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STATEMENT OF LEON H. KEYSERLING, FORMER CHAIRMAN,
COUNCIL OF ECONOMIC ADVISERS; CONSULTING ECONOMIST AND ATTORNEY; PRESIDENT, CONFERENCE ON ECONOMIC PROGRESS
Mr. KEYSERLING. Mr. Chairman and members of the committee, in order to conserve your valuable time
Mr. BLATNIK. May I say at the outset, Mr. Keyserling we appreciate your appearance before the committee. We look forward, as always, to a very challenging, stimulating presentation. Mr. Keyserling is well known to those of us who have been here for some time as the Chairman of the Council of Economic Advisers under President Truman's administration. For years he has been active with organizations and economic groups of all kinds.
We look with special interest on your presentation this morning.
Mr. KEYSERLING. I hope, Mr. Chairman and members of the committee, that the fact that these charts were placed upside down is not an augury of what you are going to hear. As I was about to say, I have a substantial prepared statement, and I have a number of charts. I would prefer, if it is agreeable to you, to insert the statement in the record, to have permission to include copies of the charts therewith, and to make an abbreviated oral statement referring to some but not all of the large blown-up charts as an aid thereto. I think that would be more rapid and more to the point. If that procedure is agreeable, Mr. Chairman
Mr. BLATNIK. It is agreeable. The statement will appear in the record at this point in its entirety.
(The statement follows:)
TESTIMONY OF LEON H. KEYSERLING? Mr. Chairman and members of the committee, I greatly appreciate this opportunity to appear before you, as you consider matters of tremendous importance to the well-being of the American economy and every one of our more than 180 million people. I say this advisedly, because the significance of the measures now before you reach far beyond those who would be affected immediately by their operation. I appear on behalf of the National Housing Conference; the views expressed herein are my own responsibility.
I intend to discuss the President's proposal for an immediate $600 million public works program to reduce unemployment in specified areas; the President's proposal embodied in the standby capital improvements bill (H.R. 10318); and the separate proposal embodied in the public works coordination and acceleration bill (H.R. 10113).
Let me say at the outset that all three of these proposals represent a most heartening acceleration of public concern about unemployment in particular, and about the entire economic situation in general. I applaud especially the action by the President with respect to the immediate $600 million proposal. It represents great courage and realism in the face of the President's expressed dedication to the objective of a balanced Federal budget in fiscal 1963, even though I do not share this objective in view of current and foreseeable economic conditions. I want to add a special word of praise for my friend, Dr. Walter Heller, Chairman of the Council of Economic Advisers, who has been and still is in the forefront of those urging more vigorous economic attacks upon unemployment and related evils. And I want to commend those members of this committee, including my friend, Congressman Blatnik, and others in the Congress, who have worked so hard and so well to bring to the forefront measures like those now under consideration.
1 Former chairman, Council of Economic Advisers. Consulting economist and attorney ; president, Conference on Economic Progress.
BASIC ATTITUDE TOWARD THE THREE PROPOSALS NOW BEFORE THE COMMITTEE
Lest what I shall say subsequently be misunderstood in any quarter, I most earnestly urge this committee to act favorably and immediately upon the $600 million proposal, and upon some combination of H.R. 10113 and H.R. 10318, unless the committee should agree with me that much more should be done at this time, and some things perhaps done differently. We should be guided by the old French proverb, warning us against throwing to the dogs all that is not fit for the gods. In view of the urgency of the current economic situation, we should not strain for perfection if what is now before the committee is the best that can be obtained now.
Having made this much clear, I hope beyond possibility of question, I would like to concentrate upon my reasons for believing that the measures now before you, singly or in combination, are woefully short of our palpable and immediate needs as a nation and a people, and equally short of our abundant resources to meet these needs. They reflect, I respectfully submit, an undue complacency which has become prevalent. They reflect to a considerable degree, I respectfully submit, an inadequate appraisal of the true nature of our economic difficulties and how best to surmount them. They reflect, I respectfully submit, too much emergency improvization and not enough long-range planning; too much reliance on Maginot line economics, and not enough adherance to an affirmative and aggressive national policy of sustained maximum employment and production and high economic growth under the Employment Act of 1946.
If there are some who might prefer to construe these, I hope, temperate criticisms as merely tactical arguments in reinforcement of the enactment of the proposals now before this committee, I am glad to furnish some ammunition toward winning a small battle, which indeed is preferable to failing to recognize that a fight against unemployment and other economic evils is still needed. But if there are others who may be propelled by what I say, and by their own objective thinking, to move ahead faster and more comprehensively than the current measures propose, so much the better in my view.
OUR RECENT ECONOMIC HISTORY AS IT BEARS UPON CURRENT PROBLEMS To bring before this committee the reasons underlying the general comments which I have thus far made, I would like to offer for your examination now, and for incorporation in the permanent record of these hearings, some charts which depict the results of my studies concerning the real nature of our economic difficulties in the past, and the truly herculean efforts which we must make to overcome these difficulties in the months and years ahead.
The first chart shows that, during the 9 years since the ending of the Korean war in early 1953 removed the galvanizing effects of wartime, our average annual economic growth rate has been only 2.5 percent. This has been about 30 percent below the 40-year historic average, excluding depression and wartime eras. It contrasts vividly with an average annual growth rate between 4462 and 5 percent, which we have actually averaged within the past four decades during those years when our productive resources were in reasonably full use, including the peacetime years 1922–29, and the mixed period of peace and limited war 1947–53 which, in an economic sense, is comparable to the defenseoriented economy of today. This 212-percent average annual growth rate since early 1953 is only about half of what now seems to be necessary, in view of the new technology and automation, to make reasonably full use of our growing productive resources.
The second chart shows how the 212-percent economic growth rate, 1953–61, has been compounded of a fairly regular pattern of short-lived booms, periods of stagnation, and recessions.
The third chart, taking account both of full-time unemployment as contained in the official figures, and of the full-time equivalent of part-time unemploy. ment, shows how the trough of each recession has tended to leave us with more unemployment than the trough of each previous recession, and how the peak of each short-lived boom when reached has tended to leave us with more unemplos. ment than the peak of each previous boom. This unusual phenomenon, to which most economists and other analysts now attest, is one which I began forecasting when many were taking comfort in the so-called recovery from the 1953-54 recession. I have called this unusual phenomenon a long-term chronic retreat from maximum employment and production.
The fourth chart is designed to dispel the widely held notion that the massive unemployment problem which we have been accumulating is due mainly to socalled structural or highly special factors. Naturally, when there are not enough jobs to go around, the most vulnerable are hit first, whether they be vulnerable because of where they live or because of personal disadvantages under which they suffer in competition with other claimants for scarce jobs. Nonetheless, the chart shows heavy unemployment so widely distributed over the whole economy as to be in the main a general problem, or what the economists call an aggregate problem, due to the deficient performance of the economy as a whole. The massive unemployment problem is neither "hard core" nor "structural" nor "special.” It is nationwide, and it will yield only to massive nationwide attack.
The fifth and sixth charts, which extend only from 1947 to 1960, but which are nonetheless highly significant, indicate the extremely wide if not universal distribution of the trend toward a slowdown in the rate of employment growth and toward acceleration of the rate of unemployment growth.
The seventh chart carries from 1954 through 1961 the story of the growing volume of idle plant and machines, which correlates fairly well with the rising tide of unemployed manpower.
TRUE SIGNIFICANCE OF THE NEW TECHNOLOGY AND AUTOMATION
Essentially, as we all know, all of this has been happening because the actual growth in the labor force, in productivity, in technology, and in automation have far exceeded the actual expansion of total national production which equates with total national demand. This is true, even though the actual growth in both the labor force and in other elements in the productive process have averaged much lower than they would have been if not repressed by the inefficiencies resulting from excessive idleness of manpower and plant.
The eighth chart, carrying from 1947 through 1960, shows how very rapidly employment in manufacturing has declined when measured against actual industrial production and against total national product. This, of course, reflects the terrific speed of technological progress.
The ninth chart shows, for a period of five decades including 1961, the tendency of output per man-hour or productivity to grow at an accelerating rate, and the word "accelerating" should be underscored, when our resources are in reasonably full use. The most recent data indicate clearly that this accelerating trend is still continuing. Consequently, the actual economic growth rate which we shall have to achieve in the years ahead to regain and sustain maximum employment and production is very much higher than the 312- or 4-percent targets which many economists are still prone to accept.
The distinction between the technological rate of productivity change and the actual rate of productivity change during periods of high economic slack has been much neglected. But the technological rate of change cannot be swept under the rug enduringly, and must in the long run immensely increase the amount of idle manpower and plant unless much higher targets for actual economic growth are established and achieved than those which now represent the common denominator of informed judgment.
THE COSTS AND ANATOMY OF THE LONG-TERM ECONOMIC RETREAT" The 10th chart depicts the staggeringly large economic losses which we have suffered, during the 9-year period 1953–61, inclusive, including a forfeiture of more than $340 billion in total national production measured in uniform 1960 dollars, and a forfeiture of about 2212 million man-years of employment opportunity. I might add that, at existing tax rates, Federal, State, and local governments have lost about $95 billion in tax revenues due to the low performance of the economy from which tax revenues are extracted. It is impossible to squeeze blood out of a turnip.
The next series of charts deal with what I call the anatomy of the low economic performance. They depict cause and effect—the nature of the distortions or imbalances which have been at the root of the trouble.
The 11th chart subdivides the deficiencies in total national production into the main component parts-consumer expenditures, private business investment, and public outlays at all levels of government.
The 12th chart indicates that the deficiency in consumer spending, by far the largest component in the total deficiency. has been due to correlative deficiencies in consumer incomes measured in real terms, especially among wage earners and farmers. The idea that the consumer spending deficiency has been due primarily to the unwillingness of American families to spend money available to them is a dangerous myth. Or to put it in another way, not enough of total personal income has flowed to those in the low and middle income groups who spend the highest portions of their income for consumer goods and services, while relatively too much has flowed to those at the top of the structure who save and seek to invest a larger portion of their incomes. I hasten to add that this does not mean that the people at the top should be shared out; I believe in income progress for all groups. If the distribution of income had been in better balance, and if the economic growth rate had been 4 or 5 percent instead of 242 percent, all groups would have had more income.
The 13th chart shows clearly, in my view, that the deficiency in private investment was a byproduct of the deficiency in ultimate demand represented by private consumer outlays and public outlays. This alone explains the enormous overcapacity in producer facilities which occurred during each short-lived boom and which translated the boom into stagnation and then into recession. Parenthetically, this shows the lack of wisdom in the attempt to provide special tax concessions to investors at this time, while neglecting adequate expansion of ultimate demand.
The 14th chart shows how an excessively restricted Federal budget has made its important contribution to the low overall economic performance. The States and localities, as we all know, have been expanding their outlays and their debts enormously faster than the Federal Government, despite much frailer sources of revenues to draw upon.
WHERE DO WE STAND TODAY, AND WHERE ARE WE HEADED! With this historical analysis as a foundation, where do we stand today, and where are we headed ? To be sure, national production and employment are at new peaks, just as they were in 1956 and 1959 and early 1960. But the crucial question is whether the current economic upturn represents a new departure from or another confirmation of the long-term chronic retreat from maximum employment and production. I submit that the latter is the case, based upon concrete evidence which is both weighty and most disturbing. As other witnesses have called to the attention of this committee, the economic recovery which has been in process for somewhat more than a year has reduced idle plant and manpower far less than previous recoveries since World War II. To take only one example which is entirely typical, unemployment was reduced about 50 percent in about the first 12 months of recovery following the 1949 recession. But unemployment was reduced only about 1242 percent, or only onefourth as much, in the first 12 months following the start of recovery from the most recent recession. The same is true, broadly speaking, with respect to idle plant.
Under these circumstances, it is manifestly superficial to talk about the paradox of persistent or "hard core" unemployment despite an otherwise fine economic recovery. There is no paradox at all, and there has been nothing fine about the current recovery thus far. By the fundamental test of how far we have moved toward restoration of reasonably full use of our manpower and plant resources, it is the least satisfactory recovery since World War II. Further, as is now being noted by most objective analysts, the pace of the recovery is slowing down. While it is likely to continue perhaps through 1962 and well into 1963, the outlook beyond then is clouded with uncertainty and considerable trepidation.
While I do not want to say "I told you so," I do not feel that a false modesty should prevent me from bringing before this committee those matters which shed light upon what I shall say shortly. In 1954, I published a study which forecast that our average annual growth rate during the period 1953-60 would be 2.5 percent. This did not receive many encomiums at the time, but it turned out to be correct. My estimates as to how much unemployed manpower and idle plant would gradually result from this low growth rate also turned out to be approximately correct.
For the good of the country, I sincerely hope that I may be wrong this time, but I don't think so. Unless we turn quickly to more vigorous and in some respects different economic policies and programs, I regretfully conclude that our economic growth rate during the 4 years 1962–65, inclusive, may not be appreciably better than during the period 1953–61 (or not enough better to compensate for the accelerated advance in technology and automation).
The 15th chart, if this should turn out to be the case, shows that we would forfeit, for the 4-year period 1962-65 in the aggregate, almost $300 billion worth of total national production and almost 18 million man-years of employment opportunity.
The 16th chart contrasts, in terms of employment and unemployment in various sectors of the economy, the alternative implications of high and low economic growth rates 1962-65.
The 17th chart depicts the alternative growth rate differentials for most of the important sectors of the economy. It does not include, however, an estimated differential of about $70 billion in public revenues at all levels of government, even assuming certain reductions in tax rates which I deem desirable. The same chart also indicates the estimated differentials in the year 1965 alone. It shows, for example, that in 1965 alone unemployment would be almost 5. million higher in the event of the low economic growth rate than in the event of the high economic growth rate. Allowing for minimum or frictional unemployment in 1965 related to the size of the labor force at that time, a continuation of the low economic growth rate might well mean full-time unemployment of from 8 to 9 million in 1965, especially if it happened to be a recession year, and a true level of employment (including the full-time equivalent of part-time unemployment) very much higher.
MAGNITUDES OF NEEDED EXPANSIONS The 18th chart depicts the needed expansions in the main sectors of the economy for the calendar years 1962 and 1963, consistent with restoration of maximum employment and production by the end of 1963, and consistent with the longer range goals through 1965. Comparing the goals for 1963 with actual 1961, employment should be up 542 million, and total production up $96 billion, measured in uniform 1960 dollars. The chart also shows the needed increases in consumer spending, business investment, and public outlays. Comparing calendar 1963 with calendar 1961, Federal public outlays for goods and services should be up about $1112 billion, and State and local outlays up about $542 billion. Transfer payments, related mostly to the social security programs, should be up about $9 billion. Residential nonfarm construction, which is very important, should be up about $9 billion.
Chart 19 depicts the main elements in a Federal budget consistent with all the other projections for the economy as a whole, and geared to the priorities of our needs both international and domestic.
The 20th chart allocates the projected Federal budget among the main priority purposes, both on a per capita basis and as a percentage of projected total national production.
SHORTCOMINGS IN CURRENT PROGRAMS AND POLICIES Viewed in this broad perspective, the whole range of our national economic programs and policies are not well matched to the gigantic economic problems confronting us, as to magnitudes, timing, or scope. The projected Federal budget for fiscal 1963 is too low on the spending side, and the avowed aim toward a $1 billion surplus in the cash budget when we have so much economic slack is unwise and indeed cannot succeed. Instead of needed reductions in general tax rates, especially as they bear upon low-income people, in order to stimulate consumption, we are moving toward the same kind of tax concessions to investment which would repeat the errors of early 1957. The monetary policy is still too tight, and interest rates are rising when they should be reduced. The efforts to lift incomes and buying power through expansion of social security and related programs are very small, when measured against the needed requirements. In the private economy, under considerable public pressure, the probability seems to me to be that wage adjustments will be far below needed expansion of consumption in this area, just as has been the case during the past 9 years as a whole despite much propaganda to the contrary. Actually, increases in wage rates in manufacturing since 1956 have lagged far behind actual productivity increases, not to speak of technological productivity increases.