take in taxes no more than absolutely necessary of the incomes of individuals and businesses. Third, Government must curb monopolistic tendencies and strive for conditions in which individuals, new methods, and new products have an opportunity to prove themselves in fair competition. It is incumbent on Government to assure the reasonable diffusion of economic power as our forefathers did of political power. Fourth, Government must pursue policies that facilitate the adjustments to advancing technology and changing consumer demands that are essential in a dynamic economy. It must avoid policies that make these adjustments more difficult. Finally, it must pursue policies that will help maintain high levels of production and employment and contribute toward achieving the goal of an expanding and widely-shared national income, earned in dollars of stable buying power.

But Government cannot assume exclusive responsibility for the smooth functioning of our enterprise system, nor can it guarantee sustained economic growth. Even an attempt to do so would involve intervention on a scale incompatible with the fundamental character of our enterprise system, based as it is on the belief that, when regulation is minimized, the energies and talents of the individual are more fully released for economic betterment. In such an economy, heavy responsibilities for the effective and equitable functioning of production and distribution must be borne by the individual in his own economic activity and in his organized activity with others.

Prominent among these responsibilities is that carried by the management of business concerns, particularly of companies having large and widespread operations, to administer their affairs so as to help avoid economic imbalance and dislocation. That much progress has been made in the acceptance of this responsibility is evidenced by the increasing practice of planning expansion programs well into the future and organizing operations with a view to greater stability of employment. Nevertheless, our economy has been subjected at times to heavy strains as excesses have crept into the management of business inventories, into the expansion of facilities, and particularly into the use of credit. Business management has a clear responsibility, in its own interest no less than in the national interest, to avoid such excesses and to formulate and carry out its plans so as to contribute to steady economic growth.

Management also has the responsibility, as does labor, to remove restrictions on competition and to enhance the adaptability of the economy to new technological and demand conditions. And thoughtful leaders of agriculture will not seek to improve its economic position by means which would prevent essential adjustments to changing market conditions. Competitive markets and the opportunity to move into any line of endeavor within the limits established by personal aptitudes, technological needs, and market demands are essential conditions of a strong enterprise system.

A further responsibilty of leaders of management and labor in a free economy derives from the fact that concentrations of power place in their

hands the ability to take actions that, through the sensitive network of our economic system, significantly affect the Nation as a whole.

Specifically, business and labor leadership have the responsibility to reach agreements on wages and other labor benefits that are fair to the rest of the community as well as to those persons immediately involved. Negotiated wage increases and benefits should be consistent with productivity prospects and with the maintenance of a stable dollar. And businesses must recognize the broad public interest in the prices set on their products and services.

The full burden of avoiding price inflation, which is an ever present hazard in an expanding economy operating close to capacity, cannot be successfully carried by fiscal and monetary restraints alone. To place this burden on them would invite the risk of producing effects on the structure and functioning of our economy which might, in the years ahead, impair the vitality of competitive enterprise. And failure to accept the responsibilities inherent in a free economy could lead to demands that they be assumed by Government, with the increasing intervention and loss of freedom that such an approach inevitably entails. The successful extension of prosperity with price stability must be a cooperative effort in which the policies of individuals and economic groups and of all levels of Government are consistent with one another and mutually reinforcing.

There is much that the last four years can teach us of the opportunities inherent in a free economy and the responsibilities of Government and of citizens for helping to realize them. Accordingly, this Report first gives a brief account of economic developments and policies in 1953-56. This is followed by a more detailed record of economic developments in 1956 and of the policies which Government adopted during that year to help maintain stable economic growth. Finally, proposals are set forth to help extend prosperity into the future, to strengthen competitive enterprise, and to increase our ability to achieve further improvements in national well-being.

Chapter 2

Economic Growth and Improvement, 1953-56

HE ECONOMIC REPORT transmitted to the Congress in January 1954 called attention to the opportunity afforded by the ending of the conflict in Korea to turn the productive capacity of the Nation increasingly to peaceful purposes and thereby to undertake a sustained improvement in living standards. It also set forth the main lines along which the Federal Government proposed to move toward this goal and to seek to fulfill its mandate under the Employment Act of 1946 to promote maximum employment, production, and purchasing power. Although the Economic Reports of the past few years have described the improvements in living that have been achieved and the policies followed to promote stable economic growth, it may be useful to review briefly the developments of the four years, 1953-56. This review will provide both a record of achievement in a free economy and guidance for the years ahead.

The period was one of growth in our own economy and in the economies of other free nations, and witnessed clear gains in the well-being of the American people. The course of expansion was not entirely even, however, and the capacity of our economy to adapt to extensive, and in some cases sharp, changes was repeatedly tested. The agricultural sector faced especially difficult problems of adjustment. The rapidly changing conditions in the economy as a whole, as well as in particular sectors, called for a high degree of flexibility in Government policies affecting economic growth and stability. Successive sections of this chapter sketch this record of economic growth, of improvement in well-being, and of adjustment to economic change.

GROWTH OF ECONOMIC ACTIVITY

Increasing numbers of our people have been seeking and finding employment during the past four years. The number of persons in the labor force in 1956, including those in the military services, was almost 4 million more than in 1952; and the decline of 750,000 in the armed forces in this period released an additional number for civilian employment (Chart 1). During 1954 the growth in the labor force was relatively slow; but in the past two years the rate of growth was unusually rapid. Along with this increase in the labor force, the number of persons employed rose by about 4 million. Although unemployment increased during 1953-54

There was a larger increase in the output of goods and services.

SOURCES: DEPARTMENT OF LABOR, DEPARTMENT OF COMMERCE, BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM, AND COUNCIL OF ECONOMIC ADVISERS.

409649°-57—2

contraction of economic activity, it has since fallen to less than 4 percent of the labor force, and a significant number of the unemployed are persons newly drawn into the labor force who are counted as unemployed while seeking work.

The employment of growing numbers of persons has been accompanied by increases in the efficiency of our productive system. The output of goods and services expanded in 1956 to the new high figure of $412 billion. Expressed in dollars of constant purchasing power, this is 12.5 percent more than was produced in 1952. With an employment increase of 6 percent during these years and a modest decline in average working hours, the gain in output reflects a sizable improvement in productivity. However, changes in productivity have historically been uneven from year to year, and the last four years have been no exception. In the expansion of early 1953, and again in the recovery of 1955, productivity gains were quite large. On the other hand, advances in productivity were small during the 1953-54 contraction and again in 1956.

Since purchases of military goods by the Federal Government were reduced sharply in the four-year period, over-all measures of the increase in national output do not fully reveal the rise in the flow of goods and services available for civilian use (Chart 2). The 1953-54 adjustment to a lower level of defense expenditures made it possible to devote an increasing proportion of the economy's resources to the output of goods and services for consumers, to the enlargement of productive capacity, and to the needs of State and local governments. While total gross national product in constant dollars rose about 12.5 percent, consumer expenditures, private investment outlays, and State and local purchases of goods and services increased substantially more. Together, these three sectors of our economy accounted for 88 percent of all purchases of goods and services in 1956, compared with 84 percent in 1952.

The Nation's productive plant and equipment have been notably expanded and improved. Since 1952, business firms and farmers have spent over $150 billion to increase capacity and replace worn out and obsolete facilities. The growth in the physical stock of equipment appears to have been especially large, perhaps as much as one-quarter. Also, important advances in technology have improved the quality and efficiency of plant and equipment. These investment outlays contain the promise of greater national output and better living in the years ahead.

As would be expected in a growing economy in which production techniques and patterns of demand are continually changing, not all industries shared equally in the expansion. For some industries with a strong growth component, notably chemicals, aluminum, and electric power, output increased throughout the period; production in certain other industries, whose output fell substantially in 1954, advanced rapidly in both 1955 and 1956; and the output of still other industries, such as automobiles and home building, which had been particularly high in 1955, declined in 1956.