Preparing a Report

In the first months of the project, Samuelson and Altman consulted widely. In addition to those at the October 30 meeting, they were in touch with economists at the Bureau of the Budget, the Department of Labor, the Office of Price Administration (OPA), the Securities and Exchange Commission, and the Board of Economic Warfare.⁶ These consultations, Altman claimed, confirmed the importance of their work, for studies of consumer demand were considered basic both to maintaining full employ­ment and to understanding the problems of transition.⁴⁵ Their own work up to March 1942 entailed the analysis of basic statistics.

e. Gerhard Colm, Leontief, Hildegaard Kneeland, Raymond Goldsmith, and Louis Bean, respectively.

would form the basis for their estimates of the distribution of income in the “objective year.”⁴⁷

As part of his response to a request from the NRPB director for a progress report, Altman provided a detailed rationale for their work.⁴⁸ Clearly, their results would assist more specialized planning. He emphasized that their work would inform not just government but the American people as a whole, for it would give them an understanding of the roles of government, busi­ness, and individuals in maintaining full employment.

An illustration of the way that their work was expanding beyond deter­mining consumer spending is provided in a memorandum Samuelson sent to Blaisdell on March 24, 1942, titled “Expansion in Non-Essential Civilian Capacity.”⁴⁹ This was concerned only indirectly with full-employment con­sumption, for it addressed the problem of what would happen during the war, as the economy approached full capacity. Up to now, Samuelson argued, the various sectors of the economy had been able to expand together. Thus, despite the massive increase in defense spending, one in six tons of steel had gone into automobile production in 1941. Production of consumer durables was higher than ever before. He might well have had Leontief s input—output analysis in mind when he wrote, “In a thousand ways the system is geared to move for­ward together, each component waiting on the slowest.” However, now that full employment was being approached, this would no longer be possible, and some activities would have to be restricted. It was vital to ensure that non­essential activities did not use resources that were useful for war production.

A few days after writing this memorandum, Samuelson agreed to write something that could form part of a memorandum on the control of investment, a piece titled “Investment in 1941 and the Business Inflationary Gap in 1942.” The terminology of the inflationary gap, worked out by Keynes for the analysis of British inflation, was widely used at this time to denote the gap between the total demand for resources and what was avail­able, the assumption being that such a gap would lead to price rises.^f His primary concern, however, was not with the problem of inflation per se but with how much investment would be choked off by shortages of construc­tion materials and other goods.⁵⁰ He hoped that Mordecai Ezekiel in the Department of Agriculture, and two of those in his unit, would be able to shed light on what would normally be invested. A note records one of his staff, Goodman, having contacted the Commerce Department for an expla­nation of their statistics on inventories. That this was being done at a fairly disaggregated level is shown by a memorandum in which one of their team calculated that 2.4 percent of the output of pig iron went directly toward consumer goods.⁵¹

The project faced a potential crisis in April 1942, when Altman thought he might have to leave the NRPB to join the air force. Clearly, an experi­enced economist would be needed to replace him, and he approached Albert Hart, whom he and Samuelson had known in Chicago, about whether he would be interested.⁵² Hart responded favorably to the idea of taking on the work, but was not enthusiastic about moving to Washington. It was important, he argued, that teams of economists outside Washington be kept up to strength, and were free to criticize what was going on there.

f. The pervasiveness of inflation gap analysis is shown by the fact that Milton Friedman (1942), though he doubted the concept would be useful in peacetime, considered it a useful tool for wartime planning.

important, Altman and members of his unit relied on being in frequent con­tact with other agencies.

In May, they managed to get the services of the first of the academic economists whom Samuelson had hoped to recruit the previous year. Abram Bergson was hired for three months, starting June i, to work on a specific part of the consumption study. In addition to assisting with the general tasks of the unit relating to consumption at different levels of national income, he had the task of undertaking much more disaggregated analysis: he was required to supervise or carry out studies of: “(i) the distribution of income in various fields of business enterprises and industrial activity, (2) the distri­bution of income by geographical area, and (3) the distribution of income by individuals and families.”⁵⁴

The way the project was developing is shown by a contents list for the material that Samuelson hoped they could “whip into shape” for the annual report, summarizing their work.⁵⁵ It comprised four sections: whether there would be a boom or depression after the war; the financial situation of busi­nesses and families during and after the war; the distribution of income, saving, and spending after the war; and policy implications.

Over the summer, Bergson began to make an input into the program. On July 7, he sent members of the unit a critique of a consumption function that Ezekiel had published in a recent issue of the American Economic Review, argu­ing that it was flawed: it did not use appropriate, or even consistent, defini­tions of saving and investment, he worked in current dollars, and he had not justified the use of a time trend.⁵⁷ All pointed to things the unit needed to do better. A progress report submitted at the end of the month showed him playing a major role in the supervision of research in the unit. In addition to supervising the work of junior colleagues, he had written a memorandum on John Dunlop's work on cyclical variations in the structure of wages and on Joseph Pechman's thesis on how changes in income were linked to distribu­tion, and he was investigating the relationship between marginal and aver­age propensities to save at different income levels. He outlined a list of eight projects that someone, not necessarily himself, should undertake.

That month, Goodman reported a conversation with a member of the Progressive Urban Planning Section of the NRPB, out of which arose a number of suggestions that would have broadened the activities of the Full Employment Stabilization Unit in the direction of giving a broader picture of the likely economic situation after the war.⁵⁸ Goodman also reported on activities being undertaken elsewhere in the NRPB that they might find useful.⁵⁹

A draft of the report covering this work, Studies in Wartime Planning for Continuing Full Employment, was completed in August.⁶⁰ It was a report by the staff of the Full Employment Stabilization Unit, ten of whom were listed, Altman (head of the unit) and Samuelson (consultant) appearing at the top of the list.

The report followed the table of contents Samuelson had proposed to Eliot back in June, and it started by examining the experience of demobili­zation after 1918. There had been a small boom immediately after the war, but that was because, in economic terms, the war had not ended in 1918, even though fighting stopped then. Many government contracts had to be completed—ship construction, for example, carried on after hostilities had ended—and the government was committed to payments for veterans. The result was that “government deficit expenditure of a magnitude approaching that of the last year of the war prevented economic distress during the demo­bilization period, and that too early discontinuance of that support resulted in depression.”⁶¹ It went on to argue that there were significant differences between the wars: the current war was total war, whereas the previous one had been only partial, with only a quarter of national income going to the war effort and without the need, until the last two months, to curtail con­sumption. Because mobilization had been greater in the present war, demo­bilization would be more difficult, creating many structural problems. There was also the problem that, unlike the situation in 1917, because there had been prolonged depression before the war, there was no expectation of con­tinued growth after the war.

Unemployment after the Second World War would depend on the level of demand, and so they devoted much of their report to estimates of consump­tion spending, adopting a disaggregated approach as in the previous work on which they drew, and exploring the effects of different ways of making the distribution of income more equal. The report argued that investment would not rise sufficiently to maintain full employment, because there had been a massive increase in plant and equipment during the war. The conclusion reached was that, in the absence of government intervention, there might be unemployment after the war. Because industry would not have had time to adapt to producing the consumer goods that would be in immediate demand after the war, scarcity of consumer goods might lead to price rises. Their forecast was of “large-scale unemployment accompanied by price inflation” unless price controls continued.⁶² In a section provocatively entitled “Raising our Sights,” the report expressed the view that

The war has taught us what levels of national income, consumption, and investment are within our grasp if we pay attention to economic essentials instead of to economic shibboleths. If public policy after the war is devoted to maintaining employment and economic opportu­nity,... the American people will be able to have within this decade national incomes one third larger than in 1941 and twice as large as in the middle thirties.⁶³

It argued for spending on things such as veterans bonuses to maintain incomes, but was cautious about lowering taxes: corporation and excess prof­its taxes should come down from their wartime rates, but these should be kept at levels that were “high compared to pre-war standards.”⁶⁴ The reason was the need not only to maintain incomes but also to reduce inequality. The report also argued that defense spending should be tapered off gradually and that the Public Works Reserve should be recreated.^g

Wartime Planning for Continuing Full Employment was mimeographed, with a smaller circulation than had it been published. Producing the report in this way was consistent with the NRPB's task as making available “confidential ‘ever current recommendations' for activities to stabilize employment and maintain a high national income, to be continuously filled out and improved month by month, as long as the war lasts.”⁶⁵

The interim report was sent out for review, and no fewer than nineteen people offered criticisms and suggestions.⁶⁶ Many readers approved of the report, though most of them found points of disagreement or places where the exposition needed improvement. One of the most critical was George Stigler, whose views were summarized in an internal memorandum:

The report in its present form is not suited to governmental publica­tion according to George Stigler who also “differs strongly from the author's implicit political and social views.” He also states “that there

g. The Public Works Reserve was a scheme for maintaining a reserve of public works projects that could be implemented during a depression so as to alleviate high unemployment.

are too many cases where statements are made which are with your facilities capable either of proof or disproof.”⁶⁷

The memorandum did not elaborate on what these social and political views were or what statements should be tested. The first section, on previous expe­rience, was best received by the reviewers, though even this was criticized. Harold Moulton of the Brookings Institution, who had previously written a critical review of Keynes's General Theory, considered it fallacious to argue that the fluctuations in government spending controlled the level of activity, for this argument failed to take account of the fact that aggregate purchas­ing power was the result of both private and government spending; he did not accept that they had moved together after the First World War.⁶⁸ Jacob Marschak, of the New School for Social Research, made a similar comment in that he thought the section suggested excessive reliance on “net government spending,” though he thought that this defect had been corrected in later sections of the report. He found the section on the transition to peace after the First World War, and the comparisons with the current war, “particu­larly illuminating” and thought it would “obviously have very great practical use.”⁶⁹

Criticism of other parts of the report can be seen as paying tribute to the ambitious nature of the task that had been undertaken, given the unsettled state of economic theory at the time. For example, Marschak questioned the assumptions about how demand would respond to price changes. An inter­esting comment was made by Samuelson's Harvard friend Paul Sweezy, a Marxist, who criticized the perspective underlying the policy analysis in the final section.

When it comes to prescribing solutions to economic problems, the authors seem to assume that all that is required is a proper analysis and the indicated cure will naturally be adopted. In other words economic problems are treated as essentially technical problems; that they are also social and political problems which arise from and are inextricably bound up with a given social structure of class power and class aims does not enter the picture. [These] seem to me to be definite limits on the scope of the report.⁷⁰

The overall verdict would seem to be that the interim report needed consid­erably more work before it became the final report. It could be that it was because he had heard some of these criticisms that Hansen made the some­what defensive suggestion that Goldenweiser tell Delano “that Mr. Hansen has had a number of conferences with Messrs. Blaisdell and Samuelson on the report and that he has offered extensive comments and criticisms.”⁷¹ Samuelson might be the academic consultant responsible for the report, but Hansen was following it closely.