The Full-Employment Stabilization Unit

On July 10, 1941, Alvin Hansen wrote Samuelson from the Federal Reserve. Reminding him that he had not yet replied to a previous proposal for research in connection with the NRPB, Hansen wanted to make another suggestion, “perhaps more interesting and more feasible.”¹⁶ Drawing on its earlier stud­ies of the distribution of income, the NRPB was trying to work out what the distribution of income would be if full employment were achieved and if fam­ily allowances were in place to improve the position of the poorest families.

Samuelson agreed and on July 23, Blaisdell wrote to Samuelson saying that the NRPB was very interested in recruiting him, but it would be a couple of weeks before he could provide details. Samuelson filled in his for­mal application on August 5, and on August ιι he received a letter confirm­ing his appointment, for not more than fifteen days per month, at a salary of

chapters 17 and 20 this volume) contained echoes of what later came to be called the permanent income and lifecycle theories of consumption. Clawson notes that Milton Friedman, the author of the former theory, was on the staff that prepared one study and he assisted with another.

c. The terms “post-defense” and “post-emergency” were in use even though the United States had not yet entered the war and would not do so for another two years.

$12.77 P^er day's work.¹⁷ His plan was to follow Hansen's example in com­muting fortnightly to and from Washington on the overnight train, spend­ing at most one night away from home.¹⁸ When in Washington, he would stay with friends—Erich and Freda Roll (Erich was with the British Supply Mission), John D. Wilson (then with the Office of Strategic Services), and David Lusher (at the Office of Price Administration).¹⁹

Two weeks later, Samuelson wrote memoranda outlining his project and the resources he would need.²⁰ He reckoned that he would require one or two senior people with the rank of “economist” or “associate economist” and a further two “assistant economists.”²¹ These would be based in Washington, and at least one of the senior people would have responsibility for liaison with other units when Samuelson was not present. He also asked to have at least one assistant economist based with him in Cambridge. His conception of the project is shown by his claim that, because it would involve the “use and interpretation of varied statistical data,” the most important quality required of these recruits was “imagination sufficient to formulate the right questions and enough ingenuity to dig out the answers.”²² “Specialized high powered theoretical and statistical tools” were less important.

Though Samuelson was proposing to employ people to do further work, he must already have done a significant amount of work on the problem, perhaps as a result of earlier discussions with Hansen. His memorandum, “Consumer Demand at Full Production,” could hardly have been written from scratch in a single month.²³ It was based on the assumption that policy should have two aims: to maintain full employment and to substantially reduce poverty. These were connected, for changing the distribution of income in favor of the poor would increase spending, thereby raising the level of demand, and it would also affect the composition of demand.

The rationale for making such estimates was planning. Samuelson drew an explicit analogy between wartime and peacetime planning.

It is the responsibility of those who direct our armed forces to say what is needed under modern conditions in guns, tanks, airplanes, war­ships and munitions. Essential to the production of those implements are the necessary raw materials, productive plant, labor force, energy resources, and transportation facilities. Our organizing and productive genius must then turn its attention to the things that must be done in order to provide us with the required instruments of defense.²⁴

Samuelson then continued by claiming that “[t]he same technique could be utilized in providing for consumer satisfactions—the fundamental purpose of our peace time economy.” It was not necessary to “provide all Americans with an American standard of living,” so “a production goal might be set by a more or less arbitrary determination of what Americans need and ought to have.” If it was to be democratic (unlike planning being undertaken else­where), it would “preserve as large a measure of consumer choice as possible.” Samuelson’s memorandum suggested a method of planning that was con­sistent with consumer choice, and in an appendix he provided a checklist of what needed to be done:²⁵

I.

II. Define the transitional requirements.

III. Design the programs for moving toward the objectives.

IV. Explore the usefulness of directives already available to government.

This was a very wide-ranging program, involving detailed planning of the entire economy and a spectrum of government policies, from vocational train­ing and the maintenance of purchasing power, to housing, education, and rec­reation programs. One of its remarkable features is the centrality of income distribution to the analysis. It was sufficiently important for Samuelson to include an appendix that explained how to calculate a curve showing the cumulative distribution of income across consumer units, and another that provided thirty pages of tables of the distribution of various types of spend­ing across consumer units. His project was closely connected to Hansen’s

d. The Lorenz curve would be shifted almost halfway toward the line of perfect equality. work, and he described Hansen's memorandum on “Post-Defense Full Employment” as “a masterly statement of the problem.”²⁶ Points Samuelson covered included the need to take account of the distribution of income in working out how government spending would affect demand, and the prob­lems with creating enough opportunities for private investment.

The economist with whom Samuelson was to work most closely at the NRPB was Oscar Altman, head of the Full Employment Stabilization Unit, to which Samuelson was attached. Six years older than Samuelson, he had overlapped with Samuelson in Chicago where he had been a graduate stu­dent, obtaining his PhD in 1936.²⁷ His thesis had been related to taxation and the law, two chapters being published in a law review, though by the end of the war he had acquired training in statistics, publishing an actuarial analysis of the life of B-29 aircraft engines.²⁸ As an NRPB staff member he had been responsible, in May 1939, for writing up the deliberations of the TNEC concerning saving and investment. In Saving, Investment and National Income,²⁹ published as Monograph 37 in the TNEC series on the distribution of economic power, Altman baldly asserted that saving and investment were the two main determinants of national income, and that all witnesses agreed that “savings had to be returned to the income stream—spent for investment goods or in other ways offset” if national income were to be maintained.

It is highly essential that all that part of the current flow of income which is not expended on consumption goods, namely that part which is saved, shall be expended either directly by the saver himself or indi­rectly through a borrower on new plant and equipment of some sort. If the amount which is saved is large, as it is likely to be at a high income level, it is necessary that equally large outlets be available for these savings in equipment and plant expansion, and in residential and public construction.³⁰

As befits a report for a committee on the distribution of economic power, Altman's statistics sought to analyze who was doing the most saving, with statistics on business saving, government saving, and saving by households with different incomes. Concentration of national income was one of the main factors determining saving. Concentration was also a factor he analyzed when considering how savings were transmitted to investors—notably concentra­tion in financial institutions associated with the institutionalization of saving through pensions and life insurance companies—and in discussing the direc­tion of investment. Investment was, he concluded, more concentrated than it had been twenty years before, a conclusion backed up with many tables that showed the distribution of saving and investment between businesses of different sizes. This increased concentration made savings institutions more liquid and implied an uneven flow of saving into different sectors. In his conclusions, Altman made the case that investment was needed as an offset to saving, irrespective of whether it could be made to yield an income.

Samuelson and Altman were responsible for a small part of the NRPB's planning activities. When listing the planning tasks being performed, NRPB director Charles Elliott categorized them as concerned solely with “consumer market, etc.” under the general heading of “Private Activity,” which itself was listed as one of eight “substantive programs.”³¹ Separate sections dealt with programs such as demobilization of manpower and machines, industry, and the public sector.

One route through which Samuelson became involved with other agencies was that of regular conferences, such as one apparently chaired by Hansen at the NRPB on October 30, a few weeks after he had begun his fortnightly visits to Washington. It involved representatives from the Bureau of Agricultural Economics, the Bureau of Labor Statistics, and the Bureau of Foreign and Domestic Commerce, as well as Hansen, listed as representing the Federal Reserve Board, and Samuelson for the NRPB.³² The purpose of the meeting was to exchange information about research that would shed light on postwar readjustment. Lest anyone thought that their concern was solely with the volume of investment, Hansen made it clear that they were concerned with “capital improvement of all kinds.” In order that there should be continuing contact, they agreed to meet every other Thursday at 11:30, and to continue over lunch afterward. There was then a review of research being undertaken in the different departments represented.

The Commerce Department was preparing a breakdown of gross national product into sixty-three categories, and was planning work on the expan­sion of investment by private industry. The Bureau of Foreign and Domestic Commerce was planning a study of foreign trade patterns at full employ­ment. The National Economic Unit was planning to investigate how much investment would be undertaken at different levels of income. The Bureau of Labor Statistics was studying the composition of employment and the employment effects of the defense program, and was planning studies of the cost of living (subject to available funding). The minutes of the meeting described Samuelson’s project in more detail:

Mr. Samuelson is directing a project that will begin by making vary­ing assumptions about income distribution under a stalemate econ­omy, high consumption economy, a redistributed income economy, and a full employment economy. Income distribution is a first step in projecting consumer purchasing under each of these conditions. Then it is expected to approach the needed levels of private capital forma­tion from this angle.³³

It is not clear how much coordination of research work took place as a result of the meeting, but it will have provided Samuelson with a much clearer pic­ture of what Washington economists were doing than he could have gotten by working in any single department.

The first task facing Altman and Samuelson was to recruit staff, and so in August and September Samuelson approached possible candidates and departments who might have recent doctoral students whom they could sug- gest.³⁴ One list of thirty possible names shows that he was considering people currently working in other agencies, as well as people still in universities, and that many of these were unavailable. In several cases this was because they might be called for military service.³⁵ It was not the best time of year, as many potential recruits were already committed. The secretary at Chicago’s Economics Department reported that one of the two people Samuelson asked about had an academic post, and the other had gone to the Bureau of the Budget.³⁶ Howard Ellis, at the University of California, Berkeley, wrote, “So many of my students have recently gone into government service, or into aca­demic positions left vacant by the migration to Washington that I have only one suggestion.”³⁷ Walt Rostow and Rutledge Vining both expressed inter­est, but explained why they could not be involved.³⁸ Word that Samuelson was looking for people got around, and he had people approach him,³⁹ but in October he would tell George Jaszi and the Federal Reserve that he was “still desperately hunting for competent economists who can qualify for a Civil Service rating.”⁴⁰ On December 11, Altman was able to report that within a few days they would be in a position to recommend at least half the necessary appointments.⁴¹

If the work were to be completed on time, it would be necessary to hire the others within a few weeks. By December 30, Altman had found eight people to work on the project, an increase in the numbers Samuelson had proposed in the summer, most of whom were transferred from other govern­ment agencies or from other activities within the NRPB.⁴² His attempts to recruit outsiders from universities seem to have come to nothing, and it was probably Altman, with more extensive contacts in Washington, who found people, though Samuelson was involved in interviewing and selecting them. The job description of one of the senior recruits was:

To prepare and direct, under general supervision, studies in the pat­terns of consumption and public and private investment at various levels of national income; to investigate past and prospective trends in these patterns; to conduct studies in the distribution of individual and corporate income at various levels of national income, and to advise junior members of staff with respect to statistical source materials and methods of analysis and presentation.⁴³

Junior recruits had similar duties except that their responsibility was to assist rather than direct such work.⁴⁴