OLD ECONOMICS ON THE NEW FRONTIER

...Instead, this crucial speech intimated some adherence to the "budgetbalancing" and "prudent finance" tenets of conservative economics and bookkeeper criteria...

...Many of the so-called "backlogs" of civilian demand—resulting from the great depression and two wars—are no longer so insistent...

...If this were done, I believe that the President would decide upon much stronger economic measures...

...it cannot take account of future drastic changes in the international situation beyond the realm of forecasting...

...and about 95 billion dollars of public revenues at all levels, which could be used to increase vastly our essential domestic and international undertakings...

...For the period 1953-1960, I estimate that this long-term retreat from maximum employment and production caused us to forfeit more than 260 billion dollars in total national production (measured in uniform 1959 dollars), to forfeit about 18.5 million man-years of employment opportunity, and to forego enormous potential gains in the liquidation of poverty and the servicing of public needs...

...First, let us probe the economic outlook now...

...There is still much evidence of neo-classical theories untested by empirical scrutiny of the economy in operation...

...about 20 million man-years of employment opportunity...

...In view of the new technology, moving forward so rapidly in factory, farming, and office work, home construction for the ill-housed and urban renewal afford the largest single opportunity to restore and maintain maximum employment and production...

...This would mean a true level of unemployment (taking info account the full-time equivalent of part-time unemployment) close to nine million, contrasted with about 6.3 million during the first quarter of 1961...

...Come next year, the President may find himself caught in the trap of the analyses which his economists have furnished, to the point where it will be increasingly hard for him to resist either tax increases or sharp cuts in domestic outlays to compensate for increased defense outlays...

...Against all of this, the Democratic candidate for President in 1960 spoke with great emphasis and conviction...

...There is still a cultural lag even among some of the "liberal" academicians, and this unwittingly reinforces the more conservative spokesmen who are also in the Administration...

...But it missed a tremendous opportunity to emphasize that the current idleness of manpower and plant—representing a gap of at least seventy-five billion dollars between actual national production and reasonably full production—plus a burgeoning technology and a rapidly growing labor force, can be called upon for even larger defense exertions than proposed, while simultaneously permitting and indeed requiring large additions to strength-building domestic programs, both public and private...

...Viewing the urgent domestic and imperative worldwide tasks which depend so substantially upon economic performance, there is cause for some concern...

...The deficiency in private consumer outlays was caused by the slow pace of advances in total real wages (consumer income advances, during the "boom" periods, lagged far behind an "equilibrium" ratio to profits and investment in producers' facilities...

...And if the economic approach now being urged upon the President is designed merely to achieve strength through "sacrifice," it is hard to see how we shall become stronger by deficient economic policies...

...The best way to examine how all this happened is to survey how each short-lived "boom" was succeeded by "stagnation" and then "recession...

...This is a delicate balance...

...nobody can substitute his own judgment for that of the President in the choice between alternative risks...

...and repeated "inflation" scares, used to justify these other wayward policies, and to give us still more inflation—of a highly "selective" nature—by feeding the fat and starving the lean...

...Yet for the President to make these choices wisely, his advisers in the economic field (as well as elsewhere) must furnish him with the best feasible guides as to the relative risks involved...

...If the current approach is designed to appease conservative opposition, it already seems more liable to result in the fortification of that opposition's resistance to needed domestic spending...

...persistently regressive efforts to water the economic tree at the top rather than at the base...

...Consequently, they insist that the Administration has been demonstrating the art of the practical, which is the essence of statecraft...

...failure to diagnose the real causes of the chronic economic trouble...

...Old Economics on the New Frontier by LEON KEYSERLING JUST PRIOR to the election last November, I voiced in The Progressive my firm belief that, on the economic front, Senator John F. Kennedy was endowed with qualities which would help to "lift the concept of a great national purpose under freedom from a pretentious generality into a splendid performance...

...And it is significant that the speech looked upon the rate of growth expected as a mere "forecast" which may turn out to be wrong, instead of projecting an intensified economic effort at least comparable to the growing tensions on other fronts and treaiting the growth rate in the future as something to be defined and achieved...

...These deficiencies in the Kennedy Administration's program to date spring substantially from some shortcomings in the economic thinking which is being pressed upon a President properly absorbed in other matters...

...In monetary policy, the changes thus far do not sufficiently liberalize credit nor sufficiently reduce interest rates...

...To be sure, wise national and world leadership in crucial times does involve questions of domestic "political" exigency...

...This level of unemployment at the end of 1962, near the peak of the current "boom" (if it lasts that long), might be much higher than during the previous "boom" year 1959, thus representing continuation rather than reversal of the "long-term retreat...

...To understand the core economic challenge which confronted the President when he assumed office, it will be helpful to review briefly the period since the termination of the Korean hostilities removed the galvanizing effects of wartime...

...In each "boom" period, and even after the advent of the immediately succeeding "stagnation" period, private investment in the means of expanding production grew much more rapidly than expansion of demand for ultimate products in the form of public outlays and private consumer expenditures combined...

...the citadel of excessive Federal Reserve Board power has not been challenged by the Administration...

...Then, as "overcapacity" in acute form was worked down, another "boom" or upturn set in, subject to the self-defeating ingredients already described...

...Idle manpower and plant increased even though the economy was slowly creeping upward in absolute terms...

...short-term improvisations not fitted into longer-term perspectives, preoccupation with monetary and financial and price movements rather than with the real production and usages which are the true wealth of nations...

...When the resultant "overcapacity" became sufficiently pronounced, business investment was cut back sharply, and this, together with the longer-term deficiencies in ultimate demand, brought on "recession...

...Even though seven months under a new Administration is too short a time to enter definitive judgment, it is significant that unemployment now is practically as high as in January, with little prospect of much reduction in the near future...

...To what extent has this expectation been vindicated...

...The regressive income trends are still continuing, and the tight-money policy has not been modified much...

...As a consequence of these shortcomings, I estimate that the growth rate in 1961 and 1962 will not much exceed half that required to restore maximum employment by the end of 1962...

...The automatic stabilizers in the economy, while improved absolutely in some respects, are much smaller relative to the size of the economy than in 1953, and this is also true of the Federal budget and the immensely important Social Security programs...

...Giving full weight to those aspects of the President's "Berlin crisis" speech of July 25 which dealt with economic problems, some economists still suggest with a sigh that small programs are being commissioned to do big jobs...

...This long-term retreat produced an average annual overall growth rate of only 2.5 per cent, when the growth rate needed to be somewhere between four and five per cent to absorb the increase in the size of the labor force and in improved productivity, and thus prevent the chronic increase in idle manpower and plant...

...then a period of "boom," or rather sharp upturn, during which employment and production increased at a substantial rate, but not fast enough nor long enough to reduce idle manpower and plant to as low a level as before the immediately preceding "recession...

...In 1965 alone, assuming a low 19611965 growth rate, we might be suffering full-time unemployment in the neighborhood of seven million...

...And it should be made clear that the economy now is in some respects more vulnerable than in early 1953...

...These dismal comments are based upon a comparison of the Administration's short-range and long-range economic programs, including those still under consideration by the Congress, with the programs which I estimate to be needed to restore maximum employment and production by the end of 1962 (a modest goal), and to establish a sound foundation for maintaining these conditions thereafter...

...From mid-1957 to late 1960, the economy repeated these three successive periods of "recession," "boom," and "stagnation...

...In defense of the Administration, it is argued that there has not been time enough...

...about 225 billion dollars worth of private consumer spending, which could be used to reduce poverty and to lift living standards in general...

...The first and most direct way to expand economic activity is...

...The American people will respond rationally to more effective economic proposals reasonably explained...

...And the "recession" prevailing when the new Administration took over was in its essential characteristics, in my view, the start of a third "cycle" in this same pattern...

...The quantitative deficiencies in public economic programs during the Eisenhower Administration had some pervasive qualitative overtones: unwillingness to develop any overall perspective or program under the Employment Act of 1946...

...But this attitude slights the massive poverty still in our midst, and ignores the central fact that the new technology and automation require large increases in public outlays and enormous expansion of private consumption to avoid chronically rising unemployment of manpower and plant...

...by only nominal expansion (measured against need) of Federal programs which increase private consumption, such as Social Security programs and minimum wage laws...

...and that the American people are not ready and willing to espouse the bigger things which need to be done...

...And during the "boom" periods, the tax and monetary policies and the negative government attitude toward wage increases, as well as special tax incentives to business investment, conspired to generate the relatively excessive profit and investment binges already mentioned...

...It may be a shock to those who have heard so much about the primacy of our public needs to learn that total domestfc outlays in the fiscal 1961 Federal budget are a smaller percentage of estimated total national production than during at least one year of the Eisenhower Administration...

...This probing takes into account the increased defense outlays generated by the "Berlin crisis...

...by increasingly regressive tendencies in income distribution, which placed too large a part of consumer income in the hands of those at the top of the income structure, and too small a part in the hands of those in the lowermiddle-income and low-income groups who spend a larger percentage of their incomes and save less...

...and, finally, a period of "stagnation," during which employment and production moved upward at a much reduced rate, insufficient to absorb the growing labor force and growing productivity...

...Either course would further retard an economy still far from its full strength and therefore would jeopardize our international position...

...that the composition of the Congress is inimical...

...constitutional aversion to the full use of our abundance, made manifest in a scarcity philosophy which took direct action to abort each "recovery" period long before it became complete...

...And at currently proposed levels of expenditures, the firm stand against tax cutsjp expand consumption will result in an undesirable budget surplus long before restoration of anywhere near maximum utilization of manpower and plant...

...The President's speech on the "Berlin crisis" was moving in its appeal to steadfastness andhonor...

...My own disturbing appraisal is that, without these far more vigorous and sweeping economic efforts, the American economy during the period 1961-1965 may average an overall economic growth rate not appreciably higher than during the period 19531960...

...the states and localities, on the contrary, have been expanding their outlays rapidly, pushing hard against the limits of their - ability to raise revenues and borrow money...

...The deficiency in total private investment (which occurred during the 1953-1960 period as a whole, but not during the "boom" periods) was not the result of public policies inimical to business profits or "confidence," but rather to the deficient expansion of public outlays and private consumption which led into "stagnation" and "recession...

...This is tantamout to arguing the untenable proposition that tax rates should be relatively higher if a disappointingly slow rate of economic growth yields a large economic slack than if a more rewarding economic growth rate yields less economic slack...

...by vast deflation of farm income...

...The President said that tax rate increases would be requested next year, if the economy did not grow rapidly enough to provide additional revenue compensation at existing tax rates for the proposed expenditure increases...

...But the extent of the "political" risks which the President should take by "proposing too much" depends upon his evaluation of the competing risks which arise when his substantive economic proposals are scaled far below real needs...

...The same weaknesses explain the Administration's relatively dim view of expansion of private consumption, sometimes rationalized on the ground that we need public education more than tail-fins, and that we should therefore shift production from private to public use...

...defensive and discrete measures (designed to combat inflation and deflation) which seemed advanced in the Thirties but not now, rather than an overall view and positive and specific goal-setting meshed with ' thoroughly coordinated policies under the Employment Act of 1946...

...Improvements in programs to enlarge private consumption directly, such as Social Security, unemployment compensation, and minimum wages, have been much too small...

...During these "recessionary" periods, the automatic "stabilizers" in the economy (such as the progressive tax system and unemployment insurance), plus some new stimulatory policies injected by the government, helped to keep ultimate demand fairly stable or even somewhat on the rise...

...These weaknesses do much to explain the Kennedy push for tax concessions to promote private investment, which now competes with the Republican obsession on this score and neglects the compelling evidence that the road to a sustainably high rate of investment is not through tax bonanzas but rather through developing adequate markets for ultimate products...

...For example, during the period 1954-1956, investment in plant and equipment grew about eight times as fast as ultimate demand, and about five times as fast during the period 1958-1960...

...Some recent forecasts, with which I agree, indicate that full-time unemployment at the end of 1962 may be between five and six per cent of the civilian labor force...

...While the President certainly believes that he is receiving liberal and modern economic advice, this is not yet entirely the case...

...From mid-1953 to mid-1957, the economy underwent, first, a period of "recession," marked by absolute declines in employment and production...

...The Administration's proposals for aid to education, housing, assistance to depressed areas, foreign economic assistance, and national defense commendably blaze .new trails...

...Yet I estimate that the new housing program recently approved by the Congress would provide, over a period of more than a year, only a little more than one-ninth the volume of new home construction for lower-middle-income families, and only about one-third the volume of new homes for low-income families, which we should average each year between now and 1965...

...If I should turn out to be correct in my estimate of very low economic growth in the future—in the absence of much more strenuous programs— we would forfeit during the period 1961-1965 about 390 billion dollars worth of total national production (measured in uniform 1959 dollars...

...And there are some economists close to the Administration who expect that about 1963, in the absence of much more vigorous and sweeping economic efforts than any now apparently under consideration, we shall slide into what is euphemistically called another "inventory recession...

...But for the two calendar years 1961-1962, the Administration's spending program (including the "Berlin crisis" program) involves increases several biliion dollars short of the needed amount, especially in view of the deficiencies in other programs set forth below...

...Exhortations to labor to be careful about wage increases, while pleasing to a general public which has been subjected to much erroneous propaganda, do not arise from any realistic analysis...

...and by the generally restrictive and regressive private-income effects of the tight Federal budget policy and the rising interest rates inherent in the tight-money policy...

...that the margin of the President's popular victory was narrow...

...to enlarge the public outlays in the Federal budget...

...According to my estimates, the 1953-1960 deficiency of 260 billion dollars in total national production was composed of a deficiency of about 30 billion dollars in public outlays, about 170 billion in private consumer outlays, and about 60 billion in total private investment...

...But what has taken place since last fall, and where do we stand today...

...The deficiency in public outlays was entirely attributable to the restrictive budget policies of the Federal government...