THE MICHIGAN DAILY

ckley Gives the Case for

Tax Reform: Spur US.

O


PROF. GARDNER ACKLEY
ere are many characteristics
"dynamic" economy, but here
11 focus on three only. In my
nent,, a dynamic economy
makes maximum use of avail-
productive resources-that is,
4tal output is close to its "po-
a1 output" most of the time;
is characterized by a rapid
th of its potential output; and
adjusts rapidly and flexibly
ianges in the composition of
inier demand, to changes in
national markets, and to
ing technology.
nil Use of Resources
Il utilization of available pro-,
ve resources is my first cri-
n of a dynamic economy.
ed on this basis, the Ameri-
economy has been only rea-
bly dynamic since the end of
War.
the long-run, our most basic
uctive resource is our man-
r. Over the period 1947-1957,
aployment in the United
s averaged a pretty decent
per cent of our labor force,
ficantly exceeding 4 per cent

only during recessions and early
phases of business recovery.
But since 1957, unemployment
has averaged 6.0 per cent of the
labor force, and has not in any
month -f the past 66 fallen below
5.0 per cent. Last month, 5.7 per
cent of our civilian labor force
Editor's Note
Prof. Gardner Ackley is on
leave from the economics de-
partment to serve in Washing-
ton as a member of the Presi-
dent's Council of Economic Ad-
visers.
The article is excerpted from
the latest issue of the Michigan
Business Review by permission
of its editor, Prof. J. Philip
Wernette of the business ad-
ministration school.
Prof. Ackley's remarks were
first presented in a lecture
sponsored by the business
school last May, but remain rel-
evant as an overview in light
of thescurrent Congressional
struggle over tax reform.

was available for and actively
seeking employment, but without
success. Another 1.5 per cent was
working part-time but preferred
full-time employment.
Further, it is clear that a large
number of potential workers-per-
haps as many as 500,000-have
withdrawn from or failed to enter
the labor force because they were
convinced jobs were unavailable.
Many of these would enter or re-
turn if jobs became more freely
available.
Clearly, we are not fully utilizing
our basic manpower resources, as
judged either by our own earlier
performance, or in comparison
with the record of most countries
of Western Europe, where unem-
ployment-measured on a fully
comparable basis-runs in the
range of 1-3 per cent.
I have spoken of excessive un-
employment only as a form of
economic waste-and it is an ex-
travagance that even a wealthy
society can ill afford. But it is
also, of course, a social evil that
no humane society should long
tolerate.
Our second basic productive re-

source is our stock of plant and
equipment. This, too, we are utiliz-
ing considerably less fully than
we have earlier, and than we;
should.
According to the McGraw-Hill
index of capacity utilization, in-;
dustrial operations were on the
average at 83 per cent of capacity
at the end of 1962, as compared
with an average preferred operat-
ing rate of 92 per cent.
This is exactly the same per-
centage reported a year earlier. A
quarterly index of capacity utiliza-
tion in manufacturing compiled
at the Federal Reserve Board has
averaged 5 per cent lower in the
past 5 years than during the pre-
vious decade. Excess capacity is
a frequent complaint of business-
men in almost every major in-
dustry, and is clearly the main
factor holding down corporate
profits.
Even though profits were qt a
record level of $51.5 billion last
year, and currently are running
well above that, we calculate that
they might be $7-$8 billion higher
if we were operating a a 4 per
cent level of unemployment.

High or growing unemployment
of labor and high and increasing
underutilization of plant capacity
are both quite consistent with a
steadily rising level of output.
The reason, of course, is that our
labor force is continually expand-
ing, plant capacity is continually
enlarged through investment, and
the productivity of both labor and
equipment are steadily rising as a"
result of technological change,'
better management, and increased
worker skills.
As our potential output grows,
we must run merely to stand still.
And we have not been running
fast enough these past five years.
We estimate that if the economy
were today operating at a level
consistent with 4 per cent unei-
ployment of our normal labor
force, the gross national product
would be some $30-$40 billion
higher than the total amount we
spend on education in this coun-
try, and about equal to what we
spend on health and medical care.
By the test of full utilization, I
think that we must conclude that
our economy has proved inade-

quately dynamic in the past
years.

51

t

WELCOME
STUDEiNTS
::. MCHIGAN'S Wolverines -Michigan's
4 famous Marching Band-The Victors-

Growth of Potential
Output
My second criterion of a dy-
namic economy is rapid growth.
We could get a "one-shot" growth
of about 5%/-6 per cent merely by
our making fuller use of the pro-
ductive resources we now have
available-by eliminating the $30-
$40 billion gap I have just been
discussing. This is cheap and easy
growth.
But once we have reasonably full
utilization of existing resources,
further growth depends (a) on the
enlargement of our resources and
(b) on the increased productivity
of those resources.
Over the past century as a
whole, no other country can match
our record of economic growth.
And during the first postwar dec-
ade, our total output rose at a
healthy average annual rate of
almost 4 per cent, well above our
historical growth rate for the pre-
vious century.
But since 1957, our progress has
slowed to 3 per cent. As best we
can tell, even the growth of our
potential output has slowed down,
as the persistent failure to use all
of our existing potential has weak-
ened the incentives to increase it.
At the same time, many coun-
tries of Western Europe have been
accelerating their rates of growth
to annual averages of 5, 6, even
7 per cent, and Japan to rates of
9 or 10 per cent.
A year-and-a-half ago, the
United States joined with the
other 19 nations of the Organiza-
tion for Economic Cooperation
and Development (18 countries of
Western Europe plus Canada) in
setting as a target a 30 per cent
increase in their combined gross
national products between 1960
and 1970."
Since the United States pro-
duces more than half of the total
output of the group, it is not hard'
to calculate that this target is
unlikely to be met unless the rate
of growth in the U. S. is raised
substantially above the level that
has prevailed in the past 5 or 6
years.
Flexibility of
Adjustment to Change
The third characteristic of a
dynamic economy is the speed and
ease with which it adjusts to
changes in the composition of de-
mand and to technological de-
velopments.
In this respect, our economy
has always performed well. But
the question has arisen, particu-
larly in recent years, whether it
performs as well as it might.
Indeed, some have argued that
our recent high rate o unemploy-
ment is merely a symptom of the
inability of our labor force to
adapt itself to an accelerated pace
of technological change - often
Lessons in Singing
and Speaking-
CAROL S. WESTERMAN
(Memeber of National Assoc.
Teachers of Singing.)-

carelessly referred to as "automa-
tion" . .
I conclude that we can and must
make our economy even more dy-
namic than it has been-particu-
larly than it has been in the most
recent past. Part of the respon-
sibility for doing this falls on the
federal government.
Although there are many as-
pects of federal policy that affect
our performance--ranging from
our patent system and antitrust

PROF. GARDNER ACKLEY

policy on the one hand to our
monetary policy on the other-I
shall stress our most important in-
strument of policy, the federal
budget-taxes and expenditures.
Utilization of Our
Productive Capacity
Why are we failing to use the
productive capacity that we have
available?
The major reason for our failure
to use our capacity is not that we
have become indolent, or that
workers prefer to be unemployed,
or that businessmen enjoy seeing
unutilized machinery depreciate.
It is primarily a simple lack of
sufficient demand for what we
could produce at a high level of
capacity utilization.
The federal budget is a power-
ful instrument for influencing the
level of total demand.: Govern-
ment purchases.of goods and ser-
vices-including the services of Its
own employees-constitute a sig-
nificant elenient in total demand.
Currently, the federal govern-
ment purchases roughly .11 per
cent of our total gross national
product. In addition, its social in-
surance payments, direct relief
payments, veterans' benefits, in-
terest payments on the federal
debt, and subsidies (none of which
are part of the gross national pro-
duct) enlarge private incomes and
contribute to the ability of the re-
cipients of such payments to pur-
chase goods and services in the
market.
Other Side of Coin
On the other hand, its taxes-
including the payroll taxes which
finance the social insurance sys-
tem-reduce the purchasing oower

of taxpayers and thus limit total
demand.
During periods of war and ue-
fense emergency, the federal gov-
ernment raised tax rates severely
in order to curb private demand,
so as to divert productive resources
to military uses.
Although tax rates deliberately
designed to restrain private spend-
ing during wartime have been
somewhat reduced, they still re-
main in partial effect today,
The greatest contribution that
the federal government can now
make to a more dynamic economy
is to release somewhat further the
tax brakes which hold back total
demand.
This is why the President has
proposed a program of major tax
reduction-in a net amount of
over $10 billion over the next yearr,
and a half. .
The bulk of the proposed tax
reduction should and will go to
consumers. As taxes are reduced,
consumer spending will rise, gen-
erating more production and high-
er incomes, and in turn still more
consumer spending.
Increased utilization of plant
and equipment used for making
consumer goods will stimulate ad-
ditional investment in productive
facilities, further expanding total
demand. Every dollar of tax re-
duction will enlarge total output
by several dollars.
Risin the Growth
Rate of Potential
Output
Along with an improved utiliza-
tion of our productive potential,
there are many ways in which the
federal budget can improve the
growth rate of the potential itself.
For one thing, many goverin-
ment expenditures contribute di-
rectly to an increase in the na-
tion's capacity to produce. Prom-
inent among these are expendi-
tures on education and research.
Economists have in recent years
repeatedly revised upward the im-
portance that they attribute to
education as a factor in economic
growth.
Edward Denison's excellent book
on U. S. economic growth esti-
mates that 23 per cent of the total
growth of U. S. output, 1929 to
1957, can be attributed to the h-
creased level of education of the
working population.
Federal expenditures on re-
search and development now
amount to roughly $12 billion per
year. Although the major part of
this contributes directly to our
defense and space programs, much
of Wit cnpotentially contribute as
well to the growth of civilian pro-
ductivity.
The President has proposed a
new. program designed to stimulate
improvements in civlian tech.
nology and the faster dissemina-
tion of the newest technological
information to producers, espe-
cially in those industries in which
technological progress has been
lagging.
The President has also proposed
-as part of his new tax program--
special tax treatment to stimulate
private. expenditures on research
and development.
Along with education and tech-
nological advance, the most im-
portant contribution to growth
comes from investment.
Investment expands existing
productive capacity, but it also is

I

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Discussion: "Christian Morality and

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