Why It Is a Depression and How to Stop It
ULMER, MELVILLE J.
Why It Is a Depression and How to Stop It If Government fails to act, unemployment could hit 10 million By Melville J. Ulmer Professor of economics, American University ONE of President...
...In the first quarter of 1958, they went down by an additional $2 billion...
...history, we find many small dips in business activity and many very large ones...
...And yet the fear of inflation grips and paralyzes our Washington leaders, so that they cannot confront the present danger of depression...
...I would recommend at once a substantial tax cut, of not less than 25 per cent, on personal incomes, and a similar cut in'the excise taxes on many consumer goods...
...this is true, contrary to popular opinion, of these postwar years, too...
...So our ability to meet interest payments has doubled while the debt itself declined...
...Our debt today is actually $4 billion less than it was in 1945...
...The difficulty in the present situation stems from the fact that the economic managers of our nation have been asleep at the switch, and seem to have difficulty awakening even now...
...Actually, some components of the general price level have shown considerable weakness in recent months...
...Is it possible that the tax cut proposed may prove excessive, that it may induce inflation...
...This is the indelible mark of depression...
...The law itself can provide for this possibility...
...Then the President suggested that we wait for the April figures...
...In fact, in peacetime years, we have been, approximately, balancing the budget...
...Of the 14 industry groups for which manufacturers' sales are computed, 13 were still heading downward...
...It will not be the first time that prices remained firm while production and employment were declining...
...The question is how and when it can be conquered...
...This crude psychological approach has never worked...
...The Commerce statisticians now estimate that in the second quarter of this year—that is, the quarter ending June 30—investment will decline by an additional $1.5 billion, and that by the end of this year the total decline in investment from its peak last fall will amount to more than $7 billion...
...At a time like this, we can expect that the survey would underestimate the decline...
...The actual decline in business investment by the end of this year, taken at an annual rate, will thus he much closer to $10 billion than to $7 billion...
...The gross national product as a whole could easily drop by $30-40 billion during the year unless the economy is buttressed...
...He is now being urged to write another one called Inflation Without Prosperity...
...There is little in the available facts to provide encouragement about the future of business...
...Economists are practically unanimous on how to combat depressions...
...The difference between the big ones and the little ones, aside from size, is in the behavior of investment...
...President Eisenhower first asked us to wait until we received the figures on unemployment in March...
...The Federal debt is now $275 billion, isn't it...
...Prices of many basic commodities, such as copper, lead, rubber, wool and zinc, have been dropping sharply...
...Are we in a recession, to use the popular Washington expression, or are we in the beginning of a depression...
...The quantity of new orders—a very important figure —was declining for all of the five industry groups for which they are compiled...
...This raises production, employment and profits...
...But the Department of Labor found that unemployment rose from 5.2 million in February to 5.4 million in March...
...For the result of investment reductions tends to be cumulative...
...The Labor Department reports that in most industrial centers more than 6 per cent of the labor force is unemployed...
...In the fourth quarter of 1957, the annual rate of such expenditures declined by $1.5 billion...
...It also swells the nation's overall income, and increases the demand for goods and services of all varieties...
...The same thing happened for a time in 1937—at the beginning of a depression which brought unemployment to more than 10 million workers...
...When it reduces taxes, this obviously permits individuals and business concerns to retain a larger proportion of their incomes...
...When business in general finds itself in this position, when most producers discover that they have excess capacity, new investment drops, employment declines, and the volume of spending contracts cumulatively...
...And in those 13 years our gross national product rose from $213 billion to $430 billion...
...Looking back at U.S...
...But more than 90 per cent of our debt was built up during the two world wars...
...Each year, the Commerce Department sends questionnaires to the largest corporations asking about their investment plans for the coming year...
...The trend now underway suggests that, though the spring figures may show seasonal improvement, the number of unemployed may rise to 6 million in summer...
...It should aim at having these projects ready to start in September, in case the economy at that time is still heading downward...
...It is this sum which must be offset by the activity of the Federal Government...
...The number of jobless is increasing...
...Employment and production in general were still declining, after allowance for the seasonal factor...
...When a public official asserts that he opposes make-work projects, this is a confession of a job undone...
...We had, for example, small declines in 1954, 1949 and 1926...
...Sales are declining in nearly every sector of the economy...
...By December—if we fail to take proper action—it could reach 10 million...
...There is a good chance that this will stimulate expenditures by households and business enough to offset the currently declining elements...
...What we have, then, is clearly a depression...
...The Government can, and should, act on both fronts...
...Since we have already delayed too long, I believe we must move now with particular vigor...
...True, retail prices are still edging upward, and some manufacturers' prices are quite firm...
...We had big ones in 1937, 1929 and 1921...
...Temporarily business becomes overstocked, and production declines slightly until merchants work off excess inventory...
...But the fulfillment of these needs must be planned in advance...
...Why It Is a Depression and How to Stop It If Government fails to act, unemployment could hit 10 million By Melville J. Ulmer Professor of economics, American University ONE of President Eisenhower's advisers recently wrote a book entitled Prosperity Without Inflation...
...We have more than enough legitimate needs for hospitals, schools, dams, bridges, highways, sewage controls, river reclamations, irrigation projects, and so on...
...This is a sharp reduction in business investment in plant and equipment...
...On the chance that it will, the Government should prepare now for a program of public works of at least $5 billion...
...The latest Commerce Department compilation shows that the decline in personal income and retail sales has been retarded— but by no means reversed—by unemployment insurance and other Government outlays...
...The bills passed in recent weeks—on highways and on housing—will together have only a minor impact on the total economy in the months ahead...
...If the automobile industry, for example, has the capacity to produce 8 million cars annually and only sells 4 million, the auto manufacturers will not start building large new facilities...
...Recessions, or small declines in business activity, are due mainly to inventory adjustments...
...Now7 what can we do about it, and what are the chances of getting it done...
...The answer lies in the behavior of business investment in plant and equipment...
...When the Government increases its own spending—on dams, schools, highways, and so on ¦—this stimulates production, employment and incomes directly...
...This tends to expand purchasing power and the demand for goods and services...
...Provision can also be made for a further automatic tax increase six months later, if inflationary trends become dominant...
...The effects at the retail level should be felt in the months ahead...
...But, it is often rejoined, when the Government increases its spending and reduces its taxes, this means a deficit...
...Only the highway bill calls for actual expenditure of Government funds, and this amounts to less than $2 billion, only a small portion of which is likely to be spent this year...
...If a businessman is using only half his capacity, he will not rush out to build a newr plant simply because a public official declares that tomorrow the sun will be shining...
...Now are we, today, in a recession or a depression...
...When business activity weakens, the Government is expected to reduce taxes and increase its own spending...
...If by the end of the calendar year unemployment has been reduced to 3 million or less and the economy is still expanding briskly, an automatic increase in taxes could become effective, equal perhaps to half the original reduction...
...But this reflects a typical rigidity in some monopolistic branches of industry and in unionized labor markets...
...The foundation of the problem is the decline in business investment on plant and equipment, which promises to reach $10 billion before the year is out...
...Nor will a jobless man buy a new car on the President's say-so...
...The purpose here is not to write a tax bill, but to suggest that the problem of maintaining stability is soluble—if only intelligence is substituted for traditional conservatism...
...We did not incur the bulk of this debt through combatting depressions...
...And this our Government has failed to do, except in very minor degree...
...Otherwise its effect will grow cumulatively...
...When this happens, you have a recession, brief and mild...
...For example, when the steel industry finds that its orders from the construction industry are declining, it will reduce its own investments even more than it had originally intended...
...He thought there would be a seasonal decline in the jobless, as the construction industry got underway in the northern states, and planting activity began on some of the farms...
...But we must be prepared for the possibility that it will fall short...
...Depressions all have something else in common...
...President Eisenhower's tactics are clear: to increase business confidence through the repeated assertion that tomorrow we will be better off than we are today...
...For depressions start when the fixed productive facilities of business become larger than required by present and prospective needs...
Vol. 41 • June 1958 • No. 22
