Will Growth Increase Federal Control? The Coming Crisis

EDWARD T. CHASE

IT IS clear that the highly charged debate over our economic growth rate and the integral question of private versus public spending will be the central domestic issue of the 1960s. The manner in which the Kennedy Administration attempts to resolve this problem will determine our governmental framework for a generation. In particular, it will establish the pattern of relationships between the federal government and our other great power system, free enterprise, or what economists call more precisely the price-market system.

It was Allen W. Dulles, director of the Central Intelligence Agency, who first predicted economic suicide if we did not change our ways. As the controversy evolves, there is an increasing realization that growth and private versus public spending — a polarity Americans had not thought about in twenty-five years — have to do with our very survival. Only recently, the chairman of the Council of Economic Advisers, Professor Walter W. Heller, suggested that government intervention in the economy may not need to be directing, but simply stimulating. “One of the chief arguments for a more positive program for economic growth,” Dr. Heller stated, “is that it is far easier to achieve many of our common goals by enlarging the size of our economic pie than by transferring income and wealth from one group to another.”

But Federal Reserve Board Chairman William M. Martin, Jr., differed with him over this point. He contended that, in the case of chronic unemployment, for example, general stimulation of the economy will not be enough. We have the modern paradox of employment and unemployment simultaneously at record peaks. Affirmative government intervention in specific programs of training and job placement is needed to overcome the kind of persistent structural unemployment now so common. In effect, Martin was saying that a steppedup economic growth rate alone, while desirable and even essential, is an incomplete solution. This hard lesson will have to be learned again and again, because it applies not only to unemployment but to a whole series of economic problems.

The consequences of our failure to learn are serious in the extreme; we can lose in the competition with Communism for the allegiance of the world’s newly emerging nations, because our own example will prove unpersuasive. We can lose something even more precious — our sense of confidence that our own social institutions are both effective and serve worthy ends. In this latter respect, the morale of the younger generation is at stake.

The urgency of the growth debate is comprehensible only in the light of two basic forces:

1) our demographic change, by which I mean population growth, a change in the age complexion of the American population, and the population’s massive shift into our urban and suburban centers;

2) technological progress. Take a vivid example fraught with political tension, medical care for the aged. Many readers, like the author, have parents over sixty-five. According to official government reports, 55 per cent of all people sixtyfive and over (including those still working) have less than $1000 cash income per year. About a third have liquid assets up to $200, in case of an emergency. Only a tiny fraction have substantial assets readily convertible to cash. And illness strikes the aged two to three times more frequently than the rest of the population; their hospitalization is much longer — the costs run 120 per cent higher than those for the rest of us; and for drugs and medicines the disproportion is even greater. Meantime, medical costs, which have doubled since the war, continue to spiral, with hospital costs advancing relentlessly 5 to 6 per cent each year. Scientific progress has meant marvelous but very expensive new equipment, drugs, and procedures.

Technology has equipped medicine with the means to control the death rate and thus make those over sixty-five the nation’s fastest growing population group, and at the same time it has made our industrial plant so productive as to eliminate the aged as an essential part of our work force. Thus, relatively few can earn even minimal annual incomes.

The elderly, increasing in number at the rate of one million every three years, while tolerably fed, housed, clothed, are largely unprotected by health insurance. Only about 40 per cent have even fragmentary health-insurance coverage, according to the Department of Health, Education, and Welfare. Even if the growth of health insurance continues at the booming rate of earlier years, still only about 56 per cent of the aged will be covered by 1965. Yet, after food, clothing, and shelter. medical care has come to be accepted as the fourth basic social right, a right regardless of income.

What bearing has this situation on the question of growth and private versus public spending? This much is clear: a rise in the economic growth rate by itself is beside the mark. Though economic growth is necessary for many reasons, we are learning that growth in a modern industrial society also can be dismayingly irrelevant. In the instance at hand, the bulk of the elderly lack the financial means to afford the health insurance they desperately require; whereas the insurance industry, operating in the market system, cannot hope to insure the aged at premium rates on which the companies can break even, let alone make a profit, for these rates are set by the costs of medical care in the first place.

What we witness, in short, is the spreading phenomenon that goes to the root of the growth debate: the incapability of the price-market system, for technical reasons beyond its purview, to supply an essential public need. The only recourse is government support or provision of the service. And, given the strapped financial situation of the states, the federal government usually must step in.

URBAN CONGESTION

Medical care for the elderly is by no means an isolated example of what the twin forces of technology and demographic change are doing to our society, and, more particularly, to our reliance upon the price-market system as the key determinant of how our wealth is allocated. Consider urban congestion and urban renewal. The problem of urban congestion has become a national nightmare, and its most critical aspect is the alarming decline in mass transportation facilities. As commuter railroad services are terminated, as whole lines fold, as transit companies founder under rising costs and declining patronage, automotive vehicles and the facilities encouraging them proliferate. America’s fabulous technological achievement in mass-producing highways and private automobiles has made the giant, sprawling metropolitan complex possible. Here is the locus of the population explosion. At the same time, this accomplishment mortally threatens public transportation as a profit venture.

Can a “hands off. let private growth solve this” position succeed? Obviously not, because the market system simply cannot cope with such a mammoth deficit operation. Hence, substantial government subsidies, tax relief, and even outright takeover of mass transportation systems have become commonplace. And such measures alone do not remedy the situation. Substituting government financing for the market system is not a sufficient answer, since the proper planning of transportation facilities and of land use is the essence of the matter. Support without planning means wasting tax moneys on moribund or irrational organizations; for example, inefficient railroads, or authorities building highways which add to the traffic problems of cities. The congestion, air and land pollution, destruction of neighborhoods, and hideous disarray of our urban complexes are usually traceable to a lack of integrated planning from a central vantage point. The lesson has been made clear again and again that without government intervention, either by an authority transcending petty political jurisdictions or by some federal entity, the imbalance will grow between private automotive transportation and public mass transportation. If we intend to rescue our cities before this situation becomes irretrievable, we must come to accept more rather than less government “interference" in realms where the invisible hand of the market has hitherto held sway.

The same holds true in the closely related case of urban slum clearance and rehabilitation. Of all the domestic tasks confronting mid-century America, none has a higher priority than the physical renewal of our cities, where two thirds of our entire population live. Will an increase in our economic growth rate, even up to 5 per cent annually, benefit matters here? Precious little. The evidence shows that mere demand does not register in the tremendously costly and complicated task of rebuilding cities. Only with the intervention of the federal government through the clever mechanism of the “Title 1” program, which makes a profit incentive possible, can the forces of the market be brought to bear on the slum-clearance problem. Only the most hidebound conservatives would contend in 1961 that we should leave the survival of our cities up to the vagaries of market values. The role of government is as inevitable here as it is in regulating the natural monopolies of water, gas, electricity, and telephone service.

The controversy grows hotter in areas where it is only beginning to be appreciated that the market system is failing to fulfill the need. For instance, it is uncertain whether Americans will yet tolerate the principle of large-scale government participation in acquiring and preserving open land. Open land is disappearing at a rate of a million acres a year, for superhighways, airports, and suburban sprawl. We prosecute for food pollution, and even for air and water pollution. Yet, apart from local anti-billboard regulations, we have not begun to invoke comparable powers to prevent land pollution. Is there any doubt but that controls must be forthcoming, and would be, if they were not stigmatized as antibusiness by vested business interests?

RESEARCH AND DEVELOPMENT

Now consider the specialized issue of air transportation. It typifies a whole category of vital technical problems and poses a fundamental question about the government’s part in financing industrial research and development. The government has recently announced that supersonic commercial airliners are coming in the immediate future. Their production cost is well beyond the capacity of the private aviation companies. No conceivable acceleration in their growth will render these corporations able to meet the burden of producing the supersonic commercial airliner. Also, it is estimated that the world market will be able to sustain only one producer. Therefore, the first nation to create an effective supersonic airplane will achieve monopoly. It will achieve something more—the national prestige that goes with such an achievement. What is essential again is not growth alone, but bold governmental decision on a matter of resource allocation.

This example raises the point that government intervention may be essential to achieve economic growth itself, besides accomplishing a given project. How big should government’s role be in subsidizing industrial invention and innovation? These activities are at the heart of economic growth. There is evidence that the price-market economy is by no means sufficiently effective in seeing to it that we are devoting enough resources to “R and D” (as the knowing call research and development), to invention, to innovation. The fantastic success of government research and development in military technology is prompting economists to examine their potential in industrial areas as well.

The terrible gap between our actual economic productivity and our potential productivity is another reason why Washington economists contemplate a revolutionary research and development role for government. The gap in 1960 between actual and potential output was $30 to $35 billion, or 6 to 7 per cent of our total output. This amounts to two thirds of what we spend on national defense, almost twice what we spend on public education, and about one and a half times what we spent in 1960 on new homes.

The gap in mid-1961 between what we are producing and what we can produce is approaching $50 billion. A basic reason for this higher figure is that recoveries from recent slumps have been incomplete, never quite regaining previous peaks in employment and productivity. Steel and oil have been operating at hardly better than 50 per cent of capacity for a long period. This holds for several other major sectors of the economy. Small wonder that the President’s Council of Economic Advisers testified to Congress that “Even the world’s most prosperous nation cannot afford to waste resources on this scale.”

Our leading economists are, therefore, considering radically broader applications of research and development. Inventiveness, knowledge, and highly technical skills are the crucial contributors to growth. The newest stress is upon the primary value of investment in people versus machinery. Large-scale federal subsidy and direction will be necessary in re-educating, retraining, and relocating the victims of technological change, who range from unskilled farm laborers to skilled transport workers displaced by pipelines.

POLITICAL ACTION AND PUBLIC NEED

Paradoxically, at the height of its achievement in producing goods and services, the American price-market system is revealing alarming inadequacies, not only as a self-regenerating iorce for growth but as a rational allocator of our large but limited resources. Professional economists and political leaders and the educated public are becoming uncomfortably aware of this. The general public will remain ignorant and complacent for only a short time. In consequence, control of the economy is becoming a government concern, not because of subversion or ideological considerations but because the impersonal forces of technology and demography are requiring it.

The corporation, which is the work horse of the economy (four fifths of Americans work for corporations), increasingly will find its main endeavors directed by law instead of by the invisible hand of the competitive market. Now, so far as the corporation is concerned, intervention by law hitherto has been aimed strictly at keeping the market free, because the health of the free market has been judged primary to national well-being. Even today no one disputes the fact that the competitive price-market system founded on private property and the profit incentive remains our most effective instrument for distributing consumer goods and services.

But, because the market is failing to solve vital social needs, a completely new kind of intervention will occur. Corrective action will not mean simply a stepping up of the traditional kinds of government interference, such as trust busting, tariffs, and regulations. It will be something quite strange to Americans. There is one major precedent that illustrates this new kind of government role — the Full Employment Act of 1946. That act was the first instance where the national government stipulated by law that the goals of full employment and equitable income distribution were to be a federal legal concern and were not to be left up to the price-market system.

At that time, the end of World War II, all but a handful of economists predicted nationwide unemployment. This anticipated crisis stimulated passage of the law. But the crisis did not materialize, owing to the immense, underestimated backlog of demand created by the war. The thinking behind the act was not “radical” in the invidious sense of the term; namely, a socialistic demand that we scrap the American way and try something different. Rather, the philosophy was one of tacit acknowledgment of an essential role for the market system, supplementing it with political action in the interest of rational resource allocation and public need. The whole thrust of the growth debate is for extensive implementation of this principle.

A NATIONAL ECONOMIC BUDGET

The United States must develop a new kind of national economic budget, quite different from the federal budget as we have known it. The traditional budget has actually involved some limited planning and allocation of resources, but only on a short-term basis. In the future, the budget will have to embrace all our national resources viewed against national goals over a long term. Such a budget, goals oriented, would be more than a mere annual federal accounting. It would comprise an integrated, comprehensive, continuing plan for the entire nation. It would mean fiveor six-year projections of the use of our national resources and output in terms of employment, growth, foreign policy objectives, housing, roads, welfare, and other such goals.

One of the appeals of such a budget (apart from the inexorable logic of the forces making it a necessity) is that, enunciated by the President, it would act as a means for rallying public opinion, for articulating a meaningful program for the American economy beyond the sheer aggrandizement of material wealth. In its broadest aspects, it would amount to a working agreement on the priorities for the use of our total resources. In its narrowest aspects, it would amount to national programing of explicit policies.

RATIONING OUR RESOURCES

Such a budget is not going to be achieved overnight, but it will come within the decade. It must come, because long-range blueprints and decisions on use of resources are an essential ingredient of the future. Though perhaps not a matter for jubilation, it certainly should not be a matter for dismay. Walter Lippmann hinted at such a conception of the budget in his commentary on President Kennedy’s first budget. His remarks also indicated why even a tentative move in the direction of a goals-oriented budget will not be accomplished immediately. “It is a complicated thing,” he wrote, “to explain that the Federal budget is not only an accounting of revenues and expenditures. It is also a great fiscal engine which as a matter of national policy has to be managed in such a way as to promote a stabilized growth of the economy. It is a makeweight which has to be swung from deficit to surplus and from surplus to deficit to compensate for the ups and downs of the business cycle. There is nothing sinister or mysterious in this idea. But it is a new idea.” Lippmann went on to write that the notion of a budget covering a number of years, instead of just one year, will require that the President himself educate the people. For, “most of what he has promised to do, most of what for the long pull urgently needs to be done, depends on explaining this theoretical issue to the people.”

THE TEST OF OUR INVENTIVENESS

Resistance to the idea can be expected. It will be charged that bureaucratic planning and reduced profit incentive will stifle the market system; that the public will be the victim of a noncompetitive, flaccid economy, with Communiststyle suppression of cherished individual freedoms just around the corner. But this risk is justified by disagreeable facts: that we are operating drastically under our productive capabilities, slump or no slump, and have been for some time; that the imbalance between satisfying public needs and fulfilling private demands continues to worsen; and that the public already is victimized by noncompetitive, administered prices in industries making up a third to a half of our economy — basic industries like steel, electrical equipment, and autos — and by industry-wide union wages, combining to create a relentless wage-price rise that is the despair of economists.

There is an inherent possibility of a constitutional crisis. American political inventiveness, our justly famous instinct for freedom, is going to be put to the most difficult test it has had in a century. This is because any successful society must have a theory, a clear comprehension of principle, for what it is doing. Such an understanding is essential if a society intends to achieve great ends, and as the precondition for the kind of congressional action required. The Council of Economic Advisers serves as an example of the type of organization needed. This might well be made by law into a powerful agency for national planning.

The intense pressure for planning is building up from many directions. Presidential adviser Dean James Landis, for one, has suggested that the federal regulatory agencies, through better formulation and coordination of their policies, could be the key to revitalization of major sectors of the economy. But the most fundamental pressure of all is exerted by the fact that the United States now competes in a world of government-controlled economies. Meanwhile, our own economy remains substantially guided by disparate private corporate interests. The strategies of these corporations reflect their primary obligations to shareholders. No formal compunction exists to relate these obligations to the common interest. The American myth about the free, competitive system and its miraculously beneficent role runs counter to legal and political regulation of economic affairs.

Our hope must be that genuine public understanding of our true condition will do two things. It will act to eliminate the anxiety that comes from the unknown, and the resultant dangerous nonsense about subversion. It will thus release us to exercise to the full America’s unmatched talent for combining individual freedom with optimum collective performance. In this light, President Kennedy’s striking statement in his State of the Union Address, “Before my term has ended, we shall have to test anew whether a nation such as ours can endure. The outcome is by no means certain,” can be appreciated as more than rhetoric. Survival is, indeed, the issue.