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FOR RELEASE ON DELIVERY
MONDAY, DECEMBER 29, 1975
4:00 P.M. CST (5:00 P.M. EST)

NO TALENT FOR PLANNING
Remarks by
Henry C. Wallich
Member, Board of Governors of the Federal Reserve System
at the
session on
"The Case For and Against National Economic Planning 1
1
Annual Meetings of the
American Economic Association
in
Dallas, Texas
Monday, December 29, 1975




NO TALENT FOR PLANNING
Remarks by
Henry C. Wallich
Member, Board of Governors of the Federal Reserve System
at the
session on
f The Case For and Against National Economic Planning1
,
1
Annual Meetings of the
American Economic Association
in
Dallas, Texas
Monday, December 29, 1975

To question planning is like questioning common sense.
We all plan as individuals.

Why then fail to make the fullest use

of this commonsensical procedure at the national level?
We are not likely to settle this issue in the abstract.
Theory tells us that under ideal conditions planning can generate
efficient solutions to economic problems.

Theory also tells us

that under certain conditions markets can fail to provide efficient
solutions to the economic problem.

In the United States the role of

planning, except in war time, has been limited largely to patching up
what are perceived to be market failures.

In my remarks today I would

like to develop the thesis that aside from judgments concerning the

The views expressed herein are my own and do not necessarily reflect
those of the Board of Governors or the B o a r d fs staff.

-2efficiency of an ideal planning process this limited role for planning
in the U.S. economy is partly accounted for by the fact that our
political process and our national character make planning especially
difficult.
In particular, I would like to draw upon the planning
experience of the two economies that perhaps have been most successful
in the postwar period -- Germany and Japan.

The Germans, who operated

a tightly planned economy during most of the 1930fs, backed away very
deliberately from that system after the war.

This is not to say that

there are no traces of public planning in the German economy.

A

systematic and orderly people would have a hard time not engaging
in such activities to some degree.

But the ideology and, in good

measure, the reality have been market oriented.

One is tempted to

attribute this decision in good part to the historic association of
central planning with an obnoxious political regime.

But it is

worth noting that the Germans explain their preference for the market
not only in terms of insurance against a political relapse, but quite
specifically also on the grounds of the favorable performance
characteristics of the market system.

The results achieved, as

we know, do not contradict that view.
Japan, despite the small size of its public sector, can be
regarded as a country where public planning plays a very considerable
role.

Whether we think of the policy of doubling GNP in 10 years, or

of the pervasive influence of the Ministry of Industry and Foreign Trade
(MITI), or of the deliberate means employed by the Ministry of Finance







-3and the Bank of Japan in channeling financial flows, the ubiquitous
role of the public planner is very apparent.

By methods very different

from those of Germany, a postwar economic performance even more
impressive has thus been realized.
As in Germany, the political context of the Japanese orienta­
tion toward public planning is important.

In this case, however, it

is not J a p a n 1s political history, but its political process that is
the key to understanding J a p a n fs planning.

Students of the Japanese

way of life refer to Japan as a consent society.

That is to say, the

predominant mode of group decision making, both public and private,
is through consensus rather than confrontation or competition.
interest and opinions of all parties are taken into account.

The
A

great effort is made to avoid overruling or outvoting anybody.

This

pattern seems to prevail both in private corporations and in the
bureaucracy.

The process often is slow, conveying to the outsider

an impression of hesitancy and indecision.

But once everybody has

signed off on a decision, action is general and forceful.
The environment in which Japan found itself after World War II
has favored effective planning for rapid growth.

One must suppose that,

even if market forces had been allowed to hold sway unmitigated by
public planning, Japan would have found itself moving rapidly in the
direction of big industrial power status.

What the Japanese did was

to accelerate considerably this nearly inevitable trend.

This tendency

to plan along the grain of market forces, rather than against it, seems

-

4-

to have been characteristic of J a p a n 1s public policies in both the
real and the financial sector.

Thus, during the postwar period,

the Japanese technique of group decision-making and the economic
opportunities which Japan encountered helped to make economic
planning effective.
For the United States, the salient facts of the matter seem
to be that neither our political processes nor the general condition
of the country favor effective public planning.

Compared to the

highly structured and closely knit world of Japan, ours is wide open.
As contrasted with the principle of consent in Japan, our public
decision-making proceeds by competition and confrontation.

It is

a familiar dictum, of course, that politics is the art of compromise.
But compromise, in the American framework, often comes only after
bruising battles, and it need not carry any further than the point
where one side manages to get 51 per cent of the vote.

The winner

takes all; the loser*s consent is not solicited.
This, I submit, is a process that makes effective public
planning difficult.




Confrontation, the effort to achieve a

majority, absence of a need to consult the wishes of the minority,
suggest severe strains.

In the effort to assemble a majority, the

competing sides are compelled to make extreme promises.

Expectations

are likely to be created that exceed possibilities of fulfillment.
Demands made on resources tend to exceed the supply.

The hallmark

of a planned economy under a decision-making system such as ours
is likely to be excess demand.

-

5-

Inflationary propensities of this kind are likely to be
enhanced by the technology of planning.

Efficiency, getting the

biggest bang for a buck, is bound to be the dominant motivation of
competent technicians.

Good technocrats abhor waste.

But a free

economy requires a degree of slack, some unutilized supply elasticity,
if prices are not to be always rising.

Directing a larger share of

productive capacity toward planned activities in the American environ­
ment, therefore, is likely to lead, first to inflation and later on,
perhaps even to price and wage controls.
Other features of our political life tend to enhance these
propensities.

Our political framework has a very short time horizon.

All members of the House, one-third of the Senate, face re-election
every two years, the President every four.
comparisons, these are short periods.
also seems to be short.

By most international

Our public attention span

A review of our rapidly shifting public

concerns over the last 15 years readily documents this -- with growth,
the environment, consumerism, energy independence and others following
and often superseding one another.

When the time span during which a

national goal can command nationwide attention falls short of the time
required to install the corresponding technology, planning, as opposed
to more flexible private decision-making processes, in response to
rapidly shifting goals will produce disorder and waste.




-6 -

Finally, and once more in contrast to postwar Japan, the
United States today confronts a set of circumstances not conducive
to effective economic planning.
for production.

In Japan, planning essentially was

Resources were withheld from consumption and channeled

into productive investment.

Consumption was allowed to take care of

itself as income grew rapidly.
Planning in the United States, I suspect, would be principally
for use.

Ours has always been a high consumption and low investment

economy, in comparison to other leading industrial countries.

Today,

if I read the signs right, consumption even more than in the past
outranks production as a national concern.
Production does not rank high in our national scale of values.
It is pretty much taken for granted, as concepts like "post-industrial 1
1
and maybe "post-economic 1 society indicate.
1

Our principal concerns

are with the old, the young, the unemployed, the welfare recipients,
the sick, the consumer -- all of them having in common that they are
non-producers.

The producer pays.

His job of producing, moreover, is made more difficult by
rapidly mounting regulations favoring the environment, health and
safety, and a variety of other highly desirable and most worthwhile
purposes, all of which have in common the unfortunate feature that
they burden the producer.

The adversary role in which he is cast is

matched by the diminished public esteem in which business is held.




-7The picture of "Japan, Inc.," the intimacy between government and
business in France and Germany, contrasts distinctly with the businessgovernment relationship prevailing in the United States.
These circumstances support my hypothesis that planning in
the United States would be oriented more toward use than toward production.
This orientation would enhance the tendency toward excess demand, with
the ensuing probable consequences of inflation and controls.
In summary, proposals for planning in the United States seem
to me to propose the wrong thing in the wrong country at the wrong time.
Given the American way of making group decisions, given our excessive
emphasis on short-run objectives that shift frequently, and given the
unsympathetic treatment meted out to the producer, I see little good
coming from intensified public planning.

It is not surprising that,

until recently at least, Americans have tended to favor the free market
as a solution to the problem of deciding what is to be produced.

The

market turns competition into a constructive force while in politics
it becomes a divisive one.

The market avoids confrontation by

substituting anonymous decision-making by the consumer.

Private

processes of profit and utility maximization help to reconcile competing
and shifting objectives with technological and financial limitations.
Market processes, rather than planning, have been appropriate
to the American environment, except in wartime.

Other countries may be

better suited for the application of planning techniques.

In the United

States, an effort at comprehensive planning is likely to lead to severe




-8political conflict, to excessive demands upon the economy, and to
inefficient use of resources as divergent and shifting demands fail
to be reconciled.




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