This chart undertakes to show what is happening to the economy in terms of these three purposes. The expression is all in terms of a uniform price level. Any price level could be taken for that purpose. We have taken 1951 prices. This is to show not what has happened to the dollar value of the product, but what has happened to the actual product.

The black parts at the bottom of the bars are the Government purchases of goods and services-Federal, State, and local. Of course, the bulk of that, as I shall show shortly, are security outlays.

The white part of the bars is the second side of the triangle, business investment, gross private domestic investment. And I will give something of a breakdown on that in a little bit.

And the third part of the bar, the top part, is personal consumption expenditures, which is the exact reflection of what 155 million consumers more or less are getting by way of goods and services. I have carried this back to 1939.

The CHAIRMAN. Are getting or expending?

1 Mr. KEYSERLING. Well, the expenditure is the measure of getting, because these are shown at a uniform price level; in other words, if this shows that they are spending so many billion dollars more than in 1939, Senator, it is not in terms of a different price level—it is adjusted for the changes in prices.

The CHAIRMAN. In other words, do I understand that the top part of the bar indicates not only the dollars which are expended, but the commodities which are received in return therefor?

Mr. KEYSERLING. Yes, sir. In other words, this part is bigger than this one. It does not mean that the prices are higher. It means that there are more goods flowing to the civilian economy. There is an adjustment for changes in prices. The simplest illustration of this is that the total national product in 1939 is shown at $179 billion. That is in 1951 prices.

In 1939 prices, it was lower by the amount that there has been a price change since then.

The CHAIRMAN. So that this chart is prepared to eliminate the socalled fall in the value of the dollar?

Mr. KEYSERLING. Yes, sir.

The CHAIRMAN. And show the exact comparison between 1939 and now in terms of 1951 dollars?

Mr. KEYSERLING. Yes, sir.

The CHAIRMAN. You could have done the same thing in terms of 1939 dollars?

Mr. KEYSERLING. Yes.

The CHAIRMAN. And the proportions would have been the same? Mr. KEYSERLING. The proportions would be the same. It is not exact, because there are, of course, technical difficulties in translating dollars into goods at different price levels, but substantially I think it shows what I do regard as the most important central aspect of the economy, what it is actually producing, and what is actually happening to the things that it produces in terms of how the three sides of the triangle fit together into the whole picture.

The only current interest of the 1939 and 1944 comparison is to show that in 1944 there was an enormous increase in the black bar, representing public outlays and, of course, they were almost entirely

national defense. In 1951 prices, public outlays were $151 billion in 1944. And it is perfectly obvious, since this black bar in 1944 is so near the total size of the 1939 bar, that the main way by which in 1944 we maintained a necessary level of business investment and a very ample level of civilian supplies was by increasing the total length of the bar, in other words, increasing total production. And it was an observed phenomenon of World War II that, despite the diversion of enormous resources to the fighting of the war, there was an expansion of real output to the point where in 1944, although the distribution was somewhat different, the general level of civilian -supply was, allowing for population change and stating it moderately, about as good as in 1939 though we were carrying an enormously heavier defense burden.

Another interesting thing in this connection, and I do not want to carry it too far because of limitations of time, and it will be dealt with more extensively by Mr. Clark, broadly speaking in the years between 1944 and 1950 the increased productivity capacity created during World War II was reabsorbed in domestic uses and not left languishing or idle. So that by 1950, the last year before the impact of the Korean outbreak, the total output was, approximately, the same as in the war year 1944, but with an enormously different composition. The black part, Government having swung way down, from here to here, the white part, business investment, having greatly risen. and the top part, personal consumption, of course, having risen, so that even on a per capita basis the availability of civilian supplies was greater.

The CHAIRMAN. As I look at that chart, the second column, which is for the year 1944, it would indicate that the Government at that time was expending practically 50 percent of the total.

Mr. KEYSERLING. Just about that, $150 billion out of $320 billion, that is, Government-Federal, State and local. Most of it was Federal.

The CHAIRMAN. That business expenditures were very slight, percentagewise.

Mr. KEYSERLING. Yes, sir.

The CHAIRMAN. And that consumer expenditures, ordinary individual expenditures, were practically the same as Government expenditures?

Mr. KEYSERLING. Just about.

The CHAIRMAN. How do you compute the amount of business expenditures-what factors go into that?

Mr. KEYSERLING. I have a chart which shows gross private domestic investment in more detail. It shows the level of private business investment in construction, in residential construction, in tools, plant, and equipment. There is a breakdown in appendix table B-3 of the Economic Report which shows the exact composition of gross private domestic investment. It is the total investment of the business community, in 1951 prices on an annual basis, in plant expansion, in inventory accumulation, and in the building and improvement of tools and equipment, and in other construction, all of the things that it consumes for the purpose of ultimately producing goods for other to consume.

The CHAIRMAN. If I can judge the length of these columns from this distance I would come to the conclusion that while ordinary con

sumer or individual expenditures in 1952 are less, percentagewise, than they were in 1947, they are actually in dollar value greater than they were in 1947.

Mr. KEYSERLING. In goods value greater; yes, sir. The reason for the very small size of the business investment bar during World War II, although there were enormous expansion programs, is that during World War II for a variety of reasons most of those expansion programs were financed by Government and, therefore, enter into the black bar. And the plant and capacity which was added and built was mostly disposed of to industry after the war.

The CHAIRMAN. Then do I understand that the white bar on the first chart represents only investment?

Mr. KEYSERLING. Private outlays. In other words, if the plant was built by the Government and financed by the Government, as many were during World War II, it would enter into the black bar. The CHAIRMAN. It does not include expenditures privately made for labor, or does it?

Mr. KEYSERLING. It includes the labor cost factor in the private outlays of an investment character.

The main point I want to discuss in connection with these later bars is this, that the essence of the mobilization effort is to try to find what balance among these three bars, in other words, among the part of our resources devoted to the security build-up, the part devoted to the industrial or productive build-up, and the part devoted to consumption, will give us the greatest strength in the long run in the face of a situation which is uncertain, in the sense that World War II situation was certain. Then, while we could not know for sure who would win, we knew the die was cast. The philosophy of the effort now is to try to undertake a vigorous and substantial security build-up, but at the same time maintain a high enough level of civilian supplies, not only to satisfy the necessities of life, and even they are in part subjective, because what we regard as the necessities of life, people in China or even in Great Britain would regard as fantastic luxuries-but also to sustain a level of civilian supplies which in a free democracy under current conditions will keep the people feeling that there is hope as well as life, and that they are not being so sharply cut back by a defense program as to undermine support for that program while the program remains necessary.

You might call that a political consideration. I do not care much what you call it. It is a factor in the life of our economy under current conditions.

Moreover, the purpose is to keep a very high level of business investment, because in the long run since production is the ultimate source of all wealth and all economic strength. We must keep building the essential parts of the industrial mobilization base as it is sometimes called, so that if the defense burden does last for a long time it can be supported with relatively less strain on other parts of the economy, whether measured by resource strain, or by the taxes that reflect that strain if they are enacted, or whether measured by pressure upon supplies which translate themselves into inflation. The strain becomes less as the productive power of the economy increases.

Of course, I cannot here talk either to validate or invalidate the size of these black bars in the later years, because the Council has taken.

the position that we cannot possibly be expert in what the size of the primary security program should be from the viewpoint of national protection. We have views on it as citizens, everybody does. We believe that whatever is undertaken should be undertaken as economically as possible.

We do not pose as experts or quasi-experts as to what the size of the defense outlay should be unless it should reach the point where we felt that it could be demonstrated that it was impoverishing the other two sides of the triangle to the degree that it weakened our general economic strength.

Looking candidly at the depiction of what actually has happened in the economy, we have not yet been prepared to say that a program of the current or projected size has reached that point of danger. It is burdensome, it involves cut-backs and hardships; it raises difficult financing problems, but we cannot say, at least we cannot say as of now, that it threatens to impoverish the industrial mobilization base or weaken it, or cut civilian supplies to an intolerable level.

In a general way, the year 1951 showed that, due to the security build-up, total public outlays rose from $41 billion in the first half of 1950, to $71 billion at an annual rate in the second half of 1951.

Meanwhile, the changes in the level of consumer supplies were small, from about $20412 billion to $203 billion. Now allowing for population growth, that represents a slight per capita decrease, but it is still a very heavy level of consumer supplies, and that will be borne out by current popular observation of the level of food supply, clothing, automobile supply, television supply, radio supply-all kinds of sup ply-in 1951.

As to the industrial mobilization base or the broad base of our productive capacity which, I think, is the most important of the three for the reasons given, although it is an intermediate step between production and consumption, in 1951 there was a level of investment for the year as a whole of approximately $59 billion, 63 in the first half and 55 in the second half.

This level of business investment contrasts with $48 billion in the very high level year 1948 and, of course, is enormously higher than in prewar years. The high significance of this will be shown a little more clearly in a later chart, which breaks it down, and shows just what was accomplished and is in process of accomplishing during the course of 1951 and on into 1952 in expansion of certain basic or vital elements in the production base such as steel, aluminum, electric power, transport, copper and the like.

Running on into 1952, I have here some computations which I would like to ask permission not to have inserted in the record in exact detail, because we do not like to make predictions of future years, since they are problematical, but roughly speaking, we make the best estimate we can.

The CHAIRMAN. This is off the record.

Mr. KEYSERLING. It may go on the record. I want to get the gist of it in the record, but not the exact figures.

The CHAIRMAN. All right.

Mr. KEYSERLING. Not because they are secret, but because they are

estimates.

The estimate of public outlays, of course, is based upon the projecte size of the defense program which is fairly clear, at least, for the

next calendar year, rather independent of the exact size of the appropriations for the fiscal year 1953.

The computation is that the now projected defense program will lift the level of spending or take of the economy for that purpose by about $20 billion between the annual rate now and the annual rate at the end of next year.

Mr. CLARK. This year.

Mr. KEYSERLING. The end of this year, calendar 1952.

The estimate of business investment is based upon current expansion programs now under way, commitments already made, and the declared investment intentions of business, which are pretty well rounded out, at least two or three quarters ahead, by a process of accumulating of individual business intentions.

The estimate of consumer expenditures is somewhat more problematical, from the viewpoint of what they will actually spend as against what they will save, and that will enter into the estimate of the inflationary outlook which Mr. Clark is going to discuss, but these estimates in any event are consistent with the available supplies of consumer goods, assuming an expanding defense program and a large investment program.

What it shows in broad outline, moving on into 1952, is that there would be, with the expanded defense program a high and rewarding level of investment in plant and equipment, not so high as over this past year, but that the decline would occur in part because of a lower inventory investment and in part through the weeding out of the less essential forms of investment. For example, housing, of course, is essential in peacetime, but the estimate contemplates a considerably lower level of residential construction, somewhere in the neighborhood of 750,000 or 800,000 in 1952, contrasted with about 1,100,000 in 1951. It also contemplates a lower level of automobile output, moving downward toward about 4 million, as against 5.3 million in 1951, and so forth.

But it nonetheless shows, measured against the need for the security program, that the economy can move ahead under this program with good servicing to the other two sides of the triangle. Further, if total war is prevented, by a couple of years from now (with the basic expansion programs more or less completed, thus relieving the shortages of critical points of the economy, and with the defense program leveling off at what might be called a maintenance level or even at the now projected level) we would move again to a level of civilian supplies and a level of available resources for business investment higher than currently and, of course, a priori higher than past years.

That is the broad picture. I do not want you to think that these other charts are going to take as much of your time as this first one. I have concentrated on this first one because it seems to me to be rather central to the whole course of our presentation.

The CHAIRMAN. And easier for the committee to understand.

Mr. KEYSERLING. Well, I think that is a prime requirement. I think it is easy to understand, because it does try to put on one chart a whole picture of what is happening in the economy in real

terms.

Senator FLANDERS. May I inquire whether at any point you will have the personal consumption expenditures on a per capita basis? Mr. KEYSERLING. I do not have it in any of these charts, but we have the figures and can readily make them available to vou.

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