(3) whether the additional earnings cause a proportionate increase in business capital expenditures and a consequent additional creation of jobs, personal purchasing power, and earnings.

Business analysts and investment managers will be following this particular phenomenon by observing the month-to-month and quarter-to-quarter trends of the significant elements. However, aside from this matter of economic dynamics, the statistical evidence suggests that the business figures to be reported over the balance of this year will continue to show unusually good year-to-year comparisons.

Senator CLARK. What is most remarkable about this performance, however, is the great stability in prices which has accompanied it. Indeed, the figures look so good that there are already pundits asking if the United States has not finally licked the business cycle. Even the august magazine Business Week in its June 27 issue has been led to observe that "the current upswing is changing many rules that have applied for more than a century."

I ask that the article "A Well-Tempered Boom" from the June 27 issue of Business Week magazine be included at this point in the record.

(The article referred to previously follows:)

[From Business Week, June 27, 1964]

A WELL-TEMPERED BOOM

The longest business upswing on record is changing economic ideas that have been held for more than 100 years. For the first time, a boom has been accompanied by price stability.

At mid-1964, U.S. business finds itself in the midst of an upswing that's changing everybody's thoughts about what a free enterprise economy can do.

Previously, it was believed the United States couldn't expect to combine economic growth with price stability for more than a short period of time. The current upswing already is the longest on record for normal peacetime years and shows absolutely no signs of topping out (Business Week, Mar. 28, 1964, p. 23). But in over 40 months of business advance, industrial prices barely have budged from a horizontal line.

The old idea was that prosperous times create enough distortions between prices and costs, sales and inventories, credit and liquidity, capacity and demand to bring a downturn. Yet a careful look at the economy over the past 40 months shows a record that is singularly free of the kinds of imbalances that always have appeared in past periods of prosperity.

FIRST IN A CENTURY

Indeed, the current upswing is changing many rules that have applied for more than a century. The National Bureau of Economic Research's business cycle chronology, dating back to 1854, covers 27 business expansions. It shows that the U.S. economy is now writing a wholly new record of stable growth:

Prices have been uniquely stable over the past 40 months. The Federal Reserve index of industrial production has risen by over 25 percent-a good gain by historic standards. Metals prices have been rising since mid1963, but cuts in other areas have kept the overall wholesale price index stable.

Past upswings always have brought rising costs. This time, costs have declined. The Census Bureau's index of unit labor costs in manufacturing (1957-59-100) stood at 98.6 in April, more than three points below the 102.1 figure of February, 1961, when the current business upswing got underway.

Good business always has led previously to higher interest rates. Yet in April of this year, bond yields stood at approximately the same level as in early 1961.

EXPLANATIONS

In seeking to explain these new trends, economists point to a long list of changes in the behavior of government, business, and consumers, all of which make for greater stability of growth.

In sharp contrast to a history of abrupt shifts, the Federal Government has been pursuing smoothly expansionary fiscal policies. Government spending rose by $7 to $9 billion in each of the years between 1960 and 1963. The growth of spending is now tapering off. But this year's tax cut of about $9 billion will have a similar expansionary effect.

MONEY SUPPLY

Defined

The Federal Reserve Board, too, has abandoned its old stop-start behavior in favor of a policy of allowing the money supply to grow smoothly. to include demand deposits and currency only, the U.S. money supply has grown by $2 to $5 billion in each of the past 3 years. Figures up to the end of May lead to the expectation of similar growth in 1964. If the money supply is broadened to include time deposits, the growth of monetary liquidity has been more dramatic, but equally smooth.

For its part, business has rigorously avoided the scramble for inventories that has always occurred in the past when prosperity has led to a big push for sales. In a dramatic change in management policy (Business Week, Apr. 4, 1964, p. 25), companies now see tight inventory management as the right policy during prosperity as well as recessions. The result is a stability of the inventory sales ratio that has lasted throughout the present upswing.

UNDER WRAPS

Business also shows restraint in its long-term planning. The most recent McGraw-Hill capital spending survey showed that companies are planning a 14 percent increase in capacity over the next 3 years. Over the same period, they foresee a 19-percent increase in the physical volume of their sales-an expectation that seems reasonable, even conservative, in the light of the tax

cut.

Consumer spending reflects a similar restrained optimism. The cut in personal taxes has led neither to a burst of savings nor a burst of spending. Instead, consumers are spending at close to the normal relation to disposable income. Some analysts have argued that the months since the tax cut have been abnormally high debt repayments. But the $587-million increase in outstanding installment debt in April is actually the biggest gain posted so far this year, and is above the average monthly increase for 1963.

INVESTMENTS

Cautious optimism carries over into investment behavior. Stocks have made a sharp recovery from the 1962 crash. But because earnings have also grown, price-earnings ratios have continued relatively stable.

Particularly in the past year, the benefits of stable growth have been widespread. Profits continue to post new quarterly records. Long-term unemployment, which seemed intractable only a few months ago, is declining. And the United States is making strides in closing both the balance-of-payments deficit and the deficit of the Federal budget.

Senator CLARK. Surely present performance demonstrates that the state of economic know-how is now such that it is possible for wise public policy to be applied in such a way that it can help assure consistent and sound economic expansion without the threat of runaway inflation.

If there ever was a time when the country needed an intelligent discussion of its future economic policies, it is now. The Subcommittee on Employment and Manpower has studied the employment challenge ahead for well over a year and it has come to the conclusion that we are, indeed, entering a "second industrial revolution” in which the terms of human labor will be steadily altered from what we have known in the past. More than this, our economy will come to be preoccupied more and more with technological innovation and change a preoccupation which will profoundly affect the occupational outlook for millions of Americans. The challenge this will

pose for public policy in the years ahead will be compounded by an astronomical growth in the size of the labor force because of the high birth rates which have prevailed for most of the years since World War II.

The subcommittee has chosen to call this new challenge the "manpower revolution" and it finds that still greater application of economic knowledge must be pursued in the years ahead if the "manpower revolution" is to work for instead of against us. This will require a realinement in the way private enterprise has looked at economic reality. It will also require a proper mixture of public employment and manpower policies.

With regard to changes in outlook in the private sector, I might say that already much a shift is underway. In testimony before our subcommittee, representative spokesmen from business and industry indicated that they were increasingly aware that our corporate society is hardly the model of perfect competition, invoked by those who find present-day economics a hard pill to swallow.

One of the most interesting contributions to this growing discussion in the private sector appeared in the Atlantic Monthly in June written by John R. Bunting, vice president of the Federal Reserve Bank of Philadelphia, entitled "What's Ahead for Business?" At one point, Mr. Bunting is moved to comment on the peculiar dichotomy which exists in the minds of many private businessmen :

The schizophrenic businessman incessantly advertises to beguile the consumer into buying his product, but he has never identified himself with program to raise overall spending at the expense of saving.

Perhaps the success of the tax cut, as it works its will, will cure some of this schizophrenia, for that ailment is an affliction which does no one-and particularly business-any good.

I ask that the article "What's Ahead for Business" by John R. Bunting from the June 1964 issue of the Atlantic Monthly be included at this point in the record.

(The article referred to above follows:)

[From the Atlantic Monthly, June 1964]

WHAT'S AHEAD FOR BUSINESS?

(By John R. Bunting)

Since the end of World War II, the American economy has performed with unparalleled efficiency. True, there has been some inflation, especially during the immediate aftermath of the war, but that was neither unexpected nor inexcusable. Four short, shallow recessions blemish the record too; and for the past 5 years Americans have come to be conscious of a persistent balance-of-payments problem, plus an inability to get the economy to a position of full employment.

By any comparative standards, however-whether its own record, or the past or present record of any other national economy-the 18 years since the war have been the most prosperous, trouble-free years in the history of the American economy.

Yet, during this period significant changes have taken place in the basic structure of our economy. At the outset it may be helpful to list three important forces making for modification in the structure of our business society: (1) the Maximum Employment Act; (2) the emerging dominance of the corporate conglomerate; (3) automation.

The Maximum Employment Act was formalized in 1946. In large measure, its spiritual conception occurred a decade earlier in the New Deal. It was a natural outgrowth of the social reform that swept through the United States in the wake of the great depression. Despite the fact that the act has been in existence for some time, few businessmen have properly assimilated into their

thinking the tremendous institutional changes it has wrought. Of course, an overwhelming majority of the business community did not agree with this act when it was passed. Many still hold out against it. No businessman, however, should fail to realize how it has changed the cost structure of business.

Now there is every good economic reason for business to assume everyone in the labor force as a fixed cost. After all, what this act means is that each person in the labor force is to be employed, or to receive income while temporarily unemployed. One way or another, business is going to pay labor whether working or not. Obviously, then, from the point of view of the economy as a whole, operations are more efficient at full employment because the unemployed remain in the overall cost figures, even though they make no contribution to production. What this could mean in the not too distant future is that big business, at least, will assume all employees as a fixed cost much as industry in Japan and in some of the European countries does. All workers would be put on a salary basis and treated the same as office workers. Profits would bear the brunt and reap the reward of the vagaries in business activity.

The likelihood of this eventuality is reinforced by the growing dominance of the corporate conglomerate in the business world. The conglomerate is a large corporation diversified to the extent that within itself separate subcompanies operate in vastly different markets. The idea is to stabilize the income and earnings of the whole unit. But more than just a strong desire for stabilized income and earnings is powering the drive toward conglomeration. Corporations, huge and dominant in their own field, are inhibited by a sense of propriety-and a suspicion of what the "antitrusters" would do-from further expansion there. Awash in depreciation reserves, in retained earnings, and in other vestiges of cash flow, they seek profitable outlets for their funds and skills in other sectors of industry.

Many businessmen who are deeply involved in diversification deplore this trend. They recognize that the actions of the corporate conglomerate frequently are not in strict conformity with a market economy. These businessmen believe strongly that for a market system to work, business must try to maximize profits in each market. But the growth of the diversified large enterprise does not allow them to operate in this manner.

A firm that produces a variety of products and operates across many markets does not necessarily regard a particular market as a separate unit for determining business policy. Therefore, it does not need to attempt to maximize profits in the sale of each of its products. Some products may be classified as moneymaking items, some as convenience goods, and some as loss leaders.

The diversification of the large firm minimizes loss in one part by setting it against profit in another. This is a source of strength to the firm. In economic terms, however, such a spreading of risk nullifies, or at least blunts, the effect of changes in prices, costs, and profits as guides to economic activity. Profits from one activity subsidize the continuance of another. Survival of the fittest is abrogated. The selective forces of competition are ineffective.

Of course, management of a huge firm desiring to maximize profits may expand the profitable facilities and eliminate the others. But this does not follow automatically. The allocation of costs is usually the result rather than a source of a policy decision.

Most important, however, huge size, by necessitating the development of a corporate social conscience, strikes at the very foundations of the market system. The modern corporation cannot play the economic game in the traditional manner. It cannot convince itself, even, that an invisible hand will cause its selfish actions to be for the common good. It cannot pull out all stops to kill off competition. It cannot try to make as much profit as it might. Business actions can no longer be predicated on the simple motive of self-interest.

Large firms respect one another. Competition among them is intense, but there is a feeling of live and let live, cooperation, and recognition of priorities of interest in the hope of reciprocal recognition. There are even unwritten rules that cause large firms to refuse to try to win away important customers of a large rival. They have to pull their punches in dealing with smaller rivals too. Frequently, it is wiser to let them live than to compete so viciously as to kill them off and bring on antimonopoly proceedings of some sort. So the game can never be played on an all-out basis.

This is leading to a new concept of the American economic system. Economists have long held such a concept. Now the businessman himself is slowly coming to the conviction that he has a responsibility to discipline himself. He can

no longer enjoy the luxury of believing in an economic system in which the lure of gain and an invisible hand would steer everyone and the whole economy in the right direction and at the right pace.

Recently, we have come to be aware of another factor which is transforming our business system: Automation.

Changes growing out of technological innovations have always been notoriously difficult to measure and are almost always much broader than imagined. The automobile, for example, did infinitely more than just supplant the buggy. It replaced staying at home, and is now transplanting cities, towns, and the whole countryside. Now automation may be replacing certain skills; but, more important, it is transforming our educational needs.

I do not mean to suggest that we shall have to train workers to man the new automated equipment. Computers and other forms of automated equipment are giant morons, not giant brains. Even the highly regarded programing of a computer is difficult, not because of the inherent complexity of the computer itself, but because of the need to spell out every step in painstaking detail. Just as most of the jobs replaced by the computer did not call for high intelligence or creative people, neither does most work with the computer. On the other hand, the incessant load of information emptying from the computer begs for more general intelligence in its use and interpretation. A more theoretical bent in education as opposed to our traditional pragmatic bias in this country would seem appropriate if we are to take full advantage of automation.

At the present time, it is quite possible that a structural change is taking place in the role which private capital plays in our economy. All the talk about automation over the past decade or so would suggest that spending for new plant and machinery has been tremendous. Actually, it has been anything but. The shortfall in plant and equipment spending has been obscured by the magnitude of the raw figures. They have been impressive.

The failure of investment in plant and machinery is not a failure to grow, but a failure to grow enough to hold its proportionate part of GNP. There is a persuasive enough explanation for this. After the shortage-induced post-war boom in capital investment, a letdown was inevitable. Every capital-spending boom is bound to bring in its wake some excess capacity. In fact, the astonishing part is not that there has been a letdown, but that the letdown has been so gentle.

But an important part of the story remains untold. The amount of capital (plant and equipment) required per dollar of output, call it the capital-output ratio, has been declining. The Council of Economic Advisers has estimated that this ratio dropped from 2.3 ($2.30 of capital to $1 of output) in 1929, to about 1.8 in the period since the war. That is more than a 20-percent decline.

Other bits of evidence, difficult to validate, suggest that the capital-output ratio has been falling fairly consistently since 1900. All of this implies that quite possibly the American economy has reached the state where technological development is so productive that less is needed. In other words, the normal increase in productivity per man-hour will come from a lesser increase in capital. What seems to be happening is that in an evolutionary way scientific processes, not just automation, are bringing the American economy to a point where smaller amounts of capital are producing larger outputs of consumables. In order that a relatively free market economy may adjust to this structural change, consumption expenditures as compared with saving must grow proportionally larger. In the absence of a steady stream of exciting new products, there is little chance of this just happening when needed. For a time, perhaps, the excessiveness of saving is disguised, as funds chase each other in the stock market and find outlet overseas. But if consumer spending stays at the same percentage of income, saving remains redundant and business activity is sluggish. In this situation, modern government moves in. Government spending in everincreasing doses is prescribed. After a time, however, it becomes obvious that' Government spending is growing larger absolutely and proportionately. Businessmen in particular become alarmed, and other antidotes are sought. Unfortunately, it is particularly difficult for businessmen to see this problem in true perspective. First, they can scarcely admit to themselves the need for ever larger Government spending and conversely smaller inputs of capital. Instead, they ask for larger profits, greater permissible allowances for depreciation reserves, and the like so that they can hike capital spending back to its former role in the economy. But their own efficiency and inventiveness prevent them from getting it there. It is a paradox not yet sufficiently comprehended that