part for our poor performance through most of the Eisenhower years for as Mr. Maddison observes

if a country appears consistently to run into difficulties which others manage to avoid, one is entitled to assume that bad policy played a role.

And, having evolved exceptionally high rates of unemployment in those years, our task is now more difficult, for to quote Mr. Maddison again

it is more difficult to get rapid growth started than to keep the economy on a high-growth path and the United States can scarcely be said to have had a fiscal policy for most of the 1950's, although public discussion and governmental consideration of tax changes were extensive. U.S. tax rates were raised in 1950 and 1951 during the Korean war, and were lowered in 1954, but there was no attempt to compensate for the 1958 or 1960 recessions by fiscal policy or, indeed, to offset the longer term tendency from 1957 onward for the economy to work below fullcapacity level. This happened in spite of the fact that the U.S. tax structure is more progressive than that in most European countries, and has a built-in tendency to dampen the growth of private demand.

Why was the U.S. economy untouched by fiscal policy over 8 years in spite of two recessions? Why have the U.S. authorities accepted fluctuations in activity involving absolute falls in output and substantial increases in unemployment as a fact of life, and restricted active policy intervention to the monetary field or to minor variations in public spending? This seems to have been due in part to a misjudgment as to the causes of rising prices, in part to a more oldfashioned attitude to fiscal policy than in Europe, in part to the intellectual influence of a fatalistic school of business-cycle analysis, and in part to special constitutional difficulties in wielding a fiscal policy. The existence of inadequate demand during the 1950's was fully admitted by the Council of Economic Advisers in its 1963 report:

"In the past 5 years, the economy has been consistently out of balance-with too little demand to match our supply capabilities. In the first postwar decade, when demands were considerably stronger, the balance was frequently tipped in the other direction."

The U.S. emphasis on the virtues of a balanced budget has had no postwar counterpart in Europe, where there are no statutory limits on fiscal policy such as the ceiling on government debt and on the interest rates payable on longer term government securities as in the United States. The constitutional system of checks and balances in the United States makes it more difficult for an administration to change taxes quickly than is the case in Europe.

R. A. Gordon, of the University of California at Berkley, one of the finest economists in the United States, has remarked in outlining the differences between United States and European economic policy that

(1) No advanced economy in Western Europe gives as low priority to the full employment objective, or interprets it as loosely, as does the United States. (2) Probably no country in Western Europe, not even Germany, attaches as much importance to price stability as does the United States.

(3) Only a few countries, like England and the Netherlands, whose dependence on foreign trade is far greater than that of the United States, give the balanceof-payments objective the priority that it holds on this side of the Atlantic.

(4) The objective of rapid growth is emphasized more in Europe than in this country, and this objective is more likely to be explicitly incorporated into Government policy programs.

(5) Nowhere in Western Europe is as much emphasis given to fiscal conservatism as in the United States. No European country takes as a major policy goal the need to have current tax receipts cover all government expenditures on both current and capital account, and in no country in Western Europe, including Germany, is holding down government spending considered a paramount objective in and of itself.

Yet why this should be so is difficult to determine. For even the "Goals for Americans" drafted by the President's Commission on National Goals during the Eisenhower administration said:

The economy should grow at the maximum rate consistent with primary dependence upon free enterprise and the avoidance of marked inflation * * * increased investment in the public sector is compatible with this goal.

Such growth is essential to move toward our goal of full employment, to provide jobs for the approximately 13,500,000 net new additions to the work force during the next 10 years; to improve the standard of living; and to assure U.S. competitive strength.

Public policies, particularly an overhaul of the tax system, including depreciation allowances, should seek to improve the climate for new investment and the balancing of investment with consumption. We should give attention to policies favoring completely new ventures which involve a high degree of risk and growth potential.

I agree with this assessment. And on one point the findings of the Subcommittee on Employment and Manpower justify a still stronger position: full employment will require conscious use of Federal expenditure policy in the years ahead. Throughout the cold war we have been deceived into believing that, because the Federal budget has been large, it has been pumping the life into our economy required to keep it operating at high levels. But an overwhelming proportion of our budget has been devoted to highly specialized military needs.

The following table from Mr. Maddison's book reflects what a disproportionate impact expenditures on defense inflict on our total government spending, Federal, State, and local, in comparison to the European countries as a percentage of GNP.

Government current expenditures on goods and services as a proportion of GNP at current prices

Sources: 1950 and 1960, OECD, General Statistics, 1938 from Statistics of National Product and Expenditure, No. 2, OEEC, Paris, 1957. The U.S. figures of OEEC and OECD were adjusted to exclude Government investment in machinery (see app. I). Earlier years from national sources cited in app. A.

The second shows how much of this is accounted for by the Central Government:

TABLE IV-2.-Share of Central Government in total government consumption,

Source: Statistics of sources and uses of finance 1948-58, OEEC, 1960.

The next breaks this down for 1957.

Government expenditures as a proportion of gross national product in 1957

It shows that in terms of investment in our national wealth-roads, urban renewal, resource development, education, and welfare, the United States stands at the bottom among the industrialized countries of the West. In defense expenditures it stands way at the top.

A forthcoming book by Frederick C. Mosher and Orville F. Poland entitled, "The Costs of American Governments: Facts, Trends, Myths" only reinforces the case. This study has found that while defense and related expenditures have increased enormously, we are actually spending less on our domestic welfare in 1961 than we were in 1936.

Now it is precisely here that we have fallen down, for while we have concentrated an enormous share of our public financial resources on national security expenditures, technological change and other forces have adversely affected the employment potential in production line jobs. Normally, this slack might have been taken up by increased public expenditures in fields such as community renewal, resource development, transportation, and education. But our heavy burden in defense kept us from it.

Consequently the country is presently plagued with community, resource, and worker obsolescence. Obsolescence which must be corrected through a proper arsenal of public investment programs. Now, with the prospect of reduced defense outlays in the offing, we have the opportunity to do just that.

Senator Gaylord Nelson, of Wisconsin, alert to this new proposal, has introduced S. 2958 which would devote some of our wasted manpower to the correction of natural resource problems. The bill carries out in several ways one of the recommendations of the Subcommittee on Employment and Manpower.

Before he describes his bill, I would only advise Senator Nelson that I am in complete accord with his objective in this bill so long as it is part of a concerted employment and manpower program for the United States. At this point in the record, there shall be inserted a paper by R. A. Gordon entitled "Full Employment as a Policy Goal" and an article describing the findings of the OECD regarding U.S. manpower policies entitled, "Seeking a Solution to U.S. Manpower Problems."

(The articles referred to follow :)

FULL EMPLOYMENT AS A POLICY GOAL*

(By R. A. Gordon, University of California, Berkeley)

It is fair to say that high employment is a primary goal of economic policy today in all the industrially advanced countries of the Western World. We usually refer to this goal as that of "full employment," although there are still objections to the use of this term in the United States. These objections are perhaps less widespread than they were at the beginning of the postwar period, when the Murray full employment bill became the Employment Act of 1946. Thus, in 1960, President Eisenhower's Commission on National Goals apparently felt no compunction in referring to "our goal of full employment.' And more recently Arthur F. Burns felt moved to say: "I believe that the American people are more firmly committed to that ideal of full employment than they were a generation ago. If the Employment Act were recast today, it might even be christened "The Full Employment Act,' as was the original Murray bill."

THE CONTRAST BETWEEN EUROPE AND THE UNITED STATES

Whether we use the term "full employment" or not, employment policy has not meant the same thing in Western Europe and the United States in recent years. The contrast is a twofold one: in aspiration levels and in success in achieving these aspirations.

The European countries have set their employment goals high. Further, they have raised their sights over the last decade. Rates of unemployment that were considered satisfactory a decade or more ago are now considered to be unacceptably high. One can say that a ratchet effect has been at work. The longer unemployment has remained at levels of 3 or 2 percent or less, the stronger has become the resolve not to permit a return to unemployment levels of 4 or 5 percent or more that once were considered satisfactory or at least acceptable. And the longer overall unemployment has remained at a very low level, the stronger has become the resolve to eliminate remaining pockets of above average unemployment-which, to the extent that they exist in most Western European countries, reflect regional problems rather than differential opportunities related to age, color, education, or occupation.

The employment goal has been set high in Europe, and the success in achieving the goal has been impressive. Unemployment in the United States has not been below 5 percent since 1957. Contrast this with the record summarized in table 1. If, for the moment, we take these figures at their face value, we see that not a single European country listed had an unemployment rate as high as 4 percent in 1961 or 1962. Of the countries listed, only Italy has experienced unemployment in excess of 4 percent since 1955; and over this same period only Italy again has had an unemployment rate higher than that in the United States in some years (all before 1960). In the last half dozen years or so, France, West Germany, the Netherlands, Sweden, and the United Kingdom have regularly been operating at unemployment rates well below 3 percent. and usually below 2 percent. The same is true of most of the rest of Western Europe.

But are these figures comparable with the American estimates? The figures in parentheses for 1960-62 in table 1 offer a partial answer to this question. These provide revised unemployment rates adjusted to correspond to American

This paper represents a progress report on research; the results of which, it is hoped, will be embodied in a monograph concerned with full employment as a policy goal. This is part of the research program on unemployment at the University of California, Berkeley, which is being supported by a grant from the Ford Foundation. The assistance of Mr. Ralph Abascal in the preparation of this paper is gratefully acknowledged.

1 Goals for Americans, Report of the President's Commission on National Goals (New York, Prentice-Hall, 1960). p. 10.

2 From "Some Reflections on the Employment Act," an address delivered at the annual meeting of the American Statistical Association, Minneapolis, Minn., Sept. 7, 1962.

It is interesting to contrast official statements in Germany today with those of 10 years ago. In 1954-55 references were made to the achievement of full employment as the unemployment rate fell below 5 percent. By 1959 the Bundesanstalt für Arbeitsvermittlung und Arbeitslosenversicherung was saying that "earlier opinions on what constitutes the minimum of unemployment during a boom * must now be looked at as obsolete." And a year later the same agency declared that unemployment must fall below 3 percent if full employment were to be achieved. See the various issues of Amtliche Nachtrichten published by this agency.

definitions. The revisions were made by the U.S. Bureau of Labor Statistics.* Unfortunately, similar revised figures are not available for earlier years.

The adjustments effected by the figures in parentheses are moderate, being largest in the case of France and England. By and large, what we said previously about low unemployment in Europe still holds. Unemployment rates of 3 percent or less-usually much less-have been the rule in recent years. A number of European countries have had serious unemployment problems at some time during the last 15 years; for example, the absorption of refugees in West Germany, some difficult problems of adjustment in Belgium, and the continuing struggle with unemployment and underemployment in Italy's Mezzogiorno. But despite this, unemployment rates as high as 3 percent by American definitions have been the exception rather than the rule in recent years.

This is not to say that it is reasonable to assume that "full employment" in the United States corresponds to as low an unemployment rate as does full employment in these European countries. This is a problem to which we shall return later in this paper. In general, the European countries listed in table 1 assume that full employment corresponds to an unemployment rate in the neighborhood of 2 percent-perhaps in a range of from less than 2 to 3 percent by American definitions, depending on the country. On the whole, the full employment goal has been set at a high level, and even at this high level the goal in recent years has been much more consistently achieved (or surpassed) than in the United States.

The American record presents, of course, a striking contrast. There is some evidence that, if anything, our sights may have been lowered somewhat. It is true that the magic number of 4 percent is still widely quoted. The Council of Economic Advisers continues to espouse the 4-percent figure as only a first step toward a still lower unemployment rate. But the hard fact remains that the Congress and the American people seem to be prepared to live indefinitely with unemployment of more than 4 percent-and that other economic goals, particularly fiscal conservatism, price stability, and equilibrium in the balance of payments at the present goal value of the dollar, are given precedence over that of full employment defined as unemployment of 4 percent or less of the labor force. Or to put the matter in another way, increasing public insistence on a strict interpretation of the full employment objective is a political fact of life that European governments know they cannot ignore. The record indicates that this has not been the case in the United States." A strict interpretation of the employment objective does not carry the political punch here that it does in Europe.

THE AGGREGATIVE GOALS IN TERMS OF ECONOMIC WELFARE

Full employment is only one of a battery of “aggregative economic goals" which today are espoused, more or less explicitly, in both Western Europe and the United States. The goals are interrelated; the same instruments of monetary-fiscal policy can, in varying degrees, be used to pursue them. How full employment is defined and what is done to achieve it depends in good part on what is done about the other aggregative goals.

The revised estimates for 1960 were first published in the report of the President's Committee To Appraise Employment and Unemployment Statistics, "Measuring Employ ment and Unemployment" (Washington, Government Printing Office, 1962), ch. X and app. A. Revised estimates for 1960-62 are presented by Robert J. Myers in "Unemployment in Western Europe and the United States," in Arthur M. Ross, editor, "Unemploy ment and the American Economy" (New York: John Wiley & Sons, 1964), p. 174. should be noted that some modest standardization of the official figures for the various European countries had already been attempted by the OECD in putting together the figures in table 1.

It

In the words of the late Jack Downey, we have "the contrast between the political cash value which full employment has had in most European countries and the political tolerance for unemployment which has existed, and still exists, in the United States." See his paper in A. M. Ross, editor, "Unemployment and the American Economy," p. 161. One qualification of some importance should be inserted here. Americans have become more sensitive to wide differences in unemployment rates among different segments of the population than they were a decade or more ago. As a result, there has been some progress in recent years toward the development of a national manpower policy, of which some of the elements are the Area Redevelopment Act, the Manpower Development and Training Act, other Federal programs to develop education and training, the new "war on poverty," civil rights legislation, and so on. Obviously all these elements have not yet been integrated into a coordinated national manpower program. But, as William Haber has put it, it is clear that the Nation is increasingly involved in manpower policy." (In A. M. Ross, editor, "Unemployment and the American Economy," p. 35.)