Richard N. Cooper

English

Research Papers in Economics

RICHARD  N.  COOPER 
Yale University 
Resource  Needs 
Revisited 
THE SHARP increase  in raw materials  prices  in 1973-74  provoked  strong 
concern  over  the scarcity  of natural  resources,  particularly  minerals.  The 
last steep  and general  rise  in raw  materials  prices,  during  the Korean  War 
boom  of 1950-51,  also evoked  great  public  concern  about  scarcities,  about 
being  cut off from  leading  sources  of supply,  and about  governmental  ac- 
tions that might  deal with these possibilities.  After a series  of hasty and 
somewhat  panicky  reports,  President  Harry  S. Truman  in January  1951 
appointed  the Paley  Commission  to study  "the  broader  and longer  range 
aspects  of the nation's  materials  problem  as distinct  from the immediate 
defense  needs."  Its task was to "make  an objective  inquiry  into all major 
aspects  of the problem  of assuring  an adequate  supply  of production  ma- 
terials  for our  long-range  needs,"  and specifically  to study  "the  long-range 
requirements  outlook."  In June 1952,  after  the Korean  commodity  boom 
had subsided,  the commission,  under  William  S. Paley  as chairman,  pub- 
lished  a thoughtful  report,  done with care,  influenced  but not dominated 
by the short-run  scarcities  of 1950  and 1951.1  Its basic conclusions  were 
that U.S. demands  for materials  would grow substantially  and that al- 
though  supplies  were  adequate  at existing  relative  prices  for  many  materials, 
for others  they  were  not readily  at hand  and could  be acquired  only at in- 
creasing  cost. It avoided  the misconception  of absolute  shortage,  and re- 
1. Resources  for Freedom,  A Report to the President  by the President's  Materials 
Policy  Commission,  five volumes  (1952).  The quotations  are from "The  President's  Let- 
ter,"  dated  January  22, 1951,  reprinted  in vol. 1 of the report,  p. iv. 
238 Richard N.  Cooper  239 
fiected  a clear  understanding  of upward-sloping  supply  schedules.  It urged 
that steps  be taken  to develop  more  sources  of some  materials  and to find 
substitutes  for others  that were  prospectively  scarce. 
In meeting  its charge,  the commission  projected  U.S. demands  for ma- 
terials  to 1975.2 Reviewing  these projections  can provide  a rough report 
card  on projections  of "requirements"  over  a planning  horizon  as long as 
twenty-five  years,  and is particularly  useful  now in face of the talk about 
impending  shortages  and  the  need  to "plan"  for them.  Indeed,  a number  of 
the alarums  sounded  recently  are eerily  reminiscent  of those that spurred 
the creation  of the Paley  Commission. 
The  commission  projected  the growth  of the U.S. economy  from 1950  to 
1975,  including  the  major  components  of final  demand,  and  then  related  the 
consumption  of specific  raw  materials  to these  aggregate  projections,  taking 
into account  known  trends  in substitution.3  Relative  prices  were  assumed 
to be unchanged. 
This  brief  evaluation  compares  the projections  of the Paley  Commission 
for 1975  with actual  consumption  levels  in 1972,  a legitimate  comparison 
since the report invites "readers [to] . ..  view. ..  use of the date 1975 as a 
shorthand  means  of denoting  'sometime  in the 1970's.'  "'4 In fact, 1972  is 
superior  to 1975  for purposes  of comparison  for several  reasons  apart  from 
the availability  of more  complete  data  for the earlier  year.  Like 1950,  1972 
was a year of economic recovery  in the United States, with aggregate 
demand  slack  at the beginning  and strong  at the end. Furthermore,  1972 
was  not marked  by panic  buying  and  resulting  sharp  price  increases,  as was 
1973,  nor did it contain  the distortions  of the subsequent  period  of world 
recession.  The comparison  could  be disturbed  by the outbreak  of specula- 
tive  buying  of materials  in late 1950,  but the commission  presumably  took 
that  into  account  in making  its projections.  Most  important,  by 1972  actual 
expenditure  in the U.S. economy  exceeded  the commission's  projection  in 
every  category,  usually  by a substantial  amount  (see table 1). 
This  shortfall  in the commission's  projections,  in fact, is the first  major 
observation  about  them.  The commission  understated  the growth  in popu- 
lation  and  the  labor  force,  and  its projection  of growth  in real  gross  national 
2. Much of the technical  work on the projections  was done by a promising  young 
economist,  Arnold  C. Harberger. 
3. The commission  was concerned  with water supplies and renewable  resources  as 
well, but the comparison  here will be confined  to mineral  resources  and energy. 
4. Resources  for Freedom,  vol. 2, p. 112. 240  Brookings Papers on Economic Activity, 1:1975 
Table 1.  Comparison  of the Paley Commission  Projections of Growth 
in Selected Measures of the U.S. Economy, 1950-75, 
with Actual Growth,  1950-72 
Percent 
Paley Commission 
projections  Actual  growtha 
Per  Per 
Measure  1950-75  annum  1950-72  annum 
Gross national  product  100  2.8  123  3.6 
Gross private  domestic  investment  40  1.3  80  2.8 
Construction  30  1.0  60  2.2 
Producers'  durables  50  1.6  141  4.0 
Consumers'  durables  40  1.3  202  5.0 
Population  27  1.0  37  1.4 
Sources: Resources  for Freedom, A Report to the President by the President's Materials Policy Com- 
mission (1952), vol. 2,  p.  116; Economic Report of the President, February 1975, table C-2, p. 250, and 
table C-23, p. 275. 
a. GNP and components are computed from measures in 1958 dollars. 
product  implied  a trend  level  for 1975  about  20 percent  too low. Estimates 
of real  expenditure  on durable  goods fell even  further  short  of reality.  Al- 
though  fears of "underconsumption"  in capitalist  economies  were  begin- 
ning to recede  by 1950,  the notion of "saturation"  with consumer  goods 
was still strong.5  Moreover,  to the extent that the Paley Commission's 
report  is representative  of expectations  in 1951,  the recent  laments6  about 
low U.S. investment  rates  during  the fifties  and sixties,  with  their  implica- 
tions  for low diffusion  of new  technology  and  sluggish  growth  of the econ- 
omy,  certainly  cannot  be justified.  In fact, by 1972,  gross  investment  had 
grown  by 80 percent  since 1950,  twice  the projected  rate,  and expenditure 
on producers'  durables,  which  grew  by 141  percent,  almost  tripled  the ex- 
pected  rate. 
Despite  the substantial  underestimation  of growth  in the U.S. economy, 
particularly  in the demand  for durables,  the commission  overestimated  the 
5. This notion is well illustrated  by the following passage:  "It is difficult  to see how 
the projected  economy  would be willing to pay for more . ..  [than]  between  60 and 75 
million telephones  in ...  1975,"  compared  to about 40 million in 1950 (Resources  for 
Freedom,  vol. 2, p. 115). In fact, the United States had 116 million telephones  in 1972, 
and the number  was still rising at the rate of about 5 million a year. 
6. For a recent  example,  see Michael  Boretsky,  "Trends  in U.S. Technology:  A Po- 
litical Economist's  View," in American  Scientist,  vol. 63 (January-February  1975), pp. 
70-82. Richard  N.  Cooper  241 
consumption  of most  minerals.  Table  2 compares  the commission's  projec- 
tions  for growth  in consumption  of twenty-four  minerals  (primary  output 
only)  from 1950  to "1975"  with the actual  increase  in consumption  from 
1950  to 1972.  For seventeen  of the twenty-four  minerals  shown,  the com- 
mission's  projections  were  overstatements,  even though  the economy  out- 
stripped  expectations.  In some  respects  the projections  were  not too bad: 
half of them  fell within  20 percent  of actual  consumption.  But the mean 
error  was 46 percent,  most errors  were on the high side, and the average 
error  on the high side was much  bigger  than the average  error  on the low 
side. 
In one respect  the commission  was very  much  in tune  with  the anxieties 
of the  seventies,  however.  Implicit  in its projections  of consumption  of coal, 
petroleum,  and natural  gas is an expansion  in total energy  requirements 
(measured  in Btu)  of 97  percent.  Actual  growth  was  1 2 percent,  just slightly 
below  what  the commission  would  have  predicted  had it known  the econ- 
omy  would  grow  as rapidly  as it did. 
What  explains  the general  tendency  toward  failure  of actual need for 
materials  to match  the estimates?  One  possibility  is that  the projected  scar- 
cities  materialized,  mineral  prices  rose  (contrary  to the  projection's  assump- 
tion of no change  in relative  price),  and demand  was consequently  cut to 
match  the limited  supply.  The percentage  price  changes  shown  in the last 
column  of table  2, plotted  in figure  1 against  the projection  errors  in the 
next  to last  column,  modestly  support  this  explanation.  The  wholesale  price 
index  rose  45.6 percent  between  1950  and 1972.  Twelve  of the twenty-four 
minerals  experienced  price  increases  in excess  of 45 percent,  and of those, 
nine  involved  projections  in excess  of actual  consumption  in 1972. 
By the same  token,  the commission  underestimated  the demand  for fer- 
tilizers  (phosphate  and potash), aluminum,  and petroleum,  all of which 
experienced  below-average  price  increases.  Thus,  for  thirteen  of the twenty- 
four  minerals,  relative  price  movements  help explain  the error  in projec- 
tions,  although  the relationship  is weak;  and  for eleven  minerals  projection 
errors  were  in the opposite  direction  from  the effect  of relative  price  move- 
ments  on consumption. 
Two other  possible  explanations  come  to mind:  first,  that  improved  sec- 
ondary  recovery  of metals-as recommended  by the Paley  Commission- 
reduced  the need for new primary  production.  Unfortunately,  for all six 
nonferrous  metals  for which  the commission  projected  scrap  recovery  for 
1975, actual recovery  was below projections-sometimes  by substantial Table 2.  Comparison  of the Paley Commission  Projections of Growth 
in Consumption  of Selected Minerals and Energy, 1950-75, 
with Actual Growth,  1950-72, and Average Annual  Price Changes 
Amounts  in thousands  of short tons except as noted;  changes  in percent 
Increase  Percent 
projected  devia- 
by Paley  tion of 
U.S. consumption  Coin-  actual  Price 
mission,  from  change, 
Mineral  1950  1972  Chanigea  1950-75  projected 1960-72b 
Ferrous  minerals 
Pig iron  64,943  89,140  37  54  12  76 
Chromium  980  1,140  16  100  72  15 
Cobalt  4  7  71  344  160  36 
Manganese  1,650  2,331  41  50  6  -32 
Molybdenum  13  31  141  170  12  89 
Nickel  100  159  59  100  26  216 
Tungsten  3  7  114  150  17  44 
Nonferrous  metals 
(primary) 
Aluminum  951  4,587  382  291  -19  41 
Antimony  15  16  6  81  71  101 
Copper  1,447  1,901  31  43  9  139 
Lead  756  869  15  53  33  31 
Magnesium  18  104  473  1,845  239  69 
Mercury 
(thousands  of flasks)  49  53  8  25  16  169 
Platinum 
(millions of troy ounces)  1  2  215  30  -59  77 
Tin  71  54  -25  18  57  86 
Titanium  363  694  91  324C  122  41 
Zinc  981  1,151  17  39  19  28 
Nonmetallic  minerals 
Fluorspar  426  1,352  217  187  -9  87 
Phosphate  9,611  29,535  207  150  -19  0 
Potash  2,486  8,279  233  150  -25  11 
Sulfur  4,988  9,833  97  110  7  -8 
Energy  fuels 
Coal  494,000  526,000  6  54  45  58 
Petroleum 
(millions of barrels)  2,157  5,122  137  109  -12  35 
Natural gas 
(billions ofcubic  feet)  6,026  23,009  282  142  -37  135 
Total energy fuels 
(trillions of Btu)  31,282  66,287  112  97  -7  ... 
Sources: U.S. Bureau of the Census, Statistical Abstract of the UnJited  States, 1974 (1974), "Mining and 
Mineral Products"  chapter, and ibid., 1954 (1954); U.S. Bureau of Mines, Minerals Yearbook,  1972, vol. 1 
(1974), ibid., 1954, vol.  1 (1958), and ibid., 1950 (1953); Resources  for Freedom, vol.  1, p. 24, and vol. 2, 
p. 118; Survey  of Current  Business, vol. 30 (December 1950), vol. 52 (November 1972), vol. 55 (February 
1975), "Current  Business Statistics" section in each. 
a.  Calculated  from unrounded data. 
b.  Calculated  from annual average prices for 1950 and 1972, except for pig iron, copper, and lead, which 
are calculated  from prices in effect in June 1950 and 1972. 
c.  Includes cadmium. Richard N.  Cooper  243 
Figure 1. Relationship  between  Errors in Paley Commission  Projections 
of U.S. Consumption  of Selected Minerals in 1975, 
and Actual Price Changes, 1950-72 
Price change 
(percent) 
225 
* nickel 
200 
175._ 
0  mercury 
150  - 
0  copper 
*  natural 
gas 
125  - 
loo  0  antimony 
fluorspare  * ?nolybdenum 
fluorspar~~  ~~~  a-tin 
7  platinum  * pig iron 
magnesimn  a 
* coal 
50  Percent  change  in wholesale  price  inidex 
aluminum o  0tungsten  0  titanium 
petroleum  lead  0  cobalt 
25  -  zinc 
a  chromium 
potash e 
O  phos  phate 
*  sulfur 
-25 
*  nmanganese 
-50  -  I  --I  I  I1  I  I 
-50  -25  0  25  50  75  100  125  150  175  200  225  250 
Deviation  (percent) 
Source: Table 2. 244  Brookings Papers on Economic Activity, 1:1975 
proportions.  Indeed,  secondary  recovery  of copper  and tin was absolutely 
lower  in 1972  than it was in 1950.  This explanation,  therefore,  does not 
suffice. 
Second,  the  enormous  growth  in imports  of manufactured  goods  between 
1950  and 1972-much greater  than that in GNP-suggests that the U.S. 
economy  was  satisfying  its resource  needs  through  importation  of finished 
goods rather  than direct  consumption  of primary  minerals.  For example, 
the substantial  increase  in U.S. imports  of steel products  diminished  U.S. 
need for pig iron. On the other  hand,  U.S. exports  also expanded  rapidly 
during  this  period.  In terms  of dollar  values,  U.S. exports  increased  about 
the same  as did U.S. imports  (both  exclusive  of the mineral  products  listed 
in table  2). 
A rough  calculation  using  the input-output  tables  for the United States 
suggests  that  the mineral  contents  of exports  and import-competing  goods 
(exclusive  of direct  trade  in mineral  products)  are  very  similar,  so that this 
explanation  for the commission's  underestimate  of the economy's  mineral 
needs  also does not suffice.  However,  these tables are not well suited  for 
analyzing  the material  content  of various  goods  because  they  are  based  on 
shipments  by U.S. producers  and thus do not identify  specific  imported 
materials  consumed  in production.  Further  analysis  on changes  in indirect 
mineral  content  of U.S. trade  is therefore  required  before  the hypothesis 
can be rejected  definitively. 
While  the Paley Commission  generally  overestimated  the needs of the 
U.S. economy  for mineral  raw  materials  in the 1970s,  it underestimated  the 
needs of the noncommunist  world  economy  as a whole, with the notable 
exceptions  of  tin, antimony, cobalt, and tungsten. The commission's 
broader  projections  were  both  less comprehensive  and  less  meticulous  than 
those for the United States; with this caveat, for eleven of the fifteen 
products  it considered  its estimates  fell below actual  world consumption 
(strictly,  production)  in 1972.  This  unexpected  growth  in mineral  consump- 
tion was no doubt due to the historically  unprecedented  rate  at which  the 
world  economy  grew-very much  faster  than was thought  likely in 1951. 
The upsurge  in world  demand  for minerals  may in turn  explain  the rise  in 
relative  prices  of many minerals,  and a consequent  conservation  in U.S. 
use. 
Possibly  only  as a coincidence,  for the one commodity-tin-covered by 
an international  commodity  agreement  during  this period,  U.S. consump- 
tion  declined  absolutely  and  world  demand  fell well  short  of projections.  In Richard N. Cooper  245 
trying  to stabilize  tin prices,  did  the International  Tin Council  set them  too 
high?  Or  were  price  factors  swamped  by new technologies  of substitution? 
The Paley  Commission  made  many recommendations  for dealing  with 
the scarcities  that it foresaw.  Most concentrated  on direct government 
actions  and on government  incentives  to private  industry  to find and de- 
velop  new  sources  of each  mineral,  partly  in the  United  States  but  especially 
through  direct investment  abroad. A number of these incentives  were 
adopted,  and  supplies,  especially  from  abroad,  no doubt  responded  to them. 
But the commission  gave little encouragement  to true conservation,  and 
only  general  encouragement  (rather  than  concrete  recommendations)  to the 
development  of substitute  materials.  Thus,  this is not one of those  cases  of 
failure  to realize  projections  because  recommendations  to avoid  their  reali- 
zation  were  successfully  adopted.  Rather,  in ignoring  technical  change- 
meaning  more efficient  production  as well as substitutes-beyond that 
known  in 1950,  the commission  was  ignoring  the most important  force  for 
change  in modern  industrial  economies.  The ratio of material  input to 
output  fell faster  than  the commission  allowed  for, reflecting  technical  and 
managerial  changes,  many of which  may well have been induced  by the 
threat  of scarcity.  Such  developments  are  certain  to continue  in the future; 
and the possibilities  for secondary  use of metals remain  greatly under- 
exploited. 

Resource Needs Revisited

http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/1975_1_bpea_papers/1975a_bpea_cooper.pdf

Resource Needs Revisited

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics