CRACKS IN THE NATIONAL ECONOMY

KEYSERLING, LEON H.

Cracks in the National Economy by LEON H. KEYSERLING AMERICAN economic policy lags badly behind the times. Our current economic thinking is still shaped largely by two great crises—the Great...

...Other examples of the misguided "crusade against inflation" are the recent pronouncements of government spokesmen that wages have risen too fast, and that this contributes to inflation by forcing prices upward...
...Among single-person families aged 65 or over, about three out of every five were below $1,000, more than four out of five below $2,000, and more than nine out of ten below $3,000 a year...
...This affects almost everyone adversely...
...But the policy is increasing tremendously the financing costs of the things workers and farmers buy on credit...
...And these trends hold stationary those who need the relatively greatest amount of progress, because they are at the bottom of the heap—the American families still living in poverty...
...But this is utterly unrealistic...
...These include such items as natural resource development, housing, aid to education and public health, public assistance to the aged, to the afflicted, and to other dependents, and manpower and other welfare services...
...This slowdown has caused almost 60 billion dollars in lost production within four years...
...The second type—a third World War—would throw us into an entirely new geometry where most previous economic approaches would become pre-Euclidean...
...The slowdown in economic growth has resulted largely from an even greater slowdown in consumption growth...
...Now let us look at the part of the federal budget devoted not only to the items just mentioned, but to all purposes other than national security...
...Among multiple-person families with the head aged 65 or over, almost one family in every five had money income below $1,000 in 1955, more than two in every five below $2,000, and three in every five below $3,000...
...These damaging effects cannot be defended on the ground that we could not afford more...
...Even in the more highly-paid occupations, almost eight per cent of the men and 24 per cent of the women were below $2,000 in transportation, communication, and other public utilities...
...The "hard-money" policy, costing consumers about four billion dollars a year to subsidize higher-interest recipients, should be abandoned...
...The overall rate of economic growth, measured in uniform dollars, has in recent years fallen below the average of the past 40 years, and far below the average since World War II...
...Setting $4,000 as a minimum adequate living standard for multiple-person families, and $3,000 for single-person families, 14 million multiple-person families, or 32 per cent of the total, and 6 1/2 million single-person families, or 68 per cent of the total, were below these standards...
...This notion might not be too serious if the retarded rate of progress were an equal burden upon all...
...in the iron and steel group the increase was seven per cent, in food and beverages eight per cent, in petroleum 18 per cent, in retail and wholesale trade 19 per cent, and in electrical equipment 75 per cent...
...This includes, among others, outlays to supplement depressed farm income, to meet our obligations to veterans, to pay interest on the national debt (mostly war-incurred), to build roads, and to defray all costs of general government...
...it puts essential domestic improvement and international security programs on a malnutrition diet...
...At this juncture in our national economic life, we need above all some unifying framework to substitute a fair appreciation of what we need and can afford for the paralyzing fear that we cannot afford the necessary or even the vital...
...Even the new federal budget proposed by the President, when measured against our capabilities and needs, continues to neglect the shortages in schools and hospitals and medical care, the pittances paid out to our senior citizens in the name of "social security," the slums in which millions of families are huddled, the water and power shortages in our new cities and burgeoning suburban areas, and even the best estimated requirement of national security...
...Prices in these gigantic industries are determined largely by the conscious decisions of their managers...
...Four—Among the American working population generally, there are tremendous pay inequalities, depending upon occupation...
...With nationwide assurance that the government was itself committed to its appropriate role in promoting full prosperity, industry and labor could move with confidence toward wage-price-profit relationships conducive to attainment of full and sustained prosperity for all...
...With the perspectives thus made available, not as fiats imposed from above but rather as aids to the thinking and de-cisions of a free people, the people, their enterprise system, and their government could more harmoniously move forward in the directions and at the pace the people approve...
...Consider: One—In 1955, about a million multiple-person families and about two million single-person families, or 2 1/2 per cent and 20 per cent respectively of the total American families in these two groups, had incomes of less than $1,000...
...This strain of excessive demand affected almost every part of the economy...
...Measured in today's prices, spending for national security rose from 5 1/2 billion dollars in 1940 to 146 billion in 1944...
...This caused a decline of 14 per cent in total government outlays, though state and local outlays increased 19 per cent...
...On a per capita basis during the same four-year period, expressed in uniform dollars, the budget declined from more than $500 to about $400, or more than 20 per cent...
...Looking as far ahead as we reasonably can, we can predict that the United States will experience a gradual expansion of production and average living standards, with minor undulations in pace...
...But we have not yet responded to the two new problems that now confront us: First, we are complacently accepting a rate of economic growth and progress falling further and further below our real capabilities...
...Three—Low incomes prevail among the aged...
...This is the basic American system of enterprise, and we want to keep this system, although there is need for vast improvements in private economic policies all along the line...
...To aid these purposes, and for all other purposes of government aside from national security, federal budget outlays should be raised gradually from $160 per capita in the President's 1958 budget to about $200 by 1960...
...But the increasing shortages which result from these neglects are in some respects inflationary, because they hold supply far below demand and need...
...And in all respects, these policies are short-sighted, because they corrode the basic foundations of our long-range growth in productivity and total production...
...Such a Budget would indicate workable balances among investments, production, and consumption, and would indicate the various income flows needed to maintain this balance...
...Consumer prices rose about 25 per cent, or about per cent a year...
...In 1955, about 48 per cent of all multiple-person families were below $5,000...
...And needs grow with the country...
...The fact is that wages in general have risen too slowly to expand consumption sufficiently...
...Let us look closely at the items in the federal budget which build and strengthen our more than 170 million people...
...During World War II, we developed a moderately good program to counteract hyper-inflation, which seems to emerge in the American economy only in times of war or quick transition from war to peace...
...more than 37 per cent of the men and 84 per cent of the women in personal services...
...He is president of the Conference on Economic Progress...
...Including also a prudent allowance for considerably higher national security outlays, the total federal budget by I960—due to the fully expanding economy which an adequate budget would help to achieve— would be less than 16 per cent of total national production, contrasted with an average of almost 18 per cent in 1953-56...
...There were shortages of almost everything...
...Two—Extremely low incomes are prevalent in farm areas...
...Tax revenues could be partly recouped at once by closing some loopholes, and ultimately recouped by economic expansion...
...These disparities, in far less extreme form to be sure, are redolent of the 1920's...
...The tax burden on low-income families should be reduced soon, by raising the personal exemption by at least $100...
...This is not the worst of it...
...Despite the sound and fury about "excessive public spending," drastic cuts in the federal budget during the past few years have contributed largely to the mounting deficiencies in production and employment opportunity...
...Total production during the past few months has been at an annual rate of about 25 billion dollars below full production...
...Despite talk about the "biggest budget ever in peacetime," the President's budget for fiscal 1958 represents a slight further decline measured against our total production, and shows no appreciable increase per capita...
...Purchases by American consumers, measured in 1956 dollars, grew only 1 1/2 per cent from the fourth quarter of 1955 to the fourth quarter of 1956...
...Our total production in real terms expanded at the abnormally high rate of almost 12 per cent a year...
...The full consumption goal requires that by 1960 labor income in the form of wages, salaries, and supplements be about 20 per cent higher, and depressed net farm operators' income about 72 per cent higher, than the levels of 1956...
...Comparing the first quarter of 1957 with the first quarter of 1956, profits after taxes of 822 leading corporations increased nine per cent...
...The budget should also be measured against the needs of our growing population...
...Four million multiple-person families and 4 1/3 million single-person families, or nine per cent and 45 per cent of their respective totals, were below $2,000...
...Consumer spending also rose, because civilian employment rose by 6 1/2 million, consumer incomes advanced rapidly, and taxes took away from consumers only half of what the government was spending for war purposes...
...and it permits only crumbs to reach millions of our people who need more most, while bigger slices are cut by those who need more least...
...Total demand has been far short of our total productive power, and most productive facilities on the farm and in industry are operating far short of full capacity...
...This in effect is required under the present Act, but recent Economic Reports have ignored the mandate...
...Perhaps even more important, and due to the carry-over of thinking from the Great Depression, we have forgotten that the primary purpose of the federal budget is not to help "stabilize" the economy (even though this purpose is essential), but rather to make sure that a large enough portion of our growing total resources is allocated to those great priorities of national needs which require spending by the people through their government rather than individual spending...
...It would indicate the private and public programs essential to the well-being of the people, and reconcile all of these programs with the goals for production, employment, and consumption...
...Expansion of plant and other productive equipment has been excessive, relative to the trends in consumption...
...Iron and steel prices have been raised more than 20 per cent since the start of 1955, while steel prices in 1956 yielded the high rate of return upon net investment of 14 per cent...
...Wholesale prices rose about 32 per cent, or about seven per cent a year...
...This budget hardly meets current requirements for full prosperity and needed services...
...Anti-trust action should be strengthened...
...An excellent example of an overall inflationary situation occurred during the early years of World War II...
...In the foreseeable future, the first type of crisis seems highly unlikely...
...The facts of our economic life show: • Our overall economic growth in real terms, which averaged 4J/2 per cent a year for several years after World War II, has averaged only 2J/2 per cent during the past few years, and even less during the past fifteen months...
...The number of multiple-person families living in poverty at incomes of less than $2,000 a year can be cut by 1960 by more than three-fourths, and the number of single-person families barely subsisting on incomes below $1,000 can be cut almost in half...
...The change since this pre-Korean war period represents a decline of 36 per cent in the portion of our total economic production devoted to all purposes other than national security...
...From the fourth quarter of 1955 to the fourth quarter of 1956, investment in producers' durable equipment grew eight times as fast as consumption...
...This policy has done virtually nothing to check the excessive boom in productive facilities, because the giants responsible for most of this boom have other methods of financing...
...These trends in resource use, incomes, and living standards depend primarily upon how people fare in their private occupations, and how they choose to use the incomes thus earned...
...In sharp contrast, the situation in the most recent years, and increasingly today, has been absolutely different from overall inflation...
...The reason for so much confusion on this price-wage question is clear...
...And while the consuming public is being taxed with the cost of high interest bonanzas, the budgetary policies of the federal government reflect a jaundiced approach to many of the services the American people need most...
...This meant a decline of more than 20 per cent in the ratio of federal outlays to total production...
...Practically all of this deficiency in consumption results from deficiencies in wage income and depressed LEON H. KEYSERLING, consulting economist and attorney, was formerly chairman of the President's Council of Economic Advisers...
...During the depression, we developed a passable recovery program, and a good reform program which, with the improvements made since then, may well protect us from serious and prolonged economic declines in the future...
...More than one farm family in every three was under $2,000, contrasted with less than one family in every ten for the whole country...
...This policy is deflating and inflating the wrong things...
...These widely diverse trends do not indicate a generally inflated prosperity, but rather an inadequate and grossly distorted prosperity...
...In 1955, about one farm operator's family in every eight had an income from all sources of less than $1,000, contrasted with only one family in every forty for all American multiple-person families...
...Correspondingly, the national debt would fall from 72 per cent to 55 per cent of total national production...
...But the failure to use our resources more fully hits hardest the more vulnerable parts of the economic structure...
...This has been notably true in 1956, and on into 1957...
...On a per capita basis, measured in uniform 1956 dollars, this slash has been from $213 to $160...
...By greatly increasing the cost of public borrowing, the "hard-money," high interest rate policy is also making it harder for consumers to get schools and other services which they buy through public rather than private spending...
...The main purpose of the federal budget is to meet those basic needs of a growing people which cannot be met through private spending...
...Misreading these clear signs, the formulators of the "hard-money," high interest rate policy are repressing the overall growth rate of the economy, when we need faster growth...
...Instead of using fully our tremendous American capabilities, we are complacently accepting a far smaller national production pie than we could readily bake...
...On the federal side, these responsibilities are being slighted...
...The incomes of small businessmen have lagged greatly...
...In contrast, the prices and incomes of farmers have suffered a tremendous deflation...
...Public programs which expand consumer incomes and consumption, such as minimum wage protection, old age assistance and social security protection in all its forms, and similar welfare programs, need to be approximately doubled in effectiveness by 1960...
...With more production yielding more revenue, the federal budget would show a surplus, even with some tax reduction...
...Actually, the recent Heller Committee report has set about $5,400 as a "commonly accepted" American standard for multiple-person family income...
...It would combine economic strength with eco-nomic justice...
...Here, by way of illustration, is a model National Prosperity Budget: • The full production goal should be to lift annual production steadily to above the 500 billion dollar mark by 1960...
...more than 10 per cent of the men and more than 38 per cent of the women in wholesale trade...
...and almost 18 per cent of the men in construction...
...By 1956, the deficiency in public outlays was about 30 per cent of the 20 billion dollar deficiency in total production...
...more than 12 per cent of the men and more than 35 per cent of the women in manufacturing...
...This, too, is called part of the "fight against inflation...
...The best available instrument for developing this unifying theme would be a National Prosperity Budget, to be set forth recurrently in the President's Economic Report under the Employment Act of 1946...
...This hurt employment and consumption...
...The deficiency in this consumption now accounts for 70 per cent of the deficiency in total production...
...Our current economic thinking is still shaped largely by two great crises—the Great Depression of the '30s and World War II...
...By the first quarter of 1957, the true level of unemployment was 40 per cent higher than in 1953...
...An entirely new farm program should be initiated immediately, using income parity aids to farmers to induce adjustments in farm production geared to abundance, not scarcity...
...During the past four years, federal outlays for goods and services, measured in uniform dollars, declined about 28 per cent...
...The public is led to believe that prices in the gigantic industries, which serve so large a part of our whole economy, are still determined by the old-fashioned laws of costs and supply and demand in a free competitive market...
...Less than 30 per cent of farm families were above $4,000, contrasted with almost 70 per cent of all American families...
...Government services are not meeting fully the needs of the people, nor the requirements for full prosperity...
...With adequate consumption growth, production and business opportunity and rewards would grow accordingly...
...Selectively administered price inflation and profiteering, at the cost of retarded consumption, should be thoroughly investigated by proper governmental bodies...
...Grouping all of these together in the President's pending 1958 budget, they come to only 1.2 per cent of our total national production, and only $30.17 on a per capita basis...
...and more than 67 per cent of the men and 93 per cent of the women in agriculture, forestry, and fishing...
...In other respects, such policies are deflationary, because total economic activity now is falling further and further below the expanding requirements for full prosperity...
...The average income of multiple-person American families should rise to almost $7,600, or more than $1,100 above the 1956 level...
...Instead of dealing with these realities of inadequate and distorted prosperity, national economic policies are tilting at the windmills of a general overall "inflationary" situation which does not now exist...
...Labor income has not nearly kept up with the contribution which wage and salary earners must make to sufficient expansion of consumption...
...The attacks upon the President's 1958 budget have been utterly reckless...
...Some prices and incomes—such as big-industry profits, dividend income, and income in the form of interest— have advanced relatively too much, and thus fed the investment boom...
...These profits reflected excessive pricing policies, arising out of the concentrated economic power which enables these semi-monopolistic mammoths to fix and determine their own prices at will...
...farm income...
...But our federal, state, and local governments also have great economic responsibilities...
...Practically all types of productive resources, in the factory and on the farm, were used to the hilt...
...To be sure, despite this overall situation some parts of the economy have been moving upward too rapidly...
...and second, we are making but picayune efforts to translate general economic abundance into specific economic justice...
...Comparing 1956 with 1955, the leading corporations in the electrical machinery and equipment industries raised their profits by more than 16 per cent, in the petroleum industry by 17 per cent, in retail food chains by 27 per cent, and in the construction industry by 52 per cent, while their returns on net assets in 1956 all exceeded 14 per cent...
...It is playing havoc with small business...
...These are the basic ingredients of a model National Prosperity Budget for an expanding America committed to translating economic abundance into economic justice...
...Incomes which furnish investment funds have grown relatively too fast...
...Unemployment dropped to the negligible figure of less than one million...
...The conventional federal budget declined from 20.7 per cent of our total national production in fiscal 1953 to 16.2 per cent in fiscal 1957...
...Unemployment is too high and rising...
...steel profits in late 1956 broke all records...
...Those earning less than $2,000 in money income in 1955 included more than 26 per cent of the men and more than 68 per cent of the women in retail trade...
...The incomes of most groups rose much faster than production increased, and this pressured prices upward...
...What is merely a slower rate of progress for some, forces others absolutely downward (for example, farmers and small businessmen...
...We need also by 1960 to double total educational outlays from all sources, expand health facilities and services greatly, build an average of 2 1/2 mil lion new homes a year, lift natural resource development programs to 50 per cent above the current level, create a fully prosperous agriculture, and expand greatly economic and technical assistance to strengthen the free world...
...The general apathy towards these adverse trends reflects the erroneous notion that, so long as the absolute figures of total production, employment, and income are "higher this year than last year," it would be gilding the lily to ask whether they are high enough...
...It would also reconcile an adequate federal budget with the whole national economy, so that both would be sound and strong...
...These outlays have dropped to only 6.4 per cent of total national production in the 1958 budget, contrasted with about 6.7 per cent in the Korean war year 1953, and about 10 per cent during the pre-Korean war period 1947-50...

Vol. 21 • July 1957 • No. 7


 
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