The Online Library of Liberty

A project of Liberty Fund, Inc.

• En Torno a La Funcion Del Capital, Joaquín Reig
• Reflections On the Keynesian Episode, W. H. Hutt
• Ludwig Von Mises and the Market Process, L. M. Lachmann
• Values, Prices and Statistics, Bettina Bien
• The Tax System and a Free Society, Oswald Brownlee
• How “should” Common-access Facilities Be Financed?, James M. Buchanan
• Pitfalls In Planning: Veterans' Housing After World War Ii, Marshall R. Colberg
• Presents For the Poor, R. L. Cunningham
• Restrictions On International Trade: Why Do They Persist? W. Marshall Curtiss
• “human Action”, E. W. Dykes
• The Genius of Mises' Insights, Lawrence Fertig
• On Behalf of Profits, Percy L. Greaves, Jr.
• Tax Reform: Two Ways to Progress, C. Lowell Harriss
• The Future of Capitalism, Henry Hazlitt
• Prices and Property Rights In the Command Economy, Arthur Kemp
• The Inevitable Bankruptcy of the Socialist State, Howard E. Kershner
• Entrepreneurship and the Market Approach to Development, Israel M. Kirzner
• The New Science of Freedom, George Koether
• Financing, Correcting, and Adjustment: Three Ways to Deal With an Imbalance of Payments, Fritz Machlup
• On Protecting One's Self From One's Friends, Don Paarlberg
• Recollections Re a Kindred Spirit, William A. Paton
• Ludwig Von Mises, William H. Peterson
• The Economic-power Syndrome, Sylvester Petro
• Ownership As a Social Function, Paul L. Poirot
• To Abdicate Or Not, Leonard E. Read
• The Book In the Market Place, Henry Regnery
• Lange, Mises and Praxeology: the Retreat From Marxism, Murray N. Rothbard
• The Production and Exchange of Used Body Parts, Simon Rottenberg
• The Education of Lord Acton, Robert L. Schuettinger
• Chicago Monetary Tradition In the Light of Austrian Theory, Hans F. Sennholz
• Hubris and Environmental Variance, Joseph J. Spengler
• An Application of Economics In Biology, Gordon Tullock
• What Mises Did For Me, John V. Van Sickle
• Economics In a Changing World, G. C. Wiegand
• Can a Liberal Be an Equalitarian? Leland B. Yeager
• The Political Economy of Nostalgia, Ramon Diaz

Pitfalls in Planning: Veterans' Housing after World War II
Marshall R. Colberg

Von Mises called it a “paradox of planning” that socialist economic calculation could to some extent rely on prices established under a previous regime of capitalism but that as conditions changed the planners would more and more grope in the dark.1 Similarly, he pointed out that an individual socialist country can utilize market prices established concurrently in capitalist economies but that without such assistance would flounder.2 As a consequence the attempt to “reform” the world socialistically would never be successful. The necessary guideposts would be destroyed.

What about centralized planning of key production in a capitalistic country where, presumably, enough markets would remain free to furnish the guideposts which Von Mises so strongly emphasizes? United States experience with the Veterans' Emergency Housing Program in 1946 and 1947 provides our principal evidence regarding the problems and pitfalls which are inherent in such an endeavor. A somewhat similar effort is involved in such areas as the Interstate Highway Program, but the Veterans' Emergency Housing Program was unique, to date, in that central planning was utilized for a commodity where consumer sovereignty is normally relied upon as a guide to production. The present writer's firsthand experience with that program will be drawn upon to illustrate the problems that were encountered. Any future government programs of this general type would encounter the same difficulties in aggravated form, since the termination of World War II at least found the United States with a Washington bureaucracy accustomed to administering controls and with businessmen accustomed to some degree of compliance.3

Production Goals and Schedules

Administrators of the Veterans' Emergency Housing Program took a cue from President Roosevelt's wartime proclamation of goals for military airplane production. With great accompanying publicity, Franklin Roosevelt called for the production to 60,000 airplanes in 1942 and 125,000 in 1943. No serious attempt was made by the procuring agencies to meet these goals; in fact, the 1943 goal exceeded military requirements by far. (Actual 1942 production totaled 47,836 planes while 1943 output was 85,898.)4 In many ways the publicized goals were harmful because a multiplicity of useless production schedules resulted from the effort to make totals equal exactly 60,000 and 125,000. Single engine, civilian type airplanes, pilotless target craft, and even “equivalents” of spare parts were included in efforts to make schedules equal the goals. For a long time Washington officials were afraid to tell President Roosevelt that his goals were not being met. Actually the production achievement was excellent: the goals were at fault.

Much publicity also attended the goals set under the Veterans' Emergency Housing Act, which was signed by the President on May 22, 1946. A total of 1. 2 million housing units were to be provided in 1946 and 1. 5 million units in 1947. This two year plan was translated into a schedule of starts as shown in Table 1.

The composition of the 1946 housing schedule reveals the almost inevitable tendency of planners to include dubious items in order to make the program appear better. It can be seen that one fourth of the 1946 schedule consisted of temporary re-use of wartime barracks and dormitories, trailers, and conversions of existing residences into a larger number of dwelling units. In addition, the “window-dressing” was augmented by expressing all output in terms of starts rather than completions. The comparable “numbers racket” in World War II aircraft production was, as already mentioned, inclusion of things that were not actually military airplanes and counting as “completed” many units that still required extensive modification outside the assembly plants.

As production ensues, a planner is most reluctant to give full recognition in his scheduling to the extent of failure of an unsuccessful portion of his program, or to failure of the program as a whole. The tendency to overschedule in a weak segment is illustrated by data in Table 2 for prefabricated houses, which fell very seriously below the original plan. The 1946 total for this category was revised downward from 250 thousand in February to 100 thousand in July and to 40 thousand in November: the actual total built was 37 thousand. To the extent that other administrative actions such as priority ratings, labor referrals, material allocations, and subsidy payments are based on such seriously infeasible schedules, resources are misallocated, and the misleading schedule is much worse than none at all.

The poor showing in the prefabricated housing sector, along with the highly publicized total housing goal, put pressure on the Housing Expediter to exaggerate schedules in other sectors. For example, starts as scheduled in July 1946 for the last half of the year for conventional and conversion units together were about 35 per cent above the number realized—a sufficient discrepancy to cause serious administrative errors to the extent the schedules were taken seriously. There is a strong likelihood that an unrealistically high production schedule will be heavily, but not uniformly, discounted by those who influence the allocation of resources. This includes not only government officials but also businessmen who supply materials and components of the end items. A multiplicity of schedules resulted from lack of confidence in the central agency's schedule both during World War II munitions programs and the Veterans' Emergency Housing Program. Often the “plan” is disregarded by those at the working levels and remains largely a public relations and propaganda device.5 Since most elements of the price system and individual incentives to maximize income still remained in effect, especially after World War II was terminated, these were more influential than the central plan in guiding production. However, much confusion and inefficiency resulted from the partial adherence to, and partial disregard of, Washington plans.

Materials “Requirements”

The ambitious plans of the federal government for prefabricated housing production stimulated much related administrative activity. As of April 1, 1946 each softwood plywood manufacturer was required by the Civilian Production Administration in a “production directive” to turn out at least 45 per cent of his monthly output in the form of construction plywood, of which no more than 20 per cent might be in exterior type. At least 5 per cent had to be in the form of door plywood.

In addition, a “premium payment” (subsidy) plan was put into effect for plywood. Plywood manufacturers were authorized to pay suppliers of Douglas fir peeler logs a premium of $7.50 per thousand feet above OPA ceiling prices. A manufacturer was reimbursed in full for this added cost if his plant turned out plywood at a rate at least 25 per cent above his quarterly quota, which was based mainly on past performance. The plywood plan was originally intended to run from June 1, 1946 through March 31, 1947, but was terminated November 30, 1946. The plywood subsidy cost $2,354,650 in payments. Actually, it was not necessary for the government to take any special action with respect to plywood because other factors caused the production plan for prefabricated housing to be completely unrealistic. Among these was a lack of consumer acceptance, since the program relied on private purchase of housing. (This caused a change of designation from “prefabricated houses” to “factory built houses.”)

Even where schedules were less disastrously in error than was the prefabricated housing schedule, computation of supporting “requirements” was often only a guess. Yet these very rough estimates formed the basis for subsidy payments, export restrictions, limitation of non-preferred construction, production directives, inventory limitations, priorities, and price ceiling adjustments.

An example of the difficulty of computing supporting requirements was found in the case of finishing lime (plaster). First there was the hard question as to how many walls would be plastered and how many would use wallboard. Even more damaging was the question of average thickness of a coat of plaster. If one-sixteenth of an inch were used as a factor, no shortage of finishing lime could be foreseen. But if the average coat of plaster is one eighth of an inch in thickness, a serious shortage loomed. The problem was never solved, but was probably unimportant anyway. Planners inevitably rely on fixed bills of materials, being unable to estimate possibilities of substitution. An actual shortage of plaster would probably cause the coats to be thinner, and more wallboard, paneling, and other substitute materials to be utilized.

The utter confusion which can attend the work of a government committee responsible for making materials allocations is indicated by the following quotation from the minutes of the Fourth Quarter Steel and Iron Castings Meeting held in Washington, D.C., August 21, 1946.

Mr. A.: “I take it then that the figures just read for sheet and strip in the breakdown are subject to correction.”

Mr. B.: “That is right.”

Mr. A.: “Right, Mr. C., will you give us the estimated unit equivalents for the total tonnage?”

Mr. C.: “883, 343 units.”

Mr. D.: “883, 343. In one quarter?”

Mr. A.: “That would be about the annual capacity, I think, but let's come back to that.”

Mr. B.: “Yes, this one is going to be subject to revision.”

Mr. D.: “Well, I thought this one was screened.”

Mr. B.: “Screened under the criteria that we have to go by. You can fix the percentage on that screened criteria.”

Mr. E.: “That is merely screened down to what they think the industry can use.”

Mr. B.: “No, screened on the criteria called for.”

Mr. A.: “Gentlemen, since we decided to go through and get all of the figures set down without the comments, let's proceed that way and come back.”

Mr. C.: “I don't even dare get into furnace pipe, fittings, and duct work. I am going into that last.”

Subsidies for Building Material Producers

A central, and most revealing, aspect of the federal government's attempt to speed postwar housing construction was the “premium payments” scheme for building materials. The Housing Expediter asked Congress for authority to pay up to $600 million in such subsidies. Congress approved a limit of $400 million. Actual payments made were $27.8 million. Almost half of this amount was paid to producers of merchant pig iron, not a building material. Only about one third of merchant pig iron ultimately went into building materials, but the intent of Congress was interpreted broadly.

Table 3 Subsidies Paid

The eleven subsidy plans issued were small in number compared with the total considered seriously. The abortive plans reached all stages of readiness from premature annoucement in the public press of plans that were actually withdrawn to preliminary drafts prepared by committees or individuals. Materials which received consideration but for which plans were not issued included: clay sewer pipe; concrete block and brick; lath; finishing lime; cast iron pressure pipe; galvanized and carbon steel sheet; low-cost water heaters; ranges; steel windows, outside house paint; and imported linseed oil.6

The subsidy plans which were activated usually were based more on the availability of relatively full information regarding an industry than on relative need for the material. Also, the problem of “selling” many industries on the desirability of subsidies was much greater than anticipated. A main reason was the emphasis by the Housing Expediter on the economy of premium payments compared with increases in ceiling prices. Since subsidy payments were to be made only on increments of output above quotas, and since they would be paid out of tax receipts rather than by house buyers, they were considered better by the administrators. The materials producers looked at it differently. They often felt that the Office of Price Administration would be less likely to grant ceiling price increases if the industry accepted a subsidy. The degree of competition and extent of unionization of workers was also of consequence. The brick and structural tile industry, consisting of widely scattered, highly competitive firms, welcomed a premium payments plan. The clay sewer pipe industry, which was smaller and located mainly in Ohio, unanimously rejected a plan which was very similar in nature. Where labor was organized and contracts were due to be negotiated in the near future, management feared that the workers would be able largely to take over any premiums received by the companies. After termination of the subsidy, the higher wage rates would still be in force. In some industries there was also apprehension that subsidy payments would be used to expand capacity, hurting long-run prospects by increasing competition.

Where subsidy plans were actually formulated, the problem of determining production quotas (above which payments would be made) illustrated another common type of problem inherent in central planning. Industry representatives wanted low quotas—preferably low enough so they would collect payments for production that would have been turned out without subsidies. Government representatives wanted to keep quotas high enough to bring out some special effort but not so high as to make premiums really hard to earn so as to endanger acceptance of the payment plans. Representatives of firms already operating at high output rates claimed that premium payments would mainly benefit inefficient entrepreneurs whose plants were still closed down and who would therefore get low quotas. Formulas under which subsidies were paid represented uneasy compromises among the various forces and desires involved.

Limitations of Other Construction

In addition to positive steps to stimulate housing construction, the federal government tried to give an indirect stimulus by limiting competing construction, especially of commercial and industrial buildings. National and regional construction quotas were set in dollar terms. It was clear that many projects including racetracks, were started just before the deadline, probably with inside information from government employees as to the effective date of the limitation order. Some buildings that would otherwise not have been built in 1946 were started quickly because of the profitable situation that would arise when non-residential construction in general was reduced in volume.

The imposition of regional controls brought about a discriminatory situation in which the same type of structure approved in one city was turned down in another. The probability of graft and favoritism is obvious as it is whenever valuable economic privileges are handed out by public authorities.

At best, the device of limiting some varieties of construction in order to aid other types is a clumsy one. It was not possible in 1946 to make satisfactory measurements of how much restriction of non-residential construction was actually necessary in order to conserve enough materials, labor, and equipment for veterans' housing. To a considerable extent the activities are not competitive, especially with respect to land use where zoning is effective. Even labor was partially specialized to either residential or business building so that unemployment of heavy construction workers was often reported as the federal limitations took effect.

A tabulation maintained by Civilian Production Administration field offices during 1946 showed that almost 1,500,000 inquiries were made by persons interested in starting non-residential construction projects. About 141,000 projects were formally submitted for consideration and about half, in value terms, were approved. The denial of a project, such as construction of a building for a newly-authorized automobile dealer, involved a heavy financial impact on the individual concerned and bitter protests were common. A considerable number of persons disregarded government stop-orders and went ahead with construction plans, preferring to risk large fines rather than to forego business opportunities. This is a type of “black market” activity inherent in this type of authoritative control. Other persons initiated construction projects without seeking government clearance. During 1946 over 75,000 cases were investigated by compliance officers, and construction was stopped on almost 15,000 projects. One cannot but wonder how many projects were permitted because of pecuniary or non-pecuniary gains by compliance investigators or denied because of insufficient sub-rosa offers. As a generalization (not always valid, of course) one can say that lawyers offer a threat to a market economy because of their personal stake in the regulation of markets.

Priorities

During the postwar reconversion period the distribution of most goods was left under the control of sellers. However, the federal government exercised its still-available wartime powers to influence the distribution of some items deemed to be important to reconversion, particularly those that were related directly or indirectly to the veterans' housing program. A system of priority ratings was one of the devices employed. These were, in effect, ration tickets needed in addition to money to purchase specified items when available supplies (at controlled prices) were not sufficient to meet all demands. Industries favored as purchasers during 1946 included many which turned out building materials, builders of veterans' housing, and producers of coal, sheet steel, gray iron castings, rubber, and fractional horsepower motors.

Holders of priority ratings frequently complained that they were only a “hunting license.” More teeth were put into the ratings in September 1946 when high physical “set asides” (75 to 100 per cent) were established for many materials. These materials could not legally be sold on unrated orders without specific release by the Housing Expediter. An obvious danger in this type of regulation is that priority-rated demand will at times be less than the set aside. This will tend to discourage production as well as cause unnecessary inventory accumulations.

One of the difficult questions related to priority ratings was whether they should be “extendible,” i.e., whether a firm to which such an order was first applied should be permitted in turn to place a priority order for a similar amount with his supplier. Industry representatives were invariably opposed to extendibility since it would have been highly upsetting to established producer-dealer relationships. In addition, there was danger of abuse of extendible priority ratings by dealers. For example, a dealer receiving such ratings might serve them on a manufacturer with whom he did not ordinarily deal and receive delivery of the items called for. At the same time he might be able to acquire deliveries through regular channels without rated orders.

The very limited use made of extendibility in spite of its apparent usefulness as a central administrative tool, was one of the more striking examples of the difficulty of allocating resources authoritatively. The complexity of the great web of buyer-seller relationships existing in the nation becomes obvious when government officials attempt to redirect even a few of the flows of materials and components.

Concluding Observations

The Veterans' Emergency Housing Program was pursued vigorously only in 1946. Interagency disagreements occurred almost constantly, causing resignation of the Housing Expediter in December 1946. Most of the opposition encountered by the Office of the Housing Expediter came from government officials who were not opposed to the program but who could not see that any actual gain in residential construction was likely to ensue from many of the proposed actions.

It is not possible to say with certainty whether residential construction was increased by the program in 1946 and 1947. There was probably some increase, but it is not obvious that any gain made was preferable to the disruption of non-residential construction that occurred. Also, consumer sovereignty was replaced by authoritative decisions as to the kinds of housing needed by returning veterans. In the absence of planning a higher proportion of apartment buildings would have been erected, and these would probably have been preferred by veterans in view of their unsettled lives after release by the armed forces. The pre-fabricated housing sector was a clear failure that probably caused a serious misdirection of scarce resources.

Most analysts connected with the postwar housing program came away with renewed respect for the enormity of the job which is normally performed by the price system, operating through millions of individuals who are experts in their own fields of interest. Although only a small part of the economy was subjected to special controls, the administrative task was virtually impossible. It was probably fortunate that a great many regulations were partially or wholly ignored because non-compliers close to the scene often directed resources more rationally than the centrally formulated regulations would have done.

It is remarkable that some persons who were in a position to observe the extreme difficulty of exercising price and production controls during and just after World War II are quick to recommend their reimposition. Such persons must indeed have a great longing for personal authority over the economy!

[1]Human Action (New Haven: Yale University Press, 1949), p. 696.

[2]Socialism (New Haven, Yale University Press, 1951), p. 136.

[3]Businessmen are also utilized by the government agencies, presumably for their expert knowledge. Von Mises in a small volume entitled Bureaucracy (New Haven and London: Yale University Press, 1944) p. 70 pointed out that even in nineteenth century Europe, it was necessary for corporation management to live on good terms with those in power. The reverse is also frequently true. Government officials often treat with special favor firms in which they plan to seek employment.

[4]Aircraft, Engine, and Propeller Production, 1940-1945 (Washington: U.S. Department of Commerce, Civil Aeronautics Administration, 1946).

[5]Several Yugoslavian economists in recent years have stated privately that little attention is actually paid to the central plan by firms in that country.

[6]Details on subsidies and other aspects of the government program described in the present paper are included in the writer's unpublished Ph. D. dissertation, Federal Control of Construction Following World War II (University of Michigan, 1950).