STATEMENT OF REPRESENTATIVE JOHN A. BLATNIK ON THE GROWING PROBLEM OF UNEMPLOYMENT The most persistent and menacing domestic problem that has faced the Nation in the 1950's and early 1960's has been that of unemployment. To be sure we are far better off than we were in 1933, when one out of four members of the civilian labor force was unemployed. Nevertheless, the employment record of recent years has been a most unsatisfactory one. Only in 1 year since the end of World War II has unemployment fallen to less than 3 percent of the civilian labor force. During the 16-year period from 1946 through 1961 unemployment was between 3 and 4 percent in 5 of the years, between 4 and 5 percent in 3 of the years, between 5 and 6 percent in 5 of the years, and between 6 and 7 percent in 2 of the years and, as the years have gone by, the picture in a number of respects has become less and less favorable. For the 4-year period from 1958 through 1961, the annual average was 6.2 percent. These rates are also high in comparison with the rates prevailing in many foreign countries, members of the free world community which we are to lead and to which we must give a good example by keeping our own house in order. In 1960, for example, when unemployment was 5.6 percent in the United States, the corresponding estimates for the United Kingdom, Sweden, Norway, the Netherlands, and Germany varied from 1.2 to 1.7 percent, and in Japan the rate was a flat 1 percent. With each recurring recession in the postwar period, an ominous tendency has become noticeable. As a rule, each recession tends to start an unemployment trough that is higher than that of the preceding recession, while the peaks of unemployment are reaching gradually increasing heights. Thus, in the first two postwar business cycles unemployment had reached low points of less than 4 percent for 1948 and 1953, with peaks for 1949 and 1954 of less than 6 percent. During the last two postwar business cycles, on the other hand, the unemployment lows for 1956 and 1959 were above 4 percent and the peaks for 1958 and 1961 were well above 6 percent. Thus, taking 4 percent and 6 percent as reference points for trough and peak years, troughs and peaks of unemployment during the earlier two of the postwar business cycles were below these reference points. During the later two of the postwar business cycles the troughs and peaks were above these points. Another alarming feature of the postwar recessions has been the slow rate at which unemployment falls after having reached the recession peak. During the first two postwar cycles the unemployment rate declined by more than 1 percentage point during the 8 months following its peak. During the third cycle it declined by exactly 1 percentage point. During the fourth cycle it did not decline at all, standing at 6.8 percent at the unemployment peak in February 1961 and also at 6.8 percent 8 months later in October 1961. These were the original estimates of the Bureau of Labor Statistics. These observations indicate that recovery proceeds only very haltingly and that high rates of unemployment persist even during the recovery period of the business cycle, causing the next recession to set in at relatively high levels of unemployment. Recoveries do not become complete any more in the sense that unemployment falls to the minimum. Also, cycles tend to occur more frequently, and the span of time which separates one unemployment peak from the other becomes ever shorter. During the first postwar business cycle unemployment was at its height in 1949. The second peak occurred in 1954, the third in 1958, and the fourth in 1961, the distance in time between one peak year and the next falling always by 1 year. There are some additional factors that are apt to throw light on our unemployment situation. As a rule, output recovers both earlier and more completely than does employment after a recession. This would seem to indicate a conspicuous upward drift in the productivity of labor and industry. In terms of production, recessions thus are much more mild than in terms of employment, and unemployment rather than deficient production emerges as the central problem of the business cycle. Moreover, high as our unemployment rates are, it is doubtful whether they indicate the full severity of the problem. In many occupations the average workweek falls short of the standard of 40 hours. If part-time unemployment were converted into the equivalent amount of full-time unemployment, unemployment in January 1962, for example, would not have stood at 5.8 percent of the civilian labor force but at almost 7 percent since in addition to the unem ployed another 2.1 million workers were employed on a part-time basis and were seeking full-time work. It is relevant also that, contrary to expectations, our civilian labor force, that is, people on jobs or looking for jobs, has of late grown only very haltingly if at all. From 1960 to 1961 our civilian labor force increased by 1 million, and it was expected to increase by another million from 1961 to 1962. The callup into the Armed Forces would have reduced this figure to about 750,000. Actually, our total civilian labor force was over 100,000 less in January 1962 than it had been in January 1961. This seems to indicate that in many lines of activities substantial numbers of people are so unfavorably impressed by available job opportunities that they stay out of the labor market or depart from it. In the light of all these observations it is not surprising that the Joint Economic Committee, in its annual report of March 6, 1962, states that almost 8 percent of available civilian workers were without jobs in January 1962, compared with the more conventional estimate of 5.8 percent which includes neither part-time unemployment nor the deficiency in our labor force. As regards the duration of unemployment, the Bureau of Labor Statistics distinguishes between short-term unemployment of less than 5 weeks, long-term unemployment of 15 weeks and over, and very long-term unemployment of 27 weeks and over. If the unemployed are divided into three groups on the basis of these criteria, those in short-term unemployment have constituted by far the largest single group in each of the four postwar business cycles. Relative to this group, however, the numbers of those in long term and very long-term unemployment have steadily risen from one cycle to the next. The average duration of unemployment has increased, and the burden of unemployment is carried more heavily than before by those who are out of jobs for 15 weeks and over. The incidence of unemployment falls most heavily upon Negro workers, unskilled people, and young persons in general, that is, exactly upon those groups who are least able to afford to be out of a job. As the ordinary earning power of the first two groups is limited, and as the members of the third group may have held a job only for a short period of time, their financial reserves usually are woefully inadequate. They are bound to be still less adequate for those young persons who recently have founded families. THE COST OF UNEMPLOYMENT Nobody can measure the cost of unemployment in terms of human misery and frustration. Measurements of the economic losses of unemployment have forever been attempted. The Conference for Economic Progress, for example, cumulates a loss in employment opportunities amounting to 18.5 million manyears for the period from 1953 to 1960. If these man-years had been worked, a cumulative loss in production estimated at $262 billion would have been avoided. This is the rough equivalent of the value of a half year's total production. For a single year, that of 1961, the Council of Economic Advisers has estimated a gap of $40 billion between actual gross national product and the output obtainable at full employment. The sources of this potential gain are indicated as follows: Lower unemployment_ Larger labor force in response to greater demand_. Longer hours of work per man associated with higher utilization__. Billion $15 4 5 16 It may not be irrelevant that the rise of unemployment is paralleled by that of business failures. Since 1946 the rate of business failures has declined during only 3 years. The average annual rate of such failures per 10,000 listed concerns, as published by Dun & Bradstreet, has risen from 21 in 1946-50 to 35 in 1951-55 and to 53 in 1956-60. The rate reported for 1961 was 64.4. To find a rate that high in the past, one would have to go back to the 1930's. When business firms fail, people lose their jobs. Because people lose their jobs, other businesses may fail. Although the unemployed will continue to incur expenditures on consumer goods, these will necessarily fall short of the consumption expenditures made by employed people. As the payments which they receive in the form of unemployment compensation benefits, surplementary unemployment compensation benefits, and relief constitute only a fraction of wage payments, the unemployed people's lack of purchasing power will soon make itself felt throughout a community in which a leading business concern is in difficulty. The effects of unemployment are first felt in the local com munity. Taxes fail to be paid, bills are run up with the local merchants, and the payments on the car and the home are not met. More people lose their jobs. Some move away and some stay on in the hope of better times, leading a precarious existence in a decaying community. But the economic losses from unemployment and their cost in human terms are not the only costs to be reckoned. A complete account must include the adverse effects which protracted mass unemployment has on the structure of our society and on our institutions. From such data as are on hand it seems that the diffusion of income which made so much headway during the 1940's has come to a halt at the end of that decade. Since that time the income structure of the United States has shown little change. As the incidence of unemployment is borne, in the first line, by low income groups, and as this incidence has been rising, the conclusion seems warranted that the rising tide of unemployment has been an important factor responsible for the rigidity of our income structure. In a related fashion, plentiful job opportunities are an indispensable condition for the type of social and economic mobility in which this great country traditionally has prided itself. Where opportunities for advancement are plentiful, the dividing line between classes is a fluid one. Class barriers form no hurdle that individual initiative and effort cannot overcome. There is no rigid stratification of society such as prevailed in the old world, from which our ancestors tried to escape. To maintain our people's capitalism with its upward mobility, which has become the envy of the world, we must maintain plentiful job opportunities. THE ACCELERATED PUBLIC WORKS PROGRAM 1. A public works program creates employment directly and immediately Of all the devices in the arsenal of public policy designed to cope with unemployment, a public works program is the only one that directly and immediately opens up employment opportunities. Under a program of tax relief, jobs are created only in response to the additional spending of the taxpayer who is left with a larger disposable income. Similarly, payments under unemployment compensation, supplementary unemployment benefits, and relief do not directly create jobs but do so only in response to the spending of these amounts by the unemployed. Moreover, the receipts under the latter type of programs constitute only a fraction of what a worker would receive in the form of wage payments if he were employed. The expansionary effects of the expenditure incurred on the basis of these receipts thus must necessarily fall short of the expansionary effects of standard wage payments such as are made under a public works program. It goes without saying that psychological and social reasons, in addition to the economic effects, place a premium on a public works program. Such a program draws workers into gainful employment and frees them from the need to rely on unemployment compensation and relief. It maintains their self-respect, pride of work, and status in a society that continues to assign to them useful functions. Payments under such a program are for work done, not for being unemployed. 2. A public works program is the most economical road to full employment A public works program is not only the direct way to full employment. It is also the most economical one. More jobs are created per dollar of additional public expenditure for goods and services than are created per dollar of tax reduction. To express this thought in another way: if it is desired to put a given number of unemployed people back to work, this can be accomplished with outlay for public works that is lower than the amount required to put the same number of people back to work under a program of tax relief. This seems to be the considered opinion of professional students of public finance. I find no fault with a countercyclical policy of variation of public revenue such as it now under consideration, but I believe that an effective countercyclical attack requires systematic variations both of public revenues and of public expenditures. One measure will supplement the other, and both will lead the way to full employment. But from the point of view of fiscal propriety and the need for public investment in capital improvements, which must not be overlooked, a premium should be placed on a public works program. It puts a lower burden on the Federal budget, and results in continuing benefits by helping to meet the backlog of requirements for public facilities. 83015-62-2 3. Expenditures for public works are the only type of public expenditure that can be varied countercyclically If a public works program is so potent and economical an instrument to create employment, the question may be raised why reliance should not be placed on countercyclical variations of other types of public expenditure. The proposed program, after all, is dwarfed by a Federal outlay of which the public works program constitutes only a small fraction. If an increase in public expenditures has such powerful expansionary effects, why not rely on variations of some of the really large expenditure items in the Federal budget? Why create a new and rather small expenditure item, when the budget already abounds with large ones? The truth of the matter, however, is that none of these large public expenditure items can be varied in amount in response to economic fluctuations. Expenditures for defense, foreign aid, and general governmental operations cannot be turned on and turned off, reflecting the employment situation. The cold war does not abate when there is full employment, nor does it grow hotter when unemployment threatens. The need for foreign aid does not vary inversely with our domestic employment situation. Veterans and farmers claim their payments regardless of whether there is full employment or unemployment. The only item of budgetary expenditure that can be varied countercyclically, and that by its very nature calls for such a variation, is a public works program. 4. The guarantee of public works helps to maintain favorable longrun expectations The business-cycle history of our country is shot through with examples of minor recessions. The investigation of the factors which caused them to remain mild and not to degenerate into a fullfledged depression has been a matter to which some of the best minds among the students of business cycles have devoted a lifetime of study. They have invariably reached the conclusion that the strategic variables in our economy, that is, those with the most pronounced cyclical amplitude, are the products of industry, the capital goods, and the durable goods, concepts which in some respects overlap. Unlike agricultural products and nondurables, what all these goods have in common is that as a rule their purchase is discretionary and postponable. We cannot postpone today's meal, but whether we buy a new car this year or the next usually is a matter within our discretion. So, as a rule, is the replacement of capital goods by business firms, or the purchase of additional machinery and equipment. If. then, the behavior of the strategic variables in our economy is so largely the result of discretionary judgments on the part of consumers and business managers, there are cogent reasons for the belief that their judgments will reflect the prevailing state of confidence in the prospects of business. What apparently has counted heavily in preventing many a past recession from degenerating into a depression was the maintenance of favorable longrun expectations. Even though things might have looked pretty bad at times, more often than not there was an optimistic view of the longrun prospects of business, and this optimistic view was duly reflected in an early upturn. It seems to me then that the maintenance of favorable long-term expectations among consumers and business managers is an important task of business cycle policy. It may well be that the postwar recessions have remained relatively mild because the public was aware of the commitment Congress undertook when passing the Employment Act. The American people know that their elected representatives will not permit a recurrence of the disaster which overtook them in 1929. Their confidence can only be strengthened, and their longrun expectations favorably affected, if Congress passes legislation which implement the Employment Act by in effect guaranteeing jobs in public works that will be made available timely and speedily in the case of need. 5. A public works program facilitates stabilization policies of State and local governments Countercyclical policies to combat depression and unemployment have largely been a prerogative of the Federal Government. One reason for this is the Federal tax structure with its emphasis on progressive taxes. These, as is well known, tend to fall more rapidly than income and employment during a recession, and they rise more rapidly than income and employment during periods of prosperity. They thus constitute an important element of built-in flexibility. In the tax systems of the States and local governments, property and sales taxes preponderate. They fall only haltingly during a recession, and their increase in prosperity is a moderate one. Hence, the revenue system of the State and local governments contributes little in warding off a recession, or for that matter, in restraining the forces of inflation. On account of the financial structure of the State and local governments, severe limits also are placed on the possibilities of debt financing. The expenditure items in their budgets are for essential governmental functions which cannot be varied in line with the fluctuations of the business cycle. For all these reasons State and local government finance has at times been characterized as cyclically perverse in the sense that it underlines cyclical fluctuations of income and employment, making the fluctuations more pronounced instead of restraining them. A Federal public works program will go a long way in relieving this situation. It is designed as a grassroots program in the sense that it aims at the cooperation and partnership with the State and local governments. These are visualized as the important sources of public works projects. By stimulating the timely construction of such projects with Federal aid, the inadequacy of the fiscal behavior of the State and local governments can be repaired, thus enabling them to participate vigorously in the overall stabilization program. 6. A public works program helps to stabilize a most unstable element in the economy. A public works program will go a long way to bring a measure of stability also to an industry that always has been conspicuous for its instability. This is the construction industry. During a recession only a few industries have an unemployment rate as high as that plaguing the construction workers. To be sure, the volume of construction is buttressed by the FHA program of mortgage insurance and the VA program of mortgage guarantee. But these programs, far from operating countercyclically, may actually underline the fluctuations in construction activity. Since the construction industry and its workers are the immediate beneficiaries of a public works program, it cannot be denied that the direct benefits of such a program will accrue in the first line to those that need them most. A public works program is, first of all, a public construction program. But the stimulation of construction activity does not come to an end with the completion of the public works project. There are additional secondary effects in other lines of construction, public and private as well. It is a well-established fact that for each dollar's worth of private residential construction another 50 cents is disbursed for other construction, private and public, to provide residential services such as schools, stores, and utilities. With some modifications, such a relationship holds true also in the reverse. As a new airport, dam, or recreational facility is constructed, there is bound to arise a secondary demand for housing on the part of those who service the new facilities. 7. The secondary benefits of the public works program will be diffused throughout the economy at large The construction industry is, of course, not the only segment of our economy that needs stimulation and expansion during a recession, and the benefits that flow from a public works program will indeed not be limited to it. As employment in the construction industry increases, secondary and tertiary beneficial effects will be felt in other parts of the economy. Such benefits will eventually be diffused throughout the entire economy, and employment be stimulated everywhere. That these secondary and tertiary effects will be powerful and pervasive is guaranteed by the fact that the construction industry is a key industry. A dollar spent on new construction stimulates not only new consumer spending but also the demand for countless numbers of basic raw materials and manufactured products. Attempts to measure the secondary effects are few and far between, and they will vary by type of project. Some indication of the magnitude involved will be given by the following estimates of the Bureau of Labor |