engage, as you point out, in more deficit financing, or we would have to raise taxes considerably, would we not? Mr. GRAY. Well, we would have to Mr. SCHERER. Start to pay as you go is the only sound way to do it, isn't it? Mr. GRAY. As I suggested previously here, you might be able to shift unneeded funds from other areas into this particular area without any increase in the total expenditures, if there are unused funds available. Mr. SCHERER. I don't know where those are. John, were you finished? Mr. BALDWIN. Yes, go ahead. Mr. SCHERER. You said on page 4, sir: This piecemeal, hit and miss, fragmentary procedure has resulted in the relative deterioration of the public economy and in the accumulation of vast unmet needs, the satisfaction of which will require a very large investment program over the next generation. The very magnitude of this problem calls for planning and coordination, the establishment of priorities, and the prudent allocation of our limited capital resources. Then near the bottom of the page, that same page, you say there: Thus, for example, if the economy were able to generate $100 billion savings per year, we might elect to allocate $75 billion to private investment and $25 billion to public investment. Of the latter, or public portion, we might then elect to have the Federal Government, through its various agencies, invest $10 billion, State governments $5 billion, and local governments $10 billion. To do the job you say you think is needed to be done, how much do you say we should invest each year in these public works programs which have deteriorated to the extent you say they have? Mr. GRAY. Well, there have been a number of studies by different men who have undertaken to estimate what the accumulated needs of the country were, and what the developing needs over the next 25 years might call for. These estimates are very large. There is a considerable range, depending upon what is included in the total category of public investment, but every study that has been made indicates that there are very large unmet needs, and that these needs are growing very rapidly, due to the growth of industry and the growth of population. So I used those figures as an illustration of how it might be done. There have also been various estimates made of how much investment we need to put into the private sector of the economy. Mr. SCHERER. Do you have some rough idea of how many billions of dollars you think the Federal Government should spend each year to meet the problem which you discussed in your memorandum? Mr. GRAY. I think that 25 percent that I used would not be far wrong. Mr. SCHERER. What would that amount to in billions, for the record? Mr. GRAY. I assume there the economy was able to generate $100 billion of savings. That is looking into the future. We are not doing that now. But if the national income grows, as expected, we will very shortly be up to that figure, and the annual savings will be around $100 billion. Then it becomes a question as to how much of that will move to the private economy, and how much into the public sector. Mr. SCHERER. I don't want to push you too far, sir, but is there any way for this record you are making here that you could give us what, in your opinion, should be spent in dollars by the Federal Government to correct the condition which you point out exists in your memorandum? Approximately. Mr. GRAY. Well, I could give you the range of figures. Mr. SCHERER. Not exactly. Mr. GRAY. You find in the estimates that have been made by various people considering the Federal, State, and local governments together, it will run anywhere from $20 up to $40 billion. Mr. SCHERER. You are aware, of course, of the Federal Government's present financial situation, owing $290 billion, and running a deficit of perhaps $10 billion next year. In view of what you have just said about inflation, and what you have just said about deficit financing, do you see any way in which we could put that kind of money in the public works programs in the immediate future? Mr. GRAY. I think we are going to have to find some way to move more of our capital into the public sector in the next few years. I think the developing needs all over the country are going to require this. We are going to have to have some priorities, I think, on what comes first. It may that some things we are doing will have to be curtailed in order to do other things. I think we have not faced this problem yet. The States and local governments I am quite familiar with their operations and they are doing about all they can. Perhaps some of them are doing more than they can really finance handily, and some of them are in very bad shape financially. Mr. SCHERER. Not quite as bad as the Federal Government. Mr. SCHERER. Have you had an opportunity to read Senator Byrd's statement in the course of the debate recently in the Senate at the time that they were raising the debt limit? Mr. GRAY. I read some newspaper summaries of his statements. Mr. SCHERER. Thank you, sir. Mr. FALLON. Are there any other questions? Thank you very much, Professor Gray, for your very fine statement. Professor Hufschmidt? Would you give your name, and you may proceed, Professor. STATEMENT OF MAYNARD M. HUFSCHMIDT, DIRECTOR, HARVARD WATER PROGRAM, GRADUATE SCHOOL OF PUBLIC ADMINISTRATION, LITTAUER SCHOOL, HARVARD UNIVERSITY Mr. HUFSCHMIDT. I am Maynard M. Hufschmidt, director of the Harvard water program, their Graduate School of Public Administration, Harvard University. Mr. Chairman and members of the committee, first I want to express my appreciation for the opportunity to speak before you today. In view of the extensive testimony already presented, I can add little new evidence to support the need for Presidential standby authority to start or speed up public capital improvements. But these general points deserve restatement: (1) If fiscal and monetary policies are to have any significant counteracting effects on a slight or even a moderate economic downturn, corrective action must be taken promptly once existence of the downturn has been established. For, we know that a lag of several months may occur between the start of a recession and its identification by policymakers reading the economic indicators. When the need for corrective steps is recognized, the actions required may already be overdue. (2) Steps to counter the downswing must be big enough so that, when undertaken promptly, they have a major impact on the economy. (3) Acceleration of capital improvements takes its place, with tax reduction and the lowering of interest rates, as potentially effective antirecession measures that ought to be available for prompt application, singly or in combination, as required. (4) It follows that public works acceleration, to be an effective tool, must be applied promptly, and be of sizable scale. The standby authority sought by the President is essential to a prompt start. This is because substantial lags inevitably occur between the granting of authority to proced with public works and actual start of construction. Under existing conditions without such authority we run the danger, in short recession cycles, of obtaining major employment and income effects from public works only after we no longer need them. (5) The level of $2 billion of acceleration authority sought by the President appears to be none too large, when related to current annual expenditures of $7.3 billion for Federal and federally aided public works, $57 billion for total new construction-private and publicput in place in 1961, and the $542 billion annual rate for gross national product in the fourth quarter of 1961. I turn now to a special aspect of the use of public works for employment that was investigated by the Harvard research program with which I am associated. In dealing with questions of how to prepare optimal plans for large-scale, complex water resources developments, we had to decide what weight, if any, we should give to employment or unemployment in preparing the best plan. Should a project be designed differently where there is substantial unemployment than where full employment is the rule? The answer, presented in a book recently published by the Harvard University Press entitled "Design of Water-Resource Systems," depends, in part, on the kind of unemployment situation that is present. Two kinds are significant here: (1) Longrun, structural unemployment, such as now exists in many depressed areas throughout the country. (2) Shorter run, cyclical unemployment, national in scope, such as this country has experienced in the four relatively mild recessions of the past 14 years. We found that, in the case of longrun structural unemployment, projects should be planned so as to take the facts of unemployment into account. Because, in this case, the unemployment is likely to be present when the project is built, indefinite as this time may be, the real or social costs of the project in terms of labor diverted from other purposes are very likely to be less than the money costs. For some classes of labor, real costs may approach zero. When real costs are taken into account, this means that projects would be planned to larger scale under conditions of structural unemployment than under full employment conditions; indeed, some projects whose bene fits would be less than money costs would turn out to have benefits in excess of real costs. Of course, there may be more effective ways of handling the longrun unemployment of a depressed area than building water resources projects. These means must obviously be explored before one ought to conclude that a water resources project should be planned and built in this way. There is no substitute for overall, long-range plans for handling depressed area problems, and water projects, as indeed all public projects, ought to be tailored to fit such plans. In the case of short run, cyclical unemployment, however, projects should not be planned to take explicit account of unemployment. That is, the scale of projects should not be increased just because the economy is in a downswing at the time the project is being planned. For there is no assurance that unemployment will be present when the project is readied for construction. The better policy is to plan the project assuming full employment, and, if the need and opportunity arises, to schedule the start of the project or its rate of construction to alleviate cyclical unemployment. Most large-scale water resources projects require several years to build, and thus are not well qualified as new starts in an antirecession program. Such project construction once underway, however, can be accelerated to some degree to provide extra employment and, when there is no longer need for an employment boost, they can be decelerated. I understand that this committee has before it two separate but related proposals. One provides standby authority to accelerate public works to meet short-term cyclical unemployment problems. As I have indicated, cyclical unemployment should not be taken into account in designing water resources systems; but it may well call for accelerating the construction of systems already underway. The second proposal, requested by President Kennedy just 1 week ago, is the immediate start of a $600 million capital improvements program to give a boost to some 950 depressed or lagging areas. The structural unemployment in these areas should be taken into account in designing water resource systems and, indeed, other projects as well; in addition, their construction can be accelerated. Focusing again on the proposal for standby authority for accelerating public works, what results can be expected from the use of this authority? I deal first with the Federal capital improvements program. Given an effective period of 18 months to 2 years from the triggering of the program, to its termination, primary reliance must be given to acceleration of existing construction. Since expenditures on new work would build up very slowly, any heavy reliance on these would mean that a satisfactory expenditure rate would be reached only in the latter half of the period. Of course, this situation could be mitigated by stepping up advance planning on those Federal capital improvement programs most likely to be completed within a year after starting-projects on national forests, public lands, fish and game reserves, and the like. But all past experience indicates that, even under the best of conditions, expenditures in the short run on new starts for conventional Federal public works will be disappointingly low in relation to the desired goal. We should visualize an accelerated program for Federal public works, therefore, where expenditure increases in the early months flow largely from speedup of construction on projects already underway, while new starts make their greatest contribution only toward the end of the period. An important factor in achieving speedup of construction expenditures is the effective distribution of available funds among a large number of programs and projects. In the short run, the capacity for expansion of any given program or project is limited by the minimum time required for certain steps in the construction process-the time required for concrete to cure in a large dam, for example-and by the size and nature of program and project administration. Thus the more Federal programs involved, and the more individual projects involved in each program, the more effective the speedup. Non-Federal projects should offer even more opportunities for accelerating the expenditure rate than do Federal projects, because so many more individual programs and projects are involved, thus allowing greater possibilities for speedup. But, an important limitation here is the time involved in the processing of applications for grants for new construction starts. Here, as in the case of Federal projects, speedup of construction on projects already underway would seem to offer the best hope for early gains in expenditure rates. Emphasis should be given to this type of grant from the very start of the acceleration program. Of course, the success of any speedup program requires advance preparations, especially, advance planning of the individual projects. Existing Federal and non-Federal programs to this end should be strengthened. Acceleration of capital expenditures necessarily involves costs and in some instances these may be sizable. To the extent that speedup goes well beyond the most efficient rate of project construction, projects will cost significantly more than otherwise. Inefficiencies and higher costs may also arise in speedup of processing of project applications for Federal-aid projects. Such excess costs are directly chargeable to the unemployment alleviation program. Where no reimbursement of project costs is called for by the Federal Government, no special problem arises. For some Federal projects, however-irrigation, water supply and power projects, for examplesubstantial reimbursement is required. In these cases, excess costs caused by speedup should not be reimbursable as they are incurred for a national purpose of alleviating short-run cyclical unemployment. ADMINISTRATION OF THE PROGRAM Much of the acceleration program proposed by the President can be administered through existing agencies. For example, Federal agencies charged with direct construction can, and many do, prepare and keep up-to-date advance project plans and overall construction programs. These agencies would, of course, be in actual charge of acceleration of their programs. Federal agencies in charge of grants and loans to non-Federal entities can make advance preparations for possible speedup, aided, in some cases, by advance planning grants to local agencies from the Housing and Home Finance Agency. Again, detailed administration of the speedup program would be in the hands of those agencies handling loans and grants. |