
( 2 ) By slowing dowm the rate of growth of aggregate produc
tivity (gross national product per man-hour used in production).
The evidence of the extensive underutilization of labor and capital
has been presented above. This section discusses the slowed growth
o f productivity.
One important way that the slow growth of demand resulted in
slow growth of productivity and increased underutilization of labor
was through the absorption of labor by low-productivity sectors of the
economy. A shift in the composition of the labor force from highproductivity to low-productivity sectors will tend to slow down the rate
o f growth of productivity. In addition, many of the workers
absorbed by the low productivity sector only worked part time when
they were willing to work full time.
Before turning to the analysis o f slowed aggregate productivity
growth, the absorption o f labor by the low-wage, low-productivity
sectors o f services and trade requires elaboration.
A.
T H E ABSORPTION OF LABOR B Y T H E SERVICES A N D TRADE SECTORS
As has already been shown, the output of services has grown faster
than that o f goods since 1955. Some of the output of services is
produced, however, in sectors of high and rapidly growing produc
tivity—namely, transportation, communication, and public utilities.
I f these high-productivity, high-wage sectors had been absorbing
labor, the movement o f labor into services would not have a negative
significance for growth. As table 3-7 illustrates, however, these highwage service sectors gained little labor during the post-Korean period.
The absorption of labor took place in the low-wage services sectors
and in trade.
84
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Ch abt 3 -6
N O N -A G R IC U LTU R A L EMPLOYMENT
ANALYSIS OF INCREASE BY INDUSTRY
1953-57 AND 1953-59
INCREASE
8 TRADE MENT
Source• Employment and Earnings
Bureau of Labor Statistics
RUCTION
FACTURG 8 UTILITIES
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T able
85
3-7.— Nonagricultural employment; industrial composition of increases
during selected periods, 1925-59
[In thousands]
1925-29
1947-57
1953-57
1953-June 1959
Num Percent Num Percent Num Percent Num Percent
ber
ber
ber
ber
Total increase in nonagricul
tural employment during
period____________________ 2, 536
Services and trade............................. 1,127
M anufacturing______________ ____
748
Mining__________________________
- 2
Contract construction_____________
51
Transportation, communication and
public utilities............... ...................
83
265
Finance, insurance, and real estate..
Government........................ .................
264
100.0
44.4
29.5
-.1
2.0
3.2
10.4
10.4
8,700
3,659
1,492
-134
826
29
676
2,152
100.0
42.0
17.1
-1 .5
9.5
.3
7.8
24.8
2,481 1 0 0 . 0
1,563 63.0
-456 -18.4
-43 -1 .7
186
7.5
-73 -2 .9
323 13.0
981 39.5
2,899
1,910
-783
-139
364
-277
404
1,420
100.0
65.9
-27.0
-4 .8
12.5
-9 .5
13.9
49.0
Source : Bureau of Labor Statistics.
Historically, a shift o f labor into services and trade has been an
early sign o f developing weakness in the economy. In the late 1920’s,
services were absorbing a considerable fraction of the increase in the
labor force. This absorption continued through the first years of the
great depression of the 1930’s.
This is not to imply that a movement of labor into services and trade
is necessarily a symptom of weakness. Such a shift could occur if
the demand for services expanded relative to the demand for goods.
1. Was labor pulled into services and trade by demand?
It has already been shown that the changed pattern o f consumer
expenditures was itself largely a result of the slowT growth of con
sumer incomes. This section shows that whatever the cause o f the
level of demand for services, the large increase in low-wage employ
ment in the service industries was not necessary. The same level of
services could have been supplied by fewer workers. It was because of
the lack o f job opportunities elsewhere that there was a relatively
abundant supply of labor to these low-wage industries, with the result
that the pressure for introducing labor-saving innovation which had
been occurring ever since the end o f the depression slowed down. Our
evidence is as follow s:
(1 )
Whereas employment grew a lot, wages in services did not
grow faster than wages in many sectors o f contracting employment
(see table 3-8 and chart 3-7).
86
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T a b l e 3 - 8 . — Increase
in average annual earnings, 1953-57
Percent
increase
Industry
M i n i n g ..__ _________ _____ __ _ ______________ _______________________
Transportation
_
- _ _
_ _. ____ ___________ ___________ __
__ ___ _______ _____ _________ ________
Communication and utilities _
Manufacturing __
_
_
_________________ __ __________ _______
Construction _ _ __
- _____ __________ _ ____________ __
. ______________ ________ ____________
Government......... _
Finance, insurance, real estate... ______ _ __________ .. ____________ .
Trade . ___ ________ _______________ ____________________________
Services _ _________ __ __________________ ________ ___ ________
Total
.
. ______
—_
...........
Amount
of increase
18.1
16. 5
19. 5
17. 5
16.6
17.5
$865
845
774
732
698
660
642
573
468
17.2
« 618
19.9
19. 2
19. 2
S o u r c e : “ U.S. Incom e and Output,” table V I-15 .
This behavior of wages is all the more striking when the low-wage
character of services and trade is considered. A low-wage sector
should normally experience higher than average percentage gains in
wages just to hold the labor it has got.
T a b l e 3 - 9 . — Average
annual earnings and value added per person engaged in
production: services and trade compared ivith other private non-agricultural
sectors (1958)
Value added
per person
engaged in
production
Trade. ______ _______________________ _____________________________
Service __ .. _ ______ ___ ___ . __ _ _ ______ _____ _ _ ____
All Private Economy __ ______________________________________________
$4,697
4, 526
5,787
Average
annual
earnings
$4,135
3,262
4,452
Source “ U.S. Income and Output.”
I f labor were being drawn into these sectors by expanding demand,
one would expect their wages to rise relative to the wages of other
sectors.
(2 )
The behavior of productivity does not suggest that demand
pressure in the labor market occurred. The productivity of both
services and trade showed little or no growth during the depression,
but a healthy increase during the Second W orld War. In the post
war period, productivity in services grew fairly well until 1955, when
a tapering off occurred. Trade productivity revealed a similar pat
tern.
The war and depression behavior suggests that productivity in this
area is related to the abundance of the labor supply. Most of the
shift in employment towards services and trade took place subsequent
EMPLOYMENT, GROWTH, AND PRICE LEVELS
87
to 1953, a period when the behavior of productivity suggests that the
labor market was quite “ loose.”
( 3 ) An important proportion of employees in services and trade
are women. However, the growth of female labor force participation
rates showed no tendency to increase in the later part of the postwar
period. I f women were in fact pulled into the labor force by demand,
that demand was not strengthening toward the end of the period.
(4) The number of persons working part time who prefer full-time
work has increased relative to the labor force. (See section I I I -B
above.) It is notable that during the 1954-57 expansion, the pro
portion of the labor force in this category did not decline after 1955,
whereas during the preceding boom, declines occurred until the peak
level of output was reached. As table 3-10 illustrates, almost all the
increase in part-time workers during the postwar period took place
in the trade and services sectors. In some other sectors, the percent
age of part-time workers actually declined.
T a b l e 3 - 1 0 . — Ratio
Construction___________________
Manufacturing_________________
Durable____________________
N o n d u r a b le -.-_____ __ _
Transport___________ ________
T rade__________________________
S e r v i c e .._______ ______________
O ther-_____ __________ ________
of part-time to full-time employees, by industry
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
28.9
18.0
16.8
19.4
9.5
20.9
26.1
16.0
34.8
25.2
23.6
26.9
12.2
22.0
35.7
27.0
38.9
22.6
20.4
25.1
14.6
22.9
36.8
21.4
25.7
16.0
12.5
20.4
10.3
20.6
34.3
15.4
17.6
10.4
7.6
14.1
6.7
18.9
28.3
10.5
23.1
13.2
11.3
15.9
9.5
21.5
31.0
16.4
42.9
27.5
24.7
31.3
18.6
28.8
40.5
28.9
25.9
12.0
9.0
16.2
9.3
22.3
31.9
15.0
25.8
12.5
9.3
17.3
9.3
24.4
34.1
14.7
26.0
12.6
9.9
16.4
10.2
25.6
34.0
14.6
1958
27.8
15.6
13.7
18.1
11.1
26.5
34.8
14.8
Source: Bureau of Census.
2. Services and trade as a sponge for labor
It is clear that the hypothesis that demand pulled labor into serv
ices cannot explain most of the actual movement. Some other
explanation must be found. Since the shift of labor into services
accelerated when the growth of total demand tapered off, the
explanation of that shift may be the slow growth of total demand
itself.
I f the rate of growth of aggregate demand is not sufficiently high
to keep the growing labor force fully employed in high pay, high pro
ductivity occupations, labor may tend to be absorbed by the services
and trade sectors. Since these sectors have low output per man-hour, a
higher level o f employment can be supported by a given level of
aggregate demand if a greater proportion of people are employed
in these sectors.
To put the matter simply, the rapid growth of employment in serv
ices and trade is a result of the lack of jobs elsewhere. People who
EMPLOYMENT, GROWTH, AND PRICE LEVELS
88
would prefer to work in the high-wage and high-productivity sectors
o f the economy were forced to seek jobs in the low-wage areas, because
the rate o f growth of demand for goods was not strong enough.
These low-wage areas could supply the needed jobs by increasing
their underutilization of labor in the form of a slowed productivity
advance. The shift also helps to perpetuate itself since it slows
down the rate o f change o f productivity and therefore the rate o f in
crease of real income.
.
3 Meaning of shift for growth
I f the sponge theory of the shift of labor to services is basically
correct, then a type of underemployment exists in our country. De
mand is not growing at a sufficiently fast rate to absorb the increasing
labor force in highly productive occupations, so it is absorbed by the
low-wage, low-labor utilization sectors.
Since services have low and slowly growing productivity, a relative
shift o f labor into this sector has critical implications for economic
growth. This impact will become cumulative since the growth of
output per man-hour in the high-wage sectors is adversely affected if
output docs not grow fast enough, and since productivity growth in
the services industries themselves tends to slow down if labor is abun
dantly available to them.
B. T H E DECLINE I N T H E GROW TH OF AGGREGATE PR O DU CTIVITY
We have demonstrated the widespread underutilization o f labor
and capital in the period since Korea.
T
able
3—1 1 .— Comparison of growth in private gross national product with real
product per man-hour
[Average annual percentage rates]
1947-53
1953-57
1947-57
Total private economy
Real gross
gross
product per Real
product
man-hour
3.7
______________________________________________________ ____ 4.4
2.4
2. 7
______________________________ _____________________________
3.2
______________________________________________________ _____
3.7
Source: Computed from data from Bureau of Labor Statistics and Department of Commerce.
Table 3-11 reveals that more of the decline in the, growth of
real gross national product can be attributed to the decline in the
growth o f real gross national product per man-hour rather than to
a decline in the growth of man-hours. The increased underutiliza
EMPLOYMENT, GROWTH, AND PRICE LEVELS
89
tion o f labor was offset, to some extent, by the more rapid growth of
the labor force. Had aggregate productivity grown at the same rate
after Korea as before, the annual average growth of real product over
the 1947-57 period would have been 4.3 percent instead o f 3.8 percent.
Had such a rate of growth of productivity been coupled with the high
1953 utilization rate for labor at the end of the period, our postwar
growth would have been even higher. It is clear that an explanation
of the slow-down of productivity growth is an essential part of an
analysis o f the slowdown in the growth of real output.
This declining growth of total productivity can be separated into:
( 1 ) the effect of labor shifting between sectors and ( 2 ) the effect of
changing productivity within sectors.
(1 )
The effect of labor shifting between sectors.—Two adverse
developments occurred during the 1953-57 period: (a) After 1953,
the shift toward low-wage and low-productivity services and trade
accelerated, (b) The outflow of labor from agriculture declined
dramatically. Whereas, in the previous period 1.2 million people had
left agriculture, only 0.4 million left between 1953 and 1957. This
slowing down of the outflow of people from agriculture was due to
governmental policies which encouraged people to remain on the farm
(and the absence of policies encouraging them to leave), and the in
sufficient pull of suitable jobs elsewhere in the economy.
Both of these developments tended, of course, to slow the rate of
increase in aggregate productivity. The increased absorption of
labor by the low-wage services and trade sectors meant that a larger
and larger proportion of the labor force was switching to an area
where real product per man-hour was below average. The slowing of
the movement o f labor out of agriculture signified that fewer workers
were leaving an area of below average productivity.
48795—59---- 9
90
EMPLOYMENT, GROWTH, AND PRICE LEVELS
(2 )
The behavior of productivity ivithin sectors.—Among* the most
reliable productivity statistics today available are the Bureau of Labor
Statistics estimates of output per man-hour in agriculture, manufac
turing, and other industries. They form a solid starting point for the
analysis of changes in sectoral productivity.
T able
3-1 2 .— In d ex es of real product per m an-hour fo r private ec o n o m y , 1 94 7 -5 8
[1 9 4 7 -4 9 = 1 0 0 ]
N o n a g r i c u l t u m l in d u s tr ie s
Year
T o ta l
A g r ic u ltu r e
T o ta l
1 9 4 7 ___________________________________________________
1 9 4 8 ___________________________________________________
1 9 4 9 ___________________________________________________
1 9 5 1 ___________________________________________________
1 9 5 2 ___________________________________________________
1 9 5 3 ___________________________________________________
1 9 5 4 ___________________________________________________
1 9 5 5 ___________________________________________________
1 9 5 0 ___________________________________________________
1 9 5 7 ___________________________________________________
1 9 5 8 ___________________________________________________
9 6 .7
1 0 0 .2
1 0 3 .1
1 1 0 .4
1 1 3 .2
115. 7
1 2 0 .4
122. 6
1 2 8 .0
1 2 8 .8
1 3 2 .3
1 3 3 .4
90. 5
1 0 7 .1
1 0 2 .2
1 1 6 .2
1 1 4 .6
1 2 4 .5
1 3 8 .6
1 4 8 .3
1 5 3 .3
160. 7
1 6 8 .6
1 90 .1
9 7 .5
9 9 .4
1 0 3 .3
1 0 8 .8
1 1 0 .6
1 1 2 .0
115. 1
1 1 6 .9
1 2 1 .9
1 2 1 .8
1 2 4 .4
1 2 4 .3
M a n u fa c
tu r in g
!
|
j
j
1
1
j
;
!
!
9 7 .6
100. 1
102. 6
1 0 9 .5
1 1 1 .2
1 1 3 .0
1 1 8 .3
1 1 7 .4
1 2 5 .6
127. 1
127. 7
(l )
N onm anu
fa c tu r in g
i
1
!
|
!
I
9 7 .3
9 8 .9
1 0 3 .9
1 0 8 .4
1 1 0 .0
1 1 1 .3
1 1 2 .8
1 1 6 .7
1 2 0 .0
1 1 9 .1
122. 9
( ,)
Not available.
Source : Bureau of Labor Statistics.
1
T a b le
3 - 1 3 . — Growth of real product per m an-hour; sectors of the private
econom y , 1 9 4 7-5 7
[A v e r a g e a n n u a l p e rc e n ta g e rates]
N o n a g r ic u ltu r e
P e r io d
A g r ic u ltu r e
T o ta l
1 9 4 7 -5 3 ____________ _________________________________________
1 9 5 3 -5 7 _____________________________________________________
1 9 4 7 -5 7 ________________________ _______________ __________
6. 5
6 .0
6 .2
M a n u fa c t ur in a'
2 .8
2 .0
2 .5
I
j N onm anu
fa c tu r in g
3 .3 ,
1 .9 i
2. 5
2 .2
2 .4
S o u rc e : D a t a fr o m t a b le 3 -1 2 .
R a t e s are c o m p o u n d in te r e st c o m p u t e d fr o m Vase a n d t e r m in a l y e a r
v a lu e s .
F o r a g r ic u lt u r e , b a se a n d t e r m in a l v a lu e s are a v e ra g e s o f th e y e a rs 1 9 4 7 -4 9 , 1 9 5 2 -5 4 , a n d 1 9 5 6 -5 8 .
T h i s w a s d o n e b e c a u se o f th e h ig h ly v o litile n a tu r e o f th e p r o d u c t iv it y in d e x .
Table 3-13 reveals that the growth rate of other nonagricultural
productivity only diminished slightly after 1953. There occurred
little change in the rate of growth of agricultural productivity.
By far the majority of the within-sector productivity decline oc
curred in the manufacturing sector. Real value added per man-hour
in manufacturing grew only 1.9 percent per year from 1953-57, where
as it had grown at 3.3 percent per year from 1947 to 1953.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
91
An analysis of output and productivity for major 2 -digit industrial
groups within manufacturing and mining reveals that every industry
which experienced a slower growth of productivity following 1953
also experienced a slowdown of the rate of growth of its output.
O f the 16 inductries which had faster productivity growth in the more
recent period, 9 also had faster output growth .6
Within manufacturing, comparisons o f output and productivity for
each year during the postwar period reveal that changes in produc
tivity are positively associated with changes in the output. Output
per man-hour in manufacturing evidently grew at a slower rate after
1953 because the output of many industries did not expand so rapidly.
The association of productivity gain with the rate of growth of out
put within manufacturing appears to be clear. Had manufacturing
output grown more rapidly m the 1953-57 period, productivity in
manufacturing would, no doubt, have risen faster than it did.
Within the nonmanufacturing, nonfarm sector, with the exception
of services and trade, productivity appeared to grow at about the same
rate during both periods.7 The evidence is as follow s:
( 1 ) Public utilities and communications: The rate of increase in
productivity was extremely high over the whole postwar period, and
was higher after the Korean war. Each of these sectors also experi
enced extremely high rates of output growth.
( 2 ) Transportation: Railways experienced an acceleration in the
rate of growth of productivity after 1953, together with some improve
ment in output (whereas output fell between 1947 and 1953 it remained
unchanged between 1953 and 1957). Other transportation experienced
a decline in the growth of productivity after 1953.
(3) Construction: No evident change in the growth rate o f produc
tivity occurred.
(4) Mining: Some decline in the rate of growth of productivity
occurred. Changes in the rate of growth of productivity for 2 digit
mining industries were positively associated with changes in their
output growth.
Taken as a group, productivity in these sectors grew about the same
during the post-Korean war period as before.
The slight decline in the growth of total productivity within the
nonfarm nonmanufacturing sector was primarily a result o f: ( 1 ) the
increased importance o f services and trade ( 2 ) the slowdown of serv
ices and trade productivity growth, both o f which were discussed
above,
6 The productivity estim ates for manufacturing and mining industries are based on
Federal Reserve Output Indexes w ith 1954 value added weights.
7 Productivity estim ates for railways are those of B.L.S.
E stim ates for communica
tions, public utilities, other transportation, and construction are based on the real product
estim ates computed by Charles Sehultze.
CO
to
C hart 3 -7
EM PLO YM EN T ,
per lob
5000
NATIO N AL INCOME PER PERSO N PARTICIPATING IN PRODUCTION
IN CONSTANT (1947) DOLLARS
SERVICES, 1929-58 (Selected Years)
D ollors
TRADE, 1929-57
u nit p a rtic ip a tin g
4800
4600
4400
4200
Trade v
/
maammieam
4000
3800
t
GROWTH,
i
3600
i
3400
Services
V
3200
V
3000
AND
2800
PRICE
2600
2400
LEVELS
2200
2000
1800
I
1600
29
mrce : Table 3-14.
1939
|
1 l 1 1
|
|
1958
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T able
93
3-14.— Services and trade: 'National income originating per person
participating in production, 1929-58
[In 1947 d ollars]
Services
1929_............
1939_.........
1947 ___
1948_............
1949.........
$1, 799
1,803
2 , 562
2,570
2,622
Trade
Services
$2,863 1950______
2,749 1951______
3, 394 1952
3, 392 1953 _
3,398 1954______
$2, 697
2,701
2, 779
2, 856
2,903
Services
Trade
$3,790
3, 704
3, 795
3, 913
3, 929
$3,002
3,054
3, 063
3,077
1955______
1956______
1957_.........
1958______
Trade
$4,138
4,134
4,146
N ote.— Net National Incom e originating in services was deflated using the “ Other Serv
ices” deflator fo r consumption expenditure except fo r 1929 and 1939, where the total
consumer services deflator was u s e d ; in trade, the Schultze real value added index was
used fo r the 1947-57 estimates. The 1929 and 1939 estimates were derived from B arger’s
indexes o f productivity in distribution. The labor input figure in trade was adjusted to
take account of the reduction average weekly hours which took place during the period.
This served to raise the productivity estimate.
S ou rce: U.S. Income and O u tp u t; forthcom ing paper by Charles S chultze; H arold
Barger, “ D istribution’ s Place in the American E conom y,” N.B.E.R., 1955.
T
a b le
3-15.— Average annual rates of growth in productivity in service and trade
[A verage annual percentage rate]
Period
1929-39________ ____ _______________________________________________
1939-47________ _____ _________________________________________ _______
1947-58 1_____________________________________________________________
1947-53_________________ ____ ________________________________________
1953-58 1_____________________________________________________________
1955-58 i______________ ____ ______________________ ____ _______________
Service
Trade
Nil
4.5
1. 7
1.8
1. 5
-0.4
2.7
2.0
2.4
1.4
S o u rce : Compound interest rate computed from base and term inal values.
table 4 -15.
Data from
1
0.8
0.1
1957 for trade.
In addition to the postwar evidence already cited, the conclusion that
demand is an important determinant of productivity is supported by
three other pieces of evidence:
(а) Aggregate productivity grew faster over the long period o f
strong demand 1942-53 than over the long period of weak demand
1925-42.8
( б ) Fabricant has reported that industries with rapid long-run
output growth tended to have rapid long-run productivity growth .9
(c)
Kuh has demonstrated that increases in output require less
than proportionate increases in man-hours, especially near the end
of a business expansion.10
C. S U M M A R Y OF A N A L Y S IS OF PR O D U C TIV ITY G ROW TH
( 1 ) After 1953 changes in the flow of labor between sectors damp
ened the rate o f growth of productivity. The outflow of labor from
agriculture slowed down, and the absorption of labor by services and
trade accelerated.
( 2 ) The within-sector decline in productivity was concentrated in
those sectors o f manufacturing where the data suggest that the slow
8 Between 1929 and 1942, gross output per man-hour rose 2.5 percent per y e a r ; between
1942 and 1953, it rose 3.1 percent per year. Computed from table A in Solomon F abri
cant, “ Basic F acts on P roductivity Change,” NBER Occasional Paper 63, 1959.
(R e
printed in Employment Growth and P rice Levels Hearings, pt. 2.)
9 Solomon Fabricant, “ Basic Facts on P roductivity Change.” Hearings, pt. 2, p. 313.
10 Edwin Kuh, forthcom ing study paper fo r Joint Econom ic Committee, (Study o f Em
ployment, Growth, and P rice Levels.
94
EMPLOYMENT, GROWTH, AND PRICE LEVELS
down of output played a key role. The other sectors of the economy
showed offsetting patterns—the increasing growth of productivity in
communications, public utilities, and railways being counterbalanced
by declining growth in other transportation, mining, services and
trade.
(3)
Though it is difficult to assign a precise quantitative estimate
of the role played by demand in the decrease in the growth rate of
aggregate productivity, it seems clear that the slowing of demand had
a strong impact o n :
(a) The movement of labor into services and trade,
(b) The declining growth of productivity within services and
trade, and
(c) The slowed growth and productivity in several manufac
turing industries.
Furthermore, demand conditions may have had some adverse influ
ence upon the outflow of labor from agriculture.
It is clear that productivity would have grown at a faster rate, had
demand grown more.
VI. Sum m ary and P o l ic y Im p lic a tio n s
A. SUM M ARY
1 . The growth rate of output in the postwar period tapered off sub
stantially after 1953. Not only was recent history marred by two
recessions, but also there occurred a period of slow growth during
prosperity.
2 . This low growth during prosperity was due primarily to the
slowing down of the rate of growth of demand, particularly the
demand for goods.
3. The declines in residental construction and the fluctuations and
decline in Federal Government purchases were the primary causes
of the trouble in the goods sectors. The resulting decline in disposable
income, by eroding the growth of consumers’ purchasing power, fur
ther retarded the demand for hard goods.
4. That the supply of labor and capital did not limit growth during
this period is revealed b y :
(a) Higher unemployment rates, even during the prosperity phase
1956-57.
(b) The higher percentage of the labor force which was working
part time.
(c) The low and falling rates of capital utilization.
(d) The increasing absorption of labor by the low-productivity
sectors of services and trade.
5 . The record of productivity in the postwar period was influenced
by:
(a) The shift of labor into services and trade which tended to slow
down the rate of increase of productivity in those sectors.
(b) The slackness of demand for goods which held productivity
advances down in the goods sectors, because utilization rates were
lower than normal for the expansion phase of the business cycle.
6. Had these factors not operated, the growth rate of output after
1953 would have been substantially higher.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
95
B. POLICY IM PLICATIONS
The blame must fall primarily upon the behavior of the Federal
Government. The private sector behaved optimistically, but its
decisions were made unwise in hindsight by the unduly restrictive
behavior of the Federal Government. Whereas private industry was
making large investments during 1956 and 1957 in order to meet high
anticipated levels of output, these anticipations were overly optimistic
primarily because the Government stepped too hard on the fiscal and
monetary brakes.
Had the Government’s policies been aimed at maintaining the
growth of total demand, our growth rate over the 1953-59 period
would have compared favorably with the early postwar growth rate.
It is unlikely that such a set of policies would have involved much
additional inflation. Some intensification of the capital goods infla
tion and the inflation in certain areas o f services might have occurred,
but this would have been offset, to some extent, by the increases in
output per man-hour that would have resulted from the stimulation of
demand. A considerable amount of growth was sacrificed in order to
prevent inflation: and the policy tools that were employed were not
capable of containing inflation. But these matters are discussed in
detail elsewhere in this report.
C H A P T E R
4. P O T E N T I A L
G R O W T H 1
The preceding chapters have reviewed the record of our past eco
nomic growth and the factors underlying it, both for the longer sweep
o f many decades and for the immediate past few years. In the
current chapter, attention turns to the future. How fast could the
American economy’s output grow over the next decade or two if we
realize the full production potential for growth which is inherent in
the structure o f the economy ? What are the implications for policy of
different assumptions as to the underlying factors influencing our
economic growth? What range of possibilities can we reasonably
contemplate as a basis for discussion of the issues of public and private
economic policy ?
A t the outset it must be recognized that the further ahead we
attempt to project our potential for economic growth the more uncer
tain are the resulting estimates and the less likely it is that we can
really effectively apply the results. On the other hand, too short
a period would not allow time for underlying forces to work out their
longer term consequences. After a review of the various considera
tions it was decided that the year 1975 would be the target date for the
most remote of these projections. It is to be understood that the
projections for the year 1975 are an average of expectations for several
years centered at 1975.
TH E DETERM INANTS OF POTENTIAL ECONOMIC GROWTH
In order to develop estimates o f the growth potential of the Amer
ican economy, an analysis was made of the historical record and of
the major output-determining factors, including changes in the size
o f the labor force, fluctuations in the ratio of employment to the
labor force, changes in hours of work, trends in productivity, the effect
o f the capital stock and of its average age, and changes in the compo
sition of demand. The full analysis, supporting data, and other
technical materials will be found in a separate study paper “ The
Potential Economic Growth of the United States.” 2
As has been made clear in a previous chapter, actual output is the
result of a variety of forces affecting both demand and supply over
any particular period. The actual growth in output will be deter
mined by the growth o f demand or the growth of supply according
to which is the smaller and hence the limiting factor for each period of
time. But we are concerned here not with what is actually the past
growth in output or the future rate o f growth, but rather with what
1 Main responsibility for the drafting of this chapter rested w ith James W. K nowles.
He
was assisted by Charles B. Warden, Jr.
2 The study paper, “The P otential Economic Growth of the United States,” by James W.
Knowles, w ill be published separately at a future date.
97
98
EMPLOYMENT, GROWTH, AND PRICE LEVELS
has been the growth in the economy's potential output from the supply
side, whether or not demand has been sufficient to utilize this capacity.
Therefore, we ignore, in large part, the demand side of the problem.
Even with this simplification it is obvious that there are a large
number of factors to be considered, including: the rate and character
of scientific progress; the proportion of output which is plowed back
into capital assets; the average age of our capital assets and, hence,
the extent to which the current capital stock embodies the most up-todate technology; rising levels of educational attainment and health;
the ratio of the labor force to the population; changes in average
number of hours worked per year per person employed; changes in
the average degree o f skill exhibited in managing productive activi
ties; the degree of stimulation of advancement in efficiency from
competition at home and abroad; and a wide variety o f considerations
concerning the social and political environment in which the economy
operates. In addition to all these factors, consideration should be
given to the availability of natural resources and their average quality.
Some of these factors cannot be measured directly at the present time
and some cannot be measured at all. In the historical analysis, cover
ing the years 1909 to 1958, it has been assumed that we can represent
all o f their influences on our potential economic growth by the follow
ing measurable inputs.
(1) Labor
The labor input has been measured in terms of total man-hours
o f labor available for productive activity in the economy, including
governmental functions. It was arrived at by a study of trends in
rates o f participation in the labor force of men and women in various
age groups, and by a study of trends in the average annual hours
worked by all employed. It was assumed for the historical period
(1909-58) that about 4 percent of the labor force was unemployed
when the economy was operating at its potential output. Other per
centages could have been assumed without changing the basic analysis
except as to the relative level o f the series. In the analysis there was
utilized, also, an actual labor input which represented the product
of the total number of persons employed multiplied by actual annual
average hours worked.3
The ratio of the actual labor input to the potential labor input
measured cyclical variations in inputs while the other factors in the
analysis carried the burden of explaining long-term or secular move
ments in potential output. Therefore, in the analysis both this ratio
of actual to potential labor input and the potential labor input itself
were used.
(£) The stock of capital
To measure the supply of capital services available for use in pro
duction an estimate of the gross capital stock o f the private economy
prepared by Dr. George Terborgh was utilized.4
3 For employment and hours of work, the figures used were those prepared by Dr. John
Kendrick in his study for the N ational Bureau of Economic Research entitled “Produc
tivity Trends in the United S tates” (in preparation), a summary of which was presented
by Dr. Solomon Fabricant in his statem ent before the Joint Economic Committee at hear
ings in connection w ith the Study of Employment, Growth, and Price Levels (pt. 2,
“H istorical and Comparative Rates of Production. Productivity, and Prices.” P. 281).
4 The estim ate of capital stock, prepared by Dr. Terborgh, is that underlying Capital
Goods Review, No. 39, September 1959, published by M achinery and Allied Products
Institute, W ashington, D.C.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
99
In this series the gross capital stock represents the value, in con
stant dollars, of all capital assets surviving from past installations at
any particular point in time. It is, therefore, gross of depreciation.
It includes private plant and equipment in mining, manufacturing,
commercial, and similar types of activities, but specifically excludes
residential structures, inventories, and all Government assets.
(3) The age of capital
To measure the degree to which the existing capital stock incorpo
rates available technology, it was decided to use as one variable in the
analysis a computation of the average age of surviving capital assets
included in the above estimate of capital stock. This also was the
wTork of Dr. Terborgh .5
(Ip) A ll other variables
Because there were a number of important influences which could
not be measured directly, the analysis included a time trend having
a constant rate of increase per year. This time trend is a proxy
or stand-in for the many other variables mentioned at the outset,
such as changes in managerial skill, technological progress, improve
ments in the health and education of the labor force, and so forth.
It was found that there was no basis for varying this rate from period
to period.
These measures of the growth-determining factors were utilized to
frame a number of alternative analyses of economic growth. The
final formulation expresses changes in potential output as being the
result of changes in the inputs of potential man-hours of labor, in
the ratio of the stock of capital to this potential labor input, in the
average age of the capital stock, and in time as a proxy for all other
influences.
The formulation shows that potential output grows directly with
increases in available man-hours, increases in the ratio of capital to
labor, and the passage of tim e; while an increase in the average age of
capital assets, on the other hand, tends to reduce potential output, and
a fall in the average age tends to increase potential output.
Variation in actual output from the potential are explained by the
cyclical variable, the ratio of actual labor hours to potential labor
hours. Some of the variations are the result also of variations in
the composition o f demand and of random errors in the statistical
data.
Without going into the technical computations and formulas in
volved, which will be given in the forthcoming study paper already
cited, the relative importance of the various factors can be indicated
as follows:
( 1 ) The increase in the potential man-hours, or potential labor
input, accounts for between one-quarter and one-third of the change in
potential output,
( 2 ) The change in the ratio of the capital stock to the potential
labor input accounts for between one-eighth and one-sixth of the
change in potential output.
5
See Capital Goods Review, No. 40, Machinery and Allied Products Institute, December
1959. The average age refers to a weighted combination of the Terborgh series for plant
and for equipment.
100
EMPLOYMENT, GROWTH, AND PRICE LEVELS
(3) The variation in the age of the capital stock accounts for be
tween 2 and 4 percent of the variation in potential output.
(4) The many factors represented by the time trend, as a proxy,
account for between one-half and two-thirds o f the total annual in
crease in potential output.
(5) The other changes in output were determined by changes in
the mix or composition of demand as between industries with d if
ferent rates of productivity and by variations in the ratio of actual
man-hours to potential man-hours.
T H E POTENTIAL ECONOMIC GROWTH TO 1 9 7 5
The historical analysis was employed to prepare projections of
future potential growth, given trends in population, as well as alterna
tive assumptions about participation in the labor force, unemploy
ment, hours of work, and the average level of prosperity. These
projections, which, of course, are subject to some error, are designed
to indicate a realistic range of potential growth rates that our econ
omy might experience over the next decade. Table 4-1 summarizes
these projections.
Three alternative projections of the rate of growth of potential
output are given. Projection A assumes that our economic affairs are
managed to keep a high level of prosperity, that unemployment is
held to an average of 3 percent by the mid-1970’s, that job opportuni
ties are sufficiently abundant to attract a relatively large proportion
o f the population into the labor force, that the rate of capital accu
mulation proceeds at a rate typical of past periods of prosperity, and
that the composition of output follows the historical patterns prev
alent in past periods of strong growth. This projected rate of growth
is 4.5 percent, measured from current potential output levels, and
4.9 percent, measured from the preliminary estimate of 1959’s actual
output. It exceeds the average rate over the past 50 years.
Projection B assumes somewhat more modest success in maintaining
continuous maximum employment, an average unemployment of about
4 percent as in the recent past, continuation o f recent trends in par
ticipation rates of the population in the labor force, a rate o f capital
accumulation typical of similar past periods marked by occasional
interruptions to growth, and a corresponding mix of demand. The
projected rate of growth on this basis is 3.9 percent yer year, measured
from the output potential for 1959, or 4.3 percent per year, measured
from the preliminary estimate of the actual output for 1959.
Projection C assumes continuation of public and private policies
which in recent years have been accompanied by fairly frequent inter
ruptions to growth, continued inadequate mobility of labor and capi
tal, average unemployment of 4y2 to 5 percent, slower rate of growth
in the labor force as participation rates reflect the lower level of job
opportunities and a lower rate of capital accumulation as industries
are constantly faced with a threat of excess capacity at higher invest
ment rates. The projected rate of growth in output is 3.4 percent per
year, measured from the output potential for 1959 or 3.8 percent per
year, measured from the preliminary estimate of the actual output
for 1959. This rate is significantly higher than the 50-year average
o f about 3 percent per year achieved in the first half of this century.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
101
The acceleration is explained by the fact that even this, the lowest of
our projections, assumes that there will be no deep or prolonged de
pression such as interrupted growth during the preceding 50 years,
namely, between 1929 and 1941. During the decade of the 1930’s
the ratio o f capital to labor hardly changed while the average age of
capital stock rose rapidly and these developments significantly lowered
the average rate of growth over the past half century.
T a b le
4—1.— Selected indicators o f econom ic groivth potentials , 1 9 5 9 -7 5
[Percent increase per year] 1
Indicator
Total labor force___________________________________
Total employment, including the Armed Forces______
Average annual hours of work_______________________
Total man-hours___________________________________
Stock of private plant and equipment in constant prices
Average age of capital stock_________________________
Gross national product, in constant prices:
From 1959, actual (preliminary estimate)_________
From 1959 potential_____________________________
Projected potential growth rates, 1959-75
1.9
1.9
- .4
1.5
3.2
2
-.2
4.9
4.5
1.7
3 1.7
- .5
1.2
2.7
-.1 5
4.3
3.9
1.5
1. 5
.9
2.2
-.1
3.8
3.4
*
-.6
1 Computed by a compound interest formula, using the initial and terminal years.
* Assumes 97 percent of the labor force employed in 1975.
Assumes 96 percent of the labor force employed in 1975.
Assumes 95 percent of the labor force employed in 1975.
8
4
These projections have the following implications:
( 1 ) Without changing our economic system in any fundamental
way, that is, without instituting elaborate controls or having the Gov
ernment impose a pattern of consumption, and without Governmentimposed, forced high rates of capital accumulation, our economy can
grow at a rate as high as 4.5 percent per year. On the other hand, it
will prove extremely difficult to achieve rates greater than this within
our economic system.
( 2 ) I f we avoid stumbling into real depression, the rate of growth
may be only as low as 3.4 percent per year, higher than the 50-year
average of 3 percent per year which was achieved despite a prolonged
interruption in the 1930’s. Thus, there is a considerable range of
possible growth rates, even within a range of assumptions which
exclude depression and a forced-draft economy.
(3) There is a moderate inherent tendency for the rate of growth
of the economy to rise in the coming decade if unemployment can be
held on the average to about 4 percent, or less, of the civilian labor
force. This is due to the increase in the rate of growth in the labor
force and to the fact that the rate of increase in the capital stock and
the decline in the average age of the capital stock would not be re
stricted as in the past by long periods of low investment such as occur
in periods of prolonged depression. So long as recessions are neither
too frequent nor deep, the rate of accumulation of capital can be
quite favorable to growth.
(4) Our economic growth is within our own control. I f the Gov
ernment pursues growth-facilitating policies, the economy will ex
pand near the upper limit of the range. If, on the other hand, the
Government, as a matter of policy, sacrifices economic growth to the
pursuit of other objectives, our economy will continue to perform
1 0 2
EMPLOYMENT, GROWTH, AND PRICE LEVELS
sluggishly, will add less to our capacity, and our potential growth will
tend to be near the lower limit of the above range or even below.
(5)
In recent years, including currently, the output of the economy
has been well below its potential and probably would be in the 1970’s
under the assumptions of the C projection.
C H A P T E R
5. T H E
T he
P O S T W A R
I N F L A T I O N 1
H is t o r ic a l K ecord
Since the cessation of hostilities in August of 1945 and the release
of most wartime wage and price controls in mid-1946, the United
States has experienced a very considerable degree of inflation, al
though its severity has varied greatly from some subperiods to
others. All three of the general price indexes which measure price
movements in broad sectors of the economy— the Consumer Price In
dex (C P I ), the Wholesale Price Index (W P I ), and the gross national
product (G N P) implicit price deflator—have increased by approxi
mately the same amount since 1947, after the immediate sharp postwar
price rise had slowed. The CPI, which is designed to measure retail
price trends of goods and services purchased by city worker families,
rose 31 percent during this period. The W P I, which measures price
movements of goods at the primary market level in several sectors of
the economy, increased 24 percent. Finally, the GNP deflator, which
most nearly approaches a measure of the change in the overall price
level for all final purchases of goods and services in the economy, went
up 35 percent in this time. The movement of each of these indexes
since July 1945 is presented in table 5-1.
1
Main reponsibility for the drafting of this chapter rested with Harold M. Levinson.
He was assisted by Stanley Heckman and H am ilton G ew ehr; Thomas W ilson provided
extensive help in the statistical computations.
103
104
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T a b l e 5 - 1 . — Changes in the price level , 19^ 5 -5 9
[ 1 9 4 7 -4 9 = 1 0 0 ]
D a te
1 945— J u l
v
__
__
_________
_
________ _______
_______
1946— J a n u a r y
____
____
____
___ ______ _____ _____
J u ly
_______________________________________________________
_
1947— J a n u a r y
__ _ _ _
_
_____
_ _ _ _ _ ___________
J u l y --------------------------------------------------------------------------------------------------------1 948— J a n u a r y - __ _ _ _
___
___ __
___ ________________ __
___
_
___ ___ . . . ______
_
_
_____
J u l y ____
1 949— J a n u a r y . .
__
_
____ __
___ _ ___
__
________ __
J u ly _ _
___
_______ __
_______________ __
__
_
______
1950— J a n u a r y
___
_
_
_
______
_______
_
__
J u ly _
_______________
_
__ __
__
___ __
1951— J a n u a r y _ _ _
_
___ ___ _
__
J u l y ____________________________________________________________________
__
1952— J a n u a r y
_
_
_
_ ___ __ ___________ __ _____
J u ly _ _
_ _ _ _ _
___ _____
_ ____
_
____
1953— J a n u a r y _________
__________ __
______________ ___________________
J u l y ____________________________________________________________________
1954— J a n u a r y ______ ________________
___________________ ________________
J u l v ____________________________________________________________________
1955— J a n u a r y ___________ ___________________________________________________
J u ly _ _________________ ______________ _________ _____________ ______
1956— J a n u a r y ____________________________ _ ________________ __________
J u ly
_______ _____ ___________ ______________ ______________ ________
_______ __________ _______ ______ _______
1957— J a n u a r y ____ ______ __
J u l v _ _ . _ . . . ___ ________ ___________________ _________________
1958— J a n u a r y _________________
_______ ______________ _____ _______________
J u l y _______ _______ ______ ___________ __ ____________ _______________
1959— J a n u a r y . . _
________________________________ _______ __ __________
J u l y _ ___ __ __________________________ ___________ _________ __________
S e p t e m b e r .. _ __
_ ________ _____ ____________________________
C on sum er
p r ice in d e x
W h o le s a le
p rice in d e x
7 7 .5
77. 8
84. 6
9 1 .9
9 5 .0
1 0 1 .3
1 0 4 .3
1 0 2 .7
1 0 1 .4
100. 6
102. 9
1 0 8 .6
110. 9
1 1 3 .1
1 1 4 .1
1 1 3 .9
114. 7
115. 2
1 1 5 .2
1 1 4 .3
114. 7
1 1 4 .6
1 1 7 .0
1 1 8 .2
1 20. 8
1 2 2 .3
123. 9
123. 8
1 2 4 .9
125. 2
6 8 .9
69. 6
8 1 .1
9 2 .3
9 5 .3
104. 5
1 0 5 .5
1 0 2 .8
9 8 .0
97. 7
103. 0
1 1 5 .0
1 1 4 .2
113. 0
1 11. 8
1 0 9 .9
110. 9
1 1 0 .9
110. 4
1 1 0 .1
110. 5
111. 9
1 1 4 .0
116. 9
118. 2
1 1 8 .9
1 1 9 .2
119. 5
119. 5
119. 7
G N P i de
fla to r
(2)
(2)
9 3 .8
9 6 .2
1 00 . 6
103. 2
1 0 2 .9
101. 2
1 0 1 .4
1 0 4 .1
1 0 9 .9
1 1 1 .4
112. 7
113. 7
1 1 4 .1
114. 6
1 1 5 .4
115. 5
1 1 6 .1
1 1 7 .3
1 1 9 .0
121. 5
1 2 3 .7
126. 0
1 2 7 .3
1 2 7 .9
1 2 9 .0
(*)
(2)
Percent chanae:
J u lv
J u ly
J u ly
J u ly
J u ly
1946
1948
1P"0
1953
1955
to
to
to
to
to
J u ly
J u ly
J u ly
J u ly
J u ly
1 9 4 8 ._
_ _ ___________ _ . ______
1 9 5 0 ________________________________________________
1 9 5 3 _ _ ______
__
______
_
.
1 9 5 5 ____ __ ______________ __
___________________
1959_
___ __
________ __ _ _ _ __________
+ 2 3 .3
-1 .3
+11. 5
0
+ 8 .9
+ 3 0 .1
-2 .4
+ 7 .7
-0 .4
+ 8 .1
(2)
+ 0 .9
+ 1 0 .1
+ 2 .4
3 + 1 0 .0
1st and 3d quarter figures.
Not available.
Based on January 1959.
Sources : Bureau of Labor Statistics and Departm ent of Commerce.
1
2
3
A further breakdown of these indexes into major subperiods and
by important components clearly indicates two other important aspects
o f the postwar inflation. First, the greatest proportion of these price
rises occurred during the post-World War I I boom from 1946 to 1948
and the Korean War period from mid-1950 to 1953. Taken together,
they account for over 75 percent of the total inflation. A third period,
often called one of creeping inflation, beginning in 1955 and con
tinuing through 1958, accounted for an additional 25 percent.
Second, the greatest proportion of the postwar inflation has been
increasingly accounted for by exceptionally large price increases in a
relatively few, but quite important, sectors of the economy. In the
nature of the case, of course, some sectors will always rise more than
others, particularly over time. Nevertheless, an understanding of the
reasons underlying the diversified experience we have had, particularly
in those areas where inflation has been most severe, can help to provide
considerable insight into the basic causal forces involved.
Some of the most important divergences among sectors can be seen
in the summary figures in table 5-2. The services sector, which carries
considerable weight in both the CPI and GNP deflator, has contributed
a large proportion of the increases in both of these indexes, particu
larly the CPI. The price of new construction, which enters directly
EMPLOYMENT, GROWTH, AND PRICE LEVELS
105
into the GNP deflator, has risen almost 50 percent since 1947, as con
trasted to 33 percent for the index as a whole. The residential com
ponent o f construction also indirectly affects the C P I through “ rent”
and “ home purchase” costs, which are included as part of consumer
expenses. Equally important, the price of nonresidential construc
tion, which has risen 56 percent since 1947, ultimately affects the
prices of almost all other goods through its effects on the costs of fac
tories, stores, hospitals, etc. The “ Government GN P” index, which
enters into the GNP deflator as a measure o f the price of Government
services, has also risen by over 70 percent. Taken together, therefore,
these three sectors—services, construction, and Government—ac
counted for a very large share of the rise in the CPI and GNP
indexes.
T able
5-2.— P ercen tage change in prices in selected sec to rs , 1 9 4 7 -5 8
Price index and sector
Consumer Price Index:
All items - _________________ ____________ ________ _______
All services ________________________ _________ _ ________________
Wholesale Price Index:
All commodities _ _________________________ __ _____________
Textile products . __ ____ . . ___ _ _______ _______ _____
Farm products
________ _ - _________ - -- ___
Machinery and motive products . __ ___ - - ___- ____ - -- Metals and metal products. _____ _____ ___________________ __
GNP deflator:
Entire GNP _ __________________________ ___________________
Producers’ durable equipment ______ _ __ _ - - - __- _____Government GNP (services)-. __ ______ __________ ____ ___ ___
New private construction._ _______ _____ _ _______ _________
Residential nonfarm ..___________________________________ _. ._
Other _____________ . __ ______ _________ __________ ____ _
Personal consumption:
_________ ________ ______ _ __________
Services
Nondurable goods________ ______ _____ ____ _______ - _
Durable goods
_ _ _ ____ __________ _ _______ __ _
Relative im
portance in
index (per
cent)
Base= De
cember 1952
100.0
32.1
Base = 1954
.
7. 5
10. 7
19.3
13. 5
100 0
Base=1956
Percent
chans-e,
1947-58
+29.3
+50.7
+23.7
—6 . 6
—5.1
+61.9
+64.7
6.4
8.5
4.2
4.3
+33.4
+55. 0
+71.9
+48.4
+41.7
+55. 6
23.8
9.2
+42.1
+19. 5
100.0
8.2
31.3
+19.0
Sources : Bureau of Labor Statistics and Department of Commerce.
The same type of extreme divergence is present among W P I groups
as well, which range from a decline of 5 and 7 percent in farm and
textile products to a rise of 62 and 65 percent in “ machinery and motive
products” and “ metals and metal products,” respectively, from 1947 to
1958. The two latter groups not only account for almost one-third
of the direct weights in the W P I, but also have a very considerable
immediate impact on the prices of other goods which use steel and
other metal or metal parts, and a longer run impact on other prices
through their effects on costs of machinery and equipment. These two
sectors also account for a large part of the 55-percent increase in the
“ producers’ durable equipment” index in the GNP deflator. It is
clear, therefore, that any analysis of the inflationary process must
recognize the sectoral nature of the process and direct its attention to
these sectors, within the context of conditions in the economy as a
whole.
'48795—59---- 10
1 0 6
EMPLOYMENT, GROWTH, AND PRICE LEVELS
It is also helpful in evaluating the significance of the postwar infla
tion to view these developments in the broader framework of a longer
run time period. There is certainly no gainsaying the fact that a
more than doubling of the price level over the past 20 years cannot be
lightly regarded. Nevertheless, as chart 5-1 indicates, the American
experience from 1939 to 1953 was by no means exceptional for a period
which included two wars and only a short interwar period; similar
price movements have been associated with the dislocations and stresses
of war and postwar years throughout our history.
It is for this reason that we may view the sharp price rises of 194648 and 1950-53 with at least some equanimity, though this is not to say
that they were in any sense desirable. The third period of so-called
“ creeping” inflation, however, beginning in mid-1955 and continuing
to the present time (October 1959), has caused much more concern
because o f the lack of any exceptional stress on the economy., and
indeed, because the price indexes have continued to rise even in the
face of relatively high unemployment and very low increases in
output. It is this period more than any other which has posed the
basic questions with which the present report is concerned.
S om e P roblems
of t h e
P
r ic e
I ndexes
Changes in the level of prices, as measured by the three major
indexes mentioned above, have now become an important basis upon
which vital Government and private policy decisions are made.
Monetary policy aimed at price stabilization may be considerably
affected by monthly movements in the CPI or W P I ; similarly, wages
affecting millions of employees are adjusted regularly on the basis of
changes in the “ cost of living,'’ as reflected in the CPI, and many
business purchase contracts, particularly for fixed capital assets, in
clude provisions for escalation in line with the W P I or one of its
segments. Society in general, as consumers, savers, or producers,
make decisions based upon past and anticipated movements in the
price level. The nature of these decisions themselves, based upon past
changes in price indexes, may have a profound effect on the future
movements in prices.
A brief evaluation of the nature and limitations of these indexes
is therefore necessary. The Consumer Price Index measures changes
in the prices of a particular “ market basket” of goods and services
bought at retail by city wage earners and clerical workers, with the
composition of that market basket determined by consumer spending
patterns in 1951-52. By definition, therefore, it does not presume
to represent all consuming units, though there is no obvious reason to
believe it understates or overstates the movement of consumer prices
to other persons in the economy—self-employed, nonurban, or extreme
income groups.
The CPI, however, suffers from several important deficiencies, most
o f which are extremely difficult to deal with by precise statistical tech
niques. Perhaps the most serious problem is that of dealing with
changes in quality, particularly in the services sector which repre
sents almost one-third of the total CPI. Since the basic unit of meas
urement is a fixed transaction—e.g., the price of a hospital room per
day— no recognition is given to the fact that the quality of the goods or
C h art
5 -1
EM PLOYM EXT,
WHOLESALE PRICE INDEX, 1720-1958 AND CONSUMER PRICE INDEX, 1800-1958
GROW TH ,
AND
PRICE
LEVELS
Source: Joint Economic Committee, Study of Employment, Growth, and Price Levels. Hearings Port 2 ~
Historical and Comparative Rates of Production, Productivity, and Prices. (April, 1959) p. 3 9 4 ,
* Higher index Cotton at prewar importance.
Lower index Cotton reduced in importance.
**
o
108
EMPLOYMENT, GROWTH, AND PRICE LEVELS
service may be changed. Thus, for example, the far greater effective
ness of modern diagnosis and treatment can effect a cure with many
fewer hospital days. In the case of goods, changes in styling, im
provements in design and durability, greater ease of operation, etc.,
may all occur with no change in price. On the presumption that
over time, the quality of most goods and services will improve, an
upward bias is introduced into the index—that is, it tends to over
state the actual cost to the consumer of (say) recovering from a
sickness. Other examples come readily to mind. A particular tire
at a constant price may yield a lower price per mile because of im
provements in the quality of rubber; a man’s suit at a constant price
may yield longer wear because of improvements in the fabric; etc.
A similar problem arises from the use of fixed weights and the
failure to take account of the introduction of new products which may
be close substitutes for older and higher priced goods .2 On both
counts, current changes in the prices of a given “market basket” o f
goods tends to overstate current changes in the cost of living, or in
the costs to the consumer of acquiring an equivalent level of satisfac
tion. Perhaps the most widely known situation of this type has oc
curred within the past year with the introduction of the smaller car
by American automobile producers. For many uses, the new car rep
resents an adequate and cheaper mode of transportation; its very in
troduction, in fact, was a reflection of consumer preferences for a more
economical vehicle. Yet this important deflationary development
finds no reflection in the current Consumer Price Index, even after
the prices of these vehicles are introduced into the index under present
techniques.
The Wholesale Price Index is subject to the same general qualifica
tions, though it is designed to measure price changes for commodities
as they enter markets at various levels in the productive process.
Thus, for example, the price of steel enters into the index as a
primary metal; it may affect the index again as part of the price
of a fabricated metal part; and yet again as part o f the price o f a re
frigerator. In addition, very difficult issues of quality enter into an
evaluation of improvements in metals, industrial machinery, and other
goods. The index is also based upon constant weights which are re
vised about every 5 years. On balance, therefore, some degree of up
ward bias is probably involved.
It will be noted that one important segment of economic activity—
Government—is not included in either the C P I or the W P I. Also, the
direct costs of all types of construction— residential, commercial, and
industrial— are not measured in either index. It is largely for this
reason that the GNP deflator, which includes a measure of these sec
tors as well as those in the CPI and W P I, is considered to be the most
widely representative price index available for the economy as a whole.
Furthermore, its construction gives some greater recognition to cur
rent spending patterns. Nevertheless, most of the individual prices
which go to make up the GNP deflator are taken from other sources,
including the components of the CPI and W P I, and hence are subject
to the qualifications regarding quality, new products, etc., already
noted.
2 At the time o f this w riting, the base period used in the CPI was 7 years out o f d a t e ;
a revision is in process, however.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
109
Two additional deficiencies, however, both of which result in an up
ward bias in the GNP deflator, relate to the Government and the con
struction components. The price index which is applied to the Gov
ernment sector in constructing the GNP deflator is essentially a meas
ure of changes in the cost of inputs—i.e., in the level of wages and
salaries of Government employees—rather than a measure of changes
in the price of Government services rendered. In other words, the
Government price index does not take into account any rise in pro
ductivity o f Government employees. While the general nature of
Government work may be such that increases in productivity are rela
tively low, there can be no doubt that improvements in data-handling
equipment, accounting and office machinery, and others have resulted
in very considerable reductions in the price of many services rendered
by Government.
The index of “ new construction” is also based largely on data pro
vided by private trade organizations whose methods and reliability are
not completely known. In an industry like construction, which is
characterized by a high degree of specialization among subcontractors
and in which many structures are unique, it is extremely difficult to ob
tain even a proximate measure of changes in productivity. Under
these conditions, it is probable that private trade sources rely heavily
on changes in wage rates and in building materials costs as a measure
of “ construction costs.” I f so, improvements in productivity will not
be fully reflected in the construction price index and the GNP de
flator is biased upward thereby.
Because of these deficiencies in the data, some observers have sug
gested that the apparent inflation since 1955 is more statistical than
real. It is certainly very probable that the amount of inflation re
flected in the indexes is overstated; it seems most unlikely, however,
that the increase of 2 to 2y2 percent per year since 1955 can be ac
counted for solely by this means. Furthermore, it must be recognized
that at least some counterbalancing biases are probably present in the
data; changes in quality are not always in an upward direction, nor
are changes in styling always a net benefit to consumers. The prob
lems of inflation, therefore, do not seem to be so easily assumed away.
What is strongly indicated, nevertheless, is that a considerably
greater effort should be made by the BLS or other agencies to study
and improve the design of these price indexes so that they would more
accurately reflect quality and productivity changes and the introduc
tion of new products. This is vitally important in the case of the CPI,
which is widely publicized as reflecting changes in the cost of living
and which is widely used as a basis for wage adjustments in collective
bargaining and elsewhere. For this reason, a relatively small upward
bias in the CPI can have secondary effects which in turn create further
upward movements in costs and prices. Both the BLS and the De
partment of Commerce are, of course, fully cognizant of the problems
discussed here and have done a great deal to overcome them. Many of
the deficiences still remaining, however, could certainly be reduced if
funds and personnel were made available. The potential gains would
be well worth any added costs.
1 10
EMPLOYMENT, GROWTH. AND PRICE LEVELS
T
he
G a in s
and
L o s s e s F rom I n f l a t i o n
To most individuals and families in society, inflation is much more
than a distant and impersonal phenomenon. Its effects can be seen
daily in the prices they must pay for the goods and services they buy.
The severest effects of inflation, however, are found in the great
burden it imposes on those persons whose incomes, for various reasons,
do not rise in step with the increasing prices of the things they need.
Among the groups wTho are most hurc are the aged, the sick, and those
who must live on fixed incomes or on past savings. In effect, inflation
robs these groups of their share in the distribution of income and re
duces the real value of their wealth. In the following discussion,
therefore, we will be concerned with the effects of the postwar inflation
( 1 ) on the distribution of income and ( 2 ) on the ownership of wealth.3
t h e d is t r ib u t io n o f in c o m e
As a payment for productive services rendered by their labor or
their capital, people in society receive incomes in the form o f wages,
salaries, profits, interest, or rent. These people are then able in turn
to utilize these incomes to purchase the goods they need or want from
others. In this w7ay, goods and services are continually being ex
changed for money, and vice versa, in a never-ending flow.
Clearly, the ability of any individual to command a share of the
goods produced wTill depend upon the price of his productive service
(including the quantity of it he can sell) relative to the prices of the
goods he wishes to buy. I f inflation develops, so that all prices rise,
the effects of that inflation on each individual's share of the income
produced—i.e., on the distribution of income— will depend upon
whether his income (price) rises more or less rapidly than prices he
pays. And this, in turn, will depend upon a number of other con
siderations, including the presence or absence of long-term contractual
commitments, the mobility of the suppliers of services, the degree to
which custom plays a role in price setting, etc.
On this basis, it has usually been presumed that the major group
which benefits from inflation is the profit recipient, since costs tend
to lag behind prices during an upswing. Wage earners may also
often gain since their payments are more flexible upward than those
of fixed-income recipients. At the other extreme are those who earn
interest and rent, whose payments are often fixed at contractual levels
for long periods of time. Finally, there is a broad group of salaried
workers, many of whose incomes are quite “ sticky"—teachers, nurses,
white-collar groups, etc.— and begin to move upward only with a con
siderable lag. I f the inflation continues for long, however, even the
fixed and sticky incomes are renegotiated and the continuing redistri
bution effects of the inflation tend to become considerably less.
These expectations have been only partially supported bv the actual
distribution of income trends during the postwar inflation. These
trends, of course, may have been caused by other factors than the in
flation. The major shifts in income shares since 1946 have been the
following:
3
This discussion draws heavily on several papers w ritten in conjunction w ith the present
study, particularly S. E. Harris, “The Incidence of Inflation : or Who Gets H urt,” Study
Paper No. 7 ; A. H. Conrad, “The Share of W ages and Salaries in M anufacturing Incomes,
1947-56,” Study Paper No. 9 ; and G. L. Bach. “How Important Is Price Stability in Stable
Economic Growth,” in “The Relationship of Prices to Economic Stability and Growth,” a
compendium of papers submitted to the Joint Economic Committee, Mar. 31, 1958.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
111
1 . The share of national income going to all employees— a hetero
geneous category which includes all types of wTage and salaried
workers, from a corporation’s president to its janitor and from a
schoolteacher to a lathe operator—rose from about 65 to 69 percent.
It is very probable that a portion of this increase was due to a
change in the “product-mix,” particularly the shift away from agri
culture into services (which would shift many people out of the
category of unincorporated businessmen into employees). This pos
sibility is given support by the fact that within the manufacturing
sector only, the wage and salary share remained quite stable through
out the period. A further portion is explained by the shift in the
relative importance of Government employment, since income orig
inating in this sector is 100 percent labor income.
2 . By far the greatest loss has been suffered by unincorporated
business, whose share was cut by almost 50 percent from 1947 to 1957.
Here again, however, a large portion of this decline was a reflection of
the drastic reduction in total farm income, due in part to the declining
level of agricultural prices and in part to a sharp decline in the
number of persons in agriculture.
3. For the entire period, the share of corporate profits before taxes
declined very slightly. During the period, however, this share rose
at the beginning of each inflationary upswing in 1947-48 and 1950-51.
After the initial upsurge, the share again declined. Within the manu
facturing sector alone, the corporate share remained quite stable.
In evaluating these trends in corporate profits, it must be noted
that they are net of depreciation. I f depreciation charges are in
cluded in the returns to corporations, their share shows no decline.
To the extent that depreciation charges are based on historical rather
than replacement costs, however, this share will be overstated.
4. The interest share rose slightly, while the rent share remained
about the same. However, both of these shares had already declined
very markedly during the war years and even in the late 1930’s,
largely as a result of Government monetary policies and wartime con
trols. The minor recovery of the postwar decade, therefore, is not
surprising, and does not indicate that these shares did not suffer
markedly. In fact, it is largely as a result of the declining share go
ing to interest that the older people in society have suffered the most,
since they are no longer in a position to provide a labor service and
are dependent primarily on fixed incomes from savings accumulated
in the past.
5. Within the broad employee group mentioned under item 1 , above,
various subgroups were affected very diversely. The most important
lagging income groups were employees o f governments, educational
institutions, and religious and charitable organizations. In some in
stances, salaries of these groups lagged so greatly that their real
incomes have actually declined over the past two decades.
O f greater importance as a measure of the unequal burden of infla
tion on individuals is the fact that it is primarily the incomes of older
retired persons which have been most unresponsive to a rising price
level. This arises, of course, from the fact that it is this group more
than any other which must depend upon interest income, pensions,
life insurance annuities, or other types of fixed income payments.
Furthermore, older persons have little or no capacity or opportunity
to supplement their incomes by active employment. By the
112
EMPLOYMENT, GROWTH, AND PRICE LEVELS
same token, older persons who depend upon social security payments
for their major source of support have been able to avoid serious reduc
tions in their real standard of living only because of numerous upward
revisions in the tax and benefit programs. Continuing revisions of this
type are essential if the burden of inflation on these groups is not to
become severe. The same is true, of course, for other recipients of
social security benefits through unemployment insurance, workmen’s
compensation, etc.
Nor does the available evidence indicate that the period of inflation
has seen any improvement in the share of income going to those fami
lies at the bottom end of the income scale. According to Lampman ,4
“ the lowest fifth of income receivers now get 5 percent of all income.
It received 5 percent of income in 1947. It apparently received about 5
percent of income in the 1930’s.” Lampman also points out, however,
that the income share of the top 5 percent of income receivers has been
lowered considerably at the expense of a gain in the share of the upper
middle income group. It is not clear, however, whether this redistribu
tion is attributable solely, or even primarily, to the inflation. Data
on the distribution of income by families are given in table 5-3.
T a t i l e 5 - 3 .— H ow fa m ily income was shared by income 5ths and by the top 5 percent,
1 9 3 5 -3 6 , 1 9 U , 1954, 1957
[Percent shares]
Before tax-
1957
Quintile
1935-36
Lowest
___ ____- ____
2 1 _____________________________
31_____________________________
4th
_ ____ ________
Highest...
______ _ ______
Total
Top 5 percent _______- _____
1944
4.1
9.2
14.1
20.9
51.7
4.9
10.9
16.2
22.2
45.8
100.0
100.0
26.5
20.7
1954
4.8
11.1
16.4
22. 5
45.2
100.0
20.3
Average
Before tax After tax income after
tax 1
4.8
11.3
16.3
22.3
45.3
5.1
11.8
16.8
22.7
43.6
$1, 428
3.290
4, 690
6,326
12,154
100.0
20.2
100.0
20, 279
18.2
Federal individual income tax.
Source: Survey of Current Business, June 1956 and April 1959, and earlier studies of the staff of the Na
tional Income Division of the U.S. Department of Commerce.
1
TH E DISTRIBUTION OF W EALTH
In addition to its effects on the distribution of current income,
inflation brings about a redistribution in the ownership of wealth,
measured by the net worth (the market value of assets less liabilities)
of different households, business enterprises, or governments. As in
the case o f income, this redistribution is due to differences in price
movements o f various assets during and under the influence of infla
tion. While the dollar value of monetary assets such as bank deposits,
saving and loan shares, mortgages, Government and corporate bonds,
life insurance contracts and claims under most pension and social
insurance contracts remains unchanged, inflation commonly increases
the price o f equities and tangible assets such as common stock, real
estate, producer and consumer durables and inventories. Obviously
4 R obert J. Lampman, “ The Low Incom e Population and E conom ic G row th,” Study
Paper No. 12.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
113
individual economic units or groups of them will profit to the extent
that they hold price-sensitive rather than monetary assets; that the
price-sensitive assets they hold increase in price; and that the assets
they hold have been financed by borrowing which is payable in dol
lars. Because the share of price-sensitive assets in total assets held by
different groups, the extent to which their price-sensitive assets in
crease in value, and their debt-to-asset ratios vary, they are differently
affected by inflation.
From the end o f 1939 to the end of 1959, the price of common stock
has increased by about 350 percent. That of real estate, for which
our information is much more deficient, has advanced by 200 to 250
percent. On the other hand, the cost of living has advanced during
the same period only by approximately 110 percent. A household
without debt holding all its assets in monetary form would therefore
have suffered a decline of a little more than 50 percent in the purchas
ing powder of its net worth, as the result of inflation. On the other
hand, a household that had divided all its assets between real estate
and common stock and had at the beginning of the period financed
one-half of its total assets by borrowing, would at the end of the
20 -year period not only have preserved intact the purchasing power
of its net worth, but would actually have increased it by 60 percent.
The available statistics, defective as they are, indicate that for most
of the major sectors in the economy, monetary assets wTere either less
than debt or not much in excess of debt, so that the purchasing power
o f their net worth has been little if at all damaged by inflation. This
is the case, for instance, for nonfarm households, farmers, unincorpo
rated business enterprises, corporate business, and State and local gov
ernments, A ll these sectors have owned enough assets that have ad
vanced in price and have been sufficiently in debt to offset the losses
in purchasing power suffered on their monetary assets. The Federal
Government has on balance profited from the inflation since the pur
chasing power of its debt has been substantially reduced by the rise
in prices.
While the inflation o f the last two decades thus has not impaired the
net worth of the major sectors of the economy or sharply changed the
distribution of national wealth among them, there undoubtedly have
been substantial groups of households, and also some groups of busi
nesses, that have suffered an impairment in net worth as a result of
inflation, though there are others who have benefited. On the basis of
our information about the character of assets held by different groups
of households, business, and governmental units, and about their debtto-asset ratios, it is known, or at least it is very likely, that the main
groups o f households whose net worth has been impaired by inflation
have been people in the older age groups and of modest income and
wealth, particularly those that did not own their home. On the other
hand, households with heads in their twenties or thirties, who often
acquire homes and consumer durables on credit, and individuals in
the upper wealth groups concentrating their assets in common stock,
have actually seen the purchasing power of their net worth increased
by the differential price movements accompanying the inflation o f
the last 20 years. Such increases have been particularly marked dur
ing the last 6 years during which the level of stock prices more than
doubled while the cost of living increased by less than 10 percent.
114
EMPLOYMENT, GROWTH, AND PRICE LEVELS
The statistics available now are not sufficient to show in detail the
effect that inflation has had 011 the purchasing power of the net worth
o f different groups of households, business enterprises, and govern
mental units, and on the distribution of total national wealth among
them. They do suffice to show, however, that at least among indi
viduals, the postwar inflation has increased the inequality in the
distribution of wealth. It is estimated 5 that the share of the top
percentile of wealthholders, that is, the one percent of individuals
ranking highest if measured by total assets, which had fallen from
32 percent to 21 percent between 1922 and 1949, increased to 24
percent in 1953 and to 26 percent in 1956, the latest date for which
such estimates can be made. Because of the further sharp advance
in stock prices in the last few years, it is likely that the share of the top
one percent of wealthholders has increased and by the end of 1959
may not be far from its level of 1922, if the calculation is made on
the basis not of individuals but of families. Thus the postwar infla
tion appears to have reversed, at least for the time being, the trend
toward a more equal distribution of personal wealth and to have
restored inequality to approximately the level of the early 1920’s.
T H E VOLU M E OF REAL O U TPU T AN D ITS RATE OF GROW TH
Inflation may affect not only the distribution of output, but also
the total available to be distributed. Inflation may lead to waste, to
less saving, to a poor allocation of resources, etc. Conversely, a rising
price level can raise investment and facilitate readjustments within the
economy. In the United States there has been no clear relationship
between output and prices; we have experienced rising output in pe
riods of both rising prices and declining prices; the precise relation
ship between them, therefore, is far from clear.
T h e o r ie s o f t h e
I n f l a t io n a r y
P rocess
Before proceeding with a brief discussion of the alternative explana
tions of how and why inflation arises, an important distinction must
be stressed. The term “ inflation'’ is usually used to mean a general
rise in the price level; contrariwise, the methods of prevention o f
inflation normally center on policies designed to hold the general price
level reasonably stable. Price level stability, however, should in no
sense be identified with the stabilization of any particular price. It is
the very essence of a free enterprise economy that the prices of indi
vidual products and services be free to adjust to changing market
conditions. A change in price in response to changes in market de
mand or natural changes in supply conditions is essential to induce
particular industries or firms to expand while others contract. To
achieve price level stability by requiring that particular prices remain
stable, therefore, may well create more problems than it solves. In
fact, as will be seen, it may well be that price level stability can be
more readily achieved by making individual prices more flexible.
rR. J. Lampman, “Reviewof Economics andStatistics,” XL! (1959).
EMPLOYMENT, GROWTH, AND PRICE LEVELS
DEM A XD - PULL IN FLA TIO N
Despite a vast outpouring' of writings in the past decade or more
concerning the nature of the inflationary process, the basic theoretical
frame of reference is still essentially quite simple. The traditional
economic theory of inflation— commonly called a “ pure demandpull”— has long held that the primary cause is to be found in an excess
of available purchasing power (demand) competing for a relatively
limited quantity of available goods (supply), resulting in a rise in
prices. The limitation on supply is due to the fact that available
resources are being fully utilized—i.e., that there is full employment
in the economy— so that the excess purchasing power can only bring
about a higher price level. Assuming no further increases in aggre
gate purchasing power, the. competitive pressures of buyers will cease
once prices have risen to the point where total money demand is just
adequate to purchase the available (full employment) flow of goods..6
Furthermore, this equilibrium will not be seriously affected by shifts
in the composition of a given total demand. For while such shifts
will result in price increases in the sectors where demand is rising,
purchases in other sectors must decline correspondingly and prices in
those sectors will drop. On balance, no net upward movement will
follow.
The “ demand-pull” theory of inflation presumes that the prices of
productive services and of goods are determined in the market by the
impersonal competitive forces of supply and demand. Prices are
reasonably flexible both upward and downward; by the same token,
monopolistic considerations are sufficiently minor that they do not
significantly affect the final outcome.
The policy implication of a demand-pull inflation are likewise quite
clear. Since the basic cause is an excess of aggregate purchasing
power, policy must be directed toward reducing that purchasing power
by aggregate fiscal and monetary policies. And since markets are
competitive and wages and prices flexible, this result can be achieved
without developing any serious unemployment.
M ARKET POWER IN FLA TIO N
An alternative theory of the inflationary process which has been
increasingly stressed during the postwar period has been variously
referred to as a “ cost-push,” an “ administered-price,” or a “ sellers”
inflation. In the following discussion, we will use the term “ market
power” inflation to denote this type of theory. The term “ market
power” is extremely difficult to define precisely. Conceptually, it
refers to the ability of any group o f sellers (or in the case o f industry,
the ability of a monopolist) to establish a price for its product or serv
ice which differs from the “ competitive” level. This ability is
usually, in turn, the result of some type of group action, which may be
quite open, as in the case of labor unions, or quite tacit, as in the case
of “ accepted” practices in industries with a few relatively large firms.
Thus no collusion or concerted action is necessarily implied. Opera6
If purchasing power rises as w ell, as part of the inflationary process, there will be
further price increases. The process may or may not come to an end, depending on the
extent of feedbacks. A strong and progressive tax system or an unw illingness of the
central bank to increase the money supply would ultim ately halt the process.
116
EMPLOYMENT, GROWTH, AND PRICE LEVELS
tionally, the exercise of such market power would usually be most
clearly identified by an increase in wage rates not associated with the
existence of a relatively tight labor market or by a rise in price not
associated either with pressures on capacity or with rising costs. It
may also be that downward rigidity of wages and prices in the face
o f declining employment and sales is also a reflection o f the exercise o f
market power; this is, however, a weaker case, which will be dis
cussed in more detail in a subsequent section.
I f an important degree of “ market power” inflation exists, two major
policy approaches have been suggested. One, perhaps paradoxically,
is identical to that proposed to deal with a pure demand-pull, viz, to
restrict aggregate demand by stringent monetary and fiscal policies.
This approach is based upon the fact that a market power inflation
cannot—unless extreme assumptions are made—continue for long
unless accompanied by a continually rising aggregate demand. For
if demand is held constant, continually rising wages and/or prices
will result in continually rising unemployment of both labor and cap
ital. A t some pointy the depressing effects of these developments will
weaken market power sufficiently that the inflationary pressures will
cease. Some proponents of this view believe that the level o f unem
ployment necessary to achieve this stability is low enough to be
socially tolerable; others feel that price stability is of such overriding
importance that the problems of unemployment associated with achiev
ing price stability are secondary.
The second approach is designed to deal with the problem by reduc
ing, directly or indirectly, the power to set prices by the groups in
volved. The variations on this theme are extensive and will be dis
cussed in chapter 10 below. Some proposals call for Government par
ticipation in wage and price setting in the key sectors o f the economy
in which market power is considered excessive. Other proposals call
for much stronger application of antitrust legislation in both the
labor and product markets in order to restore the constraints imposed
by a more competitive market.
STRUCTURAL IN FLA TIO N
A third approach to inflation, largely developed within the past
2 or 3 years, presents the viewTthat inflation can arise from structural
adjustments in the economy, in the absence of either excess aggregate
demand or concentrations of market power. The most recent and
comprehensive statement of this theory is that of Schultze,7 who de
velops the proposition that an initial upward thrust of prices and
wages can occur in particular sectors of the economy because of sub
stantial and rapid shifts in demand toward those sectors, though
aggregate demand in the economy is not excessive. A net inflationary
movement can result, however, partly because of the immobility of
factors o f production—which prevents supply from adjusting quickly
to the shifts in demand—but more importantly, because o f the lack
o f downward flexibility of prices and wages in those sectors in which
demand has declined.
7Charles L. Schultze, “Recent Inflation in the United States,” Study Paper No. 1.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
117
The inflationary impact of structural imbalances becomes further
accentuated by secondary effects of the original demand-pull in the
favored sector. To the extent that the price increases result in higher
input costs for other industries, other prices will rise. I f the cost
o f living rises, wage rates in other industries may rise, even though
no tightness exists in the labor market; also wage increases in the
areas where demand is expanding may establish a “ pattern” for
equivalent adjustments where unemployment is still substantial. The
final result of this process of interaction can be continuing inflationary
pressures even after the initiating forces have disappeared.
The problems of dealing with the downward inflexibilities and inter
pendencies of structural inflation from a public policy point of view
are extremely difficult. It is clear that the use of aggregative mone
tary and fiscal controls will result primarily in lowered output and
employment with only small effects on the level of wages or prices.
I f attempts are made by selective controls of some sort to halt the
price rise in the particular sectors where demand pressures exist, there
is danger that additional resources of labor and capital, which should
be attracted into those sectors, will not be; in the long run, the
allocating function of the pricing mechanism will be seriously im
paired. Conceptually, the most appropriate policy would be to reduce
the degree of downward inflexibility in the labor and product markets.
How this can be done without sacrificing other desirable objectives,
however, is a most difficult question.
TH E COMPLEX REAL WrORLD
T o this point, we have been concerned with the various ways in
which an inflationary process can occur. Any actual inflation, how
ever, may be made up of several interrelated factors, reflecting some
elements of all of these “ theories.” An inflation which is initiated
by a condition of excess demand may be accentuated by the use of
market power; conversely, an inflation initiated by autonomous in
creases in wages and/or prices through market power cannot long
continue without an increase in aggregate demand financed by an
expansion in the money supply. Or, in the case of “ structural infla
tion,” sectoral increases in demand and employment may pull up
wages; these wage increases may establish a pattern, however, which
unions in other industries f ollow despite poor demand and employment
conditions. Finally, it may simply be that at the same time, demand
forces are strong in some industries while market power is strong in
others. Prices and/or wages may rise in both cases quite independ
ently of each other.
It is essential to recognize, therefore, that the real world is varied
and interrelated, and that no one “ theory” is likely to provide a com
plete explanation of an actual inflation. Nevertheless, if we are to
formulate an improved public policy in this area, we must do what we
can to identify and, so far as possible, isolate the dominant factors in
volved at various times and in various industries. In the remainder
of this chapter, therefore, wTe will be concerned primarily with pre
senting a summary of the empirical evidence relating to the role of
demand and supply factors, market power, and structural adjust
ments during the postwar period. This summary is based, in turn,
118
EMPLOYMENT, GROWTH, AND PRICE LEVELS
upon several studies conducted as part of the Study of Employment,
Growth and Price Levels of the Joint Economic Committee, which
have been or will be published separately as study papers, as well as
other research. The point cannot be too strongly stressed, however,
that both the analytical and empirical problems involved are very
great, and we can only hope to provide a somewhat more complete
understanding of postwar developments than has perhaps been avail
able previously. We will approach the problem first by confining our
discussion to the product market and will then proceed to an analysis
o f the labor market.
T h e P roduct M a rk et
The early section of this chapter has already presented data indicat
ing the general nature of price movements in the economy as a whole
and in some of its major sectors during the period since 1945. It will
be recalled that all three major price indexes—the Consumer Price
Index, the Wholesale Price Index, and the G XP deflator— indicated
similar basic trends. It was also pointed out that a large portion of the
inflation, particularly since 1955, can be accounted for by much greater
than average price increases in certain important sectors and indus
tries. In manufacturing, the industries which had the greatest price
rises were “ machinery and motive products'' and “ metals and metal
products.” Other sectors in which the inflation centered were con
struction, services, and government. In the following discussion,
therefore, primary emphasis will be placed upon a detailed evaluation
and analysis of most of these particular sectors.
M ANU FAC TURING
Table 5-4 provides an overall summary of general trends within
the manufacturing sector of the economy. A number of important
points are evident. O f basic importance, of course, is the fact that
the manufacturing price level has continued to rise steadily, except
for a fairly substantial reduction of 3.2 percent in the 1949 recession
and a small dowmvard readjustment after the sharp rise wdiich accom
panied the outbreak of the Korean war in mid-1951. The 1954 reces
sion, however, brought no price reduction, although the price index
for “ all manufactures” remained almost constant during: the period
1952-54.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T able
119
5-4 .— T rends in output , prices , profits , icages, and em p loym en t in
m anufacturing, 1 94 7 -5 8
[1497-49 = 100]
i ear
In d u stria l
p r o d u c t io n
1 9 4 7 _________________
1 9 4 8 __________________
1 9 4 9 __________________
1 95 0 __________________
1 95 1 __________________
1 9 5 2 __________________
1 9 5 3 __________________
1 9 5 4 _________________
1 95 5 _________________
195 6 _________________
1 957_________________
195 8 _________________
P ercent change:
1 9 4 7 -5 1 ________
1 9 5 1 -5 5 ________
1 9 5 5 -5 7 ________
1 9 5 5 -5 8 ________
100
103
97
112
120
125
136
127
142
147
147
136
2 0 .0
1 8 .3
3 .5
-4 .8
W h o le s a le
p r ic e in d e x
(a ll m a n u
fa c tu r e r s)
P r o fit
m a r g in s
P r o fit :
r a te s of
retu rn
P r o d u c tio n
w orker
e m p lo y
m en t
9 5 .9
1 0 3 .8
1 0 0 .3
1 0 4 .1
1 1 5 .5
1 1 2 .9
1 1 2 .8
1 1 3 .7
1 1 5 .0
1 1 9 .5
1 2 3 .2
1 2 4 .5
1 0 2 .3
1 0 5 .0
9 2 .7
1 1 9 .0
1 1 4 .6
9 9 .7
1 0 0 .6
9 8 .0
1 1 2 .8
1 0 9 .3
1 0 2 .3
92. 7
1 0 9 .4
1 0 9 .5
8 1 .1
1 1 9 .7
1 2 3 .4
9 8 .6
1 0 0 .9
8 2 .3
1 0 4 .9
9 8 .2
86. 8
67. 2
1 0 3 .4
1 0 2 .8
9 3 .8
9 9 .6
1 0 6 .4
1 0 6 .3
1 1 1 .8
1 0 1 .8
1 0 5 .6
1 0 6 .7
104. 4
9 4 .2
2 0 .4
-.4
7 .1
8 .3
1 2 .0
- 1. 6
-9 .3
-1 7 .8
1 2 .8
-1 5 .0
-1 7 .3
-3 5 .9
2 .9
-.8
- 1 .1
- 1 0 .8
N on p ro
d u c t io n
w orker
e m p lo y
m en t
9 7 .4
1 0 1 .8
1 0 0 .8
1 0 3 .5
1 1 5 .2
1 2 4 .6
1 3 3 .0
1 3 3 .0
1 3 6 .8
1 4 4 .8
1 5 1 .2 !
1 4 8 .8
1 8 .3
1 8 .8
1 0 .5
8 .8
D ir e c t
la b o r c o sts
p e r to t a l
w orker
m a n -h o u r
96. 3
101. rt
1 0 1 .6
9 9 .8
1 0 9 .2
1 1 1 .6
1 1 4 .6
114. 5
112. 1
115. A
118. S
120. 4
13. 4
2. 7
6 .0
7. 4
Sources : Industrial production— Federal Reserve B oard ; Em ploym ent— Bureau of
Labor Statistics ; Profits— Federal Trade Com m ission-Securities andi Exchange Commission.
It is by now almost universally agreed that the sharp rise in prices
immediately after World War II and the second wave of manufac
turing price increases during 1950-51 (1950 to 1953 in the case of the
CPI and GNP deflator) can be attributed primarily to demand forces.
The available data on rates of change in output during these years
provide considerable support to this view. During the period
1947-53 the average annual increase in manufacturing production was
over 5 percent per year. While rates of increase in output are not
per se evidence of pressures of demand on supply, since there may be
considerable excess productive capacity to draw on, this w^as certainly
not the case in 1947. The tremendous backlog of demand which had
accumulated during the war for all types of consumers’ goods, par
ticularly durables, plus the inability to maintain or replace much of
the stock of consumer-oriented capital goods, left us with a productive
capacity which was low relative to total demand in the immediate
postwar years. In such circumstances, an increase in output of well
over 5 percent per year strongly suggests that pressures on productive
capacity existed up to at least 1953. From 1953 to 1955, the rate of
increase in output slowed to only 2.2 percent per year; nevertheless,
it is likely that demand forces still impinged upon capacity in at least
some sectors of the economy during the 1955 recovery. In the light of
this general background, it is not likely that the price increases to
1953, and perhaps to 1955, reflected the exercise of market power to
any appreciable degree, though this may have been a factor, of course,
in some industries. By the same token, the high level of profits in the
postwar period, which reached a peak in 1950-51, was largely the
result of demand conditions.
After 1955, however, the increase in output continued at a very
low rate. From 1955 to 1957. production rose less than 2 percent per
year; from 1955 to 1958, total output actually declined. Neverthe
less, prices continued to rise throughout the period by approximately
8 percent, including an increase of slightly less than 1 percent during
120
EMPLOYMENT, GROWTH, AND PRICE LEVELS
the recession period 1957-58. By this point in time, there can be
little doubt that pressure on productive capacity can no longer be
considered a reasonable explanation of the continuing rise in manufac
turing prices. Furthermore, the rise in prices during the 1958 reces
sion, though small, suggests a greater degree of upward pressure in the
price level than was evident in either of the two prior recessions.
Another interesting trend indicated in table 5-4 is the remarkable
rise in the employment of nonproduction workers as compared to
production workers. From 1947 to 1958, production worker employ
ment fell from 12.8 million to 11.6 million, a decline of over 9 percent;
nonproduction worker employment, on the other hand, rose from 2.5
million to 3.8 million, or over 50 percent. This shift in the nature of
employment is of considerable significance as an added factor in ex
plaining the increasing amount of downward rigidity in unit labor
costs and prices in recessions. A comparison of the movement of
production versus nonproduction worker employment during the re
cessions of 1949, 1954, and 1958 indicates clearly that the former is
considerably more responsive to cutbacks in production than the latter.
This continuing shift toward a less flexible labor force has resulted
in a rising proportion of relatively fixed labor costs and hence, a
greater tendency for labor costs per unit of output to rise in reces
sions. This is particularly evident in the figures for 1958, and
may provide an additional explanation of the increasing tendency for
prices to rise even in recession years.
Further insight into the nature of the inflation is provided by a
more detailed breakdown of the data into the major components pro
vided in the W P I, and further into the major ( 2 -digit) industries
which make up the manufacturing sector of the economy.73- Table
5-5 shows the percentage contribution to the total change in the W P I
(other than farm and food) accounted for by each of its major com
ponents during selected subperiods. In table 5-6, a more detailed
index of a “ value added price” is presented for each manufacturing
industry over the entire postwar period .8 Taken together, these fig
7a It is another anomaly in the data currently provided by the “W holesale Price Index”
that its major classifications do not correspond, even roughly, to the major classifications
used by all other Government agencies in compiling data on profits, output, earnings, etc.
This makes it virtually impossible to obtain reasonably consistent series by industries for
analytical purposes. An expansion of the “W holesale Price Index” data along these lines
is an essential improvement.
8
These indexes are taken from a forthcom ing study paper by C. Schultze and J. Tryon,
A “value added price” differs from the usual type of price index in that it is designed to
reflect the price movements a fte r d ed ucting th e c o s t o f m aterials. A full explanation of
the sources and methodology used w ill be found in the forthcom ing study paper.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
121
ures show a very consistent picture of the inflationary process in
manufacturing. During the early period from 1947 to 1951, all
prices rose considerably, with the greatest increases centered in rub
ber, metals and metal products, ancl lumber. From 1951 to 1955, the
overall price index remained virtually stable; this was, however, the
result o f sharply divergent trends between industries. Metals and
inetal products, particularly iron and steel, led the rise; other sub
stantial increases occurred in machinery, minerals, and tobacco. In
terms o f their weights in the index, however, the overwhelming bulk
of the increase centered in metals and machinery. The major coun
terbalancing declines were in textiles, apparel, and leather. These
were all industries in which raw material costs had declined markedly
after the initial speculative runup of prices in 1950-51 (the wholesale
price index for farm products declined from 113.4 in 1951 to 107 in
1952 and to 97 in 1953), output rose considerably less rapidly than in
manufacturing as a whole, and strong competitive conditions existed
in the product market.
122
T a b le
,
5 - 5 — The rise in industrial prices, a component analysis of change in the Wholesale Price Index excluding food and farm products 1
1951-55
1947-51
95.3
100.1
101.0
10.5
19.1
17.4
8.5
22.2
49.5
32.2
21.3
34.5
37.3
28.6
23.6
19.3
21.0
11.2
4.1
100.00
13. 94
2. 98
12.38
7.58
(2. 83)
2. 24
3. 78
4.91
16. 79
(7. 34)
2 0 . 22
(7.19)
5. 54
1.97
3. 37
4.30
Percent
contri
bution
to total
change
100.0
6.7
9.9
3.0
(2 . 8 )
5.1
5.6
4.8
26.5
(12. 5)
26. 4
(7.8)
4.9
1.9
1.7
2.6
.8
Index,
1951
Percent
change
115.9
110.6
120.3
106.7
110.0
120.7
148.0
123.9
119.6
122.8
123.2
119.0
112.9
114.1
113.6
108.1
104.9
0.9
-13.8
- 22.0
1.1
-3 .1
- 2.2
- 2.8
-.2
- .3
11.0
14. 1
7.9
8.9
1.6
9.3
12.5
-12.3
Relative
impor
tance,
1951 i
Percent
contri
bution
to total
change
100.00
100.0
13. 30 -161.6
3.10 -59.6
11.41
10.8
7.20 - 2 0 . 2
(2. 95)
(5. 9)
2 . 88
-7 .1
4.04
-1 .5
5.07
- .4
17.80
178.1
(7.81)
(95. 9)
20. 77
148.8
(7.01)
(56. 3)
5. 45
7.2
1.93
17.7
3.14
30.4
3.90 -42.6
Index,
1955
117.0
95.3
93.8
107.9
106.6
118.1
143.8
123.6
119.3
136.6
140.6
128.4
122.9
115.9
124.2
121. 6
92.0
Index,
1958
126.0
93.5
112.7
110.4
123.5
145.0
117.7
131.0
150.4
168.8
149.8
139.7
123.2
136. 0
128.2
94.2
100.6
Percent
change
7.7
-1 .9
7.2
4.4
3.6
4.6
.8
-4 .8
9.8
10 . 1
20.1
16.7
13.7
6.3
9.5
5.4
2.4
Relative
impor
tance,
1955
Percent
contri
bution
to total
change
100.00
100.0
10. 84
1.87
11.79
8.48
(3. 53)
2. 49
3. 57
4. 99
18.60
(8 . 45)
22. 73
(7. 78)
5. 40
2. 75
3.12
3. 37
-2.7
1.8
6.9
3.9
(2 . 1 )
.3
- 2.2
6.4
24.7
(2 2 .3)
49.7
(14.0)
4.5
3.4
2.2
1.1
LEVELS
1
This table is computed as follows: The relative importance weight of each item is stance, except in the middle period where the computation had to be carried out in 2
multiplied by the percent change in the item and then divided by the sum of these stages because of the revisions in the index at the end of 1954.
products. The beginning of period relative importance weights are used in each inSource: Bureau of Labor Statistics, Wholesale Prices and Price Indexes.
PRICE
100.8
21.6
Relative
impor
tance,
1947
AND
90.9
101.4
98.8
99.0
93.7
98.6
91.3
89.7
92.5
91.3
95.6
93.9
97.2
Percent
change
GROWTH,
All commodities other than farm and food_
Textile products and apparel________
Hides, skins, and leather________
Fuel, power, and lighting material______
Chemicals and allied products— _______
Industrial chemicals____ - .. ___
Rubber and products__________________
Lumber and wood products____________
Pulp, paper, and allied products____ _ Metals and metal products_____________
Iron and steel ___________________
Machinery and motive products____
Motor vehicles____
Furniture and other household durables-_
Nonmetallic minerals, structural, _____
Tobacco manufacturing and bottled
beverages___ _ _ _ ---- --------- -Miscellaneous- - _____ ________ ___
Index,
1947
EM PLO YM EN T ,
Component
1955-58
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T able
123
5 -6 .— Value added price in dexes in m anufacturing industries , 19^ 7 -5 8
[1947 = 100]
Industry
Primary metals________
Nonelectrical machinery. _
Instruments____________
Stone, clay, and glass_
Fabricated metals, includ
ing ordnance.
Electrical machinery____
Rubber products ____
All manufacturing______
Transportation equip
ment_________________
Printing and publishings
Tobacco products. ______
Furniture and fixtures___
Food and kindred prod
ucts______________ ___
Paper and allied products.
Leather and leather prod
ucts__________________
Miscellaneous manufac
tures_________________
Chemical and allied prod
ucts __________________
Lumber and wood prod
ucts__________________
Apparel and fabric prod
ucts__________ ______
Textile mill products ___
1
1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
109.6
112.1
109.3
109.6
110.0
110.1
96.8
110.0
108.2
102.8
103.3
110.9
110.5
104.1
116.9
108.8
110.8
111.7
98.6
104.7
123.9
120.3
120.7
116.1
111.7
113.0
96.4
113.2
122.3
106.0
108.3
117.1
108.2
101.3
109.4
108.0
115.1
107.2
95.0
93.0
127.0
123.1
129.3
121.5
116.6
119.3
89.7
114.8
134.7
106. 9
107.5
116.4
110.5
104.2
148.1
136.6
145.8
126.0
129.1
130.7
127.0
123.5
133.1
112.0
111. 1
134. 3
113.2
123.2
1 0 1 . 2 129.8
109.5 124.2
1 1 1 . 0 119.3
1 1 2 . 8 127.5
91.4 103.9
90.3 105.7
145.8
139.2
135.9
125. 9
130.1
126.0
132.0
124.5
139. 9
119.3
120.7
135.9
120.3
154.0
135.5
138.2
136.9
127.3
125.3
123. 5
123.4
134.9
123.9
126.7
131.1
124.5
118.3
160.6
144.3
142.4
143.1
133.4
123.5
109.8
128.4
138.8
122.4
127.8
121.4
121.3
119.2
121.3
160.0
143.5
143.4
151.1
134.5
118.9
113.0
129.8
145.5
127.5
128.1
123.0
126.4
118.5
121.0
121.5 1 2 2 . 1
115.7
123.2 1 2 0 . 6 1 2 0 . 6 118.1
112.9 113.4 117.1 119.2
121.9 115.7 1 1 2 . 2 119.1
1 0 1 . 6 103.3 102. 7
99.8
95.0 90.3 84.4 87.4
172.4
150.5
150.7
150. 2
143.7
121.0
136.0
132.7
136.3
129.7
129.9
128.4
124.6
127.2
121.4
118.5
115.2
124.0
105.5
88.1
184.8
163.9
154.3
152.6
148.9
134.1
141.4
139.4
139.0
135.9
133.6
133.3
125.8
124.3
123.8
117.7
116.8
117.6
105. 7
87.5
193.3
168.4
160.8
157.3
152.8
147.9
144.6
141.4
140.1
138.4
131.8
130.2
125.8
122.1
119.3
117.3
115.4
113.6
104.6
86.7
1 Petroleum and coal products is omitted because of defects in the basic data. The figures for all manu
facturing, however, include this industry.
Source: Forthcoming study paper by C. Schultze and J. Tryon. A full explanation of the methodology
and sources will be found in this paper.
The concentrated nature of the inflation was even stronger from
1955 to 1958. During this time, the W P I, other than farm and food,
rose 9 percent. Three-fourths of this rise was accounted for by metals,
very largely the iron and steel sector, and by machinery and motive
products. The remaining one-fourth was scattered throughout most
o f the remaining components. It is to the steel and machinery indus
tries, therefore, that we will first direct our attention.
Steel
According to a detailed analysis of the steel inflation made in one
study paper,9 the direct rise in the price of steel from 1951 to 1958
(37 percent as compared to approximately 9 percent for all commod
ities less farm and food) plus its indirect effects on the costs, and hence
on the prices of products made with steel, accounted for approximately
40 percent of the total rise in the W P I since 1947, and over 50 percent
since 1953. In addition, wage settlements in the steel industry may
have had further indirect effects through their role as “ pattern setter’
for other industries, particularly aluminum, copper, and fabricated
metal products.
This impact of steel prices was attributed primarily to a combina
tion of strong market power in both the product and labor markets,
which resulted in an extraordinary increase in both prices and wages at
9
O. Eckstein and G. Fromm, “Steel and the Postwar Inflation,” Study Paper No. 2.
124
EMPLOYMENT, GROWTH, AND PRICE LEVELS
the expense of the rest of the economy. More specifically, the under
lying factors were tw o:
( 1 ) A high and relatively rising level of profit margins, which
reflected in turn an attempt by management in the industry to
raise the necessary funds for replacement and expansion of pro
ductive capacity through, internal financing, plus a strong oligop
olistic market power position in an industry where demand was
relatively inelastic (i.e., price increases did not result in great
reductions in sales).
( 2 ) An exceptional rise in wages and fringe benefits, particu
larly after 1955, which resulted from the bargaining pressures
exerted by a strong union operating within an economic environ
ment in which profits and output were high, and the outlook was
favorable.
In effect, these two factors reflected a situation in which two strong
groups attempted to bring about a redistribution of income, each in its
own favor, with the result that the rest of the economy suffered. O f
greatest significance, however, was the general conclusion of the study
that—
N eith er the increase in steel w ages nor the increase in steel prices can satis
fa c to rily be explained by dem and fa ctors alone. T he w a ge and price behavior
o f the steel in d u stry represen ts an im portant instance o f inflation caused to a
substantial degree b y the ex ercise of m arket pow er. This typ e o f inflation can
n ot be controlled by policies aimed solely at restricting total dem and.
Machinery 10
Second only to the influence of steel prices was that resulting from
the rise in machinery prices from 1955 to 1958. During this period,
the wholesale price index component “ machinery and motive products”
rose 16.7 percent; if motive products (motor vehicles) are excluded,
the increase was somewhat greater. Considering only the direct
weight of machinery prices in the index, almost one-fifth of the
total rise from 1954 to 1958 wTas due to the greater than average rise
in that sector. The indirect effects were much less than in steel,
however, since machinery prices do not represent costs of materials
which are immediately incorporated into other products.11
The most important finding of the machinery study, however, was
that demand pressures rather than market power played an important
role in the 1955-57 inflation. The analysis of the evidence during this
period indicated that neither unit wage costs nor material costs rose
by enough to account for the sharp rise in the machinery and equip
ment price index. Gross profit margins, on the other hand, rose 52
percent in electrical machinery and 32 percent in nonelectrical ma
chinery, as compared to a rise of only 12 percent in manufacturing as
a whole. O f crucial importance was the fact that data relating to
plant and equipment expenditures, output trends, and new and
unfilled orders figures, all showed a consistently strong pressure
on productive capacity in these industries. Finally, a similar an
alysis o f the movement of these same variables in the steel industry
indicated that similar demand conditions were not present in steel.
M This discussion is based on T. W ilson, “ An Analysis o f the Inflation in M achinery
P rices,” Study Paper No. 3.
11 In the longer run, o f course, machinery costs m ust be covered ju st as m aterial costs
must be if the concern is to operate profitably.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
125
The discussion concludes, therefore, that “ demand pressure played
the major role in that inflation.”
We are left, then, with an important conclusion. Since steel and
machinery together accounted for close to two-thirds of the 1955-58
increase in the wholesale price index other than farm and food it is
clear that neither “ demand-pull” nor “ market power” is in itself a
sufficient explanation of the creeping55 inflation of that period
,
,
.
“
Other manufactu/rmg
Additional data relating to changes in price and several other vari
ables are indicated in table 7 for each major manufacturing industry.
It should be noted that the increases in prices shown are value added
prices. (See footnote 8 for a brief explanation of this concept.) In
general, the industries fell into two groups; the 10 which had the
greatest price increases—from primary metals down to tobacco—and
the 8 which had the smallest—furniture to textiles.
The strongest relationship was that involving concentration ratios.12
O f the 10 industries with the highest price increases, 7 had concen
tration ratios of over 50 percent; by contrast, 6 out o f the lowest 8
had concentration ratios below 25 percent. The data also suggest,
however, that a similar, though weaker, relationship existed between
price changes and output changes, and between concentration ratios
and output changes. Thus, output rose by 30 percent or more in all
but 1 o f the 10 highest sectors, but increased by less than 20 percent
in 5 of the 8 industries with the lowest price increases. In view
,
of these general interrelationships between price changes output
changes and concentration ratios it is impossible without a more
detailed evaluation of developments in each industry to differentiate
the role of demand from that of market power considerations
,
,
,
,
.
It is possible, however, to indicate some of the more evident situa
tions. In five industries—textiles, apparel, lumber, leather, and
food—changes in output and concentration ratios were very low. In:
all o f these, value-added prices rose by much less than the average—
in fact, textile prices actually fell by 1 2 percent. In all o f these sec
tors, the average level of profits from 1947 to 1957 was also consider
ably below the general average, and average hourly earnings in four
o f them fell far below the rate o f increase in all manufacturing.
A t the other extreme, with both high-concentration ratios and high
increases in output, were four industries—instruments, transportation
equipment, electrical machinery, and chemicals. Price increases in
these industries, however, varied from a low of only 17 percent in
chemicals to a high of 54 percent in instruments. Profit levels, how
ever, were consistently higher than the average, and the rate of wage
increases was also about equal to that in all manufacturing.
Most of the specific industries which have not fallen into these two
general groups have experienced relatively unique developments. In
32 Concentration ratios represent a rough measure o f the degree o f com petition in the
product market. They were measured by the proportion o f the total value o f the products
produced in each m ajor (tw o-d igit) classification represented by fou r-digit classifications in
which the largest eight firms accounted fo r over 50 percent o f the value o f the product.
The basic data are in “ Concentration in Am erican Industry,” 'Subcommittee on A ntitrust
and M onopoly o f the Senate Judiciary Committee, 1957. This volum e also contains a
very able statement o f the lim itations on the use o f concentration ratios as a measure o f
“ degree o f monopoly.”
126
EMPLOYMENT, GROWTH, AND PRICE LEVELS
particular, the extraordinary rise in the value-added price in primary
metals and machinery, which has been discussed above, should again
be noted.
T able
5 -7 .— Trends in manufacturing industries , 1947-57
Percentage change
Industry
Value
added
price
All manufacturing _ ___ ___ _ __
Primary metals._ ... ... ___...
Nonelectrical machinery____ _____ _
Instruments. ______ _______
Stone, clay, and glass____________ ...
Fabricated metals__________________
Rubber_________________ __. ___
Transportation equipment . . . ____
Printing.._ ________ ____ ... . .
Electrical machinery____________
Tobacco _____ ___________________ _
Furniture .. . ____ ______________
Food______________________________
Paper_____________ ______ _____
Leather __ _ . ____ . _ ______
Chemicals... ______ _______
Lumber___... __ __________ . 1 _ _
Apparel________ ._ . ... __ ..
Textiles___________________________
Average
hourly
earnings
Output
39
85
64
54
53
49
41
39
36
34
34
33
26
24
24
17
18
6
-12
47
30
35
84
43
33
32
112
34
96
15
39
20
55
13
99
9
19
6
68
80
70
73
72
70
63
66
62
64
68
58
79
75
47
80
36
32
44
Average
profit rates Concentra
before tion ratios
taxes
23
23
25
24
26
24
25
33
23
28
21
23
19
24
16
26
21
13
16
81
31
70
58
19
51
83
2
72
100
7
22
5
2
59
2
8
12
CONSTRUCTION
The construction industry is another highly strategic sector of
the economy, not only in terms of the extent of the inflation within
it, but also in terms of its longer run indirect effects on the rate of
increase in prices of virtually all other goods and many services in
the economy. This results, of course, from the fact that the costs of
new factory facilities, hospitals, public utilities, and other such fixed
investments must, in the long run, be covered by the prices o f the
goods and services they produce. The price of residential construc
tion does not have such far-reaching indirect effects since it is a final
product sold to the consumer; nevertheless, as has been pointed out,
it can have a bearing on the movement of the CPI through its effects
on the components “ rent,” “ home purchase,” “ mortgage costs,” etc.
Some of the basic data relating to trends in output and prices in
construction may be found in table 5-8. For the entire postwar period
1947-58, the GNP deflator for all construction rose more than 48 per
cent, which wras considerably in excess of the rise of 33 percent for
the GNP deflator as a whole. Since new construction represented
about 9 percent of the total weight in the GNP in 1956, and consider
ing the indirect impact of construction prices as well, it is clear that
the overall impact on the entire GNP deflator has been considerable.
A breakdown of the data into “ residential” versus “ other” con
struction also shows a considerable difference in the degree of in
flation, although both components have risen substantially. By far
the greater impact has come from the nonresidential sector, where
prices have risen by almost 56 percent since 1947; by contrast, the
residential index has gone up only about 42 percent.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
127
T a b l e 5 - 8 . — P rice and output trends in construction , 1 9 4 7 -5 8
GNP deflators
(1947-49=100)
Residen
tial
Other
nonfarm
1947_____
1948_____
1949_____
1950_____
1951_____
1952_____
1953_____
1954_____
1955_____
1956_____
1957_____
1958_____
1947-51....
1951-55....
1955-57-...
1955-58....
1947-58.—
93.0
105.1
101.9
107.8
115.7
119.0
120.2
118.6
122.2
129.3
131.4
131.8
24.4
5.6
7.5
7.9
41.7
93.3
103.7
103.0
106.2
116.1
120.4
123.4
124.7
128.7
138.1
148.8
145.2
24.4
10.9
11.7
12.8
55.6
All
93.1
104.4
102.5
107.3
115.8
119.6
121.7
1 2 ,1 . 6
125.3
133.5
137.6
138.2
24.3
8.2
9.8
10.3
48.4
Whole
sale
Real
price
index,
GNP
building
materials
94.0
104.0
109.5
119.6
118.2
119.9
120.2
125.5
130.8
130.7
129.2
27.2
4.9
4.1
2.9
37.4
102.0
98.0
101.0
101.0
110.0
118.0
122.0
128.0
125.0
136.0
139.0
141.0
138.0
20.4
15.2
3.7
1.5
40.8
Real output (1947-49=100)
new construction
Residen
tial
Other
nonfarm
90.0
107.0
105.0
145.0
121.0
120.0
127.0
144.0
170.0
151.0
144.0
151.0
34.4
40.4
-15.3
- 11.2
67.7
All
Nonfarm
dwelling
units
starts
(thou
sands)
849
932
1,025
1,396
1,091
1,127
1,104
1,220
1,329
1,118
1.042
1,209
94.0
103.0
109.0
92.0
105.0
103.0
127.0
128.0
131.0
144.0
148.0
151.0
139.0
28.7
19.0
4.9
-3 .5
47.8
128.0
138.0
157.0
150.0
148.0
146.0
30.4
30.8
-5 .7
-7 .0
58.6 -------------
102.0
121.0
121.0
120.0
120.0
Sources : Bureau of Labor Statistics and Department of Commerce.
A further breakdown of these trends into major subperiods gives
additional support to the tendencies already noted in the manufactur
ing industries, but with some important exceptions. First, it is evident
that the degree of downward rigidity in prices has shown the same
basic tendency—that is, increasing rigidity in 1949 and 1954 and
finally, a continuing upward movement in 1958. This upward shift
has been much more marked in nonresidential than in residential
construction, however. In the nonresidential sector, prices barely
declined at all in 1949, as compared to over a 3-percent drop in resi
dential; in the 1954 recession, while nonresidential prices rose by 1
percent (residential fell more than 1 percent) ; and in 1958, nonresi
dential prices rose another 1 percent, residential remained almost
constant, Finally, a very notable difference between the price trends
in the construction industry as a whole and most others was the con
tinuing and quite substantial rise from 1951 to 1955. This was a
period of stability in the W P I, and the CPI and GNP deflator rose
by only 3.4 and 5.3 percent, (The GNP deflator was, of course, af
fected by the construction index itself.) Yet the construction index
rose by over 8 percent during these same years.
This considerable and persistent upward movement in the construc
tion indexes again raises the issue of the degree to which productivity
is appropriately reflected in these indexes. As was pointed out ear
lier in this chapter, the sources of the basic data upon which the
GNP price deflator for each major type of construction is based are
compiled by several independent trade sources, whose sampling pro
cedures, methodology, and accuracy are not known. Unless some
assurance is available that a reasonable allowance is made for pro
ductivity improvements, it may well be that these indexes overstate
the amount of price increases in construction. This is particularly
important in view of the fact that productivity in construction has
undoubtedly increased considerably since the end of the war, despite
a common belief to the contrary. Even an increase as low as 1 percent
128
EMPLOYMENT, GROWTH, AND PRICE LEVELS
per year can make an important difference in the indicated trends, if
no account has been taken of it .13
Be that as it may, we are primarily concerned with the underlying
forces which may explain the substantial price movements which did
occur. W e may note to begin with that the construction industry is
a rather strange hybrid of competitive and monopolistic character
istics, though probably the former are on balance the stronger. The
production process is split up among several contractors and sub
contractors, each usually specializing in one or two functions (such as
plumbing, electrical work, etc.) ; within each of these specialized
fields, competition is usually strong. On the other hand, each local
market is largely isolated from outside competition because struc
tures cannot be built except at their final site.14 This situation tends
to encourage collusion among local contractors to follow common
pricing practices. In turn, the presence of a strong union helps to
maintain and perhaps encourage such practices. Nevertheless, on
balance, it is doubtful that the exercise of market power by entre
preneurial groups in the industry can provide much of the underlying
explanation of the exceptional rise in prices.15
An examination o f the trends in real output in the industry sug
gests that at least a good part of the explanation may be found on the
demand side of the market. It is by now well known that the back
log o f demand for housing units had grown tremendously as a result
o f the very low building rates of the 1930’s and early 1940’s combined
with the huge amount o f liquid funds or near-liquid assets with which
family units w7ere left as a result of our war financing. After a brief
“ starting up” period in 1947-48, housing starts have exceeded 1 million
in every year since 1949; in addition, there has been a consistent and
strong upgrading in the size and quality of houses built.16 From 1947
to 1951, real output of new residential nonfarm construction rose 34
percent, or an annual average rate of over 8 percent. Actually, the
use o f 1951 as the terminal year understates the rate of increase in
output, and hence the extent of pressure on the productive facilities
o f the industry, since output dropped over 15 percent from 1950 to
1951. Similarly, residential output rose over 18 percent from 1951
to 1954 and over 40 percent from 1951 to 1955, the latter year having
been one o f very great expansion in homebuilding. The rise o f 18
percent during the 195Jf-65 recovery added another strong upward
thrust to the rapid rise on economic activity and general optimism of
this period. Over the entire period 1947-55, residential output rose
a phenomenal 90 percent, averaging well over 10 percent per year.
Under these conditions, it is most difficult to believe that demand did
not constitute the major underlying cause of the inflation which oc
curred during this period.
The nonresidential sector of construction showed a slower, but
almost continuous rise from 1947 to 1955, at an average rate of over
13 F or a detailed discussion o f im provements in techniques in residential construction,
see W. Haber and H. Levinson, “ Labor R elations and P roductivity in the B uilding T rades,”
U niversity o f M ichigan Press. 1956.
14 This situation is somewhat modified in residential construction by the grow th o f pre
fabricated h o u sin g ; this is, however, only a small part o f the total construction industry.
15 U nfortunately, no adequate data are available on profit levels or profit m argins in the
construction industry.
16 See the annual reports o f the H ousing and Home Finance A gency fo r detailed data
on these trends.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
129
5 percent per year. Taken together with the more sporadic but overall
much greater proportionate increase in the residential sector (gross
money expenditures in the two construction sectors were approxi
mately the same), all construction showed a rise in output of about
7 percent per year from 1947 to 1955. Given the initial shortage o f
productive capacity in the industry, the demand hypothesis is still
given strong support.
The period after 1955 is, as usual, more difficult to evaluate. After
the extraordinary spurt in homebuilding in 1955, the output trend was
downward in residential construction; the decline was over 10 per
cent from 1955 to 1958. In the nonresidential sector however the
,
,
investment boom of 1956-57 continued to carry output to new high
levels. From 1955 to 1957, output rose 5 percent; from 1953 to 1957,
it rose over 18 percent. Thus the overall trends in construction from
1953 to 1957 were generally favorable; in all construction, total output
increased by 16 percent from 1953 to 1957, or almost 4 percent per
year. Since there is a reasonably high degree of mobility of labor
and capital between the two construction sectors, demand probably
still played a role in both until 1957; certainly its role appears to
have been stronger than in manufacturing. It is also interesting to
note that a very sharp runup in the prices of building materials was
very closely tied in to the huge expansion in 1955 and to a considerable
degree to the 1950 expansion as well. From 1951 to 1954, the price
,
index of building materials remained constant, despite a continuing
increase in building activity. In the 2 years from 1954 to 1956, how
ever, the index rose almost 9 percent, then again remained almost
constant through 1958. Here again the role of the very sharp up
,
swing in particular sectors in 1955 is emphasized as a hey factor in
explaining price developments during that and the ensuing few years
.
The output data also show a rather marked contracyclical pattern
in nonresidential construction, particularly in 1954 and 1958. Despite
a drop in real GNP in both of these years, real residential construction
rose almost 14 percent in 1954 and 5 percent in 1958. In every post
war recession, including 1949, housing starts rose at least 10 percent
over their prior level; in 1958, the increase was 15 percent. Contrari
wise, real output and housing starts were cut back sharply from 1951
to 1953, and in 1956-57. Nonresidential construction, on the other
hand, followed a much more traditional cyclical pattern. The sig
nificance of the contracyclical movements in residential construction
and their relationship to monetary policy will be discussed in more
detail in chapter 9 below.
W e turn finally to a brief consideration of the role of costs. So far
as costs of building materials are concerned, the data in table 5-8
suggest that they have risen somewhat less than prices in residential
construction, and by considerably less than the prices o f nonresidential
construction, particularly after 1955. There are no grounds for be
lieving, therefore, that the price increases in construction can be traced
back to material costs. The role of labor costs and o f collective
bargaining will be discussed at a later point in this chapter.
130
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T he
S e r v ic e
I n d u s t r ie s
In some ways, the service industries represented the most important
sector of the American economy in the postwar period. For one
thing, the rate of increase in prices has been among the highest of the
major components of the GNP deflator, and very much the highest in
the CPI. Moreover, these indexes have moved inexorably upward in
every year since 1945, during recessions as well as booms. From 1947
to 1958, the GNP price index for all services rose 42 percent, as com
pared to 33 percent for the GNP as a whole. The impact of services
on the movement of the CPI and, in view of the importance of the
C P I as a factor affecting wage movements, on the economy as a whole,
is striking. Over the entire postwar years, the price index for “ all
services” rose over 50 percent, wThile the entire CPI went up only 29
percent. In fact, the CPI would have shown no net increase whatever
from 1951 to 1956 if the prices of services had remained constant; in
other words, the entire rise in consumer prices from 1951 to 1956 loas
due to the services sector. Beginning in 1956, however, all components
o f the CPI rose by considerable amounts.
Second, the services industries provided the most important sources
of employment expansion after the war. After one year o f no net in
crease from 1947 to 1948, employment in services has risen annually.
From 1953 to 1957, the average annual rate o f increase in services
employment has been 3.4 percent. This contrasts sharply with a drop
o f approximately 1 percent per year in manufacturing, mining, and
“ transportation and public utilities,” and to a rise of only 1.7 per
cent per year in construction and 1.8 percent in trade. Put another
way, the very great bulk of the expansion of employment in the econ
omy as a whole after 1953 can be traced to the services industries.
Third, services have claimed an increasingly important share of total
consumer expenditures. From 1947 to 1958, consumer purchases
of services increased 120 percent while total consumer purchases rose
only 89 percent; as a percent of the consumer's budget, services rose
from about 32 to 38 percent over this same period. Prior to 1955,
these increasing outlays were primarily at the expense of nondurables;
since 1955, however, the durables sector has borne the major brunt of
the shift toward more services.
Finally, the trends in real output show that after 1955, real output
o f services rose by a much greater amount than did real GNP. From
1947 to 1955, real GNP increased by 39 percent, while services rose
by slightly less (37.5 percent). From 1955 to 1958, however, real
EMPLOYMENT, GROWTH, AND PRICE LEVELS
131
GNP rose only 1.5 percent; in sharp contrast, the output of services
increased by 14.5 percent. By the same token, of course, it was the
services sector which provided the main source of employment expan
sion during this period.
TH E DIVERSE NATURE OF TH E SERVICE IN DUSTRIES
In tables 5-9 and 5-10, the trends in output and prices o f the major
components of what are called “ services” in the GNP and CPI are
given. A closer examination of these components indicates that, to
some extent at least, they represent areas of the economy which have
already been discussed above, but viewed in a somewhat different per
spective. Thus the “ housing” component of both indexes partially
reflects the costs of residential construction and hence is affected by
many of the same elements discussed above. Similarly the costs of
home repair services are often affected by the wages established by
the building trades unions; in some instances, the same workers may
be employed.
T a ble
5 -9 .— Output trends in the service industries , 1 9 4 7 -5 8
[1947-49=100]
Real output
Real GNP
1947_______________________
1948_______________________
1949_______________________
1950_______________________
1951_______________________
1952_______________________
1953_______________________
1954_______________________
1955_______________________
1956_______________________
1957_______________________
1958_______________________
1947 to 1951________________
1951 to 1955________________
1955 to 1957________________
1955 to 1958________________
1947 to 1958________________
98.0
101.0
101.0
110.0
118.0
122.0
128.0
125.0
136.0
139.0
141.0
138.0
20.4
15.3
3.7
1.5
40.8
All
services
97.0
100.0
103.0
109.0
113.0
116.0
121.0
124.0
131.0
138.0
144.0
150.0
16.5
15.9
9.9
14.5
54.6
Housing Household Transporta
operations
tion
94.0
106.0
113.0
119.0
124.0
129.0
133.0
138.0
145.0
153.0
162.0
26.6
16.0
10.9
17.4
72.3
100.0
96.0
100.0
104.0
113.0
120.0
123.0
129.0
133.0
149.0
161.0
170.0
179.0
25.0
24.2
14.1
20.1
86.5
101.0
101.0
98.0
98.0
104.0
106.0
108.0
104.0
108.0
109.0
110.0
109.0
3.0
3.8
1.9
.9
7.9
Other
97.0
100.0
103.0
107.0
108.0
111.0
115.0
120.0
127.0
134.0
138.0
142.0
11.3
17.6
8.7
11.8
46.4
S o u rce : “ U.S. Incom e and Output,” Supplement to the Survey o f Current Business, U.S.
Department o f Commerce, 1958, tablesi I I -5 and V II-1 3 .
132
T able
5-10.— Price trends in the service industries, .1947-68
GNP implicit price deflators (1947-49=100) 1
GNP
96.0
102.0
102.0
103. 0
111.0
Household Transpor
operations tation
104.0
107.0
111.0
114.0
115.0
115.0
116.0
118.0
120.0
9.2
7.5
2.6
4.3
22.4
93.0
101.0
106.0
110.0
115.0
120.0
128.0
131.0
133.0
137.0
139.0
144.0
23.7
15.7
4.5
8.3
54.8
95.0
103.0
105.0
111.0
116.0
121.0
124.0
127. 0
131.0
137.0
140.0
16.8
14.4
7.9
10.2
47.4
102.0
95.5
102.8
101.8
102.8
111.0
1 1 3 .5
114.4
114.8
114.5
116.2
120.2
123.5
16.2
3.2
5.0
7.9
29.3
94.5
100.4
105.1
108.5
114.1
119.3
124. 2
127.5
129. 8
132.6
137. 7
142.4
20. 7
13.8
6.1
9.7
50.7
95.0
101.7
103.3
106.1
112.4
114.6
117. 7
119.1
120.0
121.7
125.6
127.7
18.3
6.8
4.7
6.4
34.4
96.6
99.9
103.6
105.9
109.4
113.4
117.1
118.1
120.7
123.9
127.4
131.4
13.3
10.3
5.6
8.9
36.0
89.3
99.7
118.2
129. 3
138. 4
147.3
153.7
153. 9
156.4
163.9
174.1
44.8
19.0
6.5
13.1
95.0
111.0
Medical
care
Other
services
including
personal
care and
recreation
94.5
100. 9
104. 6
107.0
112.4
119.5
123.8
127. 5
131.3
136.4
142.2
149.2 /I
18.9
16.8
8.3
13.6
57.9
97.1
102.7
103.4
109.1
111.3
113.4
116.2
118.4
120.3
126.0
129.6
132.6
12.4
8.5
6.4
9.5
33.5
100.2
N o t e . —-Housing is not a pure service group. It includes house furnishings (about
one-seventh of the weight) whose price index was only 104.0 in 1959, plus household
operation services, the price index for which is separately shown in this table.
LEVELS
1 Source: U.S. Income and Output, tables 1-6 and VII -4.
2 Source: Bureau of Labor Statistics.
98.0
100.0
102.0
All items All services Housing Household Transpor
operation
tation
PRICE
95.0
104.0
107.0
112.0
113.0
122.0
126.0
127.0
129.0
132.0
134.0
17.9
13.4
3.9
5.5
41.1
101.0
Other
AND
113.0
114.0
116. 0
117.0
121.0
125.0
128.0
15.6
5.4
6.8
9.4
33.3
95.0
104.0
106.0
111.0
116.0
121.0
124.0
126.0
129.0
133.0
135.0
16.8
13.5
5.6
7.1
42.1
101.0
Housing
GROWTH,
194 7 .
194 8
194 9
195 0
195 1
195 2
1963______
195 4
195 5 .
195 6
.
195 7
195 8
.
1947 to 1951.
1951 to 1955.
1955 to 1957.
1955 to 1958.
1947 to 1958.
All
consumer
services
Consumers Price Index (1947-49=100) 2
E M P LO Y M EN T ,
[1947-49=100]
EMPLOYMENT, GROWTH, AND PRICE LEVELS
133
Another important category of services is utilities—gas, elec
tricity, water, telephone, railroads, intercity and local buses and
streetcars, and airlines. Limitations of time and resources have pre
vented a detailed analysis of each of these industries. To a very sub
stantial degree, however, all o f these utilities have similar product
and labor market characteristics. In the product market, the prices
charged are subject to regulation by Government agencies which are
required to permit these utilities to earn a “ fair return on the fair
value” o f their property. In this sense, the prices of the services
rendered by these utilities are strongly “ cost-oriented.” In industries
like railroads and local transit operations wThere demand has been de
clining sharply, prices have been increased in an attempt to cover
rising unit costs. In most of the remaining utilities, however, prices
probably have been held to levels below" what they would be in the
absence o f Government regulation.
The service industries which remain may be classified roughly into
those requiring a high degree of skill and training—medical care in
particular— and those involving very little or no skill—domestic
service, laundries, cleaning and dyeing, and so forth. A relatively
small group of personal services falls somewhere between, such as
barbershop and beauty shop operators, and automobile, radio, and
television repairmen.
Medical care17
Since 1948, the price index for medical care has increased by ap
proximately 65 percent, or at an annual rate of well over 5 percent.
The greatest increase has been for hospital care and hospitalization
insurance premiums, which have increased at an annual rate of 7.7
and 6.3 percent, respectively. Physicians fees rose about 43 percent
from 1947 to 1958 and dental fees by 38 percent.
This very considerable increase in the costs of medical care is
attributable to a tremendous rise in the demand for medical services
combined with severe shortages o f medical personnel. Roberts points
out that—
Combined private and public health care spending rose from 3.6 percent of
gross national product in fiscal 1929 to 4.7 percent in fiscal 1950 and to 5.2 per
cent in fiscal 1958. Total spending rose from $3.6 billion in 1929 to $12.4 bil
lion in 1950 and to $22.7 billion in 1958. It is clear that health and medical
care is taking vastly increased amounts of the Nation’s output in absolute and
relative terms.
These trends will undoubtedly continue strongly into the future
as the American people become increasingly aware of the improve
ments in medical science, as the health needs of a rising proportion of
older persons are felt, and as greater insistence upon Government
support for medical research develops.
Yet despite this great increase in demand, the relative supply of
medical personnel has been declining. The number o f hospital beds
per 1,000 population dropped from 9.7 in 1948 to 9.1 in 1958. Since
1949, the ratio of M.D. physicians has declined from 135 to 132 per
100,000 population; in 1920, the ratio was 137 and in 1930, it was 125.
A similar downward trend has occurred with respect to dentists.
17
For a more complete analysis of the inflation in medical care prices, see Markley
Roberts, “Trends in the Supply and Demand of Medical Care,” Study Paper No. 5.
134
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Furthermore, projections based upon currently predicted output of
U.S. medical and dental schools plus graduates from foreign medical
schools indicate that this downward trend will become even more
pronounced over the next 15 years.
Under these circumstances, there is no doubt that the rise in this
component o f services has been clue to the pressures of a rapidly
rising demand on a relatively slowly increasing supply. It is also
clear that the long run solution must rest on policies which will expand
the training facilities and provide other assistance to increase the
supply of all types of skilled medical personnel.
I V?skilled services
A t the opposite end of the service spectrum are several occupa
tions—domestic, cleaning and laundry workers, hotel employees, and
others— for which price indexes rose from 34 (dry cleaning and
pressing) to 51 (laundry) percent. Several other low-skill service
occupations, such as retail clerks, service station attendants, janitors,
etc., probably followed similar trends.
There is very little data available by which to evaluate the under
lying causes of upward movements in the prices of these types of
services. Since they are all characterized by large numbers of small
establishments operating under severely competitive conditions, it is
highly unlikely that excessive profit margins are involved. Since
they all utilize a high proportion of labor, however, some analysis of
wage-employment trends may be helpful.
From 1947 to 1958, employment in these sectors expanded quite
slowly, as compared to expansion in the medical and other professional
occupations. Over the entire 1 1 -year period, total employment in
hotels and in laundry and cleaning establishments rose from 899,000 to
991,000, an increase of less than 1 percent per year. Employment in
wholesale and retail trade, however, increased from about 9 to 11
million from 1947 to 1958, or an average annual increase of about 2
percent per year; this was in excess of the rate of increase in nonagricultural employment in the economy as a whole. Judging on the
basis of these trends in employment, there does not seem to be a par
ticularly strong case for the existence of demand pressures in these
areas. Nor can the lack of expansion in employment in these sectors be
attributed to a general shortage of labor in the economy as a whole,
at least after 1955.
An analysis of wage trends in these sectors also fails to provide
any basis for excessive increases in price. Table 5-11 compares the
percentage increase in wages in several unskilled service occupations
with those in various manufacturing industries. It can be seen that
the service trades have had wage increases generally below those in
manufacturing as a whole. This suggests that while some “ spillover”
o f wage increases from manufacturing to service industries may oc
cur, there is by no means a clearcut relationship between them.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T able
135
5-1 1 .— Percent increase in w ages in selected service and m anufacturing
industries , 19 4 7 -5 8
In d u stry
S e r v ic e s :
L a u n d r y __ _ _ _ _
___ _____
___ __
_
_ __
C le a n in g ...
_ _ ____
_ __
__
___
___ __ _
W h o l e s a l e t r a d e . . . __
___
_ _ _ _ _
_ _ _ _
___
_
___
___
_ _ _
R e t a i l tr a d e _ _ .
H o t e l s . . __ _ ___
_ _
___
._ _ . __
__
.
._
F in a n c e , in s u r a n c e , a n d rea l e s t a t e ...
M a n u fa c tu rin g :
A ll m a n u fa c tu r in g .
_
_ __
___
__
___
_ _ _
R u b b e r ..
_
__
_
_ __
__
_ _
. . .
T e x t i l e s ____ __
___
__
___ __ _ _ __ _
L e a t h e r ..
__
_ __
__
___
__ _
____
_
L u m b e r ___ __
_
_ _
_ _ _ _ _ _ _
A p p a r e l _________
_
_
_
_
_ _ _ _ _ _ _ _
____
C h e m ic a l s ___
__
__
_ _
___ __
___ __
P r im a r y m e t a ls ____
._
_
_ _ _ _
____ __
F o o d ______
_
_
____
_ _ _
_ _.
P a p e r _____________ _______
_______ __ ___________
_ ____
P r i n t i n g . ______
_ _ _
_______
_____________ _________________
1947-53
1953-58
1947-58
27 .3
2 6 .7
40. 5
3 8 .6
37 .9
32.1
15.3
15.8
22. 6
2 1 .4
24 .2
20.1
46. 7
46. 7
72 .2
68 .3
71 .2
58. 7
45.1
37. 5
31 .4
31.1
20 .3
2 3 .0
9. 7
14.9
15.9
13. 7
26. 7
31 .2
25.2
26.3
73. 6
69.1
44.1
50. 5
42 .2
34 .2
8 9 .0
9 3 .3
82.7
83.6
71.1
22. 7
18.0
49 .2
47. 4
46.0
45.5
45.0
1 8 .1
Source: Bureau of Labor Statistics.
The final variable which may explain the price movements in serv
ices is productivity. Here no reliable data are available. The nature
of the occupations involved, however, is such that it is quite prob
able that productivity increases have been considerably lower in
these sectors than in the goods-producing industries, such as manu
facturing and mining. I f this is the case, labor costs per unit of out
put have risen by more than the average and prices have been forced
upward thereby. Except insofar as the wages in services have been
increased more than otherwise by the indirect influence of union
pressures elsewhere— a possibility not generally supported by the data
available—the higher prices in the unskilled services appear to be the
result of normal competitive market forces.
Since the underlying cause of price pressures in the unskilled service
areas has been the low rate o f increase in productivity, primary empha
sis should be directed to this problem. The rise of supermarkets, the
use of accounting and computing machines, and other facts indicate
that productivity in services is not immune to improvements, if
sufficient incentive is provided to indicate it.
Skilled services
There remain a few small service occupations which require some
degree of training and skill, including automobile, radio, and T Y re
pair, barbers, and beauticians. From 1947 to 1958, auto repairs in
creased almost 50 percent in the C P I; men’s haircuts rose 72 percent;
and beauty shop services increased 24 percent. The first of these has
undoubtedly been affected by the more complicated repair services
necessary with modern automobiles. In addition, auto mechanics’
wages rose about 87 percent over the period, an amount almost equal
to the extraordinary rise in wages in the primary metals sector of
manufacturing. The levels and the increases of these wages differed
among cities in the same pattern as manufacturing wages. Little is
known about the market characteristics of the services provided under
men’s and women’s personal care, although a considerable degree of
common setting of “ price lists” is present in the former. In any case,
the importance of these items is small.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
136
Summary
As was the case in the several manufacturing sectors, the underlying
causes o f the rising prices of services have been diverse. In those sec
tors calling for a high degree of skill and training, as in medical care,
the inflation has clearly been one of pure demand and supply. In the
low-paid unskilled service groups, however, the underlying cause ap
pears to have been related primarily to a low rate of increase in pro
ductivity, combined with a rate of increase in wage rates which was
by no means excessive, and which in fact was considerably less than
in manufacturing. Here again, the role of market power was small,
though some “ spillover” from low-paid manufacturing industries may
have occurred.
T
he
L
abor
M
arket:
T
he
M
ovem ent
of
I n d u s t r ia l W
ages
In table 5-12, annual data on earnings, employment and unem
ployment are presented for the entire economy and for certain
major sectors for the period 1945 through 1958. The sectors shown
are those in which “ market power,” in the form of strong collective
bargaining, would be expected to exert its strongest influence, if any.
An examination of these figures shows that hourly earnings in these
sectors—manufacturing, mining, railroads, and construction—have
continued to rise consistently throughout the postwar period, al
though the rate of increases varied greatly. This fact obviously
raises two important questions. One, to what extent have these
wage increases been a response to demand pressures in the labor
market. And two, have wage rates been inflexible downward during
periods o f recession and if so, is this evidence of the existence of
“ market power” in the labor market ?
T able
5-12.— Employment, unemployment, and earnings in the entire economy
and in selected major sectors, 1945-58
e n t ir e p r iv a t e e c o n o m y
Year
1945.. _________________ ________________ _________ ____
1946___ ________________________________ _____ __________
1947- _________________________________________________
1948____________________________________________________
1949 . _____ ____________________________________ _____
1950
-- ______________ ______________________
1951 _________________________________________________
1952___ ____________________________ _______________
1953_________________ ___________________________________
1954
_ ____ ______________________________________
1955____________________________________________________
1956... _________________________________________________
1957 ___________________________________________________
1958 ________________________________________________
See footnotes at end of table, p. 138.
Percent of
Average
Employment civilian
number
(millions) labor force
weeks
imemployed unemployed
53.9
57.5
60.2
61.4
62.1
63.1
62.9
63.0
63.8
64. 5
65.8
67.5
67.9
68.6
2
1.9
3.9
3.9
3.8
5.9
5. 3
3. 3
3.1
2.9
5. 6
4 .4
4.2
4.3
6. 8
(0
0
) 9.8
8.6
10.0
12.1
9.7
8.3
8.1
11.7
13.2
11.3
10.4
13.8
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T able
137
5-12.— Employment, unemployment, and earnings in the entire economy and
in selected major sectors, 1945-58—Continued
M ANUFACTURING
Straight time Percent
Production
hourly
worker
change in
Percent
earnings
earnings unemployed 3 employment
(thousands)
Year
1945.
1946.
1947.
1948.
1949.
1950.
1951.
1952.
1953
1954.
1955.
1956.
1957.
1958.
0)
$1. 05
1.20
1.31
1. 37
1.42
1.53
1 . 61
1.71
1. 76
1.82
1. 91
2.01
2.08
4.6
3.3
8.1
5.2
6.2
2.9
3.4
4.9
5.*2
3.5
0)
0)
0)
3.5
7.2
5. 6
3.3
2.8
2.5
6.1
4.2
4.1
5.1
9.2
12,864
12,105
12,795
12, 715
11,597
12,317
13,155
13,144
13,833
12,589
13,061
13,195
12,911
11,656
MINING
Year
Gross hourly
earnings
1945.
1946.
1947.
1948.
1949.
1950.
1951.
1952.
1953.
1954.
1955.
1956.
1957.
1958.
0)
0)
1.51
1.71
1.77
1.82
1.99
2.07
2.20
2.20
2.27
2.41
2.53
2. 56
Percent
change in
earnings
13.2
3.2
3.1
9.3
4.0
6.3
0.0
3.2
6.2
5.0
1.2
Production
Percent
worker
unemployed employment
(thousands)
(13)
0)
C1) 2.3
*4.9
6.2
3.3
3.1
C1)
13.0
8.2
6.4
5.9
11.0
0)
C1) 845
877
811
788
812
772
737
658
651
673
664
572
CONSTRUCTION
Year
Gross hourly
earnings 4
1945____________
1946____________
1947____________
1948____________
1949____________
1950____________
1951____________
1952____________
1953____________
1954____________
1955____________
1956____________
1957____________
1958____________
• 1.68
1.79
1.86
1.98
2.15
2.27
2.43
2.54
2.60
2.73
2. 89
3. 01
Percent
change in
earnings4
6.5
3.9
6 .5
8.6
5.6
7.0
4.5
2.4
5.0
5.9
4.1
Seefootnotes at endof table, p. 138.
48795—59---- 12
Percent
Union hourly change in
rates
union rates
1.89
2. 09
2.18
2.28
2.42
2. 57
2. 71
2 . 81
2.90
3.04
3.19
3.34
10.6
4.3
4. 6
6.1
6.2
5.4
3.7
3.2
4.8
4.9
4.7
Percent
unem
ployed 3 4
7.4
11.9
10.7
6.0
5. 5
6.1
10.5
9.2
8.3
10.0
13.9
Production
worker
employment
(thousands) 4
1,764
1,930
1,925
2,076
2,309
2,328
2,310
2,277
2,410
2,559
2,442
2,278
138
T able
EMPLOYMENT, GROWTH, AND PRICE LEVELS
5 -1 2 . — E m ploym en t, u n em ploym en t , and earnings in the entire econom y and
in selected m ajor sectors, 1 9 4 5 -5 8 — C o n t in u e d
CLASS
Y ear
I R A IL R O A D S
G r o ss h o u r ly
e a rn in g s
194 5 ___________________________
_________________________
1 94 6 _________________________________________________________
1 94 7 _________________________________________________________
1948_________________________________________________________
1949_________________________________________________________
1 95 0 _________________________________________________________
1951_________________________________________________________
1 952_________________________________________________________
195 3 _________________________________________________________
1954_________________________________________________________
1955_________________________________________________________
1956_________________________________________________________
1 95 7 _________________________________________________________
1 958 ___ ______________________________________________________
1 N o t a v a ila b le .
2 N e w d e fin itio n s u s e d for 1947 a n d s u b s e q u e n t y e a r s.
3 .6 p e r c e n t.
3 O ld d e fin itio n s .
4 C o n t r a c t c o n s tr u c t io n .
5 E x c l u d in g str ik e m o n t h o f O c to b e r .
6 E s tim a te d .
0. 96
1 .0 9
1 .1 9
1 .3 0
1 .4 3
1 .5 7
1. 73
1 .8 3
1 .8 8
1 .9 3
1. 96
2 .1 2
2 . 26
2. 44
P ercent
ch a n g e in
e a rn in g s
P ercen t u n
e m p lo y e d 3
0
1 3 .5
9 .2
9 .7
9 .7
1 0 .2
1 0.1
5 .8
2. 7
2 .7
1 .6
8 .2
6 .6
8 .0
0)
(l)
( 1)
5. 5
3 .4
1 .5
1 .7
( ')
5 .7
4 .6
2 .5
3 .7
9 .7
T o ta l
e m p lo y m e n t
(th o u s a n d s )
1 ,4 2 0
1, 359
1 ,3 5 2
1 ,3 2 7
1 ,1 9 1
1, 221
1, 276
1, 226
1, 207
1 ,0 6 5
1 ,0 5 7
1 ,0 4 3
945
841
U n d e r th e o ld d e fin itio n s , th e figu re for 1947 w a s
Source : Bureau of Labor Statistics.
Turning first to the periods during which we have experienced the
greatest amount of inflationary pressures—1946 to 1948, 1950 to 1953,
and 1955 to 1957—the data consistently show that demand pres
sures were quite strong during the first two of these periods, but con
siderably less so in the last one. So far as the economy as a wThole was
concerned, the most striking single item of evidence reflecting the
extreme shortage of labor in the immediate postwar years is the fact
that total employment increased by 6.3 millions in the short span of
2 years, with another 1.2 million added in 1948. As a result, the huge
demobilization program, which reduced the Armed Forces by 10
million men in 2 years, resulted in a rise in the rate of unemployment
from 1.9 percent in 1945 to less than 4 percent in 1947 and 1948.18 The
latter rate was still well within the normal range of “ full employ
ment” in peacetime and in fact probably rose as high as it did partly
because of reconversion problems in some industries. There can be
little doubt, therefore, that considerable demand pressures existed in
the labor market through 1948. It was not until January of 1949
that the unemployment rate in the economy rose as high as 4.5 per
cent ; by December of that year, the trough of the 1949 recession was
reached, with an unemployment rate of 6.8 percent. In early 1950,
unemployment began to decline and a level of 4.5 percent was again
achieved in August 1950, shortly after the Korean outbreak. During
the entire 3 years from January 1951 to December 1953, the unemploy
ment rate rose above 3.5 percent in only 3 months; during 14 months of
the period it was 3 percent or below. Under these circumstances,
there is again no question but that demand pressures were very strong
throughout the economy. These figures provide clear support for the
widely held view that the considerable wage increases of the period
18 In part, this transition was also aided by the withdrawal o f approxim ately 3 m illion
persons from the labor force after the war ended.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
139
were primarily, if not exclusively, the result of “ normal” competitive
pressures.
The recovery from the 1954 recession was rapid until mid-1955, by
which time the unemployment rate had fallen to slightly above 4 per
cent; it remained between 4 and 4.5 percent until late 1957. On the
basis of the overall figures on unemployment, therefore, the average of
about 4.3 percent for 1955-57 as contrasted to 3 percent for 1951-53
and slightly under 4 percent for 1946-48 clearly suggests that demand
pressures were relatively weaker in the later period. Nevertheless,
the level o f unemployment of approximately 4.3 percent during this
period cannot be considered so high as to preclude the presence of
demand pressures in the labor market.
Overall averages, however, can often be quite misleading. Table
5-12 and chart 5-2 indicate, the trends of both employment and rates
of unemployment show considerably less favorable conditions in 195557 in the manufacturing, mining, construction, and railroad sectors
than in the economy as a whole. This is largely due to the fact that
unfavorable economic conditions in such sectors as agriculture, trade,
and services are reflected far more in i/72(ieremployment than in unem
ployment, since so large a proportion o f these groups is self-employed.
There has also been a shift in the composition of demand away from
the goods and toward the services producing industries in the economy.
140
EMPLOYMENT, GROWTH, AND PRICE LEVELS
C h ar t 5 -2
RATES OF UNEMPLOYMENT, MAJOR SECTORS, l946-'58
Percent
In any case, it seems clear that the degree of demand pressures in
the more strongly unionized sectors weakened measurably after 1953.
In manufacturing, production worker employment reached a peak of
13.8 million in that year, then dropped away to about 13 million in
1955-57; the rate of unemployment rose from an average of 3 percent
in 1951-53 to close to 4.5 percent in 1955-57.
In coal mining and railroads, production worker employment
showed very marked declines throughout almost the entire period. In
the light of this, the rates of unemployment were remarkably low,
doubtless reflecting a high rate of retirement of older workers under
private and government pension programs combined with a very low
rate of new entrants into these declining areas. Even so, rates of
unemployment in mining ranged from 6 to 8 percent in 1955-57,
compared to less than half that amount in 1948 and 1951-52 (no data
were available before 1948 or for 1953), while in railroads, it averaged
EMPLOYMENT, GROWTH, AND PRICE LEVELS
141
3.6 percent in 1955-57 compared to 1.6 percent in 1951-52. The situ
ation in construction was somewhat more favorable, with production
worker employment continuing to grow from the early 1950’s to the
later period. Yet once again, unemployment rates ranged from 8 to
10 percent in 1955-57 contrasted to 5 to 6 percent in 1951-53 and 7.4
percent in 1948.
The conclusion seems indicated that demand forces were sufficiently
strong during the immediate postwar and the Korean war periods to
provide the dominant explanation of the upward thrust of wages
though union strength may well have been an added factor. particu
larly in railroads and some mining sectors. In the 1955S7 period
however the demand side of the labor market was relatively weaker
though it may well have contributed to wage increases in important
industries
,
,
,
,
.
We turn now to a closer examination of the year-to-year relationship
between the rate of unemployment and the rate of change in wages in
these same major sectors. In the manufacturing, mining, and con
struction industries, the relationship is clearly evident (chart 5-3). In
each o f these, the lowest increases in wages consistently occurred dur
ing the recession years of 1949, 1954, and 1958 and in the immediate
post recession years 1950 and 1955. The years of greatest increases
were usually 1947 and 1948, and 1951-53.19
M The railroad data do not reflect this type o f relation sh ip ; this is largely due, however,
to the lag in wage adjustments which often resulted from the extensive procedural pro
visions o f the National R ailw ay Labor Act. The substantial rise in wages in 1949 is a
case in point. N egotiations begun in 1948 between the railroads and the nonoperating
employees resulted in lengthy delays, including the appointment o f a Presidential fa ct
finding board. In M arch 1949, a 7-cent increase was negotiated, plus a sh ift from a 48to a 40-hour week at the same weekly pay, as o f September 1, 1949.
142
EMPLOYMENT, GROWTH, AND PRICE LEVELS
C h a r t 5 -3
R E L A T IO N S H IP
BETW EEN
E A R N IN G S A N D
RATES
MANUFACTURING
PERCENTAGE CHANGES
IN
O F U N E M P L O Y M E N T , 1 9 4 7 - ‘5 8
MINING
5
10
IS
P e rce n t U n e m p lo y e d
CONSTRUCTION
P e rc e n t U n e m p lo y e d
RAILROADS
P e rc e n t U n e m p lo ye d
Taken as a whole, the evidence supports the general conclusion that
the level of unemployment— or alternatively, the degree of demand
pressures in the labor market— does have an important effect on the
rate o f change in the wage level.
In itself, however, this is o f limited significance. More important
is the fact that wages also showed not only a very high degree o f
downward rigidity, but also a tendency to continue to move upward,
even during periods of substantial unemployment. An analysis o f
the movement o f hourly earnings in manufacturing, mining, construc
tion, and railroads during the downswings of 1949, 1954, and 1958,
indicates that in no instance did wages decline. Rather, they rose
quite markedly in all sectors during 1958 and to a much lesser extent—
with the exception of mining—in 1949 and 1954.20 From January
20 This was also true o f negotiated rates in collective bargaining, except that m ost nego*
tiated rates remained unchanged in 1949.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
143
1949 to January 1950, earnings rose 1.5, 3.2, and 7.3 percent in manu
facturing, construction, and railroads, respectively; 21 the figures for
January 1954 to January 1955 were 2.1, 2.0, and 0.5 percent. These
magnitudes are sufficiently small so that they might reflect mere shifts
in the composition of the sample or other chance variations in the data.
When considered in conjunction with the increases of 3.9, 3.3, 6.7, and
2.7 (in mining) percent from January 1958 to January 1959, however,
it appears that a gradual upward movement rather than mere down
ward rigidity has characterized the postwTar recessions, at least in the
most recent instances. This is made more likely by the fact that the
costs o f various fringe benefits have probably also risen to some degree
during these years. It appears that there has been an upward drift
in wage-fringe costs in postwar recessions, becoming increasingly
strong in each subsequent recession.
Does this experience provide evidence o f the exercise of market
power by strong unionism? So far as dowTnward rigidity itself is
concerned, the very probable answer is “ No” ; rather, what historical
data are available indicate that similar rigidities have commonly been
noted during mild downswings at times when the influence of unionism
was virtually absent.22 Thus, accoring to Creamer, average hourly
earnings in all manufacturing remained steady and perhaps rose
slightly during the 1923-24 and 1926-27 recessions, as well as during
the first year o f the 1929 depression. Historically, substantial down
ward movements in wages have occurred only during periods of pro
longed and severe depressions, as in 1920-22 and 1929-33. The down
ward rigidity of wages in the postwar period, therefore, is not so much
a manifestation of strong unionism, as it is a reflection of the absence
of any prolonged declines in business activity.
Furthermore, dowTLWTard wage rigidity may itself be an important
element in preventing a mild recession from developing into a serious
depression. It is by no means clear that a wage reduction during a
downswing will yield a higher level o f employment; rather, a cumu
lative deflation and perhaps rising unemployment may develop. It
may well be, then, that downward wage rigidity is of some assistance
in maintaining greater economic stability.
The data in table 5-12 and chart 5-3 also provide some insight into
the question of the possibility of achieving price stability within a
“ tolerable” level of unemployment. It must be recognized to begin
with that a rise in wages even in the face o f considerable unemploy
ment is not in itself inflationary. For one thing, producers may be
willing or be forced to accept lower profit margins, at least within
limits. More important is the fact that wage increases are counter
balanced to some extent by increases in productivity. So long as
wages rise by no more than productivity, no increase in prices need
occur. During recessions, however, productivity usually rises by less
than its long run average, so that wage increases cannot be counter
balanced as easily.
It is also necessary to recognize that the level of unemployment
which society is willing to accept as “ tolerable” cannot be precisely
defined. This is a value judgment which will vary among individuals.
2l The figure for railroads is almost completely due to the shorter workweek introduced
J
• 'However, a 7-cent increase was also negotiated by the nonoperating unions.
Daniel Creamer, “ Behavior of W age Rates During Business Cycles,” Occasional Paper
34, National Bureau of Economic Research, 1950, pp. 12 and 37.
144
EM PLOYMENT, GROWTH, AND PRICE LEVELS
Furthermore, what society as a whole is willing to accept may
depend upon the characteristics of the unemployment as well as its
amount. Thus, a 6 percent level of “ frictional” unemployment, affect
ing many people for short periods of time, may be more acceptable
than a 4 percent level, which is primarily “ structural” in nature,
affecting relatively few people for a much longer time. Again, a
relatively high rate o f unemployment may be more acceptable if ac
companied by an adequate social insurance system than a relatively
low rate without such insurance.
The long run possibilities of maintaining price stability by this
approach are discouraging. During the recession years 1949, 1954,
and 1958, the average aggregate rates of unemployment were 5.9,
5.6, and 6.8 percent respectively. In 1949, average hourly earn
ings in manufacturing and mining rose by less than 1.5 percent, while
construction rose 3.2 percent (the railroad increase of 16 percent is
almost all due to hours reduction). In 1954, earnings rose by 2 per
cent or less in all sectors; and in 1958, all sectors rose by an average
of approximately 4 percent. This again suggests that the rate of
increase in wages in recessions may be growing.
Past evidence suggests, therefore, that unemployment would have to
average at least 6 percent to keep the rate of wage advance no greater
than the rate of increase in productivity. Clearly, monetary and
fiscal policies that yielded this result would be socially unacceptable.
The general conclusions suggested by this analysis of the move
ment o f wages in the manufacturing, construction, mining, and rail
road sectors are the follow ing:
1. In general, the degree of demand pressures in the labor market
were less strong during the 1955-57 period than during the years
from 191$ to 1948 and 1951 to 1953. Nevertheless, the rate of unem
ployment in 1955-57 was not so high as to preclude some role to de
mand, at least in some sectors of the economy.
2. Over the course of business cycles, the rate of increase in wages
was related to the rate of unemployment— that is, wages increased
most when the rate of unemployment was lowest.
3. During recessions, there was a marked downward inflexibility
of wages, plus some upward movement particularly in 1958. Such
downward inflexibility has long been characteristic of mild down
turns and cannot be attributed primarily to the presence of strong
unions. The continuing upward movement, however, is more sug
gestive of the influence df market power.
4. It is doubtful that a secular upward trend in wages and prices
can be avoided with an average level of unemployment which is con
sidered socially acceptable, given our present types of anti-inflation
weapons.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
145
T H E LABOR M A R K E T : T H E STRUCTU R E OF W A G E S
To this point, we have been concerned with the movement o f the
general level o f wages over the postwar period. Equally important
to an understanding of the major factors underlying wage move
ments, however, is an analysis o f the wage structure—that is, o f the
relationship between the wages in different industries. In order to do
this, the changes in wages in 26 separate industry groups were tested
against several possible explanatory variables—changes in employ
ment, output, productivity, profits, concentration ratios (a rough
measure o f the degree of competition in the product market), and
others. The 26 industries included 19 manufacturing and 5 mining
sectors, class I railroads, and contract construction.23
Before proceeding with an analysis o f these tests, however, it is
interesting to note to begin with that wages in these different indus
tries have risen by very similar amounts, particularly during 1947-51
and 1955-58. Even considering the entire postwar period, almost twothirds o f these sectors had increases falling within a range o f 70 to 90
percent. These figures are shown in chart 5-4. It is evident to begin
with, therefore, that the range within which any differentiating vari
ables can operate is relatively small; by the same token, equalizing
factors appear to have been quite strong.
23 For the reader who may be Interested in methodology, the 26 industries used were all
2-digit standard industrial classifications. For 19 manufacturing industries both cross
section and time series regressions were computed. For the 5 mining sectors and railroads,
only time series were run. The decentralized nature of the construction industry required
a more qualitative evaluation.
146
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
C hart
DISTRIBUTION
WAGE
OF
5 -4
INDUSTRIES
INCREASES,
SELECTED
BY
AMOUNT
PERIODS
OF
1 9 4 7 - 58
Percent
1947-58
CZ1 _ .
3 0 -4 0
4 0 -5 0
_____
5 0 -6 0
6 0 '7 0
7 0 “80
8 0 -9 0
90-100 100"! 10
Percentage IncreaseinGross Hourly Earnings
Percent
1947-51
i
■■■
Percent
Percentage Increase inGross Hourly Earnings
Source : Bureau of Labor Statistics.
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
147
The results of these statistical tests carried out for manufacturing,
mining, and railroads can be summarized briefly:
1. No significant relationship whatever was found between annual
percentage changes in hourly earnings and annual percentage changes
in employment in each industry. Nor was this relationship improved
by utilizing changes over particular subperiods or for the entire post
war period.
2. No important relationship was found between changes in wages
and changes in output .
3. No relationship was found between changes in wages and changes
in productivity per production worker man-hour.24
4. Within the 19 manufacturing industries, the most important
factors which were related to wage changes were (1) the level of
profits, measured as a rate of return on equity, and (2) the degree
of competition in the product market, as measured by 195 concen
tration ratios.24a The relationships to profits and concentration ratios
were very much stronger after 1951, however. The basic data are
presented in table 5-1 4 .
In mining and railroads, however, the relationship of wages to
profits did not appear and concentration ratios were not available.
24 As noted, these findings are based upon only 25 industry observations, hence, would
normally be subject to considerable qualification on grounds of lack of homogeneity within
the units. A similar test using 61 smaller (3-digit) industries, however, showed identical
results. 'See A. Conrad, “ The Share of Wages and Salaries in Manufacturing Incomes.
1947-56,, ” Study Paper No. 9.
See notes to table 5—14 for the sources of profits' data in manufacturing and of con
centration ratios. Profits figures for mining are from reports of the Internal Revenue
Service, and for railroads from the ICC.
148
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Table 5-13.— Changes in earnings, profit rates, concentration ratios, and
estimated union strength, 1941-58 and 1953-58
[Percent]
1947-53
Straighttime
earnings
Manufacturing:
Chemicals.............................
Petroleum refining________
Primary metals...................
Food..................................
Paper....................................
Printing................................
Instruments........................
Stone, clay, and glass.........
Fabricated metals...............
Nonelectrical machinery..
Furniture________________
Transportation equipment.
Tobacco................. ..............
Electrical machinery........ .
Rubber..................................
Textiles................................
Leather............... .................
Lumber................................
Apparel.................................
N onmanufacturing:
Class I railroads__________
Metal mining____________
Bituminous mining______
Nonmetallic mining______
Petroleum and natural gas.
Contract construction____
Anthracite mining........ .
Profit rates
Estimated
(average Concentra
union
strength
before
tion ratio
taxes)
49.2
47.6
47.4
46.0
45.5
45.0
44.9
44.3
43.9
43.8
41.9
40.1
38.6
38.2
37.5
31.4
31.1
22.7
18.0
26.0
19.1
22.8
20.2
26.2
23.3
24.6
26.6
26.3
26.6
26.0
33.1
20.0
31.2
25.5
20.3
15.5
24.4
13.6
58.5
56.1
51.6
51.4
50.0
50.0
49.8
7.9
15.1
10.5
17.6
15.6
(0
0)
0)
5.3
0)
0)
59.4
99.1
81.1
22.4
5.0
2.3
69.9
57.9
19.3
31.1
7.3
83.2
100.0
72.2
51.2
11.9
2.3
1.5
5.7
25-50
50-75
75-100
25-50
50-75
75-100
50-75
50-75
50-75
75-100
25-50
75-100
25-50
75-100
75-100
0-25
25-50
25-50
75-100
75-100
75-100
75-100
25-50
25-50
75-100
7.5-100
0)
0)
0)
1953-58
Manufacturing:
Primary metals...................
Tobacco_________________
Chemicals............ ...............
Paper____________________
Food___ __________________
Fabricated metals________
Nonelectrical machinery. _
Instruments_____________
Petroleum refining_______
Electrical machinery_____
Transportation equipment
Rubber__________________
Stone, clay, and glass____
Printing. .............................
Furniture............- ...............
Lumber.................... ............
Leather_____ ____________
Apparel_________ _______ _
Textiles............... .................
N onmanufacturing:
Class I railroads__________
Contract construction____
Bituminous mining______
Nonmetallic mining--------Petroleum and natural gas
Metal mining____________
Anthracite mining_______
i Not available.
* Profits in mining sectors are based on 1953-56 averages.
31.2
28.7
26.7
26.3
25.2
24.9
24.6
24.6
24.3
24.1
24.1
23.0
22.9
18.1
16.1
15.9
14.9
13.7
9.7
29.8
23.8
21.8
21.8
21.7
21.6
18.5
21.0
24.0
24.3
19.9
17.7
18.9
20.9
23.8
14.9
24.6
30.7
22.7
24.4
21.6
18.7
14.0
15.6
12.8
9.2
6.9
0)
M.O
213.1
2 13.4
2 14.9
23.3
81.1
100.0
59.4
5.0
22.4
19.3
31.1
69.9
99.1
72.2
83.2
51.2
57.9
2.3
7.3
1.5
2.3
5.7
11.9
75-100
25-50
25-50
50-75
25-50
50-75
75-100
50-75
50-75
75-100
75-100
75-100
50-75
75-100
25-50
25-50
25-50
75-100
0-25
0)
0)
0)
0)
0)
0)
0)
j
75-100
75-100
75-100
25-50
25-50
75-100
75-100
EM PLOYMENT, GROWTH, AND PRICE LEVELS
149
5-14.— Cross-section correlation coefficients between changes in straighttime hourly earnings, profits, concentration ratios, and production worker
employment in manufacturing industries, 1947^581
T able
Profits
before
taxes 2
Year
1947-48 _ ___________________________________
1948-49 ________________
___________________
1949-50
- - _______ ___ ___________________
1950-51 . . . __________________ _______________
1951-52 .
. . . ___________________________________
1952-53
. ________________________________________
.
__________
1953-54 __________________________
1954-55 . . . _______________________________________
1955-56 _____________________________________________
1956-57 ___________________________ _________________
1957-58___________________________ - _________________
0.012
.616
-.0 8 7
. 178
.598
.550
.628
.514
.055
.546
.392
Profits
after
taxes 3
0.138
.777
-.0 9 7
.127
.707
.689
.520
.600
.146
.544
.484
Concen
tration
ratio 3
0.226
.336
.033
.045
.283
.423
.463
.383
.428
.607
.549
Productionworker
employment
0.417
-.0 5 0
-.5 6 3
.171
.087
.249
.203
.233
-.1 9 7
.230
-.5 7 6
1 The 0.05 level of significance is 0.4555.
2 Profits were measured as a percentage of stockholders’ equity. D ata are from F T C -S E C
Quarterly Financial Reports for Manufacturing Corporations.
3 Concentration ratios were measured by the proportion of the total value of the products
produced in each 2-digit classification represented by 4-digit classifications in which the
largest 8 firms accounted for over 50 percent of the value of the product. The basic data
are from “ Concentration on American Industry,” Senate Subcommittee on Antitrust and
Monopoly.
4.
Qualitative judgments regarding the strength and philosophy of
unionism in several sectors of the economy suggests that this was
also a contributing factor in particular industries, sometimes rein
forcing and sometimes being limited by the variables noted above.
There was no generally applicable relationship evident bettoeen union
strength and wage changes, however. This is indicated by the figures
in table 5-13, in which industries are ranked in accordance with their
percentage increases in earnings during two major subperiods, to
gether with data on estimated union strength,25 profits, and concen
tration ratios in those industries.
W A G E TRENDS I N
N O N M A N U F A C T U R IN G IN D U S T R IE S
The wage trends in some o f the nonmanufacturing industries shown
in table 5-13 are also worth special comment. It will be recalled that
in railroads, bituminous coal, and anthracite, employment and output
dropped very sharply and almost continuously during the entire post
war period. Yet the railroad workers enjoyed the greatest increase
in wages o f any sector included in the analysis. Similarly ? wage in
creases in coal mining exceeded those in every manufacturing sector
from 1947 to 1953, although they fell somewhat behind the average
o f all manufacturing after that time.
It is extremely difficult to explain such a relatively rapid rise in
wages in these areas by tightness in the labor market, particularly
after 1953. Up to that point, it is possible that the low rate of un
employment in the economy as a whole was such as to encourage an
exodus from these industries, particularly the mining sectors. After
1953, however—and probably to some extent before that as well—the
conclusion is strongly suggested that wages have been considerably
affected by the strong market power of the unions in these industries.
25 Unfortunately, the most recent study of union strength was made in 1946. See “Extent
of Collective Bargaining and Union Recognition, 19 4 6 ,” Monthly Labor Review, May 1947.
The estimates in table 5 -1 3 are based largely upon these data ; in general, however, the
strength of unions in most industries has probably not changed greatly since that time.
150
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
Average hourly earnings in the construction industry also rose by
considerably more than those in manufacturing from 1947 to 1953
and by an amount about equal to those in manufacturing from 1954 to
1958. The nature of the construction industry is such as to create
conditions which are very favorable to the exercise of market power
by unions. First, the industry is strongly organized by several unions
representing highly skilled craftsmen, who are limited in supply.
Second, the competitive area of the product market is almost com
pletely local, so that no problem of outside competitive pressures or of
“ runaway” shops exists. Third, bargaining is conducted very largely
by autonomous local unions, subject to considerable interlocal rivalries.
And finally, the settlements negotiated in the residential sector of the
industry are often determined by the terms established by the same
local unions in the industrial and commercial sectors, where the eco
nomic environment is generally more favorable to relatively liberal
wage-fringe adjustments. Taken together, all these considerations
would suggest that union power has been a factor underlying the
relatively high wage increases in the industry.
On the other hand, however, there was considerable evidence pre
sented in the previous section of this chapter that output and employ
ment trends were extremely favorable, at least until 1955, and that
they continued to be quite favorable in nonresidential construction
through 1956 and 1957. Under these conditions, it is difficult to assert
that demand considerations did not also play an important role in the
rising wages and prices in this industry. On the basis of the avail
able data, it is impossible to pass judgment on the relative importance
o f demand versus market power in the determination of wages in the
construction industry.
W AGE “ p a t t e r n s ” I N T H E POSTW AR PERIOD
The general findings noted above are also given support by an
analysis of the nature of negotiated collective bargaining settlements
from 1946 to 1958. One of the most interesting phases of postwar
labor markets has been the development of so-called “ pattern bargain
ing,” which may be defined as the process of negotiating a collective
bargaining agreement on the basis of the same or very similar pro
visions to those already established in a prior, or “key” bargain. It
has been argued that such patterns contribute to the inflationary
process since the “ key” settlement is usually made in an industry where
conditions are favorable to a “ liberal” agreement. Since this becomes
the pattern for other industries— including perhaps, nonunion areas—
the net effect is inflationary.
Table 5-15 summarizes the wage-fringe increases negotiated in sev
eral industries, or in companies which were generally representative
o f entire industries, during major postwar periods. For purposes of
analysis, these settlements have been separated into groupings accord
ing to the concentration characteristics of the industries involved. In
addition, nonmanufacturing industries have been separated out.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
151
T a b l e 5-15.— Wage and fringe adjustments in selected industries, W-^G-oS
Company or industry
Collective bargaining settlements 1946-49
High concentration manufacturing:
United States Steel (key)____
General Motors (key)_________
Ford (key)____________________
Chrysler (key)________________
International Harvester_______
Rubber (4 companies)________
General Electric______________
Armour_______________________
Aluminum Co. (steelworkers)..
4634 cents.1
44 cents plus 6 holidays.*
4234 cents plus 6 holidays.
43 cents plus 6 holidays.
4034 cents plus 6 holidays.
41 cents plus 6 holidays.
42 cents plus 6 holidays.
4234 cents plus 8 holidays.
44 cents (estimated; actual increases usually involved
range of rates) plus noncontributory health and welfare.
42 cents plus 6 holidays.
40 cents plus 6 holidays previously in effect plus noncon
tributory health and welfare.
Anaconda Copper_____________
Lockheed_____________________
Martin_______________________
North American______________
Bethlehem Shipbuilding______
Pacific Shipbuilding__________
Sinclair Oil___________________
American Viscose_____________
Low concentration manufacturing:
Full Fashioned Hosiery_______
Northern Cotton Textiles_____
American Woolen_____________
Men’s clothing________________
Women’s clothing <___________
International Shoe____________
Massachusetts Shoe___________
N onmanufacturing:
Anthracite____________________
Bituminous coal______________
Railroad trainmen____________
Railroad nonoperating........ .......
Atlantic longshoring__________
Pacific longshoring____________
33 cents plus 7 holidays.
3334 cents plus 6 holidays.
37 cents.
41 cents (new construction).
6734 cents plus 6 holidays.3
45 cents plus 6 holidays.
3534 cents plus 5 holidays.
42 cents plus 6 holidays.
45 cents plus 6 holidays.
40 cents plus 6 holidays previously in effect.
42 cents plus 634 holidays previously in effect.*
36 cents plus 6 holidays.
3234 cents plus 6 holidays.
4934 cents.*
46 cents.
44 cents.
41 cents.
63 cents.
67 cents.
SETTLEM ENTS, 1950-54
High concentration manufacturing:
U.S. Steel (key)____________________
General Motors (key)______________
Ford-Chrysler (key)_______________
International Harvester____________
Rubber____________________________
General Electric___________________
Armour____________________________
Aluminum Co. of America_________
Anaconda Copper__________________
Lockheed__________________________
Martin_____________________________
North American___________________
Bethlehem Shipbuilding___________
Pacific Shipbuilding_______________
Sinclair Oil________________________
American Viscose__________________
See footnotes at end of table, p. 152.
4534 cents plus noncontributory pensions plus contributory
health and welfare plus 6 holidays.
42 cents plus noncontributory pensions plus contributory
health and welfare plus 6 holidays.
43 cents plus noncontributory pensions plus contributory
health and welfare plus 6 holidays.
41 cents plus noncontributory pensions plus contributory
health and wealfare plus 6 holidays.
4334 cents plus noncontributory pensions plus contributory
health and welfare plus 6 holidays.
43 cents plus contributory pensions plus contributory
health and welfare plus 1 holiday.
443^ cents plus noncontributory pensions plus noncontributory health and welfare.
49X
A cents plus noncontributory pensions plus 6 holidays.
48 cents plus noncontributory pensions plus contributory
health and welfare.
46 cents plus noncontributory pensions previously in effect.
5334 cents plus noncontributory pensions plus contributory
health and welfare.
52*4 cents plus noncontributory pensions plus contributory
health and welfare pension previously in effect.
5234 cents plus noncontributory pensions plus contributory
plus 6 holidays.
61 cents (new construction) plus noncontributory health
and welfare.
43 cents plus contributory pensions previously in effect
plus contributory health and welfare plus 1 holiday.
25 cents contributory pensions previously in effect plus
noncontributory health and welfare previously in effect.
152
T a b le
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
5-15.— Wage and fringe adjustments in selected industries, 1946-58—Con.
SE T T L E M E N T 1950-54—Continued
Collective barganing settlements 1946-49
Company or industry
Low concentration manufacturing:
Full Fashioned Hosiery_______
No change (estimated; actual increases usually involved
range of rates) plus noncontributory pensions plus non
contributory health and welfare previously in effect.
17 cents plus noncontributory health and welfare pensions.
16 cents plus noncontributory health and welfare previously
in effect.
25 cents plus noncontributory health and welfare previously
in effect plus noncontributory pensions previously in effect.
28 cents plus noncontributory health and welfare previously
in effect plus noncontributory pensions previously in effect.
20l4 cents plus noncontributory health and welfare.
18 cents plus noncontributory health and welfare previously
in effect plus holiday.
Northern cotton textiles............
American Woolen_____________
Men's clothing___________ ____
Women's clothing_____________
International Shoe____________
Massachusetts Shoe........... .........
N onmanufactur ing:
Anthracite. --------------- ---------Bituminous________ ___________
Railroad trainmen______ ______
Railroad nonoperating............ .
Atlantic longshoring.............. .
Pacific longshoring.................. .
57 cents plus noncontributory pensions previously in effect
plus noncontributory health and welfare previously in
effect.
53 cents plus noncontributory pensions previously in effect
plus noncontributory health and welfare previously in
effect.
34>2 cents (roadmen) . '
49 cents (yardmen). ?
25}^ cents plus contributory health and welfare plus 7
holidays.
54 cents plus noncontributory pensions plus noncontribu
tory health and welfare.
39 cents plus noncontributory pensions plus contributory
health and welfare.
S E T TL E M E N T S 1955-58
High concentration manufacturing:
U.S. Steel (key)_______ _____ __________
General Motors (key)---------------------------International Harvester. ...........................
Rubber___________________________ ____
General Electric. ----------- ---------------------Armour________________________________
Aluminum Co. of America........................
Anaconda Copper_____________________
Lockheed______________________________
Martin________________________________
North American__________________ ____
Bethlehem Shipbuilding_______________
Pacific Shipbuilding_____________ _____
Sinclair Oil____________________________
American Viscose______________ ____ _
Low concentration: Manufacturing:
Full Fashioned Hosiery________________
Northern cotton textiles (BerkshireHathaway) .
American Woolen. -------------------------------Men’s clothing________________________
Women’ s clothing_____________________
International Shoe_____________________
Massachusetts Shoe____________________
N onmanufacturing:
Anthracite-------------- ----------------------------Bituminous__________ ____ _____ ______
Railroad trainmen_____________ ____ _
Railroad nonoperating.......... ....................
Atlantic longshoring------------------- -------- Pacific longshoring_______ _______ _____
59K cents plus supplementary unemployment benefit plan,
plus 1 holiday.
46y> cents plus supplementary unemployment benefit plan
plus 1 holiday.
49 cents plus supplementary unemployment benefit plan
plus 1 holiday.
43 cents plus supplementary unemployment benefit plan
plus 1 holiday.
40 cents.
54 cents.
63 cents plus supplementary unemployment benefit plan
plus 1 holiday.
37 cents plus 1 holiday.
39 cents plus 1 holiday.
41 cents (estimated; actual increases usually involved range
of rates).
36 cents plus 1 holiday.
66 cents plus 1 holiday.
51 cents plus 6 holidays.
413/2 cents (estimated; actual increases usually involved
range of rates) plus 1 holiday.
13^ cents.
Association bargaining discontinued after 1954.
73^ cents.8
Out of business after 1954.
12^ cents plus 1 holiday.
14 cents.
14^ cents plus noncontributory pension.
18 cents plus
holiday.
21 cents.
50 cents.
52}4 cents.
51^ cents.
31 cents plus 5 holidays.
42 cents.
1 Additional 5 cents increase in January 1947 as result of job classification study.
2 Deviation of 1 cent from pattern as result of annual improvement factor—cost of living adjustments,
1948-49.
3 Includes 25 cents negotiated in late 1945 prior to 1946 pattern.
4 New York City coat and suit industry.
5 Paid holidays applicable to time workers only.
6 The effective hourly increase was much greater than shown because of the introduction of pay for travel
time and the reduction of the workweek without reduction in total pay.
7 In the railroad industry, contributory pensions and some noncontributory sickness benefits are pro*
vided by Federal legislation rather than through collective bargaining.
8 Association bargaining discontinued after 1954. The Berkshire-Hathaway Co. was substituted because
it had been a major concern in the previous association.
Source: Wage Chronology Series, Bureau of Labor Statistics. Additional information was obtained
from personal correspondence and data published by the Bureau of National Affairs.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
153
The results are quite striking. During the postwar period, 1946-49,
there were a total of three “ rounds” of wage increases, with the “ key”
bargains usually attributed either to the steel or the automobile26
industry. With few exceptions, other manufacturing industries or
companies, regardless of their product market characteristics, followed
this pattern with deviations of only a few pennies. In the few in
stances of substantial downward modifications of the pattern in the
high concentration sectors (aircraft and shipbuilding), the differences
were made up in the 1950-55 period. Both coal mining and longshoring, on the other hand, exceeded the pattern by considerable amounts.
The 1950-54 period, however, showed important deviations begin
ning to develop. Among the key bargains, the automobile industry
adopted an automatic cost of living annual improvement factor ap
proach (plus pensions and welfare) throughout. The steel industry,
on the other hand, negotiated new- contracts annually or semiannually.
Over the 5 years involved, the latter approach yielded a small net
advantage.
O f considerably greater importance for our purposes, however, is
the fact that the nonconcentrated sectors— textiles, clothing, and
leather {shoes)—fell far below the pattern level. In addition, the one
company in the concentrated sector which also fell far below—Ameri
can Viscose, manufacturers of rayon yarn—was subject to severe com
petition from the development o f other synthetic fibers. In effect,
those manufacturing industries in which competition in the product
market was severe and in which profit levels were being seriously cur
tailed, did not match the pattern established by the more concentrated
and more profitable industries.
The nonmanufacturing industries, however, continued to meet or
exceed the pattern. This is particularly noteworthy in coal mining
and railroads, where profits were low and employment and output
sharply declining. It should also be noted, however, that in these
instances, the union was sufficiently strong to control the supply of
labor to virtually the entire industry, including potential new entrants
into the product market.
This general configuration continued through 1955-58, but with
some significant deviations. The textile and clothing industries (in
cluding American Viscose) and shoe firms continued to reach settle
ments far below the level set in the better situated industries; one
major woolen concern discontinued operations and two employers’
associations in hosiery and cotton w^ere discontinued. On the other
hand, both the railroad and bituminous coal industries continued to
meet or exceed the pattern despite adverse economic conditions; an
thracite coal, however, fell behind. Within the more profitable con
centrated sectors, more diversification also developed, although the
bulk of settlements still ranged between 40 and 50 cents per hour.
Exceptionally large increases, however, were negotiated in three in
dustries organized by the steel union—steel, aluminum, and Atlantic
coast shipbuilding (Bethlehem Steel Co.) ; in these sectors, wage in
creases were 59%, 63, and 66 cents respectively (plus fringes) over
the 4-year period.
2(5 In fact, several settlements often precede these “key” bargains each year. Neverthe
less, the size and status of these particular industries are such that no ‘^pattern” is con
sidered as established until one of these industries has negotiated its contract. In addi
tion. several basic industries will normally postpone action until the steel or automobile
contract is signed.
48795— 59--------13
154
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Developments during 1956-58
The sequence of developments during the 1955-58 period is also
of very considerable interest. In the summer of 1955, the “ key” bar
gain was negotiated in the automobile industry, which was enjoying
its second most profitable postwar year, with sales of over 7 million
cars. The data in table 5-16 indicate that profits before taxes repre
sented a 46-percent return on stockholders’ equity; profits after taxes
were 21 percent. With this level of production and profits as a back
drop, a 3-year contract was signed, embodying an annual improvement
factor of 2 y2 percent (approximately 6 cents), an automatic cost-ofliving clause, plus fringes estimated at about 12 cents per hour. Short
ly thereafter, the steel industry negotiated a wage increase, under a
wage reopener clause, in a contract which expired in 1956. Output in
steel had also risen sharply from the 1954 recession and profits were
also at close to record highs. Table 5-16 shows that in 1955 profits be
fore taxes on equity were 27 percent; after taxes, 13.5 percent. These
levels had been only slightly exceeded in the 1950-51 Korean war
boom. Once again, this economic environment led to a wage increase
averaging 15 cents per hour. Before the year was out, the leading
firms in several other major industries which were enjoying favorable
conditions had negotiated similar contracts, many on a 3-year basis.
T a b l e 5 - 1 6 / —Profits
in the steel and automobile industries, 1947-58
M O TOR VEH ICLES
Profits before
taxes on
equity
1947..
; ______________
1948..
________
i __
1949_.
>____________ .
1950..
; _______ ___
t______________
_________
i
1955..
>.
1956..
_________
i______________
27.9
32.9
35.8
51.8
39. 5
36.8
37.9
29.4
46.1
27.1
28.1
14.4
Profit after
taxes on
equity
15.6
18.7
20. 9
24.6
14.1
13.6
13.6
13.9
21.1
13.0
14.0
8.1
Profits before Profits after Profits before Profits after
taxes as
taxes as
taxes plus de taxes plus de
percent of
percent of
preciation as preciation as
sales
sales
percent of
percent of
sales
sales
10.4
11.8
13.2
17.1
13.2
12.6
11.0
10.8
15.1
10.8
10.8
7.0
5.8
6.7
7. 7
8.1
4.7
4.7
3.9
5.1
6.9
5.2
5.4
4.0
12.3
13. 5
14. 9
18.6
14.6
14.3
12. 6
13.0
17.2
13. 6
13.9
10.9
5.8
8.4
9. 4
9.6
6.2
6.4
5. 6
7. 3
9. 0
7.9
8. 5
7.9
6.7
7.5
6.4
7.9
5.8
4.5
5.3
5.3
7.2
6. 5
6.5
5.3
14.2
18.3
18.7
12.9
16.5
16.2
19.1
17.2
17.3
15.4
9. 7
11.1
8.5
8.1
9.4
11.0
11.8
10.8
10.8
10.2
IRON AND STEEL
1947_____________
1948_____________
1949_____________
1950_____________
1951_____________
1952_____________
1953_____________
1954_____________
1955_____________
1956_____________
1957_____________
1958_____________
19.8
17.0
17.0
28.1
34.0
17.6
25.5
16.0
27.1
25.1
22.7
14. 2
12.1
14.7
9.9
14.2
12.3
8.5
10. 7
8.1
13.5
12. 7
11.4
7.2
10.9
12.3
10.9
15.1
16.0
9.3
12.4
10. 5
14.5
12.9
13.0
10.5
In 1956, the key bargain open for negotiation was in steel. Both
production and employment were at about their 1955 levels; profits
were still high, a major investment boom was developing in the
machinery sectors, and the pattern effect of the previous year's settle
ment in automobiles and other industries was strong. The result was
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
155
an extremely favorable settlement for the steelworkers— a 3-year con
tract including major fringe benefits, automatic cost of living adjust
ments, plus a 9-cent annual improvement factor in 1957 and 1958.
Similar long-term contracts were signed in aluminum and somewhat
less liberal terms were negotiated elsewhere.
The results of these two “patterns,” negotiated during periods of
high output and profits, continued to be felt throughout the declining
years of 1957 and 1958. In both of these years, despite marked de
clines in output and employment, wage increases icere automatic in
several basic sectors of the economy— automobiles, farm equipment,
meatpacking, electrical equipment, aircraft, steel, aluminum, copper,
bituminous coal, rail/r'oads, and others. The automobile contract,
which terminated in the midst of the sharp recession in 1958, was
renewed to provide for an increase of 2y2 percent per year plus cost
of living adjustments over the next 3 years. And in 1959, the steel
contract was again being negotiated in the context of a developing
boom.
This sequence of events appears to provide considerable support
to the view that the wage increases of the 1955-58 period can be traced
back to the automobile-steel expansions of 1955 and to the negotiation
of long-term key bargains at a time when economic conditions loere
quite favorable.
By the same logic, however, one would expect that the long-term
contract in automobiles, negotiated with minimum terms in the midst
of a recession, may create a pattern which will yield lower wage in
creases during subsequent boom years than would be the case under
annual contract renewals with strong unionism. This possibility,
however, is given very little support by a comparison of the wagefringe increases negotiated during the first 6 months of 1959, as com
pared to the same period in 1955. These periods are somewhat com
parable since they both represent approximately the same phase of
fairly sharp recovery from previous recessions. From December 1954
to June 1955, unemployment declined from 5 to 4.1 percent, seasonably
adjusted; in the same period, December 1958 to June 1959, the rate
fell from 6.1 to 4.9 percent.
Chart 5-5 provides a comparison of the number of employees cov
ered by negotiated contracts who received wage increases within speci
fied ranges in the first 6 months of 1955 and 1959. In 1955. 72 percent
of employees received wage increases of 5 to 11 cents, compared to onfy
60 percent in early 1959. However, a full 30 percent received more
than 11 cents in 1959, contrasted to only 8 percent in 1955; contrari
wise, 15 percent received less than 5 cents in 1955 compared to 8 per
cent in 1959. An approximate weighted average of wage increases for
1955 was 7.6 cents, in 1959, 9.2 cents. This increase of about 20 per
cent approximates the rise in hourly earnings from 1955 to 1959;
relatively, therefore, the 1959 increase was no greater than 1955. On
the other hand, the rate of unemployment was almost 1 percentage
point greater in the first 6 months of 1959 as compared to 1955. And
finally, 69 percent of the 1959 settlements also liberalized one or more
fringe benefits as contrasted to 60 percent in the first 6 months of 1955,
although the costs of the 1959 fringes may well have been below those
of 1955. Nevertheless, the weight of evidence gives very little sup
port to the view that the rate of advance in wage-fringe costs has
been slower during the 1959 upswing.
156
EMPLOYMENT, GROWTH, AND PRICE LEVELS
C hart
5 -5
NEGOTIATED SETTLEMENTS, FIRST SIX MONTHS 1955 AND 1959
Thousands of workers
900
800
700
600
500
400
300
200
100
O
over Notspecified
Source: Bureau of Labor Statistics.
The above chart relates to settlements involving 1,000 or more workers con
cluded during the 6-month period. It includes all wage changes negotiated dur
ing the January-June period that are scheduled to go into effect during the
contract year, i.e., the 12-month period following the effective date of the agree
ment. In summarizing percentage increases, it has been necessary to estimate
their value in terms of cents on the basis of available information on wage levels
in the industry.
This chart excludes—
Settlements involving fewer than 1,000 workers.
Settlements in construction, the service trades, finance, and government.
Instances in which contract reopening privileges were not exercised.
W age increases and changes in supplementary practices that went into
effect during the period but that were negotiated earlier (for example,
deferred wage increases, cost-of-living adjustments, or annual improvement
factor increases).
One final possible qualification should be noted. The data on which
these comparisons are based excludes contracts which contained re
opening clauses that were not utilized—that is, contracts in which 110
increases occurred because the union chose not to request one. They
also exclude several types of settlements noted in the chart. It is
doubtful that this would affect the data in any important way.
T H E LABOR M A R K E T : G EN ER AL C O N C L U S IO N S
It is clear from the preceding discussion that no one explanation
underlies the continuing upward movement of wages in these sectors
of the economy; rather, varying factors have been dominant during
EMPLOYMENT, GROWTH, AND PRICE LEVELS
157
different periods and in different industries. The following general
observations appear to be indicated:
(1) At least up to 1951, with the exception of the 191$ recession,,
the general level of employment and profits was sufficiently high in
virtually all industries that most, if not all, of the wage increases of
the period were caused by pressures of demand. Wages in all indus
tries moved closely together. The downward rigidity of wages in the
1949 recession was not unusual for a mild downturn of short duration.
(2) After 1951, divergences in wage movements began to develop,
based primarily on the level of profits in various industries, but also
attributable in a few industries to the strength of the union. In the
manufacturing sector, wage increases in those industries characterized
by considerable competition in the product market and suffering de
clining profits, began to fall considerably behind the general increases
being introduced elsewhere. This occurred in some strongly unionized
industries, such as men’s and women’s clothing, as well as elsewhere.
In the coal mining and railroad industries, on the other hand, both
profits and employment were declining, yet wrage increases were sub
stantial. In these areas, union strength appears to have been an im
portant contributing factor; it is interesting to note that these are also
industries in which there is very little possibility of new nonunion
entrants being established in the industry. This is probably the basic
reason for the difference in the approach of the clothing unions as
contrasted to the coal or railroad organizations.
For most industries, however, the years from 1951 to 1953 continued
to remain quite profitable, particularly those that were not subject to
serious competitive pressures. In these sectors, wages continued to
rise by approximately equal amounts, often in line with the “pattern”
established in the key bargains of strongly unionized sectors. In these
latter industries both employment and profits continued to re
main favorable during the Korean war period; thus it is again
doubtful that the rate of increase in wages was much, if at all, in ex
cess of what would have developed in any case.
(3) Beginning ivith the 195% recession, however, and again through
the years 1956 to 1958, the role of collective bargaining appears to have
been much stronger, though largely in an indirect manner. The down
ward rigidity of 1954 was, as before, quite typical of such brief down
turns ; to some degree, however, an upward movement was beginning
to be “built in” by the automatic increases included in the automobile
and some other contracts. This “pattern” did create a presumption
for a wage increase of from 3 to 5 cents during the year, even in those
industries which had not contracted for it.
The continuing upward wage movements of 1957-58, in the face of
a higher rate of unemployment, declining production worker employ
ment (which had not recovered its 1953 level even in the strong recov
ery of 1955), and a very slow rate of increase in output and produc
tivity, cannot be explained on the basis of the demand for labor or for
output. This is surely even more true in coal mining and railroads;
the situation in construction, however, was generally more favorable.
How, then, can the 1957-58 wage movements be explained? It has
already been noted that most of the wage increases in the manufac
turing industries is traceable back, directly or indirectly, to the bar
gains negotiated in 1955, particularly in automobiles, when profits were
153
EM PLOYMENT,
GROWTH,
AND PRICE LEVELS
extremely high, output was expanding rapidly, and expectations were
extremely favorable. Within this economic environment, long term
contracts were signed which provided not only for liberal wage-fringe
improvements immediately, but for continuing increases into the fol
lowing 2 years.
The 1956 agreements, led by the highly profitable steel industry,
were even more favorable, both for the immediate year and into 1959.
Output and production worker employment in steel had remained at
about 1955 levels through the first two quarters of 1956; profits had
been high in 1955 and promised to remain so in 1956; and an invest
ment boom was developing in the machinery sectors. Once again, a
3-year “key" bargain was signed in an industry with high profits and
strong market power in the product market. As it turned out the
1955-early 1956 economic environment changed drastically in 1957
and 1958; the indirect effects of the negotiations of the earlier years,
however, remained. And the preliminary evidence available regard
ing the trends in early 1959 suggests that the 1955 experience cannot
be considered as exceptional.
In an important sense, therefore, it may be said that the wage move
ments of 1957-58 can be related to strong collective bargaining; in an
equally important sense, however, it is also true that the hey bargains
were negotiated at a time when demand pressures were relatively
strong. But even more basic to the developments of the period was the
fact that the two major industries from u'hich the wage patterns of the
period emerged were industries whose product market conditions -were
such that profits were high, competitive conditions weak, and the
ability of the industry to negotiate substantial wage increases into the
future without serious concern for the adverse effects of competition
assured. It urns, then, a combination of market power in both the
product and labor markets, initiated by rising demand and high
profits which accounted for the developments in these industries.
Similarly, the increases negotiated in these circumstances did tend to
be followed by other industries (both union and nonunion) in which
the level of profits and the characteristics of competition in the prod
uct market were such as to permit similar wage-fringe adjustments
without fear of serious adverse economic reactions. Where the eco
nomic environment was unfavorable, however, particularly in terms
of actual or potential competition, the “pattern” tended to break
down.
SUM M AR Y
The preceding analysis of the postwar inflation in the United States
has brought out several points which may be summarized as follows:
1. The greatest increases in prices occurred during the post-World
War II boom from 1946 to 1949 and the Korean war period from mid1950 to 1953. Taken together, they accounted for over 75 percent of
the total postwar inflation. These increases were primarily caused by
the high aggregate demand in both the product and the labor market.
2. A third period of inflation, from 1955 to 1959, accounted for the
remaining 25 percent of the postwar inflation. This rise in prices,
however, was largely concentrated in a few important sectors of the
economy, particularly in steel, machinery, construction, and services.
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
159
3. Because the existing price indexes do not adequately reflect qual
ity improvements or productivity increases, these indexes tend to over
state the amount of inflation we have experienced, particularly since
1955. Nevertheless, some inflationary pressure has probabty occurred.
4. The major burden of inflation has fallen on groups whose in
comes are relatively fixed and who are unable to supplement their in
comes by finding employment. By far the greatest losses of real in
come have been suffered by older persons living on their past savings
or on pensions.
5. Since 1955, approximately three-fourths of the total rise in the
Wholesale Price Index, excluding farm and food products, was ac
counted for by the “metals” and “machinery” components of the index.
A detailed analysis of the forces underlying the inflation in these
sectors indicated that in the case of steel, the dominant factors were
high and rising profits and exceptional increases in wage and fringe
benefits, both of which were related to strong market power in the
labor and product markets, initiated in the context of a favorable
state of demand.
In the case of machinery, the dominant underlying factor was the
pressure of excess demand on productive capacity.
6. In most other manufacturing industries, the rate of increase in
prices was due to several interrelated factors, particularly the degree
of competition in the product market and trends in output.
7. Another important trend in manufacturing was a remarkable
shift in employment away from production workers and toward non
production workers. This has resulted in a considerable increase in
the proportion of fixed labor costs, thus accentuating the degree of
downward rigidity during recessions.
8. The rising price of construction, both residential and nonresidential, can be explained by a combination of a strong demand through
out most of the postwar period, probably combined with the exercise
of some market power by the strong construction unions.
9. The inflation in services has been the result of several inde
pendent developments. The rise in the price of medical care is at
tributable to a great increase in demand without an equivalent rise in
supply. In the case of unskilled services, the primary cause has been
a low rate of increase in productivity combined with a rise in wage
rates somewhat less than the rise in manufacturing. Primary em
phasis should be placed, therefore, on methods of increasing the sup
ply of medical services and on raising productivity in the unskilled
areas.
10. In general, the degree of demand pressure in the labor market
does have an important effect on the rate of change in wages. Never
theless, wages showTed a high degree of downward rigidity in reces
sions. This rigidity, however, was more a reflection of the absence
of any prolonged declines in business activity than a manifestation
of strong unionism.
11. It is unlikely that a secular upward trend in wages and prices
can be avoided with an average level of unemployment which is
considered socially tolerable, given our present anti-inflation weapons,
12. No significant relationship was found between changes in earn
ings and changes in employment, in output, or in man-hour produc
tivity in the manufacturing, mining, or railroad industries.
160
EM PLOYMENT, GROWTH, AND PRICE LEVELS
13. Within manufacturing, the most important factors which were
related to wage changes were (1) the level of profits, and (2) the de
gree of competition in the product market, as measured by concen
tration ratios. This relationship was not evident in mining or rail
roads.
14. There was no generally applicable relationship between wage
changes and union strength.
15. From 1946 to 1949, most collective-bargaining settlements in
manufacturing followed the “pattern’7usually established in the auto
mobile and steel industries. After 1950, however, those manufac
turing industries in which competition in the product market was se
vere and in which profit levels were seriously curtailed did not match
the pattern established in the more concentrated and more profitable
industries. This was not true in coal mining and railroads, however,
where wages continued to rise despite adverse profit and employment
conditions. In these industries, union power was a dominant factor.
16. The initial impetus for the inflationary trend from 1955 to 1959
developed out of the very rapid recovery from the 1954 recession, cen
tering in the automobile and residential construction industries and
spreading from there into steel, rubber, building materials, and others.
These increases led in turn to a substantial capital goods boom in
1956-57, extending particularly into the machinery and nonresidential
construction sectors.
17. Within this favorable economic environment, important key
bargains were negotiated by strong unions in the automobile and
steel industries, both of which were enjoying very high levels of output
and near record postwar profits. These collective-bargaining con
tracts contained liberal provisions extending over a 3-year period to
1958 and 1959. These provisions, in turn, became the pattern for
several other important industries in which profits and product mar
ket. conditions were also favorable.
18. As a result of these long-term contracts, wages continued to
rise during 1957 and 1958, after the postwar boom had leveled off
and the economy had entered into a recession. In addition, the con
tinuing shift from production to nonproduction workers caused unit
labor costs to rise sharply in 1957 and 1958. These factors con
tributed to the rise in prices during 1958 in those industries which
had a considerable degree of market power.
chapter is the fact that no one “theory” or explanation is adequate to
explain the inflation of the postwar years, particularly since 1955.
Rather, a number of varied and interrelated factors have been in
volved. It also follows, therefore, that any public policy designed to
deal with the problem must itself be diverse and flexible.
C H A P T E R
6. T H E
P R O B L E M
I
O F
U N E M P L O Y M E N T 1
n t r o d u c t io n
The provision of employment opportunities for persons who want
to work lias long been regarded as an essential function of economic
organization. That the economy should fulfill this function effec
tively also been prime concern of government. Certainly it would
be difficult for any government to survive today in a developed coun
try which countenanced mass unemployment for any extended period
of time.
Preventing depressions and unemployment of disaster proportions
is a minimum aim of economic policy today, however. Success of
policies is measured by the degree to which unemployment is kept at
as low a level as possible, consonant with other goals, year in and year
out. Even further, policies to assure effective use of the labor force are
needed—ones that will lead to high worker productivity and growth
in the economy.
The United States is not threatened at the moment with massive
unemployment. Nevertheless, it has serious labor force problems.
Unemployment is high for the present stage of the business cycle. It
is particularly severe in several chronically troubled areas and in some
industries. Younger persons are finding it more difficult to break
into the work force and older persons who have once lost their jobs
are finding barriers against reemployment. Colored persons and un
skilled workers suffer high rates of persistent unemployment.
Perhaps even more disturbing is the fact that a gradual trend to
ward a rising average rate of unemployment is revealed by the record
of the last several business cycles. Associated with this has been a
substantial increase of unemployment of long duration in the last few
years.
It would indeed be unfortunate if these trends were regarded with
complacency merely because they do not directly affect the majority,
and the more prosperous and vocal groups in the population. The
burden of unemployment falls very heavily indeed on many American
families, but it also represents a real loss both economically and
socially to the Nation.
In recognition of this fact, this report offers, in this and other sec
tions, policies for developing the skills and capabilities of the labor
force, for helping areas which are chronically afflicted with high rates
of unempoyment, for eliminating employment barriers to certain
groups in the population, and for increasing employment opportuni
ties, generally. These policies, if adopted, would help to implement
the Employment Act of 1946 and to achieve a high rate of growth.
1 Main responsibility for the drafting of this chapter rested with M ary W . Smelker.
161
162
EM PLOYMENT, GROWTH, AND PRICE LEVELS
T
h e
H
is t o r ic a l
L O N G -T E R M
R
ecord
TRENDS
In this century, a rate of unemployment of 5 percent of the labor
force or less has been achieved one-half the time. According to testi
mony presented before this committee—
no decade has passed without severe unemployment—over 7 percent of the
labor force— occurring at least once, and none, except for that in the 1930’s, has
passed without seeing at least 1 year of what we may call minimum unemploy
ment, 3 percent or less.2
Since 1800, the proportion of the labor force exposed to unemploy
ment has grown greatly.
In 1800, about 10 percent of the labor force was employees; in 1860, about 40
percent were, while today almost 90 percent work for others. Moreover, the
proportion employed in agriculture fell from 90 percent in Jefferson’s day to say
10 percent in our own.3
The share of factory employment has risen from about 2 percent
of the labor force in 1800 to 26 percent today.
While the proportion of the labor force exposed to unemployment
has increased greatly, unemployment as a percent of the labor force
has not shown a rising long-term trend in this century, decade to
decade. Two reasons for this may be the increasing participation of
women in the labor force (who tend to work mainly to supplement the
family income and thus may leave the labor force when jobs are sca rce )
and increasing Government intervention to stabilize the economy.
P O ST W AR E X P E R IE N C E
The average postwar experience with unemployment has not been
greatly different from prewar experience, with the exception of the
depressed thirties. About 4.5 percent of the labor force have been
unemployed on the average since 1947. In the recessions of 1949 and
1954 the rates were as high as 5.9 and 5.6 percent, respectively, while in
1958 the proportion of unemployed averaged 6.8 percent of the labor
force.
However, this w^as counterbalanced as far as the postwar level is
concerned by a rate of around 3 percent in 1951,1952, and 1953—years
affected by the Korean war.
EFFEC T OF RECESSIONS
Recessions and depressions have been the major cause of high un
employment in both the prewar and postwar period. The rise in the
rate of unemployment in recessions ranges from 2 percentage points
in the recessions of 1945-46 and 1948-49 to over 20 percentage points
in the depression of 1929-32 (table 6-1). The latter is by far the most
severe depression in this century, and the worst in our history. When
ranked by the increase in the percentage of labor force unemployed,
the recession of 1957-58 wTas less severe than most prewar recessions.
2 Testimony of Stanley Lebergott, hearings before the Joint Economic Committee, 8 6 th
Cong., 1st sess., pt. I l l , Apr. 25, 27, and 28, p. 571.
s Ibid., p. 571.
EM PLOYMENT,
T a b le
GROWTH, AND PRICE LEVELS
163
6-1.—Increase in rates of unemployment during "business declines, 1900-58
[Ranked by unemployment rises]
Rise in
percent
civilian
labor force
unem
ployed
1929-32_______________________
1920-21_______________________
1907-8____________ ________
1913-14______________________
1937-38________ _ _ 1957-58-- _
_____
1953-54__________
_ _
1903-4____________ _ _ __
1948-49___________________ __
1945-46______________________
20. 3
9.6
7. 7
5.3
4. 7
2. 5
2. 5
2.2
2.1
2.0
Percentage change
Output of—
Finished
commod
ities
Gross
national
product
-28
-6
-11
-5
-5
—2
-2
-2
-10
Wholesale
textile
prices
-37
-4 3
-14
-5
-13
—2
-2
0
-6
+16
Wholesale
metal
prices
-20
-21
-22
-11
0
0
+1
-11
-4
+10
Source: Testimony of Stanley Lebergott, hearings before the Joint Economic Committee,
Apr. 25, 27, and 2 8 ,1 9 5 9 , p. 585.
Since the end of World War II, there have been three major
recessions, each of which has caused the percentage of unemployed in
the labor force to double approximately. In mid-1953, unemploy
ment totaled only about 1.7 million, but it rose to 4 million, or almost
6.1 percent of the labor force (seasonally adjusted) at the trough of
the 1954 depression. Between mid-1948 and mid-1949 unemployment
rose from 2.2 million to 4.2 million, or 6.7 percent of the labor force.
In the latest recession, that lasting from mid-1957 to mid-1958, it rose
from 2.85 million to almost 5.2 million, or 7.6 percent of the labor
force. In contrast, in years of relatively full employment, 1948, 1953,
and 1956, unemployment fell to annual rates as 1owtas 3.8, 2.9, and 4.2
percent of the labor force, respectively (chart 6-1).
6-1
164
C h art
U n e m p l o y m e n t as a P ercent of th e C ivilian L a b o r Fo r c e
SEASO N A LLY A D JU STED
Percent of C iv ilia n L ab o r Force
Percent of Civilian Labo r Force
EMPLOYMENT,
GROWTH,
AND
PRICE
LEVELS
1948-50, 1953-55, AND1957 TODATE
Month from beginning of recession
UNITED STATES DEPARTMENT OF LABOR
BUREAUOf LABOR STATISTICS
LATEST DATA: NO VEM B ER 1969
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
165
U N E M P L O Y M E N T I N PROSPEROUS T IM E S
Even in times o f high prosperity, however, the problem o f un
employment is more serious than it appears on the surface. A l
though an unemployment rate of 4 percent or so is often considered
the minimum desirable in view of the needs o f a dynamic economy
for high mobility among its workers, a study o f frictional unemploy
ment by the Department of Labor, conducted for this inquiry,4 con
cluded that only about half of the unemployment in good times is due
to such short-term frictional factors as high voluntary quit rates
and seasonality of industry operations. The report finds that in
the period 1955-57, when unemployment averaged 2.9 million, or 4.3
percent o f the labor force, about half the unemployment was ac
counted for by the following factors: new entrants into the labor force,
most o f whom found jobs in a relatively short time, accounted for
about 20 percent; persons “ between jobs,” who had made a voluntary
shift, accounted for another 10 percent; and unemployment deriving
from seasonal fluctuations in industry another 20 percent.
About 50 'percent of unemployment even in good times is thus in the
category of persons who have been separated involuntarily and who
may experience more or less trouble finding new jobs. Among these
are found most of the persons unemployed for considerable periods
o f time.
Further, unemployment may appear to be low became the. num
ber of jobs is not expanding, as was probably the case in the first half
o f 1957. Many people do not actively seek jobs if they realize jobs
are unavailable, or very scarce. Many people who retire from the
labor force do so because of the difficulty o f finding suitable em
ployment. In the event of continued low employment opportunities
for several years, labor force growth may be slow in relation to
the increase in population, and concealed unemployment exists. Such
a tendency in recent years is indicated in chart 6-2; the actual labor
force in 1959 is about 700,000 persons below the long-term trend.
4
Study paper No. 6, “ The Extent and Nature of Frictional Unemployment, U.S. Depart
ment of "Labor, Bureau of Labor Statistics, Nov. 19, 1959.
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
166
C h art
6-2
C o m p a r iso n o f A c t u a l and P r o je c t e o
To t a l L a b o r F o r c e
ANNUAL AVERAGE I950-!9S9
MILLIONS
TO j—
MILLIONS
—
70
68 -
- 66
66 -
66
64 -
64
Projectedin1951onth* Basis of 1920-50 Trends
1950
195!
1955
1956
JL.
JL .
1952
1953
1957
1956
1954
1955
1959
I 960
MILLIONS
UNITEDSTATESDEPARTMENTOFLA80R
BUIICAUor labor STATISTIC*
AVERAGE WITH DEC.
ESTIMATED
Source: U. S .B u re au of the C e n su s and
Bureau of Labo r S t a tis t ic s .
Finally, even in good times a number of persons are working only
part time when they would prefer full-time employment. In July of
1958, for example, when only 2.5 million people were totally unem
ployed, there were 2.4 million people working less than full time who
would have preferred longer hours. Converting the part-time hours
to full-time equivalents, a figure of 3.7 million full-time equivalent
workers is obtained. In September of this year, when unemployment
was officially reported at 3.2 million workers, a calculation of full
time equivalent gives the number as 4.2 million.
EM PLOYMENT,
167
GROWTH, AND PRICE LEVELS
UNEM PLOYM ENT
OF
LONG
D U R ATIO N
Even during the best times a substantial proportion of the popula
tion is suffering unemployment of sufficient frequency and duration
to constitute a severe problem. In 1957, when the unemployment rate
was only 4.3 percent overall, long-term unemployment— defined as
lasting 15 weeks or longer—averaged 560,000, or almost 20 percent of
the unemployed total. This means, according to a study submitted
to this committee by the Bureau of Labor Statistics, that 3.4 million
persons had 15 wTeeks or more of unemployment during the year.
Even more significant, from the point of human social costs, is the
fact that 1.5 million people were out of work over 6 months during
1957. Many of these suffered more than one spell of unemployment.
The industrial compilation of Ion term unemployment is shown
in table 6-2.
T able 6 -2 .— Persons unemployed 15 weeks or more ~by m ajor occupation group ,
M arch 1958 and 1959
Number (in
thousands)
Occupation
Total 1________________________________
Professional, technical, and kindred workers___
Farmers and farm managers__________________
Managers, officials, and proprietors, except farm
Clerical and kindred workers_________________
Sales workers_______________________________
Craftsmen, foremen, and kindred workers_____
Operatives and kindred workers______________
Private household workers___________________
Service workers, except private household_____
Farm laborers and foremen___________________
Laborers, except farm and mine______________
Percent
distribution
Percent of
unemployed
1959
1958
1959
1958
1, 544
1,446
100.0
100.0
35.4
27.8
49
1
40
115
56
231
431
30
160
57
276
26
3
45
87
28
242
452
31
151
56
271
3.2
.1
2.6
7.4
3.6
15.0
27.9
1.9
10.4
3.7
17.9
1.8
.2
3.1
6.0
1.9
16.7
31.3
2.1
10.4
3.9
18.7
41.5
5. 9
42.6
29. 7
26.3
35.1
40.0
22.9
31.9
35.6
39.7
17.6
15.8
31.7
19.9
15.6
28.7
27.1
21.5
32.1
23.6
34.0
1959
1958
i Includes persons w ithou t work experience, not show n separately.
Source: U.S. Bureau of the Census.
Prepared by U.S. Department of Labor, Bureau of Labor Statistics, Division of Manpower and Em
ployment Statistics, Apr. 10, 1959.
WHO
ARE
THE
U NEM PLOYED?
Testimony presented to this committee by Ewan Clague, Commis
sioner of Labor Statistics, shows that the incidence of unemployment
is very unevenly distributed among different groups in the population.5
By age
By far the heaviest rates of unemployment in March of this year
were to be found among young workers under 24 years. About 12
percent of this group were unemployed compared with 6.4 percent
for the population as a whole (see table 6-3). Almost one-third
of total unemployment was accounted for by the younger labor force
members— a very substantial proportion, but scarcely high enough
to support the contention that unemployment now is largely a prob
lem of untrained youth. The lowest rates of unemployment were to
be found, as is to be expected, in the 35-to-54-age group—4.9 percent.
In the age group ranging from 55 to 64, an experience of 5.5 percent
unemployed is probably reduced to some extent by early retirement.
s Hearings before the Joint Economic Committee, 86th Cong., 1st sess., pt. 3 : “ Historical
and Comparative Rates of Labor Force, Employment and Unemployment.”
168
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
T a b l e 6 - 3 . — Unemployment
by age and sex, March 1957, 1958, and 195U
Number (in thousands)
Percent distribution
Rate of unemployment
Age and sex
Both sexes:
14 and over____________
14 to 24_____ __________
14 to 19________________
20 to 24________________
25 to 34________________
35 to 44________________
45 to 54________________
55 to 64--------------------- __
65 and over.____ ______
Male:
14 and over___ ________
14 to 24________________
14 to 19________________
20 to 24________________
25 to 34________________
35 to 44________________
45 to 54________________
55 to 64________________
65 and over____________
Female:
14 and over________ ._
14 to 24________________
14 to 19________________
20 to 24________________
25 to 34________________
35 to 44________________
45 to 54________________
55 to 64________________
65 and over. __________
1959
1958
1957
1959
1958
1957
4, 362
1, 297
606
691
903
795
706
503
158
5,198
1,419
603
816
1,190
1,036
828
561
164
2, 882
889
497
392
556
506
457
349
127
100.0
29.7
13.9
15.8
20.7
18.2
16.2
11. 5
3.6
100.0
27.3
11.6
15.7
22.9
19.9
15.9
10.8
3.2
100.0
30.8
17.2
13.6
19.3
17.6
15.9
12.1
4.4
6.4
11.9
13.0
11.1
6.2
4.9
4.9
5. 5
5.0
7.7
13.4
13.5
13.4
8.1
6.5
5.9
6.2
5.0
4.3
8.5
10.8
6.7
3.8
3.2
3.4
3.9
3.8
2, 971
846
394
452
642
510
474
373
127
3, 743
1, 021
423
598
870
679
615
418
138
1, 950
586
331
255
350
342
303
270
98
68.1
19.4
9.0
10.4
14. 7
11.7
10.9
8.6
2.9
72.0
19.6
8.1
11.5
16.7
13.1
11.8
8.0
2.7
67.7
20.3
11.5
8.8
12. 1
11.9
10.5
9.4
3.4
6.5
12.9
14.2
12.0
6.2
4.7
5.0
5.9
5.5
8.2
16.3
16.1
16.4
8.3
6.3
6.6
6.7
5.7
4.3
9.5
12.3
7.3
3.3
3.2
3.3
4.3
4.0
1, 391
451
212
239
261
285
232
130
31
1, 456
398
180
218
320
356
213
143
26
932
302
165
137
206
163
154
79
29
31. 9
10.3
4.9
5.5
6.0
6.5
5.3
3.0
•7
28.0
7. 7
3.5
4.2
6.2
6.8
4. 1
2.8
.5
32.3
10.5
5.7
4.8
7.1
5.7
5.3
2. 7
1.0
6.2
10.4
11.3
9.7
6.3
5.5
4.6
4.5
3.7
6.6
9.3
9.7
8.9
7.7
6.9
4.5
5.2
3.0
4.3
7.1
8.7
5.7
4.9
3.3
3.4
3.0
3.3
1959
1958
1957
Source: U.S. Bureau of the Census.
Prepared by U.S. Department of Labor, Bureau of Labor Statistics, Division of Manpower and Employ
ment Statistics, Apr. 10, 1959.
By sex
The average rate of unemployment was slightly higher among
males than females— 6.5 percent compared to 6.2 percent. This rep
resents a decided improvement for men from the recession situation
of 1958, when the percent of men unemployed rose to 8.2 percent
compared to 6.6 percent for women.
By major occupation groups
The highest percentage by far of unemployed in March were fac
tory operatives and kindred workers. Almost 25 percent of the un
employed were in this group; 16 percent were laborers (except farm
and mines) ; and 15 percent were craftsmen and foremen. Almost
8,0 percent of factory operatives were unemployed, the highest rate
for any group except for laborers, among whom the incidence was
almost twice as high— 16.6 percent.
169
EM PLOYMENT, GROWTH, AND PRICE LEVELS
T a b le
6-4.— Unemployment by major occupation group, March 1958 and 1959
Number (in
thousands)
Percent dis
tribution
Rate of un
employment
1959
1958
1959
1958
1959
4,362
5,198
100. 0
100. 0
6.4
7.7
118
17
94
387
213
659
1, 077
131
501
160
695
128
23
146
430
189
809
1,654
130
463
229
760
2.7
.4
2.2
8.9
4.9
15.1
24.7
3.0
11.5
3.7
15.9
2.5
.4
2.8
8.3
3.6
15.6
31.8
2.5
8.9
4.4
14.6
1.6
.6
1.1
4. 1
4.7
7.3
8.6
5.6
7.8
7.5
16.6
1.8
.7
2.1
4,5
4.4
8.9
12.7
5.4
7.6
11.3
19.1
Major occupation group
Total 1__________ _________________________ ____
Professional, technical, and kindred workers________
Farmers and farm managers__________ _. _________
Managers, officials, and proprietors, except farm.. ___
Clerical and kindred workers_______ ________________
Sales workers_____ _____ ____________________________
Craftsmen, foremen, and kindred workers_________ _
Operatives and kindred workers_____________________
Private household workers... . . ____________ ______
Service workers, except private household_____ . . . . .
Farm laborers and foremen_____ ____________________
Laborers, except farm and mine___________ . . . _____
1958
1 Includes persons without work experience, not shown separately.
Source: U.S. Bureau of the Census.
Prepared by U.S. Department of Labor, Bureau of Labor Statistics, Division of Manpower and Employ
ment Statistics, Apr. 10, 1959.
By color and sex, the rate of unemployment in March was over
twice as high for colored persons as for white persons— 12.7 percent
as compared to 5.6 percent. The higher rate obtained for both male
and female workers.
T a b le
6-5.— Unemployment by coloi' and sex, March 1957, 1958, and 1959
Number (in thousands)
Percent distribution
Rate of unemployment
Color and sex
1959
1958
1957
1959
1958
1957
1959
1958
1957
Total______________________
4,362
5,198
2,882
100.0
100.0
100.0
6.4
7.7
4.3
Male. _______ _____. . .
Female . _ .
___
2, 971
1,391
3, 743
1,456
1,950
932
68.1
31.9
72.0
28.0
67.7
32.3
6.5
6.2
8.2
6. 6
4.3
4.3
3, 428
4,163
2, 328
78.6
80.1
80.8
5.6
6.9
3.9
Male ____________ __
Female_________ ____
2,362
1,066
3, 056
1,106
1, 576
752
54.1
24.4
58.8
54.7
5.7
7.4
21.3
26. 1
5.5
5.8
3.9
4.0
Non white_____ . . . _______
933
1,035
554
21.4
19.9
19. 2
12.7
14.4
7.3
609
686
13.0
6.2
13.6
11.4
15. 5
12.6
8.4
349
14.0
7.4
13.2
325
374
180
White_. . ___ .
Female.-
. . . ___
6.7
6.7
Source: U.S. Bureau of the Census.
Prepared by U.S. Department of Labor, Bureau of Labor Statistics, Division of Manpower and Employ
ment Statistics, Apr. 10, 1959,
Owing to the fact that colored persons constitute a minority in the
labor force, the proportion of unemployed accounted for by colored
persons was only 21.4 percent, despite the high incidence of unemploy
ment in this group.
Unemployment, as can be seen from the evidence presented above,
does not boil down to particular problem groups, despite the high in
cidence among some age groups, the less skilled, colored workers, etc.
Efforts to improve the employability of these groups should certainly
be undertaken; nevertheless the basic problem of unemployment goes
deeper. Fundamentally, unemployment above frictional levels is a
matter of inadequate total demand.
4 8795— 59--------14
170
EM PLOYMENT, GROWTH, AND PRICE LEVELS
U n e m p l o y m e n t a G r o w in g P r o b l e m
Unfortunately, evidence is accumulating that the problem of unem
ployment is a growing rather than a receding one. Employment did
not respond as vigorously after the last recession as after the preced
ing two postwar recessions, particularly in manufacturing. (See
chart 6-3.) Consequently, the reduction in unemployment since the
recession of 1957-58 has not been as satisfactory as from the preced
ing two recessions. In mid-August, prior to any large scale layoffs
as a result of the steel strike, the seasonally adjusted unemployment
rate was still 5.5 percent, considerably above the rate of 4.3 percent
in the period 1955 through 1957. It was only one-half percentage
point below the rate of 6 percent reached at the height of the 1953-54
recession.
In March of this year, according to evidence submitted by Ewan
Clague, Commissioner of Labor Statistics, 35.4 percent of the unem
ployed were accounted for by those unemployed 15 weeks or longer,
compared to 27.8 percent in March 1958, and 23.0 precent in the same
period of 1957; 17.8 percent had been unemployed more than half a
year. (See chart 6-4.)
More serious, perhaps, is the fact that recent levels of persistent or
long-term unemployment are substantially higher than at correspond
ing stages of recovery from the 1949 and 1954 recessions, as is shown
in chart III. In August, the number of unemployed workers who had
been jobless for at least 15 consecutive weeks totaled 783,000, about
60 percent above the total just before the last recession. August was
16 months after the trough of the recession. At a similar time in the
last two recessions, long-term unemployment was less than 500,000
persons. Individuals with long-term unemployment at present repre
sent nearly one-quarter of the unemployed.
Not only has the reduction in unemployment since mid-1958 been
disappointingly slow, but it is worthy of note that after the recession
of 1954 the rate of unemployment never did fall as low as it had been
in 1951 and 1952. Perhaps this should not have been expected because
the latter were years affected by the exigencies of the Korean Avar.
However, if the present recovery leaves us with a higher residue of
unemployed than in 1951 and 1957, a strong presumption will be
established that the economy is suffering from increasing “structural
unemployment.”
structural
u n e m p l o y m e n t r is in g
Unemployment in excess of the frictional minimum which persists
in good times is usually called structural unemployment because it
indicates a basic failure of the economy to adjust efficiently and rapidly
to shifts in technology and resource use, location of industry, or
changes in the pattern of final demand. It may also be used to include
unemployment above frictional rates which exists over more than a
business cycle because of the failure of the economy to attain an ade
quate rate of growth. It is usually (although not necessarily) accom
panied by unemployment of long duration among specific groups of
workers associated with particular industries, or in particular geo
graphic areas.
E m ployment in T hree P o s t -W ar R e c e s s io n s
SELECTED INDUSTRIES
SEASO N ALLY
N O N A G R IC U LT U R A L IN D U S T R IE S
ADJU STED
M A N U F A C T U R IN G
EMPLOYMENT,
GROWTH,
AND
PRICE
LEVELS
Chart tj~3
LATESTDATA.-NOVEMBER1959
C h art
6-4
fcO
L ong-Term Unemployment in T hree R ecession s
PERSONS UNEMPLOYED 15 WEEKS OR MORE
EMPLOYMENT,
GROWTH,
AND
PRICE
LEVELS
UNITED STATES DEPARTMENT OF LABOR
BUREAUOFLABORSTATISTICS
LATEST OATA: NOVCK8eR1959
Source: U.S. Bureauof theCensus
173
EM PLOYMENT, GROWTH, AND PRICE LEVELS
In a recent statement submitted to the Senate Committee on Un
employment Problems, Mr. Charles D. Stewart, Deputy Assistant
Secretary o f Labor for Research and Development said:
It (structural unemployment) can typically be recognized by its long dura
tion * * *. My own estimates * * * suggest that approximately one-third of
the unemployed, in periods we usually regard as ones o f full employment, fall
in this category.
He stated further:
One advantage of this emphasis is to avoid the narcotic effect of regarding
what normally is called normal or frictional unemployment as an irreducible
minimum. Unemployment of 3 or 4 or 5 percent can be regarded as consistent
with full employment only if nothing can be done to reduce the long-term
unemployment that persists when there is full employment demand for labor.
Growing structural maladjustments in the economy are indicated by
an increase in the amount of long-term unemployment between the
prosperous years 1948 and 1956.
A study submitted to this committee by the Department of Labor
shows that the average duration of unemployment rose from 8.6 weeks
to 11.3 wTeeks between 1948 and 1956, as shown in table 6-6. Even
worse, the percent of unemployed reporting more than 6 months’ un
employment rose from 5.6 to 9.1 percent. The study states:
All of the moderate increase in the rate of unemployment (between 194S and
1956) was accounted for by the proportionately much greater rise in the con
tinuing unemployed * * *. The increasing extent of prolonged unemployment
lasting 15 weeks or longer, and even more so, 27 weeks or longer, appears to have
been one of the most important factors in this development.
T able 6 -6 .— Selected measures of the d uration of unemployment, 19/fS, 1952,
and 1956
Duration measure
Annual average duration of unemployment (weeks)_________
M ale_______________________________________________
Female ____
___
____________ _____ _
___
Percent of total unemployed reporting:
15 weeks or more unemployment__ ____ _____ ________
27 weeks or more unemployment-—________ ___________
1952
1948
8.6
9.2
7.1
15.0
5.6
1956
8.3
11.3
12.0
10.0
13.9
5.0
20.9
9.1
i 1)
0)
1Not available.
N
o t e .—
Figures are based on old definition of unemployment.
Source : U.S. Department of Labor, Bureau of Labor Statistics.
The increase in long-term unemployment between 1948 and 1956
is linked to the fact that goods-producing industries, agriculture and
manufacturing, have been declining in relative importance in the
economy, while services and Government employment have been
rising. (Chart 6-5.)
174
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
C h a r t 6— 5
EMPLOYMENT IN GOODS PRODUCING INDUSTRIES
COMPARED WITH EMPLOYMENT IN SERVICE INDUSTRIES
ANNUAL AVERAGES, 1919-1958*
SOURCe- KONFARMW
AOEANDSALARVEMPLOYMENTFROMTHE
U.S.9UREAUOFLABORSTATISTICS, AGRICULTURALEM
*
PN
LO
M
N
NO
CL
N
RM
OPT
R
IE
O.S
RS
F
A
LT
YM
W
O
RK
E
A
DyH
IE
R
ET
OIW
RU
KD
EIR
SGFP
RO
H
ETU
.,D
E
PM
AIR
EN
T
O
FRS,
AGRICULTURE, AGRICULTURAL MARKETINGSERVICE.
EM PLOYMENT,
T able
175
GROWTH, AND PRICE LEVELS
6-7.— Changes in unemployment between 1948 and 1956, by major industry
group for wage and salary workers
Unemployment
rate
(percent)
Change in unemployment
due to 1—
Industry division
1948
Wage and salary labor force _ ___
Goods-produeing industries
_ _____
Agriculture __________
Mining
__________ __
Construction _______ _ _
Manufacturing___ ___
Service-rendering industries__ _____
__ _
__ __ ___
Transportation.______
_ ______ _
___
______________
____ _
___
Trade,
Service, including private household ____ _ __
Forestry and fisheries
_______ ___ _
_ __
Public administration. _ ______ _ _ _ _ _
Total
Struc
tural
changes
Labor
force
changes
+379
+113
+266
4.1
5.0
+298
+215
+83
4. 7
2. 3
7.4
3.5
6.5
6.4
8.3
4.1
+30
+26
+80
+162
+32
+30
+33
+120
-2
-4
+47
+42
3.4
3.1
+81
-102
+183
3.0
4.3
3.2
10.8
2.0
2.4
4.1
2. 9
7.0
1.6
-2 7
+35
+81
-1
-29
-21
-37
-3
- 12
+2
+56
+ 118
+2
+5
______
___
_ ____ _ _
_
___
1956
1The structural change in unemployment is obtained by applying the change in the rate of unemploy
ment between 1948 and 1956 to the appropriate 1956 labor force component. The labor force change is the
nroduct of the appropriate 1948 rate of unemployment and the 1948-56 change in the associated labor
force component.
N
o te.
—Figures are based on old definition of unemployment.
Source : U.S. Department of Labor, Bureau of Labor Statistics.
Since 1956. the importance of manufacturing and agriculture as
a source of employment has declined further both relatively and abso
lutely. The number of jobs in manufacturing declined from 16.9
million in 1956 to 16.5 million in June of this year, so far the peak
month of industrial production. (By contrast, industrial output had
risen from 143 percent of the 1947-49 average in 1956 to 155 percent
in June 1959.)
The decline in jobs in manufacturing is strikingly illustrated by
trends in the steel, autos, and other major industries. For example,
over the 9-year period between May 1950 and May 1959 monthly
steel production increased by about 35 percent nationally while
employment moved up by about 6 percent. (In Pittsburgh, the
overall employment increase was about one-third the national aver
age.) Textile employment decreased 22.6 percent over the same
period. Coal mining employment wTas already 46 percent below the
1950 level in 1957 and the decline has continued. In automobiles the
production of 6.1 million cars required 928,900 workers in 1953, but
only 786,300 in 1957.
In April of this year, 1 million factory workers were looking for
jobs; about 600,000 of these were in the durable goods industries,
where the unemployment rate was 50 percent above that of 1957. This
is true despite the fact that many factory workers have retired from
the labor force, or taken jobs in trade or service industries, presumably
at lower rates of pay. In August factory workers represented about
32 percent of all long-term unemployment (lasting 15 weeks or longer
in one spell).
176
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Characteristics of areas with persistent labor surplus
Hitherto unpublished data of the Department of Labor shows that
important areas of the country have serious problems o f persisting
or long-term unemployment. Areas which had an unemployment
rate in excess of 6 percent in the years 1957, 1958, or 1959 (or had
fallen into this group in the 1957-58 downturn and were in this cate
gory in May 1959) were compared to areas which did not fall into the
above 6-percent group, even in the 1957-58 recession, or had recovered
from it by May of this year.
The overall rate of unemployment in the areas with persistent un
employment problems differed strikingly from that of the more
prosperous areas in M ay; 6.3 percent for the areas with the most pro
longed unemployment problem compared to 4.9 percent for the other
two groups, as is shown in table 6-8. Moreover, long-term unemploy
ment— 15 weeks or longer—was much more prevalent in the areas of
higher persistent unemployment; 42 percent of the labor force unem
ployed had been unemployed 15 weeks or longer, compared to 28.7
percent in the group o f areas which never fell below 6 percent in its
overall rate of unemployment. Even more significant, over 25 per
cent of the unemployed work force had been unemployed for half a
year in the areas with the long-standing problem of unemployment,
almost twice as many as in the group of areas of continued liigh
employment opportunities. (See table 6-9.)
T
able
6 -8 .—
Unemployment by labor market area group, by age and sex: April and May 1959
[Separate data for each of the 2 months have been averaged]
Group I
Total-- __ ________
___
___________ _______________
Unemployment rate (percent of
labor force in each age-sex group)
Group II
Group III
Group I
Group II
Group III
Percent distribution
Group I
Group II
Group III
4.9
6.3
100.0
100.0
100.0
4.7
4.6
6.0
61.5
63.5
63.5
14 to 19___________________________________________________
20 to 24__________________________________________________
25 to 34_________________________________________________
35 to 44__________________________________________________
45 to 54__________________________________________________
55 to 64_________________________________________________
65 and over____ _ __ ________ ____________________ ______
84
45
63
54
50
43
18
62
43
72
53
46
40
17
99
76
171
128
115
95
32
17.8
6.6
3.4
2.9
3.3
4.5
5.6
15.2
7.1
4.1
3.0
3.2
4.2
5.7
17.1
8.6
6.2
4.3
4.7
5.5
6.0
14.5
7.8
10. 9
9.3
8.6
7.4
3.1
11.8
8.2
13.7
10.1
8.8
7.6
3.2
8.8
6.7
15.1
11.3
10.2
8.4
2.8
Female------------------------------------------ -------- _------ ------ ----------------
224
191
413
5.4
5.5
6.9
38.7
36.5
36.5
14 to 19______________________________________ ____ ________
20 to 24___________________________________________________
25 to 34____________________________________ ______________
35 to 44__________________________________________________
45 to 54___________________________________________________
55 to 64_________________________________________ _____ _
65 and over__________________ ____ ___________ ___ _____ ___
58
34
42
40
27
20
39
18
37
40
34
19
3
5
81
61
61
70
95
35
17.2
7.3
4.8
4.5
2.9
4.0
2.2
17.6
8.4
5.9
4.8
7.0
4.7
6.9
10.0
5.9
7.3
6.9
4.7
3.5
7.4
3.4
7.1
7.6
6.5
3.6
15
12.1
4.8
5.8
5.2
4.3
4.3
4.0
0.5
1.0
7.2
5.4
5.4
6.2
8.4
3.1
1.3
Male, 25 to 64__________________________________ _____ ________
210
211
509
3.4
3.6
5.1
36.2
40.2
45.0
N o t e .— Group I includes m ajor labor market areas which did not have more than 3 . 0 -5 .9 percent of unemployed during the 1 9 5 7 -5 8 downturn.
Group II includes areas which had) higher unemployment rates than 6 percent at some time during 1 9 5 7 -5 8 but had returned to a less than 6 percent
classification by M ay 1959.
Group III includes areas which had more than 6 percent unemployed throughout 1957, 1958, and 1959.
Source: Bureau of Labor Statistics, U.S. Department of Labor.
LEVELS
4.9
717
PRICE
1,130
___
AND
524
333
_ .
GROWTH,
579
356
Male________ ___ _______ ______
EMPLOYMENT,
Number of unemployed
(thousands)
Age and sex
178
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
T able 6 -9 .— Unemployment by labor m arket area group , by d uration of
unemployment , A p ril and M ay 1959
[Separate data for each of the 2 months have been averaged]
Percent distribution
Number of unemployed
(thousands)
Duration of unemployment (weeks)
Group I Group 11 Group III Group 1 Group II Group III
-
579
523
1,130
100.0
100.0
100.0
_______
Less than 5_ _ - - _____
5 to 10_________________________________
11 to 14_______________________________
15 or longer. __ ------------- ------------------
269
102
42
166
214
97
40
172
360
199
96
476
46. 5
17.6
7.3
28.7
40.8
18. 5
7.6
32.8
31.9
17.6
8.5
42. 1
15 to 26_______________________________
27 or longer___ ___________ _ ------- _
92
74
72
100
187
289
15.9
12.8
13.7
19.1
16. 5
25.6
Total____________ _
_ ______
N o t e .— Group I includes major labor market areas which did not have more
3.0—5.9 percent of unemployed during the 1957—58 downturn.
Group II includes areas which had higher unemployment rates than 6 percent at
time during 1 9 5 7 -5 8 but had returned to a less than 6 percent classification by May
Group III includes areas which had more than 6 percent unemployed throughout
1958, and 1959.
than
some
1959.
1957,
Source: Bureau of Labor Statistics, U.S. Department of Labor.
C
h r o n ic a l l y
D
epressed
A
reas
A great part of the long-term unemployment is to be found in
the 17 major labor market areas and 53 smaller areas classified by the
Department of Labor as “ chronically depressed.” These are areas
where unemployment rates are consistently much higher than for the
rest of the Nation, and which tend to be more severely affected by
recessions and to recover more slowly in expansions than more pros
perous communities or regions.
In the chronically depressed areas, unemployment has been 50 per
cent or more above the national average in 4 of the past 5 years. On
the average, approximately 11 percent of the labor force in these sec
tors was unemployed in May 1959; this was more than double the un
employment rate for the country as a whole. Together, these 70 major
and smaller chronic labor surplus areas accounted for about 490,000
unemployed workers, or almost 15 percent of the countrywide total
as of May 1959.
The chronic labor surplus areas, as a group, also fared worse than
the Nation generally during the recent recession, and they have not
improved as much as the rest of the country during the recovery pe
riod. Total nonfarm employment in the 17 major chronic areas de
clined 10.1 percent between Slay 1957 and May 1958— about 2% times
the national average decrease of 4.2 percent. Between May 1958 and
May 1959, the country had recovered slightly more than 93 percent
o f the previous year’s job losses; in the chronic surplus areas, only 31
percent of the decline from May 1957 to May 1958 had been made up
by May 1959.
Most o f these areas are located in States in the northeastern sec
tions of the country. However, at least one major or smaller area
with chronic unemployment has been identified in each of 22 States.
As the following listing indicates, the 17 major chronic areas are con
centrated in 8 States; 9 of these are in 2 States—Pennsylvania and
Massachusetts.
EMPLOYMENT,
M AJOR
Indiana :
Evansville
Terre Haute
M assachusetts:
Falls River
Lawrence
Lowell
New Bedford
M ichigan:
Detroit
Muskegon
AREAS
GROWTH, AND PRICE LEVELS
W IT H
179
C H R O N IC LABOR S U R P L U S E S
New Jersey: Atlantic City
North Carolina: Asheville
Pennsylvania:
Altoona
Erie
Johnstown
Scranton
Wilkes-Barre— Hazleton
Rhode Isla n d : Providence
W est Virgin ia: Charleston
States which have smaller areas of persistent unemployment are:
Alabama (two areas), Connecticut (tw o), Illinois (five), Indiana
(tw o), Kansas (one), Kentucky (nine), Maine (one), Maryland
(one), Massachusetts (one), Michigan (four), Montana (one), New
Jersey (tw o), Xew York (tw o), North Carolina (tw o), Oklahoma
(one), Pennsylvania (six), Tennessee (one), Texas (one), Virginia
(one), Washington (tw o), and West Virginia (six).
CAUSES
OF CHRONICALLY DEPRESSED CONDITIONS
The factors behind the persistent high unemployment rates in the
depressed areas are very diverse. Probably the most significant com
mon characteristic of most of these areas, with the exception of De
troit, is lack o f industrial diversification. Frequently the area de
pends largely or completely upon the health of one firm or industry as
the source of its income and employment. If, under such conditions,
shifts occur in consumer preferences, techniques of production, the
optimum location of plants, or the availability of natural resources,
the area is left with a rate of unemployment which cannot be greatly
alleviated by the normal cyclical upswing of business activity.
This situation is clearly demonstrated by an examination o f the par
ticular areas involved. The increasing use of gas and oil for homeheating purposes, for example, has cut sharply into the previous
market for anthracite coal, and resulted in severe employment cur
tailment in anthracite mining centers such as Scranton and WilkesBarre-Hazleton, Pa. In bituminous coal mining areas, such as
Johnstown, Pa. and Charleston, W.Va., the growing mechanization
of mine operations has been a factor in the rise o f local jobless totals
to relatively substantial levels. Technological changes resulting
from the conversion of the railroads from steam to diesel engines have
also contributed to high unemployment in Altoona, Pa., and a number
of other railroad centers.
Decreased markets for wool and cotton textiles, in competition with
newer products based on synthetic fibers— as well as the shutdown
or relocation o f several large local mills—have been responsible for a
major share o f the prolonged unemployment problems in a number
of New England textile centers, among them Providence, R.I., Law
180
EM PLOYMENT, GROWTH, AND PRICE LEVELS
rence and Lowell, Mass. The declining sales position of gas refriger
ators— as compared with electric-powered models— accounts for some
of the unemployment problem in the Evansville, Ind., area; reductions
by auto plants have also been a factor in this locality. Shifting con
sumer preferences among various auto makes and models have been
primary elements in the deteriorating employment situation in Detroit
over the past few years; the area has been affected also by decentrali
zation of auto manufacturing facilities, automation, and changes in
emphasis in the defense program during this period.
The impact of continued unemployment in the areas of chronic
distress is very severe. According to the Department of Labor, close
to a quarter of a million workers in the 17 chronic areas exhausted
their insurance eligibility under regular State and Federal unem
ployment compensation programs during the year ended May 1959.
Unemployment is particularly prevalent for the main breadwinner.
The Department of Labor found that in May 76.5 percent of the unem
ployed workers in the 17 major areas of persistent unemployment were
males, compared to 61.5 percent nationally. The proportion was as
high as 80 percent in Charleston, W.Va., and 75 percent in Terre
Haute, Ind., Johnstown, Pa., and Detroit, Mich.
O U T LO O K FOR DEPRESSED AREAS
Despite the prospects for further substantial increases in employ-'
ment nationally, and particularly for increases in the output of metals,
automobiles, and aircraft, and machinery (which are important
sources o f employment in about half of the 17 major chronic labor
surplus areas) the outlook for most o f the depressed areas is not too
favorable. As shown in table 6-10, substantial progress has been made
in reducing unemployment rates in Muskegon, Mich., Lawrence, Mass.,
and Asheville, N.C., but the circumstances which apply to these areas
are somewhat special. The Labor Department notes that the five
areas in which recovery experience from May 1957 to May 1958 was
better than for the country as a whole—Terre Haute, Lawrence,
Lowell, Atlantic City, and Asheville—had common characteristics.
Each of these areas is a soft-goods or nonmanufacturing center. In each of
these, the staffing of new plants or other activities offset the effects of cutbacks
in some local nonmanufacturing activities.6
6
“ Chronic Labor Surplus Areas, Experience and Outlook,” U .S. Department of Labor,,
July 1959.
181
EM PLOYMENT, GROWTH, AND PRICE LEVELS
T able
6-10.— Unemployment and unemployment rates, major areas with chronic
labor surpluses, September 1959 and annual averages 1954-59
Annual average unemployment rates 1
September 1959
Total unem
ployment
State and area
Total
labor
force
Indiana:
Evansville_________________ .
77,600
Terre H a u t e ..____ ___________
44,200
Massachusetts:
Fall River____________ _____ _
56, 820
56,180
Lawrence____________ __ ____
Lowell________________________
51,650
New Bedford__________________
67, 550
Michigan:
Detroit________________________ 1, 425,000
Muskegon-Muskegon Heights 2_
56, 400
New Jersey: Atlantic City_________
70. 600
North Carolina: Asheville 2________
52,800
Pennsylvania:
Altoona_____________ _
____
53,700
98, 7G0
Erie_- __ ______ __ _______ ___
97, 300
Johnstown___ ________ ________
Scranton______________________
102, 200
W ilkes-Barre-Hazleton________
136,800
Rhode Island: Providence._ ______
335,000
West Virginia: Charleston.. _ . . .
113, 950
1954
1955
1956
1957
1958
Number
of
Rate 1
workers
1959
6,100
2,600
7.9
5.9
8.6
12.1
7.3
12.8
8.9
11.3
6.8
7.7
10.2
8.5
8.0
7.8
3. 410
2, 850
3,300
4,280
6.0
5.1
6.4
6.3
9.3
23.9
10.5
11.3
6.1
16.4
8.8
8.6
6.3
10.2
6.7
6.1
10.6
8.9
7.0
6.6
12. 2
10.3
11.0
11.2
8.5
7.5
9.5
9.7
120,000
2,900
2,600
2,800
8.4
5.1
3.7
5.3
8.8
9.0
9.5
8.1
4.3
4.3
10.1
7.6
7.7
6.4
9.3
6.8
7.3
8.7
9.4
6.9
16.1
13.1
11.5
8.2
11.3
7.7
10.0
6.4
4,600
7,600
15, 800
13.100
19, 500
21, 700
9,800
8.6
7.7
16.2
12.8
14.3
6.5
8.6
17.4
8.8
16.0
13.9
15.3
12.1
11.9
11.9
7.5
10.6
13.9
13.9
8.7
11.5
9.2
5.0
8.0
11.9
13.0
8.0
8.7
10.4
6.2
6.6
11.2
11.4
9.8
8.2
16.5
13.3
15.4
16. 4
16.8
13.1
11.6
10.5
12.7
15.4
14.7
15.8
9.5
10.1
1 Unemployment as a percent of labor force (1959 data cover bimonthly periods, January-September).
2 Classified as group C areas of moderate labor surplus in November 1959.
N
o t e .— Annual
average rates generally based on bimonthly data.
Sou rce: Department of Labor and State employment security agencies.
In addition to the chronically depressed “ disaster areas” there are at
present a large number of other areas with large reservoirs of labor.
In July, with industrial production near au all-time high, areas such
;as Pittsburgh, Pa., Detroit, Mich., Birmingham, Ala., Flint, Mich.,
and Buffalo, N.Y., had unemployment in excess of 6 percent of the
labor force. By November, the general unemployment picture had
improved, but these areas where still characterized as having “ sub
stantial labor surpluses,” or more than 6 percent unemployed.
By January, the number of areas with labor surpluses may have
shrunk further—possibly from the present 32 to about 25. Never
theless, many cities, including the industrial centers named above, will
still have large reservoirs of unemployed even though the business
recovery will be more than a year and a half old. Many communities
will continue to have unemployment rates well in excess of the fric
tional minimum through most of the months of the business expansion.
The percentage of unemployed in the country may not drop to 4 per
cent or below except for a few months at the peak of the boom.
In addition, the social and economic situation in areas which have
not been able to substantially reduce their labor surplus problem is
becoming more distressing with the passage of time.
D IF F IC U L T IE S OF B U SIN E SS R EVIVAL
When a community or region has been depressed for some years, it
becomes very difficult for it to attract the new industry which will
put it back on its feet. The available labor force may deteriorate in
182
EM PLOYMENT, GROWTH, AND PRICE LEVELS
quality, the younger and more capable members leaving the region
and leaving a residue of older and less employable persons. The in
come of the area declines so that the surrounding market for consumer
goods is not an inducement to new firms who hope to sell locally. In
some areas, business and financial leadership may be inadequate or
unwilling to employ measures which could exploit the natural advan
tages and potentialities of the area.
Generally, also, the public facilities on wThich industry depends—
roads, schools, water supply systems, etc., become run down. It be
comes difficult to secure public approval for bond issues even when
these are clearly necessary for the future of the community. Pro
gressive businesses often w7ili not attempt to bring highly paid tech
nical and supervisory personnel into an area that offers less in the way
of amenities than more prosperous localities. (In this respect, it is
interesting to note that progress is taking place among some of the
Massachusetts areas of chronic labor surplus because of their proximity
to Boston with its scientific and research centers.)
L ong-T erm
U nem ploym ent
N ot M e r e ly
D epressed
a
P roblem
of
A reas
Specific areas will continue to present grave problems. Neverthe
less, persistent unemployment may become more of a general problem
and less a problem of specific depressed areas in the future than it
has in the past. Long-term unemployment may become more widely
diffused throughout industrial centers. This will certainly be true
if the country does not maintain a higher rate of growth of demand
than in the past few years. LTnless there is a steadily expanding labor
market* it w7ill be impossible to absorb workers displaced by machines
and technological progress in general.
To the extent that manufacturing jobs become less important in
relation to the employment offered in the less cyclical services and
trades, and that white-collar or overhead jobs replace production
worker joins in manufacturing itself, cyclical variations in unemploy
ment may be reduced in magnitude. In the recession of 1957-58, un
employment rates rose substantially, with the loss of jobs concentrated
in the durable-goocls manufacturing industries. However, the
severity of the recession was no doubt mitigated by the fact that a
high proportion of the labor force was engaged in Government work,
services, and trade, which were relatively unaffected.
Even if the amplitude of cyclical variations in employment is re
duced, long-term unemployment resulting from structural dislocations,
failure to attain a high rate of economic growth, and technological
change may tend to increase. Important areas of the country nor
mally engaged in soft-goods manufacturing, aircraft production, auto
mobiles, and textiles have already been severely affected by technolog
ical unemployment. The fear of more technological unemployment
is one of the major factors making work rules an important issue in
labor-contract disputes today. If the industrial centers of the country
become reservoirs of displaced labor, there will be little hope of elimi
nating unduly restrictive work rules, or even of preventing feather
bedding from increasing.
EM PLOYMENT,
P o l ic ie s
for
GROWTH, AND PRICE LEVELS
D e a l in g
W it h
183
U nem ploym ent
The most important policy for remedying unemployment in ex
cess of the frictional minimum is the maintenance of adequate effective
demand for the output of the economy as a whole.
Supplementary measures are required to accelerate the recovery
of areas affected by structural unemployment, and to reduce frictional
unemployment. Measures for abating the severity and frequency
of recessions, and for insuring adequate economic growth are pre
sented elsewhere in this report. Some analysis is also presented of
the lack of growth in goods production which has led to persistent
high rates of unemployment among manufacturing and mining
workers in particular.
Policies to insure national prosperity will help, although not elimi
nate, human distress resulting from changes in technology and the
patterns of demand. The burden of such changes, necessary and de
sirable as they may be, should be more equitably distributed.
In addition, specific means to improve the situation in hard-hit
areas are required. Measures are also needed to raise the employ
ability and economic status of certain disadvantaged groups in the
population.
In the following pages, measures to reduce frictional, cyclical, and
structural unemployment will be discussed.
REDUCTION
OF FR IC T IO N A L
UNEM PLOYM ENT
So-called “frictional” unemployment can be reduced. A high level
of job opportunities in itself will tend to reduce time “between jobs.”
In this regard, there need be little fear that a plenitude of jobs will
increase frictional unemployment because of high voluntary jobquitting. Material submitted to this committee shows conclusively
that lay-offs and separations are a far more frequent cause of short
term unemployment than voluntary quits even in prosperous times.
Improved knowledge of the labor market and of job opportunities
would help to reduce frictional unemployment. In this respect, in
crease emphasis by the U.S. Employment Service on placement activi
ties and on providing information channels between employers and job
seekers on a nationwide coordinated basis is desirable.
POLICIES FOR
CYC LIC A L U N E M P L O Y M E N T
The reduction of cyclical unemployment is a matter of wise general
economic policy, discussed elsewhere in this document,
However, the Federal Government should use its influence to
achieve certain improvements in the State unemployment compensa
tion schemes. This might include Federal supplementation of State
funds in recessions.
A high proportion of workers becoming unemployed during a re
cession exhaust their benefits before it is over.
This is indicated by statistics collected under the temporary un
employment compensation program enacted in 1958. Under this
emergency program more than 2 million wrorkers who had exhausted
their rights after drawing benefits for an average of 20 weeks collected
extended benefits for 10 weeks more. Factory workers accounted for
184
EM PLOYMENT, GROWTH, AND PRICE LEVELS
the largest percent of recipients of extended benefits in the indus
trialized States. In Pennsylvania, a State hard hit by the recession,
a study of persons receiving temporary unemployment benefits con
ducted in November 1958 reported that the median length of con
tinuous unemployment was 52y2 weeks while less than 10 percent had
been out of work less than 46 weeks.
In the event of a recession, workers should be assured o f continued
benefits until job opportunities are restored. They should also be
assured that a reasonable fraction of their usual wage will be forth
coming.
Better provision for maintaining the income of workers losing jobs
as a result of depressions would help to cushion declines in the econ
omy and perhaps shorten the duration of recessions. However, income
maintenance should not be used as an alternative to more fundamental
measures to alleviate and prevent business declines.
POLICIES
R E L A T IN G
TO
STR U C TU R AL
UNEM PLOYM ENT
Structural unemployment is often thought of in connection with
chronically depressed areas. However, it may also be present in other
areas when a surplus of labor has existed for some time. It can also
relate to certain occupational groups. The following measures should
not, therefore, necessarily be restricted to chronically depressed areas.
Measures to reduce structural unemployment or its impact include
(a) relocation of workers, (b) training and retraining of workers, ( c)
income maintenance for persons who have been involuntarily unem
ployed for a long time, and ( d) special measures to rehabilitate chron
ically depressed areas.
(a) Relocation of workers
Two general approaches to the problems of areas wThere labor tends
to be in excess of job opportunities are possible: Further develop
ment of the area or relocation of workers to more prosperous areas.
Both of these approaches should be used, depending hi part on the
industrial or other possibilities of the areas.
Positive recruitment and relocation of 'workers from depressed areas
is desirable to supplement natural outmigration. This would require
expansion of the activities of the U.S. Employment Service in inter
area recruitment, which is presently confined to professional and
skilled occupations. Experience of the Farm Security Administra
tion shows that relocation cannot be done on a mass basis. Individual
attention is necessary.
Legislation to allow payment of transportation costs and travel
allowances might be desirable.
The feasibility of a program contemplating relocation of wTorkers
on a generous scale depends on a high level of prosperity being main
tained nationally. A t present, there are few shortages of workers in
any area outside of highly skilled and professional occupations.
Encouragement of out-migration should be most actively pursued
where opportunities for rehabilitating and stimulating the area appear
unfavorable. It may not be too desirable in areas with good prospects
for rehabilitation. For one thing, relocation tends to remove the
younger and more aggressive members of the labor force, on which
the community would depend for revival.
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
185
{ b) Training and retraining of workers
A disproportionate amount of long-term unemployment is found
among unskilled and semiskilled occupations. At the same time,
there are current shortages of some types of skilled labor, and some of
these may become more acute.
Unemployed loorkers who will undertake training or retraining in
order to acquire skills should be given loans or alloivances. Programs
for vocational training should be tied in with Department of Labor
studies of employment trends and job opportunities in various
industries.
Young people should be urged and aided to stay in school until they
have received education and training commensurate with their capa
bilities and prospective requirements in employment markets.
Special programs for retraining older people, who have unusual
difficulty finding employment once they have lost their jobs, are also
needed.
There can be little doubt that better preparation for employment
would contribute in a high measure to increases in productivity and a
more rapid rise in the standard of living.
(c) Income maintenance for persistent unemployment
A Federal-St ate program of public assistance is needed for persons
who have been involuntarily unemployed for some time, have ex
hausted their benefit rights, or have failed to establish any, and who
reside in areas of uchronic labor surplus''' as presently defined. Pres
ent public assistance programs are woefully inadequate for the need,
particularly in chronically depressed areas. Testimony presented to
the Special Senate Committee 011 Unemployment has shown conclu
sively that conditions of abject poverty and critical need exist in many
communities.
An adequate public assistance program would do more than re
lieve distress among persons who are bearing the brunt of economic
dislocations. It will help keep the labor force reemployable and help
prevent deterioration of business in the area.
(d) A id for chronically depressed areas
It has been recognized for some time that a number of the chroni
cally depressed areas are unlikely to recover in the foreseeable future
from the autonomous operation of economic forces with whatever
assistance the areas themselves can offer. It is also widely recognized
that programs for income maintenance, training and relation of
workers, while helpful, will not be sufficient to put the areas back on
their feet.
In this connection, a brief resume of Federal policy relating to
chronically depressed areas might be helpful.
Federal policy— What has been done
Localized unemployment was recognized as a significant labor
market problem during the recession of 1949. In that year, the Presi
dent directed the establishment of a program of selective Federal
assistance to such areas, which involved priority consideration for
Government loans, expediting the placement of public works con
tracts and preferences in the award of procurement contracts in the
event of tie bids with other areas. These policies were given further
48795— 59--------15
186
EM PLOYMENT, GROWTH, AND PRICE LEVELS
implementation as a result of the Korean conflict, which restricted
the production of some civilian items and resulted in serious un
employment in certain areas. In November 1953, the Federal Govern
ment initiated a program to permit rapid write-off allowances to firms
establishing or expanding certain types of defense facilities in labor
surplus areas. These areas have also been eligible, since December
1954, for preferential treatment in competing with foreign firms for
Government procurement contracts. Finally, surplus labor markets
have received primary emphasis in Federal technical assistance pro
grams, operated through the BES and State agencies, and through the
Office of Area Development of the Department of Commerce.
These various policies, however, have been of minor importance in
dealing with the problem. For one thing, none of these programs have
attempted to distinguish between chronic versus nonchronic labor
surplus areas. Furthermore, the magnitude of the programs them
selves have been almost insignificant. Over the 7-year period, March
1952 to March 1959, approximately $213 million for defense contracts
have been placed under the special preference provisions cited above,
equal to only 1y2 percent of the total defense contracts awarded to
labor surplus areas. Rapid tax amortization assistance was extended to
71 plants in 40 different areas over a 4-year period to August 1957, at
which time the eligibility requirements were sharply restricted. The
other policies have also been very limited in scope.
Technical assistance is provided by various agencies of the Federal
Government: The Office of Area Development in the Department of
Commerce prepares “how-to-do-it” pamphlets and statistical studies;
the U.S. Employment Service works with community groups and
provides placement services for new firms; the Department of Defense
also maintains a program to assist labor surplus areas to obtain defense
contracts.
In the past 3 years, there has been general agreement among the
leaders of both political parties that a broader Federal program was
required, aimed specifically at areas with persistent unemployment.
Bills have been introduced in the 84th, 85th, and 86th Congresses, but
no legislation has as yet been enacted.
State and local efforts
Almost every State now has a development agency, though the
functions of these agencies are not at all similar. A growing, but still
limited, number of States have authorized the formation of private
development corporations—basically, bankers’ pools—to invest in
equity capital in businesses operating within the State but with no
mandatory provision to favor the depressed areas.
Pennsylvania, in addition, has set up a Pennsylvania Industrial
Development Authority patterned after the features of the Federal
area assistance bills to help areas of labor surplus. During the first
2^/2 years of its life, loans were made helping to finance 72 projects
costing $24.5 million. It is estimated that 11,916 operatives will be
employed, with an estimated payroll of over $38 million.
Outlines of Federal policy for depressed areas
Programs for relocating workers in more prosperous areas are par
ticularly applicable to chronical}’ depressed areas, particularly those
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
187
with poor prospects. However, relocation can only supplement this
revitalization of the areas themselves.
In planning for area assistance, the object should be to develop
self-sustaining industries and sources of employment in the areas.
Federal aid or subsidies should not be permanent. This implies :
(1) Careful appraisal of the prospects of the areas, which are very
diverse.
(2) A large enough program of Federal aid to have a reasonable
expectation of accomplishing the result of making the areas viable.
It must be admitted that there may be large outlays involved in
these efforts, only part of which may be recoverable directly by the
Federal Government. On the other hand, it should also be recognized
that there are large social costs involved in continuous unemployment.
Young people are growing up without the advantages wThich will
permit them to make an effective contribution to the Nation’s well
being. There may also be large “sunk costs” in public and private
facilities which can be retrieved, at least in part, through a program
designed to revive the economic life of the areas.
Perhaps of even greater importance is the fact that it is not selfevident that areas of chronic unemployment are, by that very fact,
areas in which costs of production in all types of industries are too
high to be competitive. There are many instances of labor markets
which have, over time, recovered from the adverse effects of overdependence on a declining firm or industry and have successfully
attracted new industry into the area. It is true, of course, that in
most of these instances the establishment of new firms was done by
private industry without financial assistance; in this sense, no “inter
ference” with the market mechanism is involved. But it is also true
that this redevelopment process usually takes a considerable period of
time. Any type of assistance, therefore, which can be provided to
depressed areas to reduce this time lag by encouraging the formula
tion of redevelopment plans, by facilitating any necessary retraining
of the labor force, by providing information to prospective business
men as to the economic advantages of the area, by lending funds at
low interest rates to permit the area to maintain its public facilities,
etc., is quite consistent with the longrun objectives of the economy as
a whole. While some costs to the taxpayer will necessarily be in
volved, they will be lower than the costs incurred as a result of per
mitting available human and capital resources to remain unemployed
for long periods of time.
Elements of a Federal program might include:
(a) Technical assistance to the areas in planning a redevelop
ment program with reasonable chances for success.
(b) Financial assistance to chronically depressed areas for
community facilities necessary to attract new industry.
(c) Long-term loans to new industries locating in the area.
(d) Retraining allowances for workers who can thus be quali
fied for reemployment.
CH APTER 7. THE PROBLEMS OF AM ERICAN
AGRICULTURE
I n t r o d u c t io n
Economic policy faces no more perplexing problems than those
posed by American agriculture. No survey of the economic tasks
ahead for the country can be complete without special treatment of
the agricultural sector, which historically has been the base of Ameri
can growth and which even today provides us with our wonderfully
abundant food supply and with many raw materials for American
industry. This study engaged in no large-scale primary research on
the problems of agriculture. In 1957, the Joint Economic Committee,
through its Subcommittee on Agricultural Policy under the Chair
manship of Senator John Sparkman (Democrat, Alabama), held ex
tensive hearings and published a compendium in which most of the
authorities in this field presented their views. Since then, there
have been few new developments. The gloomy views held by most of
the experts at that time have so far been confirmed by the subsequent
record.
In this chapter, a brief restatement of the major dimensions of the
problem is given and the particular implications for the attainment
of the objectives of employment, growth, and price level stability are
set forth.
I . T H E PROBLEM OF OVERPRODUCTION
The economic forces which have created the substantial over
production on our farms, but which also have resulted in serious de
clines in farm income, are the following:
1.
After a long period of relatively slow advance in productivity,
output per unit of input started rising dramatically in 1942 and has
shown little sign of slowing down. This rise in efficiency is the result
of the tremendous research effort by government over a long period,
improving farm practices, developing new plant strains, selective
breeding of animals, etc. Also, the American farmer is probably the
first highly educated farmer in the world, with a college degree be
coming almost a credential for running a family farm in some parts
of the country. Besides this improvement in human resources and
in technology, the use of machinery, of fertilizer and of other inputs
has greatly risen.
Some quantitative indications of these changes are presented in
charts 1 and 2. They have resulted in an increase of total output of
American agriculture of about 5 percent a year from 1942 to 1959.
189
190
EMPLOYMENT,
GROWTH, A N D PRICE LEVELS
C h art
7 -1
2.
The growth of demand for farm products is at a much slower
rate. Estimates presented before this committee and elsewhere sug
gest a 10 percent increase in real per capita disposable income at most
leads to an increase of consumption of farm products of 2 percent.1
With population growing at about 1.7 percent, and real per capita in
come typically rising at 1.3 percent, the total increase in the demand
for farm products is only about 2.0 percent. Furthermore, chart 3
shows clearly that the growth of farm output has been and continues
to be well ahead of population growth.
1 See estimates by Theodore W. Schultz and references cited by him in the Joint Eco
nomic Committee “Policy for Commercial Agriculture,” 1957. Also W . W. Wilcox, Journal
of Farm Economics, May 1959, p. 245.
EM PLOYMENT,
191
GROWTH, AND PRICE LEVELS
C hart 7-2
PERSONS SUPPORTED BY
ONE FARM WORKER
PERSONS
20
15
10
5
0
1850
U .S. DEPARTM EN T
OF A G R IC U L T U R E
1900
N E G. 59 ( 11 )- 909
1950
A G R IC U L T U R A L
RESEARCH
S E R V IC E
3.
The resultant imbalance persists, in part, because of inadequacies
in the Government price support programs. The levels of price sup
ports have been sufficient to encourage farmers to draw additional
inputs into agriculture, particularly capital and fertilizer, to use the
new technology being made available to the fullest, and to produce
large crops. The production controls that have been applied, pri
marily acreage restrictions, have proved to have only limited effective
ness as farmers have utilized the remaining acreage more intensively.
I I . F A L L IN G F A R M IN C O M E S
With outputs rising more rapidly than demand, prices have been
falling. A t the same time, the prices paid by farmers have increased
along with the general price level, resulting in a decline in the parity
ratio, the ratio o f prices received to prices paid. As is seen in chart
7-4, this ratio today is at its lowest in 19 years.
192
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
Farmers’ total net. income has been falling irregularly. Income
per farm lias not fallen as fast because of the great decline in th e
number of farms. (See chart 7-5). From 1947 to 1959 the number of
farms fell by 1.3 million, or 22 percent.
T a b l e 7 -1 . —
Reduction in num~ber of farm s , selected periods
Redaction in farm estab
lishments
Period
Number
(millions)
1940-59_______________________________________________________________
___
___
1917-53
. .
.
1953-59.
_ _
____
____
2.2
.6
Percent
28.1
10.2
13.2
Source : Joint Economic Committee, Economic Indicators.
These figures do not show the wide range of experience within farm
ing. Thirty-one percent of the farm output is produced on 3 percent of
our farms; all but about 10 percent of total farm output is produced on
less than one-half of the total number of farms. The larger com
mercial farms produce the bulk of the output as table 7-2 shows:
C h ar t 7 -3
C h art
P A R I T Y
7-4
R A T I O
EMPLOYMENT,
GROWTH,
AND
PRICE
LEVELS
N o t e : Parity is the ratio of prices received to an index of prices paid, interest, taxes, and wage rates,
Source : Joint Economic Committee, Economic Indicators.
CO
194
N E T
IN C O M E
P E R
F A R M ,
1 9 4 7 -5 9
EMPLOYMENT,
GROWTH,
AND
PRICE
LEVELS
Ch ar t 7 -5
1947
1948
1949
Source: DepartmentofAgriculture
^950
1951
1952
1953
1954
1955
1956
1957
1958
1959
(3 rd quarter)
EMPLOYMENT,
195
GROWTH, AND PRICE LEVELS
T a b l e 7 - 2 .— Relation of farm size and output share
Number of Percent of Percent of Percent of
total farms total dollar acres used
farms
output
I. Commercial farms having market sales of:
$25,000 or over
_ __ ___________ ___ ___
___________ ___
$10,000 to $24,999 _ _
$5,000 to $9,999_____________________________
$2,500 to $4,999_____________________________
134. 000
448, 945
706, 929
811, 965
2.8
9.4
14.8
17.0
31.3
26.9
20.5
12.1
22.4
20.8
19.0
14.1
Total, over $2,500____ _ _ ___ _________
II. Small full-time commercial farms having market
sales of:
$1,200 to $2,499_____________________________
_____
Less than $1,200__
__ _ _ _ _ _
2,101, 839
44.0
90. 8
76.3
763, 348
462,427
16.0
9.7
5.7
1.4
8.8
3.9
Total, less than $2,500 __
_ _________
III. Part-time, residential, and other 1farms_________
1, 225, 775
1,455,404
25.7
30.4
7.1
2.0
12.7
11.0
1 This classification includes 2,693 institutional and experimental farms.
Source: U.S. Bureau of Census, 1954 Census of Agriculture, cited in Committee for Economic Develop
ment, “ Toward a Realistic Farm Program,” December 1957.
Since the major portion of farm aid has always been based upon
supporting the prices of crops produced for market, the major benefit
of farm programs has accrued to the larger farms with the larger
output. The other half of the total number of farms, which have
much less production for market, gets less benefit from price support
programs.
I I I . T H E ST A B IL IT Y OF F A R M IN COM ES
Because of fluctuations in the weather, crop yields have varied and
farmers’ income has been unstable. This lias been accentuated by the
inability of farmers to predict price movements as far ahead as is
necessary to reasonably plan production; the corn-hog cycle—with
high hog prices in one year leading to large hog production and high
corn prices thereafter, and culminating in an oversupply of hogs—con
tinues as it has for many years, injecting instability into an important
segment of the agricultural economy. Instability has been a problem
of agriculture throughout its history, and the problem has declined
but little in recent years.
IV . POVERTY I N AGRICULTURE
Rural poverty continues to constitute one of the leading social prob
lems of the United States. Geographically the poverty is largely con
centrated in the Appalachian mountains, the Southern States, and in
New Mexico (including particularly the Indian reservations), with
some other problem areas scattered through the Northwest and the
upper Middle West. These low production farms suffer from an
acreage too small to support a family living standard and from an
inadequate stock of capital. They have also tended to be bypassed by
technological progress and have received relatively very little benefit
from Government price support programs, because they do not pro
duce much of a marketable crop.
196
EMPLOYMENT,
GROWTH,
AND PRICE LEVELS
V . T H E A C C U M U L A T IO N OF SU RPLUSES A N D T H E D R A IN ON T H E FEDERAL
BUDGET
The biggest symptom of the inadequacy of present programs is the
enormous accumulation of surpluses and the rising drain on the
Federal budget.
Not all crops are under price support. These apply to the six
basic commodities, cotton, wheat, corn, tobacco, rice, and peanuts,
as well as dairy products, soy beans, and several other commodities.
Somewhat more than half of all agricultural sales are on crops not
under price support, the leading items being commercial vegetables,
fruits, nuts, and other grains.
Because the advance in output constantly tends to be greater than
the rise in demand, the Federal Government has been acquiring enor
mous stocks of surpluses under price support programs. Table 7-3
indicates the value of total stocks held by the Department of A gri
culture on June 30 as well as the net acquisitions of recent years.
Table 7-4 indicates the costs of these acquisitions. It can be seen that
the total cost of price supports has been increasing. In addition to
the $5.38 billion spent in 1959 for the stabilization of farm prices and
incomes, other programs to promote agriculture add at least another
$1.5 billion to the budget.
Table 7 -3.— E xpen d itu re fo r stabilization of farm prices and incom e , 1 9 5 4 -5 9
Fiscal y e a r :
Millions
1954
$1,689
1955
3,486
1956
3, 901
1957
3,4 30
1958
3, 151
1959 1 ____________________________________________________________________
5, 386
1 Eistimate.
Source : Hearings, Senate Committee on Agriculture, February 1959.
P R I C E
O w n e d ,
7-6
S U P P O R T
U n d e r
L oa n
a n d
H O L D I N G S
P u r c h a se
A g r e e m e n t s
$ B1L.
EMPLOYMENT,
GROWTH,
AND
PRICE
1948
1950
1952
1 95 4
1956
1958
I9 6 0
LEVELS
C h art
quarterly data
U. 5. DEPARTMENT OF AGRICULTURE
NEG/6518-59 (9 ) AGRICULTURAL MARKETING SERVICE
CO
198
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
Table 7 -4 .— P rice support holdings, owned under loan and purchase agreem ents,
United S tates, fry quarters, June 1948 to June 1959
[In millions of dollars]
Date
1948—June 30
Sept. 3 0 Dec. 31- _.
1949—Mar. 31
June 30...
Sept. 30...
Dee. 31...
1950—Mar. 31_
June 30...
Sept. 30„.
Dec. 31...
1951—Mar. 31...
June 30.
Sept. 30...
Dec. 31..
1952— Mar. 31...
June 30_.
Sept. 30._
Dec. 31__
1953—Mar. 31...
June 30...
Sept. 30-.
Dec. 31..
1954—Mar. 31. _
June 30-.
Sept. 30Dec. 31...
1955—Mar. 31..
June 30...
Sept. 30...
Dec. 31.
1956—Mar. 31 _.
June 30. _
Sept. 30..
Dec. 31...
1957—Mar. 31
June 30..
Sept. 30Dec. 31. _
1958—Mar. 31._
June 30..
Sept. 30Dec. 31-.
1959—Mar. 31June 30.-
'heat
8
170
692
721
569
716
1,016
1, 045
820
882
1, 005
848
505
602
679
531
411
955
1,093
1,262
1,284
1,066
2, 110
2, 321
2,169
2, 567
2, 767
2, 705
2, 586
2, 746
2, 864
2,910
2. 626
2, 778
2, 698
2, 505
2. 288
2. 430
2, 504
2, 515
2, 368
2, 959
3, 069
3, 164
3, 083
Com
1
0
130
410
762
587
611
1,086
1,078
880
867
881
827
748
667
650
557
485
593
848
1, 007
1, 322
972
1.331
1, 397
1,151
1. 239
1,436
1. 550
1, 426
1, 584
1,943
2, 000
1,887
2, 049
2, 330
2, 295
2.147
2, 175
2, 404
2, 427
2, 2S5
2, 354
2, 532
2,419
Cotton
Other
Dairy
commod
products
ities
5
51
628
680
609
520
931
961
717
162
21
34
19
36
86
62
55
43
194
368
372
408
1,293
1,387
1, 239
1, 270
1,458
1.475
1, 419
1, 514
2, 330
2, 276
2, 228
1, 698
1,724
1,747
1,469
865
912
678
546
511
1, 108
1,313
1,219
0
0
0
0
14
67
98
106
180
205
130
19
5
7
8
4
5
6
9
153
303
395
392
596
568
579
515
436
352
365
281
210
173
171
111
118
165
190
166
147
146
119
62
47
72
280
331
713
785
694
804
910
1,038
908
778
837
719
505
477
619
626
503
512
720
903
840
1, 065
1,107
1,105
909
893
1, 218
1,420
1,274
1, 288
1.631
1, 613
1,330
1, 365
1, 641
1, 662
1,229
1, 224
1, 455
1, 785
1, 601
1, 627
2,148
2, 111
1,900
Total
obliga
tions
294
552
2,163
2, 596
2, 648
2,694
3, 566
4, 236
3, 703
2, 907
2,860
2, 501
1,861
1, 870
2, 059
1, 873
1,531
2. 001
2. 609
3, 534
3, 806
4, 256
5,873
6, 740
6, 282
6, 460
7,197
7, 472
7,181
7, 339
8, 690
8, 952
8, 357
7, 899
8, 223
8, 362
7,446
6, 856
7 212
7, 529
7, 088
7, 501
8, 741
9,167
8, 693
Source: Compiled from reports of the Commodity Stabilization Service.
There is an almost universal feeling in the nonagricultural popu
lation that price and income support programs are ineffective and
their cost too high.
V I. AG R IC U L T U R E A N D T H E PRICE LEVEL
In recent years, the total inflation of the economy has been sub
stantially moderated by the fall in farm prices. Chart 7 contrasts
the movement of farm prices with food prices at retail and with other
retail prices.
EM PLOYMENT, GROWTH, AND PRICE LEVELS
199
C h art 7 -7
F OO D PRICES AND CONSUMER
PRICE INDEX
% OF 1947-491
|
|
Consumer price index
120
100
80
Farm price food products^1
1947
1950
1953
* FOODATH
O
M
E, CON
SUM
ERPRICEINDEX, BLS
AFARMVALUE, M
ARKETBASKETOFFARMFOODS, AM
S
U. S. DEPARTMENT OF AGRICULTURE
1956
1959
1962
DATAFO
R1959ARE8M
ON
TH
SAVERAGE
IEG. 7503- 59 ( 10)
AGRICULTURAL MARKETING SERVICE
While the overall price trends in agriculture have moderated infla
tion, the changes in food prices play a particularly large role in the
movements of the Consumer Price Index. The periods of drastic in
crease in this index have been periods in which food prices happen to
be rising. During both of the fast runups in the CPI—one associated
with the Korean war in 1950 and early 1951, the other in 1947-48—
food prices in the index increased faster than other commodities and
rose to a higher level than all items. For example, the total index hit
a peak in December 1951 of 113.1; the food index was 115; and the
index of all nonfood commodities was only 110.4. Thus, because a
price rise in agriculture happened to correspond with forces in the
economy causing other prices to rise, the inflationary pressure as
measured by the CPI was greater than it otherwise might have been.
A similar phenomenon occurred during the latest recession. Non
food commodities did not rise in price on the index from December
1957 until September 1958. But the food price index rose because of
temporary supply stringency caused by weather and other factors.
The food price index rose 5.5 index points between September 1957 and
June 1958 when it began to go down again. Thus the much discussed
consumer price rise during the recession was due to food prices and
the ever-rising prices in the service sector. Nonfood commodities did
not resume their rise until the last quarter of 1958, well after the
beginning of the recovery.
A distorted picture of the inflationary process results since the
movements of these food prices wTere determined by forces which, at
times, had little to do with the general inflationary processes. Thus
periods of increases in the Consumer Price Index have not always
200
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
coincided with the periods of most acute inflationary pressure in the
economy. An exaggerated notion of the significance of food prices
in the inflation is conveyed. The fundamental fact is not occasional
running-up of food prices in response to certain changes in crop
yields, but rather the longrun downward trend of prices of farm
products. The rising costs of processing have also served to obscure
the relationship between farm prices and the overall inflation.
V II . POLICIES FOR A M E R IC A N
A G R ICU LTU R E
Policies to deal with overproduction and falling farm incomes
1. The only ultimate solution to the surplus problem is a stop to the
increase in production, or at least a sloiodoion in the rate of growth, to
bring rising farm, outputs more closely into line with the growth in
demand for farm products. Since the fruits of technology will con
tinue to be reaped, this will require a transfer of resources out of agri
culture. Human costs and economic costs will be incurred in this
process.
In some other sectors of the economy, where firms are large and
labor strongly organized, such adjustments have resulted in higher
prices and lower production, leaving the per capita incomes unaffected,
and in some instances rising. The coal industry and the railroads
are examples of this type of adjustment. In other segments of the
nonagriculture economy, such as textiles, where unions are weak and
managements are not the beneficiaries of Government protection and
regulation, the costs have been borne by the industry and the workers,
and there has been widespread suffering. The adjustments required
in agriculture are so enormous, the incomes of many farms already
low, and the market structure of most of agriculture so devoid of
power on the part of the sellers, that continued large-scale Govern
ment programs are essential. The country as a lohole must share the
burden of adjustment.
At the same time, the urgent needs to accomplish other objectives
and the enormous drain on the Federal budget make it important to
have the Federal programs encourage the process of adjustment rather
than just to freeze the resources in agriculture. Thus, we must be
prepared for continued large outlays, but we must organize the pro
grams so that some end is in sight and so that the rate of growth of
the whole economy is enhanced by the transfer of excess resources to
more productive uses in other industries and occupations. Neither
the American farmer nor the rest of the people are well served by the
present impasse.
2. The first prerequisite to successful agricultural policy is a high
level of employment in the rest of the economy. People leave farming
only when other job opportunities are abundant and known. In peri
ods of substantial unemployment, exits from farming slow.
3. Continued retirement of land, from use through the soil bank
program will effectively reduce output. Retirement of entire farms
through the conservation reserve program is a much more effective
device than partial retirement of acreage on farms which continue in
operation. Therefore the conservation reserve program should be
expanded. Expansion of the conservation reserve program with em
phasis on entire farm retirement should help eliminate an unfortunate
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
201
side effect of partial retirement programs: the tendency of farmland
values to become inflated. Operators who have placed all the farm
land in the soil bank will not be anxious to acquire additional land for
crops; but farmers with only part of their lands in fallow typically
seek more land in order to fully utilize their equipment. Thus land
prices are bid up.
4. With an excess of arable land clearly evident, the Federal Gov
ernment should cease to add to this excess through reclamation, except
where other pressing social purposes are served, or where economic
feasibility can be clearly demonstrated.
5. Recent modifications in the price support program have stressed
the abandonment of production controls. While controls have not
succeeded in stabilizing output or in reducing it, they did have some
effect in slowing down the rate of increase. Abandonment of the con
trols in the case of corn has resulted in an enormous crop and an
enormous surplus. Extension of the same principle to wheat, as has
been proposed, would have the same effect. Thus, as long as there are
price supports, there must be production controls and these should
be strengthened through greater use of cross-compliance provisions
(which prevent surplus acreage of one program from being used to
produce crops in other programs).
6. In the long run, however, price support programs will inevitably
lead to continued accumulation of surpluses perhaps at an accelerated
rate. Since the objective of farm policy is not to be fair to individual
crops but to be fair to farm families, the ultimate emphasis of any
program must be on income parity, not price parity. The feasibility
of a program of income payments, based on the net incomes that farm
ers woidd have earned on a recent historical level of production at
recent historical prices, should be explored; this would permit the
prices of commodities to seek their natural level and leave farmers
free to grow as much as they can profitably produce at going market
prices. Limits should be placed on the total amount to be paid to any
individual; a figure such as $2,000, applied to net income, would con
fine the benefits to equitable levels; further limits related to the gross
income of farmers might also be imposed. This proposal would shift
the distribution of Government payments from large commercial
farms toward lower income farms. It would also be likely to cost less
than present programs. But even this proposal would have only small
benefits for low-income farmers who do not produce much of a cash
crop.
7. The emphasis in agricultural research should continue to be
shifted away from increasing output toward increasing the use of farm
products. The longrun programs of physical research, which rep
resent the spearhead of technical agricultural progress for the
entire world, should not be seriously impaired; but their emphasis
might well be shifted toward more research that would benefit the
countries in the world that suffer from famine rather than to aid our
own output which is already too large.
8. The program for disposal of surpluses overseas should be con
tinued on as vigorous a basis as possible, keeping in mind the in
terests of other traditional export countries. These programs should
be put on a longrun program basis and not made 'dependent on
shortrun -fluctuations hi our own stocks. The recent case, in which
48795— 59--------16
202
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
our surplus disposal of dairy products was suddenly terminated be
cause the surplus stock had fallen, leading to dislocations in the
import programs of the countries that had been acquiring these
surpluses, shows that these surplus activities are important to other
countries and that we must keep their stake in the program in mind
to facilitate their economic development.
9.
In executing American foreign trade policy, particularly with
regard to Western Europe, effort should be made to reduce agri
cultural protectionism in potential customer countries. The extent
of foreign agricultural protectionism, at least for one commodity,
wheat, is indicated in chart 8.
C hart 7-8
PRICE OF W H E A T
(AVERAGE
1 9 5 4 /5 5
AND
1 9 5 5
/5
6
)
RECEIVED B Y FARMERS
(Dollars per
100
kgs)
--------- Average World Import Price.
. . . . . . Average World Export Price.
Source: Reproduced from the G ATT publication “Trends in International
Trade,” October 1958, p. 86.
In the words of one witness:
In the case of our agricultural exports, it is clear that the underlying longrun economic possibilities for expansion are extremely large. Just as the
growth of productivity in Western Europe has been most marked in such fields
as metal products, machinery, and vehicles, the broad sector of our economy
which in the past two decades has shown the most spectacular gain in produc
tivity, both absolutely and in relation to productivity trends abroad has been
agriculture.
If actual patterns of trade were permitted to adjust to these
divergent trends in productivity, and to the resulting shift in the structure of
comparative advantage, there can be little doubt that the increasing competi
tion of Western European manufactured exports in world markets would go
hand in hand with rapidly growing demands in Western Europe for imported
agricultural products, and that the United States would be the largest bene
ficiary of this growth of demand.
Comparison of Western European with
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
203
American food-consumption patterns shows their much higher caloric intake
from potatoes and grains, with correspondingly lower consumption of meat
and dairy products. Since growth in real income carries with it an increasing
demand for costlier foods, it is clear that the combination of expanding manu
facturing activity and real incomes abroad and strikingly rapid gains in agri
cultural productivity here create vast underlying, longrun economic possibili
ties for expansion of American agricultural exports to the Common Market
countries (and to other Western European countries).
Unfortunately, however, realization of this underlying possibility is inhibited
by serious obstacles. A sizable expansion of agricultural exports to the Common
Market may reasonably be expected, but one major obstacle to the realization
of the very "large basic potentialities for expansion of agricultural exports— and
the obstacle most pertinent to the committee’s present discussion— is; European
agricultural protectionism. On this score, the agricultural provisions of the
Treaty of Rome are not encouraging. A permanent policy of high protection,
subsidization, and official control is clearly contemplated. In future commercial
negotiations with Common Market countries, a strong effort should be made to
induce them to adopt a long-term program of gradual reduction of import barriers
and domestic agricultural subsidies. It must be admitted that our own past
position and the special exceptions for agricultural products which we have in
cluded in our past trade liberalization proposals, will be a source of some diffi
culty in any such negotiations. Nevertheless, this opportunity should not be
neglected since the underlying possibilities for expansion of our exports to
Common Market countries are much greater for agricultural products than for
m a nufa ctured good s,2
10. Since mobility of people and of resources out of agriculture in to
other industries is the only ultimate long-term solution to the problem,
the Federal Government should take all reasonable measures which
facilitate this process—special aids to education in rural areas to
provide skills usable in other industries, relocation allowances and
strengthening of employment service facilities, and encouragement of
movement of nonfarm enterprises to rural areas to provide job oppor
tunities to those who prefer rural to urban living even when working
in nonfarm occupations.
11. It has been suggested that the ultimate solution to the problem
of overproduction lies in providing agriculture with the same type of
market structure as in some industries, giving the producers, through
market organization, control of supply and giving them the power
to keep goods off the market when they think appropriate. This
other policy of adding to the monopoly and quasi-monopoly elements
in the economy would add significantly to inflationary tendencies as
well as have other undesirable effects on the market structure of the
economy. It would be a serious deterioration of the overall structure
of the American economy.
Policies for the low-income farmers
1. None of the above policies will be sufficient to solve the problem
of the low-income farmers. The regions in which they are concen
trated pose a similar challenge to the United States as underdeveloped
countries overseas. Technical assistance in many forms could be use
fully applied.
The rural development program, lohich is particularly aimed at
farmers that do not produce much for market, should be put on a
substantial scale. This program is conducted by five Federal depart
ments and the Small Business Administration, in cooperation with
land-grant colleges, and aims to expand off-farm jobs, develop effi
cient family-sized farms, and provide special programs of education,
vocational training, and guidance. It is only by these and related
2 Hearings, pt. 5, p. 1034, in statement by Prof. Emile Despres of W illiam s College.
204
EM PLOYMENT, GROWTH, AND PRICE LEVELS
methods that the problem of poverty in agriculture can ultimately
be cured.
We recommend that this program be developed with all possible
speed and energy. Given the general overproduction of agriculture
and the outlook on farm incomes, we recommend that the program
put particular stress on the development of nonagricultural job oppor
tunities and on vocational training for industry. The attraction
of industry within commuting distance of these low-income farm
areas would be the most effective step for ameliorating their poverty.
Technical assistance in developing more effective farms and in
■improving marketing facilities should also be expanded in order to
further reduce rural poverty. Educational programs will also prove
useful.
Similar activities by the Bureau of Indian Affairs designed to cure
the rural poverty of the American Indians, should also be promoted.
The programs to provide capital to low-income families, conducted
by the Farmers’ Home Administration and other agencies, should
also be continued and strengthened, particularly to encourage land
acquisition in those areas where consolidation of farms would permit
the development of viable family enterprises.
CHAPTER 8. FISCAL POLICY1
I. F iscal P olicy and the E mployment A ct’s Objectives
The Employment Act of 1946 added to the practice of Government
a new responsibility and function, that of contributing to achieving
and maintaining a high and steady rate of employment, stability in
the general level of prices, and a high rate of economic growth. The
language of the Employment Act does not explicitly set forth the
second and third of these objectives. In practice, it has been widely
construed to include these objectives. In fact, of course, the Employ
ment Act did not change the existing relationships between Govern
ment and the economy; the actions of Government have always been
consequential in these respects. The Employment Act’s principal
significance is its express recognition of this fact and its statement of
intention that such consideration be made explicitly the objective of
Government action and that such actions be specifically adjusted to
contribute to achieving these broad economic objectives.
The act calls upon the Federal Government to—
* * * use all practicable means consistent with its needs and obligations and
other essential considerations of national policy, * * * to coordinate and utilize
all its plans, functions, and resources for the purpose of creating and maintain
ing, in a manner calculated to foster and promote free competitive enterprise
and the general welfare, conditions under which there will be afforded useful
employment opportunities, including self-employment, for those able, willing, and
seeking to work, and to promote maximum employment, production, and pur
chasing power.
This directive clearly embraces the policies guiding the Federal Gov
ernment’s revenues and expenditures, i.e., Federal fiscal policy.
To the extent that the rate of employment and the level of prices
are sensitive to changes in total demand, the implications of fiscal
policy for achieving and maintaining economic stability are, in gen
eral, quite clear. Fiscal policy should seek to offset fluctuations in
total demand which, on the one hand, would threaten an undesirably
high level of unemployment, and on the other, would result in aggra
vating upward pressures on prices by creating conditions of excess
demand.
Early postwar period experience appeared to emphasize the con
currence of trends in the price level and in the rate of employment.
Increasing unemployment and falling prices were regarded as the
pattern of recession, i.e., inadequate aggregate demand, while rising
prices were associated with a tight labor market, i.e., excess demand.
More recently, however, the divergence of trends in employment con
ditions and in price movements has led to separate identification of
1 Responsibility for the drafting of this chapter rested with Norman B. Ture of the
permanent committee staff. He was assisted by Hamilton Gewehr of the permanent staff
and William Cumberland!, B(renda C. McKeon, and Mona Salyer.
205
206
EMPLOYMENT, GROWTH, AND PRICE LEVELS
stability in the employment sense and in the price level sense as
objectives of public policy.
Downward rigidities and upward
flexibility in wage rates and in many prices pose the problem of
directing fiscal policy toward maintaining a level of total demand
adequate to serve the employment stabilization objective without
inflation, or alternatively, toward restricting total demand adequately
to achieve stability in the price level without at the same time produc
ing serious unemployment.2
A distinction has also been made in recent years between the policy
objective of stable high employment and economic growth. With a
growing labor force, achieving stability in the rate of employment
obviously means an expansion of total production. Moreover, sta
bility in this sense is an important requirement for a high rate of
capital formation in the private sectors of the economy; recession is a
major deterrent to economic growth. The policy question today,
however, is not merely whether growth in total output can be assured
but how high a rate of growth is desirable.
Stabilizing employment at a higher rate than has prevailed 011
the average during the postwar period would in itself represent a
major contribution to economic expansion. Moreover, minimizing
lapses from high employment means not only more production avail
able to meet all the demands of the economy but also, in the aggre
gate, less risk attendant upon private investment. But an additional
element of the problem today is to use the Nation’s productive capacity,
at whatever rate is deemed appropriate, to a greater extent for the
purpose of making possible a still larger volume of output in the
future.
Fiscal policy aimed at a higher rate of growth, therefore, must be
concerned not merely with adjusting total demand to the requirements
of high employment and a stable price level, but also explicitly with
channeling a larger proportion of total demand into growth-generat
ing activities. In the last analysis, this requires devoting a larger pro
portion of total available resources to private capital accumulation,
public investment, research, education, and similar intangible activities
aimed at increasing productivity. Whether principal emphasis should
be given to increasing tangible assets or an increase in technical skills
and knowledge, whether the most productive growth-generating activi
ties are plant and equipment outlays or more basic research, whether
private capital additions should result in a more intensive or a more
diversified capital structure, and whether a relatively large or small
proportion of the increased efforts to expand productive capacity and
productivity should be in the private or public sectors are assuredly
important policy problems. Whatever the answer to these questions,
however, the aggregate result is likely to be a relative increase in
components of gross national product other than private consump
tion and a consequent increase in saving, both private and public,
relative to the total national income. Fiscal policy, if it is to con
2 This dilemma is quite frequently attributed to “wage push,” which can be prevented
only if unemployment is sufficiently severe to undermine union power in seeking higher
wage rates. This is not what is meant here. Instead, we are referring to the fact that
with downward rigidities in prices and wages, the process of relative price movements by
which dynamic adjustments occur takes the form of some prices rising while other prices
remain stable, rise less, or fall little. The question we pose is whether there is some
socially tolerable level of unemployment at which these downward rigidities become weak
so that relative price changes can take the form of offsetting increases and decreases.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
207
tribute to a higher rate of growth, must be concerned with the com
position as well as the total volume of economic activity.
Other broad social, political, and economic objectives are also the
concern of fiscal policy. The impact of Government fiscal activities
on the distribution of income, both by income level and by type of in
come share, has long been a major issue of public policy. So indeed
has been the influence of fiscal policy on competitive conditions and
the opportunities for new enterprise. The fact that this chapter of
the report does not focus specifically on these concerns does not imply
their deprecation as fiscal policy objectives.
A. DIMENSIONS OF FISCAL POLICY
The Federal fiscal structure is an elaborate system of specific ex
penditures and revenue devices. The immediate objectives of most
expenditure programs are the satisfaction of social wants, not neces
sarily the Employment Act objectives. By the same token, the speci
fic elements of the Federal revenue system were not originally nor are
they now determined primarily on the basis of these objectives. The
basic function of fiscal policy is to arrange these myriad elements of
the fiscal system in such a way that while serving their individual
purposes they will as well serve the broader objectives of the Employ
ment Act. Fiscal policy, therefore, has a dual aspect.
1. Short-run economic stabilization
The Employment Act objectives of fiscal policy, in turn, have a
twofold focus. The language of the act appears to emphasize the
orientation of public policy toward maintaining economic stability,
in the sense both of a high rate of employment and stability in the
general price level. Considering the background of this legislation
and the widely prevalent fears of postwar depression at the time it
was conceived, this emphasis on the short-run problem of stability is
easily understood.3 And although postwar experience appears to have
demonstrated substantial inherent resistance in the U.S. economy
against prolonged and deep underemployment and deflation, it has
not shown the same resistance to more moderate economic reversals,
still less to inflation. The short-run stabilization focus of the Employ
ment Act and of fiscal policy, therefore, is certainly warranted, even
if the magnitude of the problem appears to be different from that
originally conceived.
In the context of fiscal policy, the economic stability problem is a
twofold one. In the first place, there is the problem of minimizing
the undesirable shocks which changes in Government activity may
impose on the economy as a whole or on some important section
thereof. A national defense emergency is certainly the most dramatic
example of this problem. The attendant increases in Government
demands upon the resources of the economy can hardly be constrained
by considerations of economic stabilization. Any change in the com
position or volume of Government demand, moreover, mav involve
the same sort of economic shocks. Since the immediate objective of
most Government programs is not economic stability but to achieve
3 Cf. Grover W. Ensley, “The Employment Act of 1946 : The Dynamics of Public Eco
nomic Policy,” The Relationship of Prices to Economic Stability and Growth, compen
diumof papers submitted by panelists, Joint Economic Committee, Mar. 31, 1958, pp. 1-12.
208
EMPLOYMENT, GROWTH, AND PRICE LEVELS
some more specific goal, and since, in a dynamic society, these other
objectives are hardly likely to remain constant for very long, Govern
ment is likely to be a source of economic instability, of changing pres
sures on resources, the rate of their employment, their prices, and the
prices of the goods and services they produce.
The corollary of the destabilizing impact of changing Govern
ment demands is the capacity of fiscal policy to offset economic in
stability. Changes in taxes, or in expenditures, or in both may be
used to compensate for changes in private demands or in demands by
Government which would otherwise give rise to recessionary or in
flationary trends.
2. Secular focus on economic groivth
While the background of the Employment Act explains its empha
sis on economic stabilization, emphasis in public policy has turned
increasingly to economic growth over the long run. The objective
of achieving and maintaining a high rate of growth has assumed
a status of equal importance with the stabilization goals explicitly
stated in the act. (See ch. 1 of this report for discussion of the im
portance of economic growth.) This emphasis introduced additional
problems for fiscal policy, since it focuses concern on the impact of
fiscal developments on the composition as well as on the aggregate level
of economic activity. It therefore raises thorny issues about the char
acter of Government activity and the distribution of fiscal burdens,
traditionally the most politically sensitive aspects of public finance.
In summary, fiscal policy cannot seek to pursue a “neutral” course
with respect to the Employment Act's objectives. The expenditure
and revenue-raising activities of Government will affect the level and
the composition of economic activity, will impinge on the conditions
determining the rate of employment, the level of prices, and the rate
of economic expansion whether or not expressly and deliberately
formulated with these objectives in mind. In a free, representative,
self-governing society, the obligation of Government to serve the
people is matched by the obligation of the people to make sure that
Government serves them well. This obligation cannot be discharged
if fiscal policy is divorced from the Employment Act.
B. CONSTRAINTS AGAINST THE USE OF FISCAL POLICY TO ACHIEVE THE
EMPLOYMENT ACT’S OBJECTIVES
The practice of fiscal policy aimed at maintaining a high rate of
employment, stability in the general level of prices, and a high rate of
economic growth is not easy. Indeed, the constraints on the vigorous,
prompt use of fiscal policy for these purposes are numerous and
varied.
In the first place, the fact that the fiscal structure consists of numer
ous and diverse expenditure and tax elements imposes limitations on
the use of fiscal policy to achieve broad economic objectives. Those
responsible for formulating fiscal policy may be in substantial agree
ment with respect to broad objectives. This global decision must
then come to grips with the problem of determining the specific
changes in expenditures or taxes necessary to achieve the objective.
These decisions may well be made on the basis of considerations which
are remotely, if at all, related to the global economic policy objectives.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
209
Ineffectual or undesirable changes, or more likely, fiscal inertia, may
often result from the interaction of political considerations.
There are other serious obstacles to the use of fiscal policy for the
achievement of broad economic policy goals. The most significant is
the fact that, except in times of national emergency, there is little
likelihood of a consensus, among those responsible for formulating
public policies, with respect to the relative priorities of policy objec
tives. Changes in these priorities will involve changes in fiscal
impact. The quick association of change in fiscal burden, in other
words, with change in policy objectives in itself acts as a deterrent
to easy agreement about what fiscal policy should seek to do.
Arraying the priority of policy objectives also involves the difficulty
of clear delineation of objectives. How much and what kind of eco
nomic growth is sought ? What is “reasonable” stability in the price
level and what measure of “the price level” should be used % A t what
rate is employment “full” ? The determination of policy priorities
involves trading off gains with respect to the various objectives.
The representative political process does not lend itself to making
such marginal determinations quickly and smoothly. In a dynamic
setting, they will often be reached only after the conditions which
impelled the determination in the first place have changed. Fiscal
policy, therefore, is likely to be sluggish, and often, at least from
the vantage point of hindsight, out of tune with the times.
An offsetting factor is the fortunate fact of automatic responsive
ness or “built-in” flexibility of both revenue and expenditure struc
tures. The tendency of Federal expenditures, particularly transfer
payments to persons, to rise and for receipts to fall during periods of
recession, and for the reverse to occur during periods of economic
expansion, without explicit, discretionary action reduces— but does
not eliminate— the inherent sluggishness of fiscal policy with respect
to the stabilization objective.
A further difficulty is that the stabilization problem may not be
one of aggregate excess or deficient demand, so that fiscal measures
of general impact may not be effective. Fiscal policy aimed at
achieving the broad economic policy objectives of employment and
price level stability and a high rate of growth is conventionally dis
cussed in aggregative terms, despite the fact that it consists of a
large number of specific fiscal components. Analytically, this con
ception involves no serious difficulty so long as the actual economic
developments with which the policy is to cope are, similarly, broad,
aggregate movements. But the important economic developments to
which public policy may have to be addressed may be sectoral changes
involving no excess demand but which lead to a rise in the price level
because of downward rigidities in prices and wages. The customary
prescription for an increase in the budget surplus under these circum
stances is likely to take the form of efforts to achieve price level
stability by way of depressing the level of total demand below that at
which full employment can be maintained.
An additional difficulty is that arising from lack of knowledge and
agreement about policy mechanics. Even assuming concensus about
policy objectives and willingness to use any policy means to achieve
them, the problem remains of determining which means are in fact
optimum. The assumption is that different combinations of policy
210
EMPLOYMENT, GROWTH, AND PRICE LEVELS
techniques and fiscal devices will have significantly different effects
on the economy. The “mix” of policy techniques, therefore, should
be adjusted in the light of the mix of policy objectives. This pre
supposes, however, a substantial amount of knowledge about the
specific effects of alternative mixes of policy devices. But this is the
very substantive area in which so much of the debate about public
economic policy has centered, particularly in the years since 1954.
It is, indeed, one of the major issues which has occasioned this inquiry
by the Joint Economic Committee. Without substantial agreement
among policymakers with respect to at least proximate conclusions
on this question, fiscal action is likely to coincide with “good” policy,
given policy objectives, only haphazardly.
Acknowledging these limitations on the use of fiscal policy to achieve
broad economic objectives certainly does not imply that they should be
complacently accepted. On the contrary, concern with the institu
tional constraints on a purposive fiscal policy is directed at pointing up
the importance of finding the means to eliminate or mitigate them.
Economic theory posits, and the historical record confirms, that fiscal
actions may have a powerful impact on the level and character of
economic activity. That such effects may occur, willy-nilly, without
efforts on the part of a self-governing society to control them can
imply only indifference on the part of that society to its economic
fate. Such indifference is belied by this study undertaken by the
Joint Economic Committee and the numerous similar inquiries in
the past.
C. THE MECHANICS OF FISCAL POLICY
Fiscal policy aims at achieving the stabilization and growth objec
tives set forth above primarily through its influence on the level and
composition of total money demand for goods and services. In the
aggregate, this influence is the difference between Government expendi
tures (or in a number of very important instances, orders) which add
to the volume of current demand, and taxes which reduce non-Government expenditures by reducing the disposable income of taxpayers.
The extent of the increase or decrease in total non-Government
expenditures resulting from these Government expenditures and taxes
depends on the spending patterns of affected taxpayers and of the
recipients of the payments by the Government. The composition
of total demand is affected by fiscal actions both by virtue of the
specific Government expenditures and by the differential impact of
the various revenue sources.
1. Basic budget-income relationships
In a simple aggregative analysis, fiscal policy will increase the level
of total economic activity if the Government’s contribution to total
demand through its expenditures is not fully offset by the contraction
of private demand resulting from the taxes imposed by the Govern
ment. I f all resources are substantially fully employed, this expan
sion of total demand will be reflected in an increase in prices. I f
there is idle capacity and unemployment, expansionary fiscal policy
will result in increases in output or in prices, depending on the initial
impact of the increase in demand in terms of the rate of capacity
utilization and the fullness of employment in the immediately affected
lines of activity and the mobility of resources.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
211
In general, if the fiscal impact is to be neither expansionary nor
contractionary, an increase in the budget surplus (or decrease in
deficit) is called for when Government purchases of goods and serv
ices are increasing and the reverse is required when purchases are
declining, i.e., the change in receipts should exceed the change in pur
chases. This is because Government purchases add dollar for dollar
directly to total demand but an equal amount of taxes will not reduce
taxpayers' expenditures dollar for dollar unless changes in their in
come are entirely reflected in changes in their expenditures. Accord
ingly, equal increases in Government purchases and taxes will increase
total demand; equal decreases will contract total demand.4
Without reference to explicit non-Government spending functions,
however, it is impossible to determine whether any given surplus or
deficit budget is expansionary or contractionary in any absolute sense.
Changes in non-Government spending functions, by the same token,
may alter the expansionary or contractionary impact of any given
amount of budget surplus or deficit. One cannot safely generalize
that budget surpluses are contractionary and deficits are expansion
ary, although one can say that compared to no budgetary change,
an increase in surplus or reduction in deficit is contractionary while
a reduction in surplus or increase in deficit is expansionary.
'2. Differences in effects on income of different types of expenditures
and revenue sources
Differences in the composition of fiscal changes have different im
plications for the impact of overall fiscal policy on the level of total
economic activity. Government expenditures for the purchase of
goods and services have a larger impact on total demand than do
transfer payments, which are not made for current production.
(Transfer payments are frequently treated as negative taxes, imply
ing that their impact on total demand will be of the same magnitude,
but opposite sign as an equal amount of income taxes.) Moreover,
the immediate demand and price effects of various types of Govern
ment purchases may very well differ, depending on the immediate
availability and the degree of specialization of the productive serv
ices and capacity required to produce the goods and services, the
volume of inventories of raw materials and final products involved,
and similar conditions.
Similarly, the immediate demand effects of equal changes in vari
ous taxes may differ. Musgrave has calculated, for example, that
consumption expenditures w^ould change by $700 million in response
to a $1 billion change in individual income taxes effected by a flat
percentage cut in all bracket rates, $825 million in response to a
$1 billion change in excises (assuming consumers adjust their outlays
in response to real rather than current money income changes), and
$500 million in response to a $1 billion change in the corporation
.income tax.5
4For a tabular outline of these budget-income relationships, cf. Walter D. Fackler,
“Government Spending and Economic Stability,” in Federal Expenditure Policy for Eco
nomic Growth and Stability, papers submitted by panelists appearing before the Subcom
mittee on Fiscal Policy, Joint Economic Committee, 85th Cong., 1st sess., joint committee
print, p. 322. For an excellent discussion of the balanced budget theorem, cf. William A.
Salant, “Taxes, Income Determination, and the Balanced Budget Theorem,” the Review
of Economics and Statistics, vol. XXXIX, No. 2, May 1957, pp. 152-161.
5Richard A. Musgrave, “The Incidence of the Tax Structure and Its Effects on Consump
tion,” in Federal Tax Policy for Economic Growth and Stability, papers submitted by
panelists appearing before the Subcommittee on Tax Policy, Joint Committee on the
Economic Report, joint committee print, 84th Cong., 1st sess., pp. 104-105.
212
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Equal changes in surplus or deficit, therefore, may have different
consequences for the level and composition of total demand, depend
ing on the specific fiscal ingredients of these surpluses or deficits and
non-Government spending functions.
S. Built-in fiscal stabilizers
The change in income related to the change in surplus or deficit
described above assumes a once and for all change in either expendi
tures or receipts (or both). The fiscal structure, however, contains
features which result automatically in changes in receipts and in ex
penditures in response to changes in income. For example, a reduc
tion in income reflected in a fall in employment will lead, under pres
ent statutory arrangements, to an increase in transfer payments in the
form of unemployment compensation. The same reduction in income
will result in a decline in various tax receipts at any given level of tax
rates, the extent of the decline depending on the income elasticity of
the various taxes. By the same token, an increase in income will
result automatically in a decline in transfer payments and a rise in
tax receipts.
Discretionary fiscal actions to expand or contract the level of total
demand, therefore, will result in automatic changes in some fiscal com
ponents in an opposite direction. The net change in surplus or deficit,
therefore, will be less than that of the discretionary fiscal action it
self.
The greater the degree of “built-in flexibility" in the fiscal structure,
the less, other things being equal, need be the discretionary fiscal ac
tion taken to moderate any destabilizing development. In view of the
“stickiness” of discretionary fiscal action, increasing the automatic
responsiveness of the fiscal structure to changes in income is, in it
self, widely regarded as an important objective of fiscal policy.
These automatic fiscal responses, however, cannot fully replace dis
cretionary action for stabilization purposes, except insofar as the ef
fects of automatic changes on income result in changes in private
spending patterns.
An offsetting consideration is the fact that taxes respond not merely
to changes in real activity but to changes in the price level as well.
To the extent that price level fluctuations and changes in the rate
of employment are in the same direction, automatic fiscal responses
will tend to moderate instability in both. But when increases in
the price level coincide with steady or declining employment rates,
built-in flexibility may result in undue restraint on the level of total
demand from the point of view of maintaining a high rate of
employment.
4. Repercussions of fiscal developments on monetary conditions
Fiscal policy developments also affect the level and composition of
total economic activity through their impact on monetary conditions.
An increase in the deficit (or reduction in surplus) generally means
that the Government will add directly to the total demand for loan
able funds, while the opposite fiscal change generally reduces total
demand for loanable funds. In addition, monetary conditions will
also be affected by the expansionary or contractionary influence of
fiscal policy 011 aggregate demand. With a given supply of money
and credit, an expansionary fiscal policy “tightens” monetary condi-
EMPLOYMENT, GROWTH, AND PRICE LEVELS
213
tioiis and a restrictive fiscal policy eases them. The actual change in
monetary conditions, of course, depends on actions affecting the sup
ply as well as the demand for loanable funds. Fiscal policy influences
on monetary conditions, therefore, may at times be offset or rein
forced by monetary policy changes.
Differences in specific fiscal ingredients of the surplus or deficit, as
indicated, may have differential consequences for both the level and
composition of total demand which in turn may also affect the com
position and level of demand for loanable funds. These changes in
monetary conditions will affect the level and composition of total
demand. Indirect or “feedback” effects on Government revenues and
expenditures, therefore, results not merely as the direct product of
automatic stabilizers times initial demand response to discretionary
fiscal actions, but also from the secondary consequences stemming
from changes in monetary conditions.*
S. The impact of Government orders on economic activity
In a number of important instances, changes in Government orders—
or obligations— more accurately measure the impact of Government
demand on the economy than changes in expenditures. The principal
reason for this is that budget expenditures are recorded as such at
the time disbursements are made, but a disbursement is sometimes
made considerably after the time that a Government order for goods
and services has been placed. It is the order which in fact gives rise
to the production activity in the private sector of the economy, while
the expenditure may reflect the conclusion of this Government-gen
erated activity.
Hard-goods procurement actions of the Department of Defense
frequently demonstrate this timelag between the initial impact of
Government activity and expenditures. Assume, for example, an 18month production leadtime for a given category of military hard
goods. Activity in the private sector of the economy will be generated
by placing an order in this category. The private contractor under
taking to fill the order will, at the time the order is placed (or perhaps
even before, if intent to place the order has been expressed to him),
begin to acquire the resources required for its completion. It is,
therefore, at the order stage that the procurement action will have its
initial and often major impact 011 the markets for labor, raw materials,
and financial resources, in this instance, as much as 18 months before
the procurement transaction is recorded in budget terms. Indeed, the
budget expenditure may coincide in time with a reduction in Governm v!it impact on total uemand.4
The impact of Government orders on economic activity cannot be
directly traced in changes in gross national product. Until the actual
disbursement of funds, no change will be shown in Government pur
6For a careful and detailed discussion of the interaction of fiscal changes, monetary
conditions, and private demand, see Richard A. Musgrave, “The Theory of Public Finance,"
McGraw-Hill Book Co., Inc., (New York, 1959), ch. 22. See also Warren L. Smith.
“Monetary-Fiscal Policy and Economic Growth,” Quarterly Journal of Economics, vol.
LXXI, February 1957, pp. 36-55.
7Differences in leadtime are not necessarily directly correlated with lag between order
and expenditure. Procurement contracts quite generally provide for progress payments by
the Government at periodic stages in the production process prior to delivery of the
completed product. In some instances, progress payments eliminate all but a very small
portion of the lag between order and expenditure, while in others the reduction in the lag
is slight. In view of these differences, a change in the composition of the Government’s
“shopping list” may involve substantial changes in the order-expenditure lag.
214
EMPLOYMENT, GROWTH, AND PRICE LEVELS
chases. Gross private domestic investment, however, will expand,,
other things being equal, by virtue of the increase in aggregate inven
tories, reflecting the addition to stocks at various stages in the produc
tion process of filling the Government order. As deliveries are made
with the completion of the order, the national income account measure
of gross private domestic investment will be reduced, other things
being equal, while the Government purchases account will rise. At
this point there is no further direct expansionary effect attributable
to the Government purchase. The Government disbursement, how
ever, does result in a transfer of liquidity from the Government to
the private sector, which may be of consequence for the level of
private activity.
Apart from these direct effects on the private sector, the Govern
ment order may result in a substantial induced income effect, The
increase in gross private domestic investment, for example, may sig
nificantly exceed the inventory change, both because of new capital
outlays required to fill the order and because of expansionary effects
on investment in other lines of activity. If the Government order
represents an initial phase of a new procurement program, anticipa
tions in a wide area of business activity, as well as in that immediately
involved, may be favorably influenced. By the same token, cancella
tion of any specific order may have adverse effects on anticipations of
a magnitude substantially in excess of those directly attributable to
the immediately affected line of business. Similarly, completion of
an order may signal the “phasing out” of a procurement program,
with the same sort of widespread impact on anticipations. Interrup
tions of a procurement program by holding back of orders previously
expected, by delaying deliveries of completed orders, or by stretch
ing out progress payments may also have adverse effects on anticipa
tions and on investment in general.
The difference in timing between order and expenditure has its
counterpart in revenue changes and, quite possibly, in other Govern
ment expenditures. The expansionary impact of the Government
order will expand tax revenues and reduce the level of transfer pay
ments, other things being equal. (Depending on monetary policy
actions, there may also be an overall reduction in liquidity, reflected in
higher interest payments by the Government.) An increase in budget
surplus (or reduction in deficit), therefore, may emerge soon after the
order is placed and before Government disbursements are made.
Other things being equal, this rise in receipts will taper off as the order
moves toward completion, so that a reduction in surplus or increase in
deficit may develop when the Government disbursement is actually
made (to the extent that the order results in expansion of investment
and income lasting beyond the actual direct production on the order,
the rise in revenues may continue beyond the increase in Government
outlays, moderating this budget change). From the point of view of
stabilization Dolicy, of course, this succession of budget shifts toward
surpluses and deficits is likely to be more appropriate than a closer
coincidence in time of the increase in revenues with the increase in
Government outlays.
In general, if the composition of Government demand does not ma
terially change, period-to-period changes in expenditures provide an
adequate approximation of the impact of Government demands on tin*
EMPLOYMENT, GROWTH, AND PRICE LEVELS
215
economy. For appraisal of multiperiod trends in which the composi
tion of Government expenditures is relatively stable, the differences in
time between orders and expenditures may be of little consequence.
In other circumstances— for example, analysis of short periods of
time in which significant changes in the composition of Federal out
lays occur— reference to expenditure data rather than the flow of
Government orders may be quite misleading.8
II. T h e R e c o r d o f P o s t w a r F i s c a l P o l i c y
The record of postwar Federal fiscal policy offers highly instruc
tive insights concerning the impact of Federal fiscal developments
on the stability and growth of the American economy. In a dynamic
environment, history may be a poor instructor. Nevertheless, the
postwar record affords a wide variety of examples of the types of
problems with which fiscal policy has been, and is likely to continue
to be, faced. Detailed examination and appraisal of this experience
is helpful in suggesting the ways in which Federal fiscal policy may
make a greater contribution to economic growth and stability.
This review7 of postwar policy begins with an examination of the
economic stabilization record and then turns to longer-run trends in
the Federal fiscal structure with respect to their relative restrictive
or expansionary impact on the growth of total demand and produc
tive capacity.
A. THE STABILIZATION RECORD
In reviewing the impact of postwar fiscal policy on economic sta
bility, the following major conclusions emerge:
(1)
Changes in the volume and character of Federal Government
demands, particularly for defense purposes, have been an important
source of economic instability. The postwar period has seen several
rising and falling waves of defense procurement activity, in connec
tion with the Marshall Plan, the Korean war, the post-Korean defense
program, and most recently the post-sputnik defense program. Be
cause of the relatively high rate of change in military technology,
these changes in defense programs are likely to involve requirements
for new specialized production facilities. They therefore have had
a sizable impact on business spending for new plant and equipment
in addition to their more immediate impact on the volume of activity
in the durable goods industries in general. Each of the several sharp
cutbacks in defense orders during the postwar period has been asso
ciated with a decline in durable goods activity, in plant and equipment
outlays, in inventories, and in economic activity throughout the
economy. Each of the rising waves of defense demands, similarly,
has coincided with rising activity in durables, expanding plant and
equipment outlays, inventory accumulation, and strong expansionary
trends throughout the economy. The available data do not support
a firm assertion that changes in defense demands were the sole source
8 For a detailed discussion of these questions, see Murray L. Weidenbaum, “Government
Spending: Process and Measurement,” n studv released by Boeing Airnlane Co., based
on Mr. Weidenbaum’s doctoral dissertation. See also Weidenbaum, “The Federal Gov
ernment 'Spending- Process’’ in Federal Expenditure Policy for Economic Growth and
Stability, papers submitted by panelists appearing before the Subcommittee on Fiscal
Po7icv. Joint Economic Committee, 1957, Joint Committee print, 85th Cong., 1st sess.. pp.
493-506.
216
EMPLOYMENT, GROWTH, AND PRICE LEVELS
of these fluctuations in durables and plant and equipment, but the
coincidence of movement is so close as to support the conclusion that
defense programs exert an extremely significant, influence, both di
rectly and indirectly, in this regard.
With the single exception of the Korean war, however, changes in
defense demands have not been accompanied on a timely basis by dis
cretionary fiscal action to compensate for their disturbing impact.
Such compensatory action as has been taken has been delayed until
inflationary or recessionary pressures have had an opportunity to
make themselves widely felt.
It may well be that failure to moderate the destabilizing effects of
changing defense activities is a result of inadequate emphasis in policy
formulation, in both the administration and the Congress, on Defense
Department obligations and too much emphasis on near-term changes
in expenditures. Because of the lag between defense orders for hard
goods and budget disbursements, undertaking compensatory adjust
ments for changes in expenditures rather than orders defers such
action until the destabilizing influence has taken effect.
(2) Except during the Korean war period, Federal postwar fiscal
policy has relied almost exclusively on discretionary changes in ex
penditures and on built-in stabilizers for purposes of achieving eco
nomic stability. Discretionary tax changes have not been employed
even in the face of strong recessionary and inflationary developments
throughout the economy. Reductions in tax rates in 1948 and in 1954
certainly contributed to moderating the recessions of 1949 and 1953-54,
respectively. In the former case, however, the reductions were en
acted despite the general assumption that inflationary, rather than
recessionary, influences dominated the economy. In the latter case,
the reductions were automatic, pursuant to the Revenue Act of 1951;
their effective date was 6 months after the recession had begun.
Earlier enactment had been proposed by the Committee on Ways and
Means in the House, but was opposed by the administration on budget
ary grounds.
(3) While the automatic stabilizers served to moderate both eco
nomic declines and booms once underway, they have not been
adequate to prevent major fluctuations in rates of employment and
output. Within the Federal revenue system, the corporation income
tax has been highly responsive to broad cyclical movements in the
economy. This sensitivity has had little apparent significance wTith
respect to capital outlays. Individual income tax liabilities, on the
other hand, have responded, in general, to a considerably lesser degree
to abrupt changes in economic conditions. In particular, they have
been relatively insensitive, particularly in the post-Korean period, to
sharp drops in employment. During the 1957-58 recession, for ex
ample, changes in the volume of transfer payments made more than
twice as great a contribution to stabilizing disposable personal income
as did changes in personal tax payments. The principal stabilizing
influence, however, appeared to be ou side the immediate framework
of the fiscal system altogether.
(4) The effectiveness of stabilizing fiscal action, either discretion
ary or automatic, is significantly affected by monetary conditions.
Under conditions of extremely high liquidity in the private sectors
of the economy, even very large budget surpluses may prove made-
EMPLOYMENT, GROWTH, AND PRICE LEVELS
217
quate to restrain inflationary expansion of total demand. This
appears to have been the situation in 1946 and 1947. In the postKorean period of increasing illiquidity, on the other hand, the respon
siveness of the economy as a whole to quite modest changes in fiscal
conditions appears to be relatively substantial.
(5)
So-called “ traditional” fiscal policy, relying on broad changes
in the relative levels of receipts and expenditures, is poorly suited to
deal with inflationary pressures originating in strong shifts in demand
among sectors of the economy rather than in excessive total demand.
More important than the magnitude of the change in budget surplus
under conditions of dynamic demand changes is the source of the
surplus. Presumably, if the objective sought is to curb inflationary
price pressures at their source, selective tax increases and/or expendi
ture cuts should be aimed specifically at the sectors in which demand
increases are likely to give rise to upward price movements. To do
so, however, would limit the process of dynamic adjustment through
relative price changes.
On the whole, the record of Federal fiscal policy aimed at economic
stabilization throughout the postwar period is not very heartening.
The following detailed review, it is hoped, will illustrate the con
clusions listed above and substantiate the recommendations offered in
the concluding section of this chapter.
1. Postwar reconversion and expansion: 1946-4-8
The postwar period began with widespread fears of serious unem
ployment and economic distress. These adverse anticipations were
based in large part on the assumption that without the stimulus of
war demands, total spending would fall to a level far below that re
quired, at then current levels of prices and wages, to provide employ
ment opportunities for a greatly enlarged labor force. These antici
pations, however, underestimated the strength of the backlog of
private demands deferred by the war and the impact of the very large
accumulations of liquid savings in making these demands effective.
Despite these misgivings about economic conditions in the postwar
era, the actual fiscal policy proposals of the administration during the
first Sy2 postwar years were oriented to expectations of inflationary
strains.
(a) Reconversion: 19Jfi
In the immediate postwar era, fiscal policy was based on the assump
tion that even with a rapid windup of defense expenditures and orders,
the level of Federal Government demand could not be expected to fall
back to that of the prewar era. In addition, the administration took
explicit note of the low level of business outlays for plant and equip
ment and of consumer outlays for durable goods over a prolonged
period of time. In view of the high degree of liquidity in both the
business and consumer sectors, demands in both these areas were ex
pected to be very high, if the private sector of the economy could be
provided assurance that both employment and product markets would
be strong. At the same time, the administration recognized that the
period of reconversion from war to civilian production would coincide
with demobilization of the Armed Forces and therefore with a greatly
expanded labor force. Until civilian production lines were restored
48795—59---- 17
218
EMPLOYMENT, GROWTH, AND PRICE LEVELS
and put into full production, a serious unemployment problem might
prevail. The immediate policy objective, therefore, was to facilitate
reconversion to the greatest extent possible.9
Short-term, transition-period stresses, both on the price level and on
employment conditions, associated with reallocation of productive
services, were the major problems with which fiscal policy was con
cerned in the first postwar year. It was specifically proposed that
relaxation of economic controls be undertaken slowly and with due
regard for the possibilities of spending sprees, both in the consumer
and business sectors, financed by the high liquidity of the private
sector. Both inflationary strains and unemployment resulting from
this reallocation seemed to have been of greater concern than the
adequacy of expected total demand.
The net result of these anticipations was a system of proposals
calling for limited tax reductions aimed primarily at encouraging
business reconversion and investment in civilian production facilities,
but also providing some support for consumption outlays. Despite
the proposed reductions in taxes, anticipated reductions in Govern
ment outlays were expected to result in a substantial reduction in the
budget deficit, although by no means eliminating it entirely.10
The Revenue Act of 1945, enacted November 8, 1945, provided tax
reductions aggregating $5.9 billion, for the calendar year 1946, as
estimated at that time. The excess profits tax was repealed for tax
years beginning after December 31, 1945. In addition corporate sur
tax rates were reduced and the capital stock and declared value excess
profits taxes were repealed. The estimated net revenue loss from these
corporate tax changes was $3.1 billion. The act also provided in
dividual income tax reductions, estimated to total $2.6 billion for
calendar 1946, and a m odest $0.1 billion reduction in excises, limited
to repeal of the use tax on m otor vehicles and boats.
Given the assumptions upon which the Treasury proposals were
based, the tax reductions afforded by the Revenue Act of 1945 appear
to have been appropriate in terms of the employment and price-level
stabilization objectives enunciated in the fiscal messages of 1945.
These assumptions, while nowhere so bearish as others widely used in
evaluating immediate postwar economic prospects, were nevertheless
too pessimistic, even though their major ingredients may have been
correct.
Unemployment did, indeed, rise sharply following the termination
of hostilities but only to a level which by postwar, peacetime standards
seems quite low. Moreover, this movement was quickly reversed; by
the middle of calendar 1946, the unemployment rate had fallen below
that realized at any time subsequently, except during the Korean war
(table 8-1, p. 275).
Gross national product in current prices fell from the second quarter
1945 peak of $223.7 billion to $197.1 billion in the fourth quarter.
9Budget Message of the President, in the Budget for the Fiscal Year 1946. Jan. 3, 1945.
pp. V—
XXVII.
10See the statement of Secretary Vinson before the House Ways and Means Committee,
Oct. 1, 1945, in Annual Report of the Secretary of the Treasury for the fiscal year 1946.
pp. 426 ff.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
219
Thereafter it rose steadily through 1946 and by the fourth quarter had
reached $22.2 billion (table 8-2, p. 276).
The price level rose along with this increase in employment and
production. Without belaboring the point, it seems clear that these
price increases were associated primarily with the very great changes
in the mix of productive activity, rather than with the aggregate level
of demand. While a slight drop in gross national product in current
prices occurred in 1946 compared with 1945, the decline in constant
prices was precipitous (table 8-3, p. 280). But every major sector of
gross national product increased substantially both in current and
constant prices, except for the Federal Government, whose purchases
of national defense goods and services declined by substantially more
than the aggregate increase elsewhere in the economy. Moreover,
these increases occurred in the face of a sharp contraction in Federal
Government defense orders which declined sharply in the fourth
quarter of 1946 compared with the estimated amounts in the three
preceding quarters.
The fiscal result of these developments, as measured on a national
income and product account basis,11 was a sharp drop in Federal
receipts of over $10 billion from the second quarter of 1945 to the
first quarter of 1946. Despite the reductions in tax rates, receipts
rose subsequently at a rapid rate and by the last quarter of 1946 were
about $3 billion higher than a year earlier. At the same time, Federal
expenditures were contracting drastically; purchases of goods and
services fell by nearly 50 percent from the first to the fourth quarter of
1945. The net result was a drastic shift from a deficit of more than
$20 billion in the last quarter of 1945 to a surplus of $10.1 billion a
year later. Most of this shift was realized from reduction in outlays,
but the increase in receipts during 1946 also contributed significantly—■
$7.8 billion (table 8-5, p. 286).
In appraising these immediate postwar fiscal and economic develop
ments, the principal question is whether any materially different policy
should have been adopted even had there been an accurate appraisal of
economic prospects.
It may be argued that in view of the increase in prices which in
fact occurred and assuming the desired reductions in Federal expendi
ture could not have been made at a materially more rapid rate, tax
rates should have been maintained at least at their wartime level, if
indeed, they should not have been raised. This appraisal, however,
implicitly places a substantially higher priority for the transition
period on curbing inflation than on speeding the reallocation of re
sources to civilian production with a minimum increase in un
employment.
If, in fact, the level of private demand was significantly influenced
by the high degree of liquidity, the tax reductions affected by the
Revenue Act of 1945 may very well have been redundant in terms of
11 Most of the quantitative discussion of fiscal actions in this paper is presented in the
national income andi product account terms. These differ in certain major respects from
both the conventional budget accounts and the accounts showing- Federal Government cash
receipts from and payments to the public. National income account receipts, for example,
include receipts of trust funds, which are excluded from the conventional but not from, the
cash accounts. They show receipts on a liability rather than a collection basis ; the col
lection basis is used in both the conventional budget and tli cash accounts. Similar
adjustments are involved for expenditures. For a detailed discussion of these differences
in concepts and measurement. se#> U.S. Department of Commerce, Office of Business Eco
nomics, U.S. Income and Output, pp. 56-57 and 178-179.
220
EMPLOYMENT, GROWTH, AND PRICE LEVELS
their short-run impact. On the other hand, in view of the very great
sectoral demand shift and the high degree of private-sector liquidity,
it is at least questionable whether a substantially greater degree of
fiscal restraint, except by effecting a decline in total private diposable
income of so great a magnitude as to have involved intolerably high
levels of unemployment, would have moderated the sharp increase in
the price le vel to any significant extent.
The reservation with respect to the general approval of imme
diate postwar fiscal policy implied in this tentative conclusion is that
had the tax reductions of the Revenue Act of 1945 not been pro
vided, aggregate demand might very well not have been appreciably
lower, but greater inroads would have been made into the accumu
lated liquid financial reserves of the private sector. This reduction in
liquidity would, presumably, have had little effect on production, em
ployment, or prices in the transition period, but the cumulative reduc
tion in liquidity might have increased the effectiveness of fiscal re
straints subsequently. The annual rate of gross private saving, in
fact, fell from $44.3 billion in 1945 to $26.5 billion in 1946, while
financial saving by individuals declined even more sharply, from $37.3
billion to $14 billion.12 Conceivably, with a lower level of income,
ex ante, for 1946, achieved through greater fiscal restraint, greater
inroads into liquid private financial reserves than those implied by
these data might have resulted. A more rapid decline in these re
serves during the early postwar period might have served to increase
the restrictive impact of the substantial budget surpluses achieved
subsequently.
The job of reducing liquidity, if indeed this was the key to less infla
tion while achieving high levels of output and employment, presum
ably should have been assumed by monetary policy. Monetary policy
during this period, however, was subject to the constraint imposed by
the responsibility of the Federal Reserve to support the prices of
Federal Government obligations. Under this circumstance, the re
duction in private liquidity which monetary and credit actions could
effect was also limited. In point of fact, however, the money supply
was not reduced nor even held constant in 1946, but increased more
than in any other year in the postwar period.13
(b) Expansion: 191fl
Going into 1947, some of the major questions around which policy
discussions had focused in the latter days of the war appeared to have
been resolved. Large-scale rapid demobilization had not produced
the prolonged unemployment crisis which was a feature of many endof-war forecasts for the early postwar period. On the other hand, the
inflation anticipated to result from high private spending propensities,
supported by large accumulations of liquidity, and from the drastic
shift in demand and production from military to civilian items, had
materialized. The decontrol of virtually all prices in late 1946 made
the problem of containing further inflationary movements appear to
be quite acute because of the assumed backlog of demands both by
business and consumers for durable goods and the continuing high
degree of liquidity in the private sectors of the economy.14 Although
12January 1959 Economic Report of the President, pp. 156, 157.
13Cf. January 1959 Economic Report of the President, p. 186.
Economic Report of the President, p. 18.
14Cf. the January 1947 Economic Report of the President, p. 16, and the 1947 Midyear
EMPLOYMENT, GROWTH, AND PRICE LEVELS
221
there was some concern as to how long these backlogs would continue
to support high levels of production and employment, on balance the
principal challenge was quite generally conceded to be that of con
taining further inflation.
This view was reflected in the budget presented in January 1947 for
the fiscal year 1948. The budget called for an estimated $5 billion
reduction in expenditures. It also contained a specific request for
extension of wartime excise tax rates, which, if granted, would result
in net budget receipts only $300 million lower than the amount esti
mated for fiscal 1947. On the basis of these proposals, a conventional
budget surplus of $1.8 billion was contemplated in the budget
message.15
This emphasis on maintaining existing tax rates was occasioned by
the growing pressure for tax reduction, which quickly materialized
in the tax bill, H.R. 1, a broad-scale individual income-tax reduction
effort.16 Moreover, the Presidential declaration of the cessation of
hostilities on December 31, 1946, involved an automatic expiration of
wartime excise-tax rates on July 1, 1947. The first substantive pro
posal in the budget message, therefore, was for legislation continuing
excises at existing rates and urging a hold-the-line position on revenues
generally.
Early in the year, the Congress moved to provide large, widely
applicable individual income-tax reduction in H.R. 1. Proposals for
tax reform and reduction had, of course, been flying thick and fast
ever since the end of the war had been in sight. Indeed, the admin
istration had urged the desirability of such reform in the closing days
of the war.17 The Secretary of the Treasury, appearing before
the House Committee on Ways and Means in May 1947, supported
with an extended discussion, efforts to effect long-range reform in the
Federal tax structure.
The specific legislative effort which culminated in H.R. 1, however,
was described by its authors not merely as a reform but as an eco
nomic stabilizing measure as well. Both House and Senate com
mittees specifically urged enactment of H.R. 1 to meet a possible
recession situation which might materialize in the latter part of the
year when Congress was not in session.18
H.R. 1 was vetoed on June 16,1947, and 1 month later the President
vetoed H.R. 3950, the provisions of which were identical with those
of H.R. 1, except that it would have become effective January 1, 1948,
instead of July 1,1947. Noting that the level of personal income, em
ployment, and business activity had continued to rise, he repeated his
earlier observations that the bill was inconsistent with sound fiscal
policy, which should be directed toward achieving a surplus to be used
for debt retirement,19
While attempting twice to enact individual income tax reduction
in the face of presidential opposition, the Congress did provide the
15 Cf. Budget Message of the President for the Fiscal Year Ending- June 30, 1948, pp. M5.
M12, and M14.
18For details of this bill, see Annual Report of the Secretary of the Treasury for Fiscal
Year 1947, pp. 56-57.
17Cf. Annual Report of the Secretary of the Treasury for Fiscal 1945, pp. 100-101, and
statement of Secretary Vinson, op. cit., pp. 326-327.
18U.S. House of Representatives, Committee on Ways and Means, “Individual Income
Tax Reduction Act of 1947,” Rept. 180, Mar. 24, 1947, and U.S. Senate, Committee on
Finance, “Individual Income Tax Reduction Act of 1947,” Rept. 173, May 14, 1947
19Message from the President, July 18, 1947, returning without approval the bill (H.R.
3950) to reduce individual income tax payments, loc. cit., p. 247.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
222
Indefinite extension of wartime excise rates requested by the President
in his budget message.
Federal expenditures (on income and product account) were rela
tively stable during 1947, at a level for the year as a whole close to
$6 billion less than that for 1946. Receipts, on the other hand, rose
about $4 billion for the year compared to 1946, yielding a surplus of
$12.2 billion for 1947, an increase of $10 billion over the preceding
year. From the last quarter of 1946 to the last quarter of 1947, how
ever, both the increase in receipts and the decline m expenditures were
quite modest. During 1947, therefore, the net result of Federal fiscal
actions was a $3.8 billion increase in surplus (table 8-5, p. 286).
A t the same time, gross national product in current prices rose very
rapidly— by about $24 billion— from the fourth quarter of 1946 to the
last quarter of 1947. Gross national product in constant 1954 dollars
also increased during this period, but at a much more moderate rate
(tables 8-2 and 8-3, pp. 276 and 280).
Implicit recognition of the inadequacy of existing efforts to curb
inflation came late in 1947 with the President’s calling the Congress
back into special session to consider a 10-point anti-inflation program.
As summarized by the President in his January 1948 Economic Re
port, this program called for selective credit controls to curb the
expansion of business and consumer credit, authority to control alloca
tions of commodities and services, extension and strengthening of rent
controls, and authority to impose rationing and price and wage con
trols on a highly selective basis.20 Quite notably, it did not include
proposals for greater fiscal restraint. The program was not enacted.
(a)
The 191$ boomlet and tapering off
Going into 1948, the administration’s focus in public economic
policy was firmly on the fight against inflation. In his Economic Re
port of January 1948, the President asserted that “the first objective
for 1948 must be to hold the inflationary trend.” 21
Generally, the source of inflationary pressures was identified as ex
cessive demands in each of the major private sectors, financed in part
by the liquidation of financial reserves, and aggravated by speculative
buying in areas of anticipated or actual shortages. In addition, some
specific supply situations were regarded as specially significant in
generating inflationary price and wage developments throughout the
economy.
While fiscal 1948 net budget receipts were expected to increase by
about $2 billion over fiscal 1947, fiscal 1949 receipts were expected to
decline very slightly, in spite of rising tax revenues because of a re
duction in receipts from sales of surplus property. Expenditures for
fiscal 1948 were expected to be about $5 billion lower than in the
preceding year, but to increase moderately in fiscal 1949. A reduction
in the surplus, therefore, was expected for fiscal 1949.22
20Loc. cit., pp. 5-6
21Ibid., p. 5.
22January 1948 Budget Message of the President for Fiscal 1949, pp. M-9, M-ll. On a
cash basis, a further but very modest reduction of about $1 billion in Government expendi
tures in calendar 1948 was proposed. Cash receipts were expected to rise to $49.2 billion
in calendar 1948, providing a surplus for 1948 of $8.8 billion, an increase of $3.2 billion
over 1947. January 1948 Economic Report of the President, p. 99.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
223
In the light of these economic and budget prospects, the administra
tion’s major tax proposal hardly appears to be in line with the pre
scripts of a stabilizing fiscal policy. This proposal was for a “ cost of
living” tax credit of $40 for each individual taxpayer and each depend
ent, the revenue effects of which were to be offset by increases in cor
poration income taxes.
The reasoning in support of this proposal was tortuous, at best.
The inflationary effect of the individual income tax reduction was
explicitly conceded, but somehow this was to be offset by an equal
dollar volume of corporation income tax receipts which nevertheless
would not “ * * * cause production to fall below the highest output
that available materials, capacity, and labor will permit.” 23 But, in
any case—
Any net change one way or the other in the effect of these tax revisions upon
inflation is outweighed by the manifest equity of the revisions proposed.24
In short, facing an inflationary situation the seriousness of which
was emphatically stressed and at least one major source of which was
identified as an anticipated general excess demand, the administration
proposed to rely primarily on automatic tax stabilizers for achieving
the desired fiscal constraint. But even these could hardly be counted
upon to have their usual potency, in view of the proposed redistribu
tion of tax burdens to lighten the load on taxpayers with spending
propensities presumably higher than the average for the economy as
a whole. Selective price and wage controls, rationing, direct materials
and resource allocations authority, and an array of selective credit
controls wTere proposed, in effect, to replace the fiscal curbs.
In any event, these equitable [tax] adjustments will not interfere with success
in our anti-inflationary efforts if the other anti-inflationary measures * * * are
promptly adopted and vigorously applied.25
The Congress did not heed the administration’s proposals. Instead,
it proceeded with efforts to reduce tax rates. The result of these
efforts, the Revenue Act of 1948, was introduced on December 18,
1947, during the special session called by the President to consider
an anti-inflation program, and was passed on March 22, 1948. On
April 2,1948, it was enacted over the President’s veto. Effective May
1, 1948, withholding rates on wages and salaries, pursuant to the legis
lation, were reduced.
The act involved an estimated full-year revenue loss of $5 billion.
These tax deductions occurred while Federal Government demand
was increasing. Both defense and civil purchases, excluding Com
modity Credit Corporation and similar capital items, were rising
markedly. In addition, U.S. commitments under the Marshall plan
were beginning to affect Federal expenditures. Moreover, obligations
for major defense procurement items were also rising, from a quarterly
rate of about $0.2 billion in the third quarter of 1946 to $1.2 billion
in the second quarter of 1948 and an annual total in that year of $3.8
billion, about a third greater than in 1947. This increase in defense
demands coincided with a steady rise, to mid-1948, in new orders re
ceived in the durable goods industries. Unfilled orders in those indus
tries had been falling sharply in 1947, but leveled off in 1948. Inven
» Ibid., p. 48.
24Idem.
25Idem.
224
EMPLOYMENT, GROWTH, AND PRICE LEVELS
tories in durables rose steadily during 1948. Total nonfarm business
inventories also increased markedly in the first three quarters of the
year (tables 8-2 and 8-4, pp. 276 and 284). Business outlays for new
plant and equipment were also increasing through the first quarter
of 1948 (table 8-9, p. 303).
The net result of these fiscal developments early in 1948 was a sharp
decline in the Federal budget surplus (income and product account).
The vigorous anti-inflationary orientation of public policy advocated
by the administration at the start of the year took the form of a
$10.1 billion reduction in surplus from the last quarter of 1947 to the
last quarter of 1948 (table 8-5, p. 286).
The year 1948 began with a slight downturn in economic activity
measured in constant 1954 dollars. The decline occurred primarily in
net exports of goods and services, but a slight drop also took place in
consumer durables, new construction, and nonfarm business inven
tories. Activity rose, however, in the second quarter and continued to
rise through the year, although at a relatively low rate following the
second quarter rise. In current prices, the first quarter lull was
less pronounced but the pattern for the remainder of the year closely
parallels that of the deflated series. In the last quarter of the year,
activity was rising at a very slow rate in some sectors and declining
in others. At the same time, the upward price trend began to weaken
(tables 8—2, 8-3, and 8-6, pp. 276,280 and 294).
In mid-1948, the President reasserted the continuing strength of
inflationary pressures and recommended an eight-point program to
arrest general price increases. First among these proposals was an
excess profits tax, apparently based on the forecast by the Council
of Economic Advisers that the Revenue Act of 1948 and the increase
in defense and foreign-aid expenditures would eliminate the cash
surplus previously estimated for calendar 1948.26 The Council also
estimated that as a result of the tax reductions of the 1948 Revenue
Act, the annual rate of consumer expenditures would increase by $3
billion to $4 billion above the rise which would have been forthcoming
in the absence of the tax cuts.27
The President’s program was not adopted.
As matters developed, the inflationary consequences of the Revenue
Act of 1948 did not materialize to any significant extent. Personal
income, before and after personal taxes, rose sharply from the last
quarter of 1947 through the third quarter of 1948, before declining
very slightly in the last quarter of the year. Personal consumption
expenditures, however, rose by less than half the increase in dispos
able personal income during 1948 (table 8-7, p. 298). Although the
tax reduction of the 1948 Revenue Act did not increase consumption
outlays significantly, it may have contributed to a higher rate of con
sumption expenditures than otherwise would have been realized.
On the whole, therefore, the Revenue Act of 1948 may be absolved
from responsibility, at least in the short run, for inflationary price
developments. Prices did, indeed, rise during the first three-quarters
26Mid-Year 1948 Economic Report of the President, pp. 5, 7, 41, 42.
27Idem.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
225
of the year, but little of the increase occurred in sectors in which the
impact of the tax cut could have been promptly registered. The per
sonal consumption component of the gross national product im
plicit price deflators, for example, shows a very modest increase from
the first to the third quarters of the year and a slight decline in the
last quarter. Far more marked increases are found in gross private
domestic investment and in the Government component (table 8-6,
p. 294).
(d) Overall appraisal of fiscal policy, 19Jp6~48
On the whole, fiscal policy performed quite well during the early
postwar years. This was a period characterized by vigorous ex
pansion of real output in response to strong demand pressures
throughout the private sector of the economy. Although the support
of extraordinarily high levels of Federal defense and related outlays,
upon which many of the end-of-the-war forecasts asserted prosperity
depended, was quickly removed, private demand and output expanded
at an extremely rapid pace. In constant 1954 dollars, total private
demand increased from $182.9 billion in 1945 to $251.0 billion in
1948, or at an average annual rate of slightly more than 11 percent.
Apart from inventory accumulation, gross private domestic invest
ment totaled $120.4 billion for the 3 years 1946-48. During the same
period, Federal purchases of goods and services fell from a total of
$117.1 billion in 1945 to $22.9 billion in 1948 (table 8-3, p. 280). With
a rapidly growing labor force, the rate of employment was quite stable
at between roughly 96 and 97 percent (table 8-1, p. 275). In terms of
the growth and employment stability objectives of public policy,
therefore, the early postwar record must be scored very high.
In terms of the price-level stabilization objective, however, the
record is less commendable. In the 3-year period ending with 1948,
the implicit price deflators for gross national product increased by
20.5 percentage points, from 68.0 (1954=100) in 1945 to 88.5 in 1948
(table 8-6, p. 294). The rise in both wholesale and consumer price
indexes was even more pronounced (table 8-8, p. 302).
One of the most striking conclusions emerging from review of this
period is the apparent reluctance of the administration to rely on dis
cretionary tax action for stabilization purposes. For the period as a
whole, reductions in expenditures and the automatic increase in tax
revenues were the sources of the budgetary surpluses which provided
the desired fiscal constraints. The administration, in fact, proposed
no increases in any tax rates at any time during this period of gen
erally excessive demand, except after taxes had been reduced by the
Revenue Act of 1948.
It may nevertheless be argued that in view of the success in reducing
outlays and in view of the apparent responsiveness of revenues to in
come expansion, no further discretionary increases in taxes were neces
sary. But, basically, this question is one of the volume of budget sur
plus, in view of anticipated levels of total demand, necessary to restrict
total spending to levels consonant with high employment and output,
on the one hand, and stability in the price level, on the other.
A major ingredient of the public policy situation in the pre-Korean
period was the extraordinarily high degree of liquidity prevailing in
the economy which apparently served as a buffer against the private
226
EMPLOYMENT, GROWTH, AND PRICE LEVELS
spending constraint wliich presumably would have resulted from the
large Federal surpluses realized during the first 3 postw ar years.
D u rin g the war period, a large volume of liquid financial reserves was
accumulated, to a very substantial extent in the fo rm o f Federal Gov
ernment debt issues. The commitment by the Federal Reserve to sup
port the prices of these issues, which continued through the postw ar
period until the Fecleral Reserve-Treasury Accord in 1951, served to
support the value of this major component of financial reserves. In
this respect it served to retard the reduction in the real value of aggre
gate liquid balances resulting from both rising levels of total activity
and a rising price level. On the other hand, the support program
made it difficult to impose monetary restraint. In this way, it may
have contributed to the rise in commodity prices, thus depressing the
real value of liquid assets.
Administration policy statements during this period made frequent
reference to the possibility that consumers and business would supple
ment their incomes generated from current production activity by
drawing on accumulated savings to finance an inflationary level of
expenditures.28 In fact, although past savings were drawn upon by
many individuals and firms, in the aggregate no reduction in liquid
financial reserves by the nonbank sectors occurred. On the contrary,
these were substantially greater in 1948 than they were in 1945. In
the 3 years 1946-48, individuals added $29.8 billion to their holding of
financial assets, while corporations, other than banks and insurance
companies, increased their financial assets by $13.4 billion.29 Although
the money supply was only very slightly greater in 1948 than it had
been in 1946, monetary policy did not limit the increase in aggregate
liquidity to any significant extent.
Nevertheless, the fears expressed by the administration appear to
have been well founded in terms of the rapid decline which did occur
in the rate of personal saving out of current disposable income in the
early postwar years. Personal saving fell from 19.1 percent of dis
posable personal income in 1945 to 8.4 percent in 1946 and 2.8 percent
in 1947, and rose to 5.8 percent in 1948 (table 8-7, p. 298). A similar
trend is observable in the corporate sector during this period. A l
though retained profits rose relative to corporate profits after tax,
increases in physical assets (plant and equipment and inventories)
rose relative to retentions at a considerably more rapid rate.30 High
liquidity, therefore, appears to have supported the early postwar dis
position toward a rising spending propensity in the private sectors of
the economy.
In view of these conditions, the necessary but unanswered question
is whether a more restrictive fiscal policy could indeed have prevented
the rise in the general level of prices when price controls were re
moved, except at the cost of widespread and fairly prolonged unem
ployment and a slower rate of growth in real output. For the 3
immediate postwar years, Federal surpluses on income and product
account totaled $22.4 billion. Quite conceivably, some significantly
greater level of budgetary surplus, achieved by explicit tax increases
28 For example, the Midyear 1947 Economic Report of the President asserts that these
saving's were in fact being- used to support the high level of demand then prevailing.
Cf. pp. 1, 12. 31, 35.
20U.S. Income and Output, op. cit., pp. 194-195.
30U.S. Income and Output, op. cit.. pp. 194-195.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
227
(since it appears unlikely that Federal expenditures could have been
reduced much more than they were) might have checked the rise in
private spending pro;' 'unties. Consumers and business alike, pre
sumably, could have- hc:-n made more reluctant to reduce the rate
of their current saving II disposable income had been reduced more
drastically relative to pretax income.31 But this assumes a tax bite
sufficiently large that adverse anticipations about the change in net
worth would offset significantly the strength of war-deferred de
mands. Such adjustments have usually been associated with quite
violent cyclical fluctuations; history offers little evidence, if any,
that the fine adjustments in fiscal and monetary conditions which, in
theory, would have eliminated the inflationary component of total
demand without significantly reducing real output and employment
could have been made through the use of the blunt instruments of
general fiscal and monetary controls.
In short, the principal deficiency of fiscal policy in the early post
war years was its inability to cope with excessive liquidity. This in
turn was the result of wartime and postwar monetary policies and
debt management.32 Given the monetary conditions then prevailing
and the basic monetary and debt management policies pursued, fiscal
policy deserves at least an A for effort.
2. The 'recession of 19J+9
While many of the early postwar forecasts suggested that public
policy would have to be concerned primarily with persistent reces
sionary pressures, fiscal policy from the very termination of hostili
ties was focused almost exclusively on containing inflationary trends.
The first test of postwar fiscal policy in preventing or ameliorating
economic decline occurred in 1949.
The year 1948 had ended with numerous indications that the rate
of expansion of the postwar years had fallen materially. In a num
ber of broad sectors, declines, in both current and constant dollars,
were underway, even though of modest proportions. Despite- these
indications, the picture at the beginning of 1949 was by no means,
clear. Federal Government expenditures were rising and were e x
pected to continue to do so for some time. While some softness had
appeared in consumer durables, it was difficult to evaluate how per
sistent or large any decline in this sector might be. Wage settlements
negotiated in 1948 were expected to add substantially to personal
income, and the problem of an upward wage-price spiral was still
very much a matter of conern.33
The fiscal program proposed by the administration for 1949, as in
the preceding years, was geared to combating inflation. Expenditures
were expected to increase (on a cash basis) sufficiently to replace the
31Conceivably, budget surpluses could have been used to increase the Treasury’s cash
balance instead of retiring debt; requiring banks to hold reserves against Government
deposits, under these circumstances, would have reduced reserves available to support loans
to the private sector. Substantially offsetting this effect, however, was the opportunity
of the banks to take advantage of the Federal Reserve’s commitment to support the price
of Government issues.
32Explicit acknowledgement of this responsibility is found in the 1949 annual report of
the Secretary of the Treasury, pp. 11-20, The Secretary pointed out that the policy of
tailoring issues to investor’s “needs” was aimed at keeping the portfolios of banks and
corporations highly liquid. In addition, the January 1949 Budget Message of the Presi
dent, at pp. 10-11, 42-43, explicitly notes the possibility that effective general credit con
trol, to reinforce fiscal and other constraints on inflation, might well require amendation
of the [then] existing policy of Federal Reserve support of Government issues at par
33January 1949 Economic Report of the President, pp. 8, 43-45.
228
EMPLOYMENT, GROWTH, AND PRICE LEVELS
surplus of 1948 with a deficit of about $600 million 1949. Cash re
ceipts were expected to be lower in 1949 than in 1948 by $1.5 billion,
but about $1 billion higher than the annual rate for the last half of
1948, reflecting, respectively, the revenue loss from the Revenue Act
of 1948 and the higher level of income anticipated for 1949.34
The President proposed restoring the anti-inflationary budget sur
pluses of earlier postwar years by tax rate increases netting $4 billion
annually. The additional revenue was to be obtained from increases
in corporation income taxes, additional individual income taxes on
middle and upper income brackets, and increases in estate and gift tax
revenues. In addition, it was urged that the contributions rate for
social security be increased.35
The proposed $3.4 billion cash surplus for calendar 1949 based on
the proposed tax increases, as outlined in the Economic Report, was
not regarded in itself as adequate to the task of curbing expected infla
tion strains. The Economic Report repeated the prior year’s request
for authority to impose mandatory controls over the allocation of cer
tain materials, and for selective price and wage controls. Extension
of Federal Reserve authority to increase reserve requirements of mem
ber banks was also requested. In addition, explicit note was taken of
the possibility that effective general credit control, to reinforce fiscal
and other constraints on inflation, might well require amendation of the
existing policy of Federal Reserve support of Government issues at
par.36
The President delineated the full employment production goal as
requiring a 3- to 4-percent increase in total output in 1949 over 1948.37
With this assumption specified, but with explicit recognition of the
possibility that recession trends would predominate,38 the President set
forth the anti-inflation program described above, implying, therefore,
that in its absence, aggregate demand would be so great as to absorb
not only the 3- to 4-percent increase in real output required for em
ployment stabilization but also to involve significant price increases.
Even while the President was urging the need for drastic antiinflationary action, the economy was sliding off the plateau of late
1948 into recession. In virtually every sector but Government and net
exports, expenditures declined, generally with some accompanying
decrease in prices. Unemployment rose from 4 percent, seasonally
adjusted, in the last quarter of 1948 to 4.7 percent in the first quarter
of 1949.
The recession was sharp and severe. In current prices, gross na
tional product fell 7.5 percent from the fourth quarter of 1948 level
(annual rate) of $265.9 billion to a second quarter 1949 rate of $256.4
billion (table 8-2, p. 276). In constant 1954 dollars the decline in
gross national product was 4.9 percent, from $297.3 billion (annual
rate) in the last quarter of 1948 to $290.3 billion in the second quarter
of 1949 (table 8-3, p. 280). Price declines occurred in most of the
broad sectors of gross national product (table 8-6, p. 294). Unem
ployment rose to a seasonally adjusted quarterly rate of 5.8 percent in
the second quarter of 1949 (table 8-1, p. 275).
34Ibid., p. 29.
35Ibid., p. 10.
30Ibid., pp. 10-11, 42-43.
- Ibid., p. 8.
ssIbid., p. 3.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
229
While the recession gained momentum, the public policy debate in
the winter and spring of 1949 continued to focus on anti-inflationary
action and did little, therefore, to resolve basic issues concerning sta
bilizing fiscal action aimed at arresting recession and promoting
recovery. The issue whether the Federal Government should delib
erately seek a budget deficit in order to minimize a decline in economic
activity and loss of employment and output was not fairly joined.
The erroneous policy focus on inflation in the midst of a deflationary,
recessionary movement occurring virtually across the board is to be
attributed primarily to the lag in information. The only clearly ap
parent trend early in 1949 was the rising level of Government outlays
and, by virtue of the Revenue Act of 1948, the emergence of a budget
deficit after 3 years of large surpluses. In view of the extremely
limited success of these surpluses in holding back general price in
creases, the prospect of losing even this constraint against inflation
must indeed have appeared alarming*
By mid-1949, however, the facts of recession and softness in prices
were not to be missed any longer.39 In his Midyear Economic
Report, the President abandoned his vigorous anti-inflation program
of the early part of the year, but not before observing that the then
present recession was attributable to prior inflationary excesses which
resulted from the failure to provide the administration with the wide
array of specific anti-inflation controls requested repeatedly in prior
years.40
The President’s antirecession program focused on (1) increasing
the amount and duration of benefits and extending the coverage of
the unemployment compensation system; (2) raising benefits and ex
tending coverage under the old age and survivors insurance system
and improving the public assistance program; (3) increasing the
minimum w^age to 75 cents an hour; (4) liberalizing Reconstruction
Finance Corporation loans; (5) improving farm income supports;
and (6) effecting certain limited tax changes. The latter proposal
called ior repeal of the excise on the transportation of property,
liberalization of the loss carryover provision, and increasing estate
and gift taxes.
Basically, therefore, the administration’s fiscal policy proposals in
mid-1949 were to support existing trends in Federal outlays while
holding the line on taxes. Although explicitly recognizing the adverse
stabilization effects which would result from efforts to balance the
budget either by cutting outlays or increasing taxes, the antireces
sionary consequences of deliberately expanding the deficit were not
granted.41 In short, already anticipated increases in expenditures,
supplemented by recession induced increases in transfer payments,
and the automatic decline in revenues were to carry the fiscal burden
for halting the decline in activity and promoting recovery.
As matters developed, however, only the automatic stabilizers were
fully operative. State and local transfer payments to persons rose
from $10 billion in the fourth quarter of 1948 to $11.8 billion a year
39By mid-1949, when the fact of recession was acknowledged, the bottom had been
reached and recovery, though still weak, was underway. Unemployment continued to rise,
however, through the 4th quarter of 1949 (table 8-1, p. 275).
40Loc. cit., pp. 5-6.
41Ibid., p. 8.
230
EMPLOYMENT, GROWTH, AND PRICE LEVELS
later (annual rate). Federal receipts fell during tlie same period
from $42.6 billion to $88.7 billion, while State and local government
receipts (net of Federal grants-in-aid) rose, offsetting $1.5 billion of
the decline in Federal revenues (table 8-5, p. 286).
Apart from the increase in transfer payments and the automatic
decline in receipts. Federal fiscal actions made little contribution to
economic stabilization and indeed were one of the sources of instability.
National defense obligations for major procurement, which had risen
in 1948, primarily in response to demands arising under the Marshal
plan, declined from a quarterly rate of $1.1 billion in the last quarter
of 1948 to $0.7 billion in the first quarter of 1949. While these orders
increased sharply to $1.3 billion in the second quarter, they fell off
even more precipitously to $0.6 billion in each of the remaining quar
ters of the year (table 8-4, p. 284).
The specific impact of fluctuations in defense orders on total durable
goods industry activity cannot be precisely delineated. The fact re
mains that new orders received in the durables industries declined
sharply after the third quarter 1948 cut in defense orders. Unfilled
orders, which had leveled off in the first three-quarters of 1948,
dropped off sharply through the third quarter of 1949. The change
in inventories in the durable goods industries lagged about a half year
behind the change in orders and unfilled orders, continuing to rise
through the first quarter of 1949 before turning clown (table 8-4, p.
284). Moreover, the reduction in defense orders and in total new
orders for durables came on top of a decline beginning after the first
quarter of 1948 in business outlays for new plant and equipment. In
constant 1954 dollars, these outlays fell by $5 billion (annual rate)
from the first quarter of 1948 through the second quarter of 1949
(table 8-9, p. 303).
Federal civil purchases, before- deducting sales and net of purchases
of capital items, also changed perversely and contributed to the 1949
decline. These outlays fell from an annual rate of $7.9 billion in the
last quarter of 1948 to $6.9 billion in the second quarter of 1949 (table
8-10, p . 304).
In short, both Federal purchases and orders not only offered no
significant barrier to the decline in total demand, but actually con
tributed to it.
On income and product account, the net result of these Federal fiscal
developments wras a shift from a third quarter 1948 surplus of $5.8
billion to a second quarter 1949 deficit of $3.9 billion. O f this change,
the decline in receipts accounted for $4.3 billion and the increase in
transfer payments accounted for an additional $3.2 billion. For the
remainder of the year, the deficit fell as expenditures declined while
receipts rose very slightly (table 8-5, p. 286).
Fiscal policy can hardly be rated high for its role in the 1949 reces
sion. While the built-in stabilizers performed well, they had to over
come not merely the decline in demand originating in the private sector
but also the recessionary influence of Federal orders and purchases.
Moreover, quite apart from errors in judgment and in analysis, the
administration explicitly rejected the deliberate use of budgetary
deficits as an antirecession instrument of public policy.
In extenuation of the administration's position in this regard, sev
eral arguments may be offered. In the first place, the President and
EMPLOYMENT, GROWTH, AND PRICE LEVELS
231
liis Council of Economic Advisers hopefully— and correctly— assessed
the recessionary developments as moderate and unlikely to be selfreinforcing (although the 1949 midyear Economic Report leaves con
siderable doubt that they did so for the correct reasons). With this
outlook, it may seem reasonable to have relied primarily upon the then
prevailing fiscal trends to provide all of the necessary support from
the public sector. While never made explicit, the reasoning of the
administration appears to have been that further discretionary action
to increase the deficit would not be easily reversed and would, in the
long run, therefore, contribute to renewal of the prerecession infla
tionary trend.
In addition, the recession appeared to be accomplishing the antiinflation objective which had been vigorously sought by the adminis
tration in the postwar period. This is not to suggest that the admin
istration endorsed the loss of employment and output in the recession,
but the midyear Economic Report suggests that these losses, in real
terms, were not so severe as to warrant drastic fiscal action which
might arrest the recession at the expense of renewing upward price
movements.
Giving due weight to such extenuations, the facts remain that the
recession was severe, whether measured in terms of losses in employ
ment, in real output, or in the decline in the rate of capital formation,
that several important Federal fiscal developments contributed to
the recession, and that no material effort was made to supplement
built-in stabilizers with vigorous, compensatory fiscal action. We have
given Federal fiscal policy an A for its first postwar semester of
reconversion and expansion. For its second semester course in deal
ing with recession, we may, if we are indulgent, concede a barely
passing grade.
S. Recovery and Korea : 1950-53
At the beginning of 1950, recovery was underway. Although un
employment remained high, the decline in total output had been
arrested and had given way to rising levels of activity. Measured in
current dollars, gross national product regained the fourth quarter
1948 postwar peak in the first quarter of 1950. In constant (1954)
dollars, the first quarter 1950 level of activity exceeded the prior post
war high. Moreover, with the exception of producers durable equip
ment and Federal purchases of goods and services, virtually every
major sector of demand registered increases in the first quarter of 1950
compared with the last quarter of 1949. A net turn in inventories
of $7.8 billion occurred during this period, following the fourth quar
ter 1949 spurt in consumer outlays, particularly for durables.
The recovery was noted on a more timely basis than the recession.
In his January 1950 Economic Report, the President and the Council
detailed the ingredients of the upturn, although explicitly noting that
recovery was still in an early stage.42 Emphasis in policy formula
tion, therefore, was on promoting recovery to full employment levels
of activity while maintaining price level stability.
The President's broad fiscal policy proposals were intended to
contribute to achieving this objective. Noting and decrying the then
present deficit, he nevertheless cautioned against trying to eliminate
- Loc. cit., in>. 1—
G,pp. 25 ff.
232
EMPLOYMENT, GROWTH, AND PRICE LEVELS
it by drastic reductions in expenditures or tax increases, lest these
impair further recovery.43 At the same time, the budget proposals,
submitted in January for fiscal 1951 provided for a gradually falling
level of expenditures and promised tax proposals which would pro
duce some additional net revenue in 1951, beyond those resulting
from rising levels of income.44 This program, it was hoped, would
move the Federal budget toward balance and surplus in a few years.
Several of the specific legislative recommendations in the January
report and budget message were intended to stimulate demand, par
ticularly investment outlays. The promised proposals for tax
changes were also characterized as stimulating business activity.45
These proposals were transmitted to the Congress on January 23,
1950. Their aims, as expressed by the President, were “ * * * to
reduce present inequities, to stimulate business activity, and to yield
about $1 billion in net additional revenue.” 46
The specific revisions proposed were (1) selective reductions in
excises; (2) income tax revisions aimed at broadening the tax base;
(3) estate and gift tax revisions; (4) a change in the corporate rate
structure; (5) liberalization of the loss carryover provision; and (6)
liberalization of the treatment of income derived abroad. Revision
of the estate and gift taxes and of the corporate rate structure was to
bring in an additional $1 billion annually, while longrun revenue
gains were anticipated with respect to the income-tax base-broad
ening proposals.47
The most important features of this tax program were the excise
reduction, the corporate rate structure change, and the estate and gift
tax revision. In general, the first two would have effected a shift in
the Federal tax burden from low- and middle-income individuals to
corporations, or from consumption to investment. While other pro
visions would have moved to offset some of the additional taxload on
corporate income, they were of substantially lesser magnitude and of
considerably more restricted impact. On the whole, therefore, the
proposed tax program was directed toward promoting recovery
through stimulating consumption outlays.
By the time the House Committee on Ways and Means was well un
derway in its work on the bill, however, the need for this stimulus had
disappeared. Income and output were rising rapidly, both in current
prices and real terms. While unemployment was still high by prior
postwar standards, it was falling rapidly. By the end of the second
quarter of 1950, gross national product had increased 7 percent in
current prices and 7.5 percent in constant 1954 dollars from the second
quarter 1949 recession low. Business inventories had continued to rise,
and the decline in outlays for producers durable equipment had turned
into a sharp second quarter rise. Personal income had risen 6 percent
from the second quarter of 1949, while corporate profits in the same
period had risen about 50 percent to a new postwar peak (tables 8-1,
8-2, 8-3, 8-7, and 8-11, pp. 275, 276, 280, 298, and 305).
43Ibid., p. 11.
44January 1950 budget message of the President for the fiscal year 1951, pp. M5-M7.
45January 1950 Economic Report of the President, p. 11.
46Message from the President, Jan. 23, 1950, transmitting a request for a revision of
the tax laws, reproduced in Annual Report of the Secretary of the Treasury for fiscal
1950, p. 181 ff.
&Idem.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
233
Recovery, in short, was well on the way. Whatever the desirability
of the President’s tax proposals made earlier in the year in terms of
longrun reform, they hardly appeared to be needed as a stimulus for
recovery.
On June 29, 1950, the House passed the tax revision bill, H.R. 8920,
incorporating in general, the President’s proposals for reducing ex
cises and for income tax revision.
The Korean war broke out 4 days before the House passage of the
bill. As the bill passed to the Senate, therefore, the Korean war
crisis completely changed the immediate objectives of fiscal policy.
The Secretary of the Treasury, testifying before the Senate Finance
Committee on July 5, duly noted the marked improvement in business
conditions and the excellent economic prospects for the remainder of
the year. Yet, with the reservation that developments in Korea might
change fiscal requirements in the near future, he endorsed the com
mittee’s continuing to work along the lines of the House bill:
The bill * * * has the merit of making improvements in the equity of our tax
system. It provides stimulation of business * * *.48
The Secretary urged amendment of the House bill to add the provi
sions recommended by the President but not adopted by the House.
On July 11, however, the Secretary recommended to the Finance Com
mittee that action on the bill be suspended.
Three weeks later, the President’s 1950 Midyear Economic Report
observed that—
There is now no need to reduce any taxes to stimulate business recovery—
and again focused fiscal policy on the fight against inflation.49 The
President recommended that action be taken on an interim basis to eli
minate the bill’s revenue-reducing features while keeping its revenue
gaining provisions and to add substantial revenues by raising indi
vidual income tax rates and the corporate tax rates provided for in the
House bill. These measures, it was hoped, would add $5 billion annu
ally on a full year basis.50 The President, at the same time, asserted
that additional revenues would be needed in the near future.
As finally enacted, the Revenue Act of 1950 raised individual and
corporation income tax rates, incorporated certain of the income tax
revisions proposed earlier and eliminated the House bill excise reduc
tions. The act also provided a directive to both House and Senate
tax committees to report out an excess profits tax bill as soon as prac
ticable after November 15,1950.51
In his July Mid-Year Economic Report, the President also asked
for selective credit controls, particularly over consumer and mort
gage credit, authority to establish priorities and allocate certain com
modities, and a program to provide loans and incentives for expan
sion of capacity to produce strategic and critical materials.52 This
request reflects the administration’s assumption that even if fiscal
actions were adequate to confine total demand to noninflationary levels,
the drastic and rapid shifts in the composition of demand, which
might be necessary if the Korean situation required a very large
48Ibid., I). 209.
49Loc. cit., p. 10.
501950 Report of the Secretary of the Treasury, p. 36, and pp. 225-242.
51Ibid., pp. 36-42.
52Ibid., pp. 11-12, 14.
48795—59---- 18
234
EMPLOYMENT, GROWTH, AND PRICE LEVELS
expansion of defense outlays, could produce severe upward strains
the price level.53 These direct controls, and additional powers
including the price and wage controls requested by the administration,
were provided.
Nevertheless, fiscal policy was called upon to bear the principal
burden for economic stabilization during the Korean war. Appar
ently the defense-crisis character of the anticipated inflationary strains
impelled the administration and the Congress to a view regarding
the role of fiscal— and particularly tax— policy which both had es
chewed previously in the postwar era. In prior postwar years, the
administration had on the whole urged a hold-the-line-on-taxes,
reduce-expenditures fiscal policy and had urged various direct con
trols for curbing inflationary strains. The Korean war swung the
administration’s position around to principal reliance on fiscal re
straints with, on the whole, prompt acceptance by the Congress.
Tax policy, moreover, was especially emphasized, since changes in
expenditures would largely reflect the expansion of defense require
ments and the rate of deliveries of defense orders. The President
urged, therefore, that the Revenue .Act of 1950, and the subsequent
Excess Profits Tax Act of 1950, be supplemented with substantial
additional revenues. At the beginning of 1951, therefore, he recom
mended broad-scale individual and corporation income tax and excise
tax increases to yield an additional $10 billion annually. Of this
amount, $4 billion was to come from increases in individual income
tax rates, $3 billion from additional corporation income taxes, and
$3 billion from excise increases.54
The Congress responded with the Revenue Act of 1951, enacted
October 20, 1951, which increased individual income tax liabilities by
an estimated $2.5 billion and corporation income tax liabilities by an
estimated $2.3 billion a year, and also increased then existing excise
rates on a wide variety of items and imposed new excises, at an esti
mated annual yeld of $1.1 billion. Various other provisions of the
act were estimated to result in a loss of revenue of about $500 million.55
Together with the Revenue Act of 1950, the Excess Profits Tax of
1950 and the Revenue Act of 1951 were estimated to raise $14.7 billion
on a full year basis. Of this amount, it was estimated that the Revenue
Act of 1950 accounted for $5.8 billion, the Excess Profits Tax Act of
1950 for $3.5 billion, and the Revenue Act of 1951 for $5.4 billion.50
The latter fell far short of the $10 billion tax increase which the Presi
dent had requested. All but $1.1 billion of this additional revenue
came from increases in individual and corporation income taxes.
In January 1952, the President repeated his request for additional
tax revenues in an amount at least equal to that by which the Revenue
Act of 1951 fell short of the $10 billion requested in 1951.57 By mid1952, however, the urgency of additional tax receipts appeared to the
administration to be considerably diminished. In his Mid-Year Eco
nomic Report, the President observed that—
011
53Ibid., p. 11.
54Message from the President, Feb. 2. 1951, transmitting- a request for increased taxa
tion. in Annual Report of the Secretary of the Treasury for Fiscal 1951, pp. 489-442.
•">Ibid., pp. 492 ft
Cf. Annual Report of the Secretary of the Treasury for fiscal year 1951. p. 44.
" January 1952 Economic Report of rlie President, p. 21.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
235
'Whether the Government runs a surplus or a deficit is important but it is not
■of such decisive importance for the economy as to outweigh all other consider
ations.53
Having noted that defense outlays would rise from the second quar
ter 1952 rate of $50 billion to bet ween $60 and $65 billion in 19 53,59 he
nevertheless asserted that—
* * * the prospective deficit is not sufficiently threatening to our economy to
justify reducing it by gambling with our national safety. * * * To the extent
that the Congress does not reduce the deficit through tax actions, the only avail
able course is to seek the more gradual removal of the deficit by (a) the levelingoff of security outlays at a maintenance rate after the necessary buildup has
been achieved, (6) the increase in revenues resulting from the further expansion
of the economy, and (c) the continuation of policies designed to eliminate waste
and increase efficiency without sacrificing essential objectives for national secu
rity and for economic progress.00
Federal receipts (on an income and product account basis) rose very
rapidly in response to both the increases in tax rates and the expan
sion of income during the Korean war, from the fourth quarter 1949
annual rate of $38.7 billion, to a peak of $72.3 billion in the second
quarter of 1953. Revenues had been expanding during the first half
of 1950 in response to the widespread recovery from the 1949 recession,
and, in the second quarter of 1950, receipts were $8.5 billion higher
(annual rate) than during the last quarter of 1949. In the first quar
ter of 1951, they reached an annual rate of $67.7 billion, more than $20
billion higher than the second quarter 1950 rate. All major compo
nents of the revenue system contributed to this increase, but the rapid
rise in personal income and corporate profits, together with the sub
stantial increase in rates, resulted in sharp increases in both personal
income tax receipts and corporate profits tax accruals (table 8-5,
p. 286).
Individual income tax liabilities continued to rise in the second and
third quarters of 1953. Corporation profits tax accruals, however,
dipped sharply after the peak in the first quarter of 1951, as a result
of a sharp drop in corporate profits, part of which reflected the in
crease in depreciation charges as special 5-year amortization charges
were claimed on defense facilities. Most of the increase in Federal
revenues to the second quarter 1953 peak, therefore, was derived from
the individual income tax.
Federal expenditures, which had risen sharply in the first quarter
of 1950, reflecting the national service life insurance dividend distri
bution, dropped off even more sharply to the third quarter of 1950.
As national defense purchases rose thereafter, other expenditures first
leveled off, then began a moderate but uneven rise to a fourth quarter
1953 peak. All Federal expenditures, civil as well as national de
fense, rose from a third quarter 1950 annual rate of $36.6 billion to a
peak of $79.4 billion in the second quarter of 1953 (table 8-5, p. 286).
The rapid increase in revenues and the initial restraint on nonde
fense outlays resulted in very large budget surpluses (on an income
and product account basis) during the initial stages of the Korean
r.«»c. cit.. p.
Ibid.. p.
.
10
12.
,Sl Ibid.. rvo. 12. 13.
236
EMPLOYMENT, GROWTH, AND PRICE LEVELS
war. Recovery in the early part of 1950 had resulted in a substantial
shift from a $2.1 billion deficit (annual rate) in the last quarter of
1949 to an $8,3 billion surplus in the second quarter of 1950. The an
nual rate of Federal surplus on income and product account increased
to $20.2 billion in the first quarter of 1951, before declining precipi
tously as the growth in receipts slowed markedly while expenditures
rose at a more rapid rate (table 8-5, p. 286).
The major impact of the Korean war defense demands on the
economy coincides very closely with the realization of these large
budget surpluses. Department of Defense orders for hard goods rose
from $0.6 billion in the first quarter of 1950 to $4.5 billion in the last
quarter of the year. A further sharp increase in orders to $8.9 billion
occurred in the first quarter of 1951, followed by a decline to $6.3
billion in the last quarter of 1951. Orders rose again sharply to
$12.0 billion in the second quarter of 1952, fell to $9.3 billion in
the third quarter, and then began a precipitous drop to $0.4 billion
in the last quarter of 1953. New orders in durable manufacturing
rose sharply from the beginning of 1950 to the first quarter of 1951,
while defense orders were increasing very rapidly; civilian demands
probably contributed heavily to this rise. The decline in defense
orders after the first quarter of 1951 coincides with a decline in
newT orders in durable manufacturing, and the subsequent rise in
defense orders to the second quarter 1952 peak is associated with a rise,
though of more modest proportions in new orders in durables. With
the sharp drop in defense orders thereafter to the end of 1953, total
durable manufacturing new orders fell off by a substantial amount
(table 8-4, p. 284).
Unfilled orders in durable goods manufacturing, similarly, parallel
roughly the change in defense orders for hard goods. These unfilled
orders rose from $20.0 billion in the first quarter of 1950 to a peak of
$75.1 billion in the third quarter of 1952. Thereafter, they fell off
quite steadily with the decline in total new orders for durables and
defense orders for hard goods. Durable goods industries inventories
show a similar pattern, with a lag of about 1 year (table 8-4, p. 284),
Plant and equipment outlays also rose sharply during the period.
In constant 1954 dollars, these capital expenditures rose to $28.9 billion
in the third quarter of 1953. In current prices, the rise was even more
substantial, from $17.9 billion to $28.8 billion, from the last quarter of
1949 to the third quarter of 1953 (table 8-9, p. 303).
In short, during the period of sharpest rise in defense demand the
rise in revenues was rapidly outpassing actual outlays. Very sub
stantial budget surpluses, therefore, served to curb the inflationary
impact of the increase in defense orders. While orders rose again
sharply from the end of 1951 to the middle of 1952, the rise was brief
and not sustained during this period in which surpluses gave way to
deficits. During the period of sharp decline in orders, from mid1952 to the end of 1953, the deficit rose sharply. Budget surpluses,
therefore, gave way to deficits at the time when, first, the expansionary
impact of the Korean defense program was moderating, and second,
expansionary impact was giving way to contractionary influence as
defense demands were sharply reduced.
The timing of surpluses and deficits in relation to changes in the rate
of defense demand appears to have contributed materially to mod
EMPLOYMENT, GROWTH, AND PRICE LEVELS
237
erating the potential inflationary impact of the Korean war. The
sharp increase in consumer purchases in the third quarter of 1950 has
been generally characterized as a speculative move, financed in con
siderable part by a sharp reduction in the rate of personal savings.
As experience had repeatedly demonstrated during the early postwar
years, budgetary surpluses, even though quite substantial, were in
adequate to restrain expansion of consumer demand during periods
of rising personal income and high liquidity. But after this specula
tive surge, budgetary surpluses appeared to exert a more nearly ade
quate constraint on the growth in total demand and on the rise in the
price level.
Gross national product, in constant 1954 dollars, rose $61.2 billion
from the first quarter of 1950 to the second quarter of 1953, an average
annual rate of more than 6 percent. O f this increase, however, almost
two-thirds represented the increase in Federal purchases of goods
and services. In constant prices, all other purchases increased by
only $21.2 billion during this 3-year period, or at an average annual
rate of less than 2 y2 percent (table 8-3, p. 280).
During the same period, the implicit price deflators for gross na
tional product increased from 87.9 (1954=100) to 98.8, a rise of about
4 percent. All but a small portion of this increase had occurred by
the middle of 1951; from the second quarter of 1951 to the second
quarter of 1953, the deflators rose by only 2.8 points. Moreover, after
a sharp rise from mid-1950 to mid-1951, consumer prices were rela
tively steady, rising only 2.7 points from the third quarter of 1951 to
the second quarter of 1953. Consumer durable prices as measured
by the deflators, declined during this period, while nondurable prices
fluctuated within a very narrow range. Services, however, continued
to rise without interruption. Producers’ durable equipment prices
were also stable after the mid-1950 to mid-1951 upsurge (table 8-6,
p. 294).
During this period, from mid-1950 to mid-1953, unemployment fell
to extremely low levels. From a seasonally adjusted rate of 5.6 percent
in the second quarter of 1950, unemployment declined rapidly to 3.2
percent a year later, and continued to fall, reaching a low of 2.7
percent in the first three quarters of 1953 (table 8-1, p. 275).
In retrospect, the period of Korean hostilities, mid-1950 to mid1953, may be regarded as the highwater mark of postwar fiscal policy.
The very large and sharp increase in defense demands, coming on top
of a rapid recovery in total demand, represented a major disturbance
originating in the Government sector. Compensatory fiscal action
was both prompt and more nearly adequate than at any other time in
the postwar era. Moreover, the discretionary tax actions taken during
the first half of the Korean war period provided a framework in which
the subsequent automatic movement of Federal Government receipts
relative to expenditures would tend to compensate for a diminution
in the disturbing impact originating in defense demands.
The Korean war period was marked by a very high rate of use of
the labor force and by both a substantial increase in total output and
a significant shift in its composition. Yet the price level, following
an initial and relatively short surge, was remarkably stable.
We may speculate on the reasons for the signal success of fiscal
policy during this period, despite its less sparkling performance in
238
EMPLOYMEXT, GROWTH, AXD PRICE LEVELS
the earlier postwar period. Selective control devices, including price
and wage controls and consumer installment and mortgage credit,
undoubtedly contributed to achieving the price-level stabilization ob
jective in the face of rapidly rising and changing total demand and
employment. But these controls, at least the price and wage limita
tions, were relatively weak throughout the Korean war. Part of the
explanation undoubtedly lies in the fact that the early postwar period
was characterized by working off of very large backlogs of war-deferred consumer and. business demands, particularly for durables, the
stock of which had grown little over a long period of time prior to
1946, whereas this process had been largely achieved by the time of
the outbreak of hostilities in Korea. In addition, the high levels of
consumer outlays relative to disposable income and the rapid increase
in business expenditures in the early postwar period had been sup
ported by an extremely high degree of liquidity in the private sectors.
By the time the Korean war broke out, however, the rise in real output
and in the price level had substantially reduced liquidity relative to
levels of national output,61 The impact of changing fiscal results on
monetary conditions and on private spending, therefore, may well
have been considerably greater than in the earlier postwar era.
The 1953-51p recession
Hostilities in Korea ended on July 27, 1953. Although defense
demands on the economy had been declining for about a year, they
fell off at a precipitous rate with the termination of hostilities. Fed
eral purchases of goods and services for defense purposes dropped
from an annual rate of $50.5 billion in the second quarter of 1953 to
$47.6 billion in the last quarter of the year (table 8-2, p. 276). Defense
Department orders for hard goods also fell, from $4.6 billion in the
first quarter of 1953 to $0.4 billion in the last quarter of the year. Nre
orders and unfilled orders in durable goods manufacturing ;il^> fell
sharply during this period; durable goods inventories also declined
after a half-year lag (table 8-4, p. 284),
In mid-1953, the economy turned abruptly from strong growth in
gross national product to sharp recession. From its second quarter
1953 peak, gross national product in current prices fell $10 billion in
a year's time. (In constant 1954 dollars the decline was even sharper,
$13.7 billion.) While consumer, new construction, and producer dura
ble equipment outlays were quite stable, nonfarm business inventories
moved from accumulation at an annual rate of $4.0 billion in the sec
ond quarter of 1953 to liquidation at an annual rate of $'3.2 billion
in the second quarter of 1954. Over the same period, Federal pur
chases fell $11.8 billion while State and local purchases rose $3.0 bil
lion. In short, the recession appears quite clearly7 to have been a
direct result of the cutback in the defense program and the associated
liquidation of nonfarm business inventories (tables 8-2 and 8-3, pi>.
276and 280).
Unemployment more than doubled between the second quarters of
1.953 and 1954. Prices, on the other hand, did not weaken but con
tinued to rise moderately through the recession (tables 8-1 and 8-6,
pp. 275 and 294).
61 Cf. the forthcoming study paper by John G. Gurley. “Fin*
Economic Development in the United States."
EMPLOYMENT, GROWTH, AND PRICE LEVELS
239
Fiscal policy in the 1958-54 recession, which resulted primarily
from a sharp reduction in Federal demands, was much less successful
than it had been earlier in dealing with the potentially severe1 infla
tionary disturbance originating in the Korean war-associated in
crease in Federal demands. This is not to suggest that defense de
mands and expenditures should have been maintained on a wartime
basis following the termination of hostilities in Korea, But the poten
tial impact of a sharp and substantial reduction in defense demands
on total economic activity was not properly appraised, nor were the
compensatory fiscal actions which were called for taken on a timely
basis or in adequate volume.
The last Truman budget, presented January 9, 1953, shortly before
President Eisenhower assumed office, called for an $8 billion decline
in new obligational authority for fiscal 1954, about $7 billion of which
was to be the reduction for military services. Expenditures, pri
marily for military services and for international security, on the
other hand, were expected to rise to a peak level in fiscal 1954, after
which they were expected to decline before leveling off at—
* * * the amounts necessary to maintain these [the Armed] Forces and to
replace current equipment with new and better items as they are developed.
The eventual decline in Federal expenditures was estimated to be in
the neighborhood of $15 billion.62
In the light of these prospects, President Truman, while avoiding
specific tax policy recommendations, nevertheless urged that—
* * * it would not be wise to plan for a large budget deficit during a period
when business activity, civilian employment, and national income are reaching
unprecedented heights. The course of prudence and wisdom would be to con
tinue to strive for a balanced budget and a pay-as-we-go policy in our rearma
ment program.03
Inferentially, therefore, President Truman not only opposed allow
ing the scheduled expiration in the excess profits tax (June 30, 1953),
the reduction in individual income tax rates (December 31,1953), and
the reduction in the corporation normal tax from 30 to 25 percent
and in excise rates (March 31, 1954), to take effect, but favored
further taxes to reduce the prospective deficit in fiscal 1954.
The budget prospects facing the Eisenhower administration as it
assumed office were anything but rosy. It sought vigorously to re
duce appropriations and obligations in order to effect a near-term and
substantial reduction in expenditures and in tax rates. Its success
in reducing obligational authority and expenditures was substantial.
President Eisenhower reported in a message to the Congress on May
20, 1953, that in its 4 months in office, his administration had already
succeeded in reducing recommended requests for new appropriations
by about $8.5 billion and planned expenditures for fiscal 1954 by
about $4.5 billion.64 In his budget message in January 1954, the
President estimated that fiscal 1954 new obligational authority would
be $11.1 billion less than President Truman had estimated" for the
year, or a drop of $19.5 billion from fiscal 1953. Expenditures for
fiscal 1954 were estimated at $70.9 billion, $7 billion less than Presi
62Budget message of the President for fiscal 1954, pp. M-6. M-7. A-5, and A-6.
6:5Ibid.. p. M—10.
64 Message from the President. May 20, 1953, transmitting recommendations for tax
legislation, in Annual Report of the Secretary of the Treasury for Fiscal 1958, p. 204.
240
EMPLOYMENT, GROWTH, AND PRICE LEVELS
dent Truman’s estimate. A deficit of $3.3 billion was predicted for
fiscal 1954 rather than the $9.9 billion estimated a year earlier.65
Moreover, further substantial reductions in obligational authority and
in expenditures were proposed for fiscal 1955.
The administration appeared to be unmindful of the seriously de
stabilizing impact which might result from such sharp reductions in
Federal demands on the economy and the likely need for compensat
ing action. Thus, when the issue of the extension of the excess
profits tax arose early in 1’953, the administration focused on budg
etary rather than economic stabilization considerations and urged a
6 months’ extension of the tax. This position was reinforced by
action taken early in the year by the Committee on Ways and Means
to advance the date for termination of the individual income tax rate
increase, provided by the Revenue Act of 1951, to June 30, 1953.
Allowing the excess profits tax to expire as scheduled would probably
have served to dislodge the committee’s bill from the House Rules
Committee, and would have resulted in a compounded revenue loss.
As matters turned out, had both reductions been made effective in
mid-1953, the subsequent recession might very well have been largely
avoided.
In a message to the Congress on May 20, 1953, President Eisen
hower set forth his proposals for tax-rate adjustments. First noting
a substantial prospective deficit in the coming fiscal year (1954),
then the high levels of business activity prevailing at the time, he
observed that tax reduction would have inflationary consequences.
His specific recommendations were for (1) extension of the excess
profits tax 6 months beyond its scheduled expiration date, (2) rescis
sion of the five-point reduction in the corporation normal tax rate,
scheduled for April 1, 1954, (3) a 1-year postponement, from Janu
ary 1, 1954, to January 1, 1955, of the scheduled one-half percentage
point increase in the old-age and survivors insurance contribution
rate, (4) rescission of the reduction in excises scheduled for April 1,
1954, and (5) allowing the 1951 Revenue Act individual income tax
rate increases to terminate, as scheduled, on December 31, 1953. The
latter, the President asserted, would be justified—
* * * only because of reductions in proposed expenditures which the present
administration has already been able to make and because of additional econ
omies we expect to achieve in the future.
Finally, the President noted that the Secretary of the Treasury would
make extensive recommendations for tax reform by the end of the
year.66
A t the time these proposals were formulated, the administration
underestimated the economic impact of the substantial economy meas
ures it was then undertaking. As the President noted, economic ac
tivity was indeed at high levels in the spring of 1953. To foresee that
cutbacks in defense orders and purchases of the scale contemplated
could exert a significant recessionary influence when vastly more sub
stantial cuts following the termination of World W ar II had not
might have called for a more rigorous appraisal of the many differ
65Budget message of the President for fiscal 1955. p. M-7.
66Cf. Annual Report of the Secretary of the Treasury for fiscal year 1953, pp. 204-207,.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
241
ences in the circumstances of the economy that the new administration
could muster. It would, moreover, have been inconsistent with the
prevalent view that business confidence had been greatly bolstered by
the election results of the preceding fall and would not be shaken by
the results of the promised termination of the Korean conflict.
With the exception of the proposed rescission of the termination of
the Korean war excise rates (selective excise rate reductions were
effected in March 1954), and the 1-year deferral of the Old Age
and Survivors Insurance contribution rate increase, the President’s
tax proposals were adopted. Thus, the expiration of the excess profits
tax and of the 1951 Revenue Act individual rate increases came 6
months late.
As matters stood the automatic fiscal stabilizers were again called
upon to bear much of the brunt for compensating for the disturbing
reductions in Federal demands. Transfer payments rose by $2 billion
(annual rate) between the second quarters of 1953 and of 1954. While
corporate profits tax liabilities fell $4.3 billion (annual rate) from the
second quarter to the fourth quarter of 1953, individual liabilities de
clined only by $0.1 billion in the same period. After the first quarter
of 1954, however, individual liabilities fell $3.3 billion to the second
quarter of 1954; about $0.6 billion of this decline was offset by the in
crease in personal contributions for social security. This tax reduc
tion, with the rise in transfer payments, more than offset the decline in
total personal income; disposable income continued to rise, as did per
sonal consumption expenditures following a brief and modest drop in
the last quarter of 1953. Moreover, corporate profits tax accruals
began to rise again in the second quarter of 1954 as corporate profits
improved (tables 8-5,8-7,8-11, pp. 286,298, and 305).
On income and product account, the Federal deficit fell from $7
billion in the second quarter of 1953 to $5.6 billion in the third quarter
of the year, before rising sharply to $11.8 billion in the last quarter
(annual rate). Despite the tax reductions effective during the first
quarter of 1954, the deficit shrank to $5.4 billion in the second quarter
of the year, wdien the recession trough was reached. This perverse
movement, of course, resulted from the fact that reductions in Federal
expenditures, particularly purchases, substantially exceeded the de
cline in revenues during the downturn.
There is little to be said in extenuation of the poor performance of
fiscal policy during the 1953-54 recession, except to refer first to the
lag in information concerning economic developments and, second,
to the repeatedly expressed confidence of the administration that the
downturn would be mild and of short duration. As had the Truman
administration before it, the Eisenhower administration explicity re
jected tax reductions, beyond those scheduled, as an antirecessionary
measure.67 In this respect, both administrations were, fortuitously,
well served by tax reductions enacted in advance of the recession.
As the Truman administration before it, the Eisenhower administra
tion failed to assess property the recessionary impact of reductions in
Federal demands effected in a relatively short period of time. And
like its predecessor, the EisenhowTer administration apparently felt
67 See, for example, the address telecast and broadcast by the President, Mar. 15, 1954,
on the tax program, in annual report of the Secretary of the Treasury, for fiscal 1954,
pp. 221-224.
242
EMPLOYMENT, GROWTH, AND PRICE LEVELS
compelled to gear its tax program to budgetary considerations rather
than to those of economic stabilization.
5. Recovery and boom: 1951^-55
(a)
Recovery in 195h
In mid-1954, the economy turned from recession to recovery. Con
sumption expenditures continued to gain, as did new construction,
particularly residential in the nonfarm sector. A t the same time,
inventory liquidation tapered off and the decline in Federal purchases
of goods and services slowed very considerably (table 8-2, p. 276).
In the last quarter of the year, vigorous recovery was underway.
Consumption outlays were rising more sharply than at any time since
the last quarter of 1952, residential construction was expanding
rapidly, a relatively substantial increase occurred in net exports of
goods and services, and inventory liquidation gave way to accumula
tion. Government purchases again declined as Federal purchases for
national defense continued to contract, but the reduction was modest
compared with that at the beginning of the year.
Gross national product in current prices reached a new peak at an
annual rate of $370.8 billion in the last quarter of 1954. Unemploy
ment, which had reached a recession high of 5.9 percent, seasonally
adjusted, in the third quarter of 1954, had declined to 5.4 percent in
the last quarter of the year. As measured by the implicit price de
flators, movements in the price level were quite limited. The gross
national product deflator had risen from 98.8 in the second quarter of
1953 to 99.9 in the first quarter of 1954; it fell slightly in the second
quarter of the year and rose to 100.2 in the last quarter (tables 8-1,
8-2, 8-3, and 8-6, pp. 275, 276, 280, and 294).
It was in this recovery phase that the fourth tax reduction of calen
dar year 1954 was enacted, on August 16, 1954. The expiration of the
excess-profits tax and the individual rate reductions, effective January
1, 1954, together with the excise reductions effective April 1, 1954, had
reduced revenues, on a full-year basis and at high income levels, by an
estimated $6 billion. The Internal Revenue Code of 1954 added an
estimated full-year revenue reduction of $1.4 to this amount,68
The Internal Revenue Code of 1954 was not intended as an anti
recessionary measure. Work on this legislation had begun early in
1953, before recessionary influences were recognized or understood.
The act, instead, was aimed at basic structural reform of the income
tax to eliminate inequities and reduce obstacles to economic growth.69
It provided no general rate reductions, although it did afford reduc
tions in taxes for particular groups of taxpayers.70
Although the new code made numerous changes in the internal reve
nue laws, its principal substantive provisions (in the context of this
discussion) were the substantial acceleration of depreciation allow
ances on new depreciable facilities and a limited exclusion and credit
for dividends received by individuals from domestic corporations.
68Since 1954 income was somewhat less than that on the basis of which these estimates
were made, the estimated revenue loss was probably on the high side for the first three
reductions. On the other hand, the full-year cost of the Revenue Code of 1954 was under
estimated if for no other reason than that it failed to take into account the ultimate cost
of the depreciation revisions it provided.
69Budget message of the President for fiscal 1955. p. M—
15.
70For a detailed summary of the changes made by the Internal Revenue Code of 1954,
see Annual Report of the Secretary of the Treasury for Fiscal 1954, pp. 246-286.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
243
These provisions in particular characterized the tax revisions as
directed principally toward easing the existing tax burden on private
investment.
It is difficult to evaluate the effectiveness of these provisions in this
regard. Accelerating depreciation allowances, presumably, will stim
ulate capital outlays both by increasing the after-tax rate of return on
investment in depreciable facilities and by generating an expansion in
the flow of internal business funds. No generalization can be made
with respect to the extent of the former effect in the absence of detailed
data on the useful life (for tax purposes) of the assets acquired follow
ing the effective date of the Internal Revenue Code of 1954. With
respect to the latter effect, however, it is observable that the annual
increase in corporate funds from depreciation increased markedly, in
absolute terms, following the enactment of the accelerated deprecia
tion provisions. For the years 1946 through 1953, the average annual
increase in funds from this source (as found in the national income
data) was about $1.1 billion. Since 1953 the average annual increase
has been about $1.6 billion, roughly 50 percent greater.71
With the data now available, no close association is found between
the use of the accelerated depreciation provisions and increases in
capital outlays.72 (Capital outlays did, indeed, increase rapidly fol
lowing 1954, but such evidence as is available hardly supports the view
that the 1954 code changes in depreciation were a major contributing
influence).
The dividends-received exclusion and credit for individuals, al
though widely justified as equity measures aimed at reducing the
double taxation of dividends, were also regarded as important meas
ures to reduce the existing tax bias against equity financing and to
improve the market for new corporate equity issues. In this respect,
too, the evidence is inconclusive. While equity issues have indeed
increased since 1954, year-to-year changes in the proportion of total
sources of corporate funds derived from equity issues seem to be more
closely associated with broad changes in economic conditions.73
In short, apart from the relatively limited amount of reduction in
tax liabilities for calendar 1954 effected by the newr code, its contribu
tion in the short run to expansion of economic activity cannot be estab
lished. As already indicated, recovery from the recession was well
underway by the time of enactment of the revision and was proceeding
vigorously in the last quarter of the year before the new law became
fully effective.
The expansion of personal income and corporate profits during
the recovery resulted in a rising volume of Federal receipts (on in
come and product account). A t the same time, Federal expenditures
continued to decline, though at a much reduced rate. The result
was a contraction of the Federal deficit from an annual rate of $10.6
billion in the first quarter of 1954 to $2.3 billion in the last quarter of
the year (table 8-5, p. 286).
J1U.S. Income and Output, op. cit., p. 216.
72Cf. Federal Revenue System: Facts and Problems, materials assembled by the com
mittee staff, joint committee print, Joint Economic Committee, 86th Cone., 1st sess.,
pp. 73-79.
73Federal Revenue System: Facts and Problems, op. cit., pp. 28-30, and Gurley, op. cit.
244
EMPLOYMENT, GROWTH, AND PRICE LEVELS
( b) The 1955 boom
As the year 1955 began, the President and his Council of Economic
Advisers noted the recovery in economic activity and forecast con
tinued economic expansion in 1955.74 The fiscal program recom
mended for this expansion phase was continued reductions in Federal
expenditures which, when achieved, would make possible additional
tax reductions. The target was to balance the cash budget in 1955,
with the prospect that continuing economic expansion with further
expenditure cuts would make possible additional tax reductions in
1956. Accordingly, it was recommended that the scheduled reduction
in corporation income tax and excise rates be deferred for a year.75
Since the President’s report explicitly set forth the desirability of
compensatory fiscal action for purposes of economic stabilization,76
the inference to be drawn from these fiscal recommendations is that
the administration anticipated a period of steady, noninflationary
expansion of the economy in which reductions in Federal expendi
tures with matching tax reductions would be compensated for by
increases in demand elsewhere. These anticipations, however, under
estimated the strength and failed to appraise accurately the character
of the expansionary developments in 1955 and, therefore, the conse
quent challenges facing fiscal policy in the ensuing years.
From the last quarter of 1954 to the last quarter of 1955, gross na
tional product in current prices increased by $38.1 billion, or by 10.3
percent. The expansion occurred on virtually an across-the-board
basis, with the minor exception of net exports of goods and services
(table 8-2, p. 276).
The decline in Federal purchases of goods and services came to a
halt at the beginning of the year; national defense purchases leveled
off until mid-1956, while other purchases fluctuated moderately within
a narrowTrange, reflecting changes in Commodity Credit Corporation
and similar purchases and Government sales.
Defense orders for hard goods, however, were lower in the first three
quarters of 1955 than in the same period of the preceding year, but
then began a strong rise which continued into 1956. Xew orders in
durable manufacturing rose very rapidly, primarily in response to
rising civilian demands. Unfilled orders and inventories also rose
very rapidly in 1955 (table 8-4, p. 284). In the second quarter, plant
and equipment outlays began the strong rise which was to characterize
the next 2 years as those of investment boom (table 8-9, p. 303).
In short, the year 1955 was marked by a very rapid expansion in
total spending, originating primarily in the private sector, to which
defense demands contributed at the end of the year. More important
than the increase in the aggregate volume of demand, however, was
the strong growth in demand for durables and the consequent raising
of horizons for capital outlays. Developments in 1955, therefore,
augured a strong sectoral shift in demand continuing beyond the
immediate boom period.
Although the Council of Economic Advisers had noted the prob
ability of differential rates of expansion in the various sectors of the
74January 1955 Economic Report of the President, p. 24.
75Ibid., pp. 48-50.
76Ibid., p. 49.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
245
economy,77 it failed to take into account the possibility of inflationary
developments arising out of these sectoral demand shifts. In this, of
course, the Council was not alone. Lags in information, as always,
served to becloud economic prospects. The strength and duration of
the increase in private investment demand certainly exceeded expecta
tions.
Apart from the administration’s proposals to continue reducing
expenditures wherever possible and its requests for deferral of sched
uled tax reductions, fiscal policy was to rely primarily on the built-in
stabilizers to limit the expansion of total demand to proportions
consistent with economic stabilization objectives. Federal receipts,
on income and product account, responded to the expansion of eco
nomic activity, increasing in the aggregate by $10.2 billion from the
fourth quarter of 1954 to the corresponding quarter of 1955. A l
though Federal expenditures also rose during this period, the Federal
Government income and product account shifted from a deficit of $2.3
billion to a surplus of $5.6 billion (table 8-5, p. 286).
The increase in Federal and State and local personal tax payments,
however, offset only 13 percent of the increase in personal income.
At the same time, the rate of personal saving fell during the first
three quarters of 1955 (table 8-7, p. 298). Built-in flexibility in the in
dividual income tax was inadequate to curb the substantial increase in
consumer outlays, particularly in the face of a strong demand for
automobiles and other durables and easy consumer credit.
Corporate profits tax accruals responded more vigorously, off
setting close to 43 percent of the increase in profits before tax.
Nevertheless, corporate profits after tax rose to $24.9 billion in the
last quarter of 1955 (annual rate), a level exceeded in the postwar
period only in the two quarters immediately following the outbreak
of Korean hostilities (table 8-11, p. 305). The increase in taxes was
inadequate to prevent a rising level of dividend distributions and
capital outlays.
The immediate inflationary consequences of the expansion of total
demand in 1955 were not particularly striking. In the fourth quar
ter of 1955, the overall implicit price deflator for gross national
product was 101.9, compared with 100.2 a year earlier (table 8-6,
p. 294). Nevertheless, the 1955 rise in prices was strong relative to that
occurring in the preceding 2y2 years, during which the deflator had
risen by the same aggregate amount.
While prices rose moderately, unemployment fell to slightly more
than 4 percent in the last quarter of 1955, where it leveled off for
the next seven quarters (table 8-1, p. 275). Employment conditions,
therefore, did not show the same inflationary pressures, at least when
measured against earlier postwar years.
6. Inflation on the level: 1956-57
At the beginning of 1956, the administration noted with pride the
accomplishments of the economy in the preceding year. “Full em
ployment, rising incomes, and a stable dollar have been cherished
goals of our society. The practical attainment of these ideals during
1955 was the year’s great economic achievement.” 78
77Ibid., pp. 24-25.
78January 1956 Economic Report of the President, p. III.
246
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Continuing expansion at a high rate of use of the labor force- and
production capacity was envisaged for 1956. This expansion, it was
explicitly noted, would in all probability involve significant shifts in
the composition of demand.79
The prospect of general inflationary movements becoming strong
in 1956 was nowhere suggested in the President's economic report.
The outlook, therefore, was continuing expansion, though at a slower
rate than in the preceding year, with stability in the general price
level.
In this setting, fiscal policy was to aim at achieving budgetary bal
ance. This called for again deferring the scheduled reductions in
corporate income and excise tax rates. The expansion of income was
to produce a sufficient increase in revenues to allow some gain on the
moderate increase in expenditures anticipated at the time. Should
any surplus develop, it was to be devoted to debt retirement rather
than tax reduction.80
Measured in current prices, economic expansion continued at a
vigorous pace through 1956 and the first three quarters of 1957. From
the last quarter of 1955 through the third quarter of 1957, the average
annual rate of increase of gross national product was 5.3 percent.
Moreover, the expansion was widespread; a moderate decline in out
lays for residential construction was more than offset by the increase
in other construction outlays. Virtually the only major component
of gross national product to register a decline, in current prices, was
the change in business inventories (tables 8-2, p. 276).
The principal feature of this expansion of demand was the rise in
outlays for plant and equipment. In current prices, these expendi
tures had increased from a seasonally adjusted annual rate of $25.7
billion in the first quarter of 1955 to $31.5 billion in the last quarter
of that year. They continued to rise, to a peak rate of $37.8 billion
in the third quarter of 1957 (table 8-9, p. 303).
On the other hand, measured in constant 1954 dollars, the average
annual rate of increase in gross national product over the same period
was about 1.4 percent, and virtually all of this growth occurred in the
last quarter of 1956 and the first two quarters of 1957. The increase
was in consumer expenditures for nondurables and services, in net
exports of goods and services, and in State and local government
purchases ( table 8-3, p. 280).
Seasonally adjusted plant and equipment outlays in constant dol
lars rose more modestly than the current price series indicates. From
the first quarter of 1955 through the third quarter of 1957, the increase
was $7.1 billion, virtually all of which had occurred by the third
quarter of 1956 (table 8-9, p. 303).
The divergence between the two measures of gross national product,
of course, represents the rise in prices occurring during this period.
From the last quarter of 1955 through the third quarter of 1957, the
overall implicit price deflator for gross national product rose from
101.9 to 109.1. Although significant increases occurred in every com
ponent of aggregate demand, they were most pronounced in the case
or ' onsumers’ and producers’ durables and in Government purchases
(table 8-6, p. 294:).
79Thid.. pp. 43-50.
8(1Ibid., pp. 72-76.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
247
While total demand and prices continued to rise and output leveled,
off, employment rose with the increase in the labor force. Seasonally
adjusted, the quarterly rate of unemployment varied only slightly
between 4.1 and 4.3 percent during this period (table 8-1, p. 275). But
major shifts were occurring in the composition of employment, The
increase in employment in manufacturing was quite small, although
substantial increases were made in State and local government employ
ment and services. Moreover, within manufacturing, a marked in
crease occurred in nonproduction worker employment while employ
ment of production workers declined.81 Similar shifts were occur ring
in the composition of production.82 In short, while total output was
growing at a very slow rate, major shifts were occurring in the level
of activity among the major sectors of the economy.
According to Professor Sehultze, the overall growth of money de
mand in this period was not excessive. The strong and widespread
upward price movements in this period were attributable, rather, to
the substantial changes in the composition of demand and changing
employment patterns. In general, price increases originated in sectors
in which demand was rising and spread to other sectors by raising their
costs. By virtue of the downward rigidities of wages and prices, the
original upward price impulses were not offset by equivalent down
ward price movements in sectors in which demand was contracting.
In addition, associated with the investment boom was a substantial
increase in employment of so-called overhead labor, i.e., research and
other technical and administrative personnel. Since real output in
creased at a very slow^ rate, unit costs of output rose, adding to the
upward pressure on prices.83
In retrospect, fiscal and monetary policies were poorly suited to deal
with the problems of economic stabilization and growth during this
period, if the thesis presented in chapter 5 of this report and by
Professor Sehultze is correct. Throughout this period, during which
monetary restraints became increasingly rigorous,81 no effort was made
to direct such restraints to the specific sectors of the economy in which
rising demand w^as effecting significant price disturbances, even though
it was widely conceded that general credit contraints might well
impinge with varying degrees of force on the different sectors.
The record indicates that the principal impact of monetary and
credit restraints was on housing and associated consumer durables,
the decline in which affected outlays for plant and equipment only
after a considerable lag. A considerable part of the general upward
price pressure of the period, however, stemmed from the rise in plant
and equipment outlays which were only tardily affected by monetary
restraints. In other words, to the extent that monetary constraints
served to restrain the increase in money demand, they did so, appar
ently, without curbing the increases in demand in the particular sectors
in which price increases originated. Moreover, according to Sehultze,
the restraint on expansion of aggregate demand, particularly in the
latter part of this period, served to promote more widespread price
increases by limiting the expansion of real output to levels at which
81Cf. Sehultze, op. cit., p. 122.
Ibid., p. 101.
83Ibid., pp. 1-16. See also chapter 5 of this report.
A c c o r d i n g to Gurley’s measure of liquidity, the ratio of liquid assets to gross national
product declined markedly between 1954 and 1957. Cf. Guriev, op. cit
248
EMPLOYMENT, GROWTH, AND PRICE LEVELS
unit costs were greater than they would have been at higher rates of
production.85
Fiscal policy, on the whole, made little contribution to economic
stability during this period, and probably contributed significantly to
inflationary strains. Individual and corporation income tax rates, it
is true, were maintained, while the social security contribution rate
was increased for calendar years 1957 and 1958. In addition, increases
were made in excise rates on gasoline and diesel fuels, trucks and highway-vehicle tires and new excises were imposed on tread rubber and on
highway use by trucks in connection with the financing of the high
way program inaugurated in 1956. From the last quarter of 1955,
Federal receipts on income and product account rose $7 billion through
the third quarter of 1957. Over the same period, however, Federal ex
penditures rose by $9.6 billion, reducing the income and product ac
count surplus from $5.6 billion in the fourth quarter of 1955 to $3
billion in the third quarter of 1957 (table 8-5, p. 286).
The composition of the changes in Federal expenditures, rather than
their magnitude, appear to be at the source of the inflationary impact
of Federal fiscal developments during this period. National defense
purchases of goods and services rose by $5.8 billion and gross civil
purchases, other than those by the Commodity Credit Corporation
and similar outlays, increased by $1.7 billion, reflecting, primarily, the
increased activity in highway construction under the Federal A id
Highway Act of 1956. (State and local government expenditures
were also rising during this period, reflecting the rising level of capital
programs, including schools and highways, in these jurisdictions, see
tables 8-5 and 8-10, pp. 286 and 304).
In addition, defense obligations for hard goods also rose very
sharply in 1956, during the height of the investment boom. These
orders rose from a total of $7.9 billion in" calendar 1955 to $18.5 bil
lion in 1956, and from a quarterly rate of $0.7 billion in the third
quarter of 1955 to $5.9 billion in the second quarter of 1956. Activity
in the durable goods industries was at a postwar peak rate in 1956, as
measured by new orders received and unfilled orders. Inventories in
these industries also rose sharply. Defense obligations and durable
goods industries activity declined after the end of 1956, although in
ventories continued to rise until the middle of 1957 (table 8-4, p. 284).
Increases in Federal demands, therefore, were concentrated in the
very sectors in which total demand was rising and in which strong
upward price pressures were developing, and at the very time at which
private demand was at a peak. On the other hand, apart from the
increase in highway excises, the expansion of Federal revenues, both
discretionary and automatic, were concentrated in the consumer sec
tor^ in which the price increases (as measured by the implicit gross
national product deflators) were relatively modest and lagged behind
those in producers’ durables and construction.
85 Schultze, op. cit., pp. 1-12. Schultze concludes that “Even should aggregate demand
rise no more rapidly than the supply potential of the economy, however, inflation can still
take place if the composition of demand changes sharply. Faced with this situation we
can attempt to alter the composition of demand by using selective controls or we can
accept the moderate price increases which will otherwise occur. In either event, the
problem cannot be solved by a further repression of demand through general monetary and
fiscal policy” (p. 3).
EMPLOYMENT, GROWTH, AND PRICE LEVELS
249
Fiscal developments, therefore, were as poorly oriented, from the
point of view of their sectoral impact, as monetary policy during this
period, in terms of the price-level stabilizing objective. Fiscal and
monetary constraints of a general character could have been imposed
with sufficient severity to limit aggregate money demand to noninflationary levels. In view of the substantial sectoral shifts in demand,
to which Federal demands contributed, the very limited increase in
real output, and the stability of employment rates, however, such rigor
ously restrictive policies would have resulted in lower levels of real
output and employment. A s matters stood, these constraints were
not adequate to curb inflation but sufficiently rigorous to limit the
growth in real output to very small proportions.
Schultze’s analysis does not suggest that less restrictive monetary
and fiscal policies during this period would have materially reduced
the extent of price increases, but it does argue that such policies would
not have materially increased inflationary pressures. A t the same
time, a more pronounced growth in real output might have been
achieved.
Economic developments in this period illustrate the kind of dilemma
with which public policies aimed at economic growth, high employ
ment, and price level stability may be faced. Dynamic changes in
the composition of demand and in optimum combinations of inputs
may in themselves give rise to inflationary pressures in an economy
in which resource mobility is not very high, even if aggregate demand
is not excessive. Should public policy seek to curb these price pres
sures? I f so, should it seek to do so by direct limitations of the
dynamic impulses toward reallocation of resources, i.e., by checking
the increases in demands in expanding sectors through selective credit
and fiscal devices ? To do so wTould be to improve the position of fixedincome groups and economic units which will not benefit immediately
and directly from the dynamic shifts. This will be at the cost of
the welfare of the rest of the economy which stands to gain from
the changes in economic activity and possibly at the expense of all,
over a longer period of time, as a result of a slower rate of expansion
of capacity to produce the goods and services most desired. Alterna
tively, should public policy seek to curb price pressures, in this type
of situation, by general fiscal and monetary restraints on the expan
sion of demand? To do so might w^ell require levels of activity so
low as to involve substantial unemployment and a materially reduced
rate of growth in productive capacity. The final alternative is to
focus primarily on expansion of total product and productive capac
ity, while minimizing impediments to dynamic adjustments in re
source use, and to accept the cost of this dynamic expansions in terms
of some upward movement in the general level of prices.86
The basic failure of public policy in this period is not that it chose
among these alternatives contrary to the wishes of the Nation as a
whole, but that it failed to assess the problem correctly and to make
an explicit choice among alternative policies to cope with it. The
result was inflation and an unduly limited growth in real output.
86 Cf. Schultze, op. cit., p. 15. See also N. B. Ture, “Economic Growth and Federal Tax
Policy.” Proceedings of the 51st Annual Conference of the National Tax Association, 1958,
especially pp. 388-391.
48795—59---- 19
250
EMPLOYMENT, GROWTH, AND PRICE LEVELS
7. Recession again: 1957-68
In the fourth quarter of 1957, the economy began a sharp decline
which continued into the first quarter of 1958. In constant 1954
dollars, the drop in gross national product was at an annual rate of
$19.6 billion from the third quarter of 1957 to the first quarter of
1958. The decline occurred across the board with the exception of
consumer outlays for services, new residential (nonfarm) construc
tion, and Government purchases of goods and services. It was most
pronounced, in real terms, in plant and equipment outlays and in
inventories (table 8-3, p. 280).
In current prices, much the same pattern is to be observed (table 8-2,
p. 276). Prices continued to rise in most of the broad sectors of gross
national product throughout the recession and subsequent recovery
(table 8-6, p. 294).
Unemployment in this period rose from a seasonally adjusted rate
of 4.3 percent in the third quarter of 1957 to 6.5 percent in the first
quarter of 1958. W hile real output and current money demand
turned up in the second quarter of 1958, the rise in employment
lagged. Unemployment continued to rise to a peak rate of 7.4 per
cent in the third quarter of the year (table 8-1, p. 275).
The recession beginning in the latter part of 1957 appears to have
originated primarily in the leveling off of business demands for plant
and equipment after the third quarter 1956 peak, a sharp drop in
exports following the rise in 1956 associated with the Suez crisis,
the moderate decline in total construction in real terms, and a de
clining rate of increase in consumer outlays.87 Federal fiscal develop
ments also contributed to the decline.
From mid-1956 through the third quarter of 1957, defense orders
for hard goods declined substantially, after a sharp rise in the preced
ing year. Those orders had increased from $0.7 billion in the third
quarter of 1955 to $5.9 billion in the second quarter of 1956. They
fell to $2.2 billion in the third quarter of 1957. Moreover, this de
cline in defense orders coincided very closely with the decline in total
new orders for durable manufacturing industries. These had reached
a post-Korean peak of $44.9 billion in the last quarter of 1955, there
after they fluctuated moderately around an average of $43.3 billion in
1956 and then skidded sharply to $36.1 billion in the last quarter of
1957. Unfilled orders in the durable goods industries fell from $61
billion in the last quarter of 1956 to $48.1 billion a year later. Inven
tories continued to rise to mid-1957, and then turned down sharply
(table 8-4, p. 284).
The impact of the cutback in defense hard goods orders was par
ticularly severe in the aircraft industry. Total new orders, civilian
as well as military, in this industry were $6.5 billion in the second
half of 1956 but fell to $3.7 billion in the first half of 1957. Virtu
ally all of this decline was in new orders for military aircraft (in
cluding missiles).88
These simple magnitudes do not convey the full significance of this
cutback. Because of the rapidly changing technology in military
hard goods, any given change in the volume of orders for such equip
87Cf. January 1958 Economic Report of the President, ch. 2.
88Cf. U.S. Department of Commerce, Office of Business Economics, Survey of Current
Business, November 1959, pp. 4-6.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
251
ment is likely to result in a substantially magnified change in total
new orders for durable goods. Defense contractors receiving new
orders are likely often to have to place new orders for production
facilities, to a substantial extent because new defense orders increase
the rate of obsolescence of highly specialized plant and equipment.
Although the change in defense orders relative to the change in total
new orders in durable goods industries may appear to be relatively
small, it seems quite likely that the defense component of total new
orders is, on the whole, the most significant in determining trends in
activity in these industries.
In the prior postwar recessions, the sluggishness of discretionary
policy changes to curb the downturn could fairly be ascribed, in con
siderable measure, to the tardiness of information concerning eco
nomic developments. W hile this data lag had by no means disap
peared, it was substantially reduced in the 1957-58 turn. Thus, the
January 1957 Economic Report of the President noted explicitly
some of the ingredients which made for uncertainty concerning the
economic outlook for 1957. Among these were the loss in liquidity in
business and among financial institutions, the possibility of either a
downturn or a slower rate of increase in capital outlays, and uncer
tainties in the international situation affecting net exports of goods
and services.89
In addition, the economy wave in Federal Government appropria
tions touched off by the Secretary of the Treasury in January 1957
upon the presentation of the budget for fiscal 1958 augured a reduced
rate of increase in Federal outlays if not an actual decline in the latter
half of calendar 1957. The determined effort by the administration
at midyear to avoid having to apply to the Congress for an increase
in the debt ceiling by vigorous efforts to curb increases in outlays must
also have suggested diminishing support for economic expansion from
this sector.
Explicit recognition of the downturn in fact was not long delayed.
The Federal Reserve’s national summary of business conditions in its
successive releases for the months of September through December
1957 noted the leveling off and downturn in real output and employ
ment at the middle and end of the third quarter of the year.90 So
indeed did Economic Indicators. In addition, the Federal Reserve’s
action to reduce the discount rate on November 15 was a clear signal
of change in outlook. The January 1958 Economic Report of the
President and the budget message also specifically acknowledged the
decline in activity then underway.91
Timely recognition of the downturn did not lead to any major
improvement in compensatory fiscal action. The administration re
quested a further extension of the corporate income tax and excise tax
rates. While various administration officials suggested that tax rate
reductions might become necessary if the decline accelerated rather
than moderated, the issue was avoided by the adoption of a “let’s see
next month’s indicators” attitude. In addition, the magnitude of the
deficit anticipated as a result of the automatic decline in receipts and
the decision to increase expenditures must surely have appeared
89Loc. cit., pp. 44-46.
90Cf. the September through December 1957 issues of the Federal Reserve Bulletin.
91Loc. cit., pp. Ill and M-9, respectively.
252
EMPLOYMENT, GROWTH, AND PRICE LEVELS
frightening to both the administration and congressional leaders who
apparently assumed a “ Let George do it” attitude.92
The principal antirecession measures were Federal extension of ex
hausted State unemployment benefits, acceleration of procurement
programs, emergency Federal aids for housing, an increase, partly
retroactive, in salaries of Federal employees, and suspension of certain
spending limitations under the Federal-aid highway program.
In other words, although some compensatory spending action was
taken (the extension of unemployment compensation benefits w^as an
important policy advance in this regard), tax policy was relegated to
a passive role. The administration-congressional position against re
ducing taxes for stabilization purposes was adhered to in the face of
widespread support for tax cuts and a determined effort on the part
of a small group in the Congress.93
The limitations which prevail against the use of antirecessionary tax
adjustments were suggested in the introduction to this chapter. In
connection with the 1958 recession, it seems clear that the major ob
stacle to compensatory tax cuts was a preference for expenditure in
creases, particularly since appropriations had been cut back vigorously
in 1957, though with little short-run effect on actual outlays,94
The fiscal results, measured in the income and product account, dur
ing the downturn evidences the substantial limitations on the effec
tiveness of the built-in tax stabilizers, particularly in the individual
income tax. Total Federal receipts declined from an annual rate of
$82.7 billion in the third quarter of 1957 to a recession low of $75.2
billion in the first quarter. O f this $7.5 billion decline, personal taxpayments accounted only for $1.4 billion, excises for $0.5 billion, and
contributions for social insurance for only $0.1 billion. Corporate
profits tax accruals, on the other hand, dropped by $5.5 billion (table
8-5, p. 286).
Excluding transfer payments, personal income fell from an annual
rate of $332.7 billion in the third quarter of 1957 to $327.8 billion
in the first quarter of 1958. The decline in Federal personal tax lia
bilities offset 28.6 percent of this decline (table 8-7, p. 298) . W hile
this ratio is not lower than that in the preceding recession, it is clear
that the built-in decline in personal tax liabilities made only a limited
contribution toward arresting the recession. The drop in corporate
taxes, on the other hand, was substantial relative to the change in
corporate profits (table 8-11, p. 305). Although reduction in corpo
rate profits taxes contributed to improvement in net working capital
during this period, it was of no apparent significance in limiting the
decline in capital outlays.
During this period of decline, Federal expenditures increased from
an annual rate of $79.7 billion in the third quarter of 1957 to $83.2
billion in the first quarter of 1958. O f this $3.5 billion increase, $2.3
billion was the rise in transfer payments (table 8-5, p. 286).
92See Norman B. Ture, “Limitations On the Use of Anti-Recessionary Tax Policy,”
Virginia Law Review, vol. 44, No. 6, 1958, pp. 964 ff.
93Efforts were made to amend the excise rate extension bill to provide income tax reduc
tion. While these efforts failed, the excise on transportation of property was repealed, at
a revenue loss estimated at $485 million annually. In addition, the small business provi
sions of the Technical Amendments Act of 195S provided income tax benefits to small
business in an estimated amount of $260 million.
94Cf. Ture, “Limitations on the Use of Anti-Recessionary Tax Policy,” op. cit.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
253
Together with the change in receipts, a net change of $11 billion
from surplus to deficit was realized between the third quarter of 1957
and the first quarter of 1958 (table 8-5, p. 286).
Two major conclusions may be drawn from the 1957-58 recession.
In the first place, individual tax liabilities (as currently estimated)
are quite insensitive to substantial declines in employment, so long as
personal money income is sustained. Since substantial stability in
money income appears to be quite consistent with serious losses in em
ployment and output, the responsiveness of personal taxes to the for
mer but not to the latter substantially vitiates their effectiveness as an
automatic counterrecessionary device.
Secondly, the 1957-58 recession demonstrated the inadequacies of
relying on increases in expenditures— other than transfer payments— ■
to counter recessionary forces. In the rapid decline of activity from
the third quarter of 1957 through the first quarter of 1958, Federal
purchases increased only by $0.4 billion. Although the downturn
ended in the first quarter of 1958, Federal purchases continued to rise,
by an additional $4.1 billion, through the last quarter of the year.
This continued rise in outlays certainly contributed to support of the
recovery; it arrived too little and too late, however, to prevent or even
substantially to moderate the downturn.
8. Recovery and expansion, mid-1958 and mzd-1959
The administration’s confidence that the recession would be short
lived was justified. In the second quarter of 1958, economic decline
gave way to recovery. Personal consumption outlays and Government
purchases of goods and services rose while the rate of inventory liq
uidation fell off and the decline in other private investment substan
tially moderated. By the last quarter of the year, gross national
product in constant 1954 dollars had reached a new peak; consump
tion outlays were at an all-time high, producers’ durable equipment
expenditures had begun to rise from their third quarter low, inven
tory liquidation had given wTay to accumulation; and residential (nonfarm) construction was up sharply from the level of 1957. Govern
ment purchases had reached a level exceeded during the postwar era
only in 1953, when Korean war expenditures were at a peak rate (table
8-3, p. 280).
Throughout the period of both, decline and recovery, however, the
price level, as measured by the implicit price deflators, continued to
rise, and at a rate only moderately lower than during the 1956-57
upsurge (table 8-6, p. 294). In this respect, therefore, the 1957-58
construction differed from the prior postwar recession in which the
price level either declined or stabilized.
The strong recovery of the latter half of 1958 was noted in the
President’s January i959 Economic Report. In highly hedged lan
guage, the report hinted that further expansion might occur in 1959
as a result of further possible increases in plant and equipment out
lays, residential construction, exports, Government outlays, consump
tion expenditures, and the end of inventory liquidation.95
On the basis of this outlook, the report called for support of the
budget proposals for fiscal 1960, envisaging a balance of receipts and
expenditures at an estimated $77 billion level. Since this estimate
involved a $9.1 billion increase in net budget receipts and $3.8 billion
65Loc. cit., pp. 30-32.
254
EMPLOYMENT, GROWTH, AND PRICE LEVELS
reduction in net budget expenditures over the fiscal 1959 budget results
(as estimated in January 1959), the President was in effect antici
pating a restrictive shift in fiscal position. Adoption of these
budget proposals, it was estimated, would result in a shift from a
conventional budget deficit of $12.9 billion in fiscal 1959 to a surplus
of $0.1 billion in fiscal 1960. An even more pronounced shift of $13.8
billion was estimated for the consolidated cash budget.96 Apart from
relatively modest increases in certain Government service charges and
in the gasoline excise, about two-thirds of the shift in fiscal posture
was to result from automatic increases in revenues in response to ris
ing levels of income; both automatic and discretionary reductions in
expenditures were to account for about 30 percent of the shift.97 The
magnitude of this shift is oddly in contrast with the timidity of the
forecast of rising economic activity.
Economic expansion proceeded at a vigorous rate during the first
half of 1959. Measured in current prices, gross national product
was 11.5 percent higher in the second quarter of 1959 than a year
earlier and 6 percent higher than in the last quarter of 1958. In
constant 1954 dollars, the increases were about 10 percent and 5 per
cent, respectively.98 The expansion, moreover, was very broadly
based, although the change in nonfarm business inventories was cer
tainly the most pronounced element in the rise. Although unemploy
ment declined from the 7.4 percent seasonally adjusted quarterly rate
in the 3rd quarter of 1958, it remained relatively high through mid1959 (table 8-1, p. 275).
Defense orders for hard goods appears to have contributed sig
nificantly to the expansion of economic activity after late 1957-early
1958 decline. These orders, which had fallen from a total of $18.5 bil
lion in 1956 to $13.3 billion in 1957, rose to $19 billion in 1958. New
orders received in durable goods manufacturing also rose sharply
from the first quarter 1958 low through the second quarter of 1959.
Unfilled durable goods orders began to rise in the last quarter of
1958 after a precipitous decline from the end of 1956. The decline
in durable goods inventories came to a halt 6 months after the end
of the drop in new orders and rose strongly through mid-1959 (table
8-4, p. 284).
On income and product account, the Federal budget shifted from a
$10.9 billion deficit in the second quarter of 1958 to a surplus of $0.4
billion in the second quarter of 1959. This shift resulted from a
$15.2 billion increase in receipts, offset by a $3.9 billion rise in expendi
tures. Over half of the increase in revenue stemmed from the rapid
rise in corporate profits tax accruals. Two-thirds of the rise in ex
penditures resulted from increases in purchases.
The 1958-59 recovery and expansion also affords considerable sub
stantiation of the view that defense orders for hard goods are the
critical component of the demand for durable goods. As noted, new
orders received in the durable goods manufacturing industries began
to rise in the second quarter of 1958. Defense orders had begun to rise
in the last quarter of 1957. Nondefense demands for consumer dur
ables, for producers’ durables and for new construction, which were
«»Ibid., pp. 197, 199.
97Cf. the January 1959 budget message of the President for fiscal 1960, pp. 725 ff.
98U.S. Department of Commerce, Survey of Current Business, November 1959, p. 11.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
255
still falling in the second quarter of 1958, did not therefore contribute
to the rise in new orders received in durable goods manufacturing in
dustries beginning in that quarter. Nor does the rise in new orders
appear to have been an effort to stabilize the inventory position in
durable goods manufacturing. These inventories, it is true, had been
declining since the second quarter of 1957, but the decline through the
end of that year was slight.
B. SECULAR CHANGES IN THE FEDERAL FISCAL FRAMEWORK
Changes in the structure of the Federal fiscal system should be ex
pected, over time, to influence trends in the composition of total eco
nomic activity and the rate of its growth. The strength of this in
fluence, of course, will depend on many factors, many of the most im
portant of which are outside the immediate purview of government
policy."
A s indicated in the introductory discussion in this chapter, these
fiscal policy influences are at the heart of basic economic policy ob
jectives. The Employment Act of 1946 is generally construed as
placing considerable emphasis on the growth of productive capacity
and total output. Our review of postwar fiscal policy in this section,
therefore, is aimed at appraising its secular influence with respect
to these central objectives of public economic policy.
In the following discussion we examine the influence of trends in
Federal fiscal policy on the rate of expansion of total demand. In
addition, we are concerned with the influence of the Federal fiscal
structure on saving and investment. W hile our focus is primarily on
fiscal developments, changes in monetary and credit conditions are also
considered in the context of the interrelationships of these major com
ponents of public economic policy.
The major conclusions emerging from this survey are:
(1) Federal fiscal policy has tended to become less restrictive with
respect to the expansion of toted demand.
On the whole, there has been a pronounced upward trend in Fed
eral outlays, although this movement has been quite irregular. Fed
eral receipts show a similar upward trend, but at a less rapid rate over
all. Accordingly, Federal surpluses on income and product account
at high levels of economic activity have tended to diminish over the
postwar period while deficits have tended to increase during periods
of recession.
(2) The trend toward a less restrictive fiscal policy was accom
panied by a secular movement toward increasingly tight monetary and
credit conditions.
Liquidity in the private sectors of the economy evidences a pro
nounced secular decline, interrupted moderately and briefly during
periods of recession. Liquid assets and the money supply grew quite
steadily and strongly, but at a considerably slower rate than gross
national product in current prices. The mix of fiscal and monetary
policies throughout the postwar period has changed in the direction of
fiscal ease and monetary restraint.
(3) The changing mix of monetary and fiscal policies was, on the
whole, unfavorable to private investment.
99Cf. Ture, “Economic Growth and Federal Tax Policy,” op. cit.
256
EMPLOYMENT, GROWTH, AND PRICE LEVELS
The declining secular trend in Federal surplus on income and prod
uct account is associated with a slight secular decline in gross na
tional saving in relation to gross national product and a somewhat
more pronounced decline in the ratio of net national saving to gross
national product. Reflecting the steady rise in capital consumption
allowances, the long-run increase in gross private saving relative
to gross national product offsets a substantial part, but not all, of the
declining contribution of Federal surpluses to total saving. Net pri
vate saving, excluding capital consumption allowances, rose much
more modestly relative to the increase in gross national product.
(4) For the postwar period as a whole, no major change has occurred
in the distributional impact of the Federal tax structure.
Such relatively modest changes as have occurred in the distribution
of tax burdens by income level are attributable largely to the steady
rise of State and local government taxes relative to total government
incomes. The relative weight of Federal taxes on consumption and
saving, similarly, shows no pronounced secular trend.
(5) Federal expenditure trends have been in the direction of en
couraging increases in productive capacity and in productivity.
This reflects primarily the rising importance of defense activities
and associated research and development programs, which have had
a large impact on the private sectors of the economy in terms of
civilian byproducts and improvements in production technology.
(6) Changes in Federal expenditures have contributed to economic
instability •continuation of post-Korean trends in the composition of
Federal outlays suggests an increased tendency toward economic
fluctuation.
Although the rate of increase in gross Federal expenditures is the
same in the pre-Korean and post-Korean periods, the rate of increase
in defense demands in the former was much more moderate than in the
latter years. A s we have seen, changes in defense outlays are asso
ciated with substantially greater changes in activity in the durable
goods manufacturing industries. Fluctuations in levels of output and
employment throughout the economy, in turn, are significantly influ
enced by activity in durables. An offsetting factor is that fluctuations
in defense purchases relative to trend have been substantially less in
the post-Korean than in the pre-Korean years. Should changing
defense requirements lead to greater variability in defense demands in
the future, however, the destabilizing consequences of these changes
in demand are likely to be greater than formerly.
1. The decline in fiscal restraint
A s the earlier discussion pointed out, a rise in Government outlays,
even when matched by an increase in revenues, will add to total de
mand, other things being equal. From the middle of 1946 through
the end of 1958, gross expenditures 1 of the Federal Government in
creased at an average annual rate of 9.1 percent (table 8-10, p. 304) ;
Federal revenues, however, rose at an annual rate averaging 6.7 per
cent (table 8-5, p. 286.)2 The trend, therefore, has been toward a
declining rate of surplus.
1Federal expenditures, on income and product account, before deducting Federal sales.
2Growth rates in this discussion are computed from regression equations derived by the
least squares method from quarterly data at seasonally adjusted annual rates, except where
otherwise noted.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
257
Major differences occurred in the trends of receipts and expenditures
in the pre-Korean and post-Korean periods. In the former period
(mid-1946 to mid-1950) expenditures increased at an average annual
rate of 8.5 percent while receipts declined 0.7 percent annually. Dur
ing this period, however, Federal receipts (on income and product
account) exceeded expenditures by more than $23 billion. In the
latter period, 1955 through 1958, the average annual increase in ex
penditures was 8.5 percent, as in the pre-Korean period, while receipts
rose, on the average, at an annual rate of 3 percent. For these years,
however, the excess of receipts over expenditures was only $2.8 billion.
In short, while expenditures tended to rise much more rapidly relative
to receipts in the former than in the latter period, the changes in
receipts and expenditures in absolute terms resulted in a substantially
lower surplus in the latter compared with the former period.
The composition of the changes in expenditures, as well as the rate
of change in the aggregate, had an important bearing with respect to
the influence of Federal fiscal activities on the expansion of total
demand. In the pre-Korean period, defense purchases rose, over the
period as a whole, at an average annual rate of 0.4 percent; all Federal
purchases, including civil purchases, increased at a rate averaging 3.1
percent annually. In the years 1955 through 1958, on the other hand,
defense purchases rose annually by 4.9 percent and all purchases by
5.2 percent, on the average, Since purchases generally have a larger
and more immediate impact on demand then do other Government
expenditures, increase in Federal outlays in the post-Korean period
were more expansionary than in the pre-Korean years, despite the
fact that the rate of increase of total Federal expenditures was the
same in both periods. Moreover, as the discussion in section I I - A
of this chapter indicates, increases in defense purchases are likely to
have a disproportionately large impact on demand in the private sec
tor of the economy. The much more pronounced increase in these
purchases after Korea than in the early postwar years affords addi
tional evidence of the more expansionary influence of Federal fiscal
policy in the post-Korean compared with the pre-Korean period.
Differences in the impact of fiscal policies on the expansion of de
mand cannot be inferred merely from comparison of budget results in
different periods,3 A budget deficit or surplus of a given size w7ill
have a different impact on total demand in a $450 to $500 billion gross
national product economy from that in a $250 to $300 billion economy.
The relationship of the budget surplus or deficit to gross national
product, therefore, must be considered, not merely the absolute size of
the surplus or deficit. In addition, changes in private spending pat
terns will also affect the expansionary or contractionary influence of
net budget results. The greater the proportion of disposable income
likely to be spent in the private sector, the greater will be the impact
on total demand of any given change in Government surplus or deficit.
An admittedly rough measure of the expansionary impact of secular
changes in the Federal fiscal structure is the relationship between the
ratio of budget surplus (or deficit) to gross national product and the
rate of employment of the labor force.4 Excluding the third quarter
3See discussion in sec. I-C, above.
4This assumes a fairly stable set of relationships between changes in output and employ
ment and between changes in demand and in output.
258
EMPLOYMENT, GROWTH, AND PRICE LEVELS
of 1951 through the fourth quarter of 1953, when extraordinary
changes occurred in the volume and character of Federal outlays, time
series showing the rate of employment and the ratio of Federal sur
plus (or deficit) to gross national product moved closely together.
(See tables 8-12 and 8-13, p. 307.) Table 8-14, p. 308, shows the
computed values of the ratio of surplus (or deficit) on income and
product account to gross national product at various rates of unem
ployment in the two periods indicated.
The difference between these relationships in the pre-Korean and
post-Korean periods are considerable. In the pre-Korean period, a
substantially higher surplus to gross national product ratio is found
when unemployment is low than in the post-Korean years. A t high
rates of unemployment, on the other hand, deficits were greater in
relation to gross national product in the pre-Korean period than in
the later years. The same pattern is seen in table 8-15, relating the
ratio of cash budget surplus (or deficit) to gross national product
with rates of unemployment.
The relationships in these tables offer further evidence that fiscal
policy was more restrictive in the pre-Korean than in the post-Korean
period. In addition, the wider range in the ratio of surplus (or defi
cit) to gross national product from very low to very high unemploy
ment rates in the earlier than in the latter period strongly suggests
that fiscal policy was more responsive to economic fluctuation before
Korea than after.
Finally, Federal purchases of goods and services were a more sub
stantial component of gross national product in the post-Korean years
than in the pre-Korean period. For the years 1946 through mid-1950,
total Federal purchases were 7.8 percent of gross national product;
in the years 1954 through 1958, the proportion was 11.6 percent, Had
surpluses in the later period also been larger in relation to gross na
tional product, the higher rate of purchases would not necessarily
indicate a more expansionary fiscal influence. Since, in fact, surpluses
were lower in relation to gross national product after Korea, the
expansionary effect of the higher rate of purchases was even greater
than the difference in percentages suggests.
2. The change in mix of fiscal and monetary policies
W hile fiscal restraints on the expansion of demand have tended to
weaken, monetary conditions have become more restrictive. The in
troductory discussion in this chapter of the mechanics of fiscal policy
indicated, in general terms, the interrelationship between budget re
sults and monetary conditions, in the absence of compensatory mone
tary action. The declining ratio of surplus to gross national product,
therefore, automatically tended to reduce the supply of loanable funds
relative to demands therefor in the private sectors of the economy.
On the other hand, the post-Korean period has been characterized
by increasing emphasis in the formulation of public policy on the use
of monetary constraints to limit the expansion of demand to noninflationary proportions and decreasing emphasis on fiscal devices. In
contrast wfith the pre-Korean period during which the administra
tion’s fiscal proposals called for holding the line on taxes while re
ducing outlays, fiscal proposals after 1954 have been oriented primarily
to restraining the increase in outlays in order to be able to devote some
of the rise in revenues, resulting from economic expansion, to tax
reduction.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
259
Very great changes in the basic circumstances of the economy as
suredly have contributed to this change in policy orientation. During
much of the pre-Korean period, reductions in defense outlays were
regarded as feasible; the modest rise, in actual dollar value, which
occurred in this period was associated to a substantial extent, with the
defense aspects of the European recovery program. Since the end of
the Korean war, however, defense requirements have expanded con
tinuously. Moreover, the limitations on monetary restraints, resulting
from the Federal Reserve’s commitment to support the prices of Fed
eral debt instruments, in the pre-Korean period required placing
principal emphasis on budgetary surpluses as an anti-inflationary
policy. The freeing of monetary policy since the Federal ReserveTreasury accord permitted deemphasis of fiscal policy for economic
stabilization purposes.
Changes in monetary and credit conditions over the postwar period
have been delineated elsewhere in this report. Using Gurley’s measure
of liquidity in the private sector of the economy, the increasing re
straint of monetary policy over the entire postwar period is quite
marked.5
With the change in the mix of monetary and fiscal policies, there
has been a secular trend toward a lower rate of expansion of real
gross national product. From the first quarter of 1947 through the
second quarter of 1950, gross national product in constant 1954 dol
lars increased at an average annual rate of 3.6 percent. From the
first quarter of 1954 through the last quarter of 1958, the increase
averaged 2.8 percent.6
The change in the mix of monetary and fiscal policies is also asso
ciated with a secular trend toward a lower ratio of both gross and
net national saving to gross national product. From mid-1946 to
mid-1950, gross national saving averaged 15.4 percent of gross national
product in current prices. In the years 1955 through 1958, gross
national saving was 14.4 percent of gross national product.7 Gross
private saving was a higher proportion of gross national product in
the latter than in the former period. The decline in Federal surplus,
however, resulted in an overall reduction in the Nation’s saving-in come
ratio.
Gross national saving includes capital consumption allowances,
which show a strong secular increase, substantially unaffected by the
postwar recession. I f this component is eliminated, the resulting
measure of net national saving shows a more marked decline relative
to gross national product in the post-Korean period compared with
the pre-Korean years. From mid-1946 to mid-1950, net national
saving averaged 9.3 percent of gross national product; in the years
1955 through 1958, the ratio was 7 percent (table 8-17, p. 311).
The influence of the decline in Federal surplus on the ratio of
saving to gross national product is clearly seen in table 8-17. In the
pre-Korean period, Federal surpluses contributed 15 percent of gross
national saving and 24.8 percent of net national saving. In the post-
5Cf. Gurley, op. cit.
6 These rates were computed as the percentage change between the respective terminal
dates.
7 Gross national saving is the sum of gross private saving and government (including
Federal, State, and local) surplus on income and product account. For the major com
ponents of gross private saving, see U.S. Income and Output, op. cit., table V - l.
260
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Korean years, on the other hand, the ratios are 1.1 percent and 2.3
percent, respectively.
As a general proposition, secular changes in the ratio of total saving
to gross national product reflect trends in the allocation of resources
between satisfaction of current demands and increasing productive
capacity for the future. In the national income accounting system,
this relationship is explicitly shown as the equality between gross
national saving and gross investment, consisting of gross private do
mestic investment plus net foreign investment. The principal com
ponents of gross private domestic investment which bear on the in
crease in the economy’s productive capacity are outlays for producers’
durable equipment and for new construction other than residential.
Measured in constant 1954 dollars, the sum of producers’ durable
equipment, and new, nonresidential construction outlays represent a
smaller proportion of gross national product in the post-Korean than
in the pre-Korean years.8
In qualification of this observation, it should be borne in mind that
expansion of the Nation’s capacity to produce is also fostered by a
wide range of activities undertaken by the Federal, State, and local
governments. These activities are not included as investment in the
national income accounts, even though their effects on productivity may
well be more consequential over the long run than many business ex
penditures for tangible production facilities. To the extent, therefore,
that diminishing surpluses, hence a falling rate of national saving, has
resulted from increases in growth-generating Government expendi
tures, the decline in the saving-income relationship, as measured in
the national income accounts, does not accurately reflect the impact
on economic growth of changes in the fiscal structure and of the mix
of fiscal and monetary policies. Nevertheless, the change in policy
mix has been associated with a decline in private investment activity
in the private sectors of the economy, relative to gross national
product.
Federal expenditures for research and development activities have
increased very substantially over the postwar years, particularly
since the end of the Korean war.9 These expenditures have a signifi
cant impact on investment activities in the private sector of the econ
omy, through their effects on the development of new products and
on advances in production technology.10
In addition, the secular rise in defense outlays has also contributed
to private capital formation. As indicated in section I I -A , the rapid
rate of technological innovation in defense often results in a relatively
great increase in demand for new production facilities by defense
contractors.
3. Secular trends in the Federal tax structure
For the postwar period as a whole, no significant trend is found in
the importance of personal tax and nontax payment and corporate
profits tax accruals relative to total Federal receipts on income and
product account (table 8-18, p. 312). In 1950 and 1951, corporate
8Of. U.S. Income and Output, op. cit., table 1-5.
9Cf. The Budget for Fiscal Year 1960, special analysis H, pp. 989-999.
10See chapter on Long-term Economic Growth : Record and Analysis in this report.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
261
profits tax accruals (including excess profits tax) rose at an extraordi
narily rapid rate in response to the high level of corporate profits
resulting from the recovery from the 1949 recession and the subsequent
upward spurt in activity following the outbreak of hostilities in Korea.
Apart from these 2 years, however, personal tax payments have con
tributed between 41.5 and 47 percent of total Federal receipts, and
corporate profits tax accruals have ranged between 22 and 29 percent
of the total. Federal indirect business tax and nontax accruals, on
the other hand, declined quite steadily over the postwar period, while
contributions for social insurance have tended to increase relative to
total receipts in the post-Korean period.
Taking State and local government receipts into account, the sta
bility of various revenue sources relative to total Government receipts
is striking.
As the introductory discussion in this chapter suggests, changes in
the revenue structure may have significant consequences for the com
position of total economic activity. These effects may stem from
changes in the distribution of tax burdens by income level, if con
sumption and saving proclivities vary significantly at different levels
of income. Numerous studies indicate, however, that the influence
of changes in tax burden distribution by income level is very slight,
except insofar as the changes are drastic and significantly shift the
distribution of disposable income to or from the extreme upper end
of the income range.11
More consequential in terms of the impact on consumption and in
vestment outlays is the change in the distribution of tax burdens as
among different kinds of shares of income, that is, compensation to
labor and returns to investment. Other things being equal, a shift
in tax burden distribution from the returns on investment to labor
income will result in a relative increase in the proportion of current
income claims for investment purposes and a decrease in claims for
consumption.12 In addition, because of the higher saving rate in the
business sector, such a shift will raise the volume of saving out of any
given level of income and therefore increase the amount of loanable
funds available for financing capital outlays.
The available evidence suggests that the changes which have oc
curred in the Federal tax structure since the end of World War II
have had little consequence for the distribution of Government tax
burdens by income level or for the more immediate impact of taxes on
consumption or investment. With respect to the former, table 8-19
shows that the distribution of total (Federal, State and local) tax
burdens by income levels has changed hardly at all since 1948. Table
8-20 indicates a general rise in effective tax rates at each of the indi
11For example, see Harold Lubell, “Effects of Income Redistribution on Consumers’
Expenditures,” American Economic Review, vol. XXXVII, March 1947, pp. 154-170 and
December 1947, p. 930. See also, Milton Friedman, A Theory of the Consumption Func
tion, National Bureau of Economic Research, Princeton University Press (Princeton,
1957).
12This assumes, of course, that the total volume of taxes relative to expenditures is such
as to provide the same overall rate of use of available resources as before the shift in taxes
occurred, The proposition may, therefore, require a larger Government deficit (or smaller
surplus), than would be needed to maintain the same rate of resource use in a higher con
sumption economy. Cf. Fellner, “Relative Emphasis in Tax Policy on Encouragement of
Consumption or Investment,” in Federal Tax Policy for Economic Growth and Stability,
papers submitted by panelists appearing before the Subcommittee on Tax Policv, Joint
Committee on the Economic Report, 84th Cong., 1st sess. (Joint Committee Print, 1955)
262
EMPLOYMENT, GROWTH, AND PRICE LEVELS
cated income levels during the same period, but the differences in the
increases do not appear to be significant with respect to overall progressivity in burden distribution. Tables 8-21 and 8-22 (p. 313) show
that the factors which have contributed to the relatively greater in
crease in effective rates at the bottom than at the top of the income dis
tributions are, first, the rising level of money income and, second, the
increasing relative weight of State and local taxes. The first factor,
with a stable Federal rate structure, particularly since 1954, served to
move the whole income distribution up with respect to the Federal
individual income tax rate schedule; because of the personal exemp
tion system, the most pronounced effect of such an income movement
is the rise in effective income tax rates at the bottom of the income
scale. The increasing relative importance of State and local taxes,
because of their heavy reliance on relatively regressive tax sources,
probably had a greater influence in increasing effective tax rates at
the lower end of the income scale than at the upper end.13
Table 8-23, p. 314, shows that there has been virtually no change in
the relative weight of the Federal tax structure on saving compared
with consumption during the postwar years. Within the period, par
ticularly in connection with the Korean war tax changes, an increase
in the burden of Federal taxes on saving compared with consumption
is to be seen, but this increase was modest and short-lived.
Implications of secular trends in Federal expenditures for eco
nomic stability
As our earlier discussion points out, national defense purchases
have grown more rapidly over the whole postwar period than any
other major component of Federal expenditures. Moreover, this
growth accelerated in the post-Korean compared with the pre-Korean
war period. The relatively great impact of defense demands on
activity in durable goods manufacturing and on plant and equipment
outlays has also been discussed at an earlier point in this chapter.
The postwar record strongly suggests that relatively moderate
changes in defense orders for hard goods are closely associated with
relatively large fluctuations in total demand for durable goods and in
plant and equipment expenditures. Other things being equal, there
fore, we might expect that continuing acceleration in the expansion of
defense demands is likely to exert an adverse influence on the stability
of employment and output rates.
An important qualification of this surmise, however, is suggested
by table 8-24, p. 314, which shows a stability index for broad cate
gories of Federal expenditures during the postwar period. National
defense purchases, it is seen, not only grew more rapidly than other
major components of Federal outlays but fluctuated more widely from
their growth trend. Much of both their growth and instability, how
ever, is associated with the defense buildup and cutback associated
with the Korean war. In addition, although virtually no growth
occurred from the beginning to the end of the pre-Korean period,
these purchases were highly unstable during those years because of
the initial postwar reductions in defense outlays, followed by the ex
pansion and contraction in connection with the Marshall plan. Since
the end of the Korean war, however, national defense purchases have
13 Prof. Richard Musgrave provided the calculations shown in tables 8-19 through 8-22,
EMPLOYMENT, GROWTH, AND PRICE LEVELS
263
been relatively stable; civil purchases since the beginning of 1955 have
been more volatile than any other of the major categories of Federal
expenditures,
A relatively limited fluctuation in the volume of defense purchases,
in itself, does not eliminate their destabilizing impact. Nevertheless,
a continuation of the much more even rate of growth of these outlays
in the post-Korean period would certainly moderate their adverse
consequences for stability in the rate of growth of activity elsewhere
in the economy.
I I I . I m p r o v in g F
ederal
F
P o l ic y
S t a b il it y
is c a l
for
E
c o n o m ic
G
row th and
To date, Federal fiscal policy has not been used as effectively as
theory suggests it might be to moderate economic instability. The
decline in the relative emphasis in public policy on fiscal policy com
pared with monetary policy since the Korean war, moreover, has
tended to weaken the contribution of fiscal policy to economic expan
sion and further to limit its use for promoting economic stability.
Both economic analysis and postwar history suggest material im
provements which could be made in Federal fiscal policy in order to
enhance its contribution to achievement of the Employment Act’s
objectives. These are listed and discussed in summary form below.
A. INCREASING THE CONTRIBUTION OF FEDERAL FISCAL FOLICY TO
ECONOMIC STABILITY
In the introduction to this chapter, a distinction was made among
the public policy objectives of increasing the rate of growth of the
economy, stabilizing the rate of employment, and stabilizing the
general level of prices. Although these distinctions are necessary in
order to evaluate the performance of fiscal policy under varying cir
cumstances, at this point it should be noted that the objectives are not
independent of each other. Recessions, with attendant losses of out
put and employment, involve not only the immediate loss of goods and
services which could be used for increasing productivity and pro
ductive capacity but also may unfavorably affect future private
capital outlays through adversely affecting anticipations of investors.
Quick spurts in private capital outlays may contribute to instability if
total demand does not increase commensurately with the increase in
productive capacity. Inflationary trends, even of the moderate de
gree observable over much of the postwar period, may also contribute
to instability in the rate of employment by promoting anticipatory
capital accumulation at rates in excess of that at which total demand,
as conditioned by sluggish public policies, will be adequate for high
rates of use of capacity.
Greater economic stability may well be a basic requirement for a
higher rate of economic growth. Indeed, several staff papers and
other chapters of this report maintain that instability is a major
source of inflation and also, over time, a major constraint on growth.
Mitigating economic instability, therefore, is an important objective
not only from the point of view of limiting the immediate losses in
welfare it involves but also as a means of increasing the Nation’s
material well-being over the long run.
264
EMPLOYMENT, GROWTH, AND PRICE LEVELS
1. More rapid growth, if it is to be maintained, increases the desir
ability of prompter and more effective stabilization policies. At the
same time, achieving a higher rate of economic growth may involve
greater tendencies toioard economic instability.
The various ingredients of the growth process have been discussed
above and elsewhere in this report. Whatever the relative emphasis
place on any of these, faster growth in a private-enterprise economy
will certainly demand a relatively larger volume of private capital
outlays.
Broadly generalizing, an economy with a relatively high private in
vestment component of gross national product should be expected to
show a greater tendency toward economic fluctuation than one with a
relatively low investment component. Investment in the United
States in the postwar years has been considerably more volatile than
consumption. Increasing the rate of private capital accumulation
relative to total output, therefore, should be expected to increase
economic fluctuations.
As suggested above, however, greater economic instability may frus
trate private efforts to expand productive capacity more rapidly. A
corollary of public policy aimed at promoting more rapid growth,
therefore, is greater alertness in public policy to economic fluctuations
and greater vigor in moderating them.
2. Under some circumstances, public policy may have to choose be
tween the price level and the rate of employment as the stabilization
objective. In such circumstances, greater emphasis should be placed
on stabilizing the rate of employment.
Most people have a strong bias against inflation. Supporting this
bias by rigorous analysis, however, is difficult when the inflation is
moderate and is associated with a slow rate of growth in total output
and with an overall unemployment rate which is relatively high by
historical standards.
This choice between stabilization objectives will be presented when
inflationary strains originate in sectoral demand changes rather than
in generally excessive demand. Attempting to use general fiscal and
monetary controls to hold back such price developments will be at the
expense of employment and output. It is debatable whether the net
gain in welfare from maintaining stability in the general level of
prices while reducing employment and output exceeds that which
would result from allowing these moderate upward price movements
to occur in response to dynamic shifts in economic activity while high
rates of employment and output are maintained overall. Pursuing
the former course may actually reinforce inflationary pressures over
wide sectors of the economy by raising unit costs of output.14
Moreover, the strength of a private-enterprise economy is derived
to a substantial extent from the favorable climate it provides for
dynamic changes in the composition of demand and in methods of
production. Attempting to curb these dynamic impulses either by
general controls which depress the economy as a whole— and thereby
contribute to weakening dynamic changes— or by more selective con
trols to slow the adjustment to these impulses in effect represents trad
ing off some of the basic sources of economic strength of the economy
14 This is not to suggest that the choice between stabilization objectives should hinge
on the small and frequent changes in employment and price level indexes. Index move
ments cannot replace informed judgments by those responsible for formulating and execut
ing public policies.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
265
as a whole for the benefit of the economic units who would otherwise
be the losers in the income-transfer process by which adjustments are
made in a free market system.
On the other hand, the character of the recent inflation does not
necessarily betide a conflict between stabilization objectives in the
future. Generally excessive or insufficient demand, with generally
rising or weakening prices have plagued the economy in the postwar
era more than once. The occasion for general fiscal action aimed, at
one and the same time, at stabilizing both employment rates and the
price level can hardly be ruled out as a thing of the past.
3.
Tax policy should be used more promptly and more vigorously
to offset economic fluctuations than it has throughout the postwar
period.
As we have seen, tax-rate reductions have never been deliberately
made to curb recessionary pressures in the entire postwar period. The
tax reduction in 1948 was made, on the contrary, in the face of what
generally appeared to be inflationary strains, although it un
doubtedly assisted materially, as well as fortuitously, in moderating
the ensuing recession of 1949. Tax reductions at the first of early
1954 were the result of legislation in 1951. They took effect 6 months
after the recession of 1953-54 was well underway. Tax cuts were
proposed and explicitly rejected as an antirecessionary policy instru
ment in the recession of 1957-58. (In the latter recession, however,
the discretionary increase in unemployment compensation benefits
represented a real advance in public policy for economic stabilization.)
Use of tax rate changes for stabilization purposes raises the ques
tion in our highly diverse Federal revenue system as to what tax
rates should be changed. To avoid delay (possibly complete
inertia), it has been suggested that tax changes for stabiliza
tion purposes should be completely divorced from considerations of
long-term structural changes in the tax system. A frequent sugges
tion is that stabilizing tax action should be confined to changing the
rate applicable to the first bracket in the individual income tax. An
alternative proposal is that a “basket” of changes be designated, with
opportunity to vary the mix of the changes within this basket as spe
cific stabilization considerations would appear to warrant. Putting
any such changes into effect, it is further proposed, should be the
responsibility of the administration and should therefore bypass the
normal legislative routine (although the requirements of the Con
stitution would at the very least require subsequent legislative ap
proval of any such change).
Although adoption of this proposal would assuredly expedite tax
changes for stabilization purposes, the fundamental constitutional and
political issues involved preclude judgment at this point with respect
to either its desirability or practicability.
In any event, the annual budget process affords the occasion for
specific evaluation of short-term economic prospects and desirable tax
adjustments to be made in the interests of economic stability. A
clearer recognition of this fact by both the executive and legislative
branches might materially reduce the sluggishness of tax policy.
The 1957-58 recession offers persuasive evidence of the ineffectuality
of increasing public expenditures to deal with recession. Although
enacted early in the recession, many of these increases did not in fact
occur until recovery was well along.
48795—59---- 20
266
EMPLOYMENT, GROWTH, AND PRICE LEVELS
In short, more vigorous fiscal policy for economic stability calls for
principal emphasis on tax rate changes and minimum reliance on ex
penditure changes, apart from unemployment compensation.
This recommendation is entirely consistent with a change in public
policy mix toward greater emphasis on fiscal restraints and easier
monetary conditions. A large budget surplus at high levels of em
ployment, therefore, does not preclude a substantial reduction in the
surplus relative to the fall in gross national product as an antireces
sionary measure.
4.
Automatic -fiscal stabilizers should be strengthened, particularly
with a view toward increasing their sensitivity to changes in employ
ment.
Over the postwar period as a whole, substantially greater reliance
has been placed on the automatic stabilizers in the fiscal system than
on discretionary fiscal action to curb economic instability. The auto
matic stabilizers, however, have only a limited function to perform:
they can damp down fluctuations but they cannot prevent them. Nev
ertheless, until discretionary fiscal action, which generally involves
lags, can be taken, automatic fiscal responses to changing economic con
ditions are important in moderating the cumulation of destabilizing in
fluences.
Of the built-in tax responses, that of the corporation income tax is
by far the most pronounced. Its effect in stabilizing corporate outlays,
however, does not appear to be particularly great. Changes in indi
vidual income tax liabilities, on the other hand, seem to be associated
with relatively substantial changes in consumption outlays. The auto
matic responsiveness of these liabilities to changes in employment con
ditions, however, appears quite slight relative to its responsiveness to
changes in personal money income. Since the 1957-58 recession dem
onstrated that a substantial increase in unemployment and loss in out
put may occur while personal income fluctuates only moderately, the
effectiveness of the individual income tax as an automatic stabilizer
appears to be limited.
To the extent that fiscal policy for stabilization purposes is to be
more closely oriented to employment rates, greater emphasis should
be placed on the unemployment compensation system. The dangers
in excessive liberalization of unemployment insurance benefits have
been frequently cited; many of them are very real indeed. Neverthe
less, there is considerable room for increasing the duration and amount
of benefits without courting these perils.
Numerous proposals have been offered for semiautomatic fiscal
stabilizers, that is, tax rate reductions which would become effective
automatically when unemployment exceeded some specified rate, and
tax rate increases which would go into effect when the price level,
as measured presumably by the Consumer Price Index, rose a specified
number of points within some designated period of time. It seems
clear, however, that if the executive and legislative branches of the
Federal Government could agree upon satisfactory legislation to pro
vide such semiautomatic stabilizers, the occasion for them would auto
matically have disappeared.
A government so disposed could be
counted on to take prompt and vigorous discretionary tax action to
curb both recessionary and inflationary development.
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
267
Moreover, if the inflationary movement did not reflect generally ex
cessive demand but sectoral changes in demand, use of this semi
automatic stabilizer might well result in depressing total demand and
employment below desired levels.
5. Decisions with respect to the volume and character of defense
procurement should be made on the basis of judgments about the Na
tion’s long-term military posture. They should be divorced from
short-run budgetary considerations and prospects concerning the
level of economic activity. On the other hand, these decisions should
be a major consideration in formulating stabilization policies.
The destabilization potential of changes in defense demands has
been repeatedly cited in this chapter. To adjust the level of these
demands to considerations of the debt limit or budget balancing, there
fore, is to run a significant risk of increasing economic instability as
well as impairing the effectiveness of defense preparations.
In view of the rapid rate of technological advance, however, fre
quent changes in defense procurement should be expected. It should
be recognized that these changes may have serious consequences for the
level of activity in important sectors of the economy. Public policy
should be prepared to make compensatory adjustments, primarily in
taxes, on a timely basis in response to these disturbances originating
in changes in defense demands. Timely adjustments, moreover, should
be oriented primarily to changes in defense orders rather than to
defense expenditures, at least to the extent that disbursements lag
behind orders.
6. Reducing the information lag is an important condition for
increasing the speed and vigor of discretionary fiscal responses to
economic fluctuations.
Major improvements have been made in the postwar period in this
respect. Indeed, the promptness with w7hich the 1957 turn to reces
sion was recognized was one of the few heartening aspects of public
policy in this period.
One of the principal deficiencies in the present statistical inventory
is the lack of an anticipatory series concerning Defense Department
obligations for hard goods. As the postwar record shows, fluctuations
in the volume of these orders are associated with greatly enlarged
fluctuations in the volume of activity in durable-goods manufactur
ing and in plant and equipment outlays. Indeed, defense hard-goods
orders are the principal destablizing components of the Federal fiscal
system. Data showing likely changes in these orders for the coming
several quarters wTould materially assist in clarifying economic pros
pects and in timely formulation of public-policy proposals aimed at
economic stabilization.
Another important deficiency is the lack of a series showing sea
sonally adjusted cash receipts from and payments to the public. This
report at various points has stressed the interrelationships between
fiscal and monetary developments and the desirability of formulat
ing policy proposals with respect to each in the light of conditions in
the other. In many important respects, Federal cash receipts and
expenditures are potentially the most useful indicators of the impact
of Federal fiscal operations on monetary conditions. These cash re
ceipts and outlays have significant seasonal factors, adjustment for
which is desirable if trends are to be readily discernible. At the
268
EM PLOYMENT, GROWTH, AND PRICE LEVELS
present time, however, only unadjusted cash receipts and expenditure
data by major components are available.
A historical series, showing quarterly totals of cash receipts and
expenditures, seasonally adjusted at annual rates for the years 1946
through 1958, was made available to the staff by the Bureau of the
Budget. This series, presented in this chapter as table 8-16, page 309,
is an important contribution to analysis of the economic impact of
Federal fiscal operations on the economy. It is hoped that further
progress in development of this adjusted series, particularly to show
major components of receipts and expenditures, will be made and will
become part of the regularly published Economic Indicators.
7. Federal budget accounting should be revised to show more clearly
the economic impact of Federal fiscal activities.
In its “Report on Federal Expenditure Policies for Economic
Growth and Stability,” 15 the Joint Economic Committee’s Subcom
mittee on Fiscal Policy noted the importance of budgetary revision
for the purpose of facilitating appraisal of the Federal Government’s
fiscal programs in relation to economic developments.
The conventional budget in recent years has tended increasingly to
depart from the consolidated cash statement and from national in
come accounting of expenditures and receipts. Separate budgetary
accounting for trust funds obscures both the aggregate volume and
composition of Federal expenditures and receipts, and, therefore, the
impact of Federal activities on the economy during the period cov
ered by the budget. Moreover, the principal purpose of these devices
appears to be to evade the statutory debt ceiling. Many public finance
experts assert that no such ceiling should be or need be imposed in
a responsible self-governing nation. Whatever the merits of this
argument, the use of budgetary gimmicks to avoid political embarrass
ment can hardly contribute to effective fiscal policy.
8. The statutory debt ceiling shoidd be eliminated.
As indicated above, the desire to avoid the embarrassing request for
raising the debt ceiling has, in the recent postwar period, occasioned
reductions in certain Federal outlays which in turn have contributed
significantly to economic instability. A responsible, representative
government needs no such arbitrary legislative curb as is imposed by
the debt ceiling. Moreover, the principal effect of the ceiling appears
to be to encourage budgetary ingenuity rather than to impose a sig
nificant limitation on the growth of Federal expenditures relative to
receipts.
B. C H A N G E S
IN
THE
FRAM EW ORK
IN T E R E ST OF A
OF
H IG H E R
FEDERAL
F IS C A L
P O L IC Y
IN
THE
RATE OF G R O W T H
Increasing the Nation’s rate of economic growth is a wTidely accepted
objective of public policy. Achieving this objective, particularly in
a dynamic context, will be neither free nor painless. This discussion,
however, is not concerned with whether a higher rate of growTth is
desirable, and if so, how much higher a growth rate is desired or
possible,16 In this section, therefore, the objective is assumed to be
given.
35 Joint committee print, 85th Cong1., 2d sess., Jan. 23. 1958, pp. 1 3 -1 5 .
36 See Ture, “ Economic Growth and Federal Tax Policy,” op. cit., pp. 3 8 8 -4 0 1 .
EMPLOYMENT, GROWTH, AND PRICE LEVELS
269
1.
Federal fiscal policy should aim at substantially greater sur
pluses for any given level of desired restraint on demand than have
been realized during the post-Korean period.
Achieving a higher rate of economic growth requires allocating a
larger proportion of available resources to activities which increase
productive capacity and productivity. In other words, a higher
growth rate requires a reduction in real personal consumption relative
to real total product and a relative increase in real gross national sav
ing (in an expanding economy, this proposition is perfectly consistent
with an absolute increase in consumption). Without an increase in
the saving rate, a rising rate of growth-generating activity will very
likely result in inflation, If more rapid growth is desired, the alter
native to a higher saving rate is relying on the inflationary process
to effect the necessary reallocation of resources, assuming that this
process will indeed result in a greater proportional allocation of avail
able resources to those activities whose growth-generating potential
is the greatest.
In general, fiscal surpluses and monetary constraints may be con
ceived as alternative public policy devices to achieve the increase in
the rate of saving required for a higher rate of economic growth.
An increase in fiscal surplus at any given level of income and with
any given saving propensity, serves, by definition, to increase the
amount of the total current income which is saved. Channeling these
savings into appropriate uses is another problem of fiscal policy. If
the policy preference is for relying on capital formation in the private
sectors of the economy in order to raise the growth rate, the saving
represented by the surplus must be made available to those economic
units in the private sector demanding loanable funds for investment
purposes. In general, this will be accomplished through retirement
of the public debt. On the other hand, to the extent that the capital
to be accumulated is in the public sector, e.g., schools, roads, research
facilities, etc., the surplus must be devoted to financing such invest
ments. (Under present budget accounting, this would be shown as an
increase in Government outlays matched by an increase in revenues,
i.e., a surplus of receipts over noncapital outlays of the Government.)
Monetary constraints operate by limiting the expansion of the sup
ply of money and credit relative to the demand therefor as total
demand increases. The result is an increase in interest rates which
serves in varying degree to limit demands for loanable funds and to
induce people to save a larger proportion of their current incomes.
The extent to which either of these general effects will in fact obtain
depends on the specific saving and spending patterns of the numerous
and highly varied economic units of the economy. A change in the
structure of interest rates may have widely divergent effects on the
270
EMPLOYMENT, GROWTH, AND PRICE LEVELS
borrowing of different groups in the economy. There is little evidence
to suggest that the saving response will be significant through a broad
range of interest rates at any given level of total income and in any
given set of circumstances.
Raising the rate of economic growth without inflation presents the
broad policy alternatives of substantial budget surpluses at high em
ployment with relatively “easy” conditions in the credit and money
markets as opposed to small budget surpluses or deficits and relatively
restrictive monetary conditions combined with some shift in the dis
tribution of tax burdens from saving to consumption. The policy
decision should rest on which combination of fiscal and monetary poli
cies is more likely to serve the desired objectives of economic growth,
high employment, and a stable price level with the least violence to
other social, political, and economic objectives of the Nation.
Increasing the fiscal surplus is quite evidently the more certain w^ay
of effecting an increase in the ratio of gross national saving to gross
national product. To the extent that a higher rate of economic
growth in the future will require a higher rate of saving, public policy
should shift toward easier monetary conditions and greater fiscal re
straint.
2.
If a higher rate of capital formation in the private sectors of the
economy is desired, tax burdens may have to be shifted to bear less
heavily on investment and saving and more heavily on consumption
over the long rwn.
Whatever the decision about the relative weight to be placed on fiscal
or monetary efforts to provide a level of saving adequate for a higher
rate of growth, there remains the question of the effects on saving of
alternative distributions of tax burdens. Any given budget surplus
or deficit may be realized, given Government outlays, with widely
varying systems of taxation, the initial impact of which on investment
and consumption outlays will, presumably, vary as well. If it is de
sired to devote a larger proportion of a high-employment income to
private capital formation, it is clear that shifting a larger part of the
tax burden to the return on investment and easing the relative burden
of taxes on consumption will require a higher rate of surplus (or
lower rate of deficit), given monetary conditions. Other combina
tions are also possible and may be necessary to serve other goals, such
as more equal distribution of income and wealth. But with the pre
sumptions set forth above, shifting the tax burden relatively from
consumption to investment without the corollary change in budget
surplus or monetary restraint wall tend to defeat the postulated
growth objective, unless recourse is had to inflation.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
271
The principal means for effecting a shift in the relative weight of
tax burdens from investment and saving to consumption is a reduction
in taxes on business income, particularly in the corporate sector, rela
tive to personal income taxes. In effect, this involves a shift in tax
burden distribution from returns on investment to the labor share of
national income. Corporate saving represents a substantially larger
proportion of corporate profits after tax than does personal saving re
lative to disposable personal income.
There is no necessary implication in these conclusions that the
absolute tax burden on the labor share of national income need be
increased at any given time even if its share must rise. The total
volume of Federal tax receipts necessary to achieve the desired in
crease in surplus (or reduction in deficit) will depend on numerous
factors, including the level and composition of Federal expenditures.
It is quite conceivable that the above prescription would be perfectly
consistent with general tax reduction, under certain circumstances.
There is little evidence to suggest that a change in the degree of
progression in the personal income tax will have any major conse
quence for shifting the burden of taxes from investment and saving
to consumption. On the contrary, with the present pattern of pretax
personal income distribution, the change in saving or consumption in
response to a given change in disposable income seems to vary little
among income levels throughout all but the extreme ends of the
income distribution.
Changes in the degree of progression of the personal income, in
either direction, may be desirable on the basis of other considerations.
Such changes are likely to be insignificant in respect to the rate of
economic growth.
3.
Reform, of the Federal tax structure, particularly the income
and estate and gift taxes, is a concomitant of a shift in policy mix
toward higher levels of budgetary surpluses.
A greater fiscal burden demands that the tax system be made as fair
as possible. The 1955 study by the Tax Policy Subcommittee of the
Joint. Economic Committee and the 1959 study by the Committee
on Ways and Means have detailed the numerous provisions of the
Federal tax system which afford differential tax treatment for identi
cal amounts of income, depending on the source of the income or the
disposition made of it. Such “horizontal” inequities, in addition to
their adverse effects on the allocation of resources, increase the bar
riers against discretionary action to increase taxes relative to expend
itures. Increasing tax rates, in other words, will bear heavily on
taxpayers with limited access to tax devices which reduce the effective
burden of taxes, and much less heavily, if at all, on taxpayers who
can arrange their affairs to take advantage of the preferential provi
sions in the tax laws.
272
EM PLOYMENT,
GROWTH, AND PRICE LEVELS
Tax reform, particularly of the individual and corporation income
taxes, to make the respective tax bases as uniform as possible, there
fore, may well be the most important prerequisite for a change in the
mix of monetary and fiscal policies, and for any shift in the distribu
tion of tax burdens by distributive shares of national income. Such
reform would make possible substantially lower rates of tax than at
present to produce any given revenue yield. Moreover, while elim
inating inequities, it would afford the opportunity for increasing
effective progression in the distribution of personal tax burdens by
income level.
4.
Government expenditure programs should ~be revised to place
greater emphasis on activities which increase productivity and make
possible increases in productive capacity and to reduce outlays
supporting inefficient use of resources.
Studies cited elsewhere in this report have stressed the contribu
tion, over the long run, to economic growth made by public efforts in
the field of education, health, natural resource development and con
servation, and research and development. Government outlays in
these fields have risen strongly since the end of World War II. Their
continued rise at an accelerated rate may be fundamental if a higher
rate of economic growth is to be achieved and maintained.
The relative responsibilities of the private sectors, of the State and
local governments, and of the Federal Government in promoting
activity in these fields is an important policy question. Ideally this
question should be resolved on the basis of the comparative advan
tages of each sector with respect to these activities. In fact, how
ever, numerous institutional constraints impede assignment of re
sponsibilities on this basis, Basically, the policy problem may resolve
to choosing between a lower rate of expansion of these activities and
therefore of economic growth while preserving present proportional
responsibilities and disregarding institutional and political considera
tions by transferring greater responsibility for these activities to the
Federal Government.
To date, the problem with respect to research and development ac
tivities has been submerged by virtue of the close association of Federal
efforts in this field with the defense program. The productivity of
these research and development activities in World War II and fol
lowing, as detailed by several studies, is so impressive as to indicate
that, if the required resources are available, very substantial in
creases in Federal outlays in this area would represent the major
contribution the Federal Government could make in promoting ex
pansion in the private sectors of the economy. Increasing Federal
responsibility in this area, therefore, is consistent with expansion of
EM PLOYMENT, GROWTH, AND PRICE LEVELS
273
the private sector of the economy relative to the public. Similar,
although perhaps less dramatic, evidence has been presented with
respect to public outlays in the fields of education, health, and natural
resource conservation and development.
Expansion of Federal activities in these fields need not involve an
increase in total Federal demands relative to gross national product.
Numerous Federal expenditure programs are aimed primarily at sup
porting the income and wealth position of economic units in the face
of the declining relative value of their products or services as de
termined in the market. Humanitarian considerations and dicta about
social “goals” and “needs” are frequently adduced in justification of
these governmental outlays. Such considerations cannot be disre
garded in a free and representative society, but their cost in terms of
losses in output resulting from misallocation of resources should not be
obscured in public policy formulation. In view of the overall budg
etary constraints, elimination or reduction of these activities may
be essential if the Federal Government is to elaborate activities the
productivity of which is substantial.17
5.
Accurate appraisal of long-term trends in Federal expenditures
requires reform of budgetary accounting.
The Fiscal Policy Subcommittee’s Report on Federal Expenditure
Policy for Economic Growth and Stability 18 emphasized the desira
bility of long-range projections of the costs of Federal programs.
One of the major barriers to careful analysis of the longrun impact of
Federal expenditures on the economy is the fact that important activi
ties of the Federal Government are not included in the conventional
budget, The highway trust fund is a major illustration, since both
Federal expenditures on highway construction and receipts allocated to
the financing of these expenditures are excluded from the conven
tional budget totals. Similarly, extra budgetary transactions such
as the use of trust fund assets to finance various expenditure pro
grams lying outside the purview of the fund can only obscure the mag
nitude and impact of budget proposals on the economy, both in the
near future and in the long run. The current exchange by the Federal
National Mortgage Association of some of its mortgage holdings for
specified nonmarketable debt issues of the Federal Government are
another case in point. The principal purpose of these exchanges is to
reduce the budget expenditure for FNMA; the actual availability of
17 See the report of the Subcommittee on Fiscal Policy, Joint Economic Committee on
Federal Expenditure Policy for Economic Growth and Stability, op, cit.
18 Op. cit.
274
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
funds to the mortgage market, however, is not changed by this extrabudgetary manipulation.19
Continued erosion of the conventional budget by such devices will
further reduce its usefulness as a means of controlling Federal fiscal
operations.
This study has unfortunately not been able to focus on the implica
tions of State and local government fiscal developments for the
Nation’s economic growth and stability. The States and localities
have been called upon to assume increasing responsibility in providing
the public services, such as education, health, and public utilities,
which a rapidly growing population demands. The adequacy of their
fiscal resources to discharge these responsibilities is therefore of con
siderable significance for the Nation’s long-run economic growth. In
addition, the increasing importance of State and local government
finances has important implications for the effectiveness of stabiliza
tion policies pursued by the Federal Government. The heavy reliance
by States and localities on sales taxes, excises, property taxes, and
other relatively insensitive revenue sources, tends to reduce the auto
matic responsiveness of all government revenues to changes in eco
nomic conditions.
These remarks indicate that the relationship of State and local
government fiscal policies to the Employment Act’s objectives is an
important area of inquiry. It is to be hoped that further studies of
intergovernmental fiscal relations will focus on this area.
19 Cf. hearings before the Joint Economic Committee on the January 1959 Economic
Report of the President, 8 6 th Cong., 1st sess., pp. 4 1 8 -4 2 2 , 7 7 0 -7 7 5 .
EM PLOYMENT,
T able
275
GROWTH, AND PRICE LEVELS
8-1.— Unemployment as a percent of the civilian labor force, by quarters,
seasonally adjusted annual rates, 1946-59
Unemploy
ment rate
(percent)
Year and quarter
1946:
1st ________
2d— __ __ _
____ ___
3d _ _ _ _ _ _ _
4th _
_ _ _ _ ____ _
4.7
4.2
3. 6
3.4
Total_____ ___________
3.9
___
1947:
2d _
3d___________________________
4th _ _______________________
3.8
4.1
4.1
3.7
T otal______________ ____
3.9
1948:
2d _
_
___________
3d _
___
4th_________________________
Total
3.8
__
-
1949:
1st
2d
3d
4th
4.7
5. 8
6. 5
7.1
Total
___
1950:
1st
__
2d _
3d
4th— _________ -
__________
Total__
5.9
6. 5
5. 6
4. 6
4.2
5.3
1951:
1st
2d
3d
4th
3. 5
3. 2
3. 2
3.4
Total_________
3.3
1952:
1st__ _ ____
2d
3d___________________________
4th____ _ __ _
Total.........
3.8
3.7
3. 7
4.0
.......
.....
3.1
3.1
3.2
2.8
Unemploy
ment rate
(percent)
Year and quarter
1953:
1st--- _ _
_____
2d______________________ ___
3d___________________________
4th. _ _______________________
Total__
2.9
1954:
1st......... _
__ 2d___________________________
3d___________________________
4th___
___ __ _ .
_ _
Total. _.
5.3
5.7
5.9
5.4
5. 6
1955:
1st _
_ _ _ - _ _ _ _ __
2d___________________________
3d___________________________
4th___ _ _ ._ _
_ _ __ __
4.8
4.4
4.2
4.2
4.4
Total____
1956:
1st
2 d __________________________
3d_____________ ____________
4th__________________________
4.1
4.3
4.2
4.1
4.2
Total_____
1957:
1st______
2d___________________________
3d___________________________
___
_ _ __ _
4th. . . _
Total-
4.1
4.1
4.3
4.9
4.3
1958:
1st ____
2d-__
____ _ _ _ ___ _
3d _
—.
- _ ______
4th._
______ ___
_____
Total___
1959:
1st 2d____________
3d________
2.7
2. 7
2.7
3.7
6.5
7.2
7.4
6.3
6.8
_______
_______
5.9
4.9
5.1
3.1
N ote .—For concepts of the labor force and of unemployment, see January 1959 Economic Report of the
President, p. 159.
Source: Department of Labor, Department of Commerce, and Council of Economic Advisers.
—Gross national product or expenditure, seasonally adjusted quarterly totals at annual rates, 194-6-58
276
T a b le 8 -2 .
[Billions of dollars]
1948
1947
1946
Line
II
III
IV
Year
I
II
III
IV
Year
I
II
III
IV
Year
1
Gross national product_____ _______
198.0
206.3
217.1
221.2
210.7
226.0
230.0
235.6
245.1
234.3
249.5
257.7
264.0
265.9
259.4
2
Personal consumption expenditures----------
137.3
143.0
152. 7
155. 4
147.1
159.4
163.9
167.2
171.2
165.4
174.7
177.5
180.2
180.8
178.3
3
4
5
Durable goods_________ _
_______
Nondurable goods-_ ___________ _____
Services____________
______ ___
12.7
80.8
43.9
14.9
82.6
45.5
17.4
87.7
47.5
18.6
88.1
48.7
15.9
84.8
46.4
19.1
90.7
49.6
20.3
93.0
50.6
20.8
94.2
52.2
22.1
95.7
53.4
20.6
93.4
51.4
21.6
98.1
55.0
22.6
98.7
56.2
23.6
99.0
57.6
23.1
99.2
58.5
22.7
98.7
56.9
6
Gross private domestic investment_____ _
43.1
8
9
10
11
13
16
18
19
20
21
29.6
31.8
28.1
29.8
29.2
29.6
36.7
31.5
39.9
43.2
45.2
43.9
10.8
12.2
12.6
11.0
13.3
13.8
15.6
17.9
15.3
18.4
19.8
20.1
19.4
19.5
_ .
3.5
4.6
5.3
5.6
4.8
6.2
6.3
7.4
7.6
9.6
7.5
8.3
7.7
10. 5
9.2
10.4
8.0
9.7
8.6
9.7
9.7
9.7
10.1
9.3
16.4
16.7
17.4
18. 2
3.3
18.3
5.1
19.0
6.1
20.1
4.3
18.9
3.0
___ ________
Producers’ durable eq u ip m en t...
Change in business inventories—total..
Nonfarm on ly . .
Net exports of goods and services.
Exports_______________________________
Im ports___ . .
...
--
4.9
6.2
6.9
7.0
6.3
7.0
7.7
5.9
9.4
8.8
11.4
6.1
14.5
10.7
4.7
6.4
16.1
.4
- 1 .0
- 2 .7
1.4
16. 7
—. 5
6.0
8.7
5.9
4.8
6.4
1.5
1.5
-.3
2.4
1.3
2.3
2.9
3.9
2.8
3.8
4.5
6.5
4.9
4.9
9.0
9.4
9.9
7.9
9.0
4.8
3.3
2.8
3.0
3.5
11.1
7.3
12.4
7.9
14.4
7.9
13.2
8.3
12.8
7.9
17.4
18.5
8.6
17.2
9.3
17.9
8.9
15.5
10. 7
14.2
10.9
14.2
11.5
14.1
8.5
18.4
9.0
11.0
14.5
11.0
34.9
29.7
28.3
29.1
30.5
27.8
27.5
28.8
29.4
28.4
30.1
33.7
35.8
38.2
34.5
15.7
15.6
15.9
19.0
20.3
22.1
19.3
10.7
6.1
.9
11.5
5. 1
.9
11.4
5.4
11.2
5.8
11.3
8. 1
.4
11.8
8.8
.3
12.1
10.2
.2
11.6
8.2
12.9
13.7
12. 7
14.2
14.7
15.6
16.1
15.2
Government purchases of goods and serv25.9
Federal___
National defense_________
. . ..
Other_ __________________________
Less Government s a le s ... ----------State and local „
---------------
24.5
3.9
2.5
8.9
20.2
19.4
4.4
3.6
9.5
18.1
18.1
16.3
4.9
3.1
15.0
4.8
1.7
10.2
11.0
20.6
18.8
4.5
1.7
9.9
15.9
13.0
4.3
1.4
11.9
15.1
10.3
6.1
1.3
12.4
15.9
1. 1
1.1
4.7
.5
LEVELS
17
Other____
29.0
8.5
PRICE
14
15
Residential nonfarm_____
22.1
_______
AND
12
New construction_____ ____
GROWTH,
7
EMPLOYMENT,
I
T a b le 8 -2 .—
Gross national product or expenditure, seasonally adjusted quarterly totals at annual rates, 1946-58— -C o n tin u e d
[Billionsof dollars]
1949
Line
I
Gross national product..___
Personal consumption expenditures_____
III
IV
Y ear
II
III
IV
Year
257. 0
258.1
265. 8
274.4
293.2
304.3
284.6
317.8
326.4
333.8
338.1
329.0
180.5
184.0
181.2
185.7
189.9
204.4
200.1
195.0
211.5
205.5
208.8
213.4
209.8
26.8
96.2
62.6
27.9
97.7
64.3
35.5
103.3
65.7
31.2
102.0
66.9
30.4
99.8
64.9
33.0
110.2
68.3
28.0
108.1
69.4
28.5
109.5
70.8
28.4
112.7
72.3
29.5
110.1
70.2
26.3
96.3
61.5
24.6
96.6
60.0
6
Gross private domestic investment_______
30.8
33.7
30.6
33.0
39.8
46.9
51.1
61.4
50.0
56.9
61.6
56.3
51.0
56.3
18.5
18.2
18.6
19.9
18.8
21.6
23.6
25.6
25.3
24.2
25.7
25.0
24.5
24.5
24.8
Residential nonfarm_____________
Other______________________ ____
9.0
9.4
8.9
9.3
9.6
9.0
10.9
9.0
9.6
9.2
12.2
9.4
13.8
9.8
15.4
10.3
14.4
10.9
14.1
10.1
14.1
11.6
12.5
12.5
11.8
12.7
12.1
12.4
12.5
12.3
18.3
0
17.9
-5 .3
16.8
-1 .7
16.0
-5 .3
17.2
-3 .1
15.7
2.5
18.4
4.9
20.6
4.9
21.1
15.0
18.9
6.8
20.7
10.5
21.3
15.2
21.6
10.2
21.5
4.9
21.3
10.2
9.1
Producers’ durable equipment_______
Change in business inventories—totaL_
Nonfarm only
_ __ ___________
Net exports of goods and services________
-4 .1
-.6
-4 .7
-2 .2
2.2
4.2
3.8
13.8
6.0
9.3
14.0
9.1
3.8
4.6
3.7
2.1
3.8
2.0
1.1
-.6
-.2
.6
-.2
1.7
3.9
4.2
2.4
13.6
9.9
12.1
10.0
14.0
10.2
12.5
10.5
12.4
11.3
13.4
14.0
14.2
14.4
13.1
12.5
15.9
16.1
17.7
16.0
18.9
15.0
18.9
14.8
17.9
15.5
Exports __________
____ ________ _
Imports_____ _
___ ___ . ______ _
15.2
10.6
15.0
10.3
16
Government purchases of goods and serv
ices----------------------------------------------------
39.5
39.9
40.9
40.3
40.2
38.4
36.5
38.2
43.0
39.0
49.5
57.7
64.9
69.5
60.5
17
Federal_________ ___ ______________
22.5
22.3
22.6
21.6
22.2
19.1
17.2
18.4
22.7
19.3
28.7
36.1
42.9
47.4
38.8
18
19
20
National defense____ ___ _ _____
Other_ ________________________
Less Government sales _ ______
13.5
9.3
.3
13.7
8.9
.2
14.1
8.6
.1
13.0
8.7
13.6
8.9
.1
.2
12.6
6.6
.1
12.0
5.2
.1
14.1
4.4
.1
18.3
4.5
.2
14.3
5.2
.1
24.3
4.5
.2
31.2
5.1
.2
38.1
5.2
.4
41.8
6.0
.4
33.9
5.2
.3
17.0
17.6
18.3
18.7
17.9
19.3
19.3
19.8
20.3
19.7
20.9
21.6
21.9
22.1
21.7
21
State and local
___
___ _____ ____
LEVELS
14
15
PRICE
.6
4.6
AND
36.8
_________
New construction_______
GROWTH,
12
I
258.8
25.1
95.3
60.1
13
Year
181.1
24.5
97.1
59.5
10
IV
256.4
22.4
97.8
58.8
11
III
179.0
Durable goods__
__ ___________ _
Nondurable goods __ ___ _ ________
Services____ _ __ __
...............
8
9
II
259.8
3
4
5
7
I
1951
EMPLOYMENT,
____
1
2
II
1950
bO
T a b le 8 -2 .—
fcO
00
Gross national product or expenditure, seasonally adjusted quarterly totals at annual rates, 1946-58
[Billions of dollars]
1955
1954
1953
1952
Line
II
III
IV
Year
I
II
III
IV
Year
I
II
III
IV
Year
I
II
III
IV
Year
1
Gross national product_________
341.0 341.3 347. 0 358. 6 347.0 364.5 368.8 367.1 361.0 365.4 360. 0 358. 9 362. 0 370. 8 363.1 384.3 393.0 403. 4 408. 9
397.5
2
Personal consumption expenditures - . .
214.6 217.7 219.6 227.2 219.8 230.9 233.3 234.1 232.3 232.6 233.7 236.5 238. 7 243.2 238. 0 249. 4 254. 3 260. 9 263. 3
256. 9
Durable Roods____ ________ - .. 27.7 29.1 27.5 32.1 29.1 33.2 33.4 33.6 31.2 32.9 31.2 32. 2 32.3 33.9 32. 4 38.2 39.1 41.4 39.8
113.3 113. 9 115.9 117.2 115.1 118.1 118.6 117.8 117. 4 118.0 117. 9 118.8 119. 6 121.0 119.3 121. 2 123. 7 126. 1 128. 1
Nondurable eoods______ ___ ___
73.6 74. 7 76.2 77.9 75.6 79.6 81. 2 82.8 83.7 81.8 84.6 85.5 86.9 88. 3 86.3 90.0 91.6 93.4 95.3
Services. ________ _____ _ _
39. 6
124. 8
92.5
3
4
5
52.6
49.9
52.0
52.9
51.1
45.2
50.3
46. 6
47.2
48.8
52. 3
48.9
58.8
63. 1
65.4
67. 6
63. 8
25.4
26.1
25.5
26.9
27. 8
27.7
27.9
27.6
27.8
28.9
30.2
31.6
29.7
33.9
34.9
35.4
35. 4
34.9
8
9
Residential nonfarm__________
O ther_________________ ______
12.4
12.8
12.7
12.7
12.8
12.6
13.4
12.7
12.8
12.7
13.7
13.2
14.0
13.8
13. 8
14.0
13. 7
14.2
13.8
13.8
13.7
14. 1
14.7
14.2
15.8
14.4
17.0
14.6
15. 4
14.3
18. 5
15. 4
18.9
16.0
18.9
16. 5
18.4
17. 0
18.7
16.2
10
11
21.9
22.4
19.4
21.2
21.3
22.5
22.0
22. 6
21.9
22.3
21.4
20. 9
20.7
19.9
20. 8
20. 5
22. 1
24. 4
25. 4
23.1
12
Producers’ durable equipm ent__
Change in business inventories—
total_____________________________
Nonfarm o n ly ... __ _
5.3
4.7
3.1
2.1
2.5
3.0
3.1
4.0
.7 - 4 .6
1.5 - 4 .3
.4
1.1
- 2 .6
- 2 .8
- 2 .7
- 3 .2
- 2 .1
- 2 .8
.8
.2
4. 4
3.8
6.1
5.7
5.7
5.5
6. 7
6.7
5.8
5. 5
13
N et exports of goods and services-----------
3.1
2.8
.1
-.7
1.3
- .3
-.7
-.8
.3
.8
.4
2.3
1.0
1.5
.7
1.3
.9
1.1
14
15
Exports___________________________
Im ports.. --------------------------------- ---
19.0
15.9
18.3
15.5
16.0
16.0
16.4
17.1
17.4
16.1
16.5
16.7
16.5
17.2
16.7
17.5
16.7
16.7
16.6
17.0
16.0
15.7
17.9
17.1
17.3
16.8
18.7
16.5
17.5
16.5
18.7
17.2
18.6
17.9
20.0
18.7
20.3
19.4
19.4
18.
16
_
_
-2 .2
- 3 .3
4.3
3.4
.0
-.4
71.1
75.2
78.2
79.5
76.0
81.8
83.3
82.7
83.5
82.8
79.4
74.4
74.1
73.0
75.3
74. 6
74. 9
75.8
77.1
75. 6
48.5
52.1
55.0
55.8
52.9
57.4
58.9
57.7
57.8
58.0
52.9
47.1
45.9
44.4
47.5
45.1
44.7
45.3
46.1
45.3
18
19
20
National defense____________ - 43.0
5.8
Other_________________________
.3
Less Government sales-------- ---
46.2
6.2
.3
47.0
8.1
.2
49.3
6.7
.2
46.4
6.7
.3
49.8
8.0
.4
50.5
8.7
.3
49.3
8.7
.3
47.6
10.5
.3
49.3
9.0
.3
44.8
8.4
.3
41.5
5.9
.3
40.0
6.2
.3
38.4
6.2
.3
41.2
6.7
.3
39.2
6.2
.3
38.8
6.2
.4
39.2
6. 5
.4
39.1
7.4
.4
39.1
6.9
.4
21
State and local-------------------------------- 22.5
23.1
23.2
23.7
23.2
24.4
24.3
24.9
25.7
24.9
26.5
27.3
28.2
28.7
27.7
29.5
30.2
30.5
31.0
30.3
17
Federal_______________
______
LEVELS
Government purchases of goods and
services______________________________
5.1
4.0
- 1 .6
- 2 .1
PRICE
49.1
25.4
New construction.
AND
45.6
25.2
Gi oss private domestic investment____
GROWTH,
52.2
_____
6
7
EMPLOYMENT,
I
T a b le 8 -2 .—
Gross national product or expenditure, seasonally adjusted quarterly totals at annual rates, 19Jf6-58— C o n tin u ed
[Billions of dollars]
1956
Line
I
II
III
1957
IV
Year
1958
I
II
III
IV
Year
I
II
III
IV
442.5
431.0
434.5
444.0
457.1
Gross national product____ ________
410.6
415.0
421.0
430.0
419.2
437.7
442.4
447.8
442.3
Personal consumption expenditures______
265.6
268.2
270.4
275.6
269.9
279.8
282.9
288.2
288.1
284.8
3
4
5
Durable goods________________________
_______
Nondurable goods
_ __ _
Services___ _______ ___
_ ________
38.8
129.7
97.1
38.2
131.0
98.9
37.7
131.7
101.0
39.4
133. 3
102. 8
38.5
131.4
100.0
40.3
135.4
104.1
40.3
136.8
105.8
40.9
139.7
107.6
39.7
139.0
109.4
40.3
137.7
106.7
6
Gross private domestic investment_______
287.3
36.9
139.5
111.0
290.9
36.7
141. 5
112.7
294.4
37.1
143.1
114.2
299.1
39.8
143.6
115.7
441.7
293.
37.6
141.9
113.4
67.3
68.1
67.4
66.9
68.3
67.9
63.2
66.6
52.4
51.3
54.2
61.3
54.9
35.7
35.7
35.5
35.5
35.8
36.0
36.2
36.1
36.1
35.5
34.6
35.4
37.3
35.8
8
9
Residential nonfarm______________
Other ___ _______ __ ___
17.8
17.3
18.0
17.7
17.6
18.1
17.3
18.2
17.7
17.8
17.1
18.7
16.9
19.1
17.0
19.3
17.1
19.0
17.0
19.0
17.1
18.4
16.9
17.7
18.0
17.4
19.9
17.4
18.0
17.7
10
11
Producers’ durable equipment________
Change in business inventories—total..
25.8
6.2
26.7
4.4
27.6
4.0
28.6
4.0
27.2
4.7
28.8
2.2
28.6
3.6
29.0
2.7
27.7
-.6
28. 5
2.0
23.8
- 6 .9
22.6
- 5 .8
22.2
- 3 .4
23.2
.8
22. 9
- 3 .8
-.1
- 4 .9
Nonfarm only. _ __________ ______
6.6
5.2
4.4
4.1
5.1
1.9
2.9
1.7
- 1 .7
1.2
- 8 .1
- 7 .0
- 4 .5
13
Net exports of goods and services_________
1.4
2.6
3.5
4.3
2.9
6.0
5.1
5.1
3.5
4.9
2.0
1.2
1.6
.2
1.2
14
15
Exports___________ _________
_ _
Imports_____ _______________________ .
21.4
20.0
22.6
20.0
24.1
20.5
24.5
20.2
23.1
20.2
27.0
21.0
26.4
21.3
26.6
21.5
24.9
21.3
26.2
21.3
22.2
20.2
22.3
21. 1
23.1
21.5
22.7
22.5
22.6
21.3
92.6
16
Federal___ _________
____
__
76.6
77.3
79.8
82.0
79.0
84.9
86.1
86.6
87.4
86.2
89.3
91.1
93.8
96.5
44.8
44.5
46.2
47.5
45.7
49.1
49.7
49.7
49.1
49.4
50.1
51.3
53.1
54.2
52.2
18
19
20
National defense______ __________
Other_________________ _______ __
Less Government sales__________
39.1
6.1
.3
39.2
5.7
.4
41.0
5.4
.3
42.1
5.7
.3
40.4
5.7
.3
43.7
5.8
.4
44.9
5.2
.3
44.9
5.3
.5
43.9
5.7
.5
44.3
5.5
.4
44.0
6.6
.5
44.3
7.5
.5
44.5
8.9
.3
45.3
9.4
.6
44.5
8.1
.5
21
State and local________________________
31.7
32.8
33.7
34.5
33.2
35.8
36.5
36.9
38.3
36.8
39.2
39.7
40.8
42.2
40.5
LEVELS
17
Government purchases of goods and ser
vices______________ ___ ___ __ __ .
PRICE
12
AND
66.9
35.1
New construction
GROWTH,
67.1
_ _________ _____
7
EMPLOYMENT,
1
2
Year
Source: Department of Commerce, Office of Business Economics, U.S. Income and Output, 1958,
279
Gross national product or expenditure, seasonally adjusted quarterly totals at annual rates, in constant dolars, 1947-581
280
T a b le 8 -3 .—
[Billions of 1954 dollars]
1947
Line
I
II
III
1948
IV
Year
I
II
III
1949
IV
Year
I
II
III
IV
Year
Gross national product_____ ________
278.4
280.4
282.9
287.2
282.3
286.4
293.3
295.6
297.3
293.1
291. 5
290.3
295.6
293.0
292.
Personal consumption expenditures_______
192.5
196.1
196.9
197.0
195.6
198.1
199.0
199.4
200.6
199.3
199.9
203.6
204.8
209.0
204.
3
4
5
Durable goods________________________
Nondurable goods____________ . ___
Services___ __________________ _______
21.8
104.7
65.9
23.1
106.4
66.5
23.5
105.8
67. 5
24.7
104.3
68.0
23.3
105.3
67.0
24.0
105.3
68.9
24.8
104.9
69.3
6
Gross private domestic investment____ __
25.2
104.3
69.9
24.3
105. 8
70.4
24.6
105.1
69.6
23.7
105.9
70.4
26.0
106.4
71.2
27.1
105. 6
72.1
28.5
107.3
73.2
26.3
106.3
71.7
39.2
46.4
41.5
47.4
50.7
51.3
49.5
49.8
41.9
35.8
39.8
36.4
38.5
18.3
20.2
22.3
19.9
22.0
23.1
23.0
22.2
22.7
21.3
21.4
22.5
23.9
22.3
8
9
Residential nonfarm..___________
Other______ ____________________
8.6
9.9
8.2
10.0
9.6
10.5
11.6
10.7
9.6
10.3
11.4
10.7
12.0
11.2
11.6
11.5
10.6
11.6
11.4
11.2
10.1
11.2
10. 3
11.1
11.5
11.0
12.8
11.1
11.2
11.1
10
Producers’ durable equipment________
21.5
21.6
21.6
22.1
21.7
22.8
22.6
22.5
23.3
22.8
21.0
20.4
19.3
18.5
19.8
11
Change in business inventories—total__
.6
—. 5
-2 . 5
2.0
-. 1
2.7
4.9
5.8
4.1
4.4
-.4
- 6 .0
- 2 .0
- 6 .0
-3 .6
-.8
12
_
Nonfarm only_______ ____________
-.3
2.9
1.4
1.9
3.1
4. 1
3.0
3.0
.4
- 4 .6
-5 .4
- 2 .6
8.5
8.7
8.8
6.2
8.0
2.9
1.7
1.4
1.9
2.0
3.4
3.4
2.8
.9
2.6
14
Government purchases of goods and
services____ _____________________________
36.8
36.3
38.0
37.6
37.2
37.9
42.0
43.5
45.3
42.1
46.3
47.4
48.2
46.8
47.2
15
16
FederaL.. _
_____ ______________
State and local___ ____________________
19.6
17.2
18.7
17.6
20.0
18.0
19.1
18.5
19.4
17.8
19.2
18.7
22.9
19.1
24.1
19.4
25.6
19.7
22.9
19.2
25.6
20.7
25.8
21.6
25.9
22.4
23.8
23.0
25.3
21.9
LEVELS
1.8
__
PRICE
1.4
13
Net exports of goods and services___ __
AND
39.3
18.4
New construction
GROWTH,
40.6
_________
7
EMPLOYMENT,
1
2
Table 8 - 3 . — Gross national product or expenditure, seasonally adjusted quarterly totals at annual rates, in constant dollars,
1947-581— C o n tin u e d
1950
Line
I
II
III
1951
IV
Year
I
II
III
1952
IV
Year
I
II
III
IV
Year
312.0
325.6
331.6
318.1
334.0
340.0
346.3
346.9
341.8
349.6
349.3
352.6
362.3
353.5
210.7
214.2
225.6
217.0
216.8
222.3
214.5
217.5
219.8
218. 5
220.0
222.7
223.8
230.2
224.2
3
4
5
Durable goods_______ ________________
Nondurable goods.______ ____________
Services_______ __________
29.0
107.9
73.8
29.8
108.9
75.4
37.3
111.9
76.3
32.2
108.1
76.7
32.1
109.2
75.5
33.0
112.0
77.2
27.8
109.2
77.6
28.1
110.9
78.6
27.7
112.7
79.4
29.2
111.2
78.2
27.0
113.2
79.8
28.4
114.1
80.2
27.0
115.8
81.0
31.6
116.7
81.9
28.5
115.0
80.8
6
Gross private domestic investment ...........
46.2
53.8
56.5
66.3
55.9
59.1
62.7
57.7
51.9
57.7
52.7
46.0
49.5
53.2
50.4
25.3
27.3
28.3
28.0
27.4
27.6
26.2
25.6
25.3
26.0
25.7
25.8
25.7
26.5
26.0
14.0
11.3
15.5
11.8
16.5
11.8
15.4
12.6
15.5
11.9
14.8
12.8
12.9
13.4
12.0
13.5
12.1
13.2
12.9
13.2
12.4
13.3
12.6
13.2
12.8
13.0
13.4
13.1
12.8
13.2
18.2
21.1
23.0
22.8
21.3
21.5
22.0
22.3
22.2
22.0
22.5
22.9
20.0
21.8
21.8
2.7
5.4
5.2
15.5
7.2
10.0
14.5
9.8
4.5
9.7
4.6
- 2 .7
3.8
4.9
2.6
3.3
4.7
2.2
- 1 .1
1.2
7
8
9
New construction.........................
Residential nonfarm........................
Other___ ______________________
10
Producers’ durable equipment......... .
11
Change in business inventories—total. _
Nonfarm only____________________
2.4
4.8
4.1
14.5
6.5
9.2
13.7
9.2
3.9
9.0
4.0
- 3 .3
13
Net exports of goods and services_________
1.1
.6
-.7
.0
.2
.0
1.8
3.6
3.6
2.2
3.5
2.8
-.2
14
Government purchases of goods
services_______________ _ _
44.6
43.5
44.2
48.3
45.1
52.5
61.1
67.6
71.6
63.3
73.4
77.7
79.5
80.0
77.7
21.1
23.6
20.0
23.5
20.7
23.5
24.7
23.6
21.6
23.5
28.8
23.8
36.9
24.1
43.3
24.2
47.4
24.1
39.3
24.1
49.1
24.3
53.2
24.5
55.2
24.4
55.3
24.7
53.3
24.5
15
16
and
Federal___________________________
State and local____________________
__
LEVELS
12
PRICE
302.7
AND
Gross national product______ ______
Personal consumption expenditures...........
GROWTH,
1
2
EMPLOYMENT,
48795— 59
[Billions of 1954 dollars]
.—Gross national product or expenditure, seasonally adjusted quarterly totals at annual rates, in constant dollars, 1941-581
282
T a b le 8 -3
[Billions of 1954 dollars]
1955
1954
1953
Line
1
3
4
5
______________
Durable goods
Nondurable goods - - _ ____ - —
Services
_________________ --
g
Gross private domestic investment ______
8
g
10
12
IV
Year
II
III
IV
Year
I
II
III
IV
Year
368.9
373.2
370.2
363.9
369.0
360.4
359.5
362.1
370.1
363.1
382.2
389.5
397.5
401.1
392.7
234.0
236.2
236.0
234.1
235.1
233.4
236.4
239.0
243.2
238. 0
248.7
253. 7
259.9
261.8
256.0
33.0
118.1
82.8
33.5
119.2
83.6
33.7
118.1
84. 1
32.1
117.7
84.3
33.1
118.3
83. 7
31.2
117.4
84.9
32.2
118.6
85. 6
32.4
119. 8
86. 8
33.9
121. 5
87. 9
32.4
119. 3
86. 3
37.9
121. 6
89. 2
39.0
124. 3
90. 4
41.5
126. 7
91.7
39.9
128. 9
92.9
39.6
125.4
91.0
51.0
45.4
50.6
46.9
47.0
48.9
52.2
48.9
58.5
62.3
63.9
65.2
62.5
27.6
27.8
27.6
27.9
28.9
30. 2
31.5
29.7
33.5
34.0
34.2
33.7
33.9
Residential nonfarm _________
Other
___ __________________
13.6
13.5
13.8
13.8
13.5
14.1
13. 5
14.3
13.6
14.0
13. 7
14.2
14.8
14.1
15.8
14.4
16. 9
14.6
15.4
14. 3
18.3
15. 2
18. 5
15. 5
18.2
16. 0
17.6
16.1
18.2
15.7
_ __
23.1
22.2
22.6
22.2
22. 5
21.5
20.9
20. 7
19.9
20.8
20.3
21.7
23.7
24.4
.7
-4 .6
.5
-2 .5
- 2 .9
- 2 .0
.8
- 1 .6
4.7
6.5
6.0
7.1
6.1
4.1
1.5
-4 .3
1.1
-2 .6
-3 .4
- 2 .7
.1
-2 .1
3.9
5.8
5.4
6.6
5.4
-.5
-.9
-.1
.9
.6
2.4
1.0
1.5
.4
1.2
.7
.9
84.9
84.3
80.1
75.2
73.6
72.2
75.3
73.4
73.1
72.6
73.5
73.2
43.4
29. 7
42.9
29.7
43.6
29.9
43.5
29.7
Producers’ durable equipment__
Change in business inventories—total
Nonfarm only _
__
___ ______
2.6
3.2
3.2
13
Net exports of goods and services_____
-.8
-1 .1
14
Government
services
83.0
85.1
84.4
purchases
______
Federal
State and local _
of goods and
- -- - ___ __
___ __ __________
___ _______-
57.9
25.1
60.0
25.1
58.8
25.6
58.7
27.2
58.8
25.5
53.1
27.0
47.7
27. 5
45. 5
28.1
43.9
28. 3
47.5
27. 7
44.3
29. 2
22.5
LEVELS
53.0
27.6
__________________
PRICE
52.8
27.1
New construction
- 1 .2
15
16
I
AND
11
III
GROWTH,
7
II
EMPLOYMENT,
I
1956
1
2
3
4
5
7
IV
Year
II
III
IV
Year
I
II
III
IV
Year
Gross national product___________ _
398.8
398.9
400.2
405.5
400.9
408.7
410.1
410.6
403.8
408.3
391.0
393.1
400.9
410.8
399.0
Personal consumption expenditures______
263.2
263.7
263.4
266.9
264.3
268.7
270.0
273.0
271.6
270.8
268.7
271.1
275.0
278.4
273.3
Durable goods___ _ _______________
Nondurable goods. _____ ______ ______
Services_______ __ _____________
38.9
130.2
94.2
38.0
130.3
95.3
37.1
129.7
96.7
38.2
130.9
97.8
38.0
130.3
96.0
38.8
131.8
98.2
38.4
132.3
99.3
38.9
133.8
100.3
37.7
132.6
101.3
38.5
132.6
99.8
35.2
131.3
102.2
35.0
132.7
103.4
35.3
135.3
104.4
37.5
135.6
105.3
35.7
133.7
103.8
Gross private domestic investment. _ ____
62.8
61.5
61.4
61.3
61.7
59.6
60.3
59.2
54.9
58.5
45.0
44.2
46.6
53.0
47.3
_______________
32.7
32.6
32.3
31.8
32.3
32.0
31.8
31.9
31.7
31.9
31.3
30.5
31.2
32.6
31.5
Residential nonfarm_____________
Other ________________________
Producers’ durable equipment_______
16.6
16.1
24.3
16.5
16.1
24.7
16.0
16.3
25.2
15.7
16.0
25. 5
16.2
16.1
25. 0
15.5
16.5
25.2
15.3
16.5
24.8
15.3
16.6
24.9
15.4
16.3
23. 6
15.4
16.5
24.6
15.4
15.9
20.1
15.3
15.1
19.0
16.3
15.0
18.6
17.8
14.8
19.3
16.2
15.2
19.3
Change in business inventories—-total.
New construction
3.9
4.0
4.5
2.3
3.7
2.5
-.5
2.0
-6 .4
-5 .3
-3 .2
1.1
-3 .5
5.0
4.3
3.9
4.9
1.6
2.6
1.4
-1 .4
1.1
-7 .2
-6 .1
-4 .2
0
-4 .4
13
Net exports of goods and services________
.9
2.2
3.1
3.8
2.5
4.9
4.2
3.9
2.3
3.8
.8
.1
.5
-1 .4
0
14
Government purchases of goods and
services____ _________________________
71.8
71.5
72.1
73.5
72.3
75.4
75.5
74.5
75.0
75.1
76.5
77.7
78.9
80.8
78.4
15
16
Federal____________________________
State and local_____ ________________
41.8
30.0
40.9
30.6
41.5
30.7
42.5
31.0
41.7
30.6
43.5
31.9
43.4
32.1
42.4
32.1
41.9
33.1
42.8
32.3
42.8
33.7
43.9
33.8
44.3
34.6
45.2
35.5
44.1
34.4
sit price deflators are shown in table 8-6.
LEVELS
4.1
6.4
PRICE
5.8
________
Nonfarm only________
AND
8
9
10
11
12
III
GROWTH,
6
II
EMPLOYMENT,
I
1958
1957
Department of Commerce, Office of Business Economics, U.S. Income and Output, 1958.
283
284
T
EMPLOYMENT, GROWTH, AND PRICE LEVELS
able
8 -4 .— Defense obligations for hard goods and new and unfilled orders and in
ventories in durable goods manufacturing industries, quarterly, 19^6—59
[Billions of dollars]
Defense
Durable goods industries
obligations
for hard
New orders Unfilled
goods 1
Inven
received 2
orders 3
tories *
1946:
1st________________________________________________
2d___________________________________________ ____
3d___ _____ _______________________________________
4th_________________ __________________ ____ ___
(n.a.)
(n.a.)
(n.a.)
.5
16.0
18. 5
18.3
18.5
22.6
27. 0
29. 4
29.5
9.3
10.1
11.1
12.0
1947:
- _________
1st_____________________ _____ -2d________________________________________________
3d _______________________________________________
4th.______ ________________________________________
.4
1.4
.4
.4
18.3
18.0
18. 7
21.4
29.1
27.0
26.2
25.5
13.1
13.9
14.1
14.2
21. 7
24.1
23.6
22.4
25.2
25.1
25.9
24.2
14.5
14.8
15.1
15.7
20.1
18.2
20.2
20.6
21.9
18.4
17.6
18.4
16.3
15. 5
14.3
14.0
23.3
27.2
38.6
34.6
20. 0
21. 7
32.1
36.6
14.2
14. 7
14.9
16.8
45.1
39.3
33.8
33.9
50.2
57.3
61.9
64.1
18.3
20.2
21.6
22.8
35.3
35. 7
34.6
34.7
67.8
71.4
75.1
73.2
23.9
23.8
23.4
24.4
37.9
37.0
30.2
27.3
73.6
71.2
64.9
57.1
25.1
26.1
26.2
26.3
29.1
29. 5
30. 2
33.1
52.1
46. 9
45.0
44.1
25. r»
24.6
23.4
24.1
Total____ ____ ___________ __
________ ____
2.6
1948:
1st_________ ____ _____________ . _ ____ __
_
2d________________________________________
3d.. ___________________________ _____________
.
4th_______________________________________________
Total........ .......... ...
.8
1.2
.7
1.1
___________________ _ .
3.8
1949:
1st______ ________________________ ______ _______ 2d________________________________________________
3d______________________________________
4th_______________________________________________
.7
1.3
.6
.6
3.2
Total___________________________________________
1950:
1st__________________ - -- ______ _____ _________
2d___________________________________ - ........ . .
3d_________________________________________________
_ .
4th________ _______________________________
Total___________________________
.6
1.3
4.2
4.5
...
1951:
1 s t ___________ ____________________ ____
2d____ ____ _____________________ ____ ___
3d_____ ________________________________________
4th_________________________ ____ ______________
___________
10.6
8.9
8.5
6.8
6.3
.
.
Total____________ ____________ ____ _________
30.5
1952:
1 st____________________ ____ ___________ ___ ___
2 d_____ ________ ___ ____ ______________
3d________ ________ ______________ ____ ________
4th...................................................................
7.9
12.0
9.3
4.0
.
T o ta l.._________________ ________________
33.2
1953:
1 st_________________________________________ . _
2 d............................... ............................ ............
3d_______________ _________________________________
4th............................... ..............................................
4.6
3.2
.8
.4
Total. ................................ ................ _ . _ _______
9.5
1 st________________________ _____ _ . ________
2 d____ ____________ _______________________ _
3d.........................................................
_
4th______________________________________
1.2
3.3
2.3
1954:
Total___________________________
See footnotes at end) of table.
4.5
|
11.3
285
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T
8 -4 .— Defense obligations for hard goods and new and uniilled orders and in~
ventories in durable goods manufacturing industries, quarterly, 1946-59— Con.
able
[Billions
of dollars]
Defense
Durable goods industries
obligations
for hard
goods 1
Unfilled
New orders
Invenreceived 2
orders 3
tories *
1955:
lst_
_____ ________ ______ ___ ________________
2d________________________________________________
3d_________________________________________________
4th________________________________________________
__ __ __
7.9
1956:
1st____________________________ ________________ __
2d______________ ____ ______________ _______ ______
3d_____ _____ ______________________ _________ ____
4th_____________ ________ _________ _______________
4.5
5.9
3.9
4.2
Total . .
_________ ___ _____ ______
1.7
2.4
.7
3.1
Total________ ____ ____ ________________________
18.5
1957:
1st_____________________ _______ __________________
2d____ _____________ ________ _______ ______ ______
3d_____ _____________ ________ ____________________
4th_______________________ ______ _____________ ___
3.7
3.4
2.2
4.0
Total_____ _______ ______ _____ ________________
13.3
1958:
____ _____________________________________
1st__
2d................ .......... ....................................... ............ ........
3 d ____________ ___________ _________________ ____
4th
_ _ _ ____ ___ _____ ____________
______
4.8
6.4
2.6
5.2
T o ta l____ ___ _ _ ____________________ _______
19.0
1959:
1st
........................ ............................................... _
2d . . .
...................... ............. ......................................
3 d ...................................................... ............. .................
4.4
5.3
39.0
40.8
41.5
44.9
46.1
46.6
49.7
53.4
24.4
24.8
25.1
26.6
43.0
44.3
41.6
44.3
55.6
57.3
60.5
61.0
28.2
29.3
29.2
30.6
42.7
41.0
37.2
36.1
60.3
57.2
53.2
48.1
31.5
31.7
31.3
31.1
33.0
35.1
35.8
40.6
45.1
43.7
43.6
44.0
30.2
28.7
27.7
27.9
45.1
47.9
41.8
47.2
47.0
47.9
29.1
30.2
29.6
1 For the 4th quarter of 1946 through the 2d quarter of 1950, includes only obligations
for major procurement. Thereafter, hard g ood s orders by the Department of Defense
includes (1) major items of equipment such as aircraft, missiles, ships, tanks, vehicles,
ammunition, weapons, artillery, electronics, communications, etc.; (2) maintenance spares
and spare parts for such equipment; and (S) organizational equipment and supplies. It
excludes subsistence, petroleum products, and clothing.
2 Not adjusted for seasonal variation.
3 Unfilled orders at end of quarter not adjusted for seasonal variation.
* Book value of inventories at end of quarter.
Not adjusted for seasonal variation.
Source: Economic and Fiscal Analysis Division, Office of Assistant Secretary o f De
fense (comptroller);. Monthly Report on the Status of Funds by Budget Category, and
Department of Commerce, Office of Business Economics, “ Survey of Current Business.”
T a b le
8 -5 .— Government receipts and expenditures, seasonally adjusted quarterly totals at annual rates , 1946-^581
[Billions of dollars]
1946
Line
II
III
IV
Year
1948
I
II
III
IV
43.5
42.8
42.5
44.5
Year
I
II
III
IV
43.3
45.0
43.2
42.8
42.6
43.4
21.1
11.6
18.7
12.1
18.0
11.9
18.2
11.6
19.0
11.8
8.3
4.5
8.2
4.6
8.1
4.5
1
Federal Government receipts.......................
35.1
37.8
41.0
42.9
39.2
2
3
4
16.2
5.7
17.0
7.4
17.5
10.0
17.9
11.6
17.2
8.6
19.3
10.8
19.4
10.3
19.7
10.3
20.2
11.3
19.6
10.7
5
Personal tax and nontax receipts......... .
Corporate profits tax accruals................
Indirect business tax and nontax accruals- ______________
_____ ____
Contributions for social insurance____
7.5
5.7
7.8
5.6
8.1
5.4
8.2
5.3
7.9
5.5
7.8
5.5
7. 6
5.5
7.7
4.7
8.3
4.7
7.9
5.1
7.8
4.5
8.1
4.4
Year
37.1
33.7
32.8
37.0
30.6
29.6
33.7
30.6
31.1
31.1
34.7
37.0
38.8
35.4
25.9
20.2
18.1
18.1
20.6
15.9
15.1
15.9
15.7
15.6
15.9
19.0
20.3
22.1
19.3
8
9
10
Transfer payments____________________
To persons.____ __________________
Foreign (net)__________ ___________
10.9
10.5
.5
9.8
9.6
.2
9.0
8.8
.3
8.4
8.0
.4
9.5
9.2
.3
8.3
8.3
.0
7.9
7.8
.1
11.4
11.1
.2
8.4
8.2
.2
9.0
8.9
.1
8.6
8.0
.6
9.0
7.8
1.2
9.7
7.4
2.3
9.5
7.4
2.2
9.2
7.7
1.6
11
Grants-in-aid to State and local gov
ernments______ _____________________
1.0
.9
1.2
1.4
1.1
1.5
1.8
1.8
1.8
1.7
1.8
1.9
2.1
2.1
2.0
12
Net interest paid____ _________________
4.1
4.2
4.2
4.2
4.2
4.1
4.2
4.2
4.2
4.2
4.2
4.2
4.3
4.3
4.3
13
Subsidies less current surplus of gov
ernment enterprises _ ____________
2.5
2.0
1.2
.8
1.6
.7
.6
.5
.5
.6
.6
.6
.7
.7
.6
8.0
14
16
17
18
19
20
-9 .3
.7
7.3
10.1
2.2
12.9
13.2
8.7
13.9
12.2
13.9
8.5
5.8
3.8
____
12.2
12.6
13.4
13.9
13.0
14.6
15.3
15.8
16.3
15.5
17.0
17.7
18.1
18.4
17.
Personal tax and nontax receipts...........
Corporate profits tax accruals_________
Indirect business tax and nontax
accruals_____________________________
Contributions for social insurance_____
Federal grants-in-aid................................
1.5
.3
1.5
.4
1.6
.5
1.6
.6
1.6
.5
1.7
.6
1.8
.6
1.9
.6
1.9
.6
1.8
.6
2.1
.7
2.1
.7
2.2
.7
2.2
.7
2.1
.7
9.0
.4
1.0
9.2
.5
.9
9.6
.5
1.2
9.8
.5
1.4
9.4
.5
1.1
10.1
.6
1.5
10.6
.6
1.8
11.0
.6
1.8
11.4
.6
1.8
10.8
.6
1.7
11.8
.7
1.8
12.2
.7
1.9
12.5
.7
2.1
12.7
.7
2.1
12.3
.7
2.0
State and local government receipts
LEVELS
15
Surplus or deficit (—) on income and
product account_________ _____________
PRICE
44.4
Purchases of goods and services........... .
AND
Federal Government expenditures________
GROWTH,
6
7
EMPLOYMENT.
I
1947
State and local government expenditures __
10.0
10.6
11.6
12.3
11.1
13.2
13.9
14.9
15.6
i4 .4
16.7
17.2
18.0
18.2
17.6
Purchases of goods and services_______
Transfer payments to persons ______
Net interest paid_______________ ______
Less current surplus of government
enterprises..____ ___________________
8.9
1.5
.3
9.5
1.5
.3
10.2
1.8
.3
11.0
1.8
.3
9.9
1.6
.3
11.9
1.8
.3
12.4
2.1
.3
12.9
2.6
.2
13.7
2.5
.2
12.7
2.2
.3
14.2
3.0
.3
14.7
3.0
.3
15.6
2.9
.3
16.1
2.6
.3
15.2
2.9
.3
.8
.7
.7
.8
.8
.8
.8
.8
.8
.8
.8
.8
.8
.8
.8
26
Surplus or deficit (—) on income and
product account_____________ _________
2.2
2.0
1.8
1.6
1.9
1.3
1.4
.9
.7
1.1
.4
.4
.2
.3
.3
GROWTH,
AND
PRICE
LEVELS
EMPLOTMENT,
21
22
23
24
25
288
T a b l e 8 - 5 . — Government receipts and expenditures, seasonally adjusted quarterly totals at annual rates, 1 9 4 6 -6 8 1— Continued
[Billions of dollars]
1951
1950
1949
Line
Federal Government receipts------ --------------
II
III
IV
39.7
38.5
39.4
38.7
39.1
I
II
III
IV
43.1
47.3
53.6
56.9
I
II
III
IV
50.2
67.7
63.8
61.7
64.6
64.5
25.9
21.6
26.2
19.3
27.5
20.3
26.3
21.6
9.2
7.1
9.2
7.0
9.7
7.2
9.5
7.1
Year
Year
16.3
10.5
16.2
9.2
16.2
9.8
16.1
9.6
16.2
9.8
16.7
12.6
17.3
15.5
17.9
19.6
20.8
20.7
18.2
17.1
5
Personal tax and nontax receipts--------Corporate profits tax accruals....... .........
Indirect business tax and nontax ac
cruals----------------------------------- -----------Contributions for social insurance-------
25.5
25.1
7.9
5.0
8.2
4.9
8.5
4.9
8.1
4.9
8.2
4.9
8.0
5.7
8.8
5.7
10.2
5.9
9.1
6.3
9.0
5.9
10.1
7.1
A
0
Federal Government expenditures_______
41.1
42.4
42.2
40.8
41.6
47.0
39.0
36.6
41.6
41.0
47.5
55.7
62.0
67.0
58.0
42.9
47.4
38.8
10.8
8.8
2.0
11.1
8.8
2.3
10.8
8.7
2.1
2
3
4
22.5
22.3
22.6
21.6
22.2
19.1
17.2
18.4
22.7
19.3
28.7
Transfer payments _________________
To persons
________________
__________________
Foreign (net)
11.5
8.5
3.0
12.9
8.9
4.0
12.0
9.0
3.1
11.6
8.7
2.9
12.0
8.8
3.2
20.1
17.2
2.9
13.7
10.3
3.4
10.2
7.8
2.4
10.7
8.2
2. 5
13.7
10.9
2.8
10.4
8.3
2.1
11.0
8.7
2.3
11
Grants-in-aid to State and local gov
ernments---------------------- --------------------
2.1
2.1
2.4
2.3
2.2
2.4
2.5
2.2
2.3
2.3
2.5
2.6
2.2
2.6
2.5
4.4
4.4
4.4
4.5
4.5
4.5
4.6
4.5
4.6
4.7
4.8
4.8
4.7p
1.1
1.2
1.3
1.2
1.3
1.3
1.3
1.2
1.3
Net interest paid---------------------------------
4.4
13
Subsidies less current surplus of gov
ernment enterprises.......... ....................
.6
.7
.8
.9
.7
1.0
14
Surplus or deficit ( - ) on income and
product account----------------- ------- - .........
- 1 .4
-3 .9
- 2 .8
- 2 .1
- 2 .5
- 3 .8
8.3
17.0
15.3
9.2
20.2
8.1
-.3
- 2 .4
6.4
19.9
20.1
19.6
20.6
21.3
21.8
22.0
21.4
23.2
23.3
23.3
24.1
23.5
15
State and local government receipts----------
19.0
19.2
16
17
18
Personal tax and nontax receipts...........
Corporate profits tax accruals......... .......
Indirect business tax and nontax
accruals
Contributions for social insurance------Federal grants-in-aid.__r......................
2.4
.6
2.5
.6
2.5
.6
2.5
.6
2.5
.6
2.6
.6
2.6
.7
2.7
.9
2.7
.9
2.6
.8
2.9
1.0
2.9
.9
3.0
.8
3.0
.8
2.9
.9
13.0
.8
2.1
13.3
.8
2.1
13.6
.8
2.4
13.9
.8
2.3
13.5
.8
2.2
14.2
.9
2.4
14.5
.9
2.5
15.0
1.0
2.2
15.1
1.0
2.3
14.7
1.0
2.3
15.8
1.1
2.5
15.8
1.1
2.6
16.2
1.1
2.2
16.6
1.1
2.6
16.1
1.1
2,5
19
20
LEVELS
12
4.4
PRICE
Purchases of goods and services.............
g
g
10
AND
7
36.1
EMPLOYMENT, GROWTH,
1
Year
I
State and local government expenditures - -
19.1
19.7
20.6
21.2
20.2
22.1
22.6
22.4
22.7
22.4
23.1
23.7
24.0
24.2
23.8
22
23
24
25
Purchases of goods and services......... .
Transfer payments to persons ...........
Net interest paid_____________________
Less current surplus of government
enterprises------------ ----------- ---------------
17.0
2.7
.3
17.6
2.8
.3
18.3
2.9
.3
18.7
3.1
.3
17.9
2.9
.3
19.3
3.4
.3
19.3
3.9
.3
19.8
3.3
.3
20.3
3.1
.3
19.7
3.4
.3
20.9
3.0
.3
21.6
2.9
.3
21.9
2.9
.3
22.1
2.9
.3
21.7
2.9
.3
.9
.9
.9
.9
.9
.9
.9
1.0
1.0
1.0
1.0
1.1
1.1
1.1
1.1
26
Surplus or deficit (—) on income and
product account-------- ------- ------------------
- .1
-.5
-.7
-1.0
-.6
-1 .4
-1 .3
-1 .0
.1
-.3
-.7
-.7
-.1
-.3
GROWTH,
AND
PRICE
LEVELS
-.6
EMPLOYMENT,
21
Government receipts and expenditures, seasonally adjusted quarterly totals at annual rates, 1946-58-
290
T a b l e 8 - 5 . __
-Continued
[Billions of dollars]
1955
1954
1953
1952
Line
IV
Year
I
II
III
IV
Year
I
II
II
Federal Government receipts---------------
67.4
66.8
67.0
69.6
67.7
71.6
72.3
71.1
66.3
70.3
63.2
63.3
Personal tax and nontax receipts...
Corporate profits tax accruals-------------Indirect business tax and nontax
30.8
19.2
30.8
38. 0
31.3
17 9
31.7
19.4
31.2
18.6
32.1
20.7
32.5
21.0
32.5
20.0
32.3
15.9
32.4
19.4
29.1
15.7
29.0
16.1
II
III
IV
Year
IV
Year
I
63.1
65.5
63.8
69.3
71.7
74.3
75.7
72.8
29.1
16.3
29.4
17.7
29.2
16.5
30.6
19.3
31.3
19.9
31.9
21.7
32.3
22.6
31.5
20.9
11.2
9.6
11.0
9.3
III
_—
______ —
—
- 10.0
7.4
10.6
7.3
10.5
7.3
11.0
7.5
10.5
7.4
11.3
7.5
11.3
7.5
11.3
7.3
10.9
7.2
11.2
7.4
10.3
8.1
10.1
8.0
9.7
8.1
10.1
8.2
10.1
8.1
10.5
8.9
11.3
9.2
11.2
9.6
Federal Government expenditures-------
66.5
70.9
74.3
74.7
71.6
76.7
79.4
76.8
78.1
77.7
73.8
68.7
68.2
67.8
69.6
68.5
68.1
68.8
70.1
68.9
44.7
45.3
46.1
45.3
14.2
12.2
1.9
14.0
12.5
1.5
13.7
12.5
1.2
14.1
12.7
1.4
14.0
12.5
1.5
accruals
_
Purchases of goods and services-----
48.5
52.1
55.0
55.8
9.6
8.5
1.1
10.4
8.5
1.9
11.0
9.2
1.7
10.5
9.3
1.2
Grants-in-aid to State and local
governments-------------------------------
2.5
2.6
2.7
2.8
57.4
58.9
57.7
58.0
52.9
47.1
45.9
44.4
47.5
45.1
11.3
9.7
1.6
12.2
10.8
1.4
12.7
11.6
1.2
13.2
11.8
1.4
14.0
12.5
1.5
13.0
11.6
1.4
2.7
2.9
2.8
2.9
2.8
2.9
2.9
2.9
2.9
3.0
3.2
3.1
3.0
4.9
4.9
4.8
5.0
5.0
5.0
5.0
5.0
4.9
4.9
4.9
5.0
4.9
.8
.9
.8
.9
1.0
1.2
1.5
1.2
1.4
1.6
1.7
1.8
1.6
- 7 .4 ■-1 0 .6
11.4
9.5
1.9
10.7
9.5
1.2
2.6
2.2
3.4
4.8
4.8
4.8
4.7
4.7
4.7
Subsidies less current surplus of
government enterprises---------------
1.1
1.0
1.0
.9
1.0
.9
.8
1.0 - 4 .2
-7 .2
- 5 .1
- 3 .9
- 5 .1
- 7 .0
- 5 .4
- 5 .1
- 2 .3
- 5 .8
.8
3.5
5.5
5.6
3.8
25.5
26.3
27.8
27.5
27.9
27.4
28.5
29.0
29.3
29.7
29.1
30.5
31.2
32.3
33.0
31.7
Surplus or deficit ( - ) on income and
product account-----------------------------
- 5 .6 ■-11 .8
State and local government receipts-----
24.6
25.3
25.7
26.4
Personal tax and nontax receipts...
Corporate profits tax accruals------Indirect business tax and nontax
accruals_______________________
Contributions for social insurance..
Federal grants-in-aid--------------------
3.1
.8
3.2
.8
3.2
.8
3.3
.9
3.2
.8
3.3
.9
3.4
.9
3.5
.8
3.5
.7
3.4
.8
3.7
3.8
.7
3.8
.8
3.9
.8
3.8
.8
4.1
.9
4.2
.9
4.3
1.0
4.3
1.0
4.2
1.0
17.0
1.2
2.5
17.5
1.2
2.6
17.8
1.3
2.7
18.2
1.3
2.8
17.6
1.2
2.6
18.5
1.3
2.2
18.8
1.3
3.4
19.2
1.4
2.7
19.5
1.4
2.9
19.0
1.4
2.8
19.7
1.5
2.9
20.0
1.6
2.8
20.2
1.6
2.9
20.4
1.6
2.9
20.1
1.6
2.9
20.9
1.6
2.9
21.5
1.7
3.0
22.2
1.7
3.2
22.8
1.7
3.1
21.8
1.7
3.0
LEVELS
Net interest paid----------------------------
4.7
PRICE
11.6
10.2
1.4
11.4
9.6
1.8
10.4
8.9
1.5
57.8
AND
Transfer payments------------------------To persons____________________
Foreign (net)---------------------------
52.9
GROWTH,
Contributions for social insurance..
EMPLOYMENT,
III
I
21
22
23
24
25
24.7
25.4
25.5
26.0
25.4
26.7
26.7
27.3
27.9
27.1
28.8
29.6
30.6
31.1
30.1
32.0
32.9
32.9
33.4
32.7
Purchases of goods and services____ 22.5
Transfer payments to persons_____
3.0
Net interest paid______________
.3
Less current surplus of government
1.2
enterprises.---------------------------------
23.1
3.2
.3
23.2
3.1
.3
23.7
3.2
.3
23.2
3.1
.3
24.4
3.1
.3
24.3
3.2
.3
24.9
3.3
.3
25.7
3.2
.3
24.9
3.2
.3
26.5
3.3
.4
27.3
3.3
.4
28.2
3.4
.4
28.7
3.4
.4
27.7
3.4
.4
29.5
3. 5
.4
30.2
3.6
.5
30.5
3. 5
.5
31.0
3.5
.5
30.3
3.5
.5
1.2
1.2
1.2
1.2
1.2
1.3
1.3
1.3
1.3
1.4
1.4
1.4
1.5
1.4
1.5
1.6
1.6
1.7
1.6
.2
.4
.1
1.2
.3
.0
.3
-.3
- 1 .3
- 1 .4
- 1 .5
- 1 .4
Surplus or deficit (—) on income and
product account........... .......................
-.1
-.4
-.7
-.9
-.6
-.4
- 1 .0
GROWTH,
AND
PRICE
LEVELS
-.1
EMPLOYMENT,
26
State and local government expendi-
292
T a b le 8 - 5
.—Government receipts and expenditures, seasonally adjusted quarterly totals at annual rates, 1946-58— C o n tin u e d
[Billions of dollars]
1958
1957
1956
Line
2
3
4
5
7
------
Personal tax and nontax receipts-------Corporate profits tax accruals-------Indirect business tax and nontax ac
cruals____________________________
Contributions for social insurance-----Federal Government expenditures---------Purchases of goods and services..-
III
IV
76.5
77.2
76.9
79.7
Year
77.5
III
IV
Year
I
II
III
IV
Year
I
II
82.8
82.2
82.7
79.9
81.9
75.2
76.1
79.3
83.0
78.4
37.6
20.4
37.4
18.3
37.4
20.1
36.2
14.9
36.3
15.7
37.1
17.9
37.4
20.8
36.7
17.3
12.3
12.4
12.0
12.2
12.2
12.2
11.8
12.3
12.0
12.2
11.7
12.6
12.1
12.7
11.9
12.5
87.4
34.5
20.6
35.1
20.4
35.3
19.3
35.8
20.5
35. 2
20.2
37.1
21.4
37.4
20.2
11.1
10.2
11.3
10.4
11.6
10.7
12.4
10.9
11.6
10.6
12.1
12.1
12.5
12.2
69.8
70.5
72.6
74.6
73.8
78.0
80.1
79.7
80.5
79.5
83.2
87.0
89.3
90.8
49.1
49.7
49.7
49.1
49.4
50.1
51.3
53.1
54.2
52.2
16.0
14.6
1.4
17.8
16.0
1.8
17.2
16.0
1.2
18.6
17.2
1.4
17.4
15.9
1.5
19.5
18.3
1.2
21.6
20.3
1.3
22.1
20.9
1.2
21.9
20.4
1.5
21.2
19.9
1.3
44.8
44.5
46.2
47.5
45.7
15.0
13.5
1.6
15.0
13.7
1.3
15.5
13.9
1.6
11.9
13.5
1.5
11
Grants-in-aid to State and local gov
ernments_________________________
3.1
3.1
3.4
3.4
3.3
4.1
3.8
4.2
4.3
4.1
4.8
5.3
5.5
6.0
5.4
12
Net interest paid
5.0
5.2
5.3
5.4
5.2
5.5
5.7
5.7
5.6
5.6
5.7
5.6
5.5
5.5
5.5
13
Subsidies less current surplus of gov
ernment enterprises. ____________
2.5
2.7
2.7
2.8
2.7
3.2
3.1
3.0
2.9
3.0
3.1
3.1
3.2
3.2
3.1
14
Surplus or deficit (—) on income and
__________ ____
product account
6.7
6.7
4.3
5.1
5.7
4.8
2.2
3.0
-.6
2.4
-8 .0
-10.9
-10.1
-7 .8
-9 .1
15
State and local government receipts---------
34.1
34.8
35.7
36.2
35.2
37.8
38.1
39.2
39.5
38.7
40.3
41.4
42.4
43.7
41.9
16
17
18
Personal tax and nontax receipts-------Corporate profits tax accruals_______
Indirect business tax and nontax
accruals
______________
Contributions for social insurance-----Federal grants-in-aid------------------------
4.7
1.1
4.8
1.0
4.9
1.0
5.0
1.0
4.8
1.0
5.2
1.1
5.3
1.0
5.4
1.0
5.5
.9
5.4
1.0
5.7
.7
5.8
.8
5.9
.9
6.0
1.0
5.8
.9
23.4
1.9
3.1
23.9
2.0
3.1
24.3
2.1
3.4
24.7
2.1
3.4
24.1
2.0
3.3
25.2
2.2
4.1
25.7
2.3
3.8
26.2
2.3
4.2
26.4
2.4
4.3
25.9
2.3
4.1
26.5
2.5
4.8
26.9
2.6
5.3
27.4
2.7
5.5
27.9
2.8
6.0
27.2
2.7
5.4
19
20
LEVELS
14.3
13.0
1.3
PRICE
Transfer payments.-- ---------- --------To persons______________________
Foreign (net)---- ----------- ---------
AND
8
9
10
GROWTH,
6
Federal Government receipts..
II
EMPLOYMENT,
1
I
State and local government expenditures - _
34.2
35.3
36.1
37.1
35.7
38.5
39.2
39.7
41.2
39.6
42.3
42.8
43.8
45.4
22
23
24
25
Purchases of goods and services----------Transfer payments to persons................
Net interest paid_____________________
Less current surplus of government
enterprises_______________________
31.7
3.7
.5
32.8
3.7
.5
33.7
3.7
.5
34.5
3.8
.5
33.2
3.7
.5
35.8
4.0
.5
36.5
4.0
.5
36.9
4.2
.6
38.3
4.3
.6
36.8
4.1
.6
39.2
4.5
.6
39.7
4.5
.6
40.8
4.5
.6
42.2
4.6
.7
1.7
1.7
1.8
1.8
1.7
1.8
1.9
1.9
2.0
1.9
2.0
2.1
2.1
2.2
26
Surplus or deficit (—) on income and
product account______________________
- 1 .7
- 1 .0
- 1 .9
- 1 .4
- 1 .4
- 1 .7
-.1
-.5
-.4
-.8
-.5
-.7
Source: Department of Commerce, Office of Business Economics, U.S. Income and Output, 1958.
-.6
293
- 1 .1
EMPLOYMENT, GROWTH, AND PRICE LEVELS
21
294
T a b le
8 - 6 . — Im p licit price deflators fo r seasonally adjusted quarterly gross national product or expenditure , 1 9 4 7-6 8
[Index numbers, 1954=100]
1948
1
2
3
4
5
6
7
8
9
10
11
12
13
III
IV
II
Year
II
III
IV
Year
89.3
89.5
88.5
89.1
88.3
87.6
87.7
88.2
90.4
90.2
89.5
89.5
88.9
88.1
88.1
88.7
91.0
94.1
81.2
93.6
94.9
82.4
94.9
93.8
83.1
92.4
94.0
81.7
94.6
92.4
83.5
94.3
91.2
83.5
92.7
90.2
83.4
92.5
89.7
84.0
93.5
90.9
83.6
85.4
87.9
82.7
87.3
90.4
84.2
87.3
90.9
84.0
85.9
83.1
88.6
86.5
89.2
84.1
85.0
86.7
83.5
82.5
83.5
81.4
83.3
84.9
81.4
84.3
85.9
82. G
81.1
84.7
86.6
83.1
87.2
87.6
86.8
86.3
87.0
82.0
85.3
82.8
83.6
86.9
86.6
87.7
89.0
77.3
89.4
91.8
78.5
88.4
88.7
75.2
87.9
87.4
76.0
90.1
93.1
79.9
New construction_______
Residential nonfarm..
Other_______________
72.0
72.9
71.2
73.2
77.0
74.2
77.6
79.2
76.1
82.8
77.6
76.6
78.4
74.8
83.3
85.4
81.2
Producers’ durable equipment,.
74.9
76.2
77.5
88.6
Year
87.1
81.2
Durable goods____
Nondurable goods.
Services___________
IV
88.2
Gross national product.............
Personal consumption expenditures -
83.0
III
Gross private domestic investment.
76.8
Change in business inventories.
Net exports of goods and services. __
Government purchases of goods and serv
ices_____________________________________
75.7 ,
75.8
75.9
78.1
79.7
80.7
82.8
84.7
82.0
85.2
84.2
84.8
86.3
85.1
14
Federal________
81.1
80.9
79.5
81.9
83.1
83.4
84.6
86.5 :
84.4
87.7
86.5
87.2
90.7
88.0
15
State and local.
69.9
69.3
72.3 j
74.6
76.3
77.6
80.7
82.4
79.3
82.1
81.2
81.9
81.5
81.7
LEVELS
76.4
EMPLOYMENT, GROWTH, AND PEIGE
II
1949
1952
1951
1950
Line
2
Gross national product__ __
- -
_
Personal consumption expenditures______
II
III
IV
87.8
87.9
90.1
91.8
88.1
88.7
90. 6
92.2
Year
89.5
89.9
I
II
III
IV
95.1
96.0
96.4
97.5
95.2
95.8
96.0
97.1
Year
96.2
96.0
Year
I
II
III
IV
97.6
97.7
98.4
99.0
97.5
97.8
98.1
98.7
98.0
101.9
100.1
94.0
101.7
100.5
95.0
102.2
100.1
93.6
98.1
93. 5
89. 7
85.2
95. 0
92. 3
86.1
96.9
94.3
87.3
94.6
91.4
85.9
100.0
98.4
88.4
100.7
99.1
89.4
101.5
98.8
90.1
102.3
100.0
91.1
101.1
99.0
89.8
102.7
100.1
92.2
7
8
9
New construction _____ __ - - ___
Residential nonfarm.__ ________ _
Other
_ - __ _
_
85.4
87.0
83.4
86.7
89. 5
83.0
90.4
92.9
86.9
90.5
93.5
86.8
88.3
90.9
85.1
93.2
95.5
90.5
95.4
97.2
93.6
95.7
97. 9
93.8
97.0
99.7
94.5
95.3
97.5
93.1
98.0
100.4
95.8
98.5
100.3
96.8
98.6
100.5
96.8
98.4
100.1
96.6
98.4
100.3
96. 5
10
Producers’ durable equipment________
86.3
87.1
89.3
92.6
89.0
96.2
96.9
96.9
97.1
96.8
97.5
97.9
97.2
97.4
97.5
Government purchases of goods and serv
ices_________________________ ________ __
97.8
§
12
13
Federal.......
15
State and local
84.0
86.4
89.1
86.5
94.3
94.5
96.0
97.2
95.5
96.8
96.6
98.2
99.3
90.5
86.2
89.1
91.9
89.6
99.3
97.3
98.6
99.5
98.7
98.8
97.8
99.5
100.8
99.2
_________ __________
81.9
82.2
84.0
86.2
83.7
88.1
89.7
90.9
92.1
90.2
93.1
94.3
95.8
96.1
94.8
LEVELS
295
85.9
______
______________
PRICE
14
AND
92.5
89. 2
84.8
3
4
5
GROWTH,
Durable goods__________
___ _______
Nondurable goods _
__ ________
Services. ____
. ___ __ _ ________
102.6
99.8
93.1
EMPLOYMENT,
1
I
Implicit price deflators for seasonally adjusted quarterly gross national product or expenditures, 1947-58— C o n tin u e d
296
T a b l e S - 6 .—
[Index numbers, 1954=100]
3
4
5
II
III
IV
Year
I
II
III
IV
Year
I
II
III
IV
Year
98.8
98.8
99.2
99.2
99.0
99.9
99.8
100.0
100.2
100.0
100.5
100.9
101.5
101.9
98.7
98.7
99.2
99.2
99.0
100.1
100.0
99.9
100.0
100.0
100.3
100.2
100.4
100.6
101.2
100.4
Durable goods ____________ _______
Nondurable goods________ ____________
Services.. ------------- ---------------------
100.5
100.0
96.2
99.8
99.5
7.2
99.8
99.7
98.3
97.4
99.7
99.3
99.4
99.7
97.7
100.1
100.5
99.6
100.1
100.2
99.8
99.7
99.8
100.1
100.1
99.6
100.5
100.0
100.0
100.0
101.0
99.6
100.8
100.1
99.5
101.3
99.8
99.5
101.8
99.6
99.4
102.6
100.1
99.5
101.7
New construction_____________________
Residential nonfarm_________ —
Other____ ________________________
99.1
100.7
97.6
100.6
101.3
99.8
100.4
101.8
99.1
100.2
101.3
99.1
100.1
101.3
98.9
99.7
ICO. 5
99.0
99.9
99.3
100.6
100.0
99.9
100.1
100. 3
100.3
100.3
100.0
100.0
100.0
101.1
101.1
101.1
102.7
102.4
103.0
103.6
103.8
103.5
105.0
104.9
105.1
103.1
103.0
103.2
Producers’ durable equipment------------
97.8
99.3
100.1
99.0
99.0
99.8
100.0
100.1
100.1
100.0
101.1
101.8
102.7
104.4
102.6
Government purchases of goods and
services--------------- ------------- ---------------------
98.6
97.9
97.9
98.4
98.3
99.1
98.9
100.6
101.2
100.0
101.5
102.4
104.4
104.9
103.3
98.7
98.6
99.5
98.7
100.8
101.1
100.0
101.9
103.1
105.7
105.8
104.1
98.1
97.5
98.5
99.5
100.5
101.4
100.0
101.1
101.4
102.7
103.7
102.2
6
7
8
9
13
15
Federal_________________ ________- .........
State and local..................... ............... .
97.2
98.3
97.0
98.2
97.5
LEVELS
99.3
PRICE
14
AND
10
11
12
GROWTH,
Gross national product--------------------Personal consumption expenditures_______
EMPLOYMENT,
1
2
I
1955
1954
1953
1956
1957
1958
Line
II
III
IV
Year
I
II
III
IV
Year
I
II
III
IV
Year
1
Gross national product_____________
103.0
104.0
105.2
106.0
104.6
107.1
107.9
109.1
109.5
108.4
110.2
110.5
110.7
111.3
2
Personal consumption expenditures_______
100.9
101.7
102,6
103.2
102.1
104.1
104.8
105.6
106.1
105.1
107.0
107.3
107.1
107.5
107.2
3
4
5
Durable goods________ _______________
Nondurable goods____________________
Services..----------- -----------------------------
99.8
99.6
103.1
100.6
100.5
103.8
101.8
101.5
104.5
103.2
101.9
105.1
101.3
100.9
104.1
103.9
102.8
106.0
104.8
103.4
106.6
105.0
104.5
107.3
105.3
104.8
108.0
104.8
103.9
107.0
104.7
106.3
108.6
104.9
106.6
109.0
105.2
105.8
109.3
106.0
106.0
109.9
105.2
106.1
109.2
6
Gross private domestic investment_______
110.7
109.6
109.0
110.2
110.5
109.6
111.4
111.8
110.1
113.5
109.8
109.0
110.7
111.9
110.4
113.4
113.3
110.9
115.5
113.7
111.2
116.0
113.8
110.9
116.5
113.2
110.8
115.3
113.4
111.2
115.6
113.5
110.2
116.9
113.3
110.8
115.9
114.4
111.9
117.5
113.7
111.1
116.4
10
Producers’ durable equipment________
105.9
108.1
109.6
112.2
109.0
114.2
115.4
116.4
117.4
115.8
118.2
119.0
119.3
119.7
119.0
11
Change in business inventories..............
12
Net exports of goods and services........ .........
13
Government purchases of goods and
services____ ___________________________
106.6
108.1
110.7
111.5
109.2
112.6
114.0
116.3
116. 5
114.9
116.8
117.2
119.0
119.4
118.1
14
Federal_______________________________
107.2
108.6
111.2
111.8
109.7
112.8
114.4
117.3
117.0
115.4
117.2
116.9
119.7
119.9
118.4
15
State and local__ _____________________
105.7
107.4
109.9
111.1
108.6
112.3
113.6
115.0
115.9
114.2
116.3
117.6
117.9
118.9
117.7
Source: Department of Commerce, Office of Business Economics, U S. Income and Output, 1958.
LEVELS
PRICE
107. 4
107.1
107.7
AND
New construction_____________________
Residential nonfarm______________
Other_____________________ ______
GROWTH,
7
8
9
EMPLOYMENT,
48795— 59-
I
ion, seasonally adjusted quarterly totals at annual rates, 1946-58
Table 8-7.—Personal income and its dl
298
[Billions of dollars]
1948
1946
Line
II
III
IV
Year
III
IV
Year
II
III
IV
Year
182.9
186.0
179.3
188.6
186.0
193.8
197.8
191.6
202.7
209.6
214.8
214.4
210.4
Wage and salary disbursements______
Commodity-producing industries.
Manufacturing only__________
Distributive industries___________
Service industries________________
Government.------ -------------------------
106. 5
40.2
31.5
28.1
13. 5
24.8
110.2
116.8
50. 6
40.2
32.7
15.1
18.5
111.9
46.0
36.5
30.9
14.3
119.6
52. 7
41.2
33.7
15.4
17.8
121.0
53.4
42.0
34.2
15. 9
17.4
123.1
54.3
42.3
35.7
16.3
16.8
127. 5
56.8
44.4
36.9
16.4
17.3
122.8
44.9
35.9
30.9
14.1
20.3
113. 6
48. 4
38.3
31.8
14.6
18.8
130.5
58.1
45.1
38.0
16.8
17.7
133.3
59.7
46.1
38.3
17.2
18.1
138.0
61.7
47.4
39.5
17.7
19.2
138.6
61.4
47.1
39.5
17.7
135.2
60.3
46.5
38.8
17.3
18.8
Other labor income___________________
1.8
1.8
1.9
2.0
2.1
2.3
2.4
2.5
2.3
2.6
2.7
Proprietors’ income__________________
Business and professional------------Farm____________________________
34.0
20.7
13.3
35.8
21.7
14.1
38.4
38.0
37.2
17.0
34.8
19.6
15. 2
36.3
20.3
16.0
35.5
19.9
15.5
37.4
21.4
16.0
41.3
16.6
33.6
19.8
13.9
41.7
22.9
18.8
40.4
23.1
17.3
40.2
22.4
17.8
Rental income of persons--------------------
5.9
7.0
7.1
Dividends___________________________
Personal interest income--------------------
5.3
7.4
6.9
7.1
7.4
8.7
7.6
8.9
7.2
8.7
11.1
10.7
11.3
.6
.6
.6
21.0
36.6
21.3
15.3
6.2
6.4
7.8
5.8
7.6
6. 6
7.5
5.9
7.6
11.7
11.1
10.3
11.4
10.8
21.5
19.7
1.9
160.6
167.5
164.8
172.3
147.1
159.4
163.9
11.0
13.5
8.1
200.1
209.9
202. 3
19.5
17.9
18.7
17.2
1.6
158.2
163.9
166.5
137.3
143.0
152.7
155.4
Equals personal saving-----------------------------
16.3
15.1
Addendum: Disposable personal income
in constant (1954) dollars-----------------------
215.5
218.1
2.0
17.8
16.2
1.5
18.6
17.0
1.5
Equals disposable personal income_______
153.6
Less personal consumption expenditures..
1.6
11.2
207.4
2.0
1.6
2.2
21.1
197.1
.5
6.5
8.2
11.8
8. 6
22.2
19.1
8.6
11.7
.5
.6
7.3
6.5
4.0
4.1
6.1
5. 6
4.2
21.5
19.6
23.2
2.1
20.8
18.7
2.1
2.2
20.2
18.0
2.2
175.7
170.1
179.5
167.2
171.2
165.4
174.7
5.1
4.5
4.7
202.9
6.4
3.9
6.7
3.8
2.1
22.1
20.2
1.9
202.2 201.1
5.0
4.4
.8
5.8
4.2
2.2
2.2
21.1
19.0
2.1
194.7
194.0
189.3
177.5
180.2
180.8
178.3
4.8
11.4
14.4
13.2
203.5
211.7
215.3
215.1
2.1
1.8
2.7
LEVELS
19.3
1.7
21.2
19.4
1.8
19.0
17.5
2.1
Less personal tax and nontax payments - -.
Federal_______________________________
State and local_______________________
3.2
11.4
9.2
3.9
3.2
3.2
6.6
14.4
5.8
3.6
1.1
6.8
1.2
6.8
8.5
.9
5. 5
3.8
.7
5.8
3.3
1.5
7.7
3.0
8.1
10.6
6.8
6.4
8.3
.5
.4
.4
7.9
6.3
.4
.4
.4
17.1
6.6
6.1
5. 6
.3
Less personal contributions for social
insurance___________________________
20.1
20.0
2.8
PRICE
Transfer payments___________________
Old-age and survivors insurance
benefits________________________
State unemployment insurance
benefits________________________
Veterans’ benefits________________
Other. ___________________________
21.8
20.6
54.3
42.5
35.2
16.0
17.3
21.1
2.1
20.4
18.2
AND
176.7
GROWTH,
171.4
EMPLOYMENT,
Personal income__________________________
11.0
211.5
1951
1950
1949
Line
I
1
Personal income________________ ________
Wage and salary disbursements______
Commodity-producing industries. Manufacturing only__________
Distributive industries_____ - . . .
Service industries________ - - ----Government___________
_______
III
IV
Year
III
II
I
IV
Year
I
II
III
IV
Year
209.3
208.9
207. 2
207.9
208.3
220.2
221.5
230.8
241.2
228.5
248.1
255.2
258.7
264.3
256.7
136. 0
59.0
45. 7
39.2
17.7
20.1
135.0
57.3
44.0
39.5
17.9
20.3
133.3
56.1
43.3
38.7
17.9
20.6
133. 2
55.3
42. 5
38.7
18.2
21.0
134. 4
56.9
43. 9
39.0
17.9
20. 5
136. 0
57.1
44. 5
39.2
18.5
21.1
142.0
61.2
47.4
40.5
19.0
21.3
150.0
65.7
51.2
42.3
19.6
22.4
157. 3
69.8
54.6
43.2
20.0
24.3
146.4
63.5
49.4
41.3
29.3
22.3
164.3
72.6
56.7
44.8
20.6
26.4
170.0
75.1
58.5
46.0
20.8
28.1
172.1
75.3
58.5
46.2
21.2
19.4
176.2
76.4
59.4
46.8
21.6
31.4
170.7
74.9
58.3
46.0
21.1
28.8
2.8
3.0
3.1
3.2
3.0
3.4
3.7
4.0
4.2
3.8
4. 5
4.7
4.9
5.1
4.8
11
36.4
22. 7
13.7
35.9
23.0
12.9
35.1
22.7
12.4
35.0
22.3
12.7
35.6
22.7
12.9
35.5
22.2
13.3
36.2
23.1
13.2
38.8
24.5
14.2
39.7
24.4
15.3
37.5
23.5
14.0
41.5
25.9
15.6
42.2
25.9
16.3
42.4
26.0
16.4
43.2
26.2
17.0
42.3
26.0
16.3
12
Rental income of persons_____ . . . . .
7.9
8.1
8.4
8.7
8.3
8.8
8.9
9.1
9.2
9.0
9.3
9.3
9.5
9.7
9.4
9.0
11.2
Other labor income.
15
16
Transfer payments._ __ . . . ___
Old-age and survivors insurance
benefits _
__
______
State unemployment insurance
benefits
__ ____ _______
Veterans’ benefits______ _____ . . .
Other . __
__ __ _ ________
17
18
19
20
-
Less personal contributions for social
insurance___ ________
__________
Less personal tax and nontax payments__
Federal_______ . . ___ ______________
State and local___ . . .
_ __
. ...
24
Equals disposable personal income
_____
Less personal consumption expenditures...
26
Equals personal saving..
27
Addendum: Disposable personal income
in constant (1954) dollars----- ------------
-------- .... -------
7.3
9.5
7.8
9.7
7.5
9.4
7.9
9.9
8.3
10.1
9.5
10.4
11.1
10.6
9.2
10.3
8.9
10.9
8.7
11.1
9.0
11.4
11.9
12.5
12.7
12.6
12.4
21.4
15.0
11.9
12.2
15.1
12.3
12.6
12.7
12.7
12.6
.6
.7
.7
.7
.7
.7
.8
.8
1.5
1.0
1.8
1.9
i. 9
1.9
1.9
1. 5
5.2
4.6
1.8
5.3
4.8
1.9
5.0
5.1
1.8
4.9
5.2
1.7
5.1
4.9
1.9
5.1
13.8
1.6
5.4
7.2
1.1
4.6
5.4
.9
4.4
5.3
1.4
4.9
7.9
.8
4.3
5.5
.8
4.0
6.0
.9
3.7
6.2
1.0
3.6
6.2
.8
3.9
6.0
2.3
2.2
2.2
2.2
2.2
2.8
2.8
2.9
3.1
2.9
3.4
3.4
3.3
3.4
3.4
29.2
26.2
3.0
30.5
27.5
3.0
29.2
26.3
2.9
18.7
16.3
2.4
18.7
16.2
2.5
18.6
16.2
2.5
18.6
16.1
2.5
18.7
16.2
2.5
19.3
16.7
2.6
19.9
17.3
2.6
20.6
17.9
2.7
23.5
20.8
2.7
20.8
18.2
2.6
28.3
25.5
2.9
28.8
25.9
2.9
190.6
190.2
188.6
189.3
189.7
200.9
201.7
210.2
217.7
207.7
219.8
226.4
229.5
233.8
227.5
208.8
213.4
209.8
179.0
181.1
180.5
184.0
181.2
185.7
189. 9
204.4
200.1
195.0
211.5
205.5
11.6
9.1
8.1
5. 3
8.5
15.2
11. 8
5.8
17.6
12.6
8.2
20.9
20.7
20.4
17.7
212, 9
213.9
214.0
214. 9
213.8
228.0
227.3
232.0
236.1
231.0
230.9
236.3
239.1
240.8
237.0
299
25
7.3
9.3
LEVELS
21
22
23
7.4
9.1
PRICE
____ _____
Dividends___ _
Personal interest income______ . ~ -
AND
13
14
9.3
11.6
GROWTH,
______________ -
Proprietors’ income______ . . . . -----Business and professional____ ...
Farm___________________ ________
8
g
10
EMPLOYMENT,
2
3
4
5
6
7
II
T a b le 8 -7 .—
Personal income and its disposition, seasonally adjusted quarterly totals at anrwal rates, 1946-58— C o n tin u e d
1952
300
[Billions of dollars]
1953
1954
1955
Line
I
4
5
6
7
III
IV
Year
I
II
III
IV
Year
I
II
III
IV
Year
I
II
III
IV
Year
266.1 269.7 275.6 280.6 273.1 285.4 288.7 289.8 289.7 288.3 287.4 287.6 289.7 294.2 289.8 298.5 307.5 313.8 319.7
310.2
Wage and salary disbursements..
180.3 181.8 185.1 191.9 184.9 195.8 198.9 199.7 198.1 198.1 195.4 195.4 195.4 198.7 196.3 202.4 208.9 214.1 218.1
Commodity-producing indus
tries..^ _____________________ 78.6 78.5 79.7 85.1 80.5 87.6 88.9 88.8 87.0 88.1 84.7 83.9 82.8 84.9 84.1 87.2 90.8 92.5 95.0
61.1 61.3 62.1 67.2 63.0 69.5 70.9 70.5 68.6 69.9 66.7 65. 9 64.9 66.7 66.1 68.8 71.7 73.1 75.5
Manufacturing only______
Distributive industries.. ___
47.6 48.1 49.2 50.1 48.7 50.7 51.7 52.4 52.3 51. 8 52.0 52.1 52.4 52.8 52.3 53.5 55.0 56.7 57.7
Service industries. _ _______ _ 22.1 22.4 22.8 23.2 22.6 23.6 24.2 24.5 24.8 24.3 24.8 25.2 25.6 26.2 25.5 26.7 27.4 28.2 28.8
Government______ ___________
32.0 32.8 33.4 33.5 32.9 33.8 34.0 34.1 34.0 33.9 33.9 34.2 34.6 34.8 34.4 34.9 35.6 36.8 36.6
210.9
Personal income
_________ .. . . _ - -
91.4
72.3
55.8
27.8
36.0
5.2
5.4
5.5
5.3
5.8
5.9
6.1
6.2
6.0
6.1
6.1
6.2
6.4
6.2
6.7
7.0
7.3
7.5
7.1
41.2
26.4
14.7
42.4
26.8
15.6
43.9
26.8
17.1
41.4
27.5
13.9
42.2
26.9
15.3
41.2
27.6
13.7
40.7
27.5
13.2
40.3
27.4
12.9
40.7
27.3
13.3
40.7
27.4
13.3
40.6
27.1
13.6
39.6
27.6
12.0
40.9
27.8
13.1
40.6
28.5
12.1
40.4
27.8
12.7
41.1
29.3
11.8
42.4
30. 4
12.1
42.6
30.9
11.7
42.5
31.0
11.5
42.1
30.4
11.8
12
Rental income of persons.
9.9
10.1
10.3
10.4
10.2
10.4
10.5
10.6
10.7
10.5
10.8
10.9
10.9
10.9
10.9
10.8
10.7
10.6
10.7
10.7
13
14
Dividends __ _______ _________
Personal interest income______ .-
9.0
11.8
8.9
11.9
9.0
12.2
9.0
12.5
9.0
12.1
9.3
12.9
9.4
13.2
9.4
13.5
9.4
13.8
9.2
13.4
9.4
14.1
9.5
14.4
9.7
14.7
10.1
15.0
9.8
14.6
10.2
15.3
10.5
15.6
10.9
15.9
12.2
16.3
11.2
15.8
15
16
Transfer payments________ _______
Old-age and survivors insur
ance benefits___ __________ ._
State unemployment insur
ance benefits________________
Veterans’ benefits_____ ________
Other. _ _ _______ ____________
12.7
12.9
13.5
13.7
13.2
14.0
14.1
14.2
14.8
14.3
15.4
16.1
16.5
17.2
16.2
17.1
17.5
17.6
17.7
17.5
3.0
3.1
3.1
3.0
3.3
3.5
3.6
4.2
3.6
4.4
4.9
5.1
5.2
4.9
.8
3.7
6.5
.9
3.7
6.5
1.3
3.6
6.8
1.0
3.7
6.6
1.7
3.7
6.7
2.2
3.8
6.7
2.3
3.9
6.7
2.2
4.1
6.8
2.0
3.8
6.7
1.5
4.2
6.9
1.3
4.3
7.0
1.3
4.3
6.9
1.2
4.3
7.1
1.4
4.2
7.0
17
18
19
Less personal contributions for
social insurance_______ ______. . .
2.0
2.1
2.6
2.2
1.1
3.5
6.0
1.1
3.5
6.3
1.0
4.3
6.1
.8
4.1
6.2
1.0
3.9
6.2
.9
3.9
6.5
3.8
3.7
3.8
3.8
3.8
3.9
4.0
4.0
3.9
3.9
4.5
4.5
4.6
4.7
4.6
5.0
5.1
5.3
5.3
5.2
Less personal tax and nontax payments 33.9
Federal_______ ____________________ 30.8
3.1
State and local________ ____________
34.0
30.8
3.2
34.5
31.3
3.2
35.0
31.7
3.3
34.4
31.2
3.2
35.5
32.1
3.3
35.9
32.5
3.4
36.0
32.5
3.5
35.8
32.3
3.5
35.8
32.4
3.4
32.7
29.1
3.7
32.8
29.0
3.8
32.9
29.1
3.8
33.3
29.4
3.9
32.9
29.2
3.8
34.7
30.6
4.1
35.5
31.3
4.2
36.2
31.9
4.3
36.6
32.3
4.3
35.7
31.5
4.2
24
Equals disposable personal income____ 232.1 235.6 241.1 245.6 238.7 250.0 252.8 253.8 253.8 252.5 254.6 254.8 256.8 260.9 256.9 263.8 272.0 277.7 283.0
274.4
25
Less personal consumption expendi
tures........... ..................... ............ .........- 214.6 217.7 219.6 227.2 219.8 230.9 233.3 234.1 232.3 232.6 233.7 236.5 238.7 243. 2 238.0 249.4 254.3 260.9 263.3
256.9
26
Equals personal saving.............................
27
Addendum: Disposable personal in
come in constant (1954) dollars.......... 238.1 240.9 245.8 248.8 243.6 253.3 256.1 255.9 255.9 255.0 254.4 254.8 257.0 260.9 256.9 263.0 271.5 276.5 281.4
21
22
23
17.5
17.9
21.5
18.4
18.9
19.0
19.6
19.7
21.6
19.8
21.0
18.3
18.0
17.7
18.9
14.4
17.8
16.8
19.8
17.5
273.4
LEVELS
20
2.0
2.7
PRICE
5.1
Proprietors’ income. . . . . . . ____
Business and professional____
Farm____________ __________
AND
Other labor income_______________
9
10
11
GROWTH,
8
EMPLOYMENT,
1
2
3
II
1956
Line
I
II
III
1957
IV
Year
I
II
III
1958
IV
Year
I
II
III
IV
Year
Personal income___ _______________________
323.8
330.9
335.4
341.1
332.9
344.7
350.7
354.5
352.8
350.6
352.2
355.0
363.4
366.3
359.0
Wage and salary disbursements- ____
Commodity-producing industries..
Manufacturing only_____ ____
Distributive industries. _ ______
Service industries__________ __ ___
Government _____________ _____
221.6
95.9
75.7
59.1
29.5
37.1
226.6
98.3
77.1
60.3
30.2
37.8
228.7
98.7
77.4
60.8
30.8
38.4
233.4
101.9
80.6
61.2
31.5
38.9
227.6
98.7
77.7
60.3
30.5
38.0
235.9
102.2
80.8
62.2
32.0
39.4
238.7
102.8
81.2
63.3
32.6
39.9
240.9
102.9
81.1
64.3
33.0
40.6
238.6
100.8
79.5
63.7
33.3
40.7
238.5
102.2
80.6
63.4
32.7
40.2
234.6
96.3
75.8
63.4
33.7
41.2
235.4
95.8
74.9
63.1
34.3
42.2
242.3
98.2
76.9
64.1
34.9
45.2
245.1
100.9
79.1
64.5
35.3
44.3
239.4
97.8
76. 7
63.8
34.6
43.2
Other labor income..................................
7.7
8.0
8.2
8.5
8.1
8.8
9.1
9.3
9.5
9.1
9.3
9.3
9.3
9.4
9.3
9
10
11
Proprietors’ income. _ ____________
Business and professional... _____
Farm_____________________________
42.7
31.5
11.2
43.3
32.1
11.2
44.4
32.3
12.1
44.5
32.5
12.0
43.7
32.1
11.6
43.9
32.6
11.2
44.3
32.9
11.5
45.3
32.9
12.3
44.5
32.4
12.1
44.5
32.7
11.8
46.1
31.6
14.6
45.9
32.0
13.9
46.8
32.6
14.2
47.4
33.2
14.1
46.6
32.4
14.2
Rental income of persons.. . . . ______
10.7
10.8
11.0
11.1
10.9
11.3
11.4
11.5
11.7
11.5
11.7
11.8
11.9
11.9
11.8
D ividends..___ __ ___ .............
Personal interest income........................
11.7
16.7
12.0
17.2
12.3
17.7
12.0
18.2
12.1
17.5
12.6
18.8
12.7
19.4
12.8
19.8
12.2
20.0
12.5
19.5
12.7
20.2
12.6
20.3
12.6
20.5
12.0
20.8
12.4
20.4
15
16
Transfer payments___________ ______
Old-age and survivors insurance
benefits_________________________
State unemployment insurance
benefits_________________________
Veterans’ benefits________________
Other____________________ _
18.2
18.7
19.0
19.4
18.8
20.2
21.8
21.8
23.2
21.7
24.4
26.6
27.1
26.8
26.1
5.3
5.6
5.8
5.9
5.7
6.3
7.7
7.5
7.8
7.3
7.9
8.6
8.7
8.8
8.5
1.3
4.3
7.3
1.4
4.3
7.4
1.5
4.1
7.6
1.5
4.2
7.8
1.4
4.2
7.5
1.6
4.3
8.1
1.6
4.3
8.2
1.7
4.3
8.3
2.4
4.5
8.5
1.8
4.4
8.3
3.1
4.6
8.9
4.2
4.6
9.2
4.8
4. 5
9.1
4.2
4. 5
9.3
3. 9
4.6
9.1
LEVELS
17
18
19
Less personal contributions for social
insurance_________ __________
..
5.7
5.8
5.8
6.0
5.8
6.7
6.7
6.8
6.7
6.7
6.9
6.9
7.1
7.1
7.0
21
22
23
Less personal tax and nontax payments___
Feieral___________________ .
State and loeaL. ________ __
39.2
34.5
4.7
39.8
35.1
4.8
40.2
35.3
4.9
40.8
35.8
5.0
40.0
35.2
4.8
42.3
37.1
5.2
42. 7
37.4
5.3
43.1
37.6
5.4
42.9
37.4
5.5
42.7
37.4
5.4
41.9
36.2
5.7
42.1
36.3
5.8
42.9
37.1
5.9
43.4
37.4
6.0
42.6
36.7
5.8
24
Equals disposable personal income_______
284.6
291.1
295.2
300.3
292.9
302.5
308.0
311.5
309.9
307.9
310.3
312.9
320.4
322.9
316.5
25
Less personal consumption expenditures...
265.6
268.2
270.4
275.6
269.9
279.8
282.9
288.2
288.1
284.8
287.3
290.9
294.4
299.1
293.0
26
E quals personal saving. ............... ..............
19.0
22.9
24.8
24.7
23.0
22.6
25.1
23.3
21.8
23.1
22.9
22.0
26.0
23.7
23.5
27
Addendum: Disposable personal income in
constant (1954) dollars...............................
282.0
286.2
287.7
291.0
286.9
290.6
293.9
295.0
292.1
292.9
290.0
291.6
299.2
300.4
295.2
Source: Department of Commerce, Office of Business Economics.
U.S. Income and Output, 1958.
301
20
AND
12
13
14
PRICE
GROWTH,
8
EMPLOYMENT,
1
2
3
4
5
6
7
EMPLOYMENT, GROWTH, AND PRICE LEVELS
302
T a b le
8 -8 .—
Consumer and wholesale price indexes, all items, quarterly 1946-58
[1947-49=100]
Consumer
price index
Wholesale
price index
1946:
1st________________
2d___________________
3d___________________
4th__________________
77.8
79.1
86.1
90.7
70.0
72.3
81.8
89.8
1953:
1st_____
2d_____
3d_____
4th____
113. 5
114.0
114.9
115.0
Total______________
83.4
78.7
Total-
114.4
1947:
____ _________
1st.
2d___________________
3d___________________
----- -----------4th__
92.5
93.7
96.4
99.0
93.5
94.4
96.6
100.9
1954:
1st_____
2d_____
3d_____
4th____
114.9
114. 8
114.9
114.4
109.6
Total.._____ _______
95.5
96.4
Total.
114.8
110. 3
1955:
1st_____
2d_____
3d_____
4th____
114.2
114.2
115. 0
114.8
110.1
110.1
110.9
111.3
Year and quarter
Year and quarter
Consumer Wholesale
price index price index
109.7
109.5
110.4
110.0
110.1
110.5
110.5
110. 2
1948:
1st. _______ _______
2d___________________
3d___________________
4 t h . ____ __ __ ____
100.6
102.2
104.5
103.5
103.1
103.8
105.9
104. 5
Total.._ __________
102.8
104.4
Total.
114. 5
110.7
102.0
101.9
101.6
101.3
101. 5
98.9
98.1
97.7
1956:
1st.___
2d_____
3d_____
4th____
114.5
115.4
116.8
117.7
112.3
114.0
114.6
115.8
101.8
99.2
Total
116.2
114.3
118.5
119.6
120.8
121.3
116.8
117.1
118.1
118.0
120.2
117.6
122.6
119.1
119.2
119.0
119.0
1949:
1st___________________
2d___________________
3d___________________
4th. ________ ___
Total
1950:
1st___________________
2d___________________
3d___________________
4th__________________
100.5
101.2
103.6
105.7
98.1
99.3
105. 0
110.0
1957:
1st____
2d_____
3d_____
4th____
Total______________
102.8
103.1
Total.
1951:
1st___________________
2d___________________
3d___________________
4th_-_ __ . . . _
109.5
110.6
110.0
112.6
115.8
115.7
113. 7
113. 5
1958:
1st____
2d_____
2d_____
4th____
Total______________
111.0
114.8
Total.
112. 5
113.0
114.1
114.1
112.5
111.4
111.9
110.4
113.5
111.6
1952:
1 st..._______ _______
2d___________________
3d___________________
4th________ _.
_
Total______________
N
o t e .—
Quarterly indexes represent averaged monthly totals.
Source: Department of Labor.
123. 5
123.6
123.6
119.2
303
EM PLOYM ENT, GROWTH, AND PRICE LEVELS
Table 8-9.-^Expenditures for new plant and equipment ( excluding agriculture)
seasonally adjusted quarterly totals at annual rates, in current prices and
constant (1954) dollars, 1947-58
Year and
quarter
Weighted
price
deflator 1
Expenditures for new
plant and equipment
(billions of dollars)
Current
prices
Weighted
price
deflator 1
Constant
(1954)
dollars
1947:
1st______
2d_........ .
3d__ ____
4th ___
73.7
75.5
77.0
78.3
19. 7
20.3
21.0
21.3
26. 7
26.9
27. 3
27.2
T otal..
76.1
20.6
27.1
Expenditures for new
plant and equipment
(billions of dollars)
Current
prices
1953:
1st______
2d______
3 d ..
4th _
Total. _
Constant
(1954)
dollars
97.7
99.5
99.8
99.0
27.8
28.1
28.8
28.5
28.5
28. 2
28.9
28.8
99.0
28.3
28. 6
1954:
1st______
2d______
3d........ ...
4th
99.5
100.2
100.1
100.2
27.5
26. 9
26.8
26.2
27.6
26.9
26. 8
26.1
26.5
Total..
100.0
26.8
26. 8
1955:
1st........ .
2 d _____
3d______
4th
101.1
102.2
103.0
104.6
25. 7
27. 2
29. 7
31.5
25.4
26.6
28.8
30.0
1948:
1st______
2d______
3d______
4th . . . .
80.5
81.6
84.5
85.7
22.4
21.8
21.9
22.3
27. 8
26. 7
26.0
26.0
T otal..
83.1
22.1
1949:
1st______
2d______
3d........ .
4th ____
86.2
86.2
85.0
84.7
21.1
19. 7
18.9
17.9
24.4
22. 8
22. 2
21.0
T otal..
85.15'
19.3
22.6
Total..
103.1
28.7
27.8
1956:
1st -- __
2d .
3d______
4th
106. 5
108. 8
110. 2
112.6
32.8
34. 5
35. 9
36.5
30. 8
31. 7
32. 6
32.4
1950:
1st______
2d______
3d______
4th ____
85.3
85.7
88. 5
90.7
18.4
19. 2
21. 0
23.3
21. 6
22.4
23. 8
25.7
Total..
87.7
20.6
23.5
Total. .
109.6
35.1
32.0
1957:
1st______
2d.......... .
3 d _____
4th
113. 9
115.4
116.3
117.1
36.9
37.0
37. 8
36.2
32.4
32.1
32. 5
30.9
1951:
1st______
2d______
3d______
4th_____
Total. _
1952:
1st.........
2d______
3d______
4th_____
Total..
94.3
95.8
95.9
96.2
23. 7
25. 5
26. 5
26.6
25. 2
26. 6
27. 6
27.6
95.6
25.6
26.8
Total..
115.6
37.0
32.0
117.3
118. 3
118. 2
119.0
32.4
30. 3
29. 6
30.0
27. 6
25. 6
25.1
25.2
118.1
30.5
25.9
96. 9
97. 5
97.1
97.1
27.0
26. 6
25. 7
26. 7
27. 9
27. 3
26. 4
27.5
1958:
1st______
2d______
3d
4th
97.2
26.5
27.3
Total..
1 Derived (by Joint Economic Committee Staff) by weighing the implicit price deflator
for gross national product for producers’ durable equipment and new construction (other
than residential nonfarm) with weights of % and % respectively.
Source: Securities and Exchange Commission, and Department of Commerce.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
304
T a b le
8—10.— Selected, items o f Federal expenditures and purchases, seasonally
adjusted quarterly totals at annual rates , 1 9 4 6 -5 8
[Billions of dollars]
Gross
Year and quarter expenditures
1946: 1st_________
_________
3d_________
4th..........
1947: 1st_________
2d_________
3d_________
4th________
1948: 1st_________
2d_________
3d_________
4th________
1949: 1st_________
2d........ .........
3d_________
4th________
1950: 1st_________
2d_________
3d_________
4th________
1951: 1st_________
2d........ .........
3d...............
4th.......... —
1952: 1st_________
2d_________
3d_________
4th_________
1953: 1st_________
2d____ ____
3d_________
4th.............. .
1954: lst__...........
2d..................
3d_________
4th________
1955: 1st_________
2d____ ____
3d__.............
4th________
1956: 1st.................
2d...... ..........
3d. ...............
4th.............. .
1957: 1st....... .........
2d_________
3d_________
4th________
1958: 1st_________
2d_________
3d........ .........
4th________
$46.9
40.7
36.8
34.5
32.0
30.9
34.6
31.5
32.2
35.1
37.3
39.0
41.4
42.6
42.3
40.9
47.1
39.1
36.7
41.8
47.7
55.9
62.4
67.4
66.8
71.2
74. 5
74.9
77.1
79.7
77.1
78.4
74.1
69.0
68.5
68.1
68.8
68.5
69.2
70.5
70.1
70.9
72.9
74.9
78.4
80.4
80.2
81.6
83.7
87.5
89.6
91.4
Gross
Federal
purchases
$28.4
2d23.6
21.2
19.8
17.3
16.4
16.8
16.6
17.0
19.4
20.6
22.3
22.8
22.5
22.7
21.7
19.2
17.3
18.5
22.9
28.9
36.3
43.3
47.8
48.8
52.4
55.2
56.0
57.8
59.2
58.0
58.1
53.2
47.4
46.2
44.7
45.4
45.1
45.7
46.5
45.1
44.9
46.5
47.8
49.5
50.0
50.2
49.6
50.6
51.8
53.4
54.8
National
defense
purchases
$24.5
19.4
16.3
15.0
13.0
10.3
10.7
11.5
11.2
11.3
11.8
12.1
13.5
13.7
14.1
13.0
12.6
12.0
14.1
18.3
24.3
31.2
38.1
41.8
43.0
46.2
47.0
49.3
49.8
50.5
49.3
47.6
44.8
41.5
40.0
38.4
39.2
38.8
39.2
39.1
39.1
39.2
41.0
42.1
43.7
44.9
44.9
43.9
44.0
44.3
44.5
45.3
Gross
Federal
civil
purchases
less
acquisitions
of capital
items
$5.0
5.9
5.2
5.0
5.1
6.2
5.6
4.6
5.5
7.2
6.7
7.9
7.2
6.9
7.2
7.1
6.0
5.4
6.2
5.7
5.5
6.1
5.7
6.2
6.2
5.7
6.3
6.0
4.9
5.4
5.4
6.0
5.2
5.3
4.9
5.1
5.3
5.1
5.4
5.1
5.7
6.1
6.4
6.2
5.7
6.5
6.8
5.5
5.9
6.1
6.7
6.8
Transfer
payments
to persons
$10.5
9.6
8.8
8.0
8.3
7.8
11.1
8.2
8.0
7.8
7.4
7.4
8.5
8.9
9.0
8.7
17.2
10.3
7.8
8.2
8.3
8.7
8.8
8.8
8.5
8.5
9.2
9.3
9.6
9.5
9.5
10.2
10.8
11.6
11.8
12.5
12.2
12.5
12.5
12.7
13.0
13. 5
13.7
13.9
14.6
16.0
16.0
17.2
18.3
20.3
20.9
20.4
Gross
domestic
civil
expenditures
less transfer
payments
to persons
and less
acquisitions
of capital
items
$12.5
13.0
11.7
11.3
11.5
12.8
12.1
11.2
12.7
13.9
13.7
15.0
14.3
14.0
14.7
14.7
13.8
13.6
14.2
14.0
14.0
14.7
14.0
14.7
14.6
14.1
15.8
14.4
12.8
14.5
13.8
14.7
13.9
14.1
14.0
14.6
14.6
14.6
]5 .2
15.0
16.3
17.0
17.9
17.6
18.6
19.0
16.6
18.3
19.5
20.2
20.8
21.6
Source: Department of Commerce, Office of Business Economics, U.S. Income and Output, 1958, tables
III-3 and 1-3. Acquisitions of capital items estimated by staff, Joint Economic Committee.
305
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T a b le
8-1 1 . — Corporate profits before and after tax , seasonally adjusted quarterly
totals at annual rates , 1 9 4 6-5 9
[Billions of dollars]
Corporate
profits and
inventory
valuation
adjust
ment
Profits
before
taxes
Profits
tax
liability
Profits
after
tax
Inventory
valuation
adjust
ment
1946:
1st_________________ __________ ______
2d..................................................................
3d..................................................................
4th.............................................. .................
13.5
16.5
17.9
21.2
14.7
19.3
26.0
30.2
6.0
7 8
10.5
12.2
8.8
11.5
15.5
18.0
-1 .2
-2 .8
—8.1
-8 .9
Total_______________________________
17.3
22.6
9.1
13.4
- 5 .3
1947:
1st....... ........................................................
2d................................................... .............
3d..................................................................
4th................................................................
20.2
23.8
24.5
26.0
29.8
28.5
28.5
31.2
11.4
10.9
10.9
11.9
18.4
17.6
17.6
19.3
-9 .7
- 4 .7
—4.0
- 5 .2
Total,.................. ................................. .
23.6
29.5
11.3
18.2
- 5 .9
1948:
1st.............................................................
2d..................................................................
3d..................................................................
4th............................... ..............................
29.6
30.9
30.6
32.4
32.4
33.8
33.4
32.4
12.3
12.8
12.6
12.3
20.2
21.0
20.7
20.2
-2 .9
- 2 .9
-2 .8
—.1
30.8
33.0
12.5
20.5
- 2 .2
1949:
1st............................................................... .
2d.................................................................
3d..................................................................
4th............................ ...................................
29.6
27.6
29.6
26.2
28.2
24.7
26.6
26.0
11.1
9.7
10.5
10.2
17.1
15.0
16.1
15.8
+ 1 .4
+ 2 .8
+ 3 .0
+ .2
Total_______________ __________ ____
Total......... .............................................
28.2
26.4
10.4
16.0
+ 1 .9
1950:
1st.................................................................
2d..................................................................
3d..................................................................
4th................................................................
29.4
33.5
39.2
40.6
30.1
36.8
46.5
49.2
13.2
16.2
20.4
21.6
16.8
20.6
26.0
27.5
—.7
- 3 .3
- 7 .3
-8 .5
Total_______________________________
35.7
40.6
17.9
22.8
- 5 .0
1951:
1st.............................................. .................
2d......................... .............................. ........
3 d ............. ..............................................
4th........... ............................................. .
40.4
41.1
41.2
41.1
49.1
42.1
37.8
39.6
26.2
22.4
20.1
21.1
23.0
19. 7
17 7
18.5
—1.0
+ 3 .5
+ 1 .5
-a 7
Total____ ______________ _____ _____
41.0
42.2
22.4
19.7
-1 .2
1952:
1st_______________________________
2d.................... ........................................
3d_................................. ............. ...............
4th...........................................................
39.1
36.6
36.0
38.9
37.9
35. 5
35.3
38.1
20.1
18.8
18. 7
20.2
17.8
16.7
16. 6
17.9
+ 1 .3
+ 1 .2
Total........................................................
37.7
36.7
19.5
17.2
+ 1 .0
1953:
1st.............. —............................................
2d..............................................................
3d.............................................................
4th............. ......................................... .......
40. 5
39.8
37.5
31.4
40.9
41.4
39. 5
31.4
21.6
21.9
20.9
16.6
19.3
19.6
18.7
14.8
—.4
—1. 6
—2.0
0
- 1 .0
Total_____________________ ____ ___
+. 7
+ .8
37.3
38.3
20.6
18.1
1954:
1st..................... .........................................
2d______________ _______ ________
3d...... ............ .......... ....................................
4th. ............. ................................................
32.5
33.3
33.0
36.1
32.5
33.3
33. 7
36.6
16.5
16.9
17.1
18.5
16.1
16.5
16.7
18.1
0
0
—. 7
—. 5
Total......................... .............................
33.7
34.1
17.2
16.8
—.3
See footnote at end of table.
306
EMPLOYMENT,
GROWTH, AND PRICE LEVELS
Table 8-11.— Corporate profits before and after tax, seasonally adjusted quarterly
totals at annual rates, 19^6-59—Continued
[Billions of dollars]
Corporate
profits and
inventory
valuation
adjust
ment
Profits
before
taxes
Profits
tax
liability
Profits
after
tax
Inventory
valuation
adjust
ment
1955:
1st_______________________ __________
2d__________ ____ ____________________
3d______________ ________ ____________
4th___________________________________
40.3
41.9
44.4
45.8
41.4
42.8
46. 6
48.6
20.2
20.8
22.7
23.6
21.3
22.0
23. 9
24.9
—1.1
—.9
—2.2
- 2 .8
Total_______________________________
43.1
44.9
21.8
23.0
- 1 .7
1956:
1st___________________________________
2d____________________________________
3d____________________________________
4th________ ____ _____________________
42. 7
41.5
41.5
42.3
45.7
45.2
42.7
45.3
21.7
21.5
20.3
21.5
24.0
23.7
22.4
23.8
—2.9
—3.7
—1.2
- 3 .1
Total____ ____ _____ _______________
42.0
44.7
21.2
23.5
- 2 .7
1957:
1st______________________________ ____
2 d ___________________________________
3d____________________________________
4th_____ ____ ____ __________________
43.8
42.0
42.7
38.5
46.2
43. 5
44.0
39.4
22.5
21.2
21.4
19.2
23.7
22.3
22. 5
20.2
—2. 4
- 1 .5
—1.3
-1 .9
Total____ ___________ ______________
41.7
43.3
21.1
22.2
-1 .5
1958:
1st___________________________________
2d_______________________ ____ _______
3d____________________________________
4th................. .................... ....................
31. 5
33.8
38.0
43.5
32.0
33.6
38.3
44.6
15.7
16.5
18.8
21.9
16.3
17.1
19. 5
22.7
—.4
+•2
—.3
- 1 .1
_________________________
36. 9
37.1
18.2
18.9
—.4
1959:
1st___________________________________
2d_____ _____ _______ ________________
45.5
51.0
46.5
52.6
22.6
25.6
23.8
27.0
—.9
-1 .6
Total___
Source: Department of Commerce, Office of Business Economics, U.S. Income and Output, Table 1-9,
and Survey of Current Business, July 1959, and November 1959.
307
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T
8-12.— Employment as percent of civilian labor force, and Federal surplus or
deficit on income and product account as percent of gross national product, quarterly,
seasonally adjusted at annual rates, 1946—58
able
Year
and
quarter
Employ
ment
rate 1
Surplus as a percent of
gross national product
Actual
1946:
3d______
4th______
1947:
1st______
2d______
3d______
4th ..........
1948:
1st______
2d______
3d______
4th ___
1949:
1st__ __
2d______
3d______
4th_____
1950:
1st______
2d__ _
3d______
4th .
1951:
1st. ___
2 d ......
Employ
ment
rate 1
Actual
Computed
96.6
96.2
3.4
4.6
5.0
4.2
95.9
95.9
96.3
96.2
5.7
5.7
3.7
5. 7
3.6
3.6
4.4
4.2
96.3
96.3
96.0
95.3
5.6
3.3
2.2
1.4
4.4
4.4
3.8
2.5
94.2
93.5
92.9
93.5
—.5
- 1 .5
- 1 .1
-.8
.4
- 1 .0
-2 .2
—1.0
94.4
95.4
95.8
96.5
- 1 .4
3.0
5.8
5.0
.7
2.7
3.4
4.8
96.8
96.8
6.4
2.5
5.3
5.3
Surplus as a percent of
gross national product
1954:
1st______
2 d _____
3d______
4th ____
1955:
1st_____
2d______
3d______
4th ___
1956:
1st______
2d______
3d______
4th. ___
1957:
1st ____
2d______
3d______
4th ___
1958:
1st........2d______
3d______
Computed
94.3
94.1
94.6
95.2
- 2 .9
- 1 .5
- 1 .4
-.6
-1 .4
- 1 .6
- 1 .1
-.2
95.6
95.8
95.8
95.9
.2
.9
1.4
1.4
.6
1.1
1.1
1.3
95.7
95.8
95.9
95.9
1.6
1.6
1.0
1.2
.9
1.1
1.3
1.3
95.9
95.7
95.1
93.5
1.1
.5
.7
-.1
1.3
.9
-.3
- 2 .0
92.8
92.6
93.7
- 1 .9
- 2 .5
-2 .3
- 2 .0
- 2 .0
- 1 .9
1 This series lags the actual and computed surplus: Gross national product ratios by one
quarter.
See note to table 8 -1 4 .
Source: Table 8 -1 , 8 -2 , 8 -5 , and 8 -1 4 .
T
8—13.— Employment as percent of civilian labor force, and excess of Federal
cash receipts from the public over payments to the public as percent of gross
national product, quarterly, seasonally adjusted at annual rates, 1946-58
able
Year
and
quarter
1946:
3d ........... .
4th_______
1947:
1st...............
2d________
3d________
4th ..............
1948:
1st________
2d________
3d________
4th_______
1949:
1st________
2d________
3d________
4th_______
1950:
1st........
2d...............
3d................
4th, ...........
1951:
1st........... .
2d................
Employ
ment
rate
96.4
96.6
Surplus as a percent of
gross national product
Actual
2.4
3.4
Computed
2.8
3.0
96.2
95.9
95.9
96.3
3.1
2.2
1.8
3.7
2.5
2.1
2.1
2.6
96.2
96.3
96.3
96.0
5.0
4.3
2.5
.9
2.5
2.6
2.6
2.2
95.3
94.2
93.5
92.9
-.7
- 1 .6
-.6
-.6
1.2
-.3
- 1 .2
- 1 .9
93.5
94.4
95.4
95.8
- 1 .6
-.9
1.6
2.4
- 1 .2
0
1.4
1.9
96.5
96.8
2.6
1.1
2.9
3.3
Source: Tables 8-1, 8-2, 8-15, and 8-16.
Employ
ment
rate
Surplus as a percent of
gross national product
Actual
1954:
1st.
2d_
3d.
4th
1955:
lst2d.
3d.
4th
1956:
1st.
2d.
3d.
4th
1957:
1st.
2d.
3d.
4th.
1958:
lst.
2d..
3d..
4th.
Computed
94.7
94.3
94.1
94.6
- .1
-.8
- 1 .7
- 1 .1
-.6
-.9
- 1 .1
-.7
95.2
95.6
95.8
95.8
-.6
.1
-.4
0
-.1
.3
.6
.6
95.9
95.7
95.8
95.9
1.6
2.3
1.6
.1
.7
.5
.6
.7
95.9
95.9
95.7
95.1
-.2
.3
.4
.5
.7
.7
.5
-.2
93.5
92.8
92.6
93.7
-.3
- 1 .3
- 2 .2
- 2 .6
- 1 .5
- 1 .8
- 1 .8
- 1 .4
308
EMPLOYMENT, GROWTH, AND PRICE LEVELS
8-14. — Relationship o f Federal surplus on incom e and product account as
percent o f G N P to seasonally adjusted rate of unem ploym ent, 1946, Sd quarter,
to 1951, 2d quarter, and 1954, 1st quarter, to 1958, 3d quarter.
T a b le
!
Income and product
account surplus or
deficit (—) as percent
of GNP
Unemployment rate
3.0_______________________
3.5_____ _____ ___________
4.0_______________________
4.5_______________________
5.0......... ................................
19463-195l2
1954i-19583
5. 7
4.8
3.8
2.9
1.9
4. 5
2.9
1.6
.4
5
Income and product
account surplus or
deficit (—) as percent
of GNP
Unemployment rate
19463-19512 1954i-1958*
5.5_______________________
6.0______________________
6.5_______________________
7.0_______________________
7.5.
___________________
0.9
0
—1.0
- 2 .0
- 3 .0
-1 . 2
—1.7
—2. 0
- 2 .0
- 1 .9
N o t e .—Values of the ratio of surplus to GNP for given rates of unemployment were computed from the
following regression equations, fitted by the least-squares method to the quarterly time series for unem
ployment and surplus: g.n.p. ratio for the periods 19463-19512 and 1954i-1958<:
19463-19512: Ft0=U.3153-1.8352Xtl-.OO92X2 ; and 1954i-19583: F<0=18.4575-5.9541X<1-M324A"t2 ,
where i r«0=ratio of surplus or deficit to g.n.p. in a given quarter t0, and X = seasonally adjusted rate of
unemployment in the following quarter, ti.
T a b l e 8 —1 5 . — R elationship o f Federal “ cash budget ” s u r p lu s 1 as percent o f G N P
to seasonally adjusted rate o f unem ploym ent, 1946, 3d quarter to 1951, 2d quarter
and 1954, 1st quarter to 1958, 4th quarter.
Unemployment rate
Cash budget surplus or
deficit (—) as percent of
GNP
19468-19512
3.0..
______
3. 5_____ ___________
4.0______________
__
4 .5
5.0____
__ _____
3.6
2.9
2.2
1.5
.8
Unemployment rate
19463-19512
1954i-19584
2.3
1. 5
.8
.2
—.3
Cash budget surplus or
deficit (—) as percent of
GNP
5. 5______ ____ ______
6. 0_________________
6. 5__________________
7. 0_______ ____ _____
7. 5________ _________
.1
—.5
-1 .2
—1.8
- 2 .4
1954i-19584
—.8
-1 . 2
-1 . 5
—1. 7
- 1 .9
1 Excess of Federal Government cash receipts from the public over payments to the public.
N o t e .—Values of the ratio of cash budget surplus to GNP for given rates of unemployment were computed
from the following regression equations fitted by the method of least squares to the quarterly times series for
unemployment and surplus: g.n.p. ratios for the periods 1946s-1951a and 1954i-19584:
1946*—1951a: Y«8.2464-1.6197X+.0262X2, and
1954i-19584: Y = 8 .2 9 5 6 - 2.4581X+.1471X2
where Y=ratio of cash surplus or deficit to gross national product and X-seasonally adjusted rate of unem
ployment.
309
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T able
8-16.—Federal cash receipts from and payments to the public, quarterly,
calendar years 194*7-59, before and after seasonal adjustment
[Millions of dollars]
Adjusted i
Unadjusted
Year and quarter
1946:
1st-.
2 d ..
3d_.
4th.
Total.
1st..
2d ..
3 d ..
4th.
Total.
1948:
1st..
2d ..
3d ..
4th _
Total.
1st..
2d..
3 d ..
4th _
Total.
1950:
1st..
2d ..
3d ..
4th _
Total.
1951:
1st..
2d..
3d ..
4th _
Total.
1952:
1st..
2d..
3d._
4th _
Total.
1 s t ..
2d..
3 d ..
4th.
Total .
.1954:
1st..
2d...
3d..
4th _
Total.
Re
ceipts
from
the
public
Pay
ments
to the
public
Surplus
or defi
cit ( - )
Re
ceipts
from
the
public
Pay
ments
to the
public
Surplus
or defi
cit ( - )
Re
ceipts
from
the
public
Pay
ments
to the
public
12,749
9, 514
9,720
9,652
12,244
12, 015
8,449
8,691
505
- 2 , 501
1, 271
961
9, 887
10, 945
10,382
10, 999
12, 888
11, 586
8,635
8,865
-3,001
-641
1,747
2,134
10, 537
10, 810
10, 512
10, 902
13,005
10, 890
9,188
9, 012
-2,468
-8 0
1,324
1, 890
41, 635
41, 399
236
42, 213
41, 974
239
42, 617
41, 935
682
14,354
9,860
10,224
9,881
9,163
10,629
10,288
8, 536
5,001
-768
-6 4
1,345
11,319
10,952
10,977
11,262
9, 518
9, 951
10, 465
8, 694
1,801
1,001
512
2, 568
11,137
11,091
11,076
11,357
9,406
9,837
10,028
9,073
1,731
1,254
1,048
2,284
44,319
38, 615
5, 704
44,510
38, 628
5, 882
44,784
38,459
6,329
15,049
10,248
10,097
9, 576
8,641
9,033
8, 735
10,488
6,408
1,215
1,362
-912
11,884
11, 531
10, 752
10, 907
8,882
8,386
8,936
10, 546
3,002
3,145
1,816
361
11,740
11,377
10, 789
10, 760
8,644
8,582
9,135
10,168
3,096
2, 795
1,654
592
44, 970
36,897
8,073
45,074
36, 750
8,324
44, 666
36,529
8,137
13,131
8, 823
10,146
9,274
9,964
11,389
10,528
10, 762
3,167
- 2 , 566
-382
- 1 , 488
10,321
9,148
10, 671
10,603
10,261
10, 738
10,852
10,745
60
-1,590
-181
-142
10,044
9, 598
10, 426
10, 572
10, 487
10, 591
10,831
10,943
-443
-993
-405
-371
41,374
42,643
-1,269
40, 743
42,596
-1,853
40,640
42,852
-2,2 1 2
12, 242
9,309
10,499
10,401
10,760
11,105
9,351
10,754
1.482
- 1 , 796
1,148
-353
9,686
9, 729
11,176
12,313
11,174
10, 514
9,705
10,638
- 1 , 488
-785
1,471
1,675
9, 940
9,885
11,144
12, 464
11,013
10, 537
9, 980
10, 607
-1,073
-652
1,164
1,857
42, 451
41,970
481
42, 904
42,031
873
43,433
42,137
1,296
18,062
14, 475
14,009
12, 790
11,179
14, 521
15, 270
17,064
6,883
-4 6
-1,261
- 4 , 274
14,067
14,855
15,115
15,407
11, 651
13, 692
15,816
16,910
2,416
1,163
-701
-1,503
13, 973
14,671
14, 926
15, 712
11,864
13, 761
15, 779
16,884
2,109
910
-853
-1,172
59,336
58,034
1,302
59, 444
58,069
1,375
59, 282
58,288
994
21, 894
19, 399
15,369
14, 735
16,921
18, 701
17, 921
19,436
4, 973
698
- 2 , 552
- 4 , 701
17, 053
19, 589
17, 233
18,336
17, 763
17, 601
18, 439
19,215
-710
1,988
-1,206
-879
17, 721
18, 724
17, 443
17, 870
17, 420
17, 825
18, 356
18,799
301
899
-913
-9 2 9
71,397
72, 979
- 1 , 582
72, 211
73,018
-807
71, 758
72, 400
-642
22, 548
18, 693
15, 356
13, 472
18,166
21, 037
18, 216
18,511
4, 382
- 2 , 344
- 2 , 860
-5,039
17,605
17,189
17, 740
17, 261
19, 008
19, 812
18, 528
18, 492
- 1 , 403
- 2 , 623
-788
-1,231
17, 626
17, 576
17, 803
17, 319
19,180
19, 383
18, 910
18, 397
- 1 , 554
- 1 , 807
-1,107
- 1 , 078
70, 069
75, 930
- 5 , 861
69,795
75, 840
- 6 , 045
70, 324
75,870
- 5 , 546
23, 694
19, 085
13, 516
12, 268
16, 425
18, 641
18, 585
16,184
7, 269
444
- 5 , 069
- 3 , 916
18, 443
16, 527
15. 800
15, 872
17, 217
17, 619
18, 621
16,170
1, 226
-1,092
- 2 , 821
-298
17, 417
17, 007
16, 349
16, 004
17,486
17, 712
17,926
17, 002
-6 9
-705
-1,577
-998
68, 563
69, 835
-1,272
66, 642
69, 627
- 2 , 985
66, 777
70,126
- 3 , 349
See footnotes at end of table.
Adjusted 2
Surplus
or defi
cit ( - )
EMPLOYMENTj GROWTH, AND PRICE LEVELS
310
8-16.— Federal cash receipts from and payments to the public, quarterly
calendar years 1947-59, before and after seasonal adjustment—-Continued
T able
[Millions of dollars]
Unadjusted
Adjusted
Adjusted *
2
Re
ceipts
from
the
public
Pay
ments
to the
public
Surplus
or defi
cit ( - )
Re
ceipts
from
the
public
Pay
ments
to the
public
Surplus
or defi
cit ( - )
Re
ceipts
from
the
public
Pay
ments
to the
public
1955:
1st______________
2d_______________
3d_______________
4th______________
21, 302
20, 750
15, 330
14, 067
17,175
18, 589
18, 589
17, 837
4,127
2,161
- 3 , 259
- 3 , 770
17,070
18,489
17,719
18, 081
17, 968
17, 738
18, 569
17, 967
-898
751
-850
114
17, 052
17, 984
17, 795
18,186
17, 646
17, 904
18, 206
18,196
-5 9 4
80
-411
-1 0
Total----------------
71, 449
72,190
-741
71, 359
72, 242
-883
71,017
71, 952
-9 3 5
1956:
1st___ ___________
2d........ .................
3d_______________
4th ...........................
24, 085
23, 602
17,139
15, 504
17.113
19, 076
18, 280
20, 338
6, 972
4, 526
-1.141
- 4 , 834
19, 395
20, 693
20,153
20, 231
17, 922
18, 293
18,136
20, 421
1, 473
2, 400
2,017
-190
19, 542
20, 613
20, 304
20, 081
17, 941
18, 204
18, 629
19, 935
1, 601
2, 409
1, 675
146
Total........... ....... 80,330
74, 807
5, 523
80, 472
74, 772
5,700
80, 540
74, 709
5,831
24, 617
24, 846
18, 653
16,404
19,814
21, 574
21,099
20,839
4, 803
3, 272
-2 , 446
- 4 , 435
20, 425
21,711
21, 363
21, 225
20, 728
20, 917
20, 846
20, 820
-303
794
517
405
20, 655
21, 324
21, 348
21, 234
20, 863
20, 966
20, 879
20, 746
-208
358
469
488
84, 520
83,326
1,194
84, 724
83, 311
1, 413
84, 561
83, 454
1,107
23, 618
23, 219
18, 274
16, 618
19, 626
21, 850
23, 789
23, 750
3, 992
1,369
- 5 , 515
-7,132
20,141
19, 934
20, 841
21,133
20, 585
21, 266
23, 411
23, 651
-444
-1,332
- 2 , 570
- 2 , 518
20,237
20, 018
20, 647
20, 891
20, 545
21, 418
23, 069
23,917
-3 0 8
- 1 , 400
- 2 , 422
- 3 , 026
81, 729
89, 015
- 7 , 286
82, 049
88, 913
- 6 , 864
81, 793
88, 949
-7,1 5 6
1959:
1st_________ - ......... 22, 615
2d_____ _________ 24, 031
22, 721
24, 283
-106
-252
19, 387
21, 363
23, 834
23, 676
- 4 , 447
- 2 , 313
20, 503
21,117
23, 898
23,334
- 3 , 395
-2,217
Year and quarter
1957:
l s t . . _ ...... .........___
2d_______________
3d_______________
4th______________
Total_____ ____
1958:
1st_______________
2d______ ________
3d_______________
4th_____________ _
Total. _________
Surplus
or defi
cit ( - )
1 These quarterly figures are a summary of the seasonally adjusted monthly data. Monthly data were
adjusted by applying the Uni vac II procedure of the Bureau of the Census, described by Julius Shiskin
in “ Electronic Computers and Business Indicators,” Occasional Paper 57, National Bureau of Economic
Research, Inc., 1957, appendix A.
2 These adjusted quarterly data are a 5-month moving average of the final seasonally adjusted monthly
data.
N ote .—T he monthly adjusted data for the period prior to 1955 are based on concepts which differ slightly
from those used in the officially published annual series, giving rise to some differences between the
above totals and the official totals.
Source: Bureau of the Budget.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T a b le
311
8-17. — Gross and net national saving related to gross national product, season
ally adjusted quarterly totals at annual rates, 194-6-58
Federal
Net na
Gross
surplus
tional
national
savings or deficit
savings
as a per as a per as a per
cent of
cent of
cent of
gross na gross na gross na
tional
tional
tional
saving
product product
1946:
1st___
2d.......
11.3
14.8
Total.
3d____
1947:
1st___
2d
3d
4th___
1948:
1st___
2d
3d
4th___
1949:
1st___
2d
3d
4th___
1950:
1st___
2d
Federal
surplus
or deficit
as a per
cent of
net na
tional
saving
6.2
9.7
-4 1 .5
2.3
-7 5 .6
3.5
13.1
8.0
-1 6 .3
-2 6 .6
15.0
10.0
22.4
33.5
oy. 0
16.1
15.2
14.9
16.5
10.8
9.6
9.3
10.9
35.4
37.7
24.7
34.4
52.7
59.7
39.7
52.9
17.8
18. 2
17! 5
17.3
11.9
12. 2
ll! 6
11.2
31.2
18 2
12! 6
8.3
46.8
974•1
L
18.9
12.7
14.5
12.4
13.1
11.0
8.2
5.8
6.3
4.0
- 3 .7
-1 2 .2
- 8 .3
- 7 .4
- 6 .6
-2 6 .2
-1 7 .1
-2 0 .6
13.8
17.0
6.8
10.1
-1 0 .4
17.8
-2 0 .9
30.0
Total.
15.4
9.3
15.0
24.8
3d
4th___
1951:
1st___
2d
3d
4th___
1952:
1st___
2d
3d
4th___
17.2
19.8
10.7
13.2
33.7
25.5
54. 1
38.0
17.3
18.4
16. 5
15.1
10.8
11.8
9.8
8.3
36.7
13.5
-.5
-4 .7
58.9
21.0
-.9
- 8 .6
15.2
13.6
13.3
13.4
8.4
6.6
6.3
6.5
1.9
- 9 .0
-1 5 .7
-1 0 .6
3.5
-1 8 .6
-3 2 .9
-2 1 .8
Federal
Federal
Net na
Gross
surplus
tional
national
surplus
savings or deficit or deficit
savings
as a per as a per as a. per as a per
cent of
cent of
cent of
cent of
gross na gross na gross na net na
tional
tional
tional
tional
saving
saving
product product
1953:
1st___
2d
3d
4th___
13.4
13.1
13.2
11.8
6.3
6.0
5.9
4.2
-1 0 .5
-1 4 .5
-1 1 .6
-2 7 .8
-2 2 .1
-3 1 .7
-2 6 .0
-7 8 .1
Total-
15.0
8.1
1.8
3.4
1954:
1st___
2d
3d
4th___
12.4
13.3
13.0
13.9
4.6
5.3
4.9
5.8
-2 3 .8
-1 1 .3
-1 0 .9
- 4 .5
-6 3 .5
-2 8 .3
-2 8 .5
-1 0 .7
TotaL
13.1
5.2
-1 2 .3
-3 1 .1
14.2
15.9
15.9
16.6
6.2
7.9
7.9
8.5
1.5
5.6
8.6
8.2
3.4
11.3
17.2
16.0
16.7
17.2
17.2
17.0
8.5
9.0
9.0
8.8
9.8
9.4
5.9
7.0
19.2
11.4
13.5
1955:
1st___
2d
3d
4th___
1956:
1st___
2d
3d
4th___
1957:
1st___
2d
3d
4th___
1958:
1st___
2d
3d
4th___
16.4
16.0
16.0
14.5
8.1
7.7
7.6
6.0
6.7
3.1
4.2
-.9
13.5
6.4
8.8
- 2 .3
12.6
12.1
13.0
13.7
3.9
3.5
4.5
5.2
-1 4 .8
-2 0 .7
-1 7 .5
-1 2 .5
-4 7 .9
-7 2 . 2
-5 1 .0
-3 2 .6
Total-
14. 4
7.0
1.1
2.3
Source: Department of Commerce, Office of Business Economics, U.S. Income and Output, table
V-2, and Survey of Current Business, July 1959, p. 29.
8 -1 8
.—Percentage distribution of Federal, State, and local government receipts by source, 1946—
58
Federal, State, and local government receipts
17.8
19.8
21.2
18.4
25.8
26.3
21.5
21.3
19.1
21.5
19.4
18.1
15.8
33.9
32.7
34.4
38.4
34.3
30.0
31.1
31.8
33.5
32.4
32.6
32.7
34.0
Contribu
tions for
social
insurance
11.7
10.0
8.8
10.2
9.9
9.6
9.5
9.2
10.8
10.8
11.5
12.5
13.2
Personal tax
and nontax
receipts
Total
100
100
10U
100
100
100
100
100
100
100
100
100
100
43.8
45.4
43.8
41.5
36.2
40.8
46.0
46.0
45.7
43.3
45.4
45. 6
46.9
Corporate
profits tax
accruals
22.1
24.7
27.2
25.0
34.0
33.5
27.5
27.6
25.8
28.7
26.0
24.5
22.1
Indirect
business tax
and nontax
accruals
20.1
18.2
18.6
20.9
18.0
14.8
15.5
15.9
15.8
15.2
15.0
14.9
15.1
Contribu
tions for
social
insurance
14.0
11.8
10.4
12.6
11.8
11.0
10.9
10.5
12.7
12.8
13.6
15.0
15.9
AND
PRICE
LrEVELS
36.6
37.6
35.7
33.1
30.0
34.2
37.9
37.7
36.6
35.2
36.5
36. 7
37.0
Indirect
business tax
ancfnontax
accruals
GROWTH,
Source: Table 8-5.
100
100
100
100
100
100
100
100
100
100
100
100
100
Corporate
profits tax
accruals
Federal
EMPLOYMENT,
Personal tax
and nontax
receipts
Total
1946______________________________
1947______________________________
1948______________________________
1949______________________________
1950_____________________ _____ _
1951-_____________________________
1952______________________________
1953_______________ .
_
1954__________________
1955__________________ _________
1956______________________________
1957______________________________
1958______________________________
312
T a b le
EMPLOYMENT, GROWTH, AND PRICE LEVELS
T able
313
8-19.—Percentage distribution of total (Federal, State, and local) taxes
by quintiles of personal money income
Year
I
II
III
IV
V
1948
1954
1958
3.8
4.0
3.9
8.3
9.0
8.7
13.0
13.0
13.5
23.0
21.8
23.6
51.9
52.2
50.3
Total
100
100
100
Source: See source note table 9-22.
8-20.—Effective rate of tax {combined Federal, State, and local) by
quintiles of personal money income
T able
Year
I
II
III
IV
V
All
1948
1954
1958
22.5
25.0
29.1
26.9
28.6
28.5
25.3
27.8
31.2
28.5
35.8
38.3
31.8
34.6
36.1
29.5
33.0
34.7
Source: See source note table 9-22.
T able
8-21.—Dollar limits of quintiles on personal money income
Year
I
II
III
IV
V
1948
1954
1958
0-1,450
0-1,700
0-2,060
1,450-2,500
1,700-3, 200
2,060-3,878
2, 500-3, 400
3,200-4, 400
2,060-5,333
3.400-4,700
4.400-6,200
5, 333-7, 514
4,700 and over
6,200 and over
7,514 and over
Source: See source note, table 9-22.
T able
8-22.—Relation tveights of Federal compared with State and local taxes
Year
1948
1954
1958
Federal
75.4
72.4
70.1
State
and
local
Total
24.6
27.6
29.9
100.0
100.0
100.0
Source: R. A. Musgrave et al., “ Distribution of Tax Payments by Income Groups: A Case Study for
1948,” National Tax Journal, March 1951; R. A. Musgrave, “ The Incidence of the Tax Structure and Its
Effects on Consumption,” Federal Tax Policy for Economic Growth and Stability, papers submitted by
panelists appearing before the Subcommittee on Tax Policy, joint committee print, 84th Cong., 1st sess.,
November 1955.
48795— 59-------23
EMPLOYMENT, GROWTH, AND PRICE LEVELS
314
T a b le
8 - 2 3 . —Estimated
relative weight of Federal taxes on saving and
consumption, 1946-57 1
Percent of total Federal taxes falling on—
Year
1946_________
1947-........... .
1948_________
1949_________
1950_________
1951_________
1952_________
1953_________
1954_________
1955_________
1956_________
1957_________
Consumption
Saving
Assumption 1
Assumption 2
Assumption 1
Assumption 2
71.1
68.9
65.8
68.7
59.9
60.4
66.1
66.3
67.9
64.6
66.9
68.4
75.7
75.0
72.6
74.9
68.5
68.8
73.0
73.2
74.0
71.8
73.4
74.2
28.9
31.1
34.2
31.3
40.1
39.6
33.9
33.7
32.4
35.4
33.1
31.6
24.3
25.0
27.4
25.1
31.5
31.2
27.0
26.8
26.0
28.2
26.6
25.8
1 Indirect business tax and nontax accruals and contributions for social insurance (national income account
concepts) were treated as falling entirely on consumption outlays. The relative weights of personal tax and
nontax receipts on consumption and saving were estimated by distributing these receipts proportionally to
the Statistics of Income distribution of individual income tax liabilities by adjusted gross income classes for
the respective years and applying thereto an average saving function as follows:
Average saving rate
(percent)
Income class
Under $7,500______________
$7,500 to $10,000___________
$10,000 to $20,000__________
More than $20,000_________
0
.12
.26
.40
Corporate profits tax accruals were treated (1) as falling entirely on saving, and (2) as falling to the extent
of 75 percent of these accruals on saving.
Source: Table 8—5 and Treasury Department and Internal Revenue Service, Statistics
of Income.
T able 8-24.—Measures of stability1 in broad categories of Federal expenditures,
selected periods, 1946-58
1946 3-55 4
Gross expenditures_____ _
__ _
Gross Federal purchases.-- __ __________
National defense purchases _ _
_ __
Gross Federal civil purchases, less acqui
sition of capital items___
Transfer payments to persons
Gross domestic civil expenditures, less
transfer payments and acquisition of
capital items
1946 3-50
3
1950 s-53 4
1954 i-54 4
11.6
21.6
29.0
6.3
10.3
9.2
8.7
14.2
17.1
L. 6
2.1
.8
1.7
1.7
1.9
10.2
12.1
11.3
13.8
5. 7
2.1
2.2
1.0
5.6
3.7
6.5
4.7
3.3
.9
3.0
1955 i-58 4
1 Arithm etic means of percentage deviations of observed quarterly values (seasonally ad
justed at annual rates) from the trend for each category in each period. Growth trends
'were derived from logarithmic equations, computed by use of the cost-squares method
from time series of the quarterly values, seasonally adjusted at annual rates for each
component.
Source: Table 8-10.
CHAPTER 9. MONETARY POLICY AND DEBT
MANAGEMENT1
In recent years, especially since 1953, we have placed major reliance
on the monetary policies of the Federal Reserve System in our effort
to maintain high levels of employment, reasonable stability of price
levels, and a satisfactory rate of economic growth. In this chapter,
we shall study the functioning of the monetary and financial mechan
ism and its impact on the economy, paying particular attention to the
problems we have encountered in trying to make flexible monetary
policy an effective instrument for achieving the goals of economic
growth and stability, and the problems that have arisen in connection
with the management of the public debt. In addition, we shall con
sider the implications for monetary policy and debt management of
the other findings of this report concerning the structure of our econ
omy and the nature of the problems we are faced with. And, finally,
we shall advance some suggestions for increasing the effectiveness of
monetary policy and debt management.
I.
M
onetary
P
o l ic y
an d
D
ebt
M
an ag em en t
S
in c e
1946
In order to establish a point of departure and to provide the reader
with the necessary background for this chapter, we shall begin with
a systematic survey of developments in the field of monetary policy
and debt management since World War II. We shall take up first
the period prior to the Treasury-Federal Reserve accord of March 1951
and then turn to a somewhat more detailed consideration of post
accord developments. We shall attempt to draw a few broad gen
eralizations concerning our experience, saving detailed analysis and
criticism for later sections of this chapter.
A . Preaccord monetary-debt policy
TTie wartime background.—During the period of U.S. participation
in World War II, the Federal Reserve System directed its energies
almost entirely to the support of Treasury financing operations.
Early in 1942, the Treasury and the Federal Reserve agreed upon a
mutually acceptable wartime structure of interest rates on Treasury
securities. Yields were to be held at three-eighths of 1 percent on 3month Treasury bills, seven-eighths of 1 percent on 9 to 12 month
maturities, and ranging up to 2% percent on the longest term Treasury
bonds.2 The Federal Reserve agreed to buy all Treasury bills offered
to it at the three-eighths percent rate, with the seller having a repur
chase option at the same rate. A preferential discount rate of onehalf percent was established for borrowings by member banks col1 Main responsibility for the drafting of this chapter rested with W arren L. Smith.
2 See H. C. Murphy, “ The National Debt in W ar and Transition” (New Y o r k : McGrawH ill Book Co., 1 9 5 0 ), ch. 8 , and L. V. Chandler, “ Inflation in the United States, 1 9 4 0 -4 8 ”
(New York : Harper & Bros., 1 9 5 1 ), ch. IX .
315
316
EMPLOYMENT, GROWTH, AND PRICE LEVELS
Iateraled by Government securities maturing within 1 year.3 By
means of these devices, together with direct purchases in the market,
the agreed interest rate structure was maintained.
The rationale of war finance can be explained roughly as follows.
As large a portion of the funds as seemed economically and politically
feasible was raised through taxation, as much more as possible was
borrowed (at the predetermined structure of interest rates) from the
nonbank public, and the residual financing to make ends meet was
done through the banking system with the support of the Federal
Reserve.4 As a result of these operations, the total Federal debt held
outside the Treasury investment accounts increased by $196.9 billion
(from $54.7 billion to $251.6 billion) between the end of 1941 and the
end of 1945. Federal Reserve holdings increased by $22 billion, hold
ings of commercial banks increased by $69.4 billion, and holdings of
nonbank investors increased by $105.5 billion.5
Table 9-1 shows the factors affecting the money supply during the
period from the end of 1941 to the end of 1945. The chief factor gen
erating an increase in the money supply was the increase of $97.8
billion in bank holdings of Government securities; bank loans in
creased by only $3.8 billion.6 Part of the funds generated by this huge
expansion of bank credit went toward building up Treasury deposits
in the banks (which increased by $22.8 billion) and time deposits
(which increased by $20.7 billion). An outflow of gold, together with
other miscellaneous factors, offset a small amount of the expansion.
The net result was that the money supply (publicly held demand de
posits and currency) increased by $53.7 billion/
T a b l e 9 - 1 .— F a c t o r s a ffe c tin g m o n e y s u p p ly , D e c . 31, 1941, to D e c . 31, 1945
[In billions of dollars ; ( + ) denotes increase, ( — ) decrease in money supply]
Decrease in gold stock___________________________________________________
—2. 7
Increase in bank loans___________________________________________________
+3. 8
Increase in bank holdings of Treasury obligations_______________________ + 9 7 . 8
Federal Reserve banks_______________________________________________ + 22. 0
Commercial banks____________________________________________________ + 6 8 . 8
Mutual savings banks_______________________________________________ + 7 . 0
Increase in Treasury deposits in banks____________________________________—22. 8
Increase in time deposits_________________________________________________ —20. 7
Other factors net_________________________________________________________
—1. 7
Change in money supply1--------------------------------------------------------------- + 5 3 .7
1 Money supply-demand deposits adjusted plus currency outside banks.
Source : Federal Reserve Bulletin.
3 Murphy, “ The National Debt in W ar and Transition,” pp. 9 8 -9 9 , 127 ; Chandler, “ In
flation in the United States, 1 9 4 0 -4 8 ,” pp. 1 8 9 -1 9 1 .
4 For the fiscal years 1940 to 1946, covering the defense and war periods, total expendi
tures amounted to $391.1 billion, of which $176.1 billion (or 45 percent) was covered by
taxation and the remaining $215 billion (or 55 percent) by borrowing. $ 133.6 billion was
borrowed from nonbanks, $60.2 billion from commercial banks, and $21.2 billion from
Federal Reserve banks. Murphy, “ The National Debt in W ar and Transition,” pp. 2 5 6 -2 6 1 .
5 Unless otherwise indicated, the statistics used in this chapter are taken from readily
available published sources, such as the Federal Reserve Bulletin, the Survey of Current
Business and its various supplements, and Economic Indicators.
8
The expansion of $68.8 billion in commercial banks’ holdings of Government securities
shown in table I differs from the amount of $69.4 billion, referred to in the text, because
the former is book value while the latter is face value.
7 The reserves needed to support this expansion were provided chiefly by the purchase of
$22 billion of Government securities by the Federal Reserve and by a reduction of $1.6
billion in excess reserves, which were relatively large at the beginning of the period. The
expansion of deposits required $5.1 billion of additional reserves ; most of the rest were
used up through an expansion of $17.4 billion in currency in circulation, with the loss
of gold and other miscellaneous factors accounting for the remainder.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
317
From the last quarter of 1941 to the last quarter of 1945, the gross
national product (seasonally adjusted annual rate) increased from
$138.7 billion to $197.1 billion. The price level was kept under rea
sonably satisfactory control by means of direct price controls and
rationing; the implicit price deflator for the gross national product
rose by 28.5 percent between 1941 and 1945. As a result of the controls,
together with patriotic exhortations, the rate of personal saving was
exceptionally high— amounting to $126.4 billion, or 23.1 percent of
disposable income for the years 1942-45. Between the end of 1941 and
the end of 1945, the money supply (demand deposits and currency)
increased from $48.6 billion to $102.3 billion, the total of outstanding
savings deposits and savings and loan shares increased from $32.6
billion to $55.8 billion, and the total publicly held debt (i.e., debt
held outside the Treasury investment accounts and the Federal Re
serve) increased from $52.4 billion to $227.3 billion. Income velocity
of monetary circulation declined from 2.80 to 1.93 per year between
the last quarter of 1941 and the last quarter of 1945— and it was at a
low level at the beginning of the period as a result of depressed busi
ness conditions.8 Outstanding consumer debt declined from $9.2 bil
lion to $5.7 billion and total outstanding mortgage debt from $37.6
billion to $35.5 billion between the end of 1941 and the end of 1945.
The immediate postwar situation.—Thus by 1946 the economy was
extremely liquid and characterized by widespread excess demands
which were held in check by price controls.9 Price controls were weak
ened by restrictive legislation in June and then removed almost en
tirely later in the year. Beginning at midyear, the price level began a
steep rise, with the Consumer Price Index rising by 15 percent be
tween June and December. The price level continued to rise during
1947 and 194-8, although at a somewhat moderated pace.
After the war ended, the Federal Reserve continued to maintain the
interest rate structure that had prevailed during the war itself, al
though gradually some flexibility was introduced into the short-term
end of the market. The preferential discount rate on loans to member
banks secured by Government securities maturing within 1 year was
removed in the spring of 1946. In July 1947 the Federal Reserve elim
inated the posted buying rate of three-eights of 1 percent on Treasury
bills, and the rate rose gradually to a little over 1 percent by the end of
1948. The certificate rate was also freed later in 1947. Prices of long
term bonds rose sharply in early 1946, as heavy wartime borrowing
came to an end and investors were doubtful whether the volume of pri
vate security offerings would be sufficient to absorb savings. However,
by April 1946 a decline had set in, as the private demand for funds
began to climb and many classes of investors began to sell Govern
ment securities in order to obtain funds for private lending. A grad
ual rise in long-term interest rates occurred in 1946 and 1947; in
December 1947, the Federal adjusted the support price downward
slightly. However, not until the Treasury-Federal Reserve accord
8 Income v#locity is computed by dividing the gross national product (seasonably adjusted
annual rate) by the money supply (demand deposits adjusted and currency outside banks,
seasonally adjusted). It represents the number of times (per annum rate) that the
average dollar of money is spent on final output during the period/
9 For an interpretation of the way in which the large volume of liquid assets built up
during W orld W ar II and the continued expansion of liquid assets in the postwar period
have complicated the problems of the monetary authority, see the forthcoming study
paper by John G. Gurley entitled “ Financial Aspects of Postwar Economic Developments
in the United States.”
318
EMPLOYMENT, GROWTH, AND PRICE LEVELS
of March 1951 did the Federal Reserve let the prices of long-term
Treasury securities fall below par or their yields rise above 2y2 Per~
cent.
With stocks of consumer durable goods and of producers’ plant and
equipment deteriorated and inadequate and with income levels high
under conditions of full employment, private demands for credit of
all kinds were very strong. Nearly all investor groups were heavily
loaded with Government securities as a consequence of the financing
of the war. During the 1946-48 period, banks, insurance companies,
and nonfinancial corporations sold large blocks of Government secu
rities in order to expand their private loans and investments or to
finance their own expenditures on plant and equipment and inven
tories. Under the prevailing policy of supporting the prices of Gov
ernment securities, the Federal Reserve had to buy considerable
quantities of these securities. Such purchases created bank reserves
and tended to produce an inflationary increase in total bank credit
and money supply. However, while the money supply increased sub
stantially (by nearly $8 billion) in 1946, the increase in 1947 and
1948 wTas quite moderate— from $110 billion at the end of 1946 to
$111.6 billion at the end of 1948, a rise of $1.6 billion, or 1.4 percent.
The explanation is partly that the Federal Reserve displayed con
siderable skill in offsetting its purchases in some maturity sectors
by sales in others and also that the Treasury had large cash surpluses
in 1947 and 1948 which it used for debt retirement, thus taking a con
siderable amount of debt off the market. The cash surplus was $5.7
billion in 1947 and $8 billion in 1948, and the publicly held debt de
clined by $5.3 billion in 1947 and $7.8 billion in 1948.10 Thus, the
inflation in 1947 and 1948 was financed largely by an increase in the
velocity of the existing money supply rather than by the creation of
new money. Income velocity increased from 2.01 in the fourth quar
ter of 1946 to 2.38 in the last quarter of 1948, a rise of 18.4 percent.
It should also be noted that in the immediate postwar period scarcely
anyone questioned the wisdom of maintaining the wartime pattern of
interest rates or, at any rate, of “pegging” the prices of long-term
bonds at the wartime level. Various reasons were given for this—
obviously not all held by the same people—including the fear of un
employment during the period of reconversion to peacetime activity
and the feeling that the economy might revert to the state of chronic
unemployment that had characterized the 1930’s, the dislike of rising
Treasury interest costs, the fear of a catastrophic collapse in the
government bond market if “weak” holders should try to dump their
securities in a falling market, and the feeling that rising interest
rates and tightening money would do little good in combating infla
tion anyhow.
Monetary-debt policy in 1947-43.—With open market policy per
verse or at least inoperative as a stabilization device, the Federal Re
serve tried to rely on its other weapons in 1947 and 1948. The dis
count rate was raised to 1 percent with the elimination of the preferen
tial rate on loans collateraled by short-term Government securities
in April 1946 and was later increased to 1% percent in January 1948
10 The amount of debt retirement (or borrowing) in any period is not necessarily equal
to the surplus (or deficit) in the cash budget, due partly to changes in the Treasury’ s cash
balance and partly to the fact that the cash budget includes transactions of certain Gov
ernment agencies which issue their own securities.
EMPLOYMENT, GROWTH, AND PRICE LEVELS
319
and to 1% percent in August 1948. However, these increases prob
ably had very little effect, since member banks had little reason to
borrow from the Federal Reserve. During the war reserve require
ments for demand deposits were maintained at 20 percent for central
reserve city and reserve city banks and 14 percent for country banks,
while time deposit reserve requirements were maintained at 6 percent.
These were the maximum levels permissible by law except in the case
of demand deposits at central reserve city banks.11 During 1948,
these latter reserve requirements were raised first to 22 and then to
24 percent, and in August 1948 Congress passed legislation giving
the System temporary authority to raise reserve requirements above
the normal maximum levels. Limited use was made of this authority,
which expired in June 1949. Reserve requirement increases had little
restrictive effect under the existing circumstances, since banks could
readily obtain funds to meet the added requirements by selling Gov
ernment securities which had to be bought by the Federal Reserve if
the sales tended to depress their prices. Of course, the raising of re
serve requirements combined with bank sales of Government securi
ties tended to reduce bank liquidity somewhat, but bank liquidity was
so redundant and the scope for increases in reserve requirements was
so small that the effects can hardly have been significant.
Consumer credit controls under regulation W of the Board of
Governors, which had been established in 1941 by Executive order of
the President, were removed in November 1947. The controls were
temporarily reimposed, upon authorization by Congress, in August
1948 and were again abolished when the authority expired in June
1949. Under the circumstances existing at that time, many economists
favored reliance on selective controls, such as those applying to con
sumer credit, as a substitute for general controls which were rendered
inoperative by the bond support policy. Consumer credit controls
probably helped to abate the inflationary pressures during the times
they were in effect.
Several proposals were advanced during the 1946-48 period which
were designed to separate the Government securities market from the
markets for private debt in order to permit the Federal Reserve to
control credit in the interest of economic stability while at the same
time supporting the prices of Government securities.11"1 The most
widely discussed of these proposals was the so-called security reserve
plan. This scheme would have established, in addition to regular
cash reserve requirements, a secondary legal reserve requirement which
could be satisfied by holding short-term Government securities and
which could be varied within limits by the Board of Governors. One
version (referred to as the “Eccles plan” ) received the support of the
Federal Reserve in 1947 and was put before the Congress although
no action was taken on it.12 The purpose of the proposal was to tie
down Government securities in the banking system so that the Federal
Reserve could restrict credit without having to contend with bank
sales of Governments. However, it is doubtful whether such a plan
Reserve requirements for central reserve city (New York and Chicago) banks were
reduced below the maximum level of 26 percent, because of the fact that the pattern of
wartime borrowing and spending tended to drain funds out of these financial centers.
lla For a brief summary of the various proposals, see E. A. Goldenweiser, ‘American
Monetary Policy” (New Y o rk : McGraw-Hill Book Co., Inc., 1 9 5 1 ), pp. 5 1 -6 3 .
12 See “ Proposal for a Special Reserve Requirement Against the Demand and Time
Deposits of Banks,” Federal Reserve Bulletin, January 1948, pp. 1 4 -2 3 .
320
EMPLOYMENT, GROWTH, AND PRICE LEVELS
would have helped much since it would not have prevented banks
from selling longer-term securities from their portfolios in order to
obtain funds for lending. Nor would it have dealt with the problem
of insurance companies and other investors who were selling Govern
ment securities for the same purposes.
Debt management in 1947 and 1948 placed considerable emphasis
on the reduction of bank-held debt, on the ground that the monetiza
tion of debt increases the money supply and is inflationary and there
fore that demonetization of debt must be anti-inflationary. Accord
ingly, in using the substantial cash surpluses of 1947 and 1948 for
debt retirement, the Treasury emphasized the retirement of bank-held
debt. Measured against its objective, the policy was eminently suc
cessful— commercial bank holdings of Government securities declined
from $74.8 billion at the end of 1946 to $62.6 billion at the end of 1948,
a drop of $12.2 billion.13 However, it is at least doubtful whether,
under the circumstances, this helped much in the fight against infla
tion, since commercial banks were able to expand their loans and
holdings of other securities by $12.5 billion during this period despite
the fact that the money supply increased only very moderately, as in
dicated above. The banks were unloading their holdings of Govern
ment securities and using the proceeds to expand loans, a process that
was almost certainly highly inflationary and helped to cause the in
crease in velocity that occurred. By taking the securities off the hands
of the banks through debt retirement, the Treasury undoubtedly fa
cilitated this operation. It should be noted, however, that, the pressure
of loan demand being what it was, the banks would undoubtedly have
been selling Government securities anyhow, and if the Treasury had
not retired as much debt thus absorbing securities, the sales by banks
(and other investors) would have depressed security prices, thus
making it necessary for the Federal Reserve to buy more in order to
maintain the structure of interest rates. Since System purchases of
securities would have resulted in increases in member bank reserves,
thus permitting multiple expansion of credit, this process would have
been highly infla
@FedFRASER