"The lesson of our recent history is that every time the men in authority decided that some problem was too tough for democracy to lick, and that they had to evade the problem in order to save democracy, we have gotten into a quite deep hole; and in all but the [present] case, where the bill is still to be reckoned, democracy was, in the end, much more searchingly and dangerously threatened than if the challenge had been accepted in the first place, at an early stage of the difficulty …"
Herewith, only slightly condensed, is the summary of a massive, and most enlightening, three-volume report compiled at the request of the Subcommittee of Economic Statistics of the Joint Economic Committee of the Congress. The report represents the combined efforts of an impressive panel of experts in a wide variety of fields. The summary, to which we commend your attention in these pages, was written by Professor W. W. Boston, who is Professor of Economic history at the Massachusetts Institute of Technology and a stuff member of the Center of International Studies. If you are sincerely worried about how much this nation can afford to pay for its continued existence, we suggest a careful study of Professor Rostow's conclusions. —The Editors
To understand the real nature of the Soviet challenge—and what the Soviet government evidently means by "competitive coexistence"—it is necessary now to go beyond economic analysis and consider what Moscow is trying to accomplish.
Although Soviet policy objectives are primarily military, political, and psychological, they are based on an economic fact: the arrival of Russia at technological maturity. This means that the Soviet Union has the resources and technological capacity to mount a wider variety of military and economic programs than in the past. In the immediate postwar years, for example, the Soviet military threat was confined to the power of the Red Army. At the present time, it controls a full spectrum of military power ranging from ICBMs to conventional infantry and, ace might add, "volunteers." A decade or so ago, Soviet trade and credit operations as well as technical assistance programs on the present scale would have been unthinkable. At the present time the Soviet Union has the evident capacity to conduct such operations on a regular expanding basis if it chooses to do so.
Here one specific aspect of the Soviet growth rate should be noted. A six percent rate, of increase in Soviet GNP means that the government disposes each year of something like the equivalent of $12 billion for whatever purpose it chooses. Although the level of American gross national product is more than twice that of the Soviet Union, an average growth rate of three percent means that the American economy as a whole—not the government—disposes of an increment of say, only some $15 billion. I shall consider later the implications of the different procedures for allocating this increment; but in the discussion of specific dimensions of Soviet policy which follows, the wide range of capabilities and the flexibility afforded by government control over an annual increment not much less than our own should be borne in mind.
The Threat of Major War
The main weight of Soviet policy is being articulated to the Russian peoples and to the world in terms of a nonmilitary struggle, which is, indeed, being energetically and frankly pursued. But there is no evidence whatsoever that the Soviet military effort is being reduced; and there are no grounds for building American policy on the assumption that if the Soviet government believed that it enjoyed a sufficient advantage in nuclear weapons to take out American retaliatory power at a blow, it would not do so. Inhibitions may well exist in the Soviet political system against such a course of action; but there is no objective basis for believing that the United Stares would be safe should the gap in military capabilities be permitted to open to such an extent. Put another way, we Americans have no right before man or God to tempt Moscow planners with this possibility. At the present time and for some years—until we create a highly dispersed deterrent system—our ability to make this course of action irrational appears to hinge on an ability to get sufficient advance warning of a Soviet missile attack to put bombers in the air; and on the pace at which we "harden" our bases. These slender threads on which American safety now rests illustrate the dangers of analyzing the Soviet threat in conventional economic terms. Essential since 1953 when the mounting of a fusion bomb in a rocket became feasible, the Soviet Union has made a plunge for primacy in this particular weapon system. The American military danger arises from the advantage Russia has achieved in this relatively narrow area, rather than from the rough equivalence in American and Soviet total military outlays in recent years. Although it is evident that the Soviet government is not building its policy on the certainty or even likelihood that it will get far enough ahead of the United States to take out our retaliatory power at a blow, its allocations for military purposes (including air defense) and the military doctrines now developing within the Soviet military establishment are wholly consistent with a missile salvo being regarded as one among several possible routes to world primacy, coexistence or no coexistence.
The Threat of Limited War
Similarly, there is no evidence in Soviet military allocations nor in Soviet military doctrine that the use of arms short of an all-out atomic war has been ruled out. On the contrary, the evidence remains that the Soviet Union has continued to modernize its ground force in ways which would make possible combat with either conventional or tactical atomic weapons. Moreover, just as the Geneva Conference of 1955 was accompanied by the disruptive Czech arms deal with Egypt, the present exploration of the possibilities of arms reduction and control are accompanied by Chinese Communist incursions across their southern border. This lively threat is, again, not illuminated by comparative economic analysis of the Russian and American economies.
And we must look at the problem of building deterrence to limited war in even broader terms.
First, there is the fact that, since 1947—from the threat to Greece and Turkey to the latest attacks on Quemoy and Matsu—we have in the end met limited aggression not by using strategic airpower with nuclear weapons but by hurriedly mobilizing some form of limited countermeasure. There has been a gap between our emphasis on nuclear weapons in diplomatic theory and budget allocations on the one hand, and our policy when the chips were down, on the other. It is quite likely that if we and our opponents understood better how we would in fact behave, in the face of limited aggression, we would have seen fewer forays across the truce lines since the end of World War II. Our concentration on the big weapons has tempted them in the past and may tempt them again.
Second, in Europe we now confront a situation where our allies are increasingly unwilling to accept a situation where limited aggression may still occur and their only recourse is to rely on counterattack with nuclear weapons under circumstances where Soviet missiles could evidently overwhelm them and where the United States would have to reckon on direct attack. Increasingly, thoughtful Europeans have come to understand that stability in that region demands increased nonnuclear strength.
Finally, and perhaps most important of all, we must begin to understand that if we make progress toward placing nuclear weapons under international control, we must have an alternative conventional basis for maintaining security. In the long run, by slow stages, we may well move, if all goes well, to very low levels of armaments of all types. In that process, however, we cannot negotiate confidently and safely unless we can mount alternative forms of defense, should a breakthrough come that would neutralize nuclear weapons.
In short, the nature of the Soviet challenge— including the Soviet challenge to put forward concrete proposals for step-by-step movement toward the control of nuclear armaments—requires that we take the problem of deterring limited aggression much more seriously than we have done in the past fifteen years.
Since they early months of 1956 down through the Berlin crisis, the Soviet Union has on a number of occasions used the threat of its missile capabilities to strengthen its diplomacy. Again, this is a form of threat which cannot be defined with reference to economic analysis. It comes, in the end, to a simple test of nerve and will.
The Political Penetration of the Underdeveloped Areas
Soviet policy in Asia, the Middle East, Africa, and Latin America is increasingly discussed under the heading of "The Economic Offensive." This leads to complicated efforts to compare the scale of Soviet and American aid on a quantitative basis. And, indeed, it is quite clear that Soviet technical and economic assistance to underdeveloped areas in the free world as well as Soviet trade policy have been significant forms for creating areas of political influence and sympathy in various parts of the world. But analysis confined to these familiar dimensions misses the main point and the fundamental nature of the Soviet threat. It is quite evident from Communist thought, writing, and policy that their goal in Asia, the Middle East, Africa, and parts of Latin America is a repetition in some from of the story of China from, say, 1927 to 1949; that is, Soviet analysts look to a progressive failure of the non-Communist regimes in these areas to solve the problems of modernization and economic growth, leading to frustration, internal turmoil, and to acceptance of the Communist alternative as a way of organizing these transitional societies. Thus, the central challenge confronting the United States and the Western world in the underdeveloped areas is not, somehow, to outstrip Russian loans and technical assistance. The challenge is to mount our own positive long-term policies designed to maximize the chance that these transitional societies will emerge into modernization without losing their independence and without foreclosing the possibility of progressively more democratic political development. Additional American and free world resources are required in this effort; and Soviet aid and trade policies play some role in the mounting of this challenge—which is, I believe, the route to world power that Moscow now regards as most likely. But to understand and deal with that challenge we must abandon a numbers racket approach and look directly and with insight at the problems of traditional societies and what we can do to help them.
The Psychological Image
It is clear that Soviet policy is immensely alert to the possibility of exploiting schisms as among the Western European nations and as between Western Europe and the United States. Offers of East-West trade play some part in this Soviet policy; but its primary tools are military, political, and psychological—combined with the fact that Moscow controls Eastern Germany and, therefore, the possibility of German unity.
This major Soviet effort is only obliquely related to Soviet and American growth rates; and the American response lies in the area of new ideas and institutional arrangements within the Western Alliance—which is now very rich—rather than in new American expenditures.
In support of these various efforts to achieve or to prepare for a breakthrough to world primacy, the Soviet Union is mounting a remarkable and sustained effort to project to the external world and to the Russian peoples a quite particular image. That image is of an ardent, energetic, and technically competent competitor closing fast on—and preparing to supersede—a front runner who has lost the capacity to deal with his problems and prefers to go down in the style to which he has become accustomed rather than to maintain his position. Leaving aside the various American contributions to the persuasiveness of this image in the outside world, this campaign has its foundations in three dimensions of Soviet policy: a somewhat dubious numerical approach to 'catching up" with the American economy which, nevertheless, is rooted in the high momentum and technological maturity of the Soviet economy; an exceedingly solid set of Soviet achievements in missiles technology ( military and nonmilitary); and a sporadically successful projection of the Soviet Union as the leader in the quest for peace. At home, the building of Soviet policy around the objective of catching up with the United States and with the American standards of living has proved an exceedingly successful device for unifying Soviet society, appealing as it does to three strong motivations evident in the Russian peoples: a deep nationalist pride, a desire for higher standards of living, and a passion for peace. In these dimensions of the Soviet challenge, the high momentum of the Soviet economy has played some part, but it is by no means the sole basis of the challenge.
The American Agenda
We turn now to the following question: In the light of the purposes of our society at home and on the world scene, what lines of action are suggested by these multiple Soviet challenges; and what role, if any, does the growth rate and economic policy play in shaping an effective American response?
The elements in an effective American military and foreign policy are, I suspect, quite clear to us all and likely to command something of a consensus. They come to this. By our military dispositions, we must continue to make either major or limited war an irrational undertaking for Communists. On this basis, we must use our economic resources and our political and human insight to the full in doing what we can to ensure that the nations of Asia, Middle East, Africa, and Latin America remain independent and move through their difficult transitions to modernization in ways which keep open the possibility of a democratic evolution for their societies. In order to execute these military and creative missions, we must form up a new set of relationships with the resurgent nations of Western Europe and Japan. And from this solid free world base, we must maintain an endless diplomatic initiative and an endless sympathetic dialogue with the Soviet leadership seeking to exploit every serious possibility for movement toward the effective international control of armaments.
In three categories this requires more American public expenditure: to be specific (but not necessarily inclusive) to "harden" American bases in the period of Soviet missile advantage; to provide an adequate airlift for the deterrence of limited war; and to develop an American contribution to an international aid scheme for underdeveloped areas which would he adequate to the task.
I am not prepared to estimate the amount by which American public expenditures need to be increased to cover these three policy objectives; but I would say this much. It is perfectly clear that the United States is not so poor that it cannot pay the bill for an adequate national effort; nor does the difficulty lie in the potentials for American growth over, say, the next decade. The problem lies in the attitudes of mind and the procedures we bring to bear in allocating resources for public purposes; and it lies in the way we are seeking to handle the problem of inflation. It is to these themes that I now turn.
The Potentials of American Growth
The potentials for American growth in the next decade would, I believe, permit us both chronic full employment and one of those surges of growth which transcend the long period average of three percent per annum increase in GNP. I am a little skeptical that we can attain five percent rate of increase; but a four percent rate of increase could be within our grasp if our growth potentials are fully and well used. I hold this view because there are three powerful expansionary forces now operating within the American economy: the rise in population, the acceleration of research and development, and the society's massive requirements for social overhead capital. A four percent growth in GNP would yield our society an annual increment for all purposes of well over $20 billion over the next decade. The first proposition is, therefore, that I can envisage no increase in American public outlays required to deal with the Soviet threats which could not easily be met by a society with over a $500 billion GNP and a more than $20 billion annual increment in GNP.
The achievement of a high rate of growth is, however, neither automatic nor assured; we shall have to find new ways of handling the inflation problem, and we shall have to take special steps to assure that the potentials for productivity increase are, in fact, exploited. These matters are considered below. But first it is necessary to examine directly our most fundamental problem—the American method for allocating resources between the private and public sectors.
The Allocation Problem
The root cause of our difficulty lies lot in our income or our growth potential but in certain American habits of mind, carried over from earlier phases of our history, and in the workings of the political process, as they affect the allocation of resources. This interplay of intellectual conception and conventional politics conspires to make it difficult for Americans to increase the scale of public outlays except at moments of acute crisis. Here lies a danger to the national interest as well as a threat to the quality of American society.
Specifically, the working concept of modern economics encourages the view that public outlays should be accommodated to the natural ebb and flow of the private sector perhaps to be expanded at times or recession but certainly to be restrained when the private sectors exhibit high momentum. This perspective, carried over inappropriately from air era of depression and peace to a time of chronic cold war and secular expansion, constitutes a powerful deterrent to outlays in the public sector, especially at a time of chronic prosperity; for it renders difficult a rational choice between marginal outlays in the public and private sectors, without extraordinary exertions of political leadership which have not been forthcoming. Without such effort the calculation takes the form of a crude clash between the total claims of the state as against the individual family budget, in which the latter enjoys an evident prima facie advantage. The existing level of taxation acquires a degree of acceptability as citizens accommodate themselves to its burdens. Familiarity breeds not contempt but stoicism. Lacking a concerted effort of political leadership to dramatize the meaning of marginal shifts from the private to the public sector, it is difficult to generate the political base for tax increases or other forms of restraint on private outlays; e.g., checks on installment spending. This leads politicians, except under acute crisis circumstances, to work out the public outlays within ceilings determined by what the existing tax schedules—the arbitrary product of the last acute crisis—will yield at existing levels of income, if indeed it does not lead to inappropriate tax reductions.
It is essentially these two features of the American scene which have made our response to the changing directions of challenge in the cold war so sluggish on the one hand and convulsive on the other. Neither our concepts of political economy nor our notions of politics have made it possible to deal with threats to the national interest in a forehanded flexible way. We have shifted erratically from the moods and political economy of peace to those of war. In the interval between, say, mid-1948 and the attack in Korea, for example, men in responsibility came to believe that a military budget beyond $15 billion was a threat to the American way of life. After the convulsive reaction to the Korean War had lifted military outlays more than threefold, this new range became again accepted as a line to be defended with a quite irrational ideological fervor.
The heart of the Soviet challenge lies, then, in presenting us with a situation where our interests may be eroded away, without palpable crisis, to a point where a traditional convulsive American response will no longer suffice. Our conceptions and methods of allocation to the public sector are inappropriate to a world caught up in a technological arms race and a slow grinding struggle for power and ideological conceptions in the underdeveloped areas. It is not the Soviet growth rate we need fear but a mode of American allocation which tends to imprison us at a level of public outlays determined by our arbitrary response to the last major crisis.
The Inflation Problem
The allocation problem has been made more difficult in recent years by the way we have thought and acted with respect to inflation. The debate on inflation in the Western world has been dominated by men whose training has led them to examine prices almost wholly in terms of effective demand. One school says that effective demand must be restrained by fiscal and monetary means if prices are to remain constant, even at the cost of a low rate of growth. The other school says that effective demand must be sufficient to maintain full employment and rapid growth, even if this means a steady rise in prices. Both lines of thought derive directly from the experiences and concepts of the interwar years.
It is time that we freed ourselves from the vocabulary and concepts and quarrels of an earlier generation. It is time that we looked squarely at the situation as it is on the eve of the 1960s. It is time that we accepted the challenge to create a policy of full employment without inflation. Here I would echo de Tocqueville's statement: "In politics one perishes from too much memory."
In my view the inflation problem of the 1950s is only superficially to be analyzed as the product of a peculiar wage push or effective demand pull. More fundamentally it arises from a historical change in the institutional methods and attitudes brought to bear in setting industrial and farm prices on the one hand and wages on the other.
These changes have two effects. First they render it difficult to pass along productivity increases in lower prices. The common expectation is that prices can only move in one direction: up. In turn, this throws almost the whole burden of achieving a rise in real wages on money wage negotiations, where the expectation is that money wages also can only rise. This expectation forces businessmen to seek to hedge, in order to protect their profits, and labor leaders to hedge in order to protect the real wages of labor. …
The challenge confronting our democracy is to change the setting in which price and wage policies are established and to make the public interest and public presence felt. We must fashion price and wage policies under chronic high employment conditions, which are judged equitable and which allocate increases in real income by some method other than that we now have; that is, a method where money wage rates are increased more than the rise in average productivity, and then corrected by inflation. There appears to be no way of achieving a better result via conventional fiscal and monetary policy, without also bringing about changes in price policy which would permit a substantial part of the increase in real wages to assume the form of price decreases made possible by higher productivity. In this connection, it is an often forgotten lesson of economic history that periods of relative peace in labor relations have tended also to be periods of declining trend in living costs.
The Relevance of the Growth Rate
Having tried to break through the Soviet economic data to identify the concrete dimensions of the Soviet challenge and to break through the American statistics to identify the real nature of our problem, let me say a word about the US growth rate. As Report IV of the Rockefeller Brothers Fund special studies project dramatized, a high rate of growth in gross national product makes it possible to enlarge both private income per head and public outlays, at existing tax rates. Put another way, the higher the growth rate, the less the potential clash between the claims of the two sectors. But a high rate of growth, in itself, does not guarantee that the public sector will be adequately supplied with resources: for the American allocation system does not automatically maintain constant fixed percentage allocations to various purposes (assuming for a moment that such a system would yield increases adequate to the national interest at high rates of growth in GNP). Without purposeful efforts the natural tendency of the American system is for public outlays to decline as a percentage of total resources, except at intervals of acknowledged crisis.
In fact, as a rough approximation, it is quite accurate to identify the Soviet advantage over the United States as consisting in a more stable percentage allocation to military and foreign policy sectors, starting from a high initial percentage base, at a time of rapid increase in Soviet GNP. Soviet allocations follow a regular path of expansion accommodated to the high rate of growth of GNP. American allocations follow a convulsive path, moving from plateau to (downward sloping) plateau, as crises dictate.
There is every reason for us to seek a higher American rate of growth, and notably an accelerated increase in productivity. Such an achievement could ease the problem of allocation and ease the problem of inflation. But it would not automatically remove from us the hard choices of allocation, nor would it remove the challenge to the democratic process represented by the need to control inflation without stagnation or damping the rate of growth. …
Can the Democratic Process Solve These Problems?
The burden of this argument is, then, that the challenges the nation confronts, finally, have major economic dimensions: The challenges of adequate and forehanded allocation to the public sector; of dealing with inflation without damping the rate of growth; of creating an environment and a public policy which would accelerate the rise of productivity on a broad front. Each of these is a direct challenge to the vitality of the democratic political process in the United States. As members of the Joint Economic Committee are well aware, there are many Americans (including, I would surmise, certain of your panelists) who would take the view that efforts by the American political process to come to grips with them would inevitably result either in more economic loss than the gain sought; or, in political damage to our society which would outweigh the possible economic gain.
One can reply that other democratic societies have, at various times, dealt more or less successfully with each of these problems, without losing their fundamental values; for example, the American Marshall Plan effort of 1947-48, conducted without the stimulus of military operations, but with strong political leadership which succeeded in getting support for a quite sharp increase in the public budget; for example, the efforts of the Netherlands to accommodate real wages to the average level of productivity increase in the economy; for example, the performance of Western Europeans, at our strong urging, in stimulating substantial productivity increases after the second World War.
But it would be wrong to rest the American case for accepting this tough agenda merely on the basis of analogy. Times are different, nations differ, and problems are never quite the same.
The real case must be negative on the one hand, positive on the other.
Negatively we know that four of our worst mistakes in modern history arose from a fear that our democracy could not deal with the problems it faced, without losing its essence. I refer, of course, to the belief of the Republican Administration after 1929 that it could not deal with the great depression without risking unacceptable damage to capitalism; to the belief of isolationists in both parties that we could not deal with Hitler and the Axis without permanently damaging basic qualities in our society; to the belief of the Democratic Administration before June 1950 that our society could not afford a military budget of more than $15 billion; and, I would add, the similar belief of the present Administration that its overriding mission has been to reduce the public budget it inherited, despite the accelerated challenge it has faced since 1953 in many dimensions.
The lesson of our recent history is that every time the men in authority decided that some problem was too tough for democracy to lick, and that they had to evade the problem in order to save democracy, we have gotten into a quite deep hole; and in all but the fourth case, where the bill is still to be reckoned, democracy was, in the end, much more searchingly and dangerously threatened than if the challenge had been accepted in the first place, at an early stage of the difficulty.
But there is a positive case as well. The positive case is not only that the democratic technique, energetically applied, has proved capable of handling such awkward problems as severe unemployment, major war, and limited war; it is also the simple faith that if any problem is soluble by human beings it is best solved, in the long run, by responsible free men, subject to the mixture of freedom and self-discipline which is the essence of the democratic process when it works. Without that faith the struggle in which we are engaged lacks meaning.
Our experience of the past century and three-quarters should convince us that the democratic process in the United States is tough, resilient, and capable of handling whatever problems the flow of history may place on our agenda.
Now a final word. Khrushchev's Russia is not the first nation to arrive at technological maturity, feel its oats, look over the field, and decide the old front runner was ripe for the taking. In our own time we have faced such moods and policies from Germany and Japan.
In the past these fast-closing nations have been persuaded to accept the fact that the world was not their oyster and to settle down as part of the international community only by defeat in major war. Major war was then necessary because the older powers did not so conduct themselves as to make major war a totally irrational undertaking.
In Russia we do not face a nation irrevocably committed to pursue power by major war unless we tempt it beyond endurance by our weakness during the period of the missile gap. The main hope for Soviet world leadership lies in various other dimensions, notably in their hope that the Western world and the democratic principle will fail in Asia, the Middle East, Africa, and Latin America. Moreover, I believe that there may well be men in Russia who already perceive that the rise of new nations, in the southern half of the globe, and in China, in a world of atomic weapons, may require a much higher degree of collaboration with the United States than even Khrushchev's challenge to compete peacefully would imply; they may begin to count not on burying us, but on making common cause with us over a widening range of problems. The discussions about ending H-bomb tests, with all they imply about Moscow's worries concerning the spread of atomic weapons, are a small beginning in this direction.
I doubt very much that Mr. Khrushchev is sure exactly where peaceful coexistence will end: in a missile salvo; in a protracted and dangerous struggle in the underdeveloped areas; or in a peace in which Russia accepts its destiny as a very great power, in a world of many diverse substantial powers. The answer lies not in the Kremlin's plans, but in what the free world does or fails to do, notably over the next decade. It is too much to ask of Russians at this stage of their history not to exploit every weakness we may offer. It is the strength and effectiveness of our response to the Soviet challenge—in all of its dimensions—which will determine the final meaning of peaceful coexistence.
Between now and 1970 a decisive test will take place. The real lesson of your panelists' papers is that there is nothing in the structure or growth rates of the two economies that will automatically determine the outcome of this test. The answer lies in whether our political leadership mobilizes the evidently ample resources that lie to hand—resources of will, of skill, of talent, of commitment to the American heritage, as well as goods and services—to do the job.
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