Knowledge that Transforms

THE purpose of the present article is to clarify and suggest improvements in national income and product concepts as used particularly by the Department of Commerce. In developing the proposals, major problems of definition, duplication, and conceptual difficulty will be presented, together with a brief survey of the development of ideas, including some of the recent debates which focus attention on unsettled questions. Broad relations between the national income and product series developed by the Department of Commerce are indicated in Chart i, the various bars being drawn approximately to scale, as of I952.1 In national income accounting the emphasis on net value added by, or income accruing to, the various economic factors, as a result of productive services currently rendered, is well understood. On the whole this represents current money income (with some imputations), but it omits three important money income items: realized capital gains (losses), unproductive transfer payments, and government interest. It also omits one imputation of major significance: the value of housewives' services. Of the two main subdivisions of what are regarded as nonproductive government outlays, transfers and government interest, the latter was shifted from productive income in the official revisions of July I947. These conventions and changes, though generally recognized, are by no means universally accepted by specialists in the field. In fact, some of them are receiving renewed discussion in recent debates.2 All the factor shares on productive account are now entered in the Commerce national income totals before direct taxes are deducted. The addition of indirect taxes and depreciation or capital-consumption allowances raises these net totals to the Commerce gross national product totals, but this development has created confusion over the meaning of net product and the extent to which double-counting is involved in the gross totals.3 The Commerce Department also takes the national income as a base for developing its personal income series. By subtracting corporate profits (before direct taxes are deducted but after dividend allocations) and adding transfers and government interest (in the main), the Department secures a mixture of productive and nonproductive items of personal income and savings. Realized capital gains and losses are still omitted however.4

carried out we shall need a very substantial cut in individual income taxes. What that amount should be must be reached by a process of experimentation. I would lean on the side of bold reductions. We must learn to be prepared to reverse any action in such measure as events prove to be necessary. The President's Economic Report wisely counsels the need to be flexible. Unless the government is prepared to reverse itself, we shall never dare to act promptly and effectively. This is a lesson every member of the Congress needs very much to learn. Our experience since I948 gives proof of the fact that we can stoke an immense amount of fuel into the American economy without producing inflation. Since I948 (despite the Korean explosion) wholesale prices have risen less than i per cent per annum. In the peaceful days before the First World War, wholesale prices rose 3 per cent per annum for a period of I5 years. There is a real danger that we shall be too cautious always fearful of inflation and that in consequence we shall fail to reach even approximately our full production potential. There is also a danger that we shall be dragged down by the dogma of the balanced budget. It is generally agreed that the current ratio of money and liquid assets to GNP is favorable. As our GNP rises, our debt may also be permitted to rise, if that proves to be necessary to promote adequate growth and expansion. It is not improbable that the structural adjustment which is needed to offset the structural deflationary changes currently in process will require a cut in taxes substantially in excess of the cut in federal expenditures.

at a time when a further cut of farm income would be unwise. For Dr. Colm, the inadequate treatment of tax policy, the failure to consider the alternative sequels to an inventory decline (an interruption to a continued rise? a sideways movement after the decline? a further drop?) and finally the absence of any discussion of policy should the cold war become hotter these inadequacies are troublesome. Professor Bronfenbrenner wants a more adequate treatment of both growth and the international aspects of the problems. For Professor Hansen, the crucial weakness of the Report lies in the failure to deal with structural deficiencies related to a decline in government contribution and private investment. He contends that a revision of fiscal policy is required if GNP is to be maintained and to grow proportionately with the rise of productivity and numbers in the labor market. In the absence of a modified fiscal policy, the country's losses will be in the tens of billions of dollars. May I end by commending the excellent job done by the Joint Committee and its able staff, headed by Grover Ensley? The Chairman selected witnesses fairly, giving each vested interest fair representation and at the same time eliciting the cooperation of the best professional economists. Their seminars would have done credit to any university, with the discussion at a high level. There was no browbeating of witnesses: the purpose was to obtain the best assessments of the situation and the most practical proposals for therapy. In the Committee's Report, there was substantial agreement of members of both parties (the main areas of disagreement were some aspects of tax and investment policies); and more incisive and improved treatment (in the view of this writer) than in the Council Report on many points (e.g., public investment, a declaration to assure our friends abroad concerning anti-depression policy, agricultural policy, the adequacy of resources for a sound military policy). In view of the deterioration of Committee procedures on Capitol Hill, the Joint Congressional Committee deserves the approbation of all as a model committee. All the more to be regretted is the failure of other committees always to pay the attention that these recommendations deserve. It should be added, however, that the recommendations of the Joint Committee this year seem to have had considerable influence.

N this REVIEW' and in volume ten of Studies In Income And Wealth Professor Kuznets and the economists of the Department of Commerce have argued about the statistical determination of factor in national income accounting. The writings of the Commerce Department are filled with apologies and some apparent embarrassment for having to deal with the term out in the open, but Kuznets is more bold and unabashed. The dispute between Kuznets and the Department of Commerce economists is over what omissions and additions should be made to the statistical data so that factor returns or payments will represent factor as defined in economic theory. They find themselves involved in messy questions about the role of government services in production and use of resources, direct and indirect taxes, subsidies, and the cost of profits. Factor costs, Kuznets says, can be defined in terms of a partial (business firm) analysis or in terms of an aggregative (social) analysis. Factor in the partial sense are costs to enterprises that engage the factors.2 These factor are computed by adding the payments made by firms to the agents who own the labor, capital, or land employed but by excluding enterprise profits on the grounds that they are not a cost to the firm. Kuznets states that profits bridge the difference between the cost and market value of a firm's activity. To derive the factor of partial analysis, Kuznets subtracts undistributed profits of corporations and that portion of entrepreneurial net income that represents net profits from the net output valued at market prices. Although Kuznets in his social or aggregative viewpoint does not clearly distinguish between factor returns and factor costs, he believes that the sum of factor must always equal the market value of the total final product of the economy. The difficulty in perceiving the identity of factor and factor returns to the whole community is that the government, as a producer, complicates the relationships since there is no necessarily close connection between indirect taxes and intermediate government output. Social factor costs, which are identical with social factor returns, exclude all taxes but include the final product of government activity. The economists of the Commerce Department present a definition of statistical factor costs, which, as Professor Kuznets says, falls between his two definitions. Evidently the Commerce factor may be used in either the partial or aggregative analysis, for the Commerce economists write that factor are costs incurred by final buyers of output for the services of the productive resources embodied in their purchases. Or, for that matter, they are to the nation as a whole, which has only a limited quantity of economic resources to allocate among alternative uses. 3 From the payments made for the services of productive resources they would exclude excise taxes that enter market prices, but not undistributed profit items. Government services are considered as final products and do not enter into the private production as an intermediate factor. Mr. Denison admits that insofar as the free government services are used by business the market prices of privately produced commodities are less than their cost of production including profitbut he prefers not to estimate the size of the free government service in the absence of a definitive criterion.4 In concentrating on details and fine points, Professor Kuznets and the Commerce economists have raised a controversy about factor cost statistics which tends to obscure and certainly is irrelevant to the larger question which suggests itself to the student of national income. I Discussion Of The New Department Of Commerce Income Series, Simon I Income: A New Version; Milton Gilbert, George Jaszi, Edward F. Denison, Charles F. Schwartz, II Objectives of National Income Measurements: A Reply To Professor Kuznets, this REVIEW, xxx (August 1948). 2 op cit., p. I57. Gilbert et al., op. cit., p. 190. 4 Edward F. Denison, Report On Tripartite Discussions Of National Income Measurement, Studies In Income And Wealth, vol. I0, p. 73.