Automation Speeds Recovery, Boosts Productivity, Pares Jobs
Five economic facts of life stood out in the year 1961:
. SOFT RECOVERY. The mildest of the four U.S. postwar recessions brought an unexpectedly modest recovery. After hitting bottom in February, the economy turned up faster than predicted, only to stall in the summer. An upsurge in the late fall sent personal income to a record. U.S. consumers finally got over their yearlong frugality as retailers did a record Christmas business, and Detroit beamed over fourth-quarter auto sales that may even top the 1955 record of 1,700,000 cars. The year's net: not much better than 1960.
. HARD UNEMPLOYMENT. In the face of recovery, the unemployment rate stuck close to 7% for most of the year, finally dropped in November to 6.1%--which still left 3,990,000 Americans jobless.
. STEADY PRICES. For the first time in 20 years, U.S. business experienced the delights of expansion unaccompanied by inflation. Though the industrial production index reached a new high at year's end, the cost-of-living index crept up less than 1% during the year, and wholesale prices actually fell.
. BOOMING STOCKS. In years past, many Americans regarded the stock market primarily as a hedge against inflation. In 1961, even without that spur, Wall Street's bull knocked over one record after another, charged into the 720s on the Dow-Jones industrial index. On the New York Stock Exchange, a billion shares were sold, the biggest volume for any year since 1929.
. FOREIGN CHALLENGE. Those "Soaring Sixties," which bring a dry laugh in the U.S., really exist in Western Europe, thanks largely to the Common Market. The six member nations grew at a far faster rate than the U.S. in 1961, should soon join the U.S. and Russia as an economic superpower.
In the long sweep of history, however, none of 1961's most clamorous developments were likely to loom as large as another, less-publicized phenomenon: the coming of age of automation. Half reluctantly, the U.S public in 1961 began to sense that it was in the midst of a techno logical revolution, and to consider the consequences.
It was automation--in bookkeeping and on the production line--that largely dictated the timing of the 1961 U.S. recovery. It was automation that boosted the productivity of U.S. workers a healthy 6% during the year. It was also automation that compounded the most vexing problem of the U.S. economy: the growth of hard-core unemployment among the unskilled. In the U.S., 1961 was, above all, the year that automation took hold of the economy and shook it from top to bottom. What automation was doing to the U.S. in 1961 it would ultimately dp to all the world's industrial nations.
Farewell to Drudgery. Though, as a word, automation entered the American language only in 1946 (presumably when Ford Motor Vice President Del Harder snapped impatiently, "Give us some more of the automatic business, some more of that automation"), the idea of having machines do the work of man dates from the 18th century development of the steam engine and the spinning jenny. The big difference in 1961 is that machines have now begun to duplicate the work of men's minds as well as men's hands, and often do it better, faster, cheaper and more accurately.
The quintessence of automation is the computer, the whirring electronic box that can calculate, memorize, talk back, and--by designing future generations of computers--almost reproduce itself. The first business computers were delivered late in 1954. After several years of expensive trial and embarrassing error, of disappointments and ultimate breakthroughs, the computer in 1961 passed through the awkward stage and got down to serious work. This year, for the first time, sales and rentals of computers topped $1 billion, and the number of computers in the U.S., ranging from giant brains down to small, desktop convenience models, doubled to 9,000. Performing with even greater versatility than its inventors had dared to dream, the computer now touches every kind of business at every level.
What automation did for production workers in 1961 was to abolish much of the dirty and drudge work--the tedious, boring jobs that proliferated after Henry Ford's assembly lines in 1913 began to replace craftsmanship with mass assembly. In steel mills and chemical plants, yesterday's blue-collar worker now wears white overalls, sits at a pushbutton panel as massive as a cathedral organ, and takes home a technician's fat pay envelope. What computers did for clerks was to eliminate the menial paper shuffling, permitting people to spend their energies on more creative and profitable work. It could well be that computers are propelling the U.S. toward an era when the American worker can have his cake and eat it too: the material rewards of mass-produced abundance and the satisfaction that comes from performing an intricate and responsible job.
For managers, the computer in 1961 has become something much more than a way to mechanize paperwork. It has begun to solve management problems--to make economic forecasts, plan price strategies, direct production, chart distribution, analyze sales. By supplying management with information that was unavailable a few years ago. it narrows the executive's area of ignorance and broadens his area of decision-making influence, leaves less room for seat-of-the-pants hunches and costly fumbles. Says Chairman Thomas J. Watson of IBM. the world's biggest and most profitable manufacturer of computers: "Business is becoming a much more precision-tool operation than it used to be."
The New Leanness. The new, precision-tool sharpness of U.S. business shaped 1961's recession and recovery. Here the computer played two key roles: 1) it made possible more accurate and rapid forecasting of the economy's swings, and 2) it permitted businessmen to adjust their inventories more closely to those swings. Because any change in final demand is now quickly translated by computers into a rise or fall in production, businessmen can operate with leaner stocks, cut down the high costs of accumulating and warehousing inventory. And by spotting economic danger symptoms early, the computers enable business and Government to apply early remedies. Says Stanford University Economist Kenneth Arrow: "There won't be a 1930 again."
After the inventory-buying spree that followed the settlement of the 1959 steel strike, computers began to tell big corporations that they were overstocked and that many items were selling sluggishly. Businessmen responded by cutting inventories by nearly $15 billion, and thus triggered the recession. (Except for inventories, the gross national product rose fairly steadily throughout the eight-month slump.)
The Kennedy Administration, anxiously watching the figures, knew when the economy hit bottom in February: Government computers now digested in hours the myriad economic indicators that previously took weeks to assemble and correlate. Businessmen also knew it because their own computers spotted sudden demand surges and inventory shortages. Accordingly, business abruptly shifted from inventory cutbacks at an annual rate of $4 billion in 1961's first quarter to a $2.8 billion rate of accumulation in the second quarter. This turned the economy around so fast that Administration economists, who would have liked to indulge in some Government tinkering, found little reason to do so.
Salami Tactics. Lending stability and predictability to the economic cycle is but one of the computer's achievements. It has other, more mundane efforts to boast of. Says Michael McCarthy, chairman of Wall Street's Merrill Lynch, Pierce, Fenner & Smith, which handles 18% of the shares traded on the New York Stock Exchange: "It would be almost impossible for us to handle our present volume without computers." Echoes Continental Casualty Insurance Vice President Walter Foody: "The computers enable us to launch massive nationwide sales campaigns --writing as many as 30,000 policies in a single day--that simply would not be possible without them."
In the absence of computers, the nation's banks, insurance companies and Social Security system would be buried under their explosively expanding burden of paperwork, few jets would fly, and the aerospace industry would sputter to a stop. NASA computers are already plotting the flight paths of manned space probes that will not take off for years--and could never get off the pad at all were it not for computers.
Computers tell feed manufacturers and big poultry farmers which formulas offer the highest nutrition at the lowest cost. They advise sausage makers which meats--based on the daily fluctuations in prices --to use most profitably in concocting salami. Department stores from Washington, D.C.'s Woodward & Lothrop to the May Co. in Los Angeles employ computers to calculate which items are moving fastest, determine when to reorder. Tacoma's Weyerhaeuser Co. has put its forest inventories on computers, worked out optimum lumbering patterns to assure itself a steady supply of timber to the 25th century. At a Southern California Edison power plant, computers will soon monitor temperatures, pressures and flow, automatically shut down the plant when anything goes amiss, and then--at the press of a button -- perform the 1,000-odd steps to get it started again.
"It Pays Off." Prime example of a company that has approached optimum automation is Phillips Petroleum. "We're getting into computers deeper and deeper," grins President Paul Endicott. "I admit that I don't understand it all, but the boys tell me it pays off." In fact, Phillips' accountants figure that, at monthly rentals ranging from $1,700 to $65,000 apiece, the company's computers pay for themselves many times over in the course of a year.
Phillips' computers determine within minutes the desirable proportions of various end products in a monthly refinery run (it used to take humans two to three weeks), and the new speed enables the company to shift with last-minute market changes. In their spare time, Phillips' eleven major computers also help to run the company's chemical plants, design new installations and plot transport routes from Phillips' 100-odd supply sources to its 2,500 wholesalers. In the lonely Oklahoma oilfields, Phillips' automated pumping stations now enable three men to do the work of twelve. "My father was an oilfield pumper," recalls a Phillips engineer. "He worked 14 hours a day, outside, in snow and heat, and got half a day off at Christmas. Now they do the same work nine to five, weekdays, without getting their hands dirty."
The Unemployables. As Phillips' experience suggests, automation may well be leading mankind toward a golden age when most of today's back-wrenching labor will be unnecessary--but getting there seems sure to require heavy casualties. In 1961, automation displaced enough workers in the U.S. to make unemployment amid prosperity the prime economic problem of the year.
Despite November's sharp dip in unemployment, the total at year's end was still running half again as high as the 4% rate that the Administration deems toler able. More serious, there had been painfully little reduction of unemployment amongst those last-hired, first-fired groups of Americans: the unskilled, the Negroes, the very old and the very young, notably the high school dropouts. In 1961, unskilled and semiskilled laborers constituted less than a quarter of the U.S. work force--but almost half the long-term unemployed. In an increasingly automated and sophisticated economy, those workers who could offer only their physical strength and five senses were becoming not only unemployed but unemployable. Laments Solomon Barkin, research director of the Textile Workers Union: "The new types of jobs we are moving toward automatically disqualify a substantial proportion of the working population."
White for Blue. The postwar rise in wages has stimulated management to automate. Together with the growing U.S. appetite for services rather than durable goods, this has produced a startling shift in U.S. employment patterns. Since 1947, the U.S. work force has expanded from 60 million to 71 million, but the total number of production-line workers has decreased 7%. And in industries particularly susceptible to automation, the decline has been even more dramatic: since 1947, production-line employment has dropped 10% in autos, 17% in steel, 35% in textiles.
But even as it has cut blue-collar ranks, automation has been spurring a steady rise in employment of office workers to handle the new information available, technicians to devise new applications for the machines, and managers to do the decision making. Today, U.S. manufacturing employs 13% more clerks and 65% more professional and technical workers than in 1952.
Largely because of the shift from blue collar to white, the U.S. labor movement has lost some of its force. Assembly-line workers are the bulwark of the union movement, and clerks and service workers the hardest to organize. Result: union membership has dipped from 18.5 million to 18.1 million in the last five years. Between this new weakness and the emphasis on job security imposed on them by the pressures of automation, the unions ceased in 1961 to press so hard for pay raises. Though unionists intend to strive for more in 1962, manufacturing wage increases this year amounted to less than 3%, v. 5.2% in 1957.
How to Make Jobs? Businessmen might applaud the relaxation, however temporary, in the wage push--but could hardly be happy about considerable and chronic unemployment. Unless the unskilled "automation refugees" could be fitted to new jobs or new jobs fitted to them, they would burden U.S. welfare rolls for the rest of their ever-lengthening lives. How could the U.S. combine optimum industrial efficiency with relatively full employment?
Steelworkers' President David J. McDonald was prepared to forget about the efficiency, plumped for a 32-hour week at 40 hours' pay--which boils down to a thumping 25% wage increase. In his 1962 negotiations with the steel industry, warned McDonald, a "shorter work schedule" would be one of his demands. In angry rebuttal, U.S. Steel Chairman Roger Blough snorted: "If we're not careful, we can 32-hour ourselves into complete economic oblivion.'' Along with Blough, most economists--and many labor leaders--agreed that the McDonald plan was intolerable at a time when the nation was facing crucial tests at home and abroad. As for an often-mentioned alternative--a 32-hour week for 32 hours' pay--that, the experts agreed, would simply amount to sharing the unemployment, would drive more workers to moonlighting, and thus worsen the job problem.
The Obvious Answer. The most commonly offered solutions for the plight of the automation refugee are to retrain him for new jobs and to move him to where the jobs are. But when eligibility tests for a retraining program were offered to 300 laid-off Armour & Co. employees, only 160 took the test, only 60 possessed enough education and ability to make retraining feasible, and only six were actually placed in jobs. Similarly, when Swift & Co. early this month offered to relocate 150 employees from a closed-out plant in Somerville, Mass., to other plants in the Midwest, only two accepted. Between unwillingness to sacrifice local unemployment benefits and the ties of family and home ownership, the majority of U.S. industrial workers are unwilling to move in search of work.
Despite this, some economists, such as the University of California's President Clark Kerr, believe that a combination of retraining and relocation could significantly alleviate automation's impact--provided there were realistic safeguards. Union men would have to retain their old seniority rights while occupying new jobs, management would have to give earlier notice of coming layoffs, the Government would have to put out more information on job opportunities, and there would have to be down-to-earth training programs that focused on basic skills rather than specialized job training. Recalling that the U.S. Army's six-week literacy courses brought about "a remarkable improvement in the employability of under-educated soldiers," Ford Motor Co. Vice President Malcolm Denise figures that similar courses should be offered to "undereducated workers."
But at bottom, it will take more than schooling and retraining to make jobs for the automation refugees and for the 13.5 million new workers who will enter the labor force over the next decade. There has to be increased economic growth.
Steady, But No Star. Since World War II, the U.S. has twitched through several mild recessions and mild recoveries, always winding up with higher unemployment than before. In the current recovery, December seems bouncy largely because last January was so low; the year as a whole looks less roseate when reflected against past years--or against the current economic performance of foreign industrial nations. For all of 1961, the annual rate of production of goods and services in the U.S. will average out at $521 billion, which in constant dollars is a gain of only 2% over 1960. Industrial production for the year will average 109%, hardly any gain from last year's 108%.
Most of 1961's key indicators, in fact, fell short of previous peaks. Detroit's automakers had to settle for their sixth best year on record, sold 5,600,000 domestically produced cars and dreamed wistfully of 1955's sales of 7,700,000. Steelmakers poured some 97 million tons --less than they produced ten years ago and well below 1957's high of 117 million tons. Builders started 1,325,000 houses, compared with 1,500,000 in 1959. Though profits came back at an uncommonly fast pace, they still missed 1959's record of $23.8 billion after taxes. Casting a cloud over the future, U.S. industry's estimated capital outlay for 1961 ran 3% below 1960's $35.7 billion, and at year's end orders for new machinery and equipment were still lagging behind their performance in previous postwar recoveries.
Decline of Durables. Last summer the optimists hoped for what they called a superboom. The biggest economic riddle of 1961 is why the recovery was not more rambunctious. One obvious reason was that one fear or another--of unemployment in some cases, of international crises in others--prompted Americans to spend far less of their disposable income than in any year since 1958. But searching for deeper causes for the nation's relatively slow rate of economic growth, some economists point to the long-term drop in the demand of durable goods, sales of which are not even growing as fast as the population curve.
Though no one contends that the U.S. is completely "sold up," it is clear that many basic demands have been pretty well filled. For its 53 million families, the U.S. has 47 million houses and apartments officially listed as ''sound," 47 million TV sets, 51 million refrigerators, 63 million cars. This abundance of physical possessions has increasingly turned the consumer's eye toward such things as education, travel, recreation and insurance--a shift that bodes well for the more than 50% of the work force now employed in service industries, but that presents nagging problems for the 16 million Americans still working in production.
Nothing would give the U.S. economy a quicker shot in the arm than a surge in the demand for durables. Looking around for something as dramatic as television to bring on a new wave of demand, economists talk of the race for space, of urban renewal, of new trade possibilities in the emerging nations of Asia and Africa. But the most obvious place for U.S. industry to turn next is burgeoning Western Europe, where both demand and purchasing power are steadily increasing.
The Trickle-Down. No other area of the Western world could boast such vibrant economic progress in 1961 as Europe's six-nation Common Market.* Fruits of the boom in the Common Market were stronger currencies (the German mark and Dutch guilder both had to be upvalued by 5% during the year), fatter international payments surpluses (up $2.6 billion among the six nations to a total of $17.2 billion), and a bracing rate of economic growth (industrial output rose by 6% over 1960). While the U.S. nursed its unemployment aches, most places in the Common Market labored under the opposite affliction: overemployment. In West
Germany at year's end, there were 572,000 jobs to be had for the asking and only 95,000 unemployed workers. Crimped by this shortage, Germany's gross national product in constant dollars increased this year by "only" 6%, v. 8% in 1960.
The trickle-down of prosperity to Europe's working classes swelled in 1961 into a fast-running stream. Though wages in the Common Market are still less than half the^U.S. average, they increased briskly during the year, e.g., in West Germany alone wages went up an average 11%. Mass production and heightened competition cut prices: Italy's Fiat and France's Dauphine were cheaper this year than last. But though the auto has now replaced the motor scooter as standard middle-class transportation in Western Europe, the Common Market nations in 1961 reached only approximately the same level of affluence enjoyed by the U.S. in the mid-19205. There was still only one car for every 13 Europeans v. one for every three Americans, only one TV set for every three German families. As Common Market nations hustle to close this gap, they offer an unmatched opportunity to U.S. manufacturers.
Seeds of Battle. To crack Europe's rich markets, U.S. business has sprouted more than 800 branches in the Common Market nations since 1958. This investment in Europe--which in 1961 alone will total $700 million--has paid the U.S. rich dividends in the form of repatriated profits. But unless it is accompanied by a substantial increase in U.S. exports, a continued surge in U.S. investment in Europe could add dangerously to the drain on U.S. gold stocks, now down to a 22-year low of less than $17 billion.
The necessity to raise exports, which currently bring in a meager 4% of the U.S. gross national product, promises to spark the lustiest congressional fight of 1962; it will come over President Kennedy's bid for sweeping new powers to negotiate tariff reductions with the European nations. If the President wins his battle, U.S. businessmen will be presented with their broadest new market--and toughest new competition--since the 13 original states erased their tariffs against one another.
To compete in the European market will require U.S. businessmen to modernize more imaginatively. The U.S. today is producing at 17% below peak capacity, but much of its unused manufacturing plant has aged into noncompetitive obsolescence. Says Federal Reserve Board Chairman William McChesney Martin Jr.: "We have lots of additional plant and equipment which could be brought into play if demand increased. But business could not sell their production without raising prices. The steel industry knows that if the demand in Europe ever slackens off and those plants are free to turn this way, they could undersell our industry almost at will."
With European demand high and labor scarce. Continental businessmen have built upon the rubble of World War II a spanking new industrial base that rivals the U.S.'s in some respects, excels it in others. At Italy's forward-driving Fiat, computers design engine parts and direct machine tools; Fiat intends to double daily auto production within three years. At Hamburg's Willy Schlieker shipyards, a slender beam of light moves along the lines of a blueprint and automatically directs acetylene torches that slice through thick slabs of steel like butter. And the Europeans are spending freely for more automation. The Common Market Six are plowing back an average 15% of their gross national products into fixed capital investment, v. the U.S.'s 7%.
Embracing the Imperative. U.S. business, having achieved a sort of stability which seemingly enables it to avoid too deep a recession or too debilitating an inflation, may be in danger of creating an economy so stable that future growth would merely parallel the population curve. It may be rescued, as it has been in the past, by some new invention. But more realistically, many businessmen are now concluding that, to put new lift into the U.S. economy--and to create the new jobs the U.S. needs--business must turn increasingly to foreign markets. Automation should help to overcome foreign wage advantages by enhancing U.S. productivity. By most estimates, the U.S. is several years ahead of Europe in the automation race. It can remain ahead if the speeding of automation is accepted as a national imperative. For that to happen, management must be willing to spend more for modernization, Government must be willing to stimulate investment by tax and depreciation reform, and unions must be willing to accept new technological methods without demands for restrictive labor agreements.
This is one of the options before U.S. business, which generally finds itself inclined to believe that its prosperity will be sustained only if it works at it. All in all. the 1961 recovery was erratic enough to raise doubts in the minds of some business men and economists that 1962 would be as spectacular as they once hoped. If there is no steel strike, U.S. businessmen generally look for a solid rate of economic expansion in 1962, with auto production rolling at about 6,800,000 cars, steel output running at about no million tons, and housing starts--which are now running 19% above last January's low--likely to rise to 1,400,000 or 1,500,000. This might not be a superboom, or a record breaker, but could make a highly prosperous 1962.
* Current members: Belgium, France, Italy, Luxembourg, The Netherlands, West Germany. This year Britain also applied for membership, with Denmark and Norway planning to follow.
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