INFLATION AND THE BUDGETARY OUTLOOK

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85-00988R000600160044-2
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 16
• Document Creation Date: December 12, 2016
• Document Release Date: March 13, 2002
• Sequence Number: 44
• Publication Date: February 13, 1975
• Content Type: BOOK

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THE BROOKINGS
Teti
Inflation and the Budgetary 9,0 t
INFLATION AND NORMAL INCOME GROWTH, now and
in the foreseeable future, will increase federal revenues
much faster than federal expenditures for existing pro-
grams and new undertakings so far proposed by the ad-
ministration. Over the next six years, annual federal
revenues at full employment could rise by $165 billion
as against a growth in annual expenditures of $136 bil-
lion, leading to a potential full employment budget sur-
plus of almost $40 billion by 1980, unless taxes are cut
or other new programs are enacted in the interim. If
prices rise by 5 percent a year rather than by the 3 per-
cent assumed in this projection, the 1980 full employ-
ment surplus could be another $20 billion higher. In
either event, future federal budgets could accommodate
a range of new initiatives.
This prospect underlies the conclusions reached in
the fifth of the annual series of Brookings studies en-
titled Setting National Priorities. The authors of this
year's analysis of the fiscal prospects and national policy
issues reflected in the President's proposed budget are
Barry M. Blechman, a senior fellow in the Brookings
Foreign Policy Studies program, and Edward M. Gram-
lich and Robert W. Hartman, senior fellows in Economic
Studies. Karen Davis, a research associate in Economic
Studies, wrote the chapter on national health insurance.
In projecting the budgetary outlook, the authors take
into account two important initiatives proposed by the
administration, the first of which is a major change in
the nation's defense posture. The administration seems
to be taking a much stiffer view of defense require-
ments than it did in 1973. As the United States with-
drew from Southeast Asia, it scaled down its general
purpose ("conventional") forces, sharply reducing the
numbers of army divisions, ships, and aircraft from the
peaks attained in 1968. The administration believes that
these decreases in U.S. military capability have gone as
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far as they can go wilt jeopardizing the nation's
security.
This year's defense budget and the administration's
accompanying statements defining the nation's military
requirements point toward a "new look" in defense
policy and military strategy. Some of the proposed
measures would reduce the cost of defense: cuts in the
number of military support and auxiliary personnel and
renewed emphasis on buying less expensive ships, air-
craft, and weapons are particularly important in this re-
gard. Other proposals, however, would more than offset
these efficiency measures: enlarging the size and capa-
bility of general purpose forces, expanding airlift capa-
bilities, and accelerating the modernization of aircraft,
ships, and weapons. In addition, new criteria for deter-
mining the size and composition of strategic nuclear
forces, and a new emphasis on the readiness of general
purpose forces, would affect the U.S. defense budget
over the longer term.
The administration requests a large addition to the
Defense Department's budgetary authority to pay for
these first steps toward a significant change in the U.S.
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defense posture.. After adjusting for pay and price in-
creases and for the timing of the supplemental defense
budget request, the authors estimate that in fiscal 1975
a real increase of nearly 6 percent has been proposed for
"baseline" defense programs. ("Baseline" programs ex-
clude the cost of payments to retired personnel, support
of other nations, and the remaining incremental costs
of the war in Southeast Asia.) If the administration's
program is enacted as proposed, defense spending will
continue to increase through the remainder of the de-
cade. Outlays will grow by an average of 5 percent a
Setting National Priorities: The 1975 Budget, by Barry M.
Blechman, Edward M. Gramlich, and Robert W. Hartman.
Published May 1974, 269 pages, $2.95 paper, $7.95 cloth.
year in real terms through 1980, ending a five-year de-
cline in the share of the federal budget devoted to de-
fense.
The administration's second major initiative is a new
national health insurance proposal. This program would
call for additional federal expenditures of about $8 bil-
lion a year starting in 1977, and would require private
employers to contribute roughly four times that amount
in premiums for their employees. The Kennedy-Mills
plan, a leading alternative, would have the government
assume the costs of employee premiums and thus add
much more to total federal spending. Since a payroll tax
is part of the Kennedy-Mills plan, however, the net
effect on the federal budget surplus would be about the
same as under the administration proposal.
Either plan would make health insurance universal,
provide virtually free medical care to the very poor but
require more affluent persons to pay a larger part of their
medical costs, protect everyone against catastrophic
medical expenses, and include provisions intended to
discourage further rapid increases in the cost of health
care. Aside from their methods of finance, the plans
differ in that the administration proposal would give
private insurance companies and states a much larger
responsibility for administering the system and con-
trolling the costs of medical care.
THE BROOKINGS BULLETIN
Vol. 11, No. 2: Spring 1974
9 The Brookings Institution 1974
Published quarterly
The Brookings Institution is an independent organization
devoted to nonpartisan research, education, and publication
in economics, government, foreign policy
and the social sciences generally.
Second-class postage paid at Washington, D.C.
Postmaster: Change-of-address cards (Form 3579) should ire sent to
The Brookings Institution
1775 Massachusetts Avenue, N.W., Washington, D.C. 20036
Blec man, Gramlich, and Hartman examine the costs
and benefits of trends in other important policy
areas:
Continued rapid growth in income support programs.
Social Security benefits remain the largest single item in
this category, but much of the growth is accounted for
by ne er programs that provide supplemental security
incom~ to the aged and disabled and that expand the
availability of food stamps. In addition to discussing
possible improvements in these programs that would
raise their costs by about $4 billion a year, the authors
also consider whether several existing programs should
be replaced by a universal negative income tax that
could cost up to $17 billion a year by 1980.
Increasing attention to long-run energy needs. After
comparing alternative strategies for achieving inde-
pendence in energy sources, the authors conclude that
fuel stockpiling would probably cost much less than a
policy of strict self-sufficiency as a means of insuring
against' the effects of oil embargoes. They assess the
merits of stepping up research and development ex-
pendit4res for alternative energy sources, revamping
urban mass transit grants so as to reduce demands on
existing energy supplies, eliminating domestic depletion
allowances to encourage the use of nondepletable re-
sources, such as nuclear and solar energy, and eliminat-
ing foreign tax advantages to stimulate the develop-
ment of domestic energy supplies.
Dim{nishing growth in grants to state and local gov-
ernments for education, manpower, and urban com-
munity
commit
development. The authors find that if federal
merits proceed at the rate proposed in the budget,
inflation will have eroded $2 billion from the value of
these programs between fiscal 1972 and 1975. Projec-
tions based on the administration's budget requests indi-
cate a flurther decline in real spending levels that would
check the expansion of several programs inherited from
the GrIat Society.
A difficult budgetary planning problem arises from
the fac that these grant-in-aid programs must compete
for fords in the annual appropriation process, unlike
most open-ended income support programs, which grow
automatically. In the 1975 budget, open-ended programs
and other "uncontrollables," such as interest on the
federal debt and pay raises for federal employees and
pensioners, will account for nearly three-fourths of the
increase in federal spending. Given the administration's
decisiol to expand the defense budget but to limit the
rise in ~otal spending to $30 billion in 1975, only about
$3.5 bi lion will be available to increase domestic pro-
grams c ther than income support. Most of this margin
is earmarked for pollution control, urban mass transit,
and energy research, leaving less than $300 million-
not nearly enough to compensate for inflation--for ex-
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pansion of grants for education, health, manpower
training, and related activities.
Turning to an immediate problem confronting the
administration, the authors analyze the merits of a tax
cut to counteract the expected rise in unemployment.
They point out that, when. measured by the full employ-
ment budget surplus, the fiscal policy proposed for 1975
is more restrictive than at any other time since the early
1960s. Then they compare alternative proposals for les-
sening restrictiveness-the Mondale and Kennedy plans
for reducing personal income taxes, and two proposals
that would cut the social security payroll tax. All would
reduce federal revenues by about $6 billion a year, but
with varying benefits for low- and middle-income
groups. The analysis suggests that such tax cuts could
partially compensate those groups for the damage done
by inflation and rising unemployment, without worsen-
ing inflation to a significant extent.
In addition to analyzing the administration's pro-
posals, Blechman, Gramlich, and Hartman examine the
costs and benefits of other program initiatives not re-
quested by the administration. In addition to the income
support and social grant programs mentioned above,
the authors examine the possible need to cut some of the
more regressive federal taxes and to provide additional
budgetary saving for a "fiscal cushion" to discourage
higher interest rates. Some, but not all, of these ventures
could be financed by the budget surplus foreseen in the
years ahead. In the authors' view, that prospect empha-
sizes the need to reexamine the objectives and perfor-
mance of existing federal programs, as well as the justifi-
cation for the tax preferences now embedded in the
federal revenue system.
Research for the defense chapters of Setting National
Priorities was carried out as part of a continuing pro-
gram of studies supported by a grant from the Ford
Foundation. The project as a whole was supported by
grants from the Carnegie Corporation of New York and
the Richard King Mellon Foundation.
The American Tax System :
Who Bears the Burden?
Americans pay more than a quarter of their incomes to
the federal, state, and local governments in a variety of
taxes. How the overall tax burden is distributed and
whether the result is fair are questions that have di-
vided economists and puzzled laymen over the years.
The debate has centered mainly on the individual in-
come tax, the largest source of governmental revenue
in the United States. Even though the other taxes ac-
count for twice the revenue produced by the individual
income tax, the distribution of these taxes by income
classes has not been generally known.
Joseph A. Pechman, director of the Brookings Eco-
nomic Studies program, and Benjamin A. Okner, a
senior fellow in Economic Studies, have estimated the
effect of all U.S. taxes on the distribution of income by
various income classes and by other characteristics of
the taxpaying population. Their study-Who Bears the
Tax Burden?-is unique in two respects. First, the esti-
mates are based on data for a representative sample of
72,000 families referred to as the MERGE file, which com-
bines information from the 1967 Survey of Economic
Opportunity with an Internal Revenue Service file of
individual income tax returns for 1966 (without, how-
ever, revealing the identity of the taxpayers). When
properly weighted, the sample accounts for the esti-
mated total income received by all household units in
1966, the most recent year for which adequate statistics
Who Bears the Tax Burden? by Joseph A. Pechman and Ben-
jamin A. Okner. Published April 1974, 119 pages, $2.50
paper, $5.95 cloth.
are available. This information can be processed quickly
in an electronic computer, allowing estimates to be made
in more detail than was previously possible.
Second, Pechman and Okner recognized that econ-
omists still disagree about the incidence of several im-
portant taxes-the corporation income tax, the property
tax, and payroll taxes-which may be shifted in whole
or in part to consumers. Instead of limiting their analysis
to one or two views of tax shifting, the authors prepared
estimates based on eight sets of incidence assumptions
that span the range of opinions currently held by econ-
omists.
The analysis is concerned solely with the distribution
of tax burdens, with no reference to the distribution of
benefits from the governmental activities that are sup-
ported by taxes. It shows how the distribution of dis-
posable income under the 1966 tax system differed from
what it would have been if all tax revenues had come
from a proportional income tax with the same yield-
that is, a tax bearing the same relation to income at all
income levels. (A tax is progressive when the ratio of tax
to income rises as incomes rise, and regressive when the
ratio of tax to income falls when incomes rise.)
Using the MERGE file, Pechman and Okner were able
to calculate the tax burden by percentile groups as well
as by absolute income levels, thus providing a compari-
son of tax burdens for groups representing the same
number (or percentage) of family units in various parts
of the income scale. Their principal findings are sum-
marized in Figures 1 and 2. Each figure shows the effec-
tive rates of federal, state, and local taxes throughout
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Figure 1. Effective Rates of Federal, State, and Local
Taxes under the Most and Least Progressive Incidence
Variants, by Adjusted Family Income Class, 1966
Effective tax rate (percent)
10,000 100,000 1,000,000
Adjusted family income (dollars)
Figure 2. Effective Rates of Federal, State, and Local
Taxes under the Most and Least Progressive Incidence
Variants, by Population Percentile, 1966
Effective tax rate (percent)
Least progressive
Most progressive
0 1 i 1 i I i, - I .~t__-
0 10 20 30 40 50 60 70 80 90 100
Population percentile
the scale of incomes for the most progressive and least
progressive sets of incidence assumptions used in the
study. The only difference between the two is that effec-
tive tax rates are plotted on a logarithmic scale by abso-
lute income levels in Figure 1 and on an arithmetic scale
by income percentiles in Figure 2.
Figure 1 gives the impression that there are large
variations in relative tax burdens between low- and
middle-income family units and between middle- and
high-income units. Under both sets of incidence assump-
tions, effective tax rates are high at the bottom of the
income scale and then drop perceptibly until the $3,000
level is reached. Between $3,000 and $25,000 the effec-
tive rates range between 20 and 25 percent of income
and then diverge above the $25,000 level. Under the
most progressive set of assumptions, the tax burden
rises sharply until it reaches almost 50 percent of in-
reaches, only about 30 percent for those with incomes
of $100?000 or more.
Figure 2 presents a very different picture. The dif-
ferencellin effective tax rates under the two sets of inci-
dence assumptions is very small over the entire scale of
income distribution between the tenth and ninety-
seventh percentiles of family units. Over this broad
range, overing incomes between $2,000 and $30,000
and including 87 percent of all family units, the tax
system is either proportional or only slightly progres-
sive. A both ends of the distribution the effective rates
rise sharply, but the rise at the top is much less pro-
nounced under the least progressive variant than under
the mot progressive one.
These data represent the weighted averages of many
taxes, some progressive, some regressive, still others
progressive in some ranges of income and regressive in
others. Pechman and Okner also examine the burden
of each) major tax at various income levels and by dec-
iles:
? The individual income tax is progressive over most
of the income scale but becomes slightly regressive at
the very top, reflecting the fact that in the highest
income classes a rising portion of total income is not
subject 'to federal or state income taxes.
? Saes and excise taxes-are regressive throughout the
entire income scale. They exceed 9 percent at the bottom
and fall to about 1 percent at the top, since the propor-
tion of family income spent on goods and services sub-
ject to t~x falls as income rises.
? Payroll taxes are progressive for families with in-
comes iIip to about $10,000 and then become regressive.
Their progressiveness at the lower end of the scale re-
sults from the facts that much of the income received
by ver~ poor families, such as welfare payments, is not
subject Ito these taxes; and that many low-income work-
ers are not in jobs covered by the employment tax sys-
tem. Payroll taxes are regressive above $10,000 because
they are levied at a flat rate up to a maximum amount of
annual earnings.
The krucial factors in determining the degree of pro-
gressiveness of the tax system as a whole are the as-
sumptions regarding the incidence of the corporation
income l tax and the property tax. If these taxes are borne
by stokkholders and other property owners, they are
highly progressive; but if one assumes that half of the
corpor'te tax is shifted to consumers and that the
proper y tax is a tax on shelter and consumption, pro-
gressiv~ness virtually disappears.
Regardless of the incidence assumptions, Pechman
and O ner find that the average tax bite is essentially
the same over most of the income distribution. Only
come for families with incomes of $1 million or more. families at the very top and bottom of the income scale
Under the least progressive assumptions, the burden pay an average of more than 25 percent of their income
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in taxes, and the overall tax system does little to reduce
income inequality.
Structural changes were made in the federal income
taxes in 1969 and 1971, payroll taxes have been raised
almost annually, and many changes have been made in
state and local taxes since 1966. Nevertheless, Pechman
and Okner believe that the general pattern of tax bur-
dens in a more recent year would not differ much from
that shown in their study.
Who Bears the Tax Burden? is the thirty-fourth pub-
lication in the Brookings Studies of Government Finance
series. Development of the tax data file was begun under
that program of studies, which was financed by the
Ford Foundation. The analysis of tax burdens was fi-
nanced by a grant from the U.S. Office of Economic
Opportunity.
The World's Energy Problems
Are Not Insoluble, If
In March 1974, fifteen private specialists from the Euro-
pean Community, Japan, and North America met in
Brussels to discuss what might be done to cope with the
new situation in world oil markets and to explore the
future prospects for energy supply and demand. Their
report, Cooperative Approaches to World Energy Prob-
lems, is not confined to the jarring events of 1973-the
Arab oil embargo and the attendant jump in world oil
prices-but also takes into account the changes that had
been occurring over the previous several years. In that
broader setting, the current situation is seen to have
emerged from a host of economic and political trends
that culminated in a shift in the relative market power
Cooperative Approaches to World Energy Problems, a tri-
partite report by fifteen experts from the European Com-
munity, Japan, and North America. Published June 1974,
51 pages, $1.00 paper.
of oil producers and oil consumers. "Efforts to find scape-
goats elsewhere will only blind us to realities," the ex-
perts say.
In projecting oil export capabilities and import re-
quirements through the period ending in 1985, their re-
port suggests that a large potential surplus of supply
over demand could arise well before 1980. In that event,
producers would, of course, have to restrict output suf-
ficiently to eliminate the threatened surplus, or prices
would fall.
All things considered, the experts believe that some
softening of oil prices is likely-perhaps even a sub-
stantial drop. But the lesson for the major oil importers
is not that prices may fall. It is rather that, through a
combination of measures to economize in the use of
energy and to develop domestic energy production, the
importing countries can restore the balance between
their own market power and that of the oil exporters.
Several major conclusions emerge from the experts'
discussion of policy alternatives. The first is that the
world's energy-related problems are by no means in-
soluble. The world is not confronted by an imminent
physical shortage of energy, nor-if they act wisely-
need consumers of energy face the prospect of continu-
ously rising prices. The interrelated problems that have
come to be known collective) as the "energy crisis"
ere cause essentiall b the abruptness and magni
u 7e o changes in the international oil market. Had
these changes come more gra ua y, there would ZT ave
been no crisis. sit s, e djustment to-
c ange will be di icu t but manageable.
e second conclusion is that solutions to most
energy-relate pro ems ei er require international co- Z_
operation or are best pursued in a cooperative context.
ttempting to go it alone could in some respects be
ineffective and self-defeating, or damaging to the inter-
national economic system on which the welfare of all
nations depends.
Thirdly, cooperation among the major industrialized
io~f witT'
the e-x-p-o-rFn-g-c-o-u-n-tr-le-s-,-6u-F-snc-)u-16 conce ate on ,er
measures to conserve energy an expan an iversi y r?
sources o energy. orig eTrm goaTsTiou e two join
wilt oil pro ucC ce in an effort to stabilize the produc-
tion and marketing of oil for the benefit of all. Coopera-
tive international efforts will also be needed to ensure
the safe development of nuclear power as an important
new source of energy.
Finally, participants in the meeting agreed that the
international community must give immediate attention
to two urgent problems:
? The industrialized countries must agree that none.
of them will try to adjust to the sudden increase in the
costs of their imported oil through measures that make
t -e _a just-ment problems of other nations more severe.
e industrial nations, and those oil exporting coun-
tries that have revenues in excess of domestic needs,
s ou join in efforts to help the poorer developing
countries to cope with the potentially devastating effects
o greatly increased tic and rain.
e tripartite meeting on world energy problems was
the fifth in a continuing series sponsored by the Euro-
pean Community Institute for University Studies, the
Japan Economic Research Center, and the Brookings
Institution to examine international economic policies
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E OKINGS BULLETIN
and problems from three geographical perspectives. A Japan, formed in 1973 to promote cooperative solutions
grant from the Charles F. Kettering Foundation and the to common problems of the industrialized nations)
participation of the Trilateral Commission (a group of helped to cover the cost of the North American share of
private citizens in North America, Western Europe, and the undertaking.
After Oil, Bananas 'and Bauxite?
Last year the Organization of Petroleum Exporting
Countries (OPEC) successfully engineered a major in-
crease in the world price of oil. Could producing coun-
tries band together to raise the prices of other commodi-
ties essential to the industrial world? This question is
explored in the following exchange between C. Fred
Bergs ten and Philip H. Trezise, both senior fellows in
the Brookings Foreign Policy Studies program.
Mr. Bergsten's argument is adapted from his state-
ment of May 15, 1974, before the Subcommittee on
Foreign Economic Policy of the House Committee on
Foreign Affairs. Mr. Trezise's rejoinder is based on his
remarks before an Open Forum meeting held at the U.S.
Department of State in March.
"Commodity Power
Is Here to Stay
C. Fred Bergsten
that a large number of
primary producing countries will make steady, de-
termined, and often concerted efforts to raise substan-
tially their returns from a wide range of the commodities
they produce, in part through the formation of "new
OPECs," and that many of them are in an excellent posi-
tion to do so.
None of the individual commodities susceptible to
such developments has the quantitative or qualitative
importance of oil. Nor is it likely that this new com-
modity power will often be used, as was oil,, for political
reasons-though oil may well be used for that purpose
again.
Nevertheless, successful "resources diplomacy" on
the part of producing countries will further intensify
the strong inflationary pressures now engulfing the
world economy, including our own. Since many of these
primary producers are developing countries, their ac-
tions will also reduce the North-South economic and
political disparities that characterized the first postwar
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genera ion, and thus may put new constraints on U.S.
foreign policy in the coming years.
Since I first called attention to the likelihood of these
developments a year ago in "The Threat From the Third
World'f (Foreign Policy, Summer 1973), their scope and
depth have expanded dramatically.
? OPEC itself effectively quadrupled the price of oil
and cut production sharply. Oil :is of course the most
important commodity in world trade.
? The leading coffee producers have established ef-
fective control over the world coffee price. Indeed, they
are so onfident of success that they let expire the Inter-
national Coffee Agreement, which they had previously
relied on to secure the cooperation of the consuming
countries in stabilizing prices. Coffee has traditionally
been the second most heavily traded commodity in the
world.
? The phosphate producers acted together to triple
their prices. Phosphate is of course a major input to
fertilizer and detergents.
? T e bauxite producers have formed the Interna-
tional 1 auxite Association. Immediately thereafter the
leading'I producer, Jamaica, demanded a fundamental
renegotiation of its present arrangements with the mul-
tinational aluminum firms now operating there, ap-
parently including an increase in the domestic process-
ing of t-Ie bauxite ore into alumina and six times higher
taxes and royalties on all output. It is widely assumed
that the other producing countries will demand terms
equal to those achieved by Jamaica.
? The Latin American banana producers have orga-
nized an International Organization of Banana Exporters
(know: by its Spanish acronym, IPEB) and raised their
prices substantially through the joint imposition of ex-
port takes.
? The major tin producers are seeking a 42 per-
cent increase in the guaranteed floor price maintained
through the buffer stock held under the International
Tin Agreement.
? The four major copper exporters, through their
long-standing organization CIPEC, are now deciding
how to fix a floor price for their commodity.
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Several qualitative developments have accompanied
this trend. More than two dozen developing countries
have set up ministries of resources to pursue their new
economic diplomacy. The call for new "producer associ-
ations" was a central theme at a special session of the
UN General Assembly. In a recent meeting of parties to
the General Agreement on Tariffs and Trade, the de-
veloping countries unanimously rejected a suggestion to
consider the establishment of new international rules to
guarantee access to supplies for consuming countries,
analogous to the traditional GATT rules guaranteeing
access to markets for producing countries.
Thus the commodity producers are aggressively seek-
ing to improve their earnings dramatically, through
whatever means they can devise to fit the opportunities
available to them, and they are recording substantial
successes. Two basic developments explain why they
are doing so.
First, the buyers' markets of the past have largely
become sellers' markets. Downturns in commodity
prices usually lead declines in the business cycle by at
least one quarter, which is why many observers began
to predict a bursting of the commodities boom in early
1973. Yet the prices of virtually all primary products
continued to rise, or declined only marginally from rec-
ord levels, until very recently-at least eighteen months
after they "should" have turned down-despite the
sharp decline in GNP in the United States and Japan
and markedly slower growth rates in nearly every other
industrial country. References to unsuccessful carteliza-
tion efforts during the past decade, when buyers' mar-
kets dominated, are irrelevant to the current situation.
Economists frankly do not understand why this has
happened. Double-digit inflation, itself caused partly by
the rise in commodity prices, has fueled further specula-
tion in commodities as faith in paper money folds; hence
a commodity-price spiral replaces or supplements the
wage-price spiral that has explained much of the in-
flationary bursts of the past. The advent of more flexible
exchange rates, while providing a major improvement in
the balance-of-payments adjustment process, may in-
crease this effect by reducing confidence in currencies as
against "real goods." The success of the new OPECs,
and fears that more are coming, may add yet another
loop to the spiral.
Because buyers' markets have become sellers' mar-
kets in virtually every primary product, market condi-
tions provide an ideal setting for producers to raise their
prices still further. Even the most persuasive counter-
argument to this thesis published so far concludes that
"there is an improved climate for group pressure or
price leadership, and where the trend is toward higher
mineral prices . . . the new aggressive stance of pro-
ducers would seem to make it irreversible." (Bension
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Varon and Kenji Takeuchi, "Developing Countries and
Non-Fuel Minerals," Foreign Affairs, April 1974.) As
always the rich get richer-this time, of course, with
some justice in that it is the nouveaux riches who are
benefiting.
The second fundamental change is the success of
OPEC itself. There is disagreement as to whether OPEC
is really a successful cartel, or whether it is simply an
inner group of four or five countries that have propped
up the market by restraining output, or whether the re-
sults are due solely to the activity of a single country
(Saudi Arabia), or whether-in light of Middle Eastern
politics-economics has anything to do with the situa-
tion.
These questions as yet have no widely accepted
answers. But whatever the answer, OPEC has worked.
Its success promotes "new OPECs" in several ways.
In purely economic terms, the dramatic increase in
oil prices forces every oil-consuming country to maxi-
mize its own export prices so as to limit the cost to its
balance of payments and internal growth. Many de-
veloping countries have no alternative; they can look
only to their primary products if they are to recoup.
OPEC shows that a producer-country cartel can work.
If OPEC can work for oil, similar organization may
even be easier to form for other commodities. OPEC
comprises a large number of countries reliant on a single
commodity, several of which hold very different views
on important economic and political issues, including
Israel. The absence of a concerted response to OPEC by
the oil-consuming countries can only suggest to other
primary producers that they need have little fear of even
subtle retaliation against their efforts. Indeed, virtually
every action taken by the industrial nations-notably
the scrambles for "special deals" by the Europeans and
Japanese-encouraged OPEC to take more and bigger
steps.
In addition, OPEC may help its offspring directly.
The Shah of Iran has spoken publicly of such possibili-
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ties, which are one way-perhaps a very profitable way
-for the oil producers to mitigate the economic damage
they have done to a large number of countries that are
still relatively poor. Since the OPEC countries are look-
ing for profitable ways to invest their oil earnings,
simple purchases of commodities (including futures) in
the open market might meet their economic and politi-
cal goals simultaneously.
It is often argued that producer-country cartels for
other primary products will not work evert if the coun-
tries involved try to form them. That argument is not
persuasive. Only three prerequisites need be satisfied for
such cartels to succeed.
The economic requirement is a relatively low price
elasticity of demand for the commodity in question-
that is, a higher price must neither reduce final demand
for the product excessively nor trigger substitution by
similar commodities. Existing knowledge of these elastic-
ities suggests that they are quite low for a wide range
of primary products. Substitution-of aluminum for
copper, for example-is unlikely if the prices of all com-
modities are high and rising, as they have been in recent
months. Moreover, the huge investments required to
develop new sources of supply or substitutes-often in
"politically unstable" areas-are a major deterrent to
increased production even in the medium term.
In short, it would be unwise to assume that "the mar-
ket" will quickly abort the efforts of primary producers
to boost their returns substantially.
The political criterion for a cartel is simply an ab-
sence of overt enmity among the participating countries.
They need not be allies or even hold similar foreign
policy views. Some of them would have no reason even
to communicate except to maximize their commodity
power, as in the case of Bolivia and Malaysia on tin,
and Chile and Zambia on copper.
It is a common fallacy that only "shared political
values" subsumed in hatred for Israel bound together
the oil producers. In fact Iran, the second-biggest ex-
porter and the leader in raising oil prices, has been con-
sistently pro-Israeli and continued selling oil to Israel
during the Yom Kippur war. Important producers such
as Venezuela and Indonesia care little about Middle
Eastern politics. Sharp divergences exist even within the
Arab world on how best to use the oil weapon. In this
case the value-sharing is far from monolithic, and
hardly explains the success of OPEC.
Nor is it true that a surfeit of foreign exchange en-
abled the oil producers to take the risk of cartelization.
Iran and several other producing countries actually held
small reserves and spent everything they earned. Con-
versely, potential members of other cartels (Malaysia,
Brazil, and Australia, among others) have sizable re-
serves. Poverty may encourage cartel efforts more than
Approved
it will deter them. On balance, then, the foreign ex-
change position is not what made OPEC succeed.
Lastly, a cartel is manageable only if (a) relatively few
countries are involved, or (b) a single country is willing
and able to dominate the market. One or the other of
these conditions is present in a wide array of markets
for primary commodities.
Such generalities obviously cannot be applied with-
out reservation to every primary product at every
moment in future time. Intensive analysis of the eco-
nomics and politics of individual commodities is neces-
sary to (provide a clearer fix on each.
Nevertheless, individual commodity developments-
like individual acts in international trade or monetary
policy--take place within a broader framework of eco-
nomic and political trends. The trends outlined above,
coupled with the new ability of developing countries to
pursue national policies that effectively serve their in-
terestsIand reflect their view that the international eco-
nomic ystem has worked against them far too long,
suggest that commodity power and resources diplomacy
will be With us for a long time to come.
More OPECs Are Unlikely
Philip I-I. Trezise
I DO NQT BELIEVE that widespread fears about supplies
of primary commodities other than oil have any substan-
tial basis. Putting oil aside, I see small likelihood that
producing countries will be able to concert effectively
for vey long on policies to limit supplies and raise
prices. Again excepting oil, politically motivated em-
bargoes on exports of primary commodities are improb-
able and in any case would be unsuccessful.
The ,general proposition is that the Organization of
Petroleum Exporting Countries (OPEC) has provided a
model for other producers of raw materials. It follows
that the spectacular rise in the price of oil inevitably will
lead countries producing minerals and tropical products
to emulate OPEC by establishing cartels for their com-
moditi0s. I think, however, that this is a misreading both
of OPEC and of the possibilities for managing supplies
of prin: ary goods.
Coni Sider first the conditions for an effective cartel-
that is,! for successful concerted producer action to raise
prices. Broadly, they are two:
First, producers must be willing and able to withhold
enough supplies to affect the market. If only some pro-
ducers do the withholding, others must refrain from
making up the difference. If consumers have stockpiles
to draw on, the producers must hold back a greater
volume of goods. And new suppliers mustbe kept out.
 VOLUME ELEVEN, N6tW9yeAvFcprQVlease 2002/03/25: CIA-RDP85-009881 00600160044-2 9
Second, consumer demand for the cartelized product
must be relatively unaffected by higher prices. If con-
sumers can do without, or economize, or find suitable
substitutes, then a cartel will find the going rough even
if its members are able to act together.
These are hard conditions to satisfy.
It is not a simple matter to manage the supply side.
The temptation to cheat is always present among pro-
ducers. Many of the countries involved have limited
financial staying power. For some of the metals, which
are the subject of most of the present worries, reserves
are rather widely distributed. Cartels for these products
must stretch over a large number of countries if they
are to work. Lower grade reserves in nonmember coun-
tries will come to be exploited. And stockpiles can be
put on the market.
On the demand side, price elasticities will vary among
commodities. In no case, however, is it plausible that
consumers will be helpless in the face of producer efforts
to raise prices. The nascent banana cartel would appear
to have limited market power, given the variety of fruits
available to consumers. Could tin producers have sig-
nificantly better prospects, considering the alternative
materials that can be used for the same purposes? Cop-
per, bauxite, rubber, coffee-whatever the product, the
outlook is that higher prices will cause users in due
course to reduce consumption and alter their buying
habits. These frustrations always face the would-be
organizers of cartels.
Oil may be said to be a special case. The price elastic-
ities for oil are probably low everywhere. A large part
of exportable output is controlled by a few producers,
some of them well stocked with financial reserves. Per-
haps more than any other primary product, oil is suitable
for concerted measures to raise prices. The current folk-
lore is that OPEC did indeed demonstrate in 1971 and
again in 1973 the potential and the power of cartel
action.
The facts about OPEC as a cartel do not quite corre-
spond with the received wisdom.
OPEC was formed in 1959 in response to a reduction
in the posted price and thus in producer country reve-
nues from crude oil. Through the 1960s the real price
of crude oil nonetheless continued downward. In 1970
Libya, which had become a major supplier of crude to
Western European markets, had a revolution. The suc-
cessor regime, independently of OPEC, cut output
sharply in a partly political contest with the oil com-
panies whose concessions were granted by the previous
regime. Libya by itself, not OPEC, made possible the
sizable price increases of 1971, which were ratified in
the so-called Tripoli and Teheran agreements. The new
prices would quickly have come under downward pres-
sure from rising output in the Persian Gulf had not a
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surge of import demand in the United States strength-
ened the world oil market, fortuitously for the oil coun-
tries. U.S. imports of crude oil grew by two and one-
third times between 1970 and 1973, from 1.5 million to
3.5 million barrels a day.
The round of much larger OPEC price increases in
1973 was made possible, of course, by the production
cutbacks enforced in Saudi Arabia, Kuwait, and a few
smaller Arab oil countries in the wake of the Yom Kip-
pur war. Concerted action was taken by a few-not all
-of the Arab countries in an atmosphere charged with
high political emotion. It was certainly not an OPEC-
wide master design. Most OPEC countries raised output
as much as they could.
These events confirmed what was already apparent-
that oil supplies from the Arab states are vulnerable in
time of political crisis or war in the Near East, that prices
will go up when supplies are short, and that the normal
producer response to higher prices is to take advantage
of them. Whether they mean that OPEC could hold
down production levels elsewhere if Saudi Arabia were
to resume the expansion of output is much less certain.
The same holds for OPEC's capability to induce or en-
force producer unity as other adjustments are made in
world energy markets on both the supply and demand
sides.
If the oil "cartel" is a somewhat questionable proposi-
tion, cartels for other primary products are far more so.
Nothing in experience indicates that a number of sup-
plying countries can operate together in a disciplined
fashion for very long. It is evident, notably in the in-
stance of the International Coffee Agreement, that even
when producers and consumers agree to cooperate to
hold prices steady, serious problems arise in keeping
producers in line. The truth is that most of the countries
producing primary commodities have very limited capac-
ities for managing supply. Disappointment, not suc-
cess, is the likely fate of the cartels now being so easily
proposed.
The policy lessons I would draw from this are not the
currently conventional ones. I see little need to gear up
to defend ourselves against threats from the Third
World. We do have commodity problems, both in sup-
ply and trade terms, but, like all problems in foreign
economic policy, they will require for their solution the
acceptance of special responsibility by the industrial
countries and cooperation, not confrontation, between
the industrial and developing countries.
First, the major trading nations-some, particularly
the United States, are great primary product exporters
themselves-ought to make a strong effort to tighten
the rules on export restrictions as applied by themselves.
There is little prospect that the developing countries will
be ready to accept any such discipline, but it should be
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obvious that they will scarcely feel bound to refrain
from considering embargoes on exports if the United
States, Japan, and the European Community are free to
do as they please. In any event, it is important that the
industrial countries agree to restraints on their own
actions, which can be destructive of international comity
whatever the developing nations may do.
Second, a case can be made for a new look at com-
modity agreements. As prices slip from their high levels,
the developing countries are bound to come back to the
question of producer-consumer cooperation to stabilize
commodity prices. To be sure, the record of the past
shows that stabilization agreements are hard to nego-
tiate and perhaps harder still to operate, but the few
that have been established have had their uses. Much
can be said for new efforts to check commodity price
fluctuations, through buffer stocks or other approaches.
The long downward trend of primary product prices
from 1951 to 1968 contributed to the capacity short-
ages that sent prices skyrocketing in 1972-73, as well
as to the frustrations of the developing world. We could,
and should, try to do better as the recent boom fades
and prices weaken.
Making Sense of a
World in Flux
Even a headline skimmer knows that fundamental
changes are occurring within and among the industrial
nations, and between those nations and the rest of the
world. The rush to make bilateral deals with the Arab
oil producers, continuing alarm over worldwide food
shortages, and India's explosion of a nuclear device are
a few of the signs that the old order may be coming
apart. Probing beneath the surface of events, Seyom
Brown, a senior fellow in Brookings' Foreign Policy
Studies program, analyzes New Forces in World Politics
--- the political, social, and economic trends that seem to
him likely to prevail during the last quarter of the
century.
Brown points out that the range, destructive power,
and distribution of modern weapons are making inde-
New Forces in World Politics, by Seyom Brown. Published
June 1974, 224 pages, $2.95 paper, $7.95 cloth.
pendent military forces inadequate to defend most coun-
tries, while military technology is making mutual defense
pacts less valuable to the superpowers and less reliable
for weaker members of the superpower coalitions. At
the same time, coalitions along economic lines within
and between military blocs have gained prominence at
additional expense to alliance solidarity.
Approved
In any industrialized countries, the anomalies of
poverty, inflation, crime, fuel shortages, and environ-
ment4l decay in the midst of affluence have impaired
publi~ confidence in national leaders and stimulated
demands that governments attend to problems at home
before minding the business of foreign societies. As a
conseouence the mutual defense pacts cemented during
the cold war are loosened further..
In the Soviet sphere, continuing modernization has
made !it politically costly to continue to postpone atten-
tion to civilian needs, many of which now require im-
ports of commodities and technology from the West.
However, the abandonment of economic autarchy poses
a dile#nma for the Russians: Only a credible policy of
peaceful coexistence will encourage Western countries
to extend credits, liberalize their strategic embargo lists,
and o herwise reduce barriers to East-West trade; but
increased contact with the West could increase dissi-
dence within the communist countries themselves. "As
incentives and opportunities for cross-alliance interac-
tions Oise," Brown says, "the risks-particularly to the
Soviet's Union's control over Eastern Europe and over its
own r stive national groups-also rise considerably."
With the decline of the cold war, many Third World
countries have found themselves reduced from valued
clients of the rival superpowers to expendable pawns.
The result has been a search by the poor "South" for
new ways to extract concessions from the prosperous
"Nortljc." But only a few Third World countries have
raw mlliaterials, such as oil, that can be used directly as
bargaining counters with industrial consumers, or in-
directly to accumulate financial assets that could increase
their international influence. Without a decisive shift in
the patterns of global income distribution, the bitterness
of the, world's poor countries in the face of growing
international welfare disparities will deepen.
Conqurrently, the great mobility of people, materials,
ideas, and money in the rich sectors of the world econ-
omy-been most clearly in the operations of multina-
tional corporations-have lessened the ability of nations,
particularly the small and poor, to regulate their domes-
tic markets in the public interest.
Lasty, the pressure of the world's population growth
and industrialization on the earth's natural resources and
ecologies threatens the ability of even the largest and
richest 'I, countries to assure a majority of their citizens
the standards of living they demand.
One: result of these forces is a revival of nationalism,
as exemplified by the strife within NATO during the
Arab-Israeli war of 1973 and by the continuing rift be-
tween Russia and China. At the same time, however, the
nation-state system is increasingly incapable of dealing
with economic and social problems that are global in
scope. A central thesis of Brown's study is that both the
 VOLUME ELEVEN, ARAr%vPri~ForQplease 2002/03/25 : CIA-RDP85-00988gp00600160044-2
cold war coalitions and the nation-state system on which
they rest are being eroded simultaneously, though un-
evenly, in several parts of the world.
Brown believes these trends are leading toward a
global society unable to manage effectively either co-
operation or conflict. He foresees a "polyarchy" in which
nation-states, subnational groups, and transnational in-
terests and communities vie for the support of individ-
uals and for authority to allocate resources. Such a sys-
tem of world politics, Brown contends, could evolve in
peaceful or dangerous directions, depending on how the
United States and other powerful countries respond to
the forces that are upsetting the established order.
In an optimistic prognosis, important economic
groups, technologists, scientists, and other professionals
would be drawn progressively into interlocking patterns
of transnational association. The resulting interpenetra-
tion of societies could discourage war-provoking actions
by providing statesmen with "a rich web of interaction
for bargaining, registering grievances, and threatening
sanctions before total nation-to-nation hostility de-
velops."
However, Brown continues, many of the power holders
in such a polyarchic system would be even less account-
able than they are today to the wishes of the less de-
veloped, less mobile groups in world society. The upper
tier probably would comprise corporations and profes-
sionals in the high technology fields. Bargaining among
them would determine the social order; the public at
large would lose the political power it has slowly ac-
quired through national parliaments, and the corpora-
tions able to survive the transnational competition would
largely run the show. Because groups that considered
themselves disenfranchised by the emerging system
would be unlikely to tolerate its perpetuation, such an
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evolution of world politics would generate widespread
hostility against the transnational power holders and
thereby increase the likelihood of conflict. Polyarchy
could turn into anarchy, making raw power the only
arbiter.
If the emerging world political system avoided the
anarchic extreme, it still would lack effective and popu-
larly accepted means of coping with the problems of
interdependence. Without shared systems for mutual
restraint in the management of nonrenewable resources
and the environment, the prospects for mankind would
be bleak.
Brown maintains that the United States could serve its
best interests by working with, rather than in opposition
to, the forces that are reshaping world politics. It could
do so by deemphasizing its military and ideological al-
liances, cultivating a variety of limited-purpose partner-
ships, and investing its diplomatic energies in attempts
to strengthen international institutions for new global
management tasks. Elements of the new policy would
include:
? Supporting a buildup of United Nations and other
"third party" machinery for resolving international
disputes;
? Seeking out opportunities to cooperate with ideo-
logical opponents on practical projects;
? Resisting the temptation to mobilize cold war allies
to speak in concert on new issues or to rely on the al-
liance to provide the scaffolding for new institutions;
? Promoting a more open international market in raw
materials, industrial products, and investment, but with
substantial safeguards for the poor countries;
? Providing adequate financial and political incentives
to the poor countries to cooperate with the United States
and other industrial countries in the international man-
agement of scarce resources, the oceans, the atmosphere,
and outer space.
Brown contends that this is a realistic posture for the
United States, given the emerging pattern of world
politics. He doubts that any alternative U.S. foreign
policy orientation could be less provisional or specula-
tive, even if it were premised on the conservative notion
that "the more things change, the more they remain the
same.
"In the new system," he says, "the most influential
countries are likely to be those that are major construc-
tive participants in the widest variety of coalitions and
joint or multilateral ventures.... Power in the form of
promises to apply or withhold military capabilities would
still be of decisive importance on vital security issues;
but compared with other forms of power it would have
little or even negative utility in bargaining over the non-
security issues over which coalitions will be forming and
re-forming in the post-cold war system."
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L ETIN
Are Three a Crowd?
Do third parties have a legitimate place in the American
political system? Judgments are divided. Some scholars
and politicians decry third parties as undemocratic and
a threat to American traditions, while others consider
them important contributors to the representative pro-
cess. Some view them as obstacles to a reasoned ap-
proach to public policy, others as innovative contributors
to the resolution of public issues. Daniel A. Mazmanian,
a research associate in Brookings' Governmental Studies
program, arrives at the latter view in Third Parties in
Presidential Elections, a study of the conditions that al-
low third parties to arise, their influence on the outcome
of elections and on public policy, and their value within
a two-party system.
He begins by analyzing George Wallace's American
Independent party of the sixties and nine of its leading
Third Parties in Presidential Elections, by Daniel A. Maz-
manian. Published June 1974, 163 pages, $2.95 paper, $5.95
cloth.
predecessors extending back to the Anti-Masons of
1832. The list includes a diversity of groups : Free Soilers,
Populists, Socialists, Theodore Roosevelt's Progressives,
Robert La Follette's Progressives. What did they have in
common? Examining the historical pattern of third-party
voting, Mazmanian finds that the emergence of signifi-
cant third parties depends on four conditions, each of
which is necessary for the next to operate
? Severe national conflict over a few very important
issues results in a period of "crisis politics."
? The electorate divides on one or more
issues into at least one intense and estranged
and a broad majority.
minority
? A politician or political group is willing to exploit
the situation by founding a new party.
Together, these conditions suffice to produce a large
third-party vote.
Mgre predictable than the emergence of third parties
is th ir demise. In subsequent competition with the two
majo parties, neither Wallace's nor any other significant
third party has bettered its initial popular vote. Their
consistent decline is due principally to the increased
attention paid by the major parties to the minority's
views, once the minority's voting strength is revealed
at the polls. This pattern has been repeated so regularly
that it will probably apply to any future third parties
that arise.
Ar~ third-party efforts worth making? Despite their
transitory nature, Mazmanian finds strong evidence that
third parties have affected the outcome of several elec-
tions and that the ideas they espouse eventually may
emerge as public policy. By dramatizing and sharpening
minority positions on public issues, they repeatedly have
forced controversies into the open and compelled the
major; parties to respond. Thus the Free Soil party forced
debate on the issues of land settlement and the restric-
tion of slavery in the election of 1848, and the Populists
brought the concerns of western and southern farmers
to national attention in 1892. The ability of third parties
to dr~matize issues doesn't mean that their positions
become cornerstones of public policy, yet many of their
demands-progressive taxation, regulation of railroads,
child labor laws, social insurance-have been adopted
by th$ major parties and eventually enacted into law.
Inevitably, however, third parties have met with a
mixed reception in a country in which the two-party
tradit}on runs deep. Critics argue that they threaten
stab il'ty by encouraging extremism and fragmentation
of the political system. Because third parties tend to be
conta sous, the argument runs, eventually they could
embroil the United States in irreconcilable conflicts over
narrow objectives, as happened in the Fourth French
Republic and the Weimar Republic of Germany. Maz-
manian finds nothing in American political experience
to support this gloomy prognostication.
Nevertheless, third parties can and sometimes do pre-
vent a majority of popular votes from going to any one
of the major candidates in a presidential election, giving
rise to the argument that such parties endanger majority
rule. Although majority rule occasionally has been
abridged in the sense that one candidate has failed to
win mere than 50 percent of the popular vote, Mazman-
ian concludes that removing the third-party contender
would
tial ra
have changed the outcome of very few presiden-
es. In the electoral college their influence is nil.
? Both major parties reject or avoid the position of Neverl,has a third party played kingmaker in the elec-
the minority, thereby alienating the minority. toral college by throwing its votes to one of the major
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VOLUME ELEVEN, NUMBER TWO
party candidates, or forced a contingent election in the Mazmanian's study is the sixth in the Brookings series
House of Representatives. of Studies in Presidential Selection, a continuing project
In Mazmanian's view, the arguments against third that has been supported by a grant from the Ford
parties are far outweighed by the parties' value in draw- Foundation.
ing attention to neglected issues and proposing solutions,
some of which may be adopted by the major parties.
Although third parties do disrupt "politics as usual,"
they are hardly undemocratic, for they furnish the prin-
cipal means by which dissatisfied citizens may challenge
the reigning parties and exercise a check on their
performance.
Mazmanian considers these benefits important enough
to warrant adjusting the two-party system to encourage
third parties to survive after the crises that give birth to
them, and to participate in more than one election. An
example of a modified two-party system is found in New
York State, where the Republicans and Democrats vie
with each other and with third parties that are able to
sustain themselves over time. Two of the minor parties
-the Liberals and the Conservatives-not only partici-
pate in elections but also contribute directly to policy-
making in the state government. They do so within a
system of direct elections of a single chief executive,
plurality rule, two major parties, and other features com-
mon to American party systems.
Under the modified system as it operates in New York
State, a third party may run its own candidate, endorse
a candidate of a major party, or abstain from the election.
The major parties may choose between accepting an en-
dorsement, refusing it, or remaining neutral. The third
parties survive by endorsing major-party candidates on
some occasions and for some offices, while fielding their
own candidates and programs on others. A third party
need not abandon its independent organization, identity,
or ballot position when it supports a major-party con-
tender: it simply places the name of the major-party
candidate in its own column on the ballot. Over the
years, this system has produced a variety of party coali-
tions in New York, with the Liberals most often endors-
ing the statewide Democratic candidates and the Con-
servatives endorsing Republicans.
Mazmanian finds the principal advantage of the modi-
fied system to be the continuing presence of third parties
representing alternative policies and contrasting political
views-hence a continuing counterweight to the major
parties' tendencies to hedge, to opt for the center, and
to slight long-term planning and program development.
With the third-party alternative constantly available at
the fringe, each major party would have to move gradu-
ally away from the center to avert defections. Through
continuing participation in politics after the crises that
brought them into being, third parties could provide a
continual airing of minority views and encourage change
in a gradual and constructive manner.
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The Limits of Regionalism
A recurring problem of government is how to perform
functions that don't fit neatly into existing geographical
jurisdictions. Toward solving that problem, more than
thirty years of experimentation in the United States
have produced a variety of regional organizations that
span several states, the oldest and best known being the
Tennessee Valley Authority (TVA). Most of the others
were set up during the 1960s to plan and coordinate the
economic development of depressed areas, such as Ap-
palachia, or to assist in developing river basins. In Be-
tween State and Nation, Martha Derthick examines six
of the most prominent regional organizations, asking
how well they meet their various objectives, how they
might be improved, and whether they should be ex-
tended to other parts of the country.
Between State and Nation: Regional Organizations of the
United States, by Martha Derthick with the assistance of
Gary Bombardier. Published June 1974, 242 pages, $2.95
paper, $7.95 cloth.
Advocates of regionalism sometimes go so far as to
urge that state governments be replaced by regional
governments that would conform more rationally to the
"natural" or sociocultural features of American society.
Derthick considers it politically inconceivable that the
states would step aside and let regional governments
take over. Confining her analysis to the here-and-now,
she finds that regional organizations are expected to
serve at least one of three less ambitious purposes:
? Coping with the problem of scale that arises when-
ever public functions spill over state boundaries without
requiring nationwide action. As a means for carrying
out public functions on a regional scale, an organization
may have operating, regulatory, or management func-
tions; or it may plan and coordinate only. The TVA and
Delaware River Basin Commission fall into the first
category. The Appalachian Regional Commission
(ARC) ; the Title V commissions for regional economic
development, authorized by the Public Works and Eco-
nomic Development Act of 1965; and the Title II com-
missions for river basin planning, authorized by the
Water Resources Planning Act of 1965, fall into the
second.
? Coordinating federal agencies whose overlapping
functions encourage competition for funds, programs,
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THE BROOKINGS BULLETIN
and power. A classic case was the struggle among several
agencies for the right to develop various river basins a
,.generation ago. The Title II commissions were estab-
lished as much to deal with this kind of problem as with
the scale problem. The Federal Regional Councils, on
the other hand, are intended primarily to coordinate
other agencies by bringing together the regional direc-
tors of the major federal grant-giving agencies in each
of the ten standard federal administrative regions.
? Decentralizing governmental functions that have
been concentrated increasingly in Washington since the
New Deal. To that end, federal and state officials may
be brought together in a joint organization, or a purely
federal body (such as TVA) may be given authority and
flexibility to adapt its operations to local conditions. The
Federal Regional Councils represent still another strat-
egy whereby federal authority is delegated to field offi-
cials who meet in a coordinating forum, the interagency
council.
For analytical purposes, Derthick selects six cases of
regional organization. Three of them-TVA, the Dela-
ware River Basin Commission, and the Appalachian
Regional Commission-she terms "leading cases" in
that they have formal authority or other resources that
set them apart. The other three-the Title V and Title II
commissions and Federal Regional Councils-she calls
"generalized cases" because each actually comprises a
class of organizations. Although the leading cases prob-
ably have made a deeper impact on American society,
the others have a broader geographical scope and thus
are useful in estimating the results of extending regional
organizations nationwide.
Derthick examines each organization--its origins, its
principal activities on behalf of its region, its functions
as an agent of decentralization or coordination, and the
outcome of any attempt to duplicate or generalize it. She
concludes that the distinctive value of regional organiza-
tions lies in whatever merit they have as a response to
the problem of scale.
None of the organizations studied was particularly
successful as a coordinator of federal activities. Nor did
Derthick find much evidence to justify regional bodies
as agents of decentralization. Not only are the states at a
disadvantage in the joint bodies typically used to achieve
decentralization, but the joint organizations themselves
are limited in power and add little to what. the states
could do for themselves.
Derthick advances several reasons
forts so often fall short of their goals.
why regional ef-
First, any regional organization must establish itself
in a crowded, competitive universe of state and federal
government bodies. To gain a place among those power-
full rivals, it must adapt to them rather than try to
change them. Consequently every regional body has had
Approved
to operate in a narrower sphere than was originally au-
thori;Led, or to proceed at a slower pace. Even the TVA
abandoned the idea of becoming a comprehensive re-
gional planning agency.
Se~ond, the regional organizations that have been
widely reproduced are the weak ones confined to plan-
ning or coordination. The strong ones are political ac-
cidents, and accidents rarely happen twice. Each of the
leading cases grew out of circumstances that were
special and fortuitous, offering a singular opportunity
for innovation. A long debate over public versus private
ownership of nitrate plants and a dam on the Tennessee
Riven led to an unusual proposal to develop the river ba-
sin. ~} Supreme Court decision followed by a flood pre-
cipitated action on the Delaware River. The discovery of
Appa achian poverty by politicians and the media, plus a
sever flood, gave state officials an opportunity to appeal
for special aid. Instrumental in all three cases were deter-
mined leadership and weak or distracted opposition. In
contr,ast, the widely generalized organizations were to
one degree or another centrally planned in the Bureau
of the Budget, which clearly intended to limit their func-
tions and funds.
Third, the success of an organization depends on
settini and circumstance. TVA worked well in the Ten-
nesse Valley in the 1930s, but its results probably
could I 't have been duplicated in other river basins. In
qualit i of leadership, staff, and organizational spirit, the
TVA,'Delaware River Basin Commission, and ARC all
benefited from being new and experimental. Imitations
would lack the qualities of the original.
Lastly, regional organizations run against the institu-
tional 11 grain of American government. Forty years ago
the National Resources Committee studied regional prob-
lems and reached the pragmatic conclusion that the de-
sign of a regional organization should depend on its
prospective functions, its area of operation, the constitu-
powers required, and the costs and benefits. Der-
thick concludes that pragmatism is still the best policy.
To win the fight for existence, a regional organization
must have an extraordinary constituency support or
means'of self-support-conditions that depend on a for-
tuitou, coming together of opportunity, leadership, and
politic l backing.
Despite the odds, Derthick believes the Appalachian
Regio al Commission shows signs of being generaliz-
able. Tihe ARC began in 1965 as a channel for increasing
the flow of federal funds to the states, a function that
both enabled it to surmount the opposition of federal
agencies and induced the states to participate. The Title
V commissions are roughly patterned after the ARC; by
1972 all but eleven states were participating in such
commissions, and the U.S. Senate was considering re-
producing the ARC itself nationwide.
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Derthick doesn't advocate such an extension, since no
form of regional organization-with the possible excep-
tion of TVA-seems effective in attacking the problems
of coordination and excessive centralization. As for re-
gional organizations with operating or regulatory func-
tions, the best results are likely to be achieved ad hoc,
in response to particular needs that can be shown to re-
quire organization on a regional scale and to require it
so urgently that the inevitable costs in administrative
confusion are worth paying.
Martha Derthick is a senior fellow in the Brookings
Governmental Studies program; her associate, Gary
Bombardier, is now a staff member of the Subcommittee
on Intergovernmental Relations of the House Committee
on Government Operations. The study was sponsored
by the National Area Development Institute and sup-
ported by a grant from the Ford Foundation.
What's New at Brookings?
These are among the studies that have been started
recently in the Institution's three research programs:
Congressional Power. Events of the past decade suggest
to many observers that the institutional balance in the
American political system has been upset through ag-
grandizement of the presidency at the expense of the
Congress. James L. Sundquist will examine the institu-
tional balance, seeking answers to some broad ques-
tions: Has the Congress in fact declined relative to the
presidency? If so, when, in what ways, and why? How
might the Congress reassert the initiative in legislative
policymaking? Would the results be better, and at what
cost to governmental efficiency? Sundquist will combine
historical research with a systematic review of current
congressional practices during the remainder of this
Congress and the first year of the next one, building on
the research base established for his first Brookings
study, Politics and Policy.
World Agriculture: Reassessment of Trends and Poli-
cies. Judgments are divided as to whether an irreversible
turning point has been reached between world food
supplies and demand, or whether recent food shortages
are temporary. As a basis for informed agricultural
policymaking, the first part of this study will reassess
trends in agricultural production, consumption, prices,
incomes, employment, and trade in both market and
centrally planned economies, drawing on recent anal-
yses and case studies. Part two will assess the inter-
mediate and long-term implications for agricultural
policies in the United States and other industrial nations
and for the special problems of less-developed countries.
The study will be conducted by Fred Sanderson, a spe-
cialist on world agriculture who recently joined the
Foreign Policy staff as a senior fellow.
Unemployment, Inflation, and the Poor. Using the re-
sults of recent longitudinal surveys, Edward M. Gram-
lich will seek answers to four broad questions: (1) What
is the impact of varying overall rates of unemployment
on the patterns of employment and earnings of workers
in various income and racial groups? (2) How do un-
employment insurance, food stamps, aid to families with
dependent children, and other federal transfer programs
protect households against the effects of unemploy-
ment? (3) What effects do general employment condi-
tions have on family splitting, new household forma-
tion, and perhaps even birth rates among various income
groups? (4) Given the differing impact of inflation
among households, what kind of tradeoff between high
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employment and price stability should macroeconomic
policy be designed for, and how could income transfer
policies be used to protect families that are especially
vulnerable to inflation? The study will be supported by
a grant from the Department of Health, Education, and
Welfare.
Higher Oil Prices and the World Economy: An Ap-
praisal of Adjustment Policies. The purposes of this
study are to review the impact of the October 1973 oil
embargo and the subsequent rise in oil prices on the
economies of the United States, Western Europe, Japan,
and the developing countries; to assess and compare
the actions they have taken to deal with the problem;
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the project, which is supported by the Ford Foundation.
Tripartite Meeting on Future Trends in Primary Com-
modities and Their Impact on International Economic
Relations. Participants in this meeting will examine
market trends in primary commodities-minerals, tropi-
cal agricultural products, and perhaps cereals-to deter-
mine whether these trends have special significance for
the organization of the international economic system
and for relations between industrial and developing
countries. The group, consisting of private economists
from North America, Japan, and the European Com-
munity, will prepare a report reflecting its conclusions.
This meeting, the sixth in the series of meetings of
experts from these three areas to consider common eco-
nomic problems, will be held in Tokyo in October 1974
under! the sponsorship of Brookings, the Japan Eco-
nomic Research Center, and the Kiel Institute of World
Econo i mics.
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273. "D&R" Allocations in the United States, by Harold
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275. Future Directions for U.S. Trade, by C. Fred Bergsten.
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