employment was 4 percent or under, we had price increases of only 2 to 4 percent.

I know of no Democratic candidate for the Presidency who has laid out a persuasive program for getting us back to relatively full employment and bringing inflation under control. So I have not come here in a partisan spirit; on the contrary, my spirit is antipartisan, because I think there are four substantial national dangers involved in sliding complacently into the acceptance of this kind of America.

First. Our society will be increasingly eroded by social tension. As we all know, 7 percent unemployment means perhaps twice that unemployment among blacks and Chicanos, and very high unemployment for young people.

That is cushioned now by unemployment insurance, food stamps and the rest. But that's a very short-run remedy. We cannot have an America that's vital if we go on demeaning human beings on a large scale because we cannot use them in this society.

Second. The whole industrial world, North America, Western Europe, and Japan, will be enfeebled by our continued sluggishness. The predictions-whether they come from Australia or Japan or Western Europe-are for a disappointing recovery, continued slackness, continued unemployment, and continued idle capacity. Walter Heller's figure, for example is that at the end of 1976 20 percent of our industrial capacity will still be idle.

Third. Is the fact that the vitality of economic and social progress in the countries of the developing world that do not export oil depends on the momentum of the industralized world. Whatever the rhetoric heard in the U.N., the fact is, that the pace of development in Latin America, Africa, the Middle East, and Asia depends on the momentum of North America, Western Europe, and Japan. That interdependence means if we go ahead at a sluggish rate, they are going to slow down. Some countries will stagnate; and two-thirds of the men, women, and children in the world will suffer, in one way or another.

Finally, as a historian, I must recall that we risk what happened between the two World Wars when Britain, Western Europe, and then the United States experienced great economic difficulties. They turned in on themselves. The prestige of the democratic West was destroyed, out of which came the Japanese adventures 1931, and then Hitler taking over Germany at the worst of the Great Depression. In a nuclear age I don't think we can afford that kind of enfeeblement; but an America-or an industrialized world-in protracted stagflation is unlikely to be in a mood to meet its responsibilities abroad.

If you look closely, you can observe symptoms of all four of these dangers as of February 1976.

I shall not repeat the paper I filed with the committee. "A Third View of the Future." I only observe that my confidence in what I am about to propose is not based on a sense of higher virtue or intellect than those commanded by my economist colleagues. But I am

1 See p. 115.

also a historian. The economists who advise both our Republican and Democratic politician, are children of the 1930's. They have spent their whole professional life building increasingly sophisticated arguments about how to manipulate effective demand.

I am a child of the last 200 years, a historian who must deal with supply as well as demand. This is the fifth time in the past two centuries that changes in the supply situation produced the sort of thing we've experienced since the end of 1972. The other times it happened were during the 1790's, the 1850's, the 1890's and the second half of the 1930's. Each time it happened, you can observe exactly the symptoms that are so familiar to us now since the end of 1972: An accelerated general inflation; a rise of interest rates; a shift in the terms of trade unfavorable to manufacturing nations; and pressure on the real wages of the urban worker.

No two of these cases were the same. But there is a family resemblance. I evoke in my paper the name of the Russian economist, N. P. Kondratieff, who, in the 1920's, first identified these 50-year cycles.

I don't believe this cycle will necessarily repeat. But I do believe we are in a period where food and energy prices will remain relatively high for a good long time; and if we get back to rapid rate of growth, I suspect raw materials as well.

Now, each time it happened in the past, the world economy was brought back toward balance by an expansion of investment in new directions-directions which would increase the supply of agricultural products and raw materials.

The first time it was done by an expansion in Britain itself during the Napoleonic Wars, and in the United States, which enjoyed in the 1790's and down to 1807 a prosperity almost like that of OPEC. Our raw materials and foodstuffs rose in price. It gave our new Nation a great lift.

The second time, in the 1850's, the problem was solved by vast investment in opening up the American Middle West, throwing the railway lines out as far as Minneapolis. Foreign capital poured in as the wheat price was high, and, of course, when the railroads were built and the land put into production our wheat poured into Europe and we all experienced a long period of low prices.

After the 1890's, when the American frontier had ended and we could no longer carry the burden of food exports at the old level, investment poured into Canada, Australia, the Ukraine, Argentina, to bring the world back into balance.

When it happened again in the late 1930's, the balance was reestablished down to 1951 not so much by opening up new territories, because there weren't any, but by an extraordinary increase in the productivity of agriculture, with all the new seeds, chemical fertilizers and so forth.

Against this background-not being bound by history, but feeling our way in the light of the patterns of history-the critical question we have got to answer is: In what new directions must investment flow to get our economy and the world economy back into balance?

Once you put the question that way, I think the answers are reasonably clear. The answer is: into energy-including solar energy

for house heating and cooling-as well as in coal, gas and the rest; into energy conservation, including the insulation of housing; into mass transport to try to separate the use of the automobile for commuting from its use for recreation; outlays to counter air pollution; to counter water pollution; to preserve our precious agricultural base; and to expand R. & D., which I believe over the next generation is going to be a growth industry over a wide front. We have a few new physical frontiers to open: Alaska, the North Sea, the eastern slopes of the Andes. But basically, we are going to have to bring the economy back into balance through research and develpment, as we did, in effect, in American agriculture frm the late 1930's forward.

Now, my second basic point: The route back to full employment and high rates of growth is through exactly the kind of expansion in investment we need to bring our economy and the world economy back into balance. There is a convergence between the need to restore balance in the world economy and the way you get back to full employment. I do not believe that convergence is yet clearly perceived by economists; nor has this perception fully entered the political dialog.

The question worth asking is: Why can't we get back to full employment by a somewhat larger Federal deficit, or by persuading the Federal Reserve to be a little bit more liberal in the money supply? There are deep structural reasons why those old remedies, with which we are so familiar, are not sufficient now, although of course, fiscal and monetary policies remain part of the equation. The great boom-the most extraordinary boom in all of the world's historywhich ran from 1945 to 1974, was carried forward in the industrial world by certain leading sectors: the mass diffusion of the automobile, not only in the United States, but Western Europe and Japan; durable consumers' goods, television and all the household gadgetry; the move to suburbia, not only in the United States, but Western Europe and Japan; the roads, motels, and everything that went with that automobile revolution.

In addition, there was an extraordinary revolution in outlays for education, especially higher education, in the United States and elsewhere: for medical services; and in travel.

Now the rise in the relative price of energy has hit at every one of those structural bases for expansion. It's hit directly, of course, at the automobile, and energy-intensive household gadgetry, as people read their utility bills. It's struck at long-distance travel, and by reducing real incomes and the public revenues, it's also put the whole calculus between public and private outlays into a new light. From New Zealand through Australia, to Labor Party Britain, to California, and the rest of the United States, politicians have reacted by saving: "We must now contain public outlays for welfare purposes."

Given the shift in relative prices, there are, then, limits to the use of the old remedies of expanded consumers demand to get us back to where we want to be. What we need, in my view, is a certain amount of restraint in expanding public outlays for education, health

and welfare; but we need a vast increase in investment, including government inverstment in the directions I listed a moment ago.

You may ask: Why can't private enterprise do the job as it did in the past when restoring balance in the world economy?

In part, private enterprise will respond to price shifts. But if you look at the energy field, for example, there is agreement government must play a larger role. Whatever the perspective-whether it's the Ford Foundation Report or Ed Teller's Report for the Critical Choices Commission-they all end up with a long list of things that the Government must do to make it possible for private enterprise to do its job in energy; and an equally long list of things only Government can do.

The same is true, of course, with housing; with mass transport; with R. & D.; with agriculture. And this is true not only in the United States but all around the world. For good or ill, governments are into these fields so deeply that I don't see, Mr. Ash, how they can get out; and, as I say, in some cases, the nature of the task makes it impossible for private enterprise to do the whole job.

In fact, in making the case for planning, one can argue that we have gotten into some of our difficulties through bad planning in energy and agriculture. There is no way for Government to get out of these fields. The question, therefore, is not planning versus no planning; but good planning instead of bad planning.

If I'm right, then, some things must change. First, my economist. friends must go beyond the four issues about which they have argued with each other for 40 years now and taught their politician students to argue.

The four issues are: fiscal versus monetary policy as the optimum tool to manipulate effective demand.

Second, what's the trade-off between unemployment and inflation? How much unemployment will you accept to have a little less inflation?

Meanwhile, the Phillips curve, which is supposed to define that relation, has moved out to the right and gone nearly out of sight. But they go on with the same argument.

Third, should a marginal increase in real income go for public services or private outlays?

Finally, should you go back to full employment by stimulating consumption by unbalancing the Federal budget of stimulating investment by changing the tax system.

The central difference between my colleagues and I is my emphasis on the need to disaggregate and act in particular sectors.

We must also shift away from public-private confrontation in our political life, in which the private sector is sometimes used as a scapegoat for certain deeply rooted problems. The private sector is now frightened and defensive, and that's no way for an effective private sector to be in a mixed economy.

If institutions in the private sector break the law, they ought to be brought into court: but we are a society that needs a vital private sector; and we need a spirit of collaboration between the public and private sector.

Then we need some planning, and that brings me to your three questions, sir, and to my conclusion.

What role should the Government play in setting up long-term goals and the development of strategies for achieving these goals?

There are, of course, many areas in which you could apply that question: education, health, and so on. But in the field I am talking about, the critical job is for the Government, working with the private sector, to expand investment in the critical sectors I listed earlier. What is the Government presently doing in this regard? Is it in any way deficient?

It's doing something. Mr. Zarb's presence is a reminder of that. But the Government is more than the executive branch; it's also the Congress. What we need is a concept of where we are and what we have to do, shared between the Congress and the executive branch. Then we need to translate that shared concept into collaboration so that we firmly settle the trade off between energy and the environment, and get the other things done that urgently need doing.

What we are doing now is deficient partly because we lack machinery, but mainly because we lack a shared vision of where we are and what we must do.

What can be done to improve the effort? I don't believe we need a great big new institution for planning. All over this big town the raw materials for sectoral planning exist; in the energy administration, Department of Interior, Department of Agriculture, Department of Commerce, Department of Labor. The data are there. The problem is that there is no central point where the data are brought togethereither in the Congress or in the executive branch-in this sectoral perspective.

Look, for example, at the data at the end of the President's Economic Report to the Congress and see how aggregative it is. You can't even find out the level of energy investment in the United States, which is evidently one critical variable. Part of the reason is that the law makes it impossible for the Council of Economic Advisers to be big enough to hire experts on the sectors.

I don't think, then, that it would be difficult to get this kind of sectoral planning going. I don't think we need additional institutions. We do need a coordinating point, and that might be a somewhat bigger Council of Economic Advisers.

But above all, we need a new cast of mind; and that is, in part, the responsibility of my profession.

Thank you.

Chairman GLENN. Thank you, Mr. Rostow.

Mr. Ruckelshaus.

[The prepared statement of Mr. Walt W. Rostow follows:]

PREPARED STATEMENT BY W. W. ROSTOW ON "OUR THIRD CENTURY: DIRECTIONS" SYMPOSIUM

A THIRD VIEW OF THE FUTURE

Societies and governments cannot act effectively until they develop a consensus on the problems they face. Once problems are defined in an agreed way, men may well differ on the appropriate remedies; but the debate is then narrow and pointed, permitting fruitful compromise and action. Right now,