Inflation and Foreign Aid

...The Democratic Advisory Council stresses that ever-increasing productivity is necessary to achieve the basic aims of U.S...

...But this new argument cannot stand unprejudiced analysis...

...There can be no question, however, that the two problems are closely interrelated...

...really means that, in terms of August 1957 dollar-purchasing-power, the 1959 GNP would only have the value of $460 billion...

...Genuine help to our present and potential friends would take the form of making their vast potential productive powers effective...

...We do not serve this end by treating them as paupers or by feeding them out of our unsaleable surplus...

...The more steel they use for construction of consumer industries and for the production of durable consumer goods, the more normal and less warlike they are likely to become...

...The major terms of the debate need be only briefly restated here...

...In a forthcoming issue he will discuss the implications of his economic proposals for American living standards...

...Before World War I, foreign portfolio investment was a great help to our economic development...

...Such a policy would also require an open door for the importation of raw materials, instead of our present exclusionary policies...

...In December 1957, when, in spite of rising unemployment, personal income was still $8 billion, or 2.3 per cent, higher than a year earlier, per capita purchasing power was down by 2.4 per cent...

...But compared with the peak of the last boom in August 1957...

...If the then-prosperous nations of Europe had adopted our contemporary means of increasing consumption, they would have had much less money available to help in building up this country's economy...

...Furthermore, by December 1959 our population is expected to increase by four per cent over August 1957...

...foreign policy, to meet human needs and reinforce political freedom abroad by reducing want...

...All we can hope for is a gradual transformation of the totalitarian Soviet system into democratic socialism...

...It goes without saying, of course...

...The real drawback, in terms of our foreign economic policy, is that there are insufficient savings available for portfolio financing of foreign production needs...

...And there can be little doubt that rising living standards will create a better atmosphere for such a transformation than would widespread want...

...Economy: Inflation and Foreign Aid By Oscar Schnabel THE direction and growth of the United States economy have become the subject of a growing debate, dramatized by the policy conflict between Leon Keyser-ling and John Kenneth Galbraith...

...These figures are typical of our rate of consumption of raw materials...

...Our own economic history should teach us better...

...But this objective is hardly to be reconciled with our foreign policy aim of increasing production and consumption all over the non-Communist world...

...It also conflicts with the interests of industrial countries, which, by importing agricultural products, provide the means whereby potential customers can buy their industrial exports...

...We have seen recent examples of this in transportation and mining...

...At this rate, both the purchasing and financial power of their accumulated savings are reduced...

...Now it is a well-established fact that this country's ever-rising productivity has been accompanied by ever-rising prices, and Keyserling's views presage an even greater inflationary movement for the future...

...We consumed 32 per cent of the free world's natural rubber and approximately 80 per cent of the world's synthetic rubber, and nearly two-fifths of the world's tin consumption...

...For the more we succeed in this latter aim, the greater will be the need in other countries for basic raw materials...

...The most conspicuous example is the steel industry, where wages and prices have been increased during periods when demand, production and employment dropped sharply...

...He speaks of the grave dangers implicit in the production of unnecessary goods, which are absorbed by our economy only by means of unscrupulous incentives to spending above capacity, by exaggerated plant expansion, by excessive profit and wage rises, and by inflated consumer credit...

...By neglecting the impact of our national economic policy on our foreign relations, we play into the hands of our Communist adversaries, who seem to have the ability and will to adjust their economy to the aims of their aggressive foreign policy...

...Propagandists of an ever-steeper rise of the GNP have been provided with a new political argument by the reports of vast economic progress in both the Soviet Union and Communist China...

...The worst part of the story is told in the statistical results of inflation...

...As a result, the steady creation of a new, inflationary money supply becomes necessary to finance the expansion of both production and consumption...

...This "progress" will be paid for by a reduction of more than S11 billion in the purchasing power of individual savings...

...It should be obvious that any foreseeable production increase in China is absolutely irrelevant to the development of our own economy...

...But even the soundest governmental and Federal Reserve policies cannot stop inflation so long as any interference in the wages-and-prices policies of business and labor is taboo...

...A two per cent rise in the cost of living this year, added to the 2.4 per cent rise since August 1957...

...The real danger in China's economic progress is in the contrast it might present to other underdeveloped countries...

...As a result, in our highly-praised "people's capitalism" ever larger sectors of the population have become debtors instead of capitalists...

...The real problem is how to help the underdeveloped nations to raise their living standards by increasing their production...

...The drive to increase our GNP to a trillion dollars within 15 years overlooks the grave danger of the depletion of our raw materials...

...This is the equivalent of 1.5 per cent of total consumer spending during this period...

...cepted by the Democratic Advisory Council, as witness the call by Senator Hubert Humphrey (D.-Minn...

...this growth would not represent the slightest real progress...

...It would be the part of wisdom and foresight to begin now to conserve our raw material resources for the time when there will be a growing demand for them from developing foreign industries...

...but also of all those industries where a few corporations are strong enough to increase prices with no consideration for fluctuations in demand...

...This could be achieved by building up their agricultural and industrial plants, by avoiding competition with them in their vital markets, by increasing their outlets on our market...

...Surely we only weaken other free nations by dumping our farm surpluses on world markets and by curtailing imports of metals and oil...

...The most optimistic economic previews for 1959 expect the achievement of a $480 billion GNP by the end of the year, with an accompanying rise in living costs of only two per cent...

...President Eisenhower's Budget Message and his Report on the State of the Economy warn against inflation but leave the responsibility for avoiding it to the "powerful" leaders of business and labor...

...Some of the major factors that would contribute to further inflationary pressures are the following: 1. Even if in certain exceptional cases wage rises could be kept within the limits of productivity rises, there are bound to be wage rises in sectors of the economy where there is little or no increase in productivity...

...As for Soviet economic expansion, it may be hoped that the better housed, clothed and fed the Russians are, the less the Soviet leaders would be inclined to risk a war...

...This is true not only of our agricultural production...

...The Keyserling position calls for a maximum increase of productivity, a fast-growing Gross National Product (GNP), accelerated spending by government, business and consumers, and constantly rising wages and agricultural incomes...

...The debate has centered largely on domestic economic questions, overshadowing consideration of the impact of our internal economic development on our foreign economic policy...

...But it is Keyserling's philosophy that has been acOscar Schnabel, a former Austrian diplomat and economist, has long studied world economic problems closely...

...If our democracy proves unwilling or unable to give primacy to our basic national interests rather than to special interests, if we consider ever-increasing abundance more important than sacrifices for the sake of our future security and well-being, then we are in danger of losing the battle...

...Galbraith repudiates the sacrosanct nature of the GNP, which is a catch-all of essential, more or less desirable, trivial and even undesirable goods and services...

...that as long as totalitarian rule persists in the Soviet bloc, we must devote as much of our GNP as is necessary to the protection of our security and freedom, regardless of cost...

...But clearly this danger cannot be overcome by an increase in our own production or a rise in our living standards...

...We should therefore welcome, rather than fear, a closing of the gap between the two nations' living standards...

...3. Exaggerated expansion of productive capacity, though financed out of profits, is ultimately paid for by the consumers, in the form of higher prices...

...It is obvious that our subsidized overproduction of farm products plays havoc with the economies of agricultural countries...

...Just during the past year, the U. S. alone used nearly two-fifths of the world's energy consumption, which involved enormous quantities of oil, gas and coal...

...4. The insufficiency of private savings is aggravated by the depletion of such savings caused by too much consumer credit...

...Now, our ambition to increase our GNP to a phenomenal level means that our need for raw materials will grow disproportionately...

...The same might be said for the prospective expansion of Soviet heavy industry...

...At present, domestic consumers are induced to spend as much as possible at rising price levels...

...2. In basic sectors of the economy, prices and wages no longer operate within the rules of a competitive market...

...Actually, we only increase poverty abroad by, for example, dumping our unwanted over-production without regard for the vital interests of other producers, and by curtailing imports so as to stimulate our ever-growing production...

...The inflationary character of this system of financing expansion is all the more serious in view of the fact that the consumer has to pay more than twice the cost of such new investment—for 52 per cent of the profits retained by industries are taxed away by the Government...

...What counts is not the size of the industry but the manner in which it develops...

...The outcome of this debate will have major consequences for the nation's standard of living and for its capacity to cope successfully with the Soviet economic challenge to the West in the less developed parts of the world...

...similarly, the amount of current gross savings is diminished through increasing consumer credit...

...one of the Council's leading members, for a planned annual GNP increase of five per cent, which would bring it up to a trillion dollars in 1974...

...The most serious of all economic heresies is the belief that the continuous and indiscriminate growth of our GNP is good for the free world...

...According to Department of Labor statistics, from August 1957 to August 1958, 53 per cent of the working population increased its purchasing power at the expense of the remaining 47 per cent, whose purchasing power was reduced as a result of higher living costs...

...For example, in October 1957, though unemployment was ten per cent lower than it had been a year earlier, per capita purchasing power was nevertheless 0.8 per cent lower than at the end of 1956...

...The little we do in this area is restricted to inflationary government spending or the extension of big business activities abroad...

...The indiscriminate growth of our GNP, with no consideration of the merits of its components, contains one other grave implication for our foreign economic policy: It would leave no room for a wise foreign investment policy...

...In sum, a steadily and fast-growing GNP is necessary both for the elimination of poverty at home and for the free world's fight against poverty abroad...

...Instead, we ought to supply them primarily with technical and financial aid so as to build up their agricultural and industrial plant...

...Rightly or wrongly, both of these methods are vilified abroad as "neo-colonialism" or "economic aggression," evoking resentment rather than appreciation...

...Keyserling denies the inflationary consequences of these policies, for rises in wages and prices would be compensated for, thanks to ever-expanding productivity, by the increase of per-capita output...

...Ironically, though we desire to convince the world of the blessings of the free-enterprise system, we hurt our friends by our policy of government interference in the overproduction and dumping of farm goods...

...We can be thankful that England and the countries of Western Europe remained free of the blessings of our economy of waste...

...so that the actual physical per capita GNP for 1959 will be about 0.5 per cent smaller than in August 1957...