capital investments were ended. Exemption in two stages of production machinery and equipment from the 11-percent general sales tax was announced, but the first reduction did not take place until April 1967, in the hope that this would encourage firms to postpone for a year or longer plans to buy such equipment. The construction programs of all Government departments and crown corporations for the 1966-67 fiscal year were cut by 10 percent.

In addition to these fiscal measures, a very tight money situation was permitted to develop by the summer of 1966. And on January 1, 1967, the general sales tax was increased by 1 percentage point to a total of 12 percent. Finance Minister Mitchell Sharp predicted that the effect of these various measures would be to restrain price increases while probably reducing the rate of growth in gross national product by about 5 percent in real terms.

The effect on economic growth was far more drastic than that. The former vigorous expansion was slowed to a crawl.

The accompanying table shows what happened. For each quarter it gives the volume of GNP, seasonally adjusted and expressed at annual rates in dollars of constant buying power, and also the amount by which it exceeded GNP for the same quarter of the previous year.

Before the applications of restraints, real GNP had been growing at a rate of about 5 to 8 percent per year. For the previous 5 years, it had averaged 6.4 percent per year. But in the second half of 1966 it fell to about 5 percent, in the first three quarters of 1967 to about 3 percent and in the fourth quarter 1967 to 2 percent.

This sharp decline in the growth rate was particularly serious because of the rapid rate of increase in the country's labor force. Between 1961 and 1967 the Canadian labor force grew at an average annual rate of 2.6 percent, compared with 1.7 percent in the United States. Between 1966 and 1967 it increased by 3.7 percent.

ECONOMIC GROWTH, UNEMPLOYMENT AND CONSUMER PRICES IN CANADA, 1964-68

An immediate result of the lag in economic growth, therefore, was an increase in unemployment. From a peak of 7.6 percent at the beginning of 1961 it had been reduced to 4.5 percent at the end of 1964, based on quarterly averages of seasonally adjusted monthly figures. As the table shows, the decline continued at a slower pace through the end of 1965, and then held steady at 3.5 percent through the first half of 1966. This compares with an average of 3.8 percent in the United States. Commencing with the third quarter of 1966, however, both the number of unemployed and the unemployment rate began to rise. By the third quarter of 1968 there were 140,000 more unemployed than at the beginning of 1966, and the unemployment rate had risen to 5.1 percent. The Canadian economy had been "cooled down" with a vengeance. But what was the effect on prices? It was minimal and short term. The Consumer Price Index, which had risen by 3.5 percent between the first quarter of 1965 and the first quarter of 1966, rose by another 3 percent between the first quarter of 1966 and the first quarter of 1967, and then shot up still more rapidly than before restraints were imposed. By the first quarter of 1968 it had risen by a further 4.5 percent.

Altogether, between the first quarter of 1966 and the third quarter of 1968, a rise in the unemployment rate from 3.5 to 5.1 percent_was accompanied by an increase in the price index of 9.9 percent. During the same period, in the United States, a drop in the unemployment rate from 3.8 to 3.6 percent was accompanied by a price rise of only 9.3 percent. The restraints in Canada succeeded in slowing down the growth rate and forcing up the unemployment rate, but they had no appreciable effect on the rate of price increases.

THE GERMAN EXPERIENCE

The performance of the West German economy in recent years shows a startling contrast. Unfortunately there is a certain lag in the availability of German data to us, so that complete data are not available beyond 1967. In the comparisons that follow, the United States and German data cover the same period, 1962 to 1967.

5-YEAR ECONOMIC PERFORMANCE, UNITED STATES AND GERMANY, 1962-67

Source: OECD "Germany," I.G. Metall; "1969 Economic Report of the President."

Between 1962 and 1967, GNP expressed in dollars of constant buying power grew in the United States at an average rate of 4.9 percent per year, and in Germany at an average annual rate of 3.6 percent.

This difference is more than accounted for, however, by the fact that over this period the U.S. civilian labor force grew at an average annual rate of 1.8 percent, while in Germany the labor force actually declined in size. Thus, real GNP per person employed-a rough measure of the productivity performance of the economy-grew at an annual rate of 2.6 percent in the United States but at a rate of 4 percent in Germany.

During the same period, the U.S. unemployment rate averaged about 4.6 percent and the German rate, adjusted to U.S. definitions, averaged 0.5 percent.

Yet during this same period, under conditions of what American economic managers would consider a gross overheating of the German economy, the German cost of living rose at an annual average rate of 2.7 percent, only somewhat higher than the annual U.S. rate of 2 percent.

Nor was this price stability attained at the expense of German workers' wages. On the contrary, they did much better than their counterparts in the United States. During the period, gross hourly earnings in manufacturing increased at an average annual rate of 3.4 percent in the United States and 7.2 percent in Germany. After adjustment for changes in the cost of living, real hourly earnings rose at an average annual rate of 1.4 percent in the United States and 4.4 percent in Germany. It is interesting to note that in Germany the buying power of an hour's work increased at a slightly faster rate than the physical volume of production per person employed, while in the United States it lagged far behind.

The rate of increase in money wages was more than 50 percent higher in Germany than in the United States. This faster increase in wages is partly the cause and partly the effect of the better productivity performance. On the one hand, the rapid expansion of domestic demand due to the rapid increase in wages enabled overhead labor to be spread over a larger volume of production and consequently helped speed up productivity. On the other hand, the rapid expansion of output made it easier to raise wages and consequently demand without increasing inflationary pressure.

Although there was a lag in German expansion in 1967, such data as are available for 1968 indicate that the former strong performance has been resumed. In the first half of 1968 real GNP rose at an annual rate of 6 percent over the last half of 1967. Consumer prices in October 1968 were only 2 percent higher than in October 1967, and the unemployment rate in November 1968 was 1 percent.

The Government is planning for a continuation of this state of affairs, for we find the same combination of low unemployment, high price stability, and high growth rate in the German medium-term economic plan, which covers the years 1969-72. In this plan the Government has set itself the following targets:

(a) Full employment, defined as an unemployment rate of 0.8 percent.

(b) Price stability, i.e., a rise in the GNP deflator not exceeding 1 percent per year.

(c) External equilibrium, defined as a surplus on the balance of trade in goods and services on a national accounts basis of 1.5 percent of GNP.

(d) A reasonable economic growth corresponding to a trend rate of 4 percent of real GNP.

At time of writing we do not have information as to the institutional means by which the Germans have achieved this amazingly good economic performance. Unudoubtedly the much better productivity performance than in the United States, contributed to price stability, and it is very likely that the competition forced on German industry through its participation in the Common Market contributed to the superiority of both the productivity and the price performance.

ECONOMY MUST CONTINUE TO EXPAND

Because there is still a slack in our economy-idle capacity in our factories, and a level of unemployment that most other industrialized countries would consider intolerable-we must again resume expansionary economic policies in place of the restrictive policies now in effect, and avoid any more restrictive policies that might be contemplated.

One of the changes which could be made fairly quickly would be to let the 10-percent income tax surcharge die a natural death on June 30 next. That would immediately put about $10 billion per year back into the taxpayers' pockets, and while not all of it would be in the form of consumer buying power, a great deal of it would.

There is a compelling reason, however, for preferring another course. For many years now, while the majority of consumers have become relatively affluent, the public programs required to meet the social needs of our Nation have been virtually starved. In some of our larger cities important sectors of the educational machine are grinding to a halt, with teachers being laid off and classes discontinued because of lack of funds. As regards other problems of the inner cities, urban blight, slum conditions, air pollution, delinquency, and just plain poverty, we have barely begun to scratch the surface. Our entire apparatus for health care for the citizen is woefully inadequate and disorganized. As a result, for example, our life expectancy is lower than that of many other countries whom we surpass in most material ways. There are at least 10 and probably 11 other countries where a girl baby, when she is born, can expect to live longer than one born in the United States. There are at least 17 and probably 20 other countries where a male can anticipate a longer life expectancy than in the United States. And these include such countries as East Germany, Bulgaria, Japan, Greece, and Italy, whose per capita wealth is far below ours.

One of the best measures of a nation's standard of health care is the relative proportion of children who survive or die in their first year of life, as measured by the infant mortality rate. Here the record of the United States is not only poor in comparison with many other countries, but is getting relatively worse. In 1953, there were only seven countries which had an infant mortality rate below the U.S. rate of 27.8 per 1,000. By 1963, 12 had lower rates than ours, and by 1965, 15 were ahead of us. As of 1966, the United States was tied in 17th place with Czechoslovakia. True, we had reduced our rate from 27.8 in 1953 to 23.7 in 1966. But that was far less progress than many other countries had made. Sweden, for example, had only 12.6 deaths per 1,000

infants under 1 year in 1966. In that year, some 40,000 babies died in the United States who would have lived had our infant death rate been as low as that of Sweden.

Countless other unmet social needs abound on every hand. President Johnson's Cabinet Coordinating Committee on Economic Planning for the End of Vietnam Hostilities has listed new programs which should be adopted and existing programs which should be expanded to a total amount of $39.7 billion per year when funds and resources become available.

Obviously, not all of these programs can be undertaken while a large part of our discretionary resources are going into the Vietnam war. But a considerable part of them can, to the extent that additional spending stimulates the economy and leads to fuller employment and higher production.

We, therefore, propose that the 10-percent income tax surcharge be continued for 1 year, but that the revenues from it be devoted to meeting social needs, in particular, our needs in education and in the cities. (The 1-year limit is proposed in the hope that peace can return to Vietnam and the money now spent on war can be diverted to these needs.) Education and the cities are two major fields where performance has fallen short of public policy pronouncements and where recent legislative enactments fail to overcome huge deficits.

EDUCATIONAL NEEDS

The quality of education in urban public schools and its close tie to the economic and social development of our urban communities ranks high among our major domestic problems. The enormity of the needs will require massive injections of Federal moneys, as well as creative innovations, to deal with the special problems of the disadvantaged child in our urban areas.

Just what are the dimensions of the shortages of our school system that demand action? Fully one-third of the present stock of 1.7 million classrooms are more than 35 years old-a figure which coldly describes a large supply of antiquated equipment and inadequate facilities in our Nation's schools. One-half of the classrooms in slum areas are over 50 years old.

According to the Department of Labor, about one-third of the young people currently in the Nation's schools will drop out before getting their diplomas. In some of our cities' slums, this percentage runs much higher. Those who drop out have an unemployment rate twothirds greater than others in the same age group who complete their education.

How does current performance measure up against these visible needs? The simple answer is that these needs are not being met. In the words of the authoritative study of HEW's Office of Education, Projections of Public School Facilities Needs, "Public elementary and secondary school construction in recent years has done little more than keep pace with the urgent demand for facilities created by enrollment increases." In short, the backlog of inadequate educational facilities persists at a disgracefully high level-over 500,000 classrooms, according to the Office of Education study.

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