U.S. economic growth from 1976 to 1986

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U.S. economic growth from 1976 to 1986 Volume 2 - The factors and processes shaping long-run economic growth
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Table of Contents
    Front Cover
        Page i
        Page ii
    Letter of transmittal
        Page iii
        Page iv
        Page v
        Page vi
        Page vii
        Page viii
    Economic growth in the short run: Its behavior and measurement
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
    The political economy of comparative growth rates
        Page 25
        Page 26
        Page 27
        Page 28
        Page 29
        Page 30
        Page 31
        Page 32
        Page 33
        Page 34
        Page 35
        Page 36
        Page 37
        Page 38
        Page 39
        Page 40
    The challenges of noneconomic factors to economic growth
        Page 41
        Page 42
        Page 43
        Page 44
        Page 45
        Page 46
        Page 47
        Page 48
        Page 49
        Page 50
        Page 51
        Page 52
        Page 53
        Page 54
        Page 55
        Page 56
        Page 57
        Page 58
    Discussing a national growth policy: Organizational and institutional issues
        Page 59
        Page 60
        Page 61
        Page 62
        Page 63
        Page 64
        Page 65
        Page 66
        Page 67
        Page 68
        Page 69
        Page 70
        Page 71
        Page 72
        Page 73
        Page 74
        Page 75
        Page 76
        Page 77
        Page 78
        Page 79
        Page 80
        Page 81
        Page 82
        Page 83
        Page 84
        Page 85
        Page 86
    Back Cover
        Page 87
        Page 88
Full Text
4. fcz^ ;C (I 41 P / It A


2d CSogessio JOINT COMMITTEE PRINT






U.S. ECONOMIC GROWTH FROM 1976 TO 1986:


PROSPECTS, PROBLEMS,


AND PATTERNS


Volume 2-The Factors and Processes Shaping Long-Run
Economic Growth




STUDIES

PREPARED FOR THE USE OF THE

JOINT ECONOMIC COMMITTEE


CONGRESS OF THE UNITED


NOVEMBER 10,


Printed for the use of the Joint Economic C


U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1976


78-543


STATES


For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402-Price $1.10


























JOINT ECONOMIC COMMITTEE
(Created pursuant to seec. 5(a) of Public Law 304, 79th Cong.)
HUBERT H. HUMPHREY, Minnesota, Chairman
RICHARD BOLLING, Missouri, Vice Chairman


SENATE
JOHN SPARKMAN, Alabama
WILLIAM PROXMIRE, Wisconsin
ABRAHAM RIBICOFF, Connecticut
LLOYD M. BENTSEN, JR., Texas
EDWARD M. KENNEDY, Massachusetts
JACOB K. JAVITS, New York
CHARLES H. PERCY, Illinois
ROBERT TAFT, JR., Ohio
WILLIAM V. ROTH, JR., Delaware


HOUSE OF REPRESENTATIVES
HENRY S. REUSS, Wisconsin
WILLIAM S. MOORHEAD, Pennsylvania
LEE H. HAMILTON, Indiana
GILLIS W. LONG, Louisiana
OTIS G. PIKE, New York
CLARENCE J. BROWN, Ohio
GARRY BROWN, Michigan
MARGARET M. HECKLER, Massachusetts
JOHN H. ROUSSELOT, California


JOHN R. STARK, Executive Director
RICHARD F. KAUFMAN, General Counsel
ECONOMISTS


WILLIAM B. BUECHNER
G. THOMAS CATOR
WILLIAM A. Cox
LUCY A. FALCONS


CHARLES H. BRADFORD


ROBERT D. HAMRIN
SARAH JACKSON
JOHN R. KARLIK
L. DOUGLAS LEE


PHILIP MCMARTIN
RALPH L. SCHLOSSTEIN
COURTENAY M. SLATES
GEORGE R. TYLER


MINORITY
GEORGE D. KRUMBHAAR, Jr. M. CATHEBRINE MILLER
MARK R. POLICINSKI


(II)











LETTERS OF TRANSMITTAL


NOVEMBER 5,1976.
To the Members of the Joint Economic Committee:
Transmitted herewith is the second volume of the Joint Economic
Committee study series entitled "U.S. Economic Growth From 1976
to 1986: Prospects, Problems, and Patterns". This series of over 40
studies forms an important part of the Joint Economic Committee's
30th anniversary study series, which was undertaken to provide in-
sight to the Members of Congress and to the public at large on the
important subject of full employment and economic growth. The Em-
ployment Act of 1946, which established the Joint Economic Commit-
tee, requires that the committee make reports and recommendations
to the Congress on the subject of maximizing employment, production
and purchasing power.
Volume 2 comprises four studies which provide an overview on the
forces and processes that are shaping economic growth rates and pat-
terns over the next decade. The authors are Professor Richard Rug-
gles, Professor Mancur Olson, Dr. Willis W. Harman and Dr. Thomas
C. Thomas and Dr. Peter House. The committee is indebted to
these authors for their fine contributions which we hope will serve to
stimulate interest and discussion among economists, policymakers and
the general public, and thereby to improvement in public policy
formulation.
The views expressed are those of the authors and do not necessarily
represent the views of the committee Members or committee staff.
Sincerely,
HUBERT H. HUMPHREY,
Chairman, Joint Economic Committee.

NOVEMBER 1, 1976.
Hon. HUBERT H. HUMPHREY,
Chairman, Joint Economic Committee,
U.S. Congress, Washington, D.C.
DEAR MR. CHAIRMAN: Transmitted herewith are four studies en-
titled "Economic Growth in the Short Run: Its Behavior and Meas-
urement," by Professor Richard Ruggles; "The Political Economy
of Comparative Growth Rates," by Professor Mancur Olson; "The
Challenges of Noneconomic Factors to Economic Growth," by Dr.
Willis Harman and Dr. Thomas C. Thomas; and "Discussing A Na-
tional Growth Policy: Organizational and Institutional Issues," by
Dr. Peter House. These four studies comprise volume 2 of the Joint
Economic Committee's study series "U.S. Economic Growth from
1976-1986: Prospects, Problems, and Patterns." This series forms a
substantial part of the Joint Economic Committee's 30th anniversary
study series.
(IIn)







These four studies provide a broad overview perspective on major
forces and processes that have shaped, and will be shaping over the
next decade, economic growth in the United States. The significant
factors are presented from a variety of perspectives, a diversity which
will characterize each of the volumes in this study series.
Richard Ruggles explores the process of change in the short run and
its implications for economic growth. This method of analysis was
chosen since lie did not find "readily defendable" the assumption that
economic growth is determined by long run forces independent of short
run behavior. His examination of four basic questions related to the
behavior and measurement of economic growth in the short run sup-
ports the following conclusions: (1) In the last three decades, the
United States economy has not achieved full employment except under
the pressure of war demand; recoveries abort before full employment
can be achieved, and continuous growth is not sustainable; (2) house-
holds are not the source of the saving that finances enterprise expendi-
tures on plant and equipment; (3) the inability of the economy to
achieve full employment and continuous growth is the direct conse-
quence of saving and investment behavior; recoveries generate more
saving than can be absorbed by investment; (4) the thesis that reces-
sions are necessary to avoid inflationary spirals is not borne out by the
record of actual wage and price behavior.
Mancur Olson challenges the conventional wisdom on economic
growth in setting forth reasons why growth rates differ among indus-
trialized countries. His explanation centers around powerful common-
interest organizations. These, he believes gradually accumulate monop-
oly power and/or political power which tends to lower economic
growth as it is measured in national income statistics. The relative
development of such organizations in various regions of the United
States leads him to an explanation of the hypothesis that the South
and West are the Germany and Japan of the United States, and that
the older industrialized areas, and most notably New York City, are
its England.
Harman and Thomas provide a broad framework for thinking about
economic growth in the future. They examine three divergent pictures
of economic and social reality: One in which continued economic
growth is imperative, one in which it is considered improbable if not
impossible, and a third in which economic growth becomes the wrong
measure on which to focus attention in a changing societal context. Ap-
propriate policy measures for each case are discussed. They conclude
that although there are rational bases for choosing among these three.
it is impossible at the present time to obtain consensus that any of the
three is correct and that, as a consequence, it is probably desirable to
adopt policy recommendations compatible with all three.
In considering a national growth policy, Peter House does not con-
centrate so much on the need for a growth policy per se as on the ques-
tion of how it should be conducted. Ile recommends the establishment
of an Office of National Growth Policy to rationalize the massive
Federal data base for respectable policy analysis. It would also
analyze, through large scale modeling, major policies in light of cur-
rent practices and other proposed policies, ultimately suggesting
potential improvements or at least avoiding problems, especially in
the long run.






The committee is deeply appreciative of the excellent work of these
authors in assisting the committee's examination of future U.S. eco-
nomic growth. Professor Ruggles and Professor Olson are faculty
members at Yale University and the University of Maryland respec-
tively, Dr. Harman and Dr. Thomas are with the Stanford Research
Institute, while Dr. House is currently with the Institute of Trans-
portation Studies at the University of California at Berkeley.
Dr. Robert D. Hamrin of the committee staff is responsible for
the planning and compilation of this study series with suggestions and
assistance from other members of the staff.
The views expressed are those of the authors and do not necessarily
represent the views of the Members of the committee or the committee
staff. The administrative assistance of Beverly Mitchell of the com-
mittee staff is also appreciated.
Sincerely,
JOHN R. STARK,
Executive Director,
i Joint Economic Commnittee.
















CONTENTS

Page
Letters of transmittal--------------------------------------- i------- n

ECONOMIC GROWTH IN THE SHORT RUN: ITS BEHAVIOR AND
MEASUREMENT
By Richard Ruggles
Summary---------------------- ----------------------------------- 1
The record of economic growth since World War II ---------------------- 3
Sectoral saving and capital formation---------------------------------- 5
Summary of sectoral interrelations----------------------------------- 13
Short-run economic growth and saving and investment------------------- 13
Economic growth and wage and price stability----------------- ---------- 16
Conclusion--------------------------------------------------------- 20
Major policy recommendations--------------------------------------- 21

THE POLITICAL ECONOMY OF COMPARATIVE GROWTH RATES
By Mancur Olson
Summary--------------------------------------------------------- 25
The sources and causes of growth------------------------------------- 27
Some unexplained cases--------------------------------------------- 28
The formation of organized interest groups----------------------------- 29
The ultimate pattern of organized interest groups---- ------------------- 31
The effect of organized interest groups on economic growth--------------- 32
Institutional arthritis------------------------------------- ---------- 34
The United States-------------------------------------------------- 36
Encompassing organizations-------------- ----------------------------38
Internal contradictions---------------------------------------------- 39
The need for growth------------------------------------------------ 40
On the shoulders of giants---------------- --------------------------- 40
THE CHALLENGES OF NONECONOMIC FACTORS TO ECONOMIC
GROWTH
By Willis W. Harmon and Thomas E. Thomas
Summary--------------------------------------------------------- 41
1. Introduction ----------------------------------------------------42
2. First picture of reality: Indispensability of continued economic growth- 44
3. Critique of the GNP goal----------------------------------------- 45
4. Second picture of reality: Inevitability of declining growth------------ 47
5. Third picture of reality: Changing societal context------------------- 51
6. Summary and commentary---------------------------------------- 56

DISCUSSING A NATIONAL GROWTH POLICY: ORGANIZATIONAL
AND INSTITUTIONAL ISSUES
By Peter House
Summary---------------------------------------------- -----------59
The question of a national growth policy----------------------------- 61
Desirability------------------------------------------------------- 62
Content----------------------------------------------------------- 6S
Implementation---------------------------------------------------- 74
Location-------------------- -------------------------------------- 75
Feasibility and impact---------------------------------------- 2------ 2
Bibliography------------------------------------------- -----------84


(vIn)



















Digitized by the Internet Archive
in 2013













http://archive.org/details/pattrowth00unit











ECONOMIC GROWTH IN THE SHORT RUN: ITS
BEHAVIOR AND MEASUREMENT
By RIcArDt RUGGLES*


SU3MMART
This analysis of the behavior and measurement of economic growth
in the short run supports the following conclusions.
1. In the last three decades, the United States economy has not
achieved full employment except under th-e pressure of war demand;
recoveries abort before full employment can be achieved, and continu-
ous growth is not sustainable. The record shows that since World War
II there have been 10 years of recession, 12 years of recovery, and 7
years under the influence of wartime pressures. Of the 6 recovery peri-
ods, 4 aborted into recessions before full employment was reached, and
thle other two merged into the Korean and Vietnam wars. Recoveries
are so short-lived that a new recession is always just around the corner.
Thus, in the short run, growth is frustrated in recovery and eroded by
recession, and consequently, long term economic growth is reduced to
a level considerably below its potential.
2. Households are not the source of the saving that finances enter-
prise expenditures on plant and equipment. Analysis of saving and
investment patterns of the various sectors does not bear out the tradi-
tional view of personal saving as the source of financing for business
capital formation. Pension contributions do account for 10 to 20 per-
cent of gross saving, but most of these are withheld by business or
unions at the source and do not enter into individuals' disposable sav-
ing. Until the residential housing industry declined in the late 1960s,
gross disposable saving of households was in every year smaller than
their net purchases of owner-occupied housing; thus for most of this
period the household sector borrowed more than it lent.
The utility sector, which is responsible for 20 percent of gross capi-
tal formation, did borrow to finance about half of its capital expendi-
tures. But on the average the gross saving of the other business sectors
has exceeded their plant and equipment expenditures. The contribution
of the Federal government to saving and borrowing is directly related
to the 'level of economic activity; in recession the Federal govern-
ment is always in deficit, but by the end of recoveries it does generally
achieve surpluses.
3. The inability of the economy to achieve full employment and con-
tinuous growth is the direct consequence of saving and investment be-
havior; recoveries generate more saving than can be absorbed by invest-
nment. Examination of the six recoveries since 1948 shows that at first
*Professor of economics, Yale University.
(1)


78-543-76---2







the inventory turnaround and revival of fixed investment absorb the
rapid increase in gross saving which results from rising profits and
government revenues. As the recovery phase continues, however, sav-
ing continues to increase-largely because of a much faster increase in
government revenues than in its expenditures-but experience shows
that. the increases in inventory accumulation and fixed investment soon
slacken. As a consequence, demand levels off, inventories become ex-
cessive, profits and government receipts drop, saving is reduced, and a
new recession sets in. The automatic stabilizers, in the form of undis-
tributed profits and government surpluses, work in the upward as well
as the downward direction. They stabilize the money value of GNP,
not, prices or employment; thus they choke off the growth in GNP
which is necessary to achieve full employment in an economy with a
growing population. The government sector has always been in sur-
plus during the later stages of the recoveries, thus contradicting the
thesis that the. slowdown in private capital formation occurs because
private demands for savings are crowded out by government borrow-
ing. Rather, it is the increasing government revenues, not matched by
government expenditures, which drain off the purchasing power of the
private sector so that it. is unable to buy the increasing output. Thus it
is the excess, rather than the shortage, of saving which causes recov-
eries to abort.
4. The thesis that recessions are necessary to avoid inflationary
spirals is not borne out by the record of actual wcage and price be-
havior. There is no evidence that recovery or economic growth has
led to inflationary price increases; on the contrary, the low rate of
productivity increases in recession has resulted in cost-push price in-
creases, and the higher rate of productivity increases in recovery has
resulted in substantial price stability. The rapid price increase due to
scare-buying in the first few months of the Korean War quickly sub-
sided as the economy expanded. In the recessions of the late 1950s,
the secular rise of wages was not fully offset by increasing productiv-
ity, and there were moderate price increases. The period of the great-
est 1)rice stability was the early 1960s; this was also the most extended
period of economic recovery. The price increases of the Vietnam war
period, triggered by war-inspired increases in agricultural prices in
1965 and 1966. accelerated in the recession of 1970 and 1971. The
more recent price rises had their origin in rising world agricultural
prices, the devaluation of the dollar, and the quantum jump in oil
prices. The largest increases in prices that have occurred since World
War II took place during the recession of 1974-75, and it is only with
recovery that inflation appears to be subsiding. In light of past experi-
ence, there is strong reason to believe that a high rate of growth
and its concomitant high rate of productivity increase may be a neces-
sary condition for long run price stability.


Economists commonly consider economic growth to be a long run
p)lenomenon, whose rate is determined by major underlying forces
of technological change. In contrast, fluctuations in economic activity
are, considered to be short run, purely temporary departures of the
economy from its long run growth pattern. It is customary to fit long







term trends to peak periods of economic activity wlien the economy
is considered to be at full employment, and to measure the loss due
to economic fluctuations by the area lying below this long run trend.
Such a view results quite naturally from looking at the record of
economic performance in ex post terms. But the assumption that
economic growth is determined solely by long run forces independent
of short run behavior is not readily defensible. The great variability
observed in the growth rates of different countries strongly suggests
that factors other than long term technological change are important
in determining the growth that actually takes place. Furthermore,
since growth of an economy is affected both by the level of its capital
formation and by the increase in productivity result ing from learning
by doing, it seems reasonable that an economy enjoying a continu-
ously high level of economic prosperity and continuous growth will
have a higher average growth rate than an economy plagued by
periods of recession or stagnation during which capital formation and
productivity increase are relatively low.
This paper is designed to explore the process of change in the short
run and its implications for economic growth. Four questions will
be examined. (1) What has been the year-to-year record of economic
growth since World War II? (2) What has been the relation of sav-
ing to capital formation for specific sectors of the economy in this
period? (3) Can the saving and investment activities of the individual
sectors explain the short run growth pattern of the economy? (4)
How does the question of wage and price stability relate to economic
growth in the short run?

THE RECORD OF ECONOMIC GROWTH SINCE WORLD WAR II
Since World War II, the United States economy has not enjoyed
long, steady period of economic growth. Rather, the record has been
one of constant economic fluctuations, as is shown in Table 1. If we
take as the measure of recession and recovery changes in the level of
unemployment,1 the U.S. economy has had six recessions and recov-
eries in the 28 years since the demobilization in 1947. These periods
of decline and upswing have been quite short: with the exception of
periods of war they have generally lasted one or two years. If quar-
terly data were used in Table 1, a more exact measure of the timing
and length of the recessions and recoveries would be obtained. But
for present purposes the annual data quite adequately show the fre-
quency and length of the fluctuations.
1 The change in the level of unemployment rather than the change In real GNP has
been taken as a measure of recession and recovery since in some periods the increase in
real GNP has not been sufficient to keep up with the increase in capacity and the growth
of the labor force. This was true in 1949, 1957, 1961 and 1971, when real GNP increased but
the level of unemployment also rose. It seems more appropriate in the present context,
in view of the sluggish behavior of the economy, to classify these as recession years.








TABLE 1.-ANNUAL CHANGES IN FINAL EXPENDITURES FOR GROSS NATIONAL PRODUCT, REAL GROSS NATIONAL
PRODUCT, AND THE IMPLICIT PRICE DEFLATOR, AND LEVEL OF UNEMPLOYMENT, 1947-75
[Dollar amounts in billions]

Implicit Unem-
Con- Govern- Gross Real price ployment
summer ment domestic Gross GNP deflator (percent
expendi- expendi- invest- national (percent (percent of labor Type of
Year tures tures merit Exports Imports product change) change) force) period
(1) (2) (3) (4) (5) (6) (7) (8) (9)

1947... $18.0 -$2.2 $3.3 $5.0 $1.0 $23.2 -1.6 12.1 3.1 Demobili-
zation.
1948... 13.0 6.5 11.9 -2.9 2.2 26.3 4.1 6.9 3.8 Recovery.
1949... 3.4 6.5 -10.6 -1.0 -.1 -1.1 .6 -1.6 5.9 Recession.
1950... 13.9 .2 18.5 -2.0 2.4 28.2 8.7 2.0 5.1 Recovery
1951... 15.1 21.6 5.4 5.0 3.1 44.0 8.1 6. 3.3 1 and
1952... 10.1 15.5 -7.1 -.7 .7 17.0 3.8 1.3 3.0 Korean
1953... 12.6 7.0 1.2 -1.1 .3 18.9 3.9 1.5 2.9 J war.
1954... 6.2 -6.8 -.6 .9 -.6 .2 -1.3 1.4 5. 5 Recession.
1955... 17.8 -.7 15.7 2.1 1.8 33.0 6.7 2.2 4.4 Reoe
1956.. 12.3 4.4 2.6 3.8 1.8 21.5 2.1 3.1 4.1 Ro
1957... 14.4 7.7 -1.8 2.9 1.1 22.1 1.$ 3.4 4.3 t|c ,o
1958.. 9.1 8.0 -7.4 -3.4 .1 6.1 -.2 1.6 6.8 j session.
1959... 21.3 2.5 15.7 .4 2.4 37.6 6.1 2.2 5. 5 ov
1960.. 14.2 2.7 -1.1 3.9 0 19.5 2.3 1.7 5.5 Rcovery.
1961.. 10.1 7.9 -2.1 1.3 -.1 17.3 2.5 .9 6.7 Recession.
1962... 20.2 9.9 10.9 1.7 2.1 40.5 5.8 1.8 5.51
1963... 19.4 5.7 5.0 2.1 1.2 30.9 4.0 1.5 5.7
1964... 25.8 6.1 6.4 4.7 2.0 41.0 5.3 1.6 5.2 Recovery
1965... 29.8 8.6 15.4 2.1 3.6 52.4 5.9 2.2 4.5 and
1966... 34.7 20.3 12.4 3.3 5.7 64.9 5.9 3.3 3.8 Vietnam
1967... 25.6 21.5 -3.6 2.8 2.9 43.3 2.7 2.9 3.8 war.
1968... 45.6 18.5 10.7 4.4 7.0 72.2 4.4 4.5 3.6
1969... 43.8 9.1 14.7 4.8 5.3 67.1 2.6 5.0 3.5
1970.-. 39.1 11.0 -5.4 7.8 5.6 46.9 -.3 5.4 4.9 cssin
1971-.. 49.4 14.9 19.2 3.1 5.5 80.9 3.0 5.1 5.9 ecesson
1972... 64.9 19.3 28.3 7.1 11.9 107.7 5.2 4.1 5.6 Reo
1973... 76.9 16.4 31.7 28.9 18.2 135.2 5.3 5.9 4.9 Recovery.
1974... 77.6 33.8 -5.0 42.8 42.5 106.6 -1.7 10.0 5.6 Recession.
1975... 85.7 35.7 -31.3 3.7 -9.3 103.1 -1.8 9.3 8.5 )


Sources: Cols. 1 to 8, national income accounts, "Survey of
table B22, "Economic Report of the President," January 1976.


Current Business," January 1976 and July 1976. Col. 9,


The year-to-year variability in real GNP (column 7) has been quite
high, ranging from +8.7 percent in 1950 to -1.8 percent in 1975. It
is interesting to note that the periods of highest price increases
(column 8) were for the most part those that were associated with the
sharpest drops in real out. Conversely, many of the periods with high
growth rates in real output were associated with relatively low in-
creases in thle implicit price deflator. The level of unemployment has
also varied widely over the 30-year period, reaching a low of 2.9 per-
cent of the labor force in 1953 and a highi of 8.5 percent in 1975. The
two periods of lowest unemployment were war periods; since the year
1948, tlie unemployment rate in recovery never fell as low as four
percent. Thus recoveries dissolved into recession before full employ-
iment could be reached.
An examination of annual changes in finial expenditures for gross
national product (columns 1-5 in Table 1) shows that consumer
'expendlitulres rose in every year, reflecting the growth in population
and tlie increase in real income over the period. The variation in the
annuall changes of consuinmer expenditures follows in large degree the
variation in personal income. Government expenditures also rose in
lost years, but increased most sharply luringg the Korean war in 1951
and 1952 and the Vietnam war in 1966,1967, and 1968. Gross domestic
investillent showed considerable year-to-year variability-declining in







every recession, exhibiting a sharp increase at thle beginning of each
recovery, and generally tapering off as the recovery proceeded. The
annual changes in exports and imports are quite variable, but are small
relative to the changes in the other components of final expenditures.
In order to analyze the mechanism by which thle economy moves
from a recovery period into recession before ever reaching full employ-
ment, it will be necessary to examine the saving and capital formation
of the different sectors of the economy in greater detail.

SECTORAkL SAVING AND CAPITAL FORiMATION
In traditional models of economic analysis, gross capital formation
is carried out by enterprises, and households provide the saving. The
government sector is usually omitted from this part of discussion,
except to the extent that one wishes to introduce policy variables. The
national income accounts of the United States produced by the Bureau
of Economic Analysis of the Department of Commerce are formally
drawn up on this basis. Gross domestic investment is solely a business
activity. Although businesses are also recognized as having gross
saving in the form of capital consumption allowances and retained
earnings, households are not considered to do capital formation on
their own, but engage only in "personal saving," which is the difference
between disposable income and consumer expenditures. A somewhat
different view is provided by the flow of funds statistics of the Board
of Governors of the Federal Reserve System, which recognize that
households purchase consumer durables, automobiles and houses, and
that these do in fact constitute capital formation by households. Even
if the gross domestic investment concepts of the BEA is adhered to,
however, it is still possible to reorganize their national income accounts
to reflect more nearly the saving and capital formation which takes
place within specific sectors.2 For present purposes the following
sectors will be examined: (1) Households; (2) Miningr and manufac-
turing; (3) Transportation, communication and utilities; (4) Other
industries: agriculture, construction, trade, real estate, and services;
(5) The Federal government and State and local governments; and
(6) Foreign investment.

Household Sector
Ideally the household sector should be defined so that it would show
the activities of families and individuals in their role as consumers.
As defined in the national income accounts, however, the household
sector includes in addition both nonprofit institutions (universities,
hospitals, foundations, etc.) and unincorporated enterprises (farms,
shops, etc.). Although it is not practical at this juncture to redefine
the sector to exclude these elements, one can attempt to adjust its per-
sonal saving and capital formation to take into account some of the
more obvious departures from what is wanted. For example, it is ap-
parent that households do engage in capital formation when they
2 Research on extending and resectoring the national income accounts and constructing
subsector balance sheets is being carried out at the National Bureau of Economic Research
under a National Science Foundation supported project, "The Measurement of Economic
and Social Performance," NSF Grant No. SOC74-21391.






6

purchase a house to be used as a residence, and that the allowance for
capital consumption of owner-occupied housing should be part of
their gross saving. In the BEA accounts, the purchases of residences
are treated as capital formation by business, and the capital consump-
tion of owner-occupied houses as part of business gross saving.S
Another anomaly is the role of pensions and insurance contribu-
tions, which are included as part of household income and of personal
savings. While it is true that some individuals make discretionary pur-
chases of pensions and life insurance out of their current income, a
more customary situation is one in which the employer provides pen-
sions or life insurance as a fringe benefit. These fringe benefits are
costs to the employer, but like social security they are withheld by
the employer and should not be included in the employee's current
disposable income, since the employee has no direct control over them.
The argument that they represent future income and therefore should
be included, or that the employee can borrow against them, is not
relevant. The whole stream of future earnings represents future in-
come, and an individual can in theory borrow against this too, but no
one would suggest including it in current income. In welfare terms it
is undoubtedly correct that pension and life insurance contributions
improve the well being of individuals, but as a source of saving it is
far more reasonable to treat the pension and insurance contributions
in the receipts of a separate financial sector. Such a sector plays a very
important role in providing funds, but this role is independent of
the short run decisions made by households about the disposition of
their current disposable income.

TABLE 2.-SAVING AND INVESTMENT ACCOUNTS FOR THE HOUSEHOLD SECTOR, 1948-75
[In billions of dollars]

Capital
consumption Net Net
allowances Pension and purchase financial
of owner- insurance Gross of owner- saving(+)
Personal occupied contribu- disposable occupied or borrow*
Year saving housing tions saving housing ing(-) Type of period
(1) (2) (3) (4) (5) (6)

1948...... 10.6 2.6 5.3 7.9 12.6 -4.7 Recovery.
1949...... 6.7 2.8 5.6 3.9 11.5 -7.6 Recession.
1950...... 10.8 3.1 6.9 7.0 16.4 -9'.41
1951...... 14.8 3.6 6.3 12.1 14.9 -2.8 Recvery and Korean war.
1952--.... 16.0 3.9 7.8 12.1 14.7 -2.6 overy and Korean W
1953...... 17.0 4.1 8.0 13.1 15.3 -2.2
1954...... 15.6 4.4 7.9 12.1 16.7 -4.6 Recession.
1955...... 14.9 4.8 8.5 11.2 20.0 -8.8 Recovery.
1956...... 19.7 5.1 9.5 15.3 18.5 -3.2
1957...... 20.6 5.5 9.5 16.6 17,.2 -.6 Recession.
1958...... 21.7 5.9 10.4 17.2 17.5 -. 3
1959...... 18.8 6.4 11.9 13.3 21.1 -7.8 1Rcvr
1960...... 17. 1 6.8 11.6 12.3 18.9 -6.6 cover.
1961...... 20.2 7.1 12.2 15.1 18.2 -3. 1 Recession.

'The United States national income accounts include an imputation for the space
rental value of uwner-occupled housing, which Is treated as a consumer outlay and thus
reduces personal saving., although much of It does not represent any actual outlay. After
deducting from the imputed expenditure the actual costs of maintaining the house (re-
pairs, taxes. etc.). the remaining amount Is split between (1) imputed capital consump-
tion allowances, which are treated as part of business gross saving, and (2) imputed
income of the homeowner in the form of net Interest and rental income. In actuality, of
course, the capital consumption allowances of owner-occupied housing do not accrue to
any business; rather this part of the imputed expenditure of homeowners for space
rental is kept within the household, so that It is in fact part of household gross saving.







TABLE 2.-SAVING AND INVESTMENT ACCOUNTS FOR THE HOUSEHOLD SECTOR, 1948-75-Continued
[In billions of dollars]

Capital
consumption Net Net
allowances Pension and purchase financial
of owner- insurance Gross of owner- saving(+)
Personal occupied contribu- disposable occupied or borrow-
Year saving housing tions saving housing ing(-) Type of period
(1) (2) (3) (4) (5) (6)

1962 .... 20.4 7.4 12.7 15.1 19.1 -4.0
1963 .... 18.8 7.7 14.1 12.4 20.8 -8.4
1964-.... 26.1 8.1 15.6 18.6 21.5 -2.9
1965 .... 30.3 8.5 17.0 21.8 21.9 -.1 Recovery and Vietnam
1966 .- 33.0 8.8 19.4 22.4 20.6 1.8 war.
1967 ... 40.9 9.2 19.6 30.5 21.1 9.4
1968 .. 38.1 10.5 20.1 28.5 24.5 4.0
1969 -.... 35.1 12.1 21.3 25.9 25.4 .5
1970 ....- 50.6 12.8 24.3 39.1 24.9 14.2 Recession.
1971_ _ 57.3 13.7 27.7 43.3 35.5 7.8
1972.---.- 49.4 14.7 30.3 33.8 44.4 -10.6 Recovery.
1973__ 70.3 17.1 31.6 55.8 45.0 10.8 eco y
1974 ... 72.2 19.8 38.9 53.1 38.5 14.6 }Recession.
1975_.... 84.0 22.2 *41.0 65.2 37.5 27.7

Sources: Cols. I and 3 "Economic Report of the President," February 1976, tables B-18 and B-19. Cols. 2 and 5, Depart-
ment of Commerce, revised national income accounts, table 8.3.

These adjustments to personal saving have been made in Table 2.
The capital consumption allowances of owner-occupied housing have
been added to the total of personal saving available to households, and
pension and insurance contributions have been treated as a deduction
from personal income. The resulting gross disposable saving available
to households is shown as column 4. Column 5 shows net purchases of
owner-occupied housing by households, that is, their capital forma-
tion. This amount subtracted from gross disposable saving gives the
net financial saving, or when negative, borrowing, by household sector,
excluding their pension and insurance contributions. For the period
from 1947 through 1965 the capital formation of households exceeded
their gross disposable saving, and the sector as a whole was a net
borrower, not a source of saving. Since 1965, the failure of residential
housing to maintain its vigor has led to the household sector's having
some net financial saving over and above its pension and insurance
contributions. In the context of the economy as a whole, however, this
net lending is relatively small, varying from about -7 percent to
+ 20 percent of gross saving. It is interesting to note that households'
net financial saving was at its highest level in 1975, the period of
deepest recession since World War II.
This situation is in marked contrast to the usual view of the house-
hold sector as a major supplier of savings, which are employed for
capital formation by other sectors of the economy. In normal periods,
it is not the thrift of the individual householder that makes possible
the capital formation of the other sectors of the economy. In effect all
the household sector is managing to do is to provide almost enough
saving to cover its own purchases of durables.








TABLE 3.-SAVING AND INVESTMENT ACCOUNTS FOR MINING AND MANUFACTURING, 1948-75
[In billions of dollars]

Net finan-
Plant and cial lending
Capital con- Utndis- Gross equipment Net (+) or bor-
sumption tribute saving expendi- change in rowing (-)
Year allowances profits 1 (1+2) tures inventories (3-(4+5)) Type of period
(1) (2) (3) (4) (5) (6)

1948....... 6.3 2.6 8.9 9.9 1.2 -2.2 Recovery.
1949....... 6.6 4.4 11.0 8.0 -1.6 4.6 Recession.
1950....... 7.3 1.9 9.2 8.2 2.2 -1.4
1951....... 8.1 3.3 11.4 11.8 8.0 -8.4 Recovery and Korean
1952....... 9.0 4.1 13.1 12.7 1.9 -1.5 war
1953....... 9.9 3.5 13.4 13.1 1.2 -.9
1954....... 10.5 4.5 15.0 12.5 -2.6 5.1 Recession.
1955....... 11.1 6.8 17.9 13.2 2.6 2.1 )Recovery.
1956....... 12.4 5.4 17.8 17.0 3.8 -3.0 r
1957....... 13.4 5.4 18.8 18.2 -.3 .9 Recession.
1958....... 14.1 4.0 18.1 13.8 -2.1 6.4 Re1s
1959....... 14.3 6.6 20.9 14.2 2.2 4. 4 Recover
1960....... 14.7 5.8 20.5 16.4 1.2 2.9 very.
1961....... 15.0 5.1 20.1 15.6 1.4 3.1 Recession.
1962....... 15.5 6.6 22.1 16.5 3.4 2.2
1963....... 16.0 7.7 23.7 17.5 1.9 4.3
1964....... 16.6 9.5 26.1 20.7 3.1 2.3
1965....... 17.5 12.1 29.6 24.9 3.7 1.0 Recovery and Vietnam
1966....... 19.0 13.9 32.9 29.8 8.5 -5.4 war.
1967....... 20.8 11.3 32.1 30.2 5.8 -3.9
1968 ....... 22.9 9.5 32.4 30.0 4.3 -1.9
1969....... 25.0 5.7 30.7 33.5 4.6 -7.4
1970....... 27.4 1.1 28.5 33.9 1.2 -6.6 Recession.
1971....... 29.5 4.6 34.1 32.2 -1.1 3.0
1972....... 30.6 10.1 40.7 33.8 2.1 4.8 Recovery.
1973....... 32.2 8.8 41.0 40.8 6.2 -6.0 1
1974....... 35.6 -2.0 33.6 49.2 8.3 -23.9 Recession,
1975....... 38.5 12.3 50.8 52.1 -7.7 6.4

1 Includes capital consumption and inventory valuation adjustments.
Sources: Cols. 1, 2, 5, from Department of Commerce, revised national income accounts,tables 6.24,6.15,6.23, 5.8;
Col. 4, "Economic Report of the President," February 1976, table B38.

Mining and Manufacturing

The mining and manufacturing sector, which is shown in Table 3,
accumulates its gross saving in the form of capital consumption allow-
ances and retained earnings. In the recent revision of the national in-
come accounts made by the BEA an adjustment was made to capital
consumption allowances so that they would more correctly reflect eco-
noimic depreciation rather than the book value depreciation charged
by business firms. This adjustment has no net effect on the gross saving
of a firm, however, since an equal and opposite adjustment is made
to un(listributed profits. The inventory valuation adjustment to cor-
p)orate profits (and thus to undistributed profits) does affect the total,
however. It is made to eliminate from profits gains attributable to
tile change in the prices at which inventories are valued. Gross saving
columnn 3) thus represents sources of funds available to producers
aside from those arising from inventory profit or loss.
capital l formiation by the manufacturing and mining sector is com-
posedl of their expenl(litures for plant and equipment and the net
iic'riease in the volume of their inventories. The difference between
Ilhir gross s1v'ing and tlieir capital formation (columnn 6) is the net
lendliug or borrowing of miantifacturing and ininng enterprises. In
.i yer, iS Iisetors toS gross savin, exceed(led its capital formation,
and in otlier years its capital formation exceeded its gross saving. For





9

the period as a whole, however, mining and manufacturing just about
covered its own needs. In fact, up through 1972 it covered more than
100 percent of its own needs. The major periods of borrowing occurred
in years of either substantial inventory accumulation or low profits.

Transportation, Communications, and Utilities

This sector of the economy behaves quite differently from mining
and manufacturing, as is apparent from Table 4. Gross saving in the
form of capital consumption allowances and undistributed profits on
average constituted little more than half of total expenditures on plant
and equipment. Relative to capital consumption allowance, undis-
tributed profits are small, and because capital consumption allow-
ances increase continually over the years gross saving also reflects
this increase. For the period from World War II to 1963, the rate
of increase in plant and equipment expenditures in this sector approxi-
mately matched the rate of increase in gross savings, so that although
there were fluctuations in net borrowing from year to year there was
no substantial increase. Since 1963, however, expenditures on plant
and equipment in this sector have increased substantially more than
gross saving, causing the net financial borrowing to rise very
substantially.
OtJher Industries
It would be desirable to examine other subsectors such as agricul-
ture, real estate, and trade in somewhat great detail. Unfortunately
at this time it is not feasible to separate these sectors statistically, so
that they must be viewed as a consolidated group. In general these
industries come fairly close to providing gross saving sufficient to
cover their plant and equipment expenditures, but not the increase in
their inventories, as is shown in Table 5. Thus for most of the period
with the exception of the latter part of the Korean War this sector
was a net borrower. Borrowing intensified when increases in inven-
tories were substantial.
TABLE 4.-SAVING AND INVESTMENT ACCOUNTS FOR TRANSPORTATION, COMMUNICATION AND UTILITIES
1948-75
[Billions of dollars]

Net
financial
Capital Plant and Net lending(+)
consump- Undis- Gross equipment change or borrow-
tion tribute saving expendi- in ing (-)
Year allowances profits 1 (1+2) tures inventories (3-(4+5)) Type of period
(1) (2) (3) (4) (5) (6)
1948 ---- 2.9 0.4 3.3 7.0 -------- -3.7 Recovery.
1949 3.0 .3 3.3 6.8 ---------- -3.5 Recession.
1950 3.4 .5 3.2 6.8 -------- --2.9
1951....... 4.2 .4 4.6 8.0---------- -3.4 Recovery and Korean
1952....... 4.3 .4 4.7 8.3 ---36 6 ar.-r6
1953....... 4.6 .4 5.0 9.0 --------------4.0 war
1954 ---- 4.7 .2 4.9 8.2 --"--3.3 Recession.
1955....... 5.1 .5 5.6 8.7 --- 3.1 --3
1956....... 5.6 .4 6.0 10.4 ----------- -4.4 Recovery.
1957 ----- 6.1 .2 6.3 12.1 ---------- --- 5.8 Recession.
1958 ------- 6.5 .1 6.6 10.6 -4.0 0
1959 ----- 6.8 .4 7.2 11.0 ----------3.8 recovery.
1960_______ 6.9 .4 7.3 11.6 ------------- 4.3 1
1961....... 7.6 .4 8.0 11.2 .... ...... -3.2 Recession.
See footnote at end of table.
78-543-76-------






10

TABLE 4.-SAVING AND INVESTMENT ACCOUNTS FOR TRANSPORTATION, COMMUNICATION AND UTILITIES,
1948-75-Continued
[Billions of dollars]

Net
financial
Capital Plant and Net Iending(+)
consump- Undis- Gross equipment change or borrow-
tion tribute saving expendi- in ing(-)
Year allowances profits 1 (1+2) tures inventories (3-(4+5)) Type of period
(1) (2) (3) (4) (5) (6)

1962....... 7.4 .8 8.2 11.9 ------------- -3.7
1963..._... 7.7 1.3 9.0 12.3 ----- --3.3
1964...... 7.9 1.5 9.4 14.3 ........... -4.9
1965--- 8.5 2.2 10.7 16.3 .....---------.. -- -5.6Recovery and Vietnam
1966..... 9.3 2.3 11.6 19.2 ......------------.. -7.6 very and Vietnam
1967....... 10.1 1.2 11.3 20.7 ------------- -9.4 war.
1968.....- 11.0 .2 11.2 22.7------- -11.5
1969 .---. 12.3 0 12.3 25.9 ..-..... -13.6
1970 ...-- 13.7 -1.0 12.7 29.3---------- -16.6 Rcsi
1971 ....... 15.8 -1.1 14.7 30.9 ..------------ -16.2 Rcession.
1972...--.- 17.3 -.9 16.4 34.6------------...... -18.2
1973...-- 19.1 -2.8 16.3 37.6 ....--- .. -21.3 Recovery.
1974....... 21.2 -4.1 17.1 41.1 ------------ -24.0 Rei
1975...-.- 23.4 -1.1 22.3 40.7 ----.-------- -18.4 Recession.

1 Includes capital consumption and inventory valuation adjustments.
Sources: As on table 3.

TABLE 5.-SAVING AND INVESTMENT ACCOUNTS FOR AGRICULTURE, CONSTRUCTION, TRADE, REAL ESTATE, AND
SERVICES, 1948-75
In billions of dollars]

Net
financial
lending
Capital Plant and (+) or
con- Un- Gross equipment Netchange borrowing
sumption distributed savings expend- in --)
Year allowances profits (1+2) itures inventories (3-(4+5)) Type of period
(1) (2) (3) (4) (5) (6)

1948....... 8.5 7.3 15.1 11.6 3.5 0 Recovery.
1949---- 9.6 4.2 14.5 12.1 -1.5 3.9 Recession.
1950 ...--- 10.1 6.3 14.6 15.6 4.6 -5.6
1951 ...-- 11.8 3.9 15.1 14.2 2.3 -1.4 Recovery and Korean
1952 .....- 12.4 2.7 15.4 13.3 1.2 .9 war.
1953...... 13.0 2.8 15.5 15.5 -.8 .8
1954....... 13.5 3.2 16.7 16.9 1.1 1.3 Recession.
1955....... 14.3 5.3 19.3 20.5 3.3 -4.5 Reor
1956....... 15.8 5.0 19.8 20.4 .9 -1.5 recovery,
1957 ....-. 17.0 4.1 20.6 20.4 1.6 -1.4 Recession.
1958....... 17.6 3.2 20.7 21.5 .6 -1.4 Rcesson
1959..--... 18.6 5.5 24.0 26.0 3.0 -5.0 Recovery.
1960....... 19.3 4.7 24.1 25.8 2.6 -4.3 S y
1961 ....... 19.4 5.4 24.6 27.1 .8 -3.3 Recession.
1962....... 20.2 9.1 29.2 31.2 3.1 -5.1
1963 .....- 20.8 8.9 29.6 33.6 4.1 -8.1
1964....... 21.9 10.9 32.6 34.3 2.7 -4.4
1965....... 22.8 13.6 35.6 39.4 5.8 -9.6 Recovery and Vietnam
1966...... 24.6 14.3 37.9 40.6 5.8 -8.5 war.
1967....... 26.9 15.0 41.1 38.7 4.3 -1.9
1968 ...-- 29.3 16.4 44.1 46.6 3.4 -5.9
1969 ...-- 33.1 15.9 46.6 52.0 4.8 -10.2
1970...--.... 36.9 10.4 47.3 48.9 2.6 -4.2 Recession.
1971 ...-- 39.8 12.9 52.7 55.0 7.5 -9.8 R*o
1972 -..--- 42.8 16.7 59.5 66.1 7.3 -13.9 Recvery.
1973.----. 49.3 16.6 65.9 78.7 11.7 -24.5 5ey
1974...... 61.1 7.8 68.9 75.5 2.4 -9.0 Recession
1975...... 77.3 -1.0 76.3 68.0 -6.9 15.2 Reso

I Includes capital consumption and inventory valuation adjustments.
Sources: Same as table 3.






il

TABLE 6.-RECEIPTS, EXPENDITURES AND NET LENDING (+) OR NET BORROWING (-) OF THE GOVERNMENT
*SECTOR, 1948-75
[Billions of dollars]

Federal State and local Total
Net lend- Net lend- Net lend-
ing (+) ing(+) ing(+)
or net or net or net
Expend- borrowing Expend- borrowing borrowing
Year Receipts itures (-) Receipts itures (-) (-) Type of period
(1) (2) (3) (4) (5) (6) (7)

1948------- 43.2 34.9 +8.3 17.7 17.5 +0.2 +8.5 Recovery.
1949 ....... 38.7 41.4 -2.6 1.4 20.1 -.7 -3.3 Recession.
1950-------...-. 50.0 40.8 +9.3 21.3 22.5 -1.2 +8.1
1951...-------.- 64.3 57.8 +6.5 23.4 23.9 -.5 +6.01 Rcer and Korean war.
1952 ..------- 67.4 71.0 -3.7 25.4 25.5 -.1 -3.7 recovery and Korean war.
1953..-------.. 70.0 77.1 -7.1 27.4 27.3 +.2 -7.0
1954-------. 63.7 69.8 -6.1 29.0 30.1 -1.1 -7.2 Recession.
1955-------...... 72.6 68.1 +4.5 31.7 32.9 -1.3 +3.2 1 Recovery.
1956-------....... 77.9 71.9 +6.0 35.0 35.8 -.9 +5.1 R y
1957...-------. 81.8 79.7 +2.2 38.5 39.8 -1.4 +.8 Recession.
1958 ...------- 78.6 89.0 -10.4 41.9 44.3 -2.4 -12.7
1959..-------. 89.8 90.9 -1.1 46.4 46.9 -.5 -1.6 Recovery.
1960.-------... 96.1 93.1 +3.1 49.9 49.8 +.1 +3.1 eey
1961-------....... 98.0 101.9 -3.9 54.0 54.3 -.4 -4.2 Recession.
1962.------- 106.2 110.4 -4.2 58.5 58.0 +.5 -3.7
1963...-------.. 114.4 114.1 +.2 63.2 62.8 +.5 +.7
1964-------....... 114.9 118.2 -3.2 69.5 68.5 +1.0 -2.2
1965------- 124.3 123.8 +.5 75.1 75.1 0 +.5 Recover and Vietnam war
1966.------- 141.8 143.6 -1.8 84.8 84.3 +.5 -1.3 recovery and Vietnam war.
1967 ....... 150.5 163.7 -13.2 93.6 94.6 -1.1 -14.3
1968-------....... 174.7 180.5 -5.8 107.2 106.9 +.3 -5.5
1969.--.----- 197.0 188.4 +8.5 119.7 117.5 +2.1 +10.7
1970-------... 192.0 204.2 -12.1 134.9 132.2 +2.8 -9.3 )Rei
1971....------- 198.6 220.6 -22.0 152.6 148.9 +3.7 -18.3 ecesson
1972.------- 227.5 244.7 -17.2 177.4 163.7 +13.8 -3.5 1 Rcv
1973.------- 285.3 265.0 -6.7 193.5 180.5 +13.0 +6.3 Reovery.
1974.--.----- 288.2 299.7 -11.5 210.2 203.0 +7.3 -4.2 Recession.
1975-.-.--- 286.5 357.7 -71.2 234.3 227.5 +6.9 -64.4 jes4

Source: Revised national income tables 3.2 and 3.4, "Survey of Current Business," January 1976 and July 1976.

Government Sector

The government sector is shown in Table 6 divided into Federal
on the one hand and State and local on the other. Federal govern-
ment deficits generally reflect either wars or recessions. In the re-
covery of the early 1960s, there were deficits in 1962 and 1964 as a
result of tax reductions and moderate increases in expenditures. In
the recovery of 1972 and 1973 the deficit declined from its level during
the 1971 recession, but it never went into surplus.
State and local governments present a somewhat different picture.
During the first half of the period, i.e., through 1961, small deficits
were quite common, reflecting the fact that during this period state
and local governments were financing considerable real capital for-
mation (though it is not treated so in the national accounts) due
to the population and housing boom and the associated needs for
expenditure on infrastructure at the local level. Since 1961, state and
local governments have generally shown surpluses.
For a number of reasons, the surpluses and deficits of the Federal
government and the State and local governments should not be. con-
sidered separately. The Federal government through grants in aid
and revenue sharing currently furnishes approximately $60 billion
to State and local communities-an amount far larger than the sur-
pluses of these governments. By this process funds are transferred






12

from the Federal government to State and local governments, adding
to the deficit of the Federal government and making surpluses pos-
sible for State and local governments. Combining the surpluses of all
levels of government, as is done in column 7, gives a more valid pic-
ture of the government sector's saving and borrowing activity. This
consolidation emphasizes the importance of recessions and wars in
determining the surplus or deficit of the government as a whole.

TABLE 7.-NET LENDING (+) AND BORROWING (-) BY SECTOR, 1948-75
[In billions of dollars]

Trans- Agri-
Insur- portation, culture,
ance and commun- construc-
pension Mining ications, tion Foreign Statis-
House- contribu- and man- and trade, and Gov- invest- tical dis-
Year holds tions ufacturing utilities services ernment ment crepancy Type of period
(1) (2) (3) (4) (5) (6) (7) (8)

1948....... -4.7 5.3 -2.2 -3.7 0 8.5 -2.0 -1.2 Recovery.
1949....... -7.6 5.6 4.6 -3.5 3.9 -3.3 -.6 1.0 Recession.
1950....... -9.4 6.9 -1.2 -2.9 -5.6 8.1 2.1 2.0
1951....... --------2.8 6.3 -8.4 -3.4 -1.4 6.0 -.3 4.0 Recovery and
1952....... --------2.6 7.8 -1.5 -3.6 .9 -3.7 .2 2.7 Korean war.
1953....... --------2.2 8.0 -.9 -4.0 .8 -7.0 1.9 3.3
1954....... --------4.6 7.9 5.1 -3.3 -1.3 -7.2 .3 3.0 Recession.
1955....... --------8.8 8.5 2.1 -3.1 -4.5 3.2 .3 2.5 5 o.
1956-------...... -3.2 9.5 -3.0 -4.4 -1.5 5.1 -1.8 -.8 Recovery.
1957_______ -.6 9.5 .9 -5.8 -1.4 .8 -3.6 2 Recession.
1958...... --.3 10.4 6.4 -4.0 -1.4 -12.7 -.1 1.7
1959....... --7.8 11.9 4.4 -3.8 -5.0 -1.6 2.0 -.2
1960....... --------6.6 11.6 2.9 -4.3 -4.3 3.1 -1.7 -.7 Recovery.
1961 ....... -3.1 12.2 3.1 -3.2 -3.3 -4.2 -3.0 1.6 Recession.
1962....... -4.0 12.7 2.2 -3.7 -5.1 -3.7 -2.4 4.0
1963....... --8.4 14.1 4.3 -3.3 -8.1 .7 -3.2 3.7
1964....... -2.9 15.6 2.2 -4.9 -4.4 -2.2 -5.7 2.2
1965....... --.1 17.0 1.0 -5.6 -9.6 .5 -4.3 .9 Recovery and
1966....... 1.8 19.4 -5.4 -7.6 -8.5 -1.3 -1.6 3.2 Vietnam war.
1967....... 9.4 19.6 -3.9 -9.4 -1.9 -14.2 -1.2 1.7
1968....... 4.0 20.1 -1.9 -11.5 -5.9 -5.5 1.4 -.6
1969...... .5 21.3 -7.4 -13.6 -10.2 10.7 2.0 -3.3
1970....... 14.2 24.3 -6.6 -16.6 -4.2 -9.3 .3 -2.1 Rcsin
1971....... 7.8 27.7 3.0 -16.2 -9.8 -18.3 3.9 3 Rcesson
1972....... -10.6 30.3 4.8 -18.2 -13.9 -3.5 9.8 1.4 Recover.,
1973...... 10.8 31.6 -6.0 -21.3 -24.5 6.3 .6 2.7 V17
1974....... 14.6 38.9 -23.9 -24.0 -9.0 -4.2 1.0 6.6 Ra .
1975....... 27.7 41.1 6.4 -18.4 15.5 -64.4 -11.9 4.4 sso.

Sources: Cols. 1.6 from tables 1.6; cols. 7 and 8 from national income accounts, table 5.1, "Survey of Current Business,"
January 1976 and July 1976.
The Foreign Sector

Table 7 shows the net lending and borrowing activities of all of
the sectors, including foreign investment (column 7) and the statis-
tical discrepancy. When export markets are strong and exports exceed
imports the United States will show positive net foreign investment;
that is, the United States is lending funds for foreigners to purchase
exports. Conversely when net foreign investment is negative this
means that the United States is importing or providing net transfer
payments to foreigners in an amount which exceeds what it receives
or its exports, and thus is borrowing from the rest of the world. For
most years, the net borrowing from abroad or lending to abroad is
relatively small.





i 13

SUMMARY OF SECTORAL INTERRELATIONS
In Table 7, the net lending and borrowing by all sectors including
the statistical discrepancy adds up to zero, except for rounding errors
and for some years a minor amount due to the excess of wage accruals
over disbursements. Given the sectoring chosen for this analysis, it
becomes apparent that insurance and pension contributions constitute
a major source of intersectoral lending. Conversely, the capital forma-
tion of transportation, communication and utilities constitutes a major
use of borrowing. The other sectors behave quite differently in pros-
perity and recession, and over time. The household sector, which was
a net borrower up through 1965, became a net lender as residential
housing declined, and in periods of recession it becomes a substantial
lender due to the further decline in expenditures on purchases of new
housing. The government shows substantial deficits in recessions and
periods of war. Fewer generalizations can be made for the remaining
sectors, although as was noted in the discussion of the individual sec-
tors the role of inventory accumulation and the level of profits were
important considerations.
SHORT-RUN EcoNoMIC GROWTH AND SAVING AND INVESTMENT
Itis widely recognized that many factors can affect the short run be-
havior of the economic system. Wars, changes in monetary and fiscal
policy, and exogenous factors such as changes in world markets and
variations in agricultural crops may all have a major impact. It is
also true, however, that changes in the level of economic activity and
normal economic growth will have feedback effects which in turn will
alter the future performance of the economy. These feedback effects
operate through a differential impact of growth on the saving and the
investment which different sectors of the economy wish to do.
In the initial recovery from a recession, inventories, which had been
declining during the previous recession, turn around and once again
become a positive element in gross capital formation. With the up-
turn in the level of business activity profits are restored, so that
undistributed profits become a major element of gross saving for enter-
prises. In this early phase capital formation in the form of fixed in-
vestment also turns around. Probably the most striking feature of
this phase of the cycle, however, is the increase in government tax
receipts which results from the higher income and profits which ac-
company the recovery period. In view of the sluggish nature of the
government appropriation process, government outlays do not in-
crease significantly during the recovery period; some outlays such as
unemployment benefits and welfare costs may automatically drop off.
As a result the government deficit declines sharply, reducing the
amount of government dissaving. Thus in this early phase of recovery
increased capital formation due primarily to the inventory turn-
around is balanced by increased saving in the form of increased re-
tained earnings and decreased government dissaving.
SAs the recovery proceeds, the rate of inventory accumulation damp-
ens. Enterprises reach the point where they want no further increase
in their stocks of raw materials and finished goods. The recovery to






14


tis point will have resulted in some pickup in expenditures on fixed
investment in anticipation of continued growth in demand and in light
of increased profits. Government tax receipts continue to rise with the
increase in incomes and profits, closing the gap between total revenues
and outlays. Nevertheless, at this stage of the recovery the rate of
increase is already slowing down, since the rate of increase in capital
formation including inventory accumulation is advancing more slowly.
The point is soon reached when further expansion of the economy
would generate more savings (due mainly to undistributed profits and
tax revenues) than are needed to offset the expenditures on inventory
accumulation and fixed investment which producers are willing to
make. At this point unwanted inventories begin to accumulate, output
is cut back to prevent further inventory accumulation, and the new
recession begins. What has happened is that output is increasing at a
faster rate than people are able to purchase it, given the substantial
fraction of income that is siphoned off into profits and tax revenues.
The contribution of the household sector to the entire process is
relatively small in terms of fluctuations in either personal income or
outlay. It is true that when unemployment rises a portion of the popu-
lation is supported by unemployment benefits and welfare, and con-
sumer spending on durables and housing fluctuates, and this does
of course reinforce the short run fluctuation, but the magnitude of
these fluctuations in the household sector is small relative to those in
other sectors.
What is being described here is of course the classic inventory cycle,
which has been well recognized in the theory of economic fluctuations
and business cycles ever since work on these topics was initiated fifty
years ago. In a modern economy, what makes the inventory cycle
play such a dominant role is the fiscal drag generated by the auto-
matic increase in government revenue, which drains off purchasing
power during the later stages of recovery. This process aborts the
recovery, usually before it reaches full employment. The mechanism
does not depend in any way upon real capacity or availability of
labor; it is a function entirely of the change in money GNP. If by
chance due to war or some other exogenous circumstance the economy
may be pushed to full employment, once the exogenous circumstance
ceases this same mechanism will still operate to prevent the further
expansion of money gross national product required to maintain real
economic growth. Thus economic growth is frustrated and the aver-
age growth rate of the economy is restricted.
This explanation of the relation of short run economic growth to
saving and investment behavior can best be related to the six periods
of economic recovery in the last three decades in terms of the year-to-
year changes in expenditures on inventories and fixed investment by
the private sector and in the receipts and expenditures of the Federal
government. Table 8 provides such data for the period since 1948.
In the first postwar recovery, there was during 1948 a substantial
increase in inventory accumulation coupled with a strong increase in
fixed investment and an increase in Federal expenditures. Federal
revenues did not increase in this period because of tax reductions. In
the next year, 1949, both inventory accumulation and fixed investment
declined, bringing the recovery to a halt and causing Federal receipts
also to decline.








TABLE 8.-ANNUAL CHANGES IN INVENTORIES AND FIXED INVESTMENT AND IN FEDERAL RECEIPTS AND EX-
PENDITURES, 1948-75
[Billions of dollars]
: Gross capital formation Federal budget
Change in Fixed in- Federal Federal ex- Federal
Year inventories vestment Total receipts penditures surplus Type of period

1948....... 5.2 6.7 11.9 0 5.1 -5.1 Recovery.
1949....... -7.8 -2.8 -10.6 -4.5 6.5 -10.9 Recession.
1950 ...---- 9.9 8.7 18.6 11.3 -.6 119 91
1951.....- 3.5 1.8 5.3 14.3 17.0 -2.:8 .Recovery and Korean war
1952 --- -7.1 .1 -7.1 3.1 13.3 -10.2 Recovery and Korean war.
1953 .....- -2.7 4.0 1.2 2.7 6.1 -3.4
1954....... -2.0 1.4 -.6 -6.3 -7.3 1.0 Recession.
1955 ....- 7.5 8.2 15.6 8.9 -1.7 10.6 |Recver
1956....... -1.3 3.9 2.7 5.3 3.8 1.5 1O
1957....... -3.3 1.5 -1.8 3.9 7.7 -3.8 Reion
1958..._... -2.9 -4.5 -7.4 -3.3 9.3 -12.5 jeessio.
1959..... 6.8 9.0 15.7 11.2 2.0 9.2 Rcovery.
1960 .---- -1.4 .4 -1.1 6.3 2.2 4.2 ecoer.
1961 ...-- -1.6 -.6 -2.2 1.9 8.8 -6.9 Recession.
1962 .... 4.3 6.6 10.9 8.2 8.5 -.4
1963 ...-- -.5 5.5 5.0 8.2 3.7 4.5
1964....... -.2 6.6 6.4 .6 4.0 -3.5
1965.---- 3.7 11.7 15.4 9.4 5.6 3.8 lRecovery and Vietnam
1966.---- 4.8 7.7 12.4 17.5 19.8 -2.3 war.
1967 ....-.- -4.2 .6 -3.6 8.7 20.1 -11.4
1968...-.. -2.4 13.1 10.7 24.2 16.9 7.4
1969 ...-- 1.7 13.0 14.7 22.3 7.9 14.4
1970..... -5.6 .2 -5.4 -4.9 15.7 -20.7 Recsson
1971.---- 2.6 16.6 19.2 6.6 16.5 -9.8 jecsso
1972----- 3.1 25.2 28.2 28.8 24.1 4.7 Rcvr
1973----- 8.5 23.3 31.8 30.8 20.3 10.5 Recovery.
1974.---- -7.2 2.2 -5.1 29.9 34.7 -4.8 oRecesi."
1975 .---- -25.3 -6.0 -31.3 -1.7 58.1 -59.8 csson

Sources: Same as table 1.

The second recovery, starting in 1950, was again characterized by
strong inventory accumulation and increased expenditures on fixed
investment, a process that was already well under way when the
Korean crisis occurred in the middle of the year. The increase in
government revenues in response to the upswing was substantial, but
government expenditures actually declined; gearing up for the war
did not effectively get started until the following year. During the
next two years, 1951 and 1952, however, it was the Korean war ex-
penditures of the Federal government which kept the recovery going.
Private fixed investment leveled off, and the rate of inventory accumu-
lation declined. The Federal government during this period spent
considerably more than it received. The recession of 1954 reflected
primarily the sharp drop in Federal expenditures as the Korean war
drew to a close. Private inventory accumulation and fixed investment
did not take up the slack.
The third recovery, starting in 1955, repeated the pattern of 1950.
Inventories, private fixed investment and Federal receipts all rose
sharply, and Federal expenditures continued their decline. By the next
year. 1956, however, the rate of fixed investment increase slowed, and
the inventory increase declined. In the Federal sector, receipts in-
creased faster than expenditures in both 1955 and 1956. By 1957 and
1958 gross capital formation was declining, and a recession set in-
and once again Federal receipts fell below Federal expenditures.
The fourth recovery in 1959 again started out with precisely the
same pattern as the previous recoveries, and again by the next year,
1960, the economy leveled off. Inventory accumulation declined and






16


fixed investment was essentially unchanged. The recession of 1961
again repeated the recession pattern, with government expenditures
rising faster than government revenue.
The fifth recovery starting in 1962, however, differed significantly
from the previous recoveries. In the initial year Federal expenditures
increased substantially, matching the increase in Federal revenues. In
1963, private fixed capital formation continued to rise sharply,
although inventory accumulation slowed. In 1964, the increase in Fed-
eral tax revenues dropped sharply as a consequence of a reduction in
tax rates, and private fixed investment continued to increase. The
recovery continued into 1965, with both fixed investment and inven-
tory accumulation showing sizeable increases. By 1966 and 1967, the
Vietnam war was causing Federal expenditures to increase more
rapidly than Federal revenues, so that the slowing in private fixed
investment and inventory accumulation was offset. In 1968 and 1969
the increase in private fixed investment once more resumed, as the
rate of increase of spending on Vietnam tapered off, but at this stage
the increase in government revenues substantially exceeded their in-
crease in expenditures. By 1970, however, private fixed investment
collapsed. The rate of inventory accumulation dropped, and the
economy went into a recession. The year 1971 is more difficult to
interpret. Although private fixed investment increased, Federal reve-
nues rose less than expenditures, and as was noted in the discussion of
Table 1, the economy did not rise fast enough to reduce unemployment.
The sixth recovery in 1972 again exhibited the typical pattern of
the earlier recoveries. Private gross capital formation increased
sharply, but Federal receipts rose faster than Federal expenditures
and the recovery was short-lived. By 1974 private capital formation
collapsed once more, and the economy went into its sharpest recession
in three decades.
Thus five of the six recoveries and their subsequent recessions
exhibited the same general pattern. The Korean and Vietnam wars
obviously extended the recoveries underway in 1951 and 1965. With
respect to the 1962 recovery, which was different from the others, it
may well be that fiscal policy including increased Federal expenditures
in 1962 and a tax reduction in 1964 had the result of stimulating invest-
ment over the period 196,2-1964 and thus sustaining the longest
recovery on record since World War II.
Although it is true that the automatic stabilizers reduced the severity
of recessions by limiting the decline in money GNP, they also limited
the increase in money GNP. Since the labor force was growing, the
recoveries of 1956 and 1959 aborted at successively higher levels of
unemployment; it is probable that the current economic recovery will
abort at a still higher level of unemployment. The more economic
growth is restricted, the higher the level of unemployment will be;
unless the long run rate of growth of output is at least as high as the
combined increase in the labor force and productivity, in the long run
unemployment must increase.

ECONOMIC GROWTII AND WAGE AND PRICE STABILITY
Many economists argue that continuous economic growth would
result in price instability, and that tlie cumulative rise in gross na-





17

tional product must periodically be halted by recession in order to
prevent runaway price inflation. According to this view, recessions
represent periods of readjustment and realignment, in which structural
readjustments take place and waste and inefficiency are eliminated. A
variant of this analysis is the view that there is a trade-off between
price stability and the level of unemployment and that as we approach
full employment the shortage of labor will cause wages to be bid up,
initiating a wage-price spiral; price stability can then only be restored
by returning to a higher level of unemployment. More recently it has
been suggested that the trade-off between prices and wages may grow
less favorable during periods of recovery thus making the problem of
trade-off even more serious.
In considering these views, it will be useful to examine the record
since World War II. Unfortunately, there is no simple way to examine
wages and prices. Many different types of price indexes exist. The
wholesale price index, the consumer price index, and the implicit price
deflator of the GNP each tell a somewhat different story in different
periods, and the components of these indexes provide even more diver-
gent information. Similarly, what is known about wages comes from
imperfect wage measurements and even less satisfactory measurements
of labor costs. Nevertheless, the main evidence that exists on price and
wage behavior is given in Table 9. It is possible from this table to
develop some meaningful generalizations.
If the wholesale price index is examined, one of the more striking
sub-indexes is that relating to farm prices. It is generally agreed that
prices of agricultural products are responsive to demand and supply
conditions. Bumper crops tend to lower prices, and shortages cause
prices to rise. Changes in the level of income in the economy also have
a considerable impact on farm prices, a drop causing farm prices to
fall, and a rise increasing farm prices. It is important to recognize that
this fluctuation in farm prices will occur with changes in income
whether or not the economy reaches full employment. The variability
of farm prices has long been recognized, and there is a long history of
agricultural price supports and other measures designed to introduce
greater price stability for the farmer. Column 1 of Table 9 bears out
this variability of farm prices, but it says nothing whatsoever about
its relation to full employment.
TABLE 9.-ANNUAL PERCENTAGE CHANGES IN PRICES AND WAGES, 1948-75
Wholesale prices Consumer prices Private nonfarm sector
Industrial Other Compen- Unit
Farm compen- cornm- station labor Implicit
Year products modities Food modities Services per hour cost deflator Type of period
(1) (2) (3) (4) (5) (6) (7) (8)
1948.---- 7.6 8.6 8.5 7.7 6.3 8.9 5.6 6.6 Recovery.
1949 -...... -11.7 -2.1 -4.0 -1.5 4.8 3.1 -.5 1.0 Recession.
1950 ....... 4.8 3.6 1.4 -.1 3.2 5.5 -.6 1.71
1951-------....... 13.8 10.4 11.1 7.5 5.3 8.8 6.3 6.8 IRecovery and
1952----......--- -3.9 -2.3 1.8 .9 4.4 5.5 3.2 1.7 Korean war.n
1953....... -6.5 .8 -1.4 .2 4.3 5.7 3.6 2.2 Koreawar
1954-- ....... .3 .2 -.2 -1.1 3.3 3.2 1.3 1.6 Recession.
1955....... -4.7 2.2 -1.5 -.7 2.0 3.5 .1 2.1 Recovery.
1956-------....... --.7 4.5 .7 1.0 2.5 5.9 6.2 3.2 covy
1957....... 3.4 2.8 3.3 3.1 4.0 5.7 3.4 3. 5 lRecession
1958....... 4.7 .3 4.2 1.1 3.8 3.7 .6 1.0 1 sIo
1959....... ------- -4.7 1.8 -1.6 1.3 2.9 4.6 1.3 2.2 Recove ry.
1960 ....... 2 0 1.0 .4 3.3 3.9 3.2 1 6 ve)
1961....... 0 -.5 1.3 .3 2.0 3.3 -.1 .8 Recession.
78-543-76-----4






18
TABLE 9.-ANNUAL PERCENTAGE CHANGES IN PRICES AND WAGES, 1948-75--Continued


Wholesale prices Consumer prices Private nonfarm sector
Industrial Other Compen- Unit
Farm compen- corn- station labor Implicit
Year products modifies Food modities Services per hour cost deflator Type of period
(1) (2) (3) (4) (5) (6) (7) (8)
1962....... 1.1 0 .9 .7 1.9 4.2 0 .5
1963....... ------- -1.0 -.1 1.4 .7 2.0 3.6 .5 1.3
1964....... ------- -.6 .5 1.3 .8 1.9 4.8 1.2 1.3
1965....... 4.2 1.3 2.2 .6 2.2 3.6 1.0 1.7 Recovery and
1966....... 6.6 2.2 5.0 1.4 3.9 6.2 3.0 2.8 R Vietnam war.
1967....... ------- -3.4 1.5 .9 2.6 4.4 5.7 3.9 3.1
1968....... 2.4 2.5 3.6 3.7 5.2 7.4 4.7 4.1
1969....... 5.5 3.4 5.1 4.2 6.9 6.7 7.1 4.7
1970....... 3.4 3.8 5.5 4.1 8.1 6.8 6.1 4.9 Recession
1971....... 1.9 3.6 3.0 3.8 5.6 6.8 3.3 4.7 session.
1972....... 7.6 3.4 4.3 2.2 3.8 6.2 2.7 3.1 }Recovery.
1973------....... 30.0 6.8 14.5 3.4 4.4 7.8 5.7 4.2 12ey
1974....... 11.5 22.2 14.4 10.6 9.3 9.5 12.2 10.1 }Recession.
1975....... 3.8 11.5 8.5 9.2 9.5 8.9 8.0 9.9

Source: "Economic Report of the President," January 1976. Cols. 1 and 2, table B50, p. 230; cols. 3, 4, and 5, table B46
p. 224; cols. 6, 7. and 8, table B31, p. 207.

The price index for industrial commodities is more complex. It is
generally recognized that as the prices of raw materials increase these
increases will be passed along through the stages of processing, but
there is less agreement on whether or not producers increase their
prices more than costs during economic recovery. Our ability to meas-
ure industrial costs and prices is not very good. The difference between
list prices and transaction prices may be substantial. The specifications
of products, change, and new products are substituted for old products.
It is my own belief that over long periods thle wholesale price index
contains a substantial upward bias because it does not successfully
capture the product innovation and improvement which results from
economic growth. Because the bias in the long run must accumulate
from bias in the short run, the year to year changes are also biased. It
is generally argued that this bias is equally distributed over all years.
Recently I have come to the view that product improvement is highly
cyclical, and that the upward bias in industrial prices as reported in
the wholesale price index is probably concentrated in the later part of
the recovery. As column 2 shows, the changes in the wholesale price
index for industrial commodities were not particularly significant for
most years up to 1968. The effect of the Korean war in 1950 and 1951
was obvious, and the year 1956 showed a 4.5 percent increase in the
price of industrial commodities, but there are reasons for suspecting
that this increase in the price index may be exaggerated. For instance,
in some industries such as electrical products, use of the wholesale
price index to deflate the value of shipments data yields declining real
output measures, at a time when direct measures of real output and
deployment t in these industries were indicating substantial increases
in output. Industrial price increases did not really become significant
until after 1969. In 1974, a year of recession, they reached substantial
proportions, but can be explained entirely in terms of passing along
the, increases in the prices of agricultural goods and oil.
Columns 3, 4, and 5 of Table 9 show consumer prices, divided into
the three categories: food, other commodities, and services. They re-
flect quite well most of the forces making for changes in relative prices







in the economy. Food prices are obviously influenced by the price of
farm products. They are modified, of course, by the fact that processing
costs represent a large portion of thie price of food, and these processing
costs may alter farm product prices significantly. In a similar way
other consumer commodities are closely related to the wholesale prices
of industrial commodities, and again further processing tends to mod-
ify the fluctuations somewhat. Finally, services represent a wide vari-
ety of expenditures, such as rents, utilities, and personal services.
Rents behave rather sluggishly and depend in considerable degree on
the level of income in the economy and on rates of family formation
relative to rates of residential housing construction. Utility rates are
generally regulated and for many years they were stable or declining;
more recently they have risen due to rising energy costs. The price
index for personal services reflects the increase in wages quite closely.
During this whole period it is apparent that there has been a continu-
ous upward movement of the price index for services relative to those
of food and other commodities. This is a result of the natural process
of growth, and reflects relative price changes as wages move up faster
than the prices of goods.
The measurement of wage behavior is even more complex than the
measurement of commodity prices. The most widely used measure of
wage behavior is average hourly earnings. It is this that most econo-
mists use to test the existence of a trade-off between the level of unem-
ployment and wage change. However, because of the way the measure
of average hourly earnings is computed it contains an inherent cyclical
bias. Average hourly earnings are computed by dividing total wage
bills for firms by manhours. In periods of expanding employment, new
employees who are added by a firm tend to be less skilled and have less
seniority, and so they are paid less than the average of existing
employees.
This depresses the level of average hourly earnings, and under-
states the change. Thus the change in average hourly earnings con-
tains the effect of this change in the mix of employees as well as the
true change in wages. Conversely, in periods when firms are laying
off employees those with lowest seniority and lowest skills go first,
and the mix effect operates in the opposite way, raising the level of
average hourly earnings. As a result, the increase in average hourly
earnings during periods of decline is overstated. Some economists
have treated the observed variability in average hourly earnings as
an indication of lags in wage responsiveness, when it is merely the
effect of the change in mix. This defect has been recognized by the
Bureau of Labor Statistics, and they have undertaken to compile
a new index called the Employment Cost Index, which will develop
average hourly earnings for specific occupations. This new index
would eliminate that part of the mix effect which arises from the
shifting of employment among occupational groups, but the mix effect
due to changes in the structure of seniority, age, sex, and races within
occupation would still remain. What is really needed is a wage meas-
ure based upon observation of individual wage changes, placed in
the perspective of lifetime patterns of earnings.
The compensation per hour shown in Table 9, column 6, is similar
to average hourly earnings but includes the fringe benefits paid by
the employer in addition to wages. These should be taken into account





20


-since they are part of the cost to the employer. Although there is
considerable variability in compensation per hour from year to year,
no clear pattern emerges before 1968. Since then, increases in com-
pensation per hour have been substantially larger than in earlier
years. During this period unemployment has also been increasing,
giving rise to a suspicion that changes in wages are more closely as-
sociated with changes in the cost of living than they are with the
level of unemployment.
When unit labor cost (column 7) is examined, the situation becomes
even more complex. Unit labor cost combines the effect of changes in
compensation with that of changes in productivity. In certain periods
the increase in labor cost is negligible, due to productivity increases
that offset the increases in compensation per hour. In a few periods
when recoveries were ending or recessions beginning, the change in
labor cost actually exceeded the increase in compensation per hour,
reflecting an overall fall in productivity.
Column 8 shows the implicit deflator of the GNP. The only periods
of serious price inflation shown by this index are those of the recovery
from World War II, the Korean war, and the period since 1968. There
is no evidence at all that in earlier periods recessions were effective
in reversing or offsetting incipient wage price spirals, and certainly
since 1968 this has not been true.

CONCLUSION
The evidence supports the view that the failure of the economy to
reach full employment and to enjoy substantial periods of continuous
growth hlias resulted in a growth rate lower than that which could
have been achieved. The mechanism that prevents the economy from
reaching its growth potential lies in the behavior of sectoral savings
and capital formation during the process of recovery. One the inven-
tory turnaround has been completed, the increased saving due mainly
to increasing government revenues is not matched by the capital for-
mation that can be expected to take place in other sectors of the econ-
omy. As a result the economy levels off, inventories begin to
accumulate, and a new recession sets in.
The evidence does not support the thesis that the slowdown in
private capital formation occurs as a consequence of any real crowd-
ing out of private demands for funds by government borrowing;
rather it is the funds that are siphoned off into increasing government
revenues that reduce the purchasing power remaining in the rest of
the economy so that it is unable to buy the increasing output. Gov-
ernment, deficits in periods other than war have been entirely the
result of the operation of the economy below full employment. Each
peace-time recovery period, despite the failure of the economy to
reach full employment, has resulted in a surplus for the government
sector as a whole. Following the prescription that government ex-
penditures should be cut or taxes increased in order to reduce gov-
ernment deficits would have resulted in longer and deeper recessions,
more limited recoveries, even slower growth. less government reve-
nue and-paradoxically-larger government deficits. The road to fis-
cal soundness is throughli the maintenance of prosperity, not through
deeper and more extended recessions.





21


Nor does the evidence support the contention that recovery and
economic growth lead to inflationary price increases. Although some
increase in agricultural and raw material prices can be expected
during a period of recovery and economic growth, this represents
a normal relative adjustment of the price structure, reflecting changes
in demand and supply. To prevent such price increases as these it
would be necessary to prevent all economic growth. It does not appear
that economic growth exacerbates the wage-price spiral. The exist-
ence of a trade-off between unemployment and wage changes is not
supported by the data, and to the extent that economic growth re-
sults in productivity increases which dampen the increase in wage
cost it may well be that growth is the only way to control the wage-
price spiral. There undoubtedly is a wage-price spiral, since wages
respond to increases in consumer prices. But if, as in recent experience,
the government attempts to achieve price stability through restric-
tive measures the major effect will be to reduce real output and em-
ployment with little effect upon the price inflation.

MAJOR POLICY RECOMMENDATIONS
In order to reach full employment and maintain a high rate of
growth, the Federal government must develop economic policies which
will prevent economic recoveries from aborting. The first step in this
direction is to reduce the fiscal drag which occurs during the re-
covery period and has the consequence of increasing saving faster
than producers are willing to increase investment. Generally, pro-
ducers are unwilling to invest large amounts to expand capacity
at a time when both have substantial unused capacity and feel un-
certain about the need for future capacity. When this point is reached
in the recovery, stimulation of consumer and/or government expendi-
tures is needed both to provide greater utilization of existing capacity
and to encourage producers to increase their outlays for plant and
equipment. Additional consumer or government expenditures at this
juncture would have the effect of stimulating output and encouraging
more investment, and thus permitting the recovery to continue.
While this suggests that in the recovery phase fiscal policy aimed
at increasing consumer and/or government expenditures should be
the main instrument for ensuring the continuation of the economic
recovery, a monetary policy which through low interest rates and
credit availability would facilitate and encourage fixed investment
and residential housing would also be important. The basic criterion
of fiscal policy should not be whether the Federal budget is in sur-
plus or deficit; rather it should focus on the purchasing power re-
quirements of the economy. It is quite conceivable that even at full
employment with low interest rates and easy credit availability the
gross saving which the private sector would like to do in the form
of capital consumption allowances, contributions to pension funds,
retained earnings and disposable personal saving might exceed the
gross capital formation it would like to carry out in the form of
inventory accumulation, fixed investment, and owner-occupied hous-
ing. In such an instance the government sector would have to run a
defiicit in order to keep the economy at full employment and main-
tain the normal rate of growth.





22


Part of the problem in considering the role of government surpluses
and deficits is that the present government budgeting and national
income accounting conventions do not provide the government sector
with capital accounts as is done for producers in the private sector.
Governments do, however, make substantial tangible investment in
roads, buildings, and even plant and equipment. It is recognized that
producers may legitimately borrow in order to finance their purchase
of capital equipment, and that such borrowing can be repaid out of
future earnings over the life of the capital equipment. The future
earnings of government expenditures on similar capital goods are less
identifiable, but there are some cases where it is possible. The high-
way system, for instance, produces revenue in the form of the gasoline
tax, and buildings owned by the government provide space which
would otherwise have to be paid for in the form of rent in future
budgets.
If capital budgets were introduced for the government sector, it
would become evident not only that the government sector produces
a substantial current surplus, but that its gross saving, like that of
most of the other sectors was for the most part covering its gross
capital formation. As in the case of the other sectors, it would not be
logical to make a rule that the government sector should always
exactly cover its own capital formation. If for a variety of reasons,
the private sector is so constituted that at full employment its gross
saving exceeds the gross capital formation that it can carry out, the
Federal government should assume the responsibility of undertaking
what is needed. Investments in the infra-structure of society not only
are necessary, but may often be more important for future produc-
tivity increases than additional capital formation in the private sector.
Although the maintenance of the proper level of aggregate demand
is a necessary condition for full employment and high economic
growth, it is by itself no panacea. There can be structural unemploy-
nient which will persist even when there is sufficient aggregate demand.
The private sector cannot be expected to absorb those unemployed
who are not qualified to fill the available jobs. This is well recognized
in developing countries, where the ability of the modern private sector
to provide jobs falls far short of the available labor supply. The mag-
nittide of this problem is, of course, very much less serious in the
United States. The most popular approach has been to suggest train-
ing programs which would make those who were unqualified more
qualified. The success of such programs to date has not been outstand-
ing. but this may be in large part attributable to the general softness
of the economy. When even those who are well qualified are unem-
ployeCl it is not surprising that new trainees cannot be placed.
It has also been suggested that the government should be an em-
ployer of last resort, and that public service jobs should be found to
employ those who cannot get jobs elsewhere. The argument against
ihis proposal has been that it would build up an ever increasing gov-
Iernmlent bureaucracy, a result which on the one hand would have to
ie paid for by the taxpayers and on the other hand would never get
the unemployed back into useful productive jobs in the private sector.
It is of course important not only that unemployed obtain jobs, but
tliat the jobs which they perform contribute in an important way to





23


the output and productivity of the economy. If in a period of high
employment some individuals cannot find jobs which will pay a living
wage, it is then the responsibility of the government not only to
employ such people, but to ensure that they are employed in a manner
that contributes to the real output of society. They should be viewed
as a resource which is available to be used to meet specific needs of
society-not as a welfare responsibility which is only a cost. There
are many tasks that need to be done which the private sector is not in
a position to carry out, such as manning of day care centers, develop-
inent of parks and recreation areas, support personnel in education
and health areas, improving the quality of life of cities by better
maintenance and beautification. All of these activities are highly labor
intensive and if correctly structured can make use of individuals who
have difficulty finding jobs in the private sector.
The operation of the economy at full employment levels may bring
with it other problems of adjustment. It is frequently suggested that
full employment would tend to accelerate into overfull employment,
and thus to cause a wage-price spiral. Since we have not had full em-
ployment in the last three decades except in time of war, it is difficult
to evaluate this argument. However, it is important to note that a
condition of full employment and high growth is also a condition in
which the rate of productivity increase is large and capital is being
substituted for labor. This is borne out by the relatively small increase
in manufacturing employment and the sharp decline in agricultural
employment in the last three decades. What has grown in employ-
ment are the trade and service industries and the state and local
governments. The increase in employment in these areas may reflect
primarily institutional and budgetary conditions, rather than any-
thing having to do with production functions or real demand. Thus
the increase in doctors, lawyers, teachers, police, administrative and
other support personnel hired by business and government may have
occurred mainly because funds became available. A failure to fill some
of these positions might not impose any barrier to further economic
growth.
Nevertheless it is quite possible that economic prosperity and full
employment might encourage wage-price spirals to develop. Employ-
ers with high profits would be in a weak bargaining position with
unions, workers would not be afraid of unemployment, and job op-
portunities would be plentiful. The government would be in the awk-
ward position of validating any wage-price increase that may occur
in order to prevent it from eroding real purchasing power and thus
bringing on a decline in real output. Under such circumstances it
does seem reasonable that some national wage-price policies may have
to be developed.
The reliance on recession as the control mechanism to prevent wage-
p1rice spirals is, however, not only much too costly, but quite ineffec-
tive as well. The last several years have demonstrated that wage-price
spirals can occur despite considerable unemployment and recession.
Recessions do not produce adjustments-rather they create major
problems and delay needed adjustments. When profits are low, gov-
ernments are in deficit, and people are unemployed, everyone is more
interested in preserving the status quo than in taking the steps needed
for basic changes. The changes which come about are usually the result






24

of bankruptcy and unemployment, which exact a very heavy social
cost and are wasteful in even economic terms. It is only under the
stimulus of growth, high profits and ready availability of jobs that
people are willing to make the investments required to readjust to
changed conditions. Future growth depends on healthy economic con-
ditions in the present-not on recession and stagnation.










TIlE POLITICAL ECONOMY OF COMPARATIVE GROWTH
RATES

By MAIANCUR OLSON:: **


SUMMARY
Each of the major regions of the United States is larger than most
of the countries of Western Europe and there are also some systematic
differences in the policies of state and local governments in the dif-
ferent regions. Thus there is something to be said for looking at the
growth of the different regions and states of this country in the con-
text of a study of the growth rates of the major developed democratic
countries. By treating the separate regions of the United States as
though they were separate countries, and taking advantage of some
insights that can be obtained only with an international perspective,
it should be possible to get a better understanding of the single most
important reason why the South has had a higher rate of growth in
recent times than most other parts of the United States, and why the
older industrialized sections of the United States, the East and Middle
West, have been growing more slowly.
There have been two dramatic surprises in growth rates in the de-
veloped countries since World War II. One surprise was the extraor-
dinarily rapid growth rates of Germany, Japan and (until recently)
of Italy after their defeat and partial destruction in World War II.
The other surprise was the slowness of the rate of growth of Great
Britain, which in this period has fallen farther behind the other de-
veloped democracies.
The paper described here argues that these surprises were due mainly
to the fact that democratic countries with freedom of organization
gradually accumulate powerful common-interest organizations with
monopoly power or political clout, and that these organizations
(though they have some favorable effects, too) are likely to lower the
rate of economic growth as it is measured in national income statistics.
The paper develops a logical model based on the economists' theory
of public goods which shows that this gradual accumulation of com-
mon-interest organizations is not an historical accident, but is rather
inherent in the logic of the formation of organized groups.
The combination of totalitarian government and Allied occupation
between them destroyed or discredited both labor and business orga-
nizations in the nations that were defeated in World War II. After
their defeat brought free and stable conditions to Axis countries, they
*The author thanks the National Science Foundation and Resources for the Future
for support of his research. He reserves the right to reprint portions of this paper in
other publications.
**Professor of economics. University of Maryland.
(25)


78-543-76---5





26


were able to grow at a very rapid rate, partly because there were very
few organizations with special monopoly power or political strength.
Of all the nations of the world Great Britain has had the longest
experience of industrialization and the longest record of political sta-
bility and freedom from invasion. As a result of this it has accumu-
lated a denser network of common-interest organizations than any
other country. This means that Britain suffers from an "institutional
arthritis"-the "English Disease"-that greatly slows its rate of
growth. The United States is second to Great Britain both in length of
political stability (we had our Civil War) and in experience of in-
dustrialization, and has been second to Great Britain among the de-
veloped democracies in slowness of growth rate.
Within the United States there are of course great differences in the
length of time regions have been industrialized and in their rates of
growth. As the international perspective proposed here would suggest,
the recently industrialized areas in the South and West are growing
faster than older industrial areas in the East and Middle West. The
development of common-interest organizations may also have gone
farther in the Northeast, Middle Atlantic, and Middlewestern regions
than in most of the West and the South. The paper being described
here therefore tentatively explores the hypothesis that the South and
West are the Germany and Japan of the United States, and that tlhe
older industrialized areas, and most notably New York City, are its
England. The paper asks whether it is true that it was only with the
emergence of the "New South" and the passage of civil rights legisla-
tion since World War II that the South acquired the legal order,
stability, and institutions needed to end the outward migration of
blacks and encourage the importation of capital from the North, and
whether as a result of the Civil War, reconstruction, social divisions,
and state policies, the South has not yet acquired as dense a network
of growth-repressing organizations as some other parts of the United
States. The paper also asks whether the Western parts of the United
States, which were on the whole settled and urbanized after the East
and the Middle West, have for this reason a tendency toward faster
economic growth.

The modern economist can draw upon at least two hundreds years
of cumulative theorizing and research and even on the ideas of a few
men of undoubted genius. Whatever the limits of his own stature and
vision, he can say with Isaac Newton that, if hlie should sometimes see
farther ahead, it is because he stands on the shoulders of giants.1
Nonetheless, when the economist is asked why some countries are grow-
ing faster than others, he mtist concede that he hlias not been able to see
very much of the answer even from his lofty perch. Economic theory
tells us mu1ch more al,)ollt, resource, allocation and income fluctuations
in the short and medilil' term than it does about long-run changes inll
tephjnology, tai-tes, and economic organization; as others have said
bv'fore, it is more lneiarly akin to Newtonl's iiieclhainics than to Darwin's
lbioloL.yv. Most econollists agree thllat the stlldy of economiCc dvcleopImwnt
inll ti e poor countries is not one of thle more advanced specialties in
1 Rohcrt Merton ham pointed out that, contrary to widespread scientific belief, this
simillp was not original with Newton.





27


economics. Though there are probably fewer comments about the
limits of our understanding of the causes of the different growth rates
in the developed nations-the ones to which this paper is addressed-
these limits are almost as severe for developed as for the developing
areas. This paper will attempt to enlarge our understanding by calling
attention to one important influence on the rate of economic growth in
the economically advanced democracies that has previously escaped
notice. Economists have failed to see this important influence, not
because the shoulders upon which we stand aren't tall enough, but
rather because we have been loathe to turn our eyes away from our
traditional line of vision and thereby failed to see a striking explana-
tion of the most remarkable differences in growth rates just beside us.
THE SOURCES AND CAL-SES OF GROWTH
Some of the laciunae in the current understanding of the causes of
the different growth rates in the developed areas are obscured by the
frequent neglect of the distinction between the "sources" and "causes"
of growth. The sources of growth arc the increases in resources and
other developments that are the immediate occasion of the increase in
output: the additional capital that has been accumulated, the improve-
ment in the quality of the labor force that can result from more educa-
tion and training, the new technologies which increase the amount that
can be produced with given resources, and so on. Obviously any in-
crease in the quantity or quality of one or more factors of production,
to advances in the state of technological or other knowledge which
increase productivity, to improvements in the allocation of reouiirces,
and the like.
The sources of growth have the same relationship to the causes of
growth as the small streams and lakes that the the "sources" for a
river have to the meteorological and geological phenomena that ex-
plain why a given watershed has the location, shape, and flow of water
that it has. The capital accumulation, for example, that is the source
of some growth of income has in turn some more fundamental causes
which also need to be explained. Why did the enterprises choose to
make the number and type of investments they made? Why did those
whose saving made the capital available choose to save rather than
consume? Similarly, when there are technological advances, why did
they take place? Why was the advance in knowledge sought? What
were the conditions and incentives that led firms to put the advance in
knowledge to use? Only when questions such as these can be answered
do we know the causes of the growth in a given nation or period.
The sources of the growth of the major Western economies and of
Japan since World War II are understood far better than the causes
of growth, whether in these or other countries. This better under-
standing grows out of a number of pioneering studies, such as those
of Moses Abramovitz, Soloman Fabricant. John Kendrick. Jacob
Schmookler, Robert Solow, Dorothy Walters, and (above all) Edward
Denison. Denison's classic study of WVhy Growuth Rates Differ has
more than once been called the most important empirical study to
appear in economics since World War II. Econometric, index number,
and social accounting tools needed for better estimates in the future,
as well as provisional estimates, have been provided by Zvi Grilliches





28

and Dale Jorgenson (and collaborators). Because of these and other
studies, the general order of magnitude of the more important sources
of growth is becoming apparent. Though there have been great diffi-
cultics, for example, in distinguishing the effects of the advance of
knowledge from measurement error and other manifestations of our
itnorani, e. it is nonetheless becoming clear that such advances-in-
cireass in factor p)rodductivity-have been a very significant source of
arowtlh in the developed economies, at least in recent decades.2 The
natural satisfaction with the progress of these estimates of the sources
of growth in the advanced economics may well have deflected attention
from the inadequate state of our knowledge of the causes of economic
growth, even in the most advanced and often-studied economies.

SOME UNEXPLAINED CASES
There is dramatic evidence of the incompleteness of the present
unde-rstanding of the causes of growth, and perhaps even a clue to a
better understanding of the. matter, in two important sets of facts,
neither of which has been adequately explained. The first is the unex-
pectedly high rates of growth of the nations which were especially
ravaged in World War II and which in addition suffered control or
occupation by totalitarian regimes. Germany and Japan are two coun-
tries whose growth after World War II has been especially notable,
but the rate of recovery of most of the Continental countries that had
been fought over or defeated and occupied by the Nazis, and the prog-
ress of the Italian economy during much of the first two decades after
World War II, also surprised most observers. So have the rapid rates
of growth of Korea and Taiwan, both of which were freed from com-
plete and extended subjugation to the Japanese dictatorship only at
the end of World War II.
The second puzzle is found in the experience of Great Britain. As
is well known, economic growth in Great Britain has been decidedly
slower than that of other developed countries since at least World
War I, if not since the 1870's. Britain's growth rate has been so far
behind that of most other developed democracies that it now has a level
of per capital income well below that of most comparable nations.
Tlhough the relatively slow growth of the British economy and the
unexpectedly rapid growth of tlhe societies that were defeated and
o'ccupied in World War Ii have often been studied, no consensus about
the causes of either of these occurrences has emerged. Some explana-
tions of one or the other of these anomalous growth rates have received
2 Dale Jorgenson and Zvl Grilllches argued in 1969 that improvements in the Quantity,
quality, and utilization of factors of production explained 96.7 percent of U.S. growth, so
that only 3.3 percent could be due to tlie advance of knowledge (outward shifts hn the pro-
duction function). ("The ri explanation of Productivity Change," Review of Eoonomnic Studies
(.lIy 19). p. 31-64.) lBut when responding to Edward Denlson criticism ("Some Major
Issues in Productivity Analysis" Survey of Current Business (May 1969). pp. 1-27) they
apparently concluded, on the basis of revised estimates by Chrlstensen and Jorgenson,
that the true level of growth of factor productivity was probably closer to Denlson's
original and higher estimates than to their own original calculations. (See their "Issues in
Growth Accounting: A Reply to Edward F. Denison" in The Measurement of Productivity
(Washington: The Brooklngs Institution, 1972), pp. 65-94.) Note also that Dale Jorgen-
son and his collaborators in the preparation of "An International Comparison of Growth
In Productivity, 1947-1973" (presented at the November. 1975 meetings of the Confer-
ence on income and Wealth of the National Bureau of Economic Research) found sub-
stantial Increases In factor productivity In the several nations for which they made
estimates. It now seems overwhelmingly likely that advances In knowledge or outward
shifts of production functions do in fact account for a. large part of economic growth, at
any event In the developed Western nations and In Japan.






29


fairly wide currency, but (as later parts of this paper will attempt to
show) none of these has, even if it is correct, the potential to explain
more than a fraction of the difference in growth rates between Great
Britain and the defeated and occupied countries. All of those supposed
explanations that focus on some abiding feature of a country to explain
its growth rate are moreover inherently insufficient, because they do
not take account, of the different relative growth rates in different peri-
ods of history. This is particularly true for Great Britain-any ade-
quate explanation of the relatively slow rate of growth in that country
in the present century must take account of the fact that for nearly a
hundred years Britain usually had the highest rate of growth of all
nations. So far as it is possible to tell from the fragmentary informa-
tion available, Great Britain usually hlad the highest rate of growth of
per capital income of any country from onset of the industrial revolu-
tion in the middle of the eighteenth century until approximately the
middle of the nineteenth century. Beyond doubt Britain had by the
end of this period become the economically most advanced nation in
the world. Any explanation of the relatively slow rate of growth in
Britain in the Twentieth Century must therefore need replacement or
revision if it rests on some characteristic of British society, or one of
its social classes, that also prevailed when Britain had the relatively
highest growth rates, or if it fails to explain how whatever is supposed
to account for Britain's relatively slower growth rate emerged some-
time in the Victorian or Edwardian periods.3

THE FORMATION OF ORGANIZED INTEREST GROUPS
To explain the anomalous growth rates that have just been dis-
cussed, we must, as it turns out, take account of the role of organized
interest groups or associations as well as the variables customarily
included in an economic analysis. To understand these groups-labor
unions, professional associations, farmers' organizations, lobbying
groups, trade associations, and cartels-we must in turn have an ade-
quate model or conception of their formation and functioning.
Any such model must spell out the implications of a fundamental
common feature of all of the kinds of organizations in the list: the
fact that, whatever else they may do, each and every one provides
some service to everyone in some group. If a union wins higher wages
the higher wages go to every worker in each relevant category; if a
cartel raises the prices of some good, every firm selling that good in
the relevant market enjoys the higher price; if a farm organization or
other lobbying group obtains legislation favorable to some group,
everyone in that group can benefit from it. In other words, each of
the types of associations provides what the economist must define as
a "public good": a good which goes to everyone in some group if it
goes to anyone in that group. Though the phrase "public good" is in
3The absolute rates of growth of per ,apita income are Indeed higher now than in
the. eighteenth century, in Britain as well as In other developed nations. nresumiably in
laree part because of the Increase In the rate of advance of science and tpehnnlogy: the
relative rate of growth of the British economy is on the other hand decidedly slower than
in other developed nations. It follows that explanations of Britain's relatively slow Zrowth
rate in recent times could without logical error give a large role to some stable feature
of British society, provided that they were combined with hypotheses abn'it rhanaes In
other develonped societies that grow faster. The focus would then be on the changes in
other developed nations and on why Britain did not experience these changes.






f 30

many discussions applied mainly to certain goods provided by gov-
ernments, such as pollution control, national defense, and law and
order, there can be no doubt that most of the outputs of organized
interest groups in the private sector are analytically identical to most
of those of governments: neither governments nor organizations of
interest groups in the private sector are able to exclude those in the
relevant group from some or all of their services.
Economists have known for a long time that this was the reason
governments cannot sell their most basic services in a market: the
individual citizen has no incentive voluntarily to "buy" any defense,
because hlie knows that he will in any case get the benefit of whatever
resistance to invasion is paid for by others, and that in a large society
he will get only a miniscule share of the benefits that result from his
contribution. Thus every national government has to use compulsion
in the form of taxation to finance its most basic services.
In 1965 this writer pointed out 4 that organizations in the private
sector designed to further the common interests of large groups of
people also cannot normally sell their basic services in a market, that
is, rely on purely voluntary dues or contributions for support. If such
associations are to operate for any length of time at a significant scale,
they must either use some overt or covert form of coercion or else
somehow offer some benefit in addition to their public good, which
other benefit has the property that it can be withheld from those who
do not join and thereby provide an incentive for paying dues.
The single most important type of organized interest group in the
private sector is the labor union and it is well known that most strong
unions in the developed countries enjoy some form of union shop.
closed shop, agency shop, or other formal or informal arrangement
which makes it costly or hazardous or simply impossible to get em-
ployment in certain establishments or occupations without paying
dues to the union. Picketing, moreover, is characteristic of most strikes
everywhere, and though most picket lines against firms with long
experience of collective bargaining are relatively peaceful, this is
largely because the union's capacity to close down an enterprise against
which it has called a strike (or its inability to do so) is clear to all:
the early phase of unionization in this country as well as in others
involved a good deal of violence on the part of both unions and anti-
union employers and scabs.
In the United States the next largest organizations working for the
common interests of a group are the farm organizations, and they
have financed themselves primarily by "checking off" the dues for the
farm organizations from the patronage dividends or rebates of farm
cooperatives and mutual insurance companies, by allowing members
favored access to the services of agricultural extension services, or
by providing social events attractive to farm families spread out over
spa: rselv settled rural areas.
Tlil third largest interest groups in the United States, the profes-
sional nssnr'ations, have used both types of methods to get members:
cfo Peinn (thel "closed bar") and offers of "private good" benefits (pro-
S"The T,nglr of CnllpetivP Actionn" (Harvard Economic Studies. Harvard University
Preq. lq n.O 1971 : Sehliocken Bonkq. 19OSi. For the clanssie stntempnt of the nrinclpnl
,n1rllur v'rw, .n Dnavid Trumn. "The (',orprninentn1 Proee.s" (New York: Alfred Knopf,
1n.9.).





31


fessional journals, mutual insurance, testimony in malpractice suits,
cheap group air fares, etc.). Organizations that represent relatively
small groups of prosperous firms or individuals, such as trade associa-
tions, may be able to get by with providing only the public good they
offer their clients, because each firm may get so large a share of the
common benefit provided by the organization that it pays some firm
to contribute enough to make sure the organization can function.
THE ULTIMATE PATTERN OF ORGANIZED INTEREST GROUPS
The argument outlined in the previous section has several implica-
tions for the pattern of organization of interest groups in democratic
society. One implication is that the largest and most scattered interests
will presumably never be able to organize on a mass basis. Such
groups as consumers, taxpayers, the unemployed, and the poor cer-
tainly have important common interests and surely would benefit sub-
stantially if there were effective mass organizations working on their
behalf. But it is hard to see how any organizer or political entre-
preneur could (unless he had substantial assistance from the govern-
ment) manage to coerce such groups as consumers or poor people;
these groups do not assemble at any one spot, the way the workers at
a mine or factory do, and this means that nothing resembling the
picket line would be feasible even if most consumers wanted it and the
government would tolerate it. Nor does it seem possible to think of a
way of getting enough resources in the private sector to induce the
great mass of consumers, taxpayers, or unemployed or poor people to
participate substantially in collective action in their group interest.
Thus it seems reasonable to conclude that it isn't just an accident that
there aren't mass contributions to consumers or taxpayer or poverty
organizations in any of the economically developed democracies: this
reflects the underlying logic of the situation and isn't likely to change.
A second implication of the model in the previous section is that
even those large groups that can be organized into effective voluntary
Is sociations aren't usually so organized until some time after the com-
mon interests emerge. The organization of a labor union, for ex-
ample, may wait until there is a jump in the demand for the relevant
type of labor (in the United States, World Wars I and II, and espe-
cially the latter, were leading periods of union growth) so that scabs
will be hard to find and employers would lose a great deal from a
strike. In some cases when the other conditions are right, organiza-
tion may fail for lack of imaginative leadership. In the case of inter-
est groups that must trade a private benefit of some kind for participa-
tion in efforts to obtain a public good, successful organization is likely
to require exceptionally favorable conditions as well as good orga-
nizational entrepreneurship. It won't be sufficient simply to set up
some kind of business whose profits can finance mass participation to
obtain a public good; profits are more easily sought than obtained,
and if they are obtained those who promoted the business may decide
to keep them for themselves. The successful large scale lobbying or-
ganizations without coercive power normally have to obtain or exploit
some tax advantage (like the exemption from income and profits taxes
of farm cooperatives and of non-profit professional associations) or





32


some special complementarity between the organization that is needed
and a support-generating activity (like exploiting any desire for so-
cial interaction among the group with the common interest, e.g., the
Grange, the American Legion, and some ethnic organizations). They
may also need to work out special arrangements to make sure that
any income generating activities stay under the control of the interest
group (like the complicated "Kirkpatrick Plan" which keeps many
farm cooperatives under the control of various state Farm Bureaus).
Historical experience similarly suggests that it takes quite a bit of
time for large groups with common interests to organize. It was
not until 1851, or virtually a century after the start of the industrial
revolution, that the first true labor union (The Amalgamated Society
of Engineers in Britain) was formed. Though in the United States
there are some unions that go back to the second half of the nine-
teenth century, the bulk of the growth of labor unions came in the
period from 1937 to 1945. This was of course quite some time after
the country had achieved the industrialized status that seems most
favorable to unions. Some continental countries have developed really
powerful unions only after World War II or are only now develop-
ing them. The timing of the emergence of farm organizations has yet
to be researched, but in the United States at least (though there
were episodic bursts of agricultural organization in the late nineteenth
century) it was not until the organization of the Farm Bureau (in
league with the federally financed agricultural extension service) just
after World War I that there was any large and stable national farm
organization. Yet farmers constituted a very large part of the popula-
tion and had significant common interests even at the founding of the
American Republic. Many similar examples of how long it takes large
groups, at least, to organize common interest organizations could be
cited. The argument of the previous paragraph would suggest, again,
that this slow accumulation of common-interest organization is not an
accident, but a reflection of the inherent difficulty of organizing large
groups to obtain public goods.
TIrE EFFECT OF ORGANIZED INTEREST GnoTPs ON- ECONOMIC GROWTHII

The part of this intellectual structure that needs to be built next is
the one which will encompass the effect of organized interest groups
on economic growth, or more precisely, the effect of organized interest
groups on the producer rather than the consumer side. This is happily
a relatively easy part of the argument to construct, since the effect of
most suchl groups on economic growth (as it is conventionally meas-
ured) is surely predominantly negative. In saving. this there is no
attempt to deny that these organized producer interest groups serve
,iiefil functions. They will, for example, make political life more
pli ralistic and this may help to protect democratic institutions. Labor
unions, moreover, surely perform a valued function in making em-
ployees foel more secure and less subordinate to their foremen or
supervisors. Other contributions of such orramizntions could be cited,
but tlis wouldn't help us explain international andl intertemporal dif-
ferevinces in the rate of economic growth.
One reason why thle effect of organized groups on time producer
side on economic growth is overwNvhilmnin'lv negative is that these





33

groups systematically have an incentive to keep out new entrants to
their industry or occupation. If a group of manufacturers can (by
cross licensing of patents, or by exercising de facto control over its
regulator, or by uniting to destroy any new competitor) keep out new
entrants, they can get away with producing less and charging more
for it. If physicians through medical societies can, even if only under
the banner of "higher standards," limit the number of people who
enter the health field, their incomes will be far higher. If printers'
unions can through apprenticeship regulations or racial discrimina-
tion keep down the number of printers these unions can demand higher
wages. Since rapid economic growth requires reallocations of labor
and other resources as technologies, tastes, and resource availabilities
change, such barriers to entry will not only make the national income
lower on a one-time basis when they are first imposed, but will also
reduce the rate of economic growth over the longer run by limiting
the flow of resources into whatever industries and occupations should
be expanding most rapidly.
Organized interest groups on the producer side also often have an
incentive to block or delay the innovations that are the single most
important source of economic growth. If an employer has an incentive
to adopt a new technology, its adoption will normally increase the rate
of growth. But the union representing the workers who might then
need to find some other line of work can have an incentive to block
the innovation or to demand that it can be used only if featherbedding
maintains the firm's use of labor. Similarly, if one of the firms in a
cartel-like trade association discovers a better way of doing things, a
majority of the other firms in the association may have an incentive
to have the trade association bar the new practice, however much
consumers might have gained from it.
When producer groups demand favorable legislation from govern-
ment, this also will in most cases lower the rate of growth. The tariffs
they obtain will usually discourage the resources in a country from
working in the lines in which that country has a comparative advan-
tage. Price supports will discourage the use or consumption of some
commodity that is relatively abundant. Tax loopholes will encourage
capital and other resources to move into the activities that benefit
from the loophole rather into those where the value of their output
to society would be the greatest. The organized interest groups of
course also have an incentive to seek government support for the
barriers to entry we have already discussed.
Though organized producer groups of the usual type and pattern
inhibit economic growth, it is important to emphasize that it is not
common-interest organization per se that inhibits growth. Suppose,
contrary to fact, that some common-interet organization enrolled
all producers, whatever their industry, or role, or region, in a given
society. It normally could not be in the interest of the members of
thnf organization to have policies that inhibit economic growth (at
least if the growth is properly measured, so that meaFured growth
equals growth of true income). Particular sub-groups of the. member-
ship might of course gain from a growth inhibiting policy, but the out-
put that was lost because of the policy would entail a loss for some other
members of the organization: others would have to pay higher prices
for the goods on which they spent their incomes, or wages, profits,


78-543-76---6





34

or rents of other sub-groups would fall, or some combination of the
foregoing would occur. True growth by definition brings a net gain,
so a sufficiently encompassing group that attempted to maximize the
combined real income of its membership would have to favor a
growth-enhancing policy. The practical problem, if the foregoing
paiges are correct, is that all-inclusive groups, such as consumers, are
for fundamental reasons not organized, and that it is only particular
groups of producers, rather than all producers together, that are
organized. This means that the members of a typical common-interest
organization can often gain substantially from a policy that reduces
output of the society as a whole, because they get most or all of the
gains of the policy and bear little or none of thle costs.
From this it follows that we should expect that organizations
representing relatively specialized, narrow, or local interests would
tend to be less inhibited about growth-repressing policies than broader
organizations. The highly specialized craft union, for example, will
find that, though its featherbedding will have the "external dis-
economy" of reduced national output, and will even typically reduce
the aggregate earnings of the factors of production in the industry in
which its members are employed, its own members bear such a minute
share of these costs that the featherbedding may still be attractive. An
organization that represents all of the workers, or all of the firms, in
an industry, will have reason to be somewhat less restrictive. A union
that represented all manual workers in a country, or an organization
that represented all major businesses, or a political party that repre-
sented all of some broad social group, such as the "working class,"
would "internalize" so much of the "external diseconomy'.' of a growth-
reducing policy that it is likely to do almost as much to promote growth
as to prevent it. The implication of this is that the size and pattern of
common-interest organizations in a country must be determined before
the extent of their adverse effect on growth can be known.

INSTITUTIONAL ARTTI I Tris
We can now siiuiarize the argument. Associations that provide
public goods are for the most fundamental reasons exceedingly difficult
to establish, especially for larger groups; no such associations will
attract a significant percentage of large and scattered groups like
colns!mners, taxpayers, or the poor; those associations that promote the
comni imon interests of soine producer groups will be able to establish
themselves only in very favorable circumstances and thus often only
quite sonic time after the cominmon interest came to exist; as associations
of producers do eiierge tliey tend to delay innovations and real locations
of resources that bring economic growth, though this tendency is
greatly diminislhed if the producers' association includes a large elo'igh
p)roport ion of those who lose from slowing the growth rate.
It follows that countries wliose common -interest organizations have
been ('enasciilate('d or abolished by foreign occilpation, totalitarian gov-
e('m1ieit, or political in.stab)ility would tend to grow relatively quickly
afer a free andI stable legal order is establ) ish(ied. Perhaps this hlielps to
('Xpl)lai, why the observers of (lthe physical and institutional destruction
after Wold, War II so greatly underestimated tlhe growth the war-torn
ecolnoiies ,would achieve. Though there are no (loubt also other relevant




35


factors of great importance, it is probably also significant that the
underestimates of the prospective rates of growth were especially
striking' for Germany and Japan, where totalitarian governments
followed by allied occupiers who were determined to promote institu-
tional change, insured that institutional life would start almost anew
after World War II. In Germnany, Hitler had done away with inde-
pendent unions as well as all other dissenting groups, whereas the
Allies, through measures such as the decartellization decrees of 1947
and denazification programs had emasculated cartels and organizations
with right-wing backgrounds.5 In Japan, the militaristic regime had
kept down left-wing organizations, while the Supreme Conmmander of
the Allied Powers imposed the antimonopoly law of 1947 and pureed
over 4,700 officers of Zaibatsu or other corporations for their wartime
activities.6
It also follows that the longer the period in which a country has
had a modern industrial pattern of common interests and at the same
time democratic freedom of organization without upheaval or inva-
sion, the greater the extent to which its growth rate will be slowed by
organized interests. This explains why Great Britain, which has not
only the longest experience of industrialization but has also long
remained free from dictatorship and defeat, has in this century had a
lower rate of growth than other developed countries. This explana-
tion (unlike some others) is not contradicted by the fact that Britain
had a higher growth rate than other countries during its Industrial
Revolution. Britain has precisely the dense and powerful network
of common-interest organizations that the argument, developed here
would lead us to expect in a country with such a record of military
security and democratic stability. The number and power of its trade
unions is too well known to need description. The venerability and
power of its professional associations is less famous, but still strik-
ing; consider the institutionalized distinction between solicitors and
barristers, which could not possibly have emerged, at least in any rigid
form, in a free market innocent of professional associations or govern-
ment regulations of the sort they often obtain. Britain also has a
strong Farmers' Union and a great many trade associations of one
sort or another. It is also the land where the word "establishment"
first came to have its broader modern meaning, and however often the
word may be overused it does still suggest a substantial degree of in-
formal if not explicit organization of a sort that usually would emerge
only gradually in a stable society.
There are, as we argued earlier, some alternative explanations of
these cases that have circulated fairly widely. Some economists have
attributed the speed of the recoveries of the vanquished countries to
the importance of human capital as compared with the physical capi-
tal destroyed by bombardment, but this cannot be a sufficient explana-
tion, since the war killed off many of the youngest and best-trained
adults and interrupted education and work experience for many
others. Knowledge of productive techniques had not, however, been
destroyed by the war, and to the extent that the defeated nations were
SGustav Stolper et al.. "The German Economy, 1S70 to the Present" (New York: Har-
court Brace and World, 1967), pp. 258-261.
6 Richard E. Caves and Masu Uekusa, "Industrial Organization in Japan" Wasliington :
Brookings, 1976).





36

at a lower than pre-war level of income and merely needed to replace
buildings or equipment that had been destroyed, they would tend to
have an above average growth rate. But this could not explain why
these economies grew more rapidly than others after they had gone
through this stage and even after they had surpassed the British level
of per capital income.
Some have alleged that the slow growth of Great Britain is because
the British don't work as hard as people in other developed countries.
The unusually rapid growth of Germany and Japan is in the same
way said to be due to the special industriousness of their peoples. This
explanation if taken literally is unquestionably wrong, though it may
be that a closely related argument that would have some value could
be constructed. The rate of economic growth is the rate of increase of
national income, and though this could logically be due to an increase
in the industriousness of a people, it could not at least in any straight-
forward way7 be explained by their normal level of effort-this
would of course be relevant instead to their absolute level of income.
Even if the alleged differences in willingness to work are in some
way an explanation, they would not be sufficient unless backed up with
an explanation of why those in the fast-growing countries happen to
be zealous and those in the slow-growing countries happen to be lazy.
And since several countries, most notably Great Britain, have changed
relative position in the race for higher growth rates, the timing of the
waves of greater or lesser effort also needs to be accounted for. To an
economist the most plausible possibility is that any differences in
industriousness are due to the different degrees of incentive to work
to which individuals in different countries have become accustomed.
These incentives, in turn, are strikingly influenced, whether for man-
ual workers, professionals, or entrepreneurs, by the extent to which
cormnoion-interest organizations protect their members from the rigors
of competition. This the search for the causes of differences in the
willingness to work, and in particular the question of why shirking
should lie thought to be present during Britain's period of slower-
thian-average growth, but not when it had the fastest rate of growth,
bring us back to the more fundamental explanation of differences in
g.rowtli rates that is being offered in this paper.

TiE UNITED STATES
If the n'r!,'iment that has been presented here is correct, another
(tril 'yw thiLt. shoumild reveal many of the same symptoms as Great
Pl'it;iin. l>ll'eit in less striking form, is the United States. Thou.rh its
,xpcriPilleO of industri,,lization is decidedly shorter than that of Brit-
aini. it ill is, longer than that of virtually ever other country. Tlie
United Stitv.s as-o, with the single exception of its gig.antic civil war,
lhas an exceptional record of democratic stability aind immunity from
inv;is':;i. It also is described as a land of "joiners" and powerful
pi,.;r.- ii e ,'l) isips. FiirthIernorwe, as lihe ar1nmi-enlt here would predict.
it hi;-. il int,'l of the period since World War II, been second only to
(;r,.t I'i't:iil amonMg the. developed democracies in the slowness of its
,o:tv-h irat,. As ( 'lristensen, Cummings, and Jorgenson put it, "The

'TlIholh thosp who emphasize laziness or love of work as explanations of differences In
growth rates do not go into this, it Is possible that differences In the conscientiousness of
ihgso who develop or adapt new technologies, or whose work affects the price of capital
goods and lihus possibly the rate of capital accumulation, could help to explain differences
In ratPes of growth.





37


ranking of the United States in international comparisons of growth
in real output... is always near the bottom. Our study is no exception
to this general rule. During the period 1960-1973, the United States
ranked eight of nine countries in growth of real output."8
Though the preliminary evidence suggests that the United States
has exactly the ranking in growth rates that the model offered here
would predict, it is too early to be sure how well the model fits this
country. The United States is such a large and diverse country that
averages for the nation as a whole may obscure profound regional
variations that may have no less significance for the argument.9
Edward Denison pointed out long ago in a somewhat different context
that differences in output per employed workers in the different re-
gions of the United States in 1960 were greater than those an-ong the
countries of Northwestern Europe. Different states of thle United
States also have different tax policies, expenditure levels, and labor
relations legislation, with certain regions having systematically dif-
ferent state and local government policies than other regions.
The major regions of the United States are larger in size and popu-
lation than many of the individual nations of Western Europe. It
would therefore be better to do some research into the question of
how well the argument developed here fits the different regions of
the United States before passing judgment on the applicability of the
argument to this country.
One of the tasks of this research would be to relate differences in
growth rates among the different regions of the United States to the
length of time they have had to develop industrial and urban orga-
nizations, to the extent to which their organizational evolution was
retarded by the Civil War and its aftermath, and to the density of
the organizational networks that they contain. An associate, Mr.
Kwang Choi, is undertaking an empirical study of these and other
relationships in a complementary project. Though his study is in a
very early stage and further work may lead to very different results,
his preliminary findings are nonetheless suggestive. He asked whether
the growth of private nonfarm income by state in the 48 contiguous
states in the last five years for which data were readily available
(1969-74) could be explained in terms of the extent to which the state
has long had a high level of urbanization or industrialization and
by whether or not it had been defeated in the Civil War. A long ex-
perience of urbanization suggests that a state has had a long period
in which to build up common-interest organizations relevant to the
existing pattern of interests, whereas defeat in the Civil War suggests
that a state has had a shorter period of political stability and less of
an opportunity to accumulate common-interest organizations than
otherwise comparable states.
Choi's provisional measure of urbanization was the proportion of
the state's population residing in urban areas in 1900 and a dummy
variable was used to indicate defeat in the Civil War. Choi's regression
results showed that a larger percentage of urbanization in 1900 was
associated with a lower, and defeat in the Civil War was associated
8 "An International Comparison of Growth in Productivity, 1947-1973," op. cit.
Moreover, as the country with perhaps the highest level of economic development.
the United States has had very little opportunity to augment its rate of growth through
"catching up" with technological leaders. Thus we should make a reasonable honorary addi-
tion to the United States growth rate to take account of the country's limited opportunity
to borrow foreign technologies superior to its own. With such an honorary addition, the
United States growth rate might still be on the low side, but we cannot know for sure.






38


with a higher growth of private nonfarm income. Both relationships
were statistically significant and together they explained 42 percent
of the variation in growth of private nonfarm income by state.10 It
is probably the case that the states with long histories of urbanization
and which escaped defeat in the Civil War also have the denser net-
work of common-interest organizations that the theory implies they
would have, but this has not yet been definitely established.
Though idiosyncratic factors and the shortcomings of individual
leaders were very important, it is also worth asking whether the special
problems of New York City, the American city that has been a large
modern city longest, are in part due to the logic developed in this
paper. It would be nice to know, for example, whether the fascinating
parallels between Great Britain and New York City drawn by Norman
Macrae of The Economist in "Little Britain in New York" 11 would
stand up to a systematic examination. In particular, are newer large
cities in the South and the West typically in better shape than the
older industrial centers of the East and Midwest? And in ways related
to the evolution and structure of the organizational life within them?

ENCOMPASSING ORGANIZATIONS
It might seem at first glance that the relatively respectable rate of
growth in Sweden contradicts the idea outlined here, since Sweden
as enjoyed democratic freedoms of organization and security against
invasion for some time. Many of Sweden's common-interest organiza-
tions are, however, highly centralized. It has only three principal
labor unions and the largest of these represents a substantial propor-
tion of the labor force. And, as the previous section of this paper
showed, it follows from the public good/external economy logic on
which this paper is based that relatively encompassing organizations
internalize part of the external diseconomy of any anti-growth
policies they might adopt, and should accordingly be ambivalent
about such policies. Students of Swedish labor such as Walter Galen-
son have suggested that Swedish labor unions are unusually anxious
to promote economic growth and that their leaders point out how
growth is advantageous to their membership as a whole. The reasons
for the relatively centralized common-interest organizations in
Sweden need to be studied. The relatively small size and the ethnic
homogeneity of tlhe country and diverse other factors may be impor-
tant, but it would also be interesting to determine whether the timing
of Sweden's industrialization was a factor. Britain and the United
States as well as son0m other countries had already industrialized, and
even started to form unions and other common interest organiza-
tions, by the time Sweden began its industrial revolution. Could the
exanmp)le of unions and other such groups in other countries, perhaps
especially Great Britain have encouraged labor organizations or
otier organizational entrepreneurs to create unions and other organi-
zations? The relatively specialized craft unions that sprang up spon-
taneously in Great Britain and to some extent in the United States
in the nineteenth century were naturally fairly small, whereas organi-
1*Kwang Chol, Thesis Draft Materials, Department of Economics, University of Mary-
land. 1976.
IL "America's Third Century" (New York : Harcourt Brace, 1976), pp. 72-74.





39


zations founded by ambitious organizers might perhaps be as big as
their organizers could make them. Certainly the unions that were
organized in later periods in the United States tended to be large,
industrial unions rather than small craft unions. One wonders whether
it is generally true that spontaneously created common-interest or-
ganizations are smaller, and thus more harmful to growth, than those
that are stimulated by example and organized according to some con-
scious design.
It would also be interesting to look at the experience of the German
Federal Republic from this perspective. Though German labor unions,
at least, are less centralized than those in Sweden. they are still far
more centralized than those in Britain and the United States. The
relatively small number of separate unions in Germany must not only
have reduced growth-inhibiting jurisdictional disputes, but perhaps
also given the German unions more inhibition about policies that
reduce growth rates. It would also be useful to pinpoint the extent to
which this relatively rational labor union structure is due to the con-
scious designs in the post-war period when these unions were created.

INTERNAL CONTRA-DICTIONS
If the foregoing argument is correct, there is a most disturbing
"internal contradiction" in the evolution of the developed democra-
cies. This is by no means the contradictionwhich Marx claimed to have
have found, helpful as this bit of his terminology may be in describ-
ing it tersely. The contradiction is rather between our desire for demo-
cratic stability and peace, on the one hand, and our desire for realiz-
ing our full economic potential, on the other.'2 Even for those who,
like this writer, are so intensely devoted to the democratic freedoms
that they would fight for retaining them even if the cost were fore-
going all further growth, this is not a happy finding. To some at least
slight degree, this contradiction is ineluctable in that there appears
to be no panacea that can entirely eliminate the tension that has been
described.
To a degree-let us optimistically say, to a far greater degree-the
contradiction is inescapable, in that changes in policies, procedures, and
attitudes can eliminate most of the problem. Some of the adverse
effects of striking asymmetries in political power among groups can
be eliminated by special agencies and assistance for groups, such as
consumers, that are under-represented, and by legislation designed
to countervail the harmful effects of groups with monopoly power
or disproportionate political organization. "Constitutional" or pro-
cedural rules, and even ethical precepts, which rule out or limit certain
types of government intervention or private coercion, would come close
to solving the problem.13
S"A helpful critic in a Continental country with a long tradition of Marxian scholarship
suggested that the contradiction I have described should be called a "contradiction of
capitalism," apparently partly on the grounds that it applies to the countries many prefer
to call "capitalistic-the nations with democratic as opposed to Communist or other
dictatorial governments. From the perspective of the history of economic thought, how-
ever, this represents an astonishing change in terminology it is a democratic political
system with freedom of organization that characterizes "capitalism" and rives rise to
its contradictions, not the economic forces at work in markets upon which Marx focused.
On this interpretation, a prototypical and defining feature of capitalistic systems would
be their willingness to allow workers to form independent unions.
8I am indebted to Abba Lerner and to James Buchanan for helpful insights on this
point.





40


Tim NEDr FOR GROWTH
Economic growth as it is conventionally measured in national income
accounts is not anything like a perfect measure of welfare or true
income. In principle, we should, of course, prefer to compare and
explain changes in well being or welfare rather than in measured per
capital net national product, so that changes in the quality of the
environment, in the degree of social disruption, and in other social
indicators would be taken fully into account along with changes in
market output. As one who has been studying the shortcomings of the
national income statistics, the need for social indicators, and debates
about the desirability of economic growth 14 for some time, this writer
is far more concerned with this issue than most other economists are.
He would after long reflection conjecture that the countries with rela-
tively low measured growth rates have not actually fallen as far behind
the nations with higher measured growth rates as the available
statistics would suggest.15 If there were better and more comprehensive
measures of income the gap in growth rates between Japan and Great
Britain, the opposite extremes among tihe developed democracies,
would probably be a lot less wide. But it would surely still be there.
There are a great many rather technical reasons why this is probably
so, which need not be discussed here because they have been dealt with
at length elsewhere.16 But even a casual examination of emigration and
immigration rates and many other choices supports the conclusion that
the higher levels of measured income are usually very much worth
having and their causes very much worth studying.

ON THE SHOULDERS OF GIANTS
Only a detailed study of the economic histories of most of the
developed economies with democratic governments could show defini-
tiv-ely whether the argument offered in this paper is really satisfactory.
It is, however, clearly consistent with the more conspicuous features of
the experience of the developed democracies and certainly fits this
experience better than any obvious alternative explanation. And if the
argument here is correct, then the most puzzling and striking variations
in growth rates among developed countries have been accounted for,
and we have taken a tiny but badly needed step toward an economics
that can encompass evolutionary changes ,as well as short term develop-
lmients. It therefore seems very likely that the inadequacy of the
economists' understanding of the causes of growth in the developed
countries has been due, not to any want of stature in our predecessors
in the field, but to the narrowness of our own preoccupations. Perhaps
there is a lesson in this for those who are inclined to rebel against
modern economics; the need is not to spurn what the great economists
of the last two centuries have learned about the workings of markets,
but rather to develop the breadth of vision needed to see these markets
in the context of the organizational, political, and social processes that
surround and pervade thenim.
"Mancur Olson and Hans Landsberg, eds.., "The No-Growth Society" (New York: W. W.
Norton. 1974; London, Woburn, 1975) ; U.S. Dept. of Health, Education and Welfare.
"Tnward A Social Report." (Washlington: U.S. Government Printing Office, 1909).
15 "Mancur Olson, "Beyond the Measuring Rod of Money" (forthcoming).
11 Ibid.












THE CHALLENGES OF NONECONOMIC FACTORS
TO ECONOMIC GROWTH

By WILLIS IV. HARMAN and THOMAS C. THoArks*


SUMMARY
Proponents and opponents of continued economic growth both
invoke improved quality of life as the primary rationale supporting
their view. Different persons see differing pictures of economic and
social reality. The complication introduced by this fact is of extreme
importance to democratic decision making.
Three divergent pictures of economic and social reality are exam-
ined here: one in which continued economic growth is imperative, one
in which it is considered improbable if not impossible, and a third in
which economic growth becomes the wrong measure on which to focus
attention in a changing societal context.
In the first perception of continued economic growth :i'. imperative,
the two necessities of near full employment and a strong economy to
accomplish societal goals constitute sufficient reason to make lowered
growth an unacceptable course. Limitations of the physical capacity
of the world to meet human needs, while important to bear in mind,
will not actually be approached for many decades. Meanwhile pat-
terns of consumption will undoubtedly change markedly-quite likely
in ways that will reduce demands on scarce resources and ameliorate
environmental difficulties.
One problem that stands out in this view is the shortcomings of
GNP as a measure of national welfare. To eliminate objectionable fea-
tures of the GNP (e.g., its tendency to include both making a mess
and then cleaning it up as contributions to the overall product), vari-
ous alternative measures of net national welfare have been proposed.
In this view availability of empirical time series for some such meas-
ure of net welfare would greatly contribute to the fruitfulness of
public policy debates on the growth issue.
The second perception, of continued economic growth as improbable
if not impossible, stresses the fundamental limitations of environ-
ment and resources, and the problems of managing an increasingly
ungovernable system. Aspects of the management problem include
difficulties in attracting capital to major investment needs, difficulties
in carrying out large scale technological advances, deteriorating labor
quality, and problems of increasing governmental regulation. Policy
recommendations favored in this view include stronger conservation
measures, decentralization, and development of appropriate tech-
nology.
*Stanford Research Institute.
(41)






42


The third picture, which includes a radical change in the societal
context, is the one where noneconomic forces act on the economy most
strongly and change most rapidly with time. In this view the basic
trends of the industrial era (including the trend toward continued
growth) have generated conditions that necessitate major systemic
change. Society is approaching a governance crisis of major propor-
tions. Legitimacy of the old order is challenged on the grounds of
new power concentrations not being duly constituted, guiding moral
principles being inadequate, and societal problem solving efforts being
ineffective. In this view appropriate policy measures include keeping
energy and growth policies flexible, preserving options, attempting to
strengthen the voluntary sector and fostering open dialogue on growth
policy issues.
There are rational bases for choosing among these three pictures.
However, for the time being it is probably impossible to obtain con-
sens.iis that one picture is correct and the others -are in error. Thus,
since all three views are held by significant factions of the polity, it
is probably desirable to adapt policy recommendations compatible
with all three.
It is important to distinguish between the varying interests of
stakeholders and the differing perceptions of reality that exist which
make collective examination of these issues so difficult. Society has
well recognized and institutionalized ways of dealing with interest-
group conflicts; it does not have similarly satisfying ways of dealing
with conflicting views of reality. Yet these diverse reality perceptions
will be centrally involved in society's crucial endeavor to identify,
explore, and assess alternative paths to the future and to choose wisely
among them.
1. INTRODUCTION
To be convincing, analysis of the kind and amount of economic
growth needed by society must be broadly conceived. Complexity and
interdependence characterize modern society; growth is inextricably
intertwined with problems of energy and materials supply, salubrity
of the environment, personal safety, distributional equity, wholesome
eOn)loVment. fit e(ll1cation, and effective democracy.
oe,.us(e of this interconnectedness of everything with everything,
politicians and their technical advisers who have developed considera-
ble self-confidence in their ability to choose appropriate actions for
specific problems, approach this complex of interrelated issues with
far less asslirance. This unsiireness is partly because of the well-known
lperversity of complex social systems (e.g., the tendency of second-order
effects of policies to negate the intended effects), and partly due to the
dlifficulties of integrating such incomnmensu rubles as economic growth,
itlical choice, and quality of life.
Tn add(lition, however, the perplexity may bl more subtly but as
iml1portanlly a result of the( quite different realities perceived'by vari-
ous groups in the society. To some it seems apparent that the quality
of life will )1e threatened by low economic growth which leads to high
iin.('c.iiloynmint, and widespread poverty. On the other hand, the desir-
ability of continued economic growth lias been disputed by others who
also invoke the quality-of-life criterion. For example, a 1969 National






43


Academy of Sciences report 1 concluded that the quality of life, involv-
in1r flexibility of choices and freedom of action, is threatened by the
demands of an expanding economy "in three principal ways: (1)
through the restrictive and harmful effects of pollution; (2) through
the increasing frequency and complexity of unconstructive but un-
avoidable human contacts; and (3) through the necessary increase in
regulatory measures-all in consequence of increasing use of and com-
petition for resources, space, recreation, transportation, housing, and
even educational facilities." We must conclude either that the rela-
tionship between economic growth and quality of life is anything but
clear, or that "different types" of economic growth and quality of life
are the subject of the two views.
That different persons see different patterns of facts and issues, dif-
ferent pictures of economic and social reality, is evident in the public
debates over growth issues-disputants sometime appear to be talking
about different realities. The complication introduced by this fact is
of extreme importance to democratic decision making.
Everyone has seen the type of visual illusion in which the observer
sees, alternatively, a particular pattern as "figure" against the remain-
der of the display as "ground," or else the reverse. One observer may
see a particular pattern or Gestalt, while another may see a wholly
different configuration. Something like this clearly happens in human
affairs, where one observer will perceive in a situation a particular
meaning while a second, with essentially the same data at his disposal,
perceives the situation quite differently. (The paranoiac is the obvious,
if exaggerated, example.) In the more complex human situation there
is nothing so neat as the "figure-ground" relationship. Eventually it
may turn out that one perception was indeed more accurate or appro-
priate than the other. However, for the moment it may not be at all
possible to establish that one perception or Gestalt is "true" and the
other "false."
Recognition of differing perceptual Gestalts may be a useful con-
cept in interpreting the arguments that surround the growth issue. If
such an idea appears to be a weak tool in comparison with the seem-
ingly more precise methods of statistical analysis, trend projection,
and computer-based modeling, it is well to recall that just such a con-
cept is central to modern historical methodology. History is intelligi-
ble, as has been said, inthe sense that historians make it so. That is to
say, the incomplete data and fragmentary descriptions of events of the
past are viewed through, and in turn contribute to, some pattern of
interpretation, some overall picture of meaning, some historical
Gestalt. Revisionist history typically amounts to offering a competing
Gestalt. The same concept of an interpretive Gestalt is central to other
disciplines as well, notably anthropology, archaeology, and strategic
intelligence. Thus an attempt to use it in "making sense" out of the
extremely complex growth issue is not without reassuring precedent.
We wish to examine briefly three such pictures of economic and so-
cial reality. In one the nation cannot afford not to grow. In the second
it is unlikely that the economy could possibly avoid a serious decline.
In the third a cultural transformation may make it a "whole new ball-
1 National Academy of Sciences/National Research Council Committee on Resources and
Man, "Resources and Man." San Francisco: W. H. Freeman; 1969.






44


game." Each of the three divergent pictures is a reasonable one; it
could be the self-evident future seen by a reasonable person.
For the time being it may be quite impossible to establish which of
these pictures is correct, since the available data can be fitted into more
than one pattern. (This is not to gloss over the fact that the conse-
quences of being wrong, in the end, may be quite different for the
three.) Thus contemporary decision making has to be carried out not
only amid data-uncertainty, but also amid pattern-uncertainty of a
most fundamental sort. This is a fundamental political fact of the
times.

2. FIRST PICTURE OF REALITY: INDISPENSABILITY OF CONTINUED
ECONOMIC GROWTH
The first of these three worldviews assumes the desirability of con-
tinued high economic growth. For several decades the standard long-
term economic projection for the United States, and indeed for nearly
all the developed nations of the world, has been for around 4 percent
real growth. Daniel Bell 2 assumes such high growth as we move into
a post-industrial age in which material want is forever banished. Hier-
man Kahn 3 assumes another century or so of continued high growth
and of other components of tlhe "basic long-term multifold trend"'
of Western civilization, during which time society diverges still fur-
ther fi'rom l)re-industrial societies in its unprecedented affluence, ex-
traordinary development of technology, and institutionalization of
secular, humanistic, and manipulative rationality.
Under the present economic structure high growth is necessary for
the society to meet the goal of full employment. The rate of growth
will have to increase in the future if the percentage of the total popu-
lation desiring employment, as well as the size of the labor force,
continues to rise through the rest of the century. Assuming present
labor participation patterns and trends, available labor supply will
increase over 22 percent by 1990 (compared with an overall popula-
tion increase estimated at 9 percent). This is the consequence of en-
trance of persons already born (the postwar "baby boom" moving
into the work force), plus the still increasing participation rate of
women. (Wives, and also others with alternative bases for support
or income sources, have come to understand that societal respect and
personal freedom tend to accompany not income alone, but a paying
jolb.) Furthermore, this expanding labor force will have characteris-
tics which in tihe past have contributed to growth and increased pro-
ductivity. Despite some undertrained subgroups it will be more highly
(educated than any labor force in history.
The government can be expected to take the necessary steps to
ensure near full employment because of the political consequences of
Iiaving, large numbers of unused, unwanted persons desiring unavail-
able work. Potential barriers to full employment can be pragmatically
overcome. For example, energy and material shortages can be resolved
with science anid technological innovation, with conservation incen-
tives, and with sectoral shifts in the economy, away from energy and
materials sectors andl toward services. These full employment imeas-
Bell. Daniel. "The Coming of Post-Industrial Society." New York : Basic Books; 1973.
SKilin, lHrmaiinn, "The Next 200 Years." New York: William Morrow; 1976.





45


ures to ensure effective utilization of the nation's talented and rap-
idly growing manpower, will be accompanied by high economic
growth. Around 6 percent a year real GNP growth will be needed to
satisfy the projected demand for jobs (which is increasing at almost
a 2 percent annual rate).
This argument assumes-and a strong case can be made for the
assumption-that no physical or technical shortage of any resource
required for economic growth is likely to directly limit growth, given
the necessary degree of sociopolitical foresight and the social will to
act on it. While there undoubtedly are limits to the physical capacity
of the natural world to meet human needs, they are not that close at
hand. It may be also true that current patterns of consumption can-
not persist indefinitely-but tlhe nature of economic growth has always
involved changing patterns. The street railway and the steamship
were replaced, for personal transportation, by the automobile and the
airplane-with, as has been well noted, dramatic increase in energy
consumption. However, vacuum-tube and mechanical relay communi-
cations technologies were replaced with transistors and integrated
circuits which use less energy. As Schumpeter claimed, economic
growth is a process of creative destruction, in which a series of differ-
ent technologies emerge and gradually disappear.
Thus both the political necessity of near full employment and the
requisite of a strong economy to accomplish societal goals demand
continued economic growth. The high educational level of the work
force suggests that the growth should be in sectors that produce chal-
lenging work for highly trained minds if serious underutilization of
talents is to be avoided. Environmental and resource depletion con-
straints further shape the kind of growth that national policy is likely
to foster.
3. CRITIQUE OF THE GNP GOAL
Looking more closely at the growth areas that are the most likely
candidates to provide this needed employment, we observe a disquiet-
ing characteristic. Many of them represent activities whose function
is to overcome problems that economic activities have created. Thus
pollution abatement-reducing air and water pollution, and control-
ling hazardous substances-is touted as a growth industry, providing
jobs associated both with manufacturing, selling and installing pollu-
tion control equipment, and with the government in regulation and
enforcement. People-moving systems may represent a growth area for
the future, as attempts are made to solve the traffic congestion prob-
lems which automobiles and freeways have bequeathed to our cities.
Safety already shows signs of being a significant growth area of the
future; the rapidly increasing demand for private protective services
is indicative of the potential of crime, violence, and social dissension
for creating jobs.
The health care industry may undergo significant expansion to
handle the stress-related diseases and the impacts of health of pol-
lutants and hazardous substances which are increasingly prevalent in
modern industrialized society. Entertainment of those bored with lei-
sure provided by modern society is another rich source of iob oppor-
tunities. Finally, defense spending and arms supply to the world
constitutes a tried and true job creation approach.





46


All of these have a common characteristic: While they provide em-
ployment and increase the GNP, their contribution to the national
welfare is less clear; they mainly represent attempts to cancel out the
consequences of other economic activities. Such defensive measures
are clearly not what Bell had in mind in describing the swelling serv-
ice economy of post-industrial society. Nor are they what Galbraith 4
means when he speaks of the need to provide more public goods.
The above observation indicates the necessity of being more specific
about what is meant by "economic growth."' Probably there would be
general agreement that economic growth involves growth in the pro-
duction of goods and services, which in turn results in more jobs and
higher per capital real income. More specifically, economic growth
might be asserted to be growth in the Gross National Product in either
absolute or per capital terms. However, GNP is an accounting concept
that is neither designed nor claimed to be a measure of welfare or well-
being. It excludes a number of items that nearly everyone would agree
contribute to well-being; for example, the value of leisure time and
the value of volunteer work and unpaid work performed in the home.
At the same time, GNP includes the market cost of the aforementioned
defensive measures which are not a net addition to welfare but merely
attempt to mitigate the negative benefits to pollution and environ-
mental deterioration, urban congestion, loss of privacy, rising crime,
and depletion of natural resources.
When Simon Kuznets and his colleagues were developing the na-
tional income accounts they originally sought to provide a measure
of the national. welfare. However, recognizing that not all dollars of
income or expenditures contribute equally to welfare, it was necessary
to make. a practical and somewhat arbitrary set of decisions about
what. could and should not be included in these accounts, and how tlhe
various flows were to be valued. These decisions were conditioned by
practical realities and by the prominence of the concept of effective
market demand for goods and services in the influential neo-Keynesian
theories.
As the "growth versus welfare" debate warmed utip toward the end
of the 1960s a number of economists suggested the development of a
measure which would be a return to the original concept of a measure
of national welfare. Three such proposals are the "measure of eco-
nomic welfare" (MEW) proposed by Nordhaus and Tobin2, the
"welfare GNP" of SaCwtz,6 and the "net national welfare" (NNW)
of the New Measurement Committee of the Economic Council of
Japan.7 All three of these measures have in common the attempt to
eliminated from the GNP those "defensive expenditures" which do not
improve tlhe welfare of the citizen, and include values imputed to
leisure, nonnmarket work, and the capital services of consumer durables
and government investments. In our present society the growth rate
of both tlhe MEW and the NNW is substantially less than that for
4 Galbrnlth. John K., "Economics and the Quality of Life," In "Economics, Peace, and
Lanughter." Boston : Hoiughton Mifflin : 1971.
5 Nordhnauim, William. and James Tobln, "Is Growth Obsolete?", In "Economic Growth."
National Bureau of Economic Research. New York: Columbia University Pre-a, 1972.
6 Snmtz. A. W., "Production of Goods and Services: The Measurement of Economic
Growth." In "Indicators of Social Change. Concepts and Measurements," ed. E. B. Sheldon
and W. E. More. New York: Russell Sage Foundation. 1968.
T Economic Council of Japan. New Measurement Committee. "Measuring Net National
Welfare of Japan." Tokyo, 1973.





47


the GNP. Furthermore, this difference will grow over time if, as
expected, waste and pollution increase faster than output.
The distinction between these two types of measures, of aggregate
demand and national welfare, is crucial to the growth debate. They
focus attention on finding strategies to increase the national welfare
without adding to waste, pollution, and resource depletion problems.
Measures of national welfare could help shift the discussion from a
"growth versus no growth" confrontation to a more profitable dialogue
on what kinds of growth to what ends? At the present time empirical
time series for net national welfare are not available to shed light on
public policy debates. Moreover the effort being directed to creating
such measures is minute compared to the effort used just to maintain
the GNP system.
As long as GNP and related time series hold the center of the staze,
their presence has a limiting effect on the quality of growth policy
debate. Either GNP becomes the focus that sets the terms of the. die-
cussion, with more qualitative considerations tacked on as an append-
age, or GNP is rejected and with it the opportunity to formulate the
debate around an informative measure. Thus availability of a more
relevant empirical time series such as the NN'W would allow the
growth debate to proceed on a new plane, illuminated by empirical
measures appropriate to the questions being asked.
Gunnar Myrdal in his book "Critical Essays on Economics" 8 views
the issue from the perspective of the social critic and proposes a major
reformulation of the issues of growth itself. He urges recognition of
a more basic distinction, one between economic growth and '"develop-
ment." By the latter hlie means to refer to "movement upward of the
whole social system"-"not only production. distribution of the prod-
uct, but also levels of living, institutions. attitudes, and policies."
Development is seen as a multi-dimensional concept; the factors that
make it up are to be recognized as incommensurable, interdependent.
and in general not given a unique monetary value in the marketplace.
He sees a fallacious precision in aggregating some factors in develop-
ment which happen to be more easily expressible in monetary term,.
and neglecting others that do not have that characteristic.
Unfortunately, as Myrdal recognizes, many of the issues he raises
have long been known to those who construct the national accounts.
but neither they nor Mvrdal have effective suggestions for reaching
the objectives proposed. Nevertheless, because the growth issue is so
important we cannot wait for perfection. A wise course would seem
to be to assign hi.g-h priority to creation of the best measures of net
national welfare that can be constructed in a relatively short time.
and to begin computing and publishing those data by the end of the
decade.
4. SECOND PICTUPJ OF REALITY: INEVITABILITY OF DECLINING
GROWT-r
In the second perception to be examined, low or declining growth
is being forced upon us by various planetary limits and because the
system has become so complex that its management is a nearly over-
whelming task.
Myrdal, Gunnar, "Against the Stream." New York: Random House, 1973.





48


Critics of this view speak of its "neo-Malthusian pessimism"; how-
ever, its adherents contend this is realism. Georrescu-Roegen 9 argues
that it is no accident, but rather a fundamental characteristic of the
economy, that material resource use, energy use, and pollution rates
have all risen essentially proportionally with GNP or other similar
maciiures of economic activity (including the economic activity of
"pollution control" which, generally speaking, amounts to shifting
waste from one form to another). Rappaport 10 discusses adaptability,
the ability of societies to deal with both short-term fluctuations in their
environment and. by transforming their own structures, nonreversin"
longer-termn changes as well. IHe argues that highlly industrialized
society may have lower adaptability than more decentralized societies
with nearly self-sifiicient local economies. "As energy flux has in-
creas.ed, the disparity between the direction of cultural change and the
goali of biological survival has widenedd"
Tlim at one level the limits to growth appear to be pollution, resource
depletion, environmental degradation, and effects of crowding. At
another level they are the problems of managing an increasingly
ungovernable system. To elucidate this latter argument, let us look
briefly at examples of management problems in four areas-major
capital investment, large-scale technological advances, labor quality,
and governmental regulation.
.M[ajor Capital Invcstmenrt.-Present technologies and living pat-
terns are built around the availability of low-cost energy and essen-
tially free waste exhaust to the environment. The fact that this
availability can no longer be assumed requires moving toward a much
monre energy-conservative and nonpolluting economy and society. This
in turn will require replacement of industrial capital, much existing
hoiilseh old equipment, and a large portion of the capital stock in trans-
portation. Large energy projects and environmental control measures
alone are estimated to require capital in the amount of a trillion dollars
in the next decade or so. To attract capital to these uses necessitates a
stable business environment. Yet the business environment of the near-
teri future is very unpredictable for a host of reasons-uncertainties
in energy price and allocation, federal regulatory actions, environ-
mentalist and consu ner actions, court decisions involving settlements
a:d delays which increase construction costs. These, uncertainties are
not, it slhotuld be noted, the uncertainties of natural forces-those we
hav, lear'ued to deal with. These are tlhe uncertainties of unmanage-
ability, arising from thle impinging on thle economy of noneconomic
facrtor.-.
Lar,,,-Srae Tr'uwloo.r-rtl AdvazncR.-Akny chnia'e in the produc-
tion ;iiti oi whid i i :.rrht counter the neo'i-Mali(-Iisiaii postulate
would 1,h' li!:'ly to depl)tld 11Iopo tec-1ol "..'l inlnovation. Yet here too
:1 1i11iibi of dk,1V'lopi)i; *is ,onspire to limIit pron.,-.. Both public and
lri\ i1te 11) p', id in i'e down from wlaiit they v.would have been had
thle tr(ii'-: of :1 dl(,'hlde :1 -,0o Clin iid. V'CtiiOiv C 1)ital for small noew
I, ..1,,o,,fic.;lly IIovIa i\X11 corpporat iul s LIas dt ied 1 ). Flurtlhermore, a ll
iiiili-t ial jnit ii. are finliiii' it iiici'" ind.ilv dliilicdlt to carry out large-

<;,.,:'r:'s,',LI* R go n. Nirhiol,. "'.nergy and Economic Myths." "Southern Economic Jour-
11.,1 V,,I. 41, No. .3. p o. :147-:; I
10 :Qlpiilprt. Rlov A., ""Fiwrgy naid the Structure of .\%tlplation." The CoEvolutlon
Q'-i r'. rly, Sprlng 1974. p '.1 '2s.





49


scale technological projects in critical fields such as transportation,
energy supply, food production, housing, and urban rejuvenation.
The apparent and immediate reasons for this latter situation vary-
from environmentalist opposition and delays that cause costs to sky-
rocket, to cost overruns due to labor demands, to increasing fuels
prices and capital shortages, to fluctuating regulatory environment,
to unexpected developmental costs. More generally there is evidence
of a basic trend in post-World War II production technology toward
diminishing capital productivity.11 And more fundamentally still is
a growing disenchantment with big technology that manifests itself
both subtly and overtly in obstructionist actions. While the precise
reasons for the difficulties may be obscure, contemporary failures con-
trast sharply with such earlier success stories as railroads, airlines,
automobile production lines, large power plants, and agribusiness-
and, of course, the Manhattan Project and the Apollo Program. The
comparison contributes to the growing disbelief in promised benefits
and discourages both private and public investment from taking bold
innovative risks.
Labor Quality.-Labor quality, as measured by educational attain-
ment, has certainly been increasing as previously noted. However,
when persons are employed at tasks that do not use their trained
skills nor challenge their basic competencies, morale and performance
suffer. Thus, although it is difficult to obtain suitable measures, expres-
sions of worker discontent, evidence of worker negligence and the
decline of craftsmanship, and manifestations of anti-work attitudes
(e.g., sabotage, pot smoking on the job, alcoholism) all suggest that
the quality of workmanship is probably declining in spite of the in-
creased educational levels.
Governmental Regulations.-Today's high technology growth econ-
omy appears intrinsically to require ever-increasing regulation, be-
cause of a number of developments, including:
Progressive degradation of the environment by the waste prod-
ucts of industrialized society;
High rate of introduction of new synthetic chemicals( upwards
of 1000 per year) whose long-term effect on man and his environ-
ment may not be known for decades;
Need to take anticipatory actions regarding resource depletion
(in advance of market-response price increases), especially in
the areas of fuels, minerals, and arable land;
Possible long-term threats to natural ecological systems and
planetary life-support systems;
Amenity, ecological, health and aesthetic impacts of large en-
ergy- and resource-related projects;
Aggravated distrust of business and increasing donbt thlint the
economic criteria of business decision making are leading the
society to good social choices.
The problems arise because regulations often fail to achieve the goals
intended. Specific remedial actions (e.g., to reduce air pollution) in-
teract with other regulatory actions (e.g., for occupational health
and safety, for energy conservation) in ways difficult. to predict; be-
lated regulation can render long range planning nearly impossible.
Commoner, Barry, The Porerty of Power, pp. 223-227. New York: A. A. Knnpf. 1076.





50


Few people argue that regulations should be abandoned. For better
or worse they are necessary for our current society. However, they
raise the basic problem of whether our economic system can continue
to operate effectively, resilently, and flexibility in the face of a rising
tide of restrictive regulations. The problem impinges not only on the
rate of economic growth, but ultimately on the very freenesss" of the
system.
The Management Problem.-Problems in all four of these areas are
aspects of the central unmet challenge that could bring about a low-
growth future, namely our ability to democratically manage an in-
creasingly large, complex, interconnected, industrialized social system.
What has happened is that as the society has become more populous,
complex and interrelated, it has aggregated what were comprehensible
smaller systems into larger and oftentimes incomprehensible super-
systems of such proportions that they seem increasingly beyond direct
comprehension and control. Many of the behavioral properties of the
large systems upon which we so rely seem to conflict with the purposes
for which those systems were originally created; large systems seem
to tend toward conditions of relatively Tow performance, they appear
to become increasingly vulnerable, beyond a certain point they seem
to increase the strain on social cohesion, they tend to diminish the
significance of the individual and contribute to alienation, they seem
to become increasingly difficult to control by democratic means, and
so on. Possible attributes of large, complex national systems and the
implications that they may have for the functioning of those systems
appear to be:
Increasing interdependence, bringing (a) vulnerability to ac-
cidental or deliberate disruption; (b) rigidity, since a change in
one element demands change in interrelated elements; and (c)
an increasing need for regulation.
Increasing scale, implying (a) diminished access to leaders;
(b) diminished significance of the individual vote; (c) more fre-
quent disturbing events; and (d) qualitative change (e.g., more
impersonal, more bureaucratic, more juggernaut-like).
Increasing complexity, involving (a) decline in the relative po-
litical understanding of citizens; (b) increasing reliance on elite
expertise; and (c) increasing alienation as persons confront an
incomprehensible totality.
Increasing need for regulation and control, involving (a) for-
inal controls substituting for custom and internalized controls;
;ind (b) increasingly forcible and increasingly broad scope regu-
latory modes.
Increasing perialhl.fon. and consequentially (a) the potential
(.eiergence of a techlnocratic elite outside, normal political checks
and balances; (b) more vulnerability to economic changes and
dislocations; and (c) decline in tlhe availability of broad general-
i4 s for overall management.
Tendency toward low performance, arising because (a) the
actual complexity is not comprehended and simple solutions are
proposed for complex problems; (b) subsystem crises command
at t(ntion and overall goalsetting and planning for the overall
Yvstcmni is neglected; and (c) system inertia tends toward con-






51

tinued functioning in an accustomed pattern long after changing
conditions should indicate the need for change.
Development of institutional boundaries that make extremely
difficult the kinds of planning and problem solving efforts that
would require the transcendence of such boundaries (e.g., regional
planning crossing over the boundaries of subregional systems).
These characteristics of large complex social systems cannot be enun-
ciated with the confidence one might put behind a scientific theorem.
Nevertheless, in sum they suggest that the limitations to continued
economic growth may lie partially in the area of manageability, and
may be very fundamental indeed.

5. THIRD PICTURE OF REALITY: CHANGING SOCIETAL CONTEXT
Both of the two preceding views of economic growth dealt primar-
ily with technical issues. By omission of any contrary assumption they
tacitly assume that the basic cultural and political context would
remain relatively unchanged. However, there are numerous indica-
tions that that context may be changing rapidly and significantly.
Changes in values and attitudes show up in various ways. DI)aniel
Yankelovich 12 gives survey evidence of what he terms a "New Nat-
uralism" including emphasis on harmony and relationship with na-
ture, on the search for sacredness, on the nonrational-the intuitive,
aesthetic, and mystical-and on community. Another sign comes from
the strength and actions of the environmentalist movement, the "hu-
man potential" movement, the "appropriate technology" movement
(e.g., as attested by the rising popularity of E. F. Schumacher's Small
is Beautiful) ,13 and similar public interest groups. Daniel Bell 4 notes
as an essential characteristic of post-industrial society a shift from
an "economizing mode" to a "sociologizing mode":
The "economizing mode" is oriented to functional efficiency and the manage-
ment of things (and men treated as things). The "sociologizing mode" establishes
broader social criteria, but it necessarily involves the loss of efficiency, the reduc-
tion of production, and other costs that follow the introduction of noneconomic
values. (See p. 43.)
The significance to the economy of such a cultural change goes much
deeper than simply changes in lifestyles and buying patterns. This be-
comes apparent upon reflection on the theory of the market economy, in
which individuals and organizations make autonomous decisions about
what to produce and to buy and sell in the marketplace, and these all
somehow add up (with the aid of Adam Smith's "invisible hand") to
satisfactory overall social choices. No one doubts the efficiency of the
market as a superb mechanism for ordering this immensely complex
process. But what often passes relatively unnoticed is the essential
though subtle role of the culture in guiding this process.
It is not true that the pursuit of private gain alone, operating in the
marketplace, results in wise social choices. The culture that guides the
microdecisions is determinative of the kind of social macrodecisions
that result. If, for example, the culture has negligible concern for
2 Yankelovich, Daniel, "The Changing Values on Campus." New York: Washington
Square Press, 1972.
13 Schumacher, E. F., "Small Is Beautiful: Economics as if People Mattered." New York:
Harper and Row, 1973.
14 Bell, Daniel, op. cit.





52


future generations, then the marklcet will reflect this by dictating rapid
depletion of renewable resources and spoliation of the environment.
talk of "internalizing the externalities" not withstanding. Short-term
gains to subdivision developers will take precedence over long-term
needs for fertile land. The future will be discounted at rates that profit
the present generation, which is another way of saying future genera-
tions be damned. If the culture contain, no ethic of protecting th!e poor
and the weak (whether persons or nations), thewn market decision minak-
ing will make the powerful richer and thle weak poorer.
The interaction between cultural values and the requirements of the
economy is illuminated by the example of saving vs. consuming. In the
early capitalist economy, saving was important to build up capital.
However, during the last half century tlhe ethic of frugality gave way
before an emphasis on economic growth. The sin of extravagance be-
came the virtue of consumption; a massive advertising industry built
up to persuade the public to be less frugal and to consume more, and
government economic policy to some extent conveyed the same advice.
The society now faces a dilemma, in that there are a host of reasons
that a new frugality-doing more with less-is in order. Frugal ulse
of resources would ease both the problems of resource depletion and of
environmental impacts associated with resource extraction and con-
sumption; it would also reduce the gluttonous image of the U.S. in the
international community. But any such cultural change opposes the
powerful momentum of the growth-oriented economy.
Thus the cultural context and the behavior of the economy are in-
extricably interlinked. The pattern of cultural values and motivations,
and both depend upon an underlying vision of reality.
Basic Chawacteristics of the Industrial Era.-Somine of the basic
trends characteristic of industrial society, which have accounted for
its benefits and achievements but also lead toward its most basic prob-
lems, are the following:
Industrialization of production, i.e., subdividing work needed
to produce goods and services into elemental increments, anl or-
ganizing and managing those increments toward the goals of pro-
ductivity and efficiency.
Autmnation, the further organizing of work so that it can be
performed by energy-driven self-operating machines.
Risnqg ikhfluence of science, i.e., tlhe searchl for knowledge 01i1ided
by the principles of objectivity anlld causal ty, and( embodying tlhe
prediction and control values of teclhnoloic'al application.
Newr concentrations of powvcr-especially economic pownr' in tlhe
expanding industrial corporations and :,siociated financial insti-
tilt.ion.s, [i(nd iiilte'llectiial power in the scientific and technological
elite.
RI;Ing erv 7.s of ehduation withl st ron- enmphlasis on prepalaration
for entering twhe ifndstt rialized economy.
Prlf/mat;e and economic valtcx prelonlatinntig, with tlie indi-
vidual free to -'.evIk hi.s own svelf-inl ,,'i l, ;iQ hu cw iines it, ill tile
market place.
,1[f, .,l i.ororl.rs, bot i as aii olIservi1ble trend and a drcelaredl
foal, 111), lyin Jg -ian's expanding conilrol over nature and 1his an-
limited ability to understand tlie universe fi'rom lihe data provided
1by liis ph)lY! -fi a 1 .





53

In the first and second worldviews, the rightness of these charac-
teristics and the continuation of these trends tends to be unquestioned.
In the third view being explored there is more emphasis on the di-
lemmas to which they have brought us:
1. Industrialization and automation trends lead to less and less in-
trinsically rewarding work being available for a populace with ever
increasing technical training (called education). Furthermore, envi-
ronmental degradation and resource scarcities place limits on expand-
ing production, and hence on expanding employment. The net result
is chronic unemployment and underemployment (e.g., work which
falls short of employing abilities and fostering individual growth).
2. The industrialization trend and the goal of material progress, in
the absence of more eternal values, lead ineluctably to conditions of
tle "new scarcity." The problems of resource depletion, environmental
deterioration, hazardous substances, and threats to the planet's life-
support ecosystems are not accidental but fundamental and intrinsic
to the industrial pattern. They arise partly because the pressure to
keep productivity increasing necessitates increasing consumption, in-
creasing energy use, and increasing automation (so that it takes ever
faster expansion of the economy to create the same number of jobs-
hence intensification of environmental and resource depletion
impl)acts).
3. Energy (so far large fossil) is increasingly vital to an industrial-
izing world society; it is the high energy mode of modern industrial-
ized society that brings the most basic international confrontation.
But the paradigm of industrial society contains no rationale or incen-
tive for more equitable distribution of the earth's resources, or of the
power and wealth which has come from the exploitation of those re-
sources. The goal of stability of world society demands that some effec-
tive counteracting force be found to the natural tendency for the eco-
nomically and technologically powerful nations to further increase
their advantage.
4. The dominance of material and economic values (e.g., efficiency,
standardization, organization) tend to obscure humane values and to
diminish man, leading to problems of anomie and alienation, distrust
of big business and government, and individuals feeling loss of liberty
and meaning.
5. Predominance of the goal of material progress leads to the fail-
ure to foster socially responsible management of the development and
application of technology. The technology assessment movement is an
indication of recognition that the Faustian powers of modern tech-
nology require increasing societal control. This is difficult to achieve,
however, without threatening basic principles of free enterprise and
democratic government.
6. The rising prestige of positivistic science led to an eroding of
traditional values, and an inability of the society to provide goals that
will enlist the deepest loyalties and commitments of its citizens. Tech-
nological growth and material progress alone are not enough, but they
tend to overpower and push aside other goals, leading to social aliena-
tion and estrangement of man from Nature. Thus a reaction has ari.'en
against further industrialization of organic and human activities (e.g.,
agriculture, health care, use of leisure time). The industrial system has




54


immense d( ive but lacks the clear and satisfying guiding images and
goals to insure sound and human further development.
Looking at this another way, we see the industrial-era trends of a
few centuries duration superimposed on a much longer trend of civili-
lizattion itself---chlaracterized by:
Increasing understanding of the total environment and man's
relationship to it, of oneness with fellow man and with Nature;
Concern with and communication about the "great questions,"
the inner world, man's spiritual being;
Increasing self-awareness and self-realization, valuing of
individuality:
Societal development toward, and high value placed on, politi-
cal liberty;
Movement toward democracy, equity, justice under law.
It is where the industrial-era trends conflict with these long-term
trends of human civilization that the challenge arises for cultural
change.
.1 Goceraoire Crisc'.-Thus the focus is raised from management of
an economy (as in the second view) to goverance o.f a social system.
The fundamental challenge of our time is to the adequacy of
goverance.
From the perspective of history, the mightiest force for social
change is tlhe unproclaimined power of the society's citizens to challenge
and withdraw legitimacy from any or all of the society's governing
institutions. Familiar examples in the brief history of the United
States include the challenge to the legitimacy of monarchical gov-
ernment in the Declaration of Independence, the withdrawal of
legitimacy from the intitution of slavery, the labor unions' success-
ful challenge to the legitimacy of business treating workers as its
property and, perhaps most remarkable of all, the complete with-
drawal of legitimacy from the institution of political colonialism
since. World War II. Over the past ten or fifteen years we have wit-
nessed a growing challenge to the legitimacy of the present social
system of the industrialized world-particularly to its economic,
political, technological, industrial, corporate, and scientific aspects.
This challenge may mark one of the most important events in the
history of human civilization. More than by any other thing, the
future will be shaped by how that legitimacy challenge is resolved
and new governance structures evolve.
Although its nature is not even clear to many of those people
participating in it, this challenge is identifiable by a number of signs:
Third world insistence of a new international economic order.
Environmnentalist, consumer, minority rights, women's libera-
tion. nd youth protest movement.
(Critricismls of industrial products, business practices, and
mnniptulative advertising.
Survey data sliowiung values and attitlhuds that imply need for
elmnn r in the old orler.
G rowing sen se th'itt old answers no longer work.
Indications of dlisennchlintimneiit with tlhe assumption tliat all
sc.ieiittifc and tec'hn ological advance is unqualifiedly good.
D)ecreased trust in institutions of iiosine.ss and government.





55


New labor demands for meaningful work and participation in
management decisions.
Increasing signs o.f alienation from work and from the non-
conummunities called cities and suburbs.
Evidence of widespread search for transcendental meanings to
provide a sense of "what is worth doing."
Each factor in its way is part of the challenge to the current gov-
erance systems which increasingly is perceived to fall short of achiev-
ing the humane goals it espouses.
Legitimacy of a goverance system and its power concentrations is
fundamentally based on (1) its being duly constituted, (2) its per-
ceived adherence to adequate guiding moral principles, and (3) its
effectiveness in achieving agreed-upon goals. The contemporary chal-
lenge to our social order involves all three bases.
The governments of the industrialized democracies are duly con-
stituted. However, there exist other concentrations of power that are
not so constituted, the main example being the tremendous power
inherent in the world network of multinational corporations and
financial institutions. Because of their widespread influence, these
gigantic organizations are quasi-public. As tlhe largest corporations
have grown to wield influences over human lives that are comparable
to those governments, similar demands are being made of them that
have historically been made of governments-demands that they
assume responsibility for the welfare of those over whom they wield
power. Among those who feel themselves to be disfranchised by their
lack of representation in institutions of power are members of non-
industrialized nations, minorities, consumers, youth, the elderly, and
women. On a separate front, the intellectual power of the scientific-
technological establishment is being contested. Science's position as
the ultimate arbiter of truth is challenged on the grounds that it is
guided and dominated by prediction-and-control values that serve
industrialism rather than by humanistic goals that enhance man.
Second, the challenge is made that the industrial system is not
guided by adequate moral principles, particularly in the matter of
equitable distribution of the earth's resources. Especially with regard
to food, energy, ad economic resources, the poor continue to get poorer
relative to the rich nations. The industrial system possesses no effective
ethic or mechanism of redistribution; economic incentives predominate
over all. The system provides no effective ecological ethic; consumers
often feel manipulated and defrauded. The sense of pride in striving
toward noble goals seems clearly to be dwindling; the system does not
foster goals that enlist the deepest loyalties and commitments of
citizens.
And, thirdly, the charge is made that the system is proving ineffec-
tive in achieving even its own declared goals. The successes of tech-
nology and industrialization themselves appear to be primary causes
o.f contemporary problems. The labor of the poor and unskilled is
rendered of little value, and there is a lack of sufficient satisfying work
roles. The system does not foster preservation of the planet's habit-
ability or enhancement of the environment's capacity to promote tlle
total health of individuals. Incentive structures of the industrial
system fail to ensure that future generations will have fossil and
mineral resources and clean air, land, and water.





56


The strength of this three-pronged challenge is difficult to assess.
Conceivably the problems might be alleviated to such an extent that
the challenge would weaken and disappear. If the challenge continues
to grow, several outcomes could occur. It could become sufficiently
alarming that a highly authoritarian regime would arise and put it
down by strong governmental action. Or the confrontation could
become much stronger and result in a major whole-system trans-
formation.
Closely related to this challenge to the legitimacy of industrial-era
institutions is the appearance in the culture of a "new transcendental-
ism" (manifested in numerous cultural indicators such as book pur-
chlases and interest-group affiliations, in survey data, and in new areas
(f scientific exploration such as biofeedback and consciousness re-
search), and with this a renewed concern with the fundamental moral
and value premises that shape any society. In the emerging view there
exists a spiritual order, discoverable and explorable and in some sense
testable, against which human value choices can be assessed; there are
evident supraconscious evolutionary tendencies toward development
of man's spiritual potentialities beyond the realm of his mundane
experiences. The view of man which became dominant in the industrial
era is perceived to have over-emphasized materialistic and economic
motivations and neglected aesthetic, human, and spiritual motivations.
In the. emerging view the primary emphasis is on "to be" rather than
"to have" or "to control."
The governance structure which might emerge from this confronta-
tion would undoubtedly be decentralized and participatory to con-
siderable extent. Already the citizenry has declared in many ways
that critical technical decisions are too important to be left to the
experts (e.g., the nuclear power decision). On the other hand, some
sort of centralized regulation-at a national or even international
level-will be required for such unremitting and global problem areas
ns energy utilization, material shortages, and pollution control. To
the extent that the culture contains a strong ecological ethic and
promotes sound behavior with regard to these problems, the amount
of governmental control can be reduced.
Of cour,:e, there is no assurance that the cultural change will favor
ro'eohution of the major dilemmas facing the society. That might seem
a fortunate accident-however, the "forerunner" values of the "New
NatrnAlismn" do seem to be in the right direction. It is as though
Arnold Toynbee's15 pattern of a "universal state" coming to a "time
of troubles" and then encountering alien ways of life and values that
provide new sources of spiritual vigor-a pattern hypothesized years
befoi. anyone lad heard of the contemporary counterculture-were
playing itself out. If this third perception turns out to be correct,
the variious aspects of the legitimacy challenge will be the dominating
noneconomic factors impacting the economy. The challenge will prob-
ably increase in intensity fairly rapidly, and the societal context will
alter dramatically within the next decade or two.

6. SUMMARY AND COMMENTARY
SThree views of economic and social reality have been presented.
15 Toynbee, Arnold, "An Outline of History."






57


The first assumed continued economic growth to be desirable; the
second considers it unlikely. The third suggests the possibility of a
fundamental change in societal context. As the growth debate grows
more strident each of the three will be defended more vigorously.
Since the uncertainty is so great about how to interpret the non-
economic factors operating on the economy, the best decisions will
keep as many options open as possible. Thus it would be equally
unwise to make no preparations at all for a reduced growth economy,
or to take drastic and sudden measures to curb growth.
But is there no way to choose among these interpretations? We
earlier argued that each view of economic and social reality, each
Gestalt, fits the observable facts reasonably well. Furthermore, it is
well known in social science that we tend to act and to perceive so
as to substantiate the view of reality we have. Thus the sociologist
W. I. Thomas advances the theorem, "If men define situations as
real, they are real in their consequences." And anthropologist Gregory
Bateson asserts "Man lives by propositions whose validity is a func-
tion of his belief in them." In a sense no one of these three views can
be disproven by "facts" drawn from another, and whichever view
society comes to accept it will tend to make "real."
Yet there are criteria that can be applied to this fateful choice. Per-
haps the three most important are:
1. Does the view in the long term lead toward system adaptability,
and hence toward survivability? (After all, the laws of thermody-
namics and of ecosystem behavior do obtain, regardless of the opinions
of men. Some conditions for adaptability, for preservation of options,
are ineluctable. One of the arguments often put forth in favor of the
"continued growth" view is that, like the skater on thin ice, we can't
risk stopping. But this is equivalent to admitting that we have danger-
ously reduced adaptability.)
2. Does the view lead toward fruition of the aforementioned long-
term trend of human civilization? (Proponents of the third view, the
transforming societal context, see in it the reassertion of such tradi-
tional values as man's spiritual development, reverence for Nature,
democratic liberation from oppression by institutions, and the
brotherhood of man.)
3. Is the view compatible with whatever can be discovered to be
mans most fundamental nature? (Proponents of the third view are
particularly insistent that homo economics is not man's most funda-
mental nature.)
In the public dialogue about the desirability of growth, which is
likely to get more acrimonious before it is finally resolved, there is
an important distinction to be made. That is between the varying
interests of stakeholder groups and the differing perceptions of reality
which may exist among the citizenry. Of course, the two often overlap,
as when a group's perceived interests are part of its picture of reality;
on the other hand, groups with essentially the same Gestalt perception
of the basic social and economic reality may have quite divergent
interests. The essential point is that society has recognized and legiti-
mated ways of dealing with interest-group conflicts (e.g., compromise,
arbitration, the adversary process in the courts); it does not have, in
general, satisfactory ways of dealing with alternative perceptions of
reality. One of the most constructive steps to be taken in arriving at a





58


long-term growth policy for the nation may be to legitimate alterna-
tive perceptions of reality, as a way of shifting the political process
from an adversary mode to an exploratory mode. The adversary mode
is a time-honored way of settling a dispute; it is not a satisfactory way
of arriving at truth, nor at a wise policy.
Policy Recommendatios
Of the three perceptions earlier identified, one will eventually
emerge as having been more accurate than the others. For the time
being, however, it may be more useful to think of them not so much
in conflict, but like the different blind men's perceptions of the ele-
phlant. The first picture guards against a romanticized view of how
nice it would be for everyone if we would simply stop economic
growth. The second perception is useful for the bounds it puts on
expectations, and for emphasizing that our management problems are
serious ones. The third view is useful in understanding better the
trauma this society is passing through.
Each of the three perceptions would lead to its own policy recom-
mendations. The fact that each is the view of a sizable group in the
polity suggests the desirability of identifying a set of policy recom-
miendations that are more or less compatible with all three. For exam-
ple, the following recommendations are numbered according to which
one of the three perceptions leads to it most directly:
(1) Give high priority to creation of the best measure of net
national welfare that can be devised within the next few years, and
begin computing and publishing these time series.
(2) Institute strong incentives for conservation of energy and
materials, and for development of "appropriate technology" that is
no more demanding of resources and the environment than necessary,
and that tends to promote cooperation, community, and individual
craftsmanship and creativity. Promote decentralization of technology,
institutions, and government. Foster effective citizen participation in
major policy decisions, especially those that will be influential in
shaping the future.
(3) Keep energy and growth policies somewhat flexible-if the
societal context changes rapidly, policies that are appropriate now
may not be suitable a few years from now. Encourage legitimating
alternative perceptions of social and economic reality. Challenging
views tend to appear first in the voluntary sector (e.g., environmental-
ist groups, women's lib, consumer organizations, "voluntary simplic-
ity" and "appropriate technology" movements). Thus, a strong
voluntary sector is very important to society's ability to be adpative.
A most constructive step would be allowing a limited amount of an
individual's contributions to voluntary organizations to be deducted
directly from his income tax. (The recipient organizations should not
be restricted with regard to taking stands on public issues. The ration-
ale for the special tax provision is that the activities of voluntary
organizations are an essential component of democracy.)
A challenge before this nation, indeed before the world, is to iden-
tify, explore, and assess alternative paths to the future and to choose
among them. As suggested m this paper, while the debate may appear
to be an economic one, most of the fundamental, noneconomic, age-
old questions about the nature of man and of the good society will be
involved in the process.











DISCUSSING A NATIONAL GROWTH POLICY:
ORGANIZATIONAL AND INSTITUTIONAL ISSUES
By PETER HOUSE *


SUMMAXRY
Implementing a National Growth Policy is a broadly contro-
versial issue, and one which would be overwhelming to cover inclu-
sively. In this paper, the exposition attempts to mitigate against the
strong temptation to treat everything in great detail. For clarity and
simplicity, this discussion at times approaches an outline format and
sacrifices analysis for completeness. However, for the sake of debate,
it is imperative that the full picture be at least sketched.
Further, in an attempt to overcome the legitimate allegation that
a summary approach does not give the reader an opportunity to
judge the work on the bases of its results, a series of statements is
presented below, focusing on a feasible way to carry out a National
Growth Policy. Much of the detail required to back up the study
conclusions is presented in the text, but the following few pages
will at least initiate the reader to form his own opinion. First,
the five sections of the paper-desirability, content, implementation,
location, feasibility, and impact-can be briefly summarized as
follows:
Desirability-Although it is possible for one to make a case
for no controls or goals, there is a respectable large body of
opinion that holds that we cannot continue to run our private
or public sectors as we had in the past and that some long range
analysis and goal creation is necessary.
Content-Even agreement on the need for some capability in
the area of goal setting or comprehensive analysis does not mean
a consensus exists on how it should be done. Various alternatives
are possible for the structure and responsibility of the organi-
zation. A similarly large list of possibilities exist for the goal
potentials. In all cases, some early research will have to be
undertaken to specify the boundaries.
Implementation-The principal question of this paper is not
whether growth policy is important or should be researched, but
how it should be done. Little can be said positively about this as
many of the specifics will depend on the scope and form of the
institution; however, some attempt is made to specify implemen-
tation criteria.
Location-TIn all of the discussions that come about on growth
policy, the one that seems to stump the professional bureaucrat
*Institute of Transportation Studies, University of California, Berkeley, Calif.
(59)





60


or politician is where the function of such a group should be
carried out. The federal, state, and local governments are all
possibilities but so are several locations in the private sectors.
Directions of priorities, resources, and power are interwined in
the discussion, and the final resting place will clearly be the
result of significant bargaining and analyses.
Feasibility and Impact-The final question is one of whether
any institution of this kind would really make a difference in
how we conduct our affairs. Definitive statements are not possible,
though reference to past attempts would lead one to believe that
its effectiveness would be small.
From the information presented in these sections, the paper argues
that:
The basic structure of the American economy has changed
noticeably over the past several years with indications that there
may be real shortages in basic raw materials, such as energy,
to be contended with. In addition, part of our citizenry appears
to take note of and desire to preserve things that are not neces-
sarily costed out in the marketplace. Both of these indications,
in addition to several other institutional and political factors
covered throughout this paper, suggest that there may be a
legitimate need for the development of a National Growth Policy
and the regulation controls that would be required to make it
operable.
To cut down on the turf fights among agencies and to give
some real power to the function, the Office of National Growth
Policy's (ONGP) duties should be spelled out clearly in the
enabling legislation. It should have the ability to request the
information it needs to do its job. It should have equally real
influence to monitor its recommendations when its analysis is
complete.
Although there is great desire to specifically include "every-
one" in such an undertaking, it does not seem feasible to do so
outside the normal checks and balances already set in place. For
example, there is no possible way to develop an independent
research group outside the public sector that will have the policy
impact that one inside would have. In this same vein, setting up
a system for the state and local governments appears duplicative,
because there are already adequate ways for these bodies to lobby
their interests. What is often forgotten is that numerous studies
will be done by groups, regions, and agencies who do not fully
agree with a federal policy. These studies will help to shape
future direction and, because they are products of highly moti-
vated groups, will have potentially greater impacts than a report
published by a group with an essentially watchdog function,
outside the mainstream.
Even thoiirh the enablinas legislation for an Office of National
Growth Policy could be quite broad, it is suggested that the
office's early functions be curtailed to a "System Evaluator" or
monitor. In this role, it would function in data collection and
analysis to evaluate major policies. Just the potential for ration-
alizing the massive federal data base for respectable policy
analysis would be a significant achievement.







The role would then be one of analyzing these major policies
in light of current practices and other proposed policies, toward
ultimately suggesting potential improvements or avoiding prob-
lems, especially in the long run.
The question of exactly what power the group should have-
sign-off, information, or formally integrating policies-must be
closely considered. This latter is interesting because it brings up
the question of how one agency's plans will affect another. An
operable national growth policy should foster closer interagency
coordination of budget preparation as time goes on. If the group
is formally tied to 0MB and CBO, then a sign-off appears suffi-
cient because it is already buttressed by the power of the budget.
If it is placed elsewhere, then more powerful instruments might
be called for.
The largest area of concern for implementation of the ONGP
is the question of exactly how to carry out the task. It is fairly
clear that some preliminary investigation will have to be made
before the most useful approach is realized. Likely the most
promising methodology will make use of a form of large-scale
modeling.
There will have to be a significant commitment in terms of
manpower and funds, in the range of approximately 20 profes-
sionals and $10 million.
The ONGP should have the power to set standards for data
collection for the federal agencies and for all contractors. This
set of standards will not only enable the Office to carry out its
analyses, but to improve the technical basis for cross-agency com-
parison in normal budget analyses as well.
These summary statements are a reasonable beginning for the Office.
It gives the ONGP enough responsibility and power to test its use-
fulness of the concept. Such a beginning allows sufficient flexibility to
readjust the Office, its budget and its manpower as a function of its
utility. It is certain, however, that only trying will tell.
TIrE QUESTION OF A NATIONAL GROWTH POLICY
Once again the nation sees a portion of its leaders, thinkers, and
citizens concerned with the question of whether the government should
plan the economy's growth and direction. For historical reasons,
largely based on our Western heritage and nurtured by our frontier
spirit, many people consider this idea to be antithetical to our basic
creed of freedom. Others do not agroTee that this is so. It is fitting,
then, that the Joint Economic Committee of the Congress of the United
States should begin a round of hearings to debate the efficacy or legiti-
macy of a National Growth Policy the very year the nation is engaged
in its bicentennial celebration.
Those who have studied the question of economic planning, examin-
ing not simply the textbook "isms'", but also the actual operational
systems will find more in common between these ideologies (from the
economic point of view) than they do differences. In our own country,
where the term planning is heretical in some quarters, the question of
the need for national economic policy or national planning has sur-
faced numerous times. We will take specific note of one of the more





62


recent plans, the National Planning Association (set up under Roose-
velt), and see if there is anything for us to learn from its experience
and eventual demise. One thing is clear however. The question of
planning or economic growth policy seems only to come to the fore
when the nation is in some form of economic trouble, when some fear
that the gods of unfettered capitalism are suspected to have feet of
clay.
Recently, the nation has been beset by a staccato of crises---environ-
mental, economic, energy, water and raw materials. It has found social
ills in our health and welfare programs and in our cities among our
poor and minorities. And now, our greatest city has recently come to
the brink of bankruptcy. These traumas appear to have several things
in common: (1) their use, planned expansion or preservation has en-
gendered massive government intervention; (2) the specific remedies
normally take years to effectuate and; (3) the ramifications of these
policies will permeate throughout the economic system.
Although this paper will briefly discuss the questions of need for a
national goals strategy and will investigate what has actually been
done by the government in these areas, its principal thrust will be in
the direction of the implementation possibilities and real feasibility
of an effective program. To this end, the paper is divided into five see-
tions: desirability, content., location, implementation, and feasibility
and impact. We shall now turn to the first of these.

DESITRABILITY
The charter of this paper is sufficiently broad for the question of
desirability to accommodate numerous interpretations. The study will
attempt to refrain from the polemics surrounding the future of our
planet and focus instead on the question of whether there is perceived
need for a growth policy and the degree of public planning that such
a policy demands. I-low such a policy would be pragmatically imple-
mented within the existing system naturally follows.
Growth Policy as Technocracy
Before proceeding, the underlying reason for a growth policy
should be articulated. The need for the most recent form of such a
policy has grown out of the era of systems analyses. In general, this
process could be described in four parts:
A description of tlhe system under study at tihe present moment
in time.
A statement of the goals and objectives of the system at some
future point in time.
A series of strategies that will guide the system toward these
goals.
A monitoring network that continually measures where tlie
system is and forecasts whether the strategies selected will bring
it to the requisite goals.
In operation, such a system supposedly provides continual feed-
back to the policy level allowing it to make "mid-course" corrections
in terms of strategies to guide the system toward its end point. Using
this paradigm, the policy level is cast on the role of the driver of





63


a vehicle and, so it is argued, with adequate techniques can success-
fully guide the system. Without goal statements, however, this ineth-
odology is impossible. Consequently, from one perspective, goal state-
ments are therefore not necessary for the citizens or pohicymakers
but for the technicians who must devise the guidance system. It is this
requirement that is behind much of the desire for articulating the de-
sires and goals of when the nation was to be in the future, the per-
formance criteria, and the quality of life measurement attempts of the
Sixties and early Seventies.
The revival of the planning desire, as articulated by the techno-
crats, we shall see later in this report, was met with significant re-
sistance-so much so that the more radical desires never came to pass.
In the face of so much potential opposition, what has happened
recently that might lend some credence to those who proffer a na-
tional growth policy? In 1955, John von Neumann wrote an article
in Fortune, entitled "Can We Survive Technology?"
In the first half of this century the accelerating industrial revolution encoun-
tered an absolute limitation-not on technological progress as such but on an
essential safety factor. This safety factor, which had permitted the industrial
revolution to roll on from the mid-eighteenth to the early twentieth century, was
essentially a matter of geographical and political Lebensraum: an ever broader
geographical scope for technological activities, combined with an ever broader
political integration of the world. Within this expanding framework it was pos-
sible to accommodate the major tensions created by technological progress.
Now this safety mechanism is being sharply inhibited; literally and figuratively,
we are running out of room. At long last, we begin to feel the effects of the finite,
actual size of the earth in a critical way.
Thus the crisis does not arise from accidental events or human errors. It is
inherent in technology's relation to geography on the one hand and to political
organization on the other. The crisis was developing visibly in the 1940's, and
some phases can be traced back to 1914. In the years between now and 1980 the
crisis will probably develop far beyond all earlier patterns. When or how it will
end-or to what state of affairs it will yield-nobody can say. [18]
This merely represents one of the seemingly endless warnings from
the intellectual and scientific community predicting that we were about
to reach the limits of our growth potential. Some of the warnings of the
previous years were realized in the last decade or the present one. Crisis
min urban sprawl, the environment, energy, water, welfare and mi-
norities, the inner city, and scarce materials are common news features
today. Either we have abused the term crisis or indeed, something is
amiss.
More ominous than the impending directional change in our society,
and the rapid succession of crises that appear to go along with it, is the
ill-prepared public sector which never seems to be ready for a crisis
when it appears. A recent study conducted by the GAO on material
shortages is instructive in elucidating this problem. The survey agrees
that the very data used by the agencies who monitor the various por-
tions of our system are inadequate and faulty and consequently the
agencies have real trouble even accurately identifying problems-no
less providing solutions for them.
In a 1971 report, the President's Commission on Federal Statistics
stated:
The typical difficulty faced by policy-makers in defining problems is that a
problem usually exists only in a political context. The political system is con-
vulsive; it acts when the electorate perceives that a crisis exists.
*





64

But the public perception of a crisis often antedates the presentation of statis-
tical evidence that there is indeed a crisis. Hence, when the legislature or the
executive is faced with an aroused public, time is not available to design a survey
or experiment, gather the requisite data, and perform a careful analysis pointing
toward an optimal policy recommendation. In addition, when the public perceives
a crisis there may be no general agreement on the nature of the problem, the
important variables to be measured, or the way to relate the variables in a study.
Given the confusion about what constitutes the problem, a lack of statistics
with which to understand and respond rationally to crisis is probably inevitable.
A crisis is a crisis precisely because the problem has not been defined, it was
not foreseen, and timely data-gathering efforts were not undertaken. When a
crisis arises, some data are used to support action decisions. The data used are
often a combination of existing benchmark data produced by census-type agencies,
management data produced by agencies with related responsibilities, data pre-
sented by lobbyists who support a particular position and, particularly important,
data on public opinion gathered ad hoc by specialized private polling
organizations. [5]
Finally, the GAO report notes that not all of the problems are a
direct result of poor data. Some problems stem from a reluctance to
face the potential supply shortages and plan against them as a fore-
thought rather than an afterthought.
By relying almost solely on market forces in the resource area, the
report holds, the Government has tended to neglect emerging short-
supply situations, thereby limiting the ability to develop solutions to
the problems that evolve into crisis. The present decision making
processes do not provide for identifying, defining, and analyzing over-
all short-supply problems. Because the emergence of resource short-
ages over the past 20 years has been perceived as an anomaly, the de-
cision making process designed to control such situations has remained
essentially ad hoc and crisis-oriented. The executive branch has no firm,
coordinated structure to deal with short-supply resource and com-
modity problems on a continual basis. In essence, it appears that short-
supply decisions made thus far have been hastily implemented rather
than structured and analyzed. It is possible that such haphazard activity
could be lessened by attempting to clearly state where we are going or
want to go.
A recitation of some of the major findings of this study makes the
point of the need for a growth policy neatly. The study first alleges
that we are in a period of shortage in agricultural, mineral, industrial,
and raw material commodities; that federal officials are concerned and;
finally, that the ability to cope with the problem is limited by de-
ficiencies throughout the whole federal structure.
Although this study is limited to commodities as noted above, the
findings could be generalized readily.
The Government's decision making process for commodities that are in short
supply is essentially ad hoc and crisis-oriented. There Is no clear, coordinated
decision making mechanism for formulating policies to alleviate commodity
shortages.
Commodity policy formulation involves more than 20 Government departments,
agencies, offices, administrations, and policy councils as well as additional in-
ternational program agencies, energy agencies, advisory councils and regulatory
agencies.
The market supply and demand information needed for decision making from
multiple private and Government sources has, in a number of cases, been un-
;Ivailable, incomplete, or disputed.






65


Long-range commodity policy planning
To establish effective policies for dealing with potential and actual commodity
shortages, the Government must have the ability to project future trends and a
willingness to guide these trends in directions compatible with long-term national
objectives. Despite recent studies, and institutional changes intended to improve
long-term planning capabilities, the present decision making is still crisis-oriented.
[5]
The public sector's reluctance to either collect the data to adequately
monitor the system or to face up to the fact that it is possible to have
dislocations in the system's operation will almost assure that we shall
face a succession of crises. With this as a backdrop, it seems almost
certain that we shall require some form of national growth policy.
A second major study was conducted by the National Goals Research
Staff. The staff was set up by President Nixon in 1969 to look at future
trends leading to our third century (the National Goals Research Staff
is discussed in more detail in the last section). In one of the Appendices
(A), it addresses the question, Why a national growth policy? The
first topic is laissez-faire vs. problem control. Making obeisance to the
role of laissez-faire, the study continues.
Even with all these precautions a growth policy of this kind does involve a
deviation from pure laissez-faire. But this can be justified on two grounds: First,
it should be remembered that in this essay the problem of growth and stability
is being discussed in the framework of the present Western economies with their
large public sectors, numerous government activities and growing government
budgets. All this makes it virtually impossible for the government to remain
neutral with respect to growth. For better or worse, government activities do
have a strong impact on economic stability and growth.
*"*' ' *
Second, it may be almost impossible to decide objectively whether conscious
growth policy pushes the total government impact on growth beyond the point of
neutrality.
*
When it comes to decisions involving investment, in other words, decisions
that imply choices between consumption and economic welfare in the present
and in the future, possibly in the distant future, the individualistic postulate
that all decisions should be left to individual choices and market forces must be
more severely qualified than in the case where only choices between different
types of present consumption are involved. The main reason is that in the case
of intertemporal choices generations as yet unborn are involved. They cannot
speak for themselves. [12]
The study argues that the question of present vs. future desires is
critical and becomes even more important to us if we are in an era
that questions the potential of unlimited resources or even limited
resources.
Growth Issues
It is clear that the focus of the questions to be addressed by a na-
tional growth policy will have a broad and longer range perspective.
The following is some thinking on a sample of problems that might
be addressed.
The specific types of problems have several things in common:
(1) They involve actions which, although taken now, will bear
results both after and for a substantial period of time. or actions
which, although taken now, limit the range of actions which can be
taken in the future. The time focus will normally be in the five to
twenty-five year range.




66


(2) They are multi-faceted and interrelated national issues of con-
sequential domestic importance, requiring an integrated (e.g., inter-
agency) approach for their analysis and solution to be distinct from
those issues amenable to narrow disciplinary or departmental analysis
and action.
(3) They often involve a wide array of domestic and international
i-tiies of significance to broad segments of the American society. They
are not confined to narrow sectoral or local questions.
(4) Although they are primarily domestic issues, they may ulti-
mately be created or at least exaggerated by international events or
trends, and their resolution may have important international
implications. Some Eampl
So'me Examples

(a) Water Resources.-There is need for strategic assessment of
the long-term water resource problem. Water resource policy is directly
related to growth, environmental, and energy policies and, to a lesser
degree, urban land use (e.g., use of flood plains), agriculture (e.g.,
irrigation), transportation (e.g., waterways), recreation, etc. There
is even an international dimension to the water issue in terms of Amer-
ican relations with Canada and Mexico.
(b) Forests.-A comprehensive assessment of forests would examine
long-term needs for wilderness and recreation compared to the com-
mercial need for lumber used for domestic and export purposes. It
would also examine the potential productivity of private and public
land. opportunities for increased productivity on the best lands, tech-
nology changes (e.g., use of hardwoods to replace soft-wood uses),
increased costs if supply lags behind demand, substitution potentials,
foreign trade, and environmental implications of various choices.
(c) Agrikulture.-The issues here, as in other examples, are com-
plex in character and long-term implication. Environmental consid-
erations, overall growth policy, demographic trends, research and
development with respect to production as well as distribution and
consumption, energy use. population distribution, water availability,
metropolitan growth policy (and thus transpotration), foreign trade,
international monetary issues, foreign aid and overall foreign policy
issues must be addressed.
(d) Energy.- Perhaps the most dramatic current example of a
long-range issue calling for the kind of analysis and evaluation to
he carried out in the assessment of a growth policy is the energy prob-
len. The energy issue involves not only technological, research and
development policies, but also a mix of environmental, economic, social
and foreign policy considerations.
(") Economic Growth Development.-This would involve a stra-
teLic assessment: of the mix of probable future demands for energy
and selected raw materials, population growth, private and public
cpr-vive., foreign and domestic, fiscal and economic policy, full employ-
mont. and other factors affectinrg and affected by changing patterns and
rateq of economic growth.
(f) (rro-rth and C'honqe of Metropolitan ArrIs.-A policy for
planneprl rowth of metropolitan areas should examine the carrvinq
cannnitv of various environments across the country in an effort. to
rlofermine whether a more optimum population distribution is desir-
nhle and fensihilp. If it were determined that a metropolitan growth





67
I
strategy is desirable, then an assessment might be made of tools such
as federal contracts, water resource projects, and transportation
facilities.
(g) Housing.-An analysis of long-range housing policy choices
would involve an examination of the relationships among urban and
interurban transportation programs, forest policy, new technologies,
labor issues, demographic trends, recreational facilities, and social
programs. It would also include close dovetailing with policies related
to economic growth and growth of metropolitan areas.
(h) Transportation.-The development of a large-range strategic
transportation policy obviously entails an examination of the appro-
priate mix of various urban, interurban, and long-distance approaches
to the movement of passengers and freight. In addition, long-range
pollution and energy issues must be factored in as well as considera-
tions of national economic growth, long-term development of new
communities, and problems of existing metropolitan areas.
(i) Social Programs.-Clearly there is a need here for strategic
assessment. Crime prevention, recreation, health services, education,
housing, demographic trends, growth issues, and the challenge of
more leisure time affect the choice evaluations.
The list could go on endlessly and include environment, welfare
programs, and health delivery, to name a few. It becomes clear, how-
ever, that the relations of these policies to each other at the interstices
is clearly necessary, and yet they are not presently formally carried
out in the normal day to day operations.

Sumlmarizing the Need
It could be said that the areas that are referred to above give
one a smorgasbord view of the eminent need for a growth and plan-
ning policy with the most popular dish being as much a function of
politics as of real need.
The GAO report noted earlier has also suggested that the world
situation is such that we have a greater degree of dependence on more
parts of it than we had in the past (larger populations and greater
per capital consumption of goods and services requiring an ever in-
creasing resource base to draw from) means that we have to be in-
Preasingly aware of the impact of our major policies on the other
nations and theirs on us.
The recent incidence of global and domestic shortages in agricultural and
mineral resources has concentrated widespread attention on the need and po-
tential for long-term Government planning in natural resource development and
allocation. Awareness that these shortages could have major impact on the
U.S. economy has focused concern on the prospects for avoiding potential crisis
through long-term planning. [5]
Consequently, even though it is true that we have grown to be a
great nation without an explicit goals policy, it is not clear that we
shall thereby be able to continue to prosper usino the same approaches.
If we are to stay as a world leader, we must face up to the fact that
we may have to do so while husbanding our flagging internal re-
sources. If setting ooals is not deemed the best way to achieve this
end, then, other forms of monitoring and policy support will have
to be devised and supported. Because it is certain that the picture of
America as the land of plenty is becoming somewhat blurred.





68


The next sections will proceed with the assumption that there is
a clear desire on the part of a majority to insure a fruitful future
and a recognition that guidance is needed, not for punitive control,
but to mitigate against disasters of our creation. Toward this latter
end, we now turn to a discussion of what items ought to be considered
in a National Growth Policy.

CONTENT
The issue of exactly what should be contained in a National Growth
Policy is by no means straightforward. In general, some of the overall
requirements, regardless of the specific content, appear clear:
The Constitution, and successive actions thereafter, have set up
a system of government that has provided for a tiered form of
policy setting. It is clear that any national growth policy should
not be seen as merely another means for a higher level of gov-
ernment to control a lower one. Rather, a continuation of special-
ties between layers should be fostered.
At the very least, development of a growth policy should make
clear that the interrelatedness of the individual policies being
made by the various layers of government and their consequent
impact on one another are significant. No single agency is pres-
ently charged with looking at these linkages.
The development of a growth policy should add a time dimen-
sion to present day actions. Specifically, it is not useful to argue
whether policies ought to aim, at symptoms or at root causes of
perceived problems. The fact is that any decision, regardless of
the reasons for its making, is likely to bind and constrict future
decisions. These future impacts of present decisions should begin
to be factored into and become factors in the current policy
process.
A growth policy should not be merely a political instrument
with its content set by the current platform of the group in power.
If its purpose is for long-run guidance, then the policy should
not be buffeted by short term patches. On the other hand, it
should be structured so that it is responsive to any changes in
direction desired by our citizenry.
Some guidelines and problems that bring the need for a growth
policy about have been with us for some time. Consequently, it is cer-
tain that the federal government must have developed earlier strategies
to deal with the issues of growth. Before going on, it is profitable to
do a cursory review of some selected programs to see how we have
related to these issues in the recent past.
Past and Present of the Government Regarding Growth Issues
Although the direct involvement of the federal government in the
g-rowth of this nation has been historically significant (land grants,
railroad development, immigration policy, etc.), it was not until the
Thirties that involvement could be clearly related to today's type of
growth problems:
The development of the National Resources Board to attempt to do
national planning. Termninated in 1943.





69

Resettlement Administration to initiate housing and resettlement
projects across the country.
The TVA to foster development of an entire region.
The Full Employment Act of 1946 and the Housing Act of 1949
set goals and legislative authority to provide worker and living
security for the nation as a whole. In this same vein, highways and
the rest of the transportation system were also pegged.
Numerous councils and other administrative measures were initiated
to deal with specific challenges including urban affairs, rural affairs,
the Domestic Council, 0MB, CBO, OST. These aimed at recasting
the federal government to make it more responsive to changing times
and to strengthening the capacity of State and local governments to
handle growth.
The specific areas that have received attention in recent years
include:
Rural development, where both HUD and USDA have increased funding and
programs to strengthen the rural portion of our nation.
Transportation, where current interest in energy and the environment has
strengthened mass transit policies and caused the highway program to look at
balanced transportation.
Environment, the passage of the National Environmental Policy Act to insure
that the environmentwould be factored into present growth plans.
A whole series of specific policies relating to federal lands, housing, new com-
munities, planning requirements, insurance programs, property tax reform, and
A-95 reviews which add significant direction on the federal government's part
toward growth planning as an individual issue.
In the main, the thrust of recent administrations has been an
attempt to facilitate delivery of Federal service and to improve com-
munications among State, local and Federal officials. These include:
Decentralization of decision making authority in numerous Federal
grant programs to bring administration of these programs closer to
the people they serve.
Reduction of red tape and processing time within the federal cate-
gorical grant system through a rationalization of consistency pro-
cedures, joint funding simplification, intergovernmental cooperation,
grant consolidation, and generally improved coordination.
Establishment of uniform regional boundaries for federal domestic
agencies and increasing emphasis on Federal Regional Councils.

A National Urban Growth Policy
Although difficult to summarize, it would be derelict in a discussion
of national growth policy not to mention the one recent act that is
written specifically for this purpose. In 1970, Congress declared a
National Urban Growth Policy:
(a) The Congress finds that the rapid growth of urban population and uneven
expansion of urban development in the United States, together with a decline in
farm population, slower growth in rural areas, and migration to the'cities, has
created an imbalance between the Nation's needs and resources and seriously
threatens our physical environment, and that the economic and social develop-
ment of the Nation, the proper conservation of our natural resources, and the
achievement of satisfactory living standards depend upon the sound, orderly, and
more balanced development of all areas of the Nation.
(b) The Congress further finds that Federal programs affect the location of
population, economic growth, and the character of urban development; that such
programs frequently conflict and result in undesirable and costly patterns of





70


urban development which adversely affect the environment and wastefully use
omr natural resources; and that existing and future programs must be inter-
related and coordinated within a system of orderly development and established
priorities consistent with a National Urban Growth Policy.
(c) To promote the general welfare and properly apply the resources of the
Federal government in strengthening the economic and social health of all areas
of the Nation and more adequately protect the physical environment and con-
serve natural resources, the Congress declares that the Federal Government,
consistent with the responsibilities of state and local government and the private
sector, must assume responsibility for the development of a national urban
growth policy which shall incorporate social, economic, and other appropriate
factors. [16]
In the next section of the Act, the Housing and Urban Development
Department is required to produce a biannual report on the state of
the nation's urban areas and the plans and forecast of the future. Two
reports have been produced to this time.

The Elements of An Office of National Growth Policy
If there were to be a National Growth Policy for the nation as a
whole, distinct from an urban policy, and if a group were consti-
tuted to pay attention to this area, what would it do? Because there
are several potential roles for such a group, we shall characterize its
activities into a number of stereotypical forms for discussion purposes.
Operating Mode 1.-An Information Source-In this mode, the
Office of National Growth Policy (ONGP) is viewed as a recipient
of available information about ongoing and future growth plans and
policies. The formulation of these plans and their actual implementa-
tion constitute activities that would be carried out by other agencies
and organizations as well. This office would have no authority to com-
ment on the information received. Its most stringent act would be to
specify what information it would like to receive; however, it would
not be able to specify form.
Problems associated with this limited scope are obvious. The avail-
able data sources may or may not be useful for preparing and analyz-
ing growth policy. Various agencies would tend to withhold informa-
tion they felt would be detrimental to their case of the moment. The
d(lata itself would not be standardized and therefore would not permit
comparison of information or policies between agencies. The data
would not be complete and would hamper any serious analyses effort.
Finally, because of an inability to specify timing, this mode would
likely be of questionable value in actual operation.
Operating Mode 2.-Information Collector-In this mode, the
ONGP is chartered to acquire information from whatever agency it
desires. It has the right to expect this information, in a standardized
fashion, on the subject matter it chooses, at a specified time. It still
does not formulate or carry out policy.
In this operating mode, the ONGP would be able to draw conclu-
sions about the form of a growth policy (given the information it
has received) but would have no authority to monitor or direct opera-
tions. Conflict between this form of the group and the specific agen-
cies is highly possible due to misinterpretations and agency mid-
course corrections that would not factor into the original growth
policy.
Operating Mode 3.-Program Monitor-In this mode, the ONGP
would have the powers of Mode 2, but also would have the additional







provision given to enable the execution of its own evaluative research
on any or all growth related policies. As with the earlier modes, the
policy formulation and implementation is carried out by the indi-
vidual agencies.
The evaluation potential increases the power of the group. How-
ever, reality suggests that it could not wield such power effectively.
Even if funded adequately, sufficient manpower would not likely be
allocated to do the job in-house. This means that the task would float
to the government project manager rather than analysts.
Operating Mode 4.- A Component Evaluator-Added to the in-
formation role and the monitoring of ongoing programs as they
relate to growth issues, the ONGP would be able to evaluate specific
programs or policies one at a time as they are formulated. Again,
the formulation and implementation would be outside its purview.
Project by project evaluation by the ONGP would not obviate the
possibility that such evaluations could also be carried out by the
parent agency. The evaluations of ONGP would have to be taken into
account before the program were put forward.
This mode would have the problems noted above, plus the added
problem of ONGP becoming a strong political force, one to be reck-
oned with by all agencies. Consequently, it would have the potential
power to collect a large number of enemies that would launch a cam-
paign to lessen its influences. Another danger would be that the evalu-
ations would tend to favor safe projects and not those of a more risky
nature. In such an eventuality, the ONGP would act as a drag on
innovation.
Operating Mode 5.-The System Evaluator-In this mode, the
ability to evaluate separate policies is expanded to include the evalu-
ating the policy effects in terms of other policies. This involves co-
ordination of all policies with regard to their mutual compatibility,
joint feasibility, aggregate cost, and joint effects on specific groups
and segments of the nation's populace. This would tend to prioritize
the programs. The implementation and formulation is still carried
out elsewhere.
An obvious difficulty is that all agencies would be required to plan
in detail and in advance so that these would all arrive at the ONGP
at the same time for review. Further, it is not clear what techniques
are available for staffing (with all the personnel problems noted
above) to carry out the comprehensive analysis envisioned.
At a minimum, the ONGP would be required to set up a systematic
framework to include: (1) a comprehensive data base; (2) the capa-
bility to aggregate, manipulate, and analyze this data; (3) coordina-
tion of the data with relevant policy inputs. (Included in the last step
might be the relation of budget goals and fiscal resources to the spe-
cific policy as it relates to other policies and the ability to carry out
cost-benefit and trade-off analysis of various forms.); (4) establish-
ment of policy issues so that they include questions of feasibility,
noting the effect of the policy on state and local activities as well as
those on the private sector and noting the requirement .for involve-
ment and coordination with other government agencies; (5) the
evaluative role should carry on to chart a history of past achievements
and performance on the part of individual agencies and the nation
as a whole; finally, (6) these analyses should not be done under the





72


assumption of a future that is either well known or understood, but
through the presentation of alternative scenarios or futures which
would take as given a mix of major policies and relate new ones to
these possibilities.
Operating Mode 7.-Planner-In this mode, the ONGP would be
responsible for the formulation of all growth related policies. This
does not necessarily mean that it would be the sole policy setting
organization, but that it would coordinate all policy (as System
Evaluator) and would have the ability to institute some policies of
its own. It would not implement the policies however.
This operating mode is fraught with danger. It would have the
responsibility for formulating growth policy, but no ability to con-
trol the actual implementation process. It is not difficult to guess
where the blame or failures in goal realization would be placed.
Consequently, the political pressures against such a centralized plan-
ning agency would be intense.
Operating Mode 8.-The Implementor-This mode suggests that
ONGP would have the authority to set up implementation proce-
dures, new organizations, or portions of agencies to carry out the plans
or delegate the authority to existing agencies. This Mode would be
an evaluator, data center, planner, and impleminentor. Such a role is
unlikely to be received favorably anywhere in the nation.

Specific Goals or Policies
What specific goals ought to be addressed in a National Growth
Policy? The answer is somewhat problematical because the need for
such specificity is a function of one of the eight operating modes
chosen. A mere listing of topic headings such as population, trans-
portation, housing, and health, does not appear useful. On the other
hand. some criteria should be developed to determine what policies
are to be given attention and how they are to be evaluated.
A study by Perkowski and Picardi, entitled "Evaluating Goals for
a Sustainable Society" in Growth and Its Implications for the Future,
Part 3, provides one approach toward this end. They list a series of
,ioals (13 overall) and suggest criteria against which the goals could
b)e evaluated. The specific goals are not necessarily those that would
Ie of interest to the ONGP, but they are general enough to provide
at least a starting position. The goals (or growth issues) are:
1. Equality of Freedom and Welfare.
2. Adequacy of Basic Hluman Necessities.
3. Self Actualization.
4. Population.
5. Nonrenewable Resources.
6. Renewable Resources.
7. Irreplaceable Amenities.
S. Pollution.
9. Decisionmakinz Authority.
10. Minimize. Strategic Conflict.
11. Stability.
12. Wealth and Tncome.
13. Energy and Materials Efficiency.






73


Each of these generalized goals are then defined, and a suggested
methodology is put forth to measure the impact or success of special
policies as they are implemented. Because the article is exploratory,
it does not consider such measures in detail, but lists possible methods
for defining criteria. An example of the population goal will help
to explain the methodology.

POPULATION: GOAL 4

A sustainable society should seek and maintain a population level which en-
hances and is consistent with its other goals. The "optimum" population level,
and hence the growth rate, either negative or positive, required at any one time,
depends upon society's perception of its overall progress toward all its goals.
CRITERIA

In order to determine an "optimum" level of population, various social values
must be determined as clearly as possible. For instance, the amount of per
capital open space desired in terms of wilderness, forest land. lakes, rivers, and
seashore should be estimated as accurately as possible. The amount of tolerable
social congestion in terms of noise and residential crowding should be similarly
assessed. Then social concerns such as these can be balanced with pressures to
continue unchecked population growth. Three principal tradeoffs come to mind,
along with relevant measurement criteria :
(a) The tradeoff between population level and the quality of life, as
measured by indices such as per capital energy use;
(b) The tradeoff between population and physical diversity, as measured
by landscape diversity on a county-to-county basis:
(c) The tradeoff between population level and the efficiency of renewablle
and non-renewable physical resource utilization, as measured by the ener-
getic efficiency of such use.
Only by examining these complex tradeoffs is it possible to form a reasoned
and reasonable consensus about what should be the "optimum" population level.
Account must be taken of the social costs (or benefits) of that op)timum as
measured in terms such as those above.
The gross population level, spatial distribution, migratory patterns, immigra-
tion, emigration, and vital rates must be regularly and frequently monitored to
check the society's movement toward its pre-defined "optimal" population
goal. [14]
Finally, the methodology is shown in action. Again a sample from
the population area:
POLICY EVALUATION TABLE

Primary goal Secondary
towhich goals related Relationship cf present soci-
policy is Criteria used to evaluate to policy, etal structure to the problem
Suggested sample policy compared policy if any which the policy addresses

Imposition of fiscal penalties No. 4..------.....- Incentives to increase or Nos. 2, 5, 8, Current incentives still exis
(e.g., removal of deduc- reduce population are 11. and are unlikely to be
tons, etc.) for individuals questionable until a bet- removed despite the posi-
bearing children in num- ter determination of op- tion of the President's
bers greater than the re- timal population range Commission on Popula-
placement number of chil- can be made. tion Growth regarding
dren surviving to age 10. population levels.
Provide adequate child care No. 4-----........ Incentives to develop ade- Nos. 2, 3,5,8, Some efforts being made in
services and information, quate family planning fa- 11. this direction on Federaj
including birth control and cilities will raise quality State and local levels.
abortion information, real- of life for many popula-
istic sex education pro- tion groups.
grams in schools, etc.
Encourage comprehensive No. 4-........ Increase quality of life, in- Nos. 5, 6,8, Proposed National Land Use
land-use planning pro- crease diversity, raises 11,13. Policy Act is a positive
grams in all localities, and efficiency of mass transit step toward this policy.
formulate fiscal policies to systems, lowers pollution,
encourage land-ase ideas location of agricultural
which maximize diversity areas nearby to urban
of living experience (e.g., areas encourages waste
promote cluster zoning recycling.
concepts).





74


Thie National Goals Research Staff also set up a format for relating
a goal statement to a group of standards. Although there is no directly
comparable goal of "Population", the goal of "Urban Development'
does have a few of the same desires.
URBAN.% DEVELOPMENT
Includes projections of expenditures for physical facilities, generally
derived from other goals, to provide metropolitan areas with adequate housing,
public utilities, mass transportation, schools, hospitals, cultural and recreational
facilities, and industrial, commercial and government buildings in the nest
decade. Facility needs based on anticipated population growth in metropolitan
areas, demographic changes and shifts in the location of economic activity
within metropolitan areas, replacement needs, and past distribution of facili-
ties. Projected capital outlays include expenditures to provide all metropolitan
areas with a million or more population with a rapid rail mass transit system
by the end of the next decade. [12]
Unfortunately, the latter scheme lends itself less well to questions
of a comprehensive analysis of a series of policy statements or growth.
The former one is better in this regard.
The use of these kinds of taxonomies and methodologies to define
growth policies and their impacts need considerable work and, de-
pending upon the option chosen, may not really be necessary. How-
ever, we have stated that it will require a crisis type situation to bring
forth the effective demand for and support of a National Growth
Policy thnt goes so far as to require such effort. It is possible that
if such circumstances are strong enough they could make such a
growth policy viable. Otherwise, it is unlikely that such a complex
effort would be undertaken.

IM PLEMENTATION
COni-idering the objectives and functions of the ONGP, it is vital
that organizational arrangements for such a group meet the follow-
ing criteria:
The ONGP should be isolated from political pressures, but
should l)e sensitive to differing political views in arriving at pro-
posals for alternative policies and actions.
ONGP should not be identified solely with one particular
branch nf mxvernment or segment of the public (i.e.. executive
and legislative branch, industry, universities, state and local gov-
ernm11enlts. etc.).
''Thle ONGP should be housed in a parent organization which
llas continulityv beyond(l the term of the incumbent President or
Colucress.
Tliromgh its parent organization, the ONGP must have posi-
tionail authority whereby its proposals for alternative policies
antd actions will 1)e seriously weighed in the executive and legis-
lative branch of Government. Such clout is enhanced if the or-
ganization is strong and is directed by prestigious individuals.
The ONGP must have access to information on strategic choices
bein" developed in the various Federal departments and agencies
outside the Government.
Whether ONGP is located within the Executive or takes the form
of a separate new entity, and whether the growth policy's function is





75


performed in Congress or by a special committee, rigorous efforts must
be made to avoid an iconoclastic, elitist mode of operation. Although
there is no substitute for policymakers and bureaucrats to share expert
information, certain arrangements might help to stimulate and insti-
tutionalize this kind of communication.
The establishment of a Federal Advisory Board, consisting of senior
representatives from relevant Departments and Agencies, would help
to prevent the ONGP from becoming isolated from the rest of the
government and would provide a high-level, two-day channel for the
flow of guidance and information. In addition, a Public Advisory
Board would assure communication with the world outside Washing-
ton. Such a Board should include representatives from universities,
foundations, industry, environmental groups, labor, and other relevant
groups.
Aside from the more formal contacts with advisory groups, it is
essential that the staff be aware of interests, aspirations, activities and
writings of representative groups in the world outside the bureaucracy
and Capitol Hill. For this reason, the ONGP and its Congressional
counterpart should maintain close links with state and local govern-
ments and with non-government sectors such as industry, labor, con-
sumer, and environmental groups.
Finally, both the ONGP and the Congressional staff, but especially
the former, should keep abreast of comprehensive long-range assess-
ment functions performed in other industrially-advanced countries.
Aside from the usefulness of exchanges with respect to methodology
and substance, it will be prudent to exchange advance warnings of
major new shifts in long-range national economic and social policies.
IHaving discussed the general questions of desirability and content,
we now progress to the very optimistic question of where such a group
should be located within the economy. A number of federal officials and
others met several times at the Woodrow Wilson Center for Scholars
and discussed the problems of a National Growth Policy and issued
minutes of the meetings. A part of the following discussion is based on
one of the papers from these meetings.
LOCATION
The question of where such a function should be placed is crucial to
the final acceptance of its output. The choices of its location range from
putting it in the federal establishment to placing it in state and local
or private (including university) domiciles. The difficulties displayed
will give some indication of the complexity of setting up such an
institution.
Option I-In the Executive Branch
There are two alternative organizational arrangements within the
Executive Office which seem to hold promise: (1) placing the group
within the Office of Management and Budget; or (2) creating a new
independent agency within the Executive Office of thlie President.
WITHIN OMB
The rationale for placing the ONGP within OMB is that OMB
already has responsibilities for resource allocation, legislative clear-





76


ance and departmental coordination. The close organizational tie be-
tween these functions and the function of a growth policy might be
used to increase the effectiveness of 0OMB in its decision making role.
Certain changes within 0MB, of course, would be necessary if such a
function was assigned there. For example, since Congressional and
public interest groups would and should play an important role in the
setting and monitoring of goals, part of 0MB might have to be re-
organized to facilitate this communication.
Putting the group into 0MB would provide it with direct access
to both the budget and policymaking processes, and such access could
provide it with the means to make its directives effective. On the
other hand, the growth policy function might become a residual
claimant for the time and attention of the Director and his principal
subordinates thus reducing its potential impact.
AN INDEPENDENT AGENCY WITHIN THE EXECUTIVE OFFICE
The organizational structure for such a group could be the same
whether it was placed within 0MB or functioned as an independent
agency. Aside from more potential flexibility, the principal argu-
ment for organizing a separate entity is that the identification of
emerging problems and the formulation of policy options might best
be conducted by a staff removed from day-to-day decision making
pressures and by an official with direct access to the President.
The creation of a new separate agency has the potential of certain
obvious disadvantages, including turf definition, staff hiring and
duplication, budget questions, and the like. Moreover, there is a
danger that the group might become isolated from the mainstream of
decision making and from the decision makers themselves. On the
other hand, there would be significant merit in having this function
become the sole responsibility of a prestigious Council whose head
reported directly to the President.
Opt on II-In Congress
Tlhe v-ery nature of a National Growth Policy implies a close
partnership between the Executive and the Legislative Branches.
However, if the growth policy function is organized within the
Executive Branch, then a companion organization could be es-
tablish]ed to serve the requirements of Congress.
Since Congress is normally more fragmented than the Executive
Branch. and since tile professional capabilities of some Congressional
Coinmittees need substantial upgrading, this function should not be
g rifte'd onto any of the existing Coniressional Committees. A pos-
s-ible o-:ception here ()lould be thie Joint Economic Committee whose
charter could 1)e b)roalnned and staff strengthened for this purpose.
A new Committeo along tleo lines of Senator hunmphrey's proposal,
n "Jolint ('oliiifilittee on Ballinced National Growth and Develop-
1,C1nt," miht 1)be the answer. Tlhe number of new organizations that
would have to 1be formulated and institutional changes carried out to
imple-ment tHle full bill appears awesome. Such changee is necessary to
'ai'ry out the full raminfication of this policy, the author maintains. On
l)nlance, however, it would seem preferalble to assign the '.sessment
function to an existing Joint Committee such as the Joint Economic





o7


Committee (JEC), or to the new Office of Technology Assessment
(OTA), or the Congressional Budget Office (CBO). For a variety
of historical and other reasons, the Congressional Research Service,
General Accounting Office, and the other central staffs of Congress
do not seem a suitable base.
It is likely that either group will employ a combination of direct
staffing and contract operations which could give it access to a broad
range of analyses bearing on long-term strategic choice.
The establishment of a growth policy assessment staff as a distinct
entity within OTA or CBO and operating, preferably, under its own
Deputy Director could provide a logical focus for overseeing and
filtering the output of a parallel group in the Executive Branch.
Such a group could disseminate its assessments and its evaluations of
other agencies' policies and assessments to Congress at large.
The effectiveness of the Office on the Executive Office of the Presi-
dent and of a counterpart staff on Capitol Hill would depend, in large
part, on close and frequent consultation between the two. One im-
portant link might take the form of an annual Presidential Message
on Growth and Development along the lines suggested in Senator
Humphrey's Bill. Such a Message would contain specific legislative
proposals discussed in advance between the ONGP staffs of both
Branches of government. Care would have to be taken that sufficient
technical and policy support be given to such a group however. Much
criticism is levied at the HUD sponsored annual urban growth report
for lack of its technical-empirical content, for example. One a more
routine, day-to-day basis, there might be a joint early warning sys-
tem to identify emerging problems. A joint approach to contracting
outside research might be another device to insure close cooperation
between the growth policy staffs.
Further, within the federal establishment, the group might not be
formally placed utinder either Branch, but organized as a Commission.
Option III-A Permanent Comm vision on National Policy Choices
The group could be placed under an independent commission whose
membership would reflect broad representation from various sectors.
The members might be comprised of some membership such as the
following:
EXECUTIVE BRANCH
Chairman, Council of Economic Advisers
Director, Office of Management and Budget
Executive Director, Domestic Council
Chairman, Council on Environmental Quality
Director, Federal Energy Agency
LEGISLATIVE BRANCH, C
Chairman. Joint Economic Committee
Ranking Minority Member, Joint Economic Committee
Comptroller General of the United States
Chairman, Congressional Budget Committee
Committee heads of subject areas such as energy, the environ-
ment. defense, transportation etc.






78


OTHER GROUPS
Representatives from:
Industry
Universities
Labor
Consumer groups
State and local governments
The President would appoint members from outside the Federal
Government for a term of say six years.
The Commission would prescribe broad policies to be followed by
the staff and provide guidance and advice to it. The Commission would
publish staff reports on policy and action choices that are periodically
developed by the group. An annual report would be expected of the
Commission to both the President and the Congress.
Legislation establishing the Commission would authorize and direct
Federal departments and agencies to assist the Commission thus aug-
menting its staff. The President would be required to report annually
to the Congress on actions taken with respect to the group's proposals
for alternative policies and actions thus helping to ensure that the
top policy levels are at least aware of the Commission's activities
(though not guaranteeing that their policy guidance will truly be
effected). Congress also could direct legislation on the basis of Com-
mission reports and such activity documented in the annual report.
The above three organizational suggestions are attempts to work
within structures traditional to the federal level. Numerous other
alternatives could be envisioned. One of these was outlined in a paper
by William L. Hooper, "The 'Evaluative Function' in Government".
Rather than paraphrase, we shall quote liberally from this document.
The paper argues strenuously for a "fourth branch" of government.

Option IV-A Fourth Branch
Hooper argued first for a new political mechanism to state the situ la-
tion of where the nation was presently in regard to its own stated goals
or objectives, a kind of judge or objective observer. Such a mechanism,
he maintained, should be free of political pressure and be set up out-
side existing institutions outside and inside the government.
He goes on to discuss other possible options. Finding them infeasi-
ble, he continues with the argument that:
The one remaining alternative Is a restructuring of the existing three-branch
government, by creating a "fourth branch" to assume the several governmental
functions not envisioned or considered important at the time the Constitution
was adopted.
The new entity, the "evaluative branch", should have Its independence pro-
tected by appropriate constitutional and procedural guarantees. It would also be
essential to specify Its composition, its authority, operating procedures, and its
interfaces with the other branches and with the public. Specific constraints would
need to be established in law to assure the business community, and the electorate
generally, that the new branch's principal function would be to assist in the
preservation and strengthening of constitutional democracy and of the free
enterprise system by undertaking, under close public surveillance, those im-
portant information, analysis, planning and evaluative functions which it has
not been hitherto feasible for other branches to assume. It would also be im-
portant to insure that the new branch would not dilute any of the essential





79


responsibilities of the existing branches. Its activities would be non-executive,
non-legislative and non-judicial, and its concern would be primarily with the
longer-range, inter-branch, inter-agency, and inter-discipliniary issues which the
existing organization structure finds its difficult to face, to understand, and to
resolve, [8]
The responsibilities of the new branch would be to (1) collect data,
analyze its implications, develop alternatives, and evaluate perform-
ance of the analytic arms of the rest of the government; (2) develop
and coordinate national, state, and local data systems; and (3) do
long-range planning and interagency analysis of programs.
Although the rhetoric that surrounds the argument for such an
institution is heavy, the basic content called for is similar to that of
the more traditional approaches. Admittedly, the establishment of
such a "fourth branch" would have little chance of realistically being
implemented. A move in the direction of attempting to create such an
entity might engender the political support necessary to get the called
for services produced in other parts of the nation. To this point, we
have only discussed placing such an organization at the federal
level. There would be some sentiment for establishing such an activity
at the state, local, or private levels also or instead of at the federal one.

Option V-Regional Incol ement
An unpublished paper by a University of Pittsburgh task for:e that
was interested in preparing an unsolicited argument addressed the
question of Regional Development Centers for local political pur-
poses. Although the Centers are directed more toward urban develop-
ment, it is possible to use this plan to discuss questions of growth
policy. The first stage cited by the Task Force is the creation of a
group at the Executive or Legislative level to coordinate the inputs
from the Regional Centers and to be responsive to the rest of the
federal establishment. The next step is to create the Centers. Such
Centers would link local programs to national policy and would assure
that each area had the knowledge required for its own development.
They would:
(a) Identify regional resources, opportunities, and problems.
(b) Assist the regions in forming necessary public and private
development organizations.
(c) Provide knowledge to the regions so that each regional
organization-public and private-would have the information
necessary to the fullest development of its region; and
(d) Provide viable regional plans coordinated with national
plans.
Regional Development Centers would be responsible both to na-
tional planning and goals and to the regions that they serve. They
should be formed by the regions-and not imposed by the federal
level. While federal funding should be used to assist their early
development, they should eventually be funded by and responsible to
their respective regions.
But actual development would be the responsibility ofregional and
local public and private organizations, community groups, and in-
dividuals. The Regional Development Centers would provide key
knowledge and organizational assistance.





80


Where many regions have problems in common-water pollution,
e.c'.-a single center might serve all of the regions of the nation. The
nation now has a number of such problem-oriented centers. These
should be coordinated by a central office and given new responsibilities
so that they are responsive to regional development.
In other instances, centers would be created to serve large, multi-
state regions, with due regard to the fine fabric of regional structure.
The resources represented by each of these centers would serve the
many interrelated needs of its region in a coordinated manner.
POLICIES AND GOALS FOR REGIONAL DEVELOPMENT
Programs of the Central Office and of the Regional Development
Centers must be structured in terms of our regional fabric.
(a) All regions should be provided with close and ready access to
centers of employment opportunity and to cultural facilities. Within
regions, there must be creation and maintenance of a more dense net-
work of needed small-scale amenities.
(b) All centers of employment and cultural facilities that show
reasonable prospects for maintaining continued economic growth and
cultural development must be provided with the necessary public
investments-especially investment in people-to ensure that this is
accomplished.
(c) New regional centers might be created in potential growth areas
now beyond reasonable daily access to the advantages and facilities
of our urban society, to bring the benefits of this society to areas that
have not enjoyed them.
(d) Economic growth and cultural facilities are best concentrated
in urban growth centers, yet the rural areas can still remain superior
living environments for those who dislike the crowding and com-
plexities of urban areas. This requires that close and ready access
between the two be maintained, and that all the facilities necessary
for satisfactory residential areas be guaranteed in the countryside.
(e) In turn, the countryside should also become an important part
of the citydweller's life. Recreational areas need to be developed in
zones of natural beauty with ready access to urban centers. These can
also provide important new sources of employment to rural residents.
Thought needs to be given to a variety of recreational needs (daily,
weekend, and longer vacation) and to a spectrum of land and water,
summer and winter recreational needs.
(f) In those instances where continued growth and development are
not practicable, assistance should be given to those who desire to move
to growth regions. Assistance should include training for new jobs,
partial payment of moving costs, and assistance in finding new and
suitable employment.
Such a proposal is more ambitious than that of a data gathering,
forecasting and early warning institution as was envisioned at the
federal level. However, it is likely that the creation of a growth-
oriented organization at the non-federal level would have a tendency
to be both action oriented and more attuned to an ombudsman-type
role. Technically, there are numerous questions of integrating the var-
ious regional goal statements into a national policy and, at the same
time, relating federal growth policies to each of the regional centers.





81

Of course, it could be argued that such problems are not insurmount-
able and, indeed, the structure envisioned is part of the very fabric of
our democratic society.
Finally, there are those who might argue that a growth policy that
has an early-warning or watchdog role should be placed outside the
public sector altogether. Such proposals crop up often and relate to
numerous topic areas. The formation of the Urban Institute in Wash-
ington, D.C. originally was envisioned to carry out a large portion
of the research criteria in the urban area for HUD. Recently, with the
interest in the environment, a similar organization was proposed for
its study. Although aimed specifically at this purpose, proposal for
an Institute for Environmental Studies covers the basic requirements
for a growth policy group in the private sector.
Option VI-The Private Sector
Finally, there are several possible models for the private sector.
Recently, a systems analysis group was suggested for the Congress. for
example. An earlier example can be found in the plan for the estab-
lishment of an Institute for Environmental Studies (IES). The IES
was seen as having a staff of some 200 interdisciplinary professionals
and an annual budget of $10-15 million. The funding was to be fromni
both the public and private sectors.
The Institute was seen as having several rationales but only three
were given serious weight.
Of the three functions defined in the previous section-the development of long-
range strategies, the early warning, and the quick-reaction analytical functions-
it is unlikely that the first two will receive within the existing governmental
structure the kind of continuing attention that is necessary. These requirements
will best be met if study and evaluation are carried out by an independent group
with no commitment to the operating policies of a particular government agency,
and whose findings should also be available to the Congress and the public. [16]
Finally, it was argued that the Institute to do its best had to be
independent.
An effective analytical institution must be not only creative but also objective
and independent. Without these qualities the institution would not be able to
attract and retain the professional talent that is required to deal with difficult
environmental issues. [16]
It is apparent that such a group could be resident in a University
or set up independently. There could be only one of several such
centers. The differences between their charters could be formalized or
allowed to develop depending upon the chemistry of the parent insti-
tution and the staff members.
The heading of these six areas as Options does not mean that all of
them or some combination could not be organized. In any case, regard-
less of the decision, the general discussion of the individual structures
would still remain relevant although it is clear that the specifics would
change depending upon the circumstances surrounding the plan for
institutional development. It is difficult to array these different alter-
natives in terms of their pros and cons. The relative strengths and
weaknesses differ depending upon which of the various tasks is chosen
for the ONGP. For example, a simple coordinating role puts the
weight in favor of placing the group in the Executive or Legislative





82

Branches. A performance measurement role, it might be argued,
should be carried out in the private sector away from potential politi-
cal manipulation. A role to ensure that local participation be made a
part of goal setting processes might suggest regional centers, and so
forth. The actual analysis of alternatives will then have to await an
orderly process of deciding more basic desires first.
FEASIBILITY AND IMPACT
The question of the utility of all of the points made to now is a
direct function of whether the group carrying out the mandate of
National Growth Policy has any chance of being listened to. Its po-
tential influence can be gauged by the formal authority the group has,
where it is situated, the times, the issues, and the circumstances sur-
rounding its inception or the topics it investigates, and finally, what
the rest of the community believes the group is supposed to do. As we
have done with other portions of this paper, we will look to the past
to see whether our economy has ever attempted to establish such a
group and the results of such an attempt. First, let us summarize some
of the major resistances to planning as they have either been tradi-
tionally vocalized or as they are formulated by various sectors of the
economy.
The question of goal seeking and government planning are
value laden terms and suggest to many people an erosion of per-
sonal freedom. People in this camp come from all walks of life
and are concerned with such policies in general or specifically re-
lated issues. Those in this group are opposed to any public plan-
ning almost regardless of the details.
A potential subset of these people are those who believe that
the public bureaucracy is large enough or too large already. Any
action that would appear to swell the ranks of the public servants
would be opposed.
Others, who may or may not be opposed to the mere size of the
public bureaucracy, might object to such planning on political
administrative grounds. The position of these antagonists would
be that there are already enough (or too many) policymakers in
the public sector. An added layer which would make and manage
a national growth policy would be unwelcome. .
Some economists believe that the market mechanism developed
in the United States is quite able to function without public inter-
ference. In fact, an argument which appears to point out a defi-
ciencv in the economic sector or its workings is often met by a
si-ugestion to deregulate a private activity even more or to place
still more reliance on the price mechanism.
There is considerable concern over the growing power of the
federal government, not only at the apparent expense of the
private sector, but at the expense of the state and local govern-
ments as well. A plan for a national growth policy brings suspicion
to those who fear further eroding of the governmental and fiscal
sovereignty of other public sectors.
Finally, there is a bias against holistic planning policies by
those who feel that they represent a "pragmatic" viewpoint. These
people will oppose any policy which: (1) fosters strategic (rather





83


than tactical) analysis; (2) promotes global analysis (especially
modelling) and; (3) favors a comprehensive rather than incre-
mental approach to decision making.

Previous Experience

A search of the literature has yielded a considerable history of
potentially related exercises. The number of private organizations and
commissions is large, and the utility of trying to generalize from their
experience of question. The proliferation of individual study task
forces and goal statements produced both inside and outside the public
sector is monumental. Their impact on policy depends on so many
unique features and happenings that they can almost be treated as
discrete events. One organization appears to relate directly to the
paper at hand-the National Resources Planning Board (NRPB).
Given the belief held by some that democracy and planning are
antithetical to each other, early studies of the NRPB all seemed to
address this question first. Because an Office of National Growth would
also appear to smack of the same overtones of regimentation and guid-
ance, it is useful to note this background before investigating the insti-
tution of the NRPB itself.
American planning, if it is to be consistent with American ideal, must be
democratic in method, following democratic processes and seeking social objec-
tives determined by majority rule. These processes involve freedom of citizens
through representative institutions in government and industry to propose, dis-
cuss, and decide on policies and measures, and continuously to reexamine and
appraise their results. Despite many conflicting interests in American life, there
is a wide sphere of undebatable common interest in national defense, economic
prosperity, individual freedom, minimum standards of education, housing, and
health, and peaceful social change. In this sphere the plans of men must be
guided by the principle of the general welfare and must be evolved and executed
by democratic procedures. [7]
Clearly, the issue of planning, as described above, is intertwined
with others concerning a country just recovering from the Great De-
pression and entering a World War, and even concerned with postwar
development. On the other hand, many of the topics discussed are of
interest even today and the rhetoric used would still be generally ap-
plicable. One group looked to for planning guidance was the NRPB.
Its functions were as follows:
The National Resources Planning Board makes plans and recommendations
to the President and Congress for the wise use and fullest development of na-
tional resources, watches trends of employment and business activity and warns
of approaching periods of depression, and recommends measures calculated to
improve and stabilize economic conditions. It is preparing a six-year advance
program of public works, it also receives and records all proposed federal projects
involving the acquisition of land, and acts as a clearing house and means of
coordination for planning activities in all fields and at all the levels of Amer-
ican government. It has three part-time members, a director and three assistant
directors, and a large staff. Potentially, it would seem to be the logical place in
the federal structure for the overall, long-run planning of general economic and
social policy in all its essential aspects for the economy as a whole. But it has
not yet achieved this stature due in part to Congressional opposition, in part to
the lack of full-time service on the part of its members, and in part to the failure
to develop as yet a general framework of policy of overall national plan. In the
absence of such a framework, the Board has been unable to provide the state
and regional planning agencies with all the guidance and counsel they need in
order to articulate their plans and programs into a national setting. [6]





84


A reading of this charter might lead me to suggest that many of
these functions would be over the purview of the ONGP. However,
the NRPB is no longer with us today. Viewing the Board historically
might give some indication of pitfalls to be avoided by a similar
organization:
Is not to be a substitute for the many other research activities within the Fed-
eral Government; rather, it is intended to help us make better use of the re-
search now being done by bringing together, at one central point, those portions
of it that relate directly to future trends and possibilities. It will make access-
ible what has too often been fragmented.
Is not to be a "data bank." It might more accurately be referred to as a key
element in a management information system. For the first time. it creates
within the White House a unit specifically charged with the long perspective; it
promises to provide the research tools with which we at last can deal with the
future in an informative way. [12]
The reasons given for having suchll a staff were based on the premises
(1) that it is technically feasible to look at long-range problems; (2)
that the present situation demanded one did so; (3) that such tech-
niques should be melded into the decision process; and finally, (4) that
we need to sharpen our trade-off capability.
The final report of this group was issued as a goal statement for tlhe
nation. The staff is no longer in place.
Before we get to our own set of summary statements and suggestions,
we shall review the summary of the first Report on National Growth.
The report stated that it was extremely difficult to develop a single
comprehensive strategy for a growth policy. It cited the following
reasons:
(1) The definition of the objectives of a national growth policy requires a
searching consideration of our national objectives and priorities. This fact be-
comes more difficult as we move closer to specific goals and in practice, the uni-
versal support for the general concept turns 'aside when the discussion is on
specific issues. Questions of priorities, whether an issue is a problem, and so
forth make a comprehensive assessment difficult.
(2) The causal link between growth issues and specific policies is unclear.
(3) Tihe underlying forces that, when integrated, define a growth issue are all
individually based largely on freedom of action. Control, though often possible,
will lessen this freedom.
(4) The use of a growth policy would tend to place more power in the federal
government (or so some feel). This is not looked upon with favor by those who
support our system of layered government.
(5) The United States is physically a very large place. The very size of the
nation requires that numerous real decisions are made. largely reflecting local
desires. This feature of our governmental system might be threatened by a cei-
tralized policy.
Past experience and the difficulty of tlie problem of planning for na-
tional growth appear insurmountable. Neither the long-range or com-
prehensive analysis that would be needed to do full scale planning
are felt to be adequately tested, nor trusted, to bear the weight of policy
needs. As with most new institutions, unless there is intense need in
the form of crisis and strong policy level support, its success will de-
pend on evolvingone step at a time, progress to more planning as previ-
ous stages prove out.
BIBLIOGRAPHY
1. Advisory Commnission on Intergovernmental Relations. Urban and Rural
America: Policies for Future Growth, A Commiss8ion Report. A-32. Wash-
ington, D.C. : U.S. Government Printing Office, April 1968.






85

2. Beckman, Norman; and Langdon, Bruce, National Growth Policy: Legislative
and Executire Actions, 1970-71. Washington, D.C.: Urban Land Institute
(Research Monograph 18), 1972.
3. Brown, H.; Bonner, J.; and Weir, J. The Next Hundred Years. A Discussion
Prepared for Leaders of American Industry. New York: The Viking Press,
1958.
4. Cairncross, Sir Alec. Essays in Economic Management. London: George Allen
& Unwin Ltd., 1971.
5. Comptroller General of the United States. U.S. Actions Needed to Cope With
Commodity Shortages. Report to the Congress. B-114824.
6. Dahl, Robert A.; and Lindblom, Charles E. Politics, Economics and Welfare.
Planning and Politico-Economic Systems CResolved into Basio Social Proc-
esses. New York: Harper & Row, 1953.
7. Galloway, George B. and Associates, Planning for America. New York: Henry
Holt and Company, 1941.
8. Hooper, William L. Thie "Evaluative Function" in Government. Presented at
the National Security Industrial Association R&D Symposium on Federal
Research and Development in the 70's-Its Need and Scope, Washington.
D.C., 11-12 June 1969.
9. Kneese, A.; Ayres, R.; and D'Arge, R. Economics and the Environment. A
Materials Balance Approach. Washington, D.C.: Resources for the Future,
Inc., 1970.
10. Millett, John D. The Process and Organization of Gorernmcnt Planning. New
York: Columbia University Press, 1947.
11. National Academy of Sciences and National Academy of Engineering, En-
vironmental Study Group. Institutions for Effectire Management of the En-
vironment. Report to the Environmental Studies Board, Part I. Washington,
D.C., January 1970.
12. National Goals Research Staff. Toward Balanced Growth: Quantity with
Quality. Report. Washington, D.C., July 4,1970.
13. Nehnevajsa, Jiri. New York State Office of Planning Coordination: Alterna-
tive Roles. March 1969.
14. Perkowski, Joseph; and Picardi, Anthony. Evaluating Goals for a Sustainable
Society. Third Draft. June 13,1973.
15. Social Science Research Council Committee on Economic Stability. Quantita-
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