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." 2

THE CONTRAST BETWEEN EUROPE AND THE UNITED STATES

1

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 Arbeitsver mittlung 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 Employment 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. It 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.

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.)

In addition to full employment, these aggregative goals are rapid economic growth, price stability, balance-of-payments equilibrium, and something which has come to be called incomes policy. I should like now to explore briefly the kinds of social welfare functions which are implied by the way these goals are defined and by the priorities which seem to be attached to these goals in different countries, and by different groups and at different times in the same country. When these aggregative goals are espoused, it is implied that national economic welfare (Z) is related in some way to the following variables or constraints: U (1) The rate of overall unemployment, I

(3) The rate of change in a country's international monetary reserves, A This is one measure of the degree to which "balance-of-payments equilibrium" is achieved.

W

or

(5) Some measure of wage restraint, for which we might write the difference between the rate of change in wages per man-year and in productivity per man-year.

Let us see now how current debate and policy action suggest total economic welfare is taken to be related to these variables or constraints. Let me first introduce two additional elements:

(6) n to represent some notion of the rate of increase in the domestic price level beyond which the functioning of the domestic economy (apart from balance-of-payments considerations) becomes impaired because of "loss of confidence in the currency."

(7) Let us also add two additional price variables: Pa, or an index of domestic prices of goods that move in international trade, and P,, to represent an index of foreign prices of the same goods.

I suggest that the pursuit of our five aggregative goals can now be described as follows:

Let us now see what all of this means and what light, if any, it throws on the relations among our aggregative goals.

Let us look first at the expression in parentheses. This tells us that economic welfare changes in some way with changes in the three variables inside the parentheses. These variables relate to only three of our aggregative goals: employment, growth, and price stability. The other two goals are listed as constraints, and prices and unemployment show up again as constraints as well as variables within the parentheses.

The significance of the distinction between what is inside the parentheses of the z function and what are listed as constraints can be expressed as follows: The variables in parentheses can vary over some range; and, given the policymaker's rough notions about the nature of the function, he can seek very approximately to maximize welfare by seeking to change the values for these "target variables." His freedom to do so is limited by the constraints. These play a negative or restraining role. The policymaker is not free to vary these elements to any significant degree as he seeks to increase his conception of social welfare.

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This way of looking at things permits us to differentiate among our aggregative goals. One can say that employment and growth are positive goals. Both can vary over some range, and economic policy can seek to change them so as to increase some notion of economic welfare. Welfare will be increased as the unemployment rate is reduced and as the rate of growth of output is accelerated. Welfare is also related to the rate or change in prices, but in a complex way, and the nature of this relationship throws some light, I think, on the different ways the employment and growth goals have been pursued in various European countries and the United States.

First of all, virtually all governments and the vast majority of their citizens place some positive value on a stable price level, and a movement in the price level either upward or downward presumably detracts from welfare as viewed by the policymaker. But I should like to submit that this relatiouship, taken by itself, is a relatively weak one. Within a considerable range, variation in the price level in and of itself is not considered to have an important effect on economie welfare. Germany is perhaps an exception to this generalization. Price stability is important, but it is important chiefly as a constraint and as a constraint at two different levels. To understand this, we have to look at the entire set of constraints listed in connection with our welfare function, beginning with that for the balance of payments.8

AGGREGATIVE GOALS AS CONSTRAINTS

We expressed the balance-of-payments constraint as:

This states the condition that the percentage change in international monetary reserves should be equal to k plus or minus a margin of error, e. The value of k might be zero. In this case, no change in the stock of monetary reserves is desired, and any change in excess of e requires compensatory action.

In terms of our social welfare function, what does it mean to say that the balance-of-payments objective should be viewed as a constraint? For simplicity, let us take just two of our other goals-employment and growth-and write the welfare function

Let us assume now that the constraint is in danger of being violated through disequilibrium in the balance of payments. The overriding need to stay within U Ÿ the limits of the constraint means that and Ī Y cease to provide the same guide to policy as before. Steps will be taken to preserve or restore equilibrium even if the needed action has an effect on unemployment and growth that, taken by itself, would reduce welfare.

7 Notions as to how welfare is related to changes in these target variables depends on: (1) One's value judgments; and (2) one's understanding of how each target variable is related to other variables-both the other target variables and other variables not included in the welfare function that represent costs or benefits to society. The term "target variable" is borrowed from Tinbergen.

For a similar distinction between full employment as a "final objective" and price stability and balanceof-payments equilibrium as "means-to-end objectives," see C. Weststrate, "Economic Policy in Practice: The Netherlands," 1950-57 (Leiden, H. E. Stenfert Kroese, 1959), esp. pages 7-8.