costs over the next several years. We see, therefore, even without significant disarmament, the prospect of at least a relative decline in that part of total economic demand which stems from defense requirements. As a consequence, we must get ready now to make the economic adjustments which will insure the adequacy of total demand as well as the smoothest possible transfer of human and physical resources no longer needed in the defense effort.

In approaching the matter of economic adjustments to changes in the levels or directions of defense purchases of goods or services, it would be unfortunate either to exaggerate or to minimize the difficulties involved. The problems should not assume such proportions for us that we forget the intrinsic economic desirability of shifting our resources from military to civilian utilization. But we should not let recognition of this intrinsic economic desirability lull us into false security as to the need for positive action to ease the necessary adjustments to changes in defense demand.

According to figures supplied by the Department of Labor, spending for national security purposes provides, directly or indirectly, just under 10 percent of American employment. In addition to the 2.8 million men and women in the armed services in 1962, there were approximately 1 million civilians employed by the Federal Government in defense-related agencies, primarily the Department of Defense. It is estimated that in 1962 about 2.9 million persons-about 5 percent of total nonagricultural employment-were engaged directly or indi rectly in providing defense goods and services.

These 6,700,000 people, and their potential for our economic and social wellbeing and progress, will necessarily be a prime object of interest for policymak ers at all levels in our society in the event it becomes possible because of disarmament agreements or for other reasons to reduce the defense requirement on the economy.

In a study which we prepared for the United Nations, and which was published last year under the title, "The Economic and Social Consequences of Disarmament," we set out the nature of the problem to be faced and solved in this connection.

It is clear that there is no single right solution available, and that the proper mix of policies of programs will vary depending on the timing, phasing, scope, and content of the decline in defense demand which would be encountered in any particular case. A relatively minor reduction in defense demand, spread over the whole spectrum of the defense program, and occurring in a period of rising economic activity generally, obviously will call for a response different from that required for a rapid and massive reduction in procurement of weapons coinciding with a period of general economic stagnation or decline. And there are, of course, numerous other possible contingencies, for no two of which would the same set of solutions or responses be appropriate.

The maintenance of adequate total demand is a major consideration in any circumstance, because declining demand involves loss of employment, loss of economic momentum and a smaller national product out of which to meet the needs of our people. It is also clear that a healthy national economy with growing aggregate demand is a sine qua non of satisfactory local and regional solutions to defense spending shifts.

There are various ways by which the Federal Government can influence a proper balance between demand and productive resources in a time of declining defense demand. The level and structure of taxes could be modified, civilian public programs could be expanded at both the Federal level and by way of increased Federal grants to States and other non-Federal public authorities, Federal loan programs could be enlarged, and transfer payments could be expanded in such categories as social security, personnel separation, and so forth. Monetary policy could be relaxed, assuming no limitation on such action from the balance-of-payments side. Some of these devices were used after World War II with success. The future decisions as to what devices to use should be influenced both by what is required for the maintenance of a sound economy and by what we as a people want individually and collectively from and for our society.

The executive branch of the Federal Government will in any given circumstance of a declining defense demand, have the duty to make recommendations concerning substitute demands. Congressional action will be needed, for example, as to what taxes should be cut and by how much, and what civilian programs and expenditures should be expanded.

In this connection it is worth noting that to the extent that declinnig defense demand would also be reflected in reduced defense expenditures overseas, our balance-of-payments problem would be eased and the constraints otherwise imposed by the balance of payments on desirable monetary policy could be relaxed. This brings me to the problem that we face, not only in the event of declining defense demand, but constantly, with every change in the pattern of total demand, defense, and otherwise. I refer to the problem of facilitating the shift of resources to new uses and of maintaining the economic viability of particular localities or regions. Like most other economic problems, it owes its special importance to its being, in the final analysis, a human problem.

It is made up of diverse factors like homeownership and levels of skill of individuals and entire segments of a particular labor force, the skill and farsightedness of business management and of community leadership and the available educational and cultural opportunities. There are also physical factors affecting plant location, product research and planning, financing possibilities, and so forth. Mr. Gilpatric and Mr. Bradford have already told you something of the efforts which the Department of Defense is making to solve the structural problems that arise when there is a significant shift in the pattern of defense demand. We believe that these efforts will yield valuable experience in dealing with these situations. The broader program, both public and private, of vocational training and retraining generally, and of area economic development, will also teach us much. These are problems which affect many interests and in which many must play a role-the Federal Government, State and local governments, labor unions, management, educational institutions, and others.

To enable Government and industry to cope with changes in defense spending there has long been a need for adequate data, information, and analysis. The broad purpose is to develop the capability for useful projections of impact of actual or assumed changes in defense demand, in a variety of contingencies. Once this capability has been developed, programs can be prepared for all types of situations, on the aggregate national level and down to the level of specific plants and communities.

What we need to establish is what may be called an early warning system to provide early warning, not of attack but of opportunity, opportunity to use our resources in more productive, socially useful ways than arms manufacture. Although, as Mr. Gilpatric has said, the leveling off of defense spending "could bring certain problems, they are the kind of national problems that should be welcome." As a major first step toward obtaining a reasonably adequate information base on the local, regional, and industrial impact of defense procurement, ACDA recently joined with the Department of Defense in a project involving the use of the Bureau of the Census and two important private research agencies. I be lieve both Mr. Gilpatric and Mr. Hitch have told you something of this joint project.

We also plan in this fiscal year to commission a study of what would be the economic impact of declining defense demand in the electronics industry. In the context of our responsibility this appears to us to be a particularly interesting industry. It has its feet in both the military and civilian markets, has made tremendous strides in technology, and is composed of a great variety of establishments. We are anxious to get insight into such questions as the quantitative and qualitative aspects of the military and civilian production in this industry, its manpower implications, and the practical possibilities and potential for shifts to civilian production.

We also hope to contract in this fiscal year for a study or studies of the problems which would be encountered in dealing with declining defense demand in a regional context. The project will analyze the shortrun and longrun income and employment problems which a community, metropolitan area, State, or region significantly dependent upon receipts from defense expenditures can be expected to face in the event of a decline either in the total national level of defense expenditures or in defense expenditures in the applicable geographical subdivision. We will also examine the problems of intergovernmental (Federal, State, and local) cooperation in developing useful programs of action to mitigate and overcome the effects of local loss of income from defense activity, as well as the problems of cooperation between the public and private sectors. Obviously, such a research effort is essential, bearing in mind the heavy regional concentration of defense employment.

We expect to undertake other studies in due course, and we also recognize that our effort is but a part of the total effort of the Federal Government and

of other institutions and persons to examine the workings of our ever-changing economy and of the various factors that bear on it.

One is sometimes shocked to encounter in our country a negative kind of faith that there is no effective substitute for defense as an employer of men and facilities. The feeling seems to be that if we were to shut down the defense sector of the economy, the resources now devoted to defense would very likely be idle or substantially underemployed. In the face of the very large spectrum of unmet civilian needs which we have in this country, that is of course a complete fallacy-unless we assume that we have no desire, given the opportunity, to take care of the unmet needs of our society. There is no peculiar magic in military demand as an employer of resources which civilian demand would not have, and quite possibly in considerably greater measure.

It is important to remember that the question before the country in the event of disarmament is not whether we can use our resources for something else. The basic decision is, "How much can we afford to do as a people, and where among several competing end uses shall we place our limited resources?" as Dr. Wiesner recently pointed out in his statement to the Subcommittee on Science, Research, and Development of the House Committee on Science and Astronautics.

The contention has been made that our private wants are so well provided for nowadays that little additional demand can be looked for in that sector and that this would make economic adjustment to declining defense demand today much more difficult than after World War II.

Here is the answer of the business community, as given by the Morgan Guaranty Trust Co. of New York:

1

"For a long time it was a standard Communist deprecation of capitalist economies to allege that they needed the fuel of armaments activity to keep going. That theme has changed. The Russian Government, replying in 1961 to questions of a United Nations group studying disarmament, asserted-not surprisingly-that changing over from military to nonmilitary production would present no economic problems for socialist countries. Then, in a remarkable revision of party dogma, it added: 'nor are there any insurmountable economic obstacles to disarmament for the capitalist countries, including the United States.'

"What a pity it would be if faint-faithed capitalists were to pick up a tired old line that the Communists appear to have dropped!"

The similar view of labor was expressed by Walter P. Reuther in his report earlier this month to the Industrial Union Department, AFL-CIO. He said: "While America cannot drop her guard, neither can she ignore the challenge of a peace race with the Soviet Union. Industrial labor would gladly welcome such a race. It is our firm belief that the free world can show by example that it can meet and surmount the problems of abundance inherent in a world unburdened by massive armaments."

There is nothing in our economic history in the past decade to suggest a declining consumer propensity to spend, despite rising income. More important, we have growing needs in sectors which cannot be met out of consumer goods production, because they pertain to a large extent to the present and future quality of our society. The translation of these needs into effective demands illustrates the maxim that sound social policy makes good economic sense.

What is sound social policy-and especially what the priorities should be as between different goals-is a matter for national decision. It is not for ACDA to decide, but the Agency has an obligation, I think, to identify the choices available to the American people-to the Congress, State legislatures, and community, industrial and labor leaders.

Opportunities to meet the country's unmet needs are many. Things which occur to one at once are improved educational facilities, more and better housing, slum clearance and urban renewal, better and more widespread medical care, improved urban rapid transit and other transportation, air and water pollution control, conservation and development of natural resources, and public support of more research for the improvement of the lives of our people, for instance in the medical field.

For example, by 1970, educational expenditures will need to be 75 percent larger than they are today (an increase of $20 billion) at today's prices and

1 Morgan Guaranty Survey, August 1963.

wage levels, merely to provide the same level of education to a growing population. As Edward F. Denison has stated in his study "The Sources of Economic Growth in the United States":

"Increased education is not only one of the largest sources of past and prospective economic growth. It also is among the elements most subject to conscious social decision."

In this connection, the average salary of a public elementary or secondary school teacher is approximately 25 percent less than the average family personal income in the United States. It would take about $2.4 billion even to bring the salary level of teachers up to average standards.

This condition, which is even worse in particular regions, naturally tends to prejudice the quality and content of our educational program, because other occupations will tend to attract the best qualified personnel away from teaching. As another example of unmet public needs, in 1959-60 the United States devoted 5.4 percent of GNP, or $26.5 billion, to public health, personal health services, construction of medical facilities, and medical research. But significant groups in the population, particularly among the aged, in rural areas, and in low-income groups generally, receive less than adequate medical care and would use additional medical services were they able to obtain them. There are also significant regional differences in the adequacy of medical services.

Without going into detail about other social needs which might be satisfied through resources now preempted by defense programs, I cannot leave the subject without reference to one matter which the country has before it. I mean the continued poverty of too many of our people.

In 1962, 16 percent of our families had annual incomes of less than $2,500 and 29 percent of persons living alone had incomes of less than $1,000. To give every family at least $2,500 per year and every person living alone at least $1,000 per year would have cost about $10 billion in 1960, as Ida C. Merriam has pointed out in a recent Social Security Bulletin. She also noted that a significant proportion of the poorest stratum of our population is not, and should not be, in the labor force; about one-fourth are aged 65 and over. For most of this group the adequacy of social security benefits largely determines the level at which they live. There are very real and pressing consumer needs in this sector of the economy, and an increase of income in this group could be expected to have a relatively larger consumption multiplier effect than increases in other incomes. I have set out a few of the possible uses to which we might allocate the human and physical resources now devoted to defense-if and when we have the opportunity for making such a shift. As Secretary Rusk has pointed out in discussing our stake in disarmament, we have unfinished business in this country, and there is good reason to remember this fact as we examine the question of manpower and employment in the defense sector.

The completion of this unfinished business should go hand in hand with action to help the expansion of demand and strength in the private sector of our economy. For the latter purpose, we should in the right proportions use such tools as appropriate tax reductions, incentives to sound conversion and expansion, assistance with manpower retraining, loans, accelerated amortization and the other methods that have been or will be found to further initiative and free enterprise and private demand.

In conclusion, I should like to emphasize two points:

First, not enough has been done to date, either by Government at the various levels or by the business world, to meet the problem of conversion from defense spending. A greater sense of urgency is needed. We can be confident we can do what is necessary as a country, but only if we do it in good time. Now we have the time, since it seems reasonably certain that substantial measures of disarmament will, if they can be prudently and successfully negotiated, involve a gradual process of reductions phased over a period of years. But we must get ready.

Second, we believe that effective arms control and disarmament will make it possible for the United States to move out of the valley of the shadow of death to the higher ground where all our people can be better off.

PREPARED STATEMENT BY BETTY GOETZ LALL

NATIONAL PROSPECTS FOR UTILIZATION OF DEFENSE INDUSTRY MANPOWER
AND RESOURCES

Mr. Chairman, I want to thank the subcommittee for inviting me to appear before it to discuss the utilization of manpower and resources resulting from possible reductions in defense spending. I appear as a private citizen, being connected for the year 1963-64 with the Center for International Studies at Cornell University where I have a grant to do research on certain aspects of disarmament and arms control.

To the extent I have any competence to discuss the subject matter of these hearings it is my recent prior connections with the U.S. Arms Control and Disarmament Agency and the Senate Foreign Relations Subcommittee on Disarmament. In the latter connection, particularly, considerable study was made of some of the economic aspects of arms control agreements.

BENEFITS OF HEARINGS

The Subcommittee on Manpower of the Senate Labor Committee is performing an important service by holding these hearings at this time. First, the hearings should stimulate the many agencies in the executive branch to coordinate their interests and views on the question of the Government's role in assisting defense industries to shift from activities devoted solely or substantially to defense to activities devoted to peaceful pursuits. The executive branch has not yet started to work seriously and substantially in this area and at least immediately prior to these hearings one could not determine whether there was any unified policy on how to deal with problems that might arise.

A second result of the hearings might be to focus attention to the subject of interested segments of the public. Many parts of labor and industry would be affected by reductions in defense expenditures. In addition there are many communities in which large defense plants are located, or small communities in which even a reduction or cancellation of a small defense operation would have a decided impact. Most of these groups have been given no information from any source, Government or private, as to what would be some likely results of defense reductions due to disarmament agreements or shifts in defense planning and strategy.

Thirdly, these hearings will develop data which the legislative branch, through this subcommittee, can use to deal with problems in this area. Until now no part of the Congress has publicly expressed any conclusions about what should be done, if anything, if defense spending could be reduced substantially.

SUPPORT FOR S. 2298: HART-HUMPHREY BILL

Fourthly, these hearings undoubtedly will point to the need for certain kinds of action on the part of the Congress. One type of legislation that would be welcome is already before this subcommittee. This is the bill S. 2298, introduced by Senators Hart and Humphrey, to establish a Commission on the Application of Technology to Community and Manpower Needs. One of the key responsibilities of such a Commission would be to join technological skills and processes developed by industry, through defense and other governmentally sponsored research, with unmet community needs. Another of the main tasks of the proposed Commission would be to help clarify the role of the Federal Government in maintaining a high level of employment and economic growth during a transition period from high to lower defense spending.

Many people pretend today that the question of any adjustment to reduced defense spending would be no different than the situation after World War II, when there was no economic slump after the war, but on the contrary, industry prospered and the economy continued at a high level for a few years. But the aftermath of World War II saw a great pent up demand for consumer goods which were unavailable during the war. This demand was joined by a situa