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The Prospects for Prosperity in 1955

Leon Keyserling analyzes where we shall be a year from now if we follow present policies, and what the US needs and can afford for a fully productive economy.

IN SOME underdeveloped areas overseas which have become crucial to the future of freedom, hundreds of millions of people toil with scant means which make it hard to maintain a bare standard of living and to resist Communist encroachment. In sharp contrast, the United States now possesses an immense reservoir of idle men and other productive strength, pleading to be used to meet our needs. Between now and the end of this year, we can bring more than 214 million unemployed and new workers—the most skilled and productive in the world—into the stream of usefulness. We can, without inflationary strain, expand our total output for 1955 at least 6 percent above 1954, and by the fourth quarter of this year lift it to about 8 percent, or about $30 billion at an annual rate, above current levels. If we unsheathe fully the great non-secret weapon of our economic strength, we can more adequately and more easily serve our domestic needs and world responsibilities—and also balance the Federal Budget.

But our current national economic policies are not well adjusted to the full use of this great non-secret weapon. These policies seem geared to the objectives, “optimistically” described, of advancing our total output this year by only about 3 percent above last year. This would be far short of the expansion needed to keep up with a growing productivity and labor force. With such limited growth, the true level of unemployment—which includes both full-time unemployment and its part-time equivalent—would be likely to rise from about 4 million in 1954 as a whole to about 5 million in 1955 as a whole, with a considerably higher level by the year’s end. That would leave us, even at the end of the year, with an annual rate of output nearly $20 billion below the full production level.

Moreover, it is doubtful whether under existing policies and programs we would register even a 3-percentrate of growth for this year. Farm personal income, so essential to national prosperity, is being pushed further downward, despite a 20-percent reduction since 1951 and a per-capita income for farmers averaging only about one-third that of other citizens. Auto production, the mainspring of the recent “upturn,” is scheduled to decline later this year. Business investment in plant and equipment is not expanding, small business is losing ground, and consumer incomes are not rising sufficiently. Public policies, instead of being adjusted upward to furnish the stimuli required for a full economy, are mainly being reduced downward to mesh with a stagnant or retarded economy.

National security and international economic assistance, already severely slashed, are being compressed further in the face of serious world difficulties. With the shortage in educational facilities already a national disgrace and becoming a national menace, the federal government which alone has the resources to meet most of this deficit has thus far proposed only a strikingly inadequate stop-gap. Vast health needs are being countered by an assumption that some new way can be found to pay for better health without really spending money. Natural resource developments, for conservation and power, highways and water supply, are being driven further downward, although they are already far below the requirements for national security, population growth and private industrial development. Old-age insurance is being held to levels which furnish our senior citizens only about one-third of the cost of a decent standard of living, and unemployment insurance protection is so weak that close to 2 million of those unemployed in 1954 exhausted their benefits. Minimum wage proposals are not even keeping up with changes in living costs; much less with economic growth. With about one-third of all American families living in substandard housing, there is practically no rebuilding of slums, and without this the housing “boom” may be near the saturation point.

Efforts to give the financial account of the government priority over the economic account of the country put second things first; in addition, they are self-defeating because the customary Federal Budget is not and cannot be balanced in an unbalanced economy without taking domestic and international risks which quite properly no one should take. In calendar 1954, the federal deficit was about $4 billion; in this calendar year, the prospective deficit is estimated at about $3.5 billion. Instead of spiraling the servicing of our domestic and international needs downward in a resigned attitude toward high unemployment and slack production, the practical goal is to bring forth, by the end of this year, the more than 2½ million, new jobs and the almost $30 billion (8 percent) increase in the annual rate of total output, needed for full employment and almost full production.

To expand consumption, which is at the core of prosperity in relative peacetime, the personal-income-tax exemptions should be raised by about $200, furnishing about $4.5 billion of additional purchasing power. The minimum wage law should be raised to $1.25 and coverage expanded, which by the end of this year might add another $2.5 billion to purchasing power. Further to stimulate production and jobs, the annual average level of federal outlays for this calendar year, in the conventional Budget, should be raised about $3.5 billion above those now contemplated, which in a much expanded economy would still be $6.75 billion below the 1953 level. Gradual expansion, to achieve the higher average for the year as a whole than now contemplated, could by the fourth quarter of this year add about $3 billion, stated at annual rates, to outlays for national security and international aid; about $750 million toward the restoration of agriculture; about a billion dollars toward improved education and about $300 million toward improved health; and about $1 billion toward the protection and expansion of our natural resources base, including public works.

Old-age-insurance-benefit payments by the fourth quarter of this year should be increased by about a billion dollars at annual rates, and unemployment insurance should be greatly strengthened; these changes would not result in higher Federal Budget costs because of their method of financing, but they would add greatly to consumer buying by enlarging the receipts of low-income families, who spend a larger part of what they receive. And it is recommended that the government undertake to lift the annual rate of slum clearance and low-rent housing to an annual rate of between 300 thousand and 500 thousand units by the end of this year. The subsidy cost of this to the government would be only a few million dollars annually in the first year, but no other single measure would add so much toward re-employment and business stimulation through the channels of enterprise.

THIS program is entirely consistent with the purpose of the Employment Act of 1946 that maximum employment, production and purchasing power be combined with the preservation of free competitive enterprise. The program deals with traditional programs, but expands them to match our needs and productive abilities. A rise in the annual rate of federal spending above current levels by about $6 billion this year would be accomplished by a rise of almost $30 billion in our total national product. Due to vast re-employment and appropriate wage increases, the annual rate of wage and salary income would rise by more than $15 billion. The annual rate of consumer spending—and consequently of business sales to consumers—would rise by about $16 billion. The annual rate of farm personal income, to make up for the gross farm income, would rise by about $4 billion; and expanded consumption of food and clothing, plus exports to underdeveloped areas, would cut deeply into farm “surpluses.” The annual rate of total business investment would rise by about $6.5 billion; exclusive of inventory change, it would rise by about 2½ billion. Corporate profits would rise by at least $2.5 billion. The people of America would not only produce and consume more; they would also save about $3⅓ billion more at annual rates.

With this balanced economic expansion on all fronts, federal spending under the customary Budget would drop from 20.2 percent of total national output in calendar 1953 to 17.7 percent in calendar 1955. With a base established for even more solid economic progress in 1956, a balanced Federal Budget in a balanced economy would result by the end of that calendar year.

We should embrace the concept of a national prosperity budget, which would blend in just proportion our common needs and capabilities in a full employment and full production program for all. Aside from the benefits to our national economy and our national security, this would stress the great moral values which weigh most in a democracy. It would bring the American people to an appreciation of the great things which bind us, together instead of the small things which divide us; it would place the things we can achieve above the things we should not fear; it would range the things we must afford above the things we have erroneously come to believe we cannot afford; it would substitute for a sword hanging above our heads the great non-secret weapon of our productive genius and capacity for progress when we pull together in practical pursuit of common goals.

The Need for Growth

When the American economy is healthy, its productivity—the output of each worker for each hour worked—grows from year to year with more tools and better skills. In addition to this increasing production by each employed worker, full employment means more employment from year to year, because of population growth. Adding together the growth in output per worker and the growth in employment, each succeeding year of full employment means a vast increase in total production. Because of productivity growth, the growth in total production is much faster than the growth in population.

For sustained full employment and full production, the total buying power of the people, as consumers, investors and through government, must therefore rise as rapidly as the growth in the number of people wanting jobs, plus the growth in productivity. The standard of living must rise about as fast as the growth in our ability to produce exceeds the growth in our population, except when we use a lot of the increased production for war. More leisure—shorter working hours and improved retirement plans—while highly desirable, can absorb only a part of our growing power to produce.

In early 1953 our potential for annual growth in productivity in a full economy was at least 3.7 percent. In addition, the growth in the civilian labor force, unless lack of opportunity prevents numerous people from  looking for work, should be about 1.5 percent a year (including presently reducing levels of the armed forces). We should allow for a reduction of about 0.7 percent a year in the number of hours work per week by those fully employed, in line with current expectations. Thus, the growth in the labor force should, with full employment, add about 0.8 percent a year to the total number of hours worked by everybody. Combining productivity and labor force, the economy needed to expand by at least 4.5 percent a year in 1953 and 1954 to maintain full employment and full production.

This would have lifted the annual rate of our total output from $361.8 billion in the first quarter of 1953 to about $391 billion in the fourth quarter of 1954. Instead, actual output in the fourth quarter of 1954 was only $361 billion, according to preliminary estimates, or about $30 billion lower than needed for full employment and full production. Over the two-year period, the actual drop in total output was insignificant. But it was immense when measured against the imperative need for growth. This explains the rising tide of unemployment.

The Unemployment Picture

The most vivid and painful fact in American economic life today is that unemployment is far too high, by any standard that decent people will accept. It has not yet been substantially reduced. It threatens to rise. The recent and widely publicized business upturn is encouraging. But it has not yet given satisfactory signs of endurance, nor made much headway for the economy as a whole. And in areas where increases in production have been most pronounced in recent months, more goods are being turned out by the same number of workers—or by even fewer workers. We are headed for an increase in hard-core unemployment, unless general economic expansion gets into high gear on a hard road; it is now in low gear on a soft surface.

Total employment in 1954 averaged about one million lower than in 1953, and more than 450 thousand lower than in 1952. It was higher than in still earlier years. By this superficial test, 1954 was the third best year on record. But with about ¾ million more people needing jobs every year, if employment in any year is not correspondingly higher than in the preceding year, we are just that much worse off. By this proper test, 1954 was not the third best year on record, but a bad year indeed.

This is why full-time unemployment, as shown by the official figures of the Census Bureau, rose from 1.6 million in 1953 to more than 3.2 million in 1954. It rose from about 2.5 percent to 5 percent of the civilian labor force.

But this is not the whole story. For example, if 100 men get a 10 percent reduction in hours due to slack production, it should be counted as the equivalent of 10 men unemployed full time. If 12 men are temporarily laid off for one month, it should be counted as the equivalent of one year of full-time unemployment for one man. The true level of unemployment—expressed in this common denominator of full-time unemployment—rose from about 1.8 million in 1953 to about 4.1 million in 1954, an increase of more than 120 percent. It rose from 2.9 percent to 6.3 percent of the civilian labor force.

By the fourth quarter of 1954, a 7½ percent deficit in total output below the full production level was accompanied by excess unemployment amounting to about 3½ percent of the full employment level of employment. The essential reason for this seeming discrepancy is plain: In addition to revealed unemployment, millions of workers were being inefficiently used—in agriculture, in trade, in service industries, and in other areas of the economy where their full experience and capabilities were not drawn forth and, generally, their earnings were reduced.

THE latest monthly figures for 1954 show a slight decline both in employment and unemployment, due to seasonal shrinkage in the labor force. The December level of employment was slightly lower than a year earlier, and more than a million below two years earlier. In December, full-time unemployment somewhat above 2.8 million was about the same as in November, higher than in October, about one million higher than a year earlier, and about 1.4 million higher than two years earlier. Seasonally adjusted, full-time unemployment in December, 1954, was about 3 million, and the true level of unemployment about 3.7 million.

The unemployment picture in the most recent months is further darkened by unfavorable developments in important parts of the economy. Although in the fourth quarter of 1954 manufacturing employment was about 250 thousand higher than in the third quarter, this was due largely to the upswing in new-model auto production and in steel. Extended maintenance of this upswing is highly unlikely, as will be discussed shortly. Moreover, there was practically no improvement in manufacturing employment from month to month during the fourth quarter.

This has startling implications. A sizable increase in production has been accomplished without comparable increases in employment, due mostly to technological advance. Considering manufacturing, mining, and construction together, production in the fourth quarter of 1954 was higher than in the fourth quarter of 1953, but employment was down more than one million, or more than 5 percent. What is going to happen when fully automatic production, popularly called “automation,” accelerates this advance in technology, while the labor force continues to grow? Is still more of the “surplus” labor supply to be kept on the farm or sent to the farm? How many more workers can find jobs in trade and service industries and in nondescript part-time jobs, how fast, for how long, and at what pay?

An upturn in business activity can be accompanied by no improvement in the job situation—or even a worsening—if the upturn is not big and enduring enough (a) to reduce unemployment, and (b) to keep up with further growth in productivity and in the labor force. This is why the upturn in recent months has not made large inroads upon unemployment. In the fourth quarter of 1954, the annual rate of total output was only about 1½ percent higher than the fairly stationary annual rate during the first three quarters. It remained about 2½ percent below the annual rate a year and a half earlier, and about 7½ percent below the annual rate which would have been required for full employment by the fourth quarter of 1954 if the growth consistent with a full economy had been carried forward steadily from early 1953.

Some continuation of the business upturn is expected. But if our total national output in 1955 should be better than in 1954, but the same as 1953—“the best year on record”—the level of true unemployment for 1955 as a whole might well exceed 5 million, with a lower level of full-time unemployment due to the sharing of part-time and temporary unemployment in the 1954 manner.

If the level of total output in 1955 should be 3 percent above 1954, as recently predicted "optimistically" by the head of our largest industrial corporation, this would not be nearly enough to take up the current slack in employment, and to absorb productivity and new workers. The level of true unemployment for 1955 as a whole might well average around 5 million, with a somewhat lower level of full-time unemployment.

To restore full employment and reasonably full production by the end of 1955, the level of total output would need to reach an annual rate, in the fourth quarter of the year, more than 8 percent above the level in the fourth quarter of 1954. For 1955 as a whole, it would need to be in the neighborhood of 6 percent above 1954 as a whole. The key problem is to get the expansion of output required to restore full employment by the end of 1955. So we turn now to examine our national economic deficit in output, and how to remove it.

Our Economic Deficits

In 1953, our total output was $3 billion below the full economy level, and in 1954 about $27.4 billion too low. In the two years together, the loss was about $30 billion. In the fourth quarter of 1954 despite some business upturn, the deficit at an annual rate of about $30 billion was as big as the combined deficit for the past two years. The deficit grows, not only when output stands still or falls backward, but also when it does not expand enough to keep up with advancing productivity and a growing labor force.

Whether measured as what we have lost in two years, or as the annual rate of loss now, a national economic deficit of $30 billion is equivalent to more than $575 for every family unit in the United States. It has meant an annual wage and salary loss for the whole economy of at least $15 billion; a loss of about $3 billion in agricultural personal incomes; a loss of about $5 billion in corporate profits, with a much higher relative rate of loss by small business. It has drawn down the accumulated savings of millions of families, and swelled the debts of millions of families who have no savings at all. And it has meant a very heavy loss in federal revenues.

Another way of measuring the loss is to translate it into an equivalent value of goods and services, representing some of our most urgent national needs. One-sixth of $30 billion worth of productive human effort—lying, idle in a recessionary period—would be equivalent to the cost of replacing about one million urban and rural slums with an American standard of housing; the same one-sixth would approximate the requirements per year to build up our defenses against sneak air attack, at rates which most of the experts urge but which others say our economy “cannot afford.” One-fifteenth of this amount would be enough to make significant inroads upon the problem of inadequate medical care for millions of American families—hospitals, doctors, nurses. One-thirtieth of this amount would be enough to increase the salaries of a million teachers by $1,000 a year; and one=third of this amount would be enough to eliminate the present backlog of needed classrooms in elementary and high schools. One-tenth of this amount would be more than the annual average of our economic assistance to other free peoples since World War II, toward an improved standard of living and to protect themselves against Communist aggression or subversion.

These examples do not mean that this is how we would or should use this $30 billion worth of annual product— if we were not losing it. That would be determined freely by a free people, as consumers and as citizens. Nor would most of these uses be in the form of public spending; most of them would involve consumer spending and business investment. But we can all agree that an annual $30 billion national economic deficit, in view of our vast needs and wants, is intolerable.

Part II of this article, next week, will detail what specific programs are needed to produce prosperity for 1955 and the future.

LEON H. KEYSERLING, President of the Conference on Economic Progress, the non-political organization for economic research and education which sponsored this study, last served the US Government as Chairman of the President's Council of Economic Advisers from 1950 until his resignation in 1953. He also served as the Council’s first Vice-Chairman from its inception in 1946 to 1950.

Beginning with the first year of the New Deal, Mr. Keyserling served as assistant to former Senator Robert Wagner and as a staff member of the Senate Committee on Banking and Currency, then as Deputy and Acting Administrator of the Housing Authority, qnd during World War II, as General Counsel of the National Housing Agency. He helped to write the National Labor Relations Act, the Social

Security Law, the Employment Act of 1946 and the Wagner-Ellender-Taft postwar housing legislation.

The 66-page pamphlet, of which this 2-part article is a condensation, can be obtained for 35¢ from the Conference on Economic Progress, 1001 Connecticut Avenue, N. W., Washington 6,  D. C.

The National Committee of the Conference includes the following:


Attorney, former Asst. Atty. General of US, Judge US Court of Appeals


Attorney; former Director, Office Economic Stabilization


Chairman, Julius Kayser Co.


Exec. V.P., Nati. Pneumatic Co.


President, Int. Assn. Machinists, V.P. and memb. Exec. Cncl., AFL


President, Welch Grape Juice Co.


Econ. & atty.; former Chmn. President's Council of Economic Advisers


President, Farm Bur. Insurance Cos.


President, Amer. Associated Cos., Amer. Factors Co.


President, National Farmers Union


President, Voltarc Tubes, Inc.


President, CIO


Chairman, Cameo Curtains, inc.


Pres., Nat. Fed. Grain Co-operatives