American Notebook Ferment in the Economy

...The economy, like any organism, can absorb only so many minor injuries before the cumulative impact begins to undermine the economic health of the nation...

...Since both arguments are relevant, perhaps what is required is a trial assessment of some of the larger forces causing the present ferment in the economy...

...Given the decline in manufacturing employment, the growing unused capacity in the economy, and the seriously limited value of built-in stabilizers in compensating for lost income, the prospect for rapidly expanding mass consumption to create employment must ultimately depend on changes in the share of income received by lower income classes...

...Prior to the completion of this expansion program any slack in defense pro duction was generally absorbed by unsatisfied consumer demands...

...And, because of the more than adequate industrial capacity, capital spending, which declined from $37 billion in 1957 to $30 billion this year and probably $31 billion in 1959, will go primarily for modernization rather than expanded capacity...

...Adding to the somewhat diminished role of the military sector of the economy is the fact that the growing importance of missiles will seriously reduce the number of workers required in military production by stressing the need for fewer, better-paid technicians rather than large groups of workers...

...In 1956, the most recent data available, the top half of the American spending units purchased 88 per cent of the new cars, and centralized most of the consumption power, in all fields, on which future employment will be dependent...

...This continued inequality in income makes it improb able that purchasing power among the lower income half of the nation, the group which needs it most, might expand sufficiently to maintain full employment through full consumption in an ever more efficient technology...

...This, in fact, is an important new development in the economy, and its consequences can only be negative from the viewpoint of maintaining full employment...

...Manufacturing output last August was 35 per cent greater than in 1948, but employment of production workers was six per cent lower...

...Given the modest expectations for steel and auto production next year —even optimists expect no more than 75 per cent and 60 per cent, respectively, of capacity to be utilized—heavy unemployment in these fields will continue, if not grow...

...DISQUIETING, too, for the economy is the inadequacy of the so-called builtinstabilizers in counteracting declining labor income...

...As the unions in the auto, electrical, and chemical industries know, such modernization usually means declining labor forces, lay-offs, and unemployment...

...the pessimists to a continuing hard-core of unemployment...

...In 1957, as in 1948, the top tenth of the spending units received at least 30 per cent of the personal income and had an average income about 25 times greater than the lowest income tenth and twice as great as the second highest income tenth...

...The most persistent economic problem, at least since 1945, has been the continued inequality of income and purchasing power...

...The growth of employment in finance and government may continue, but the current practice of introducing computers and electronic machines in banks, Internal Revenue and Social Security offices, and even Post Offices, will seriously reduce the rate of employment growth in these fields, if not absolute employment...

...Even if the present recession does not last beyond this year, the recovery will most likely be very temporary and the next economic decline will be substantially more serious...

...In October 1956, for example, 50 per cent of all retail workers earned less than $1.25 an hour, and 26 per cent earned less than $1...

...Today we are capable of maintaining very high civilian and military production, and any reduction in either field will simply mean idle plants and workers...

...The remarkable growth in productive capacity in basic industries since 1951 reflects the amortization policies practiced by the Office of Defense Mobilization since the Korean conflict to build the economy to the point where it could supply both guns and butter...

...This disparity between production and employment explains the current persistence of heavy unemployment in steel, autos, and many durable goods industries...

...This year output will be no more than 75 per cent of capacity, probably about 73 per cent...

...Economists have been busy issuing conflicting diagnoses on the present state of the economy...

...Probably the most important single trend in the economy since 1948 has been the failure of the manufacturing sector to expand output sufficiently to counterbalance rising worker productivity and maintain full employment...

...In 1951, under the pressure of the Korean crisis, production rose to 94 per cent of capacity in these continued on page 94 Ferment in the Economy continued from page 4 fields, and during the recession of 1954 it fell to 78 per cent...

...The economy is in these important respects weaker today than it has been since the end of the war...

...Technological innovation accounts for the difference, and although a comparison with 1929 raises dismal and not altogether irrelevant analogies, it is worth noting that from 1919 to 1929 manufacturing output rose 40 per cent while employment fell two per cent...

...A missile costing one million dollars requires 30 per cent fewer man-hours to build than an airplane at the same price...

...This policy, which has allowed rapid five-year tax write-offs for much business capital spending, was instrumental in sustaining the immediate post-World War II prosperity fed by the backlog of accumulated consumer wartime savings and business profits...

...The expansion of employment in the service and trade fields has one major and unanticipated liability—low wages, and therefore an increasing number of lower income families...

...EQUALLY DISTURBING for the economic future is the growing gap between national capacity to produce the basic materials upon which the economy is dependent—paper, cement, textiles, petroleum products, and metals—and actual output...

...Perhaps most disturbing of all is that the confidence of all too many in the efficacy of these stabilizers has dampened the general willingness to consider more decisive economic measures...

...The optimists point to rising industrial production, to rising profits and building plans, and to the stock market...

...Builtin stabilizers of unemployment compensation, social security, and the like may pull the economy out of its doldrums, as they have in part during the past year, but like many medicines they may only cure the symptoms of more complex maladies which linger on...

...Ignoring the potential homes, roads, schools, and foreign aid such stagnation represents, the existence of this surplus industrial capacity will sooner or later be reflected in lower capital spending by business, and consequently higher unemployment...

...Relief and other transfer payments have added somewhat to the lost income, but most of it has gone to the low-income aged, handicapped, and others generally unable to purchase new durable goods...

...Unless the total military budget increases substantially, the "salutary" effect of arms expenditures in maintaining employment and production will decline as the character of armaments is altered...

...As Daniel Creamer, under the auspices of the National Bureau of Economic Research, has shown in his important study of income in the 1948-49 recession, unemployment compensation and automatic tax reductions offset only one-quarter of the loss in disposable income...

...It has been pointed out, with considerable validity, that any reduction in manufacturing employment will be compensated for by the continued rapid post-war increase of employment in trade, service, and especially finance and government...

...Considering the fact that average unemployment compensation payments amount to only one-third of the average factory worker's weekly income, that over onethird of the nation's workers are not even covered under the plan, and that many workers have run out of payments, it is unlikely that the offset of the income lost in this recession has been much greater than that of 1949...

...Failure to solve any of the causes of post-war recessions by redistributing relative consumption among lower income groups and expanding public works and foreign aid has only undermined the economy's ability to meet new problems presented by the declining importance of military production, the growing industrial capacity, and the substantial ineffectiveness of built-in stabilizers as they are presently organized...

...Maintenance of the spending power of unemployed workers through unemployment insurance under such circumstances will not increase capital expenditures in the medium-run so long as existing productive facilities can meet the demand...