The New Hooverites

...Plants are currently operating at 65-70 per cent of their capacity, and more potential customers would mean more machinery in use...

...Thinking Aloud THE NEW HOOVERITES BY CARL LANDAUER The Vietnam war saddled the United States with the folly of the McGovern candidacy, the McGovern candidacy saddled the United States with another Nixon term and Watergate, and Nixon and Watergate have saddled the United States with a conservative Administration guided by a simplistic, retrograde philosophy...

...It is a result of the decline of economic activity, which has reduced tax revenue and forced the government to disburse large sums to the unemployed...

...It is ridiculous to praise free enterprise for developing America's economic capacity while simultaneously filling the air with cries of despair over industrialization's inevitable consequences...

...The argument for increasing production rather than throttling economic activity is quite compelling...

...When the New Dealers began using government as an instrument to make economic life more secure for the common man, they were only catching up with the practices of other advanced countries...

...It teaches, consequently, that the way to fight rising prices is to keep a tight rein on the money supply...

...Carl Landauer is an Emeritus Professor of Economics at the Berkeley campus of the University of California...

...The numbers are widely used to paint a grim picture of workers being crushed by the taxes that go to nonworkers, and of "collectivists" imposing new and overwhelming obligations upon everybody...

...Nevertheless, the so-called Phase II of Nixonomics worked fairly well...

...A frightening scenario is offered of more than half the annual GNP being consumed by the Federal, state and municipal treasuries...

...The young radicals of the New Left, being at heart anarchists-even those who call themselves Marxists- want to dismantle the state, including public services...

...They think, though, that the answer is larger doses of the same remedy...

...Nor was the shift to public support an arbitrary act...

...The attack of the new Hooverites, however, is directed not only against the welfare budget but against public expenditures in general...

...For Keynesianism, which fit the situation of the 1930s very well, has since revealed its inadequacies...

...Although in the past this would probably have resulted in serious price rises, businessmen now have a hefty incentive to keep increases to a minimum...

...Considering that at the start of the postwar era the United States was suffering from, in Galbraith's words, "private affluence and public squalor," this suggests nothing beyond a slow narrowing of the gap...

...This is the only explanation for the phenomenon-contrary to past experience-of new price rises by several major corporations in the face of a general decline in economic activity...

...Urbanization, modernization and a host of other changes rendered private assistance largely obsolete...

...Besides, the growth of public spending was to a great extent necessitated by the expansion of the private sector: Because larger, faster cars were being produced, the government had to build more and better roads...

...Individuals beyond working age, for example, had to be cared for even before there was a Federal insurance system (the United States never having adopted the custom, found in some primitive societies, of killing off its elderly...

...The record of price controls has been distorted: They were last instituted by a President who used them merely as a trick of political strategy, and administered by people who did not believe in the possibility of their success...

...Again, let us look at the figures...

...And their antistatist offensive is being facilitated by the failure of economic science...

...Yet suppose monetary policy were changed so as to augment consumers' purchasing power, and thereby sales...

...Liberalized monetary policies could ultimately help us achieve, not energy self-sufficiency perhaps, but at least drastically reduced dependence on foreign sources...

...Since much of the present attack focuses on welfare costs, it seems reasonable to look first at the relevant figures...

...In fact, social programs relieve the private sector of responsibilities it previously shouldered...

...With the liberal Keynesian economists unable to devise a convincing course of action, the conservatives are having considerable success preaching a return to the old gospel...

...Between 1950-72-the last year for which we have complete and reliable information-welfare outlays by all public agencies (including Social Security) rose from 8.9 per cent of the Gross National Product (GNP) to 17.5 per cent, and from 37.6 per cent of all government expenditures to 53.4 per cent...

...The policy we are now pursuing is extremely costly, both in material and human terms...

...Of course, for the economy to be invigorated, larger Federal budgets would be necessary, and one of the main points in the propaganda of the new Hooverites is the size of the national deficit...

...But the reason for our large deficit is not reckless spending, as the conservatives insist...

...Granted that everything we might do to cope with today's economic situation would to some degree be a gamble, it seems wiser to try to fight inflation by stimulating the output of goods and services than to continue on a restrictive monetary course...

...In such a case, the sacrifices imposed on society by the deflationary policies of President Ford and Federal Reserve chief Arthur F. Burns would have been made in vain...

...and if they are not thoroughly imbued with the illusion that modern society can live without the state, they want to return it to its role of half a century ago...

...But today's critics care little about reform...

...Simply projecting the trend of the last 30 years into the future, therefore, is misleading...

...Once prosperity returns, it will undoubtedly become very much smaller, and could disappear entirely...

...Regardless of the original cause of inflation and of the surrounding circumstances, they maintain, if the money supply is sufficiently curtailed, big businesses will eventually find its impossible to sell their goods, and prices will come down...

...They might not even bring us monetary stability...

...The most important thing to keep in mind is that controls must not be allowed to distort supply-demand relations, only to prevent monopolists from replacing the old formula of "small unit profit and large output" by its opposite, large unit profit and drastically reduced output...

...GNP, meanwhile, went from $289-$1,155 billion...

...One should also remember that the seemingly startling rise in welfare expenditures partly reflects the United States' former backwardness in this area...

...Large sections of the middle class, among them the upper layers of the industrial labor force, bitterly complain about financing welfare institutions...

...Then, too, if this motive should not be sufficient to check inflationary pressures, it could be supplemented by carefully designed and managed price controls...

...There is no a priori reason to think it will...

...But since the '30s our economy has undergone enormous structural changes, and big business, having grown still bigger and reduced competition, is better able to withstand market fluctuations...

...Moreover, this has happened at a time when the social achievements of the last decades are under attack from other sources as well...

...It would be futile to deny that the official bureaucracy has many shortcomings, that some of its tasks might be better left to voluntary bodies, and that the question of how heavily the working population can or should be burdened for the benefit of those who cannot earn a living needs continued and careful examination...

...Then, it is alleged, individual liberty will be lost...

...Some of the advocates of tight money are willing to acknowledge that the present structure of our economy makes fighting inflation more difficult...

...Indeed, under existing conditions, the answer seems to be that it will not...

...The fault in this reasoning lies in its not taking into account that a smaller quantity of goods can still be sold at even higher prices...

...What is more, this policy could be combined with an effort-much stronger than the ongoing one-to deal with the energy crisis...

...Traditionally, conservatives have conceded that there is one area where the state has a legitimate role to play-monetary affairs...

...One of this gospel's messages is that it is more important to fight inflation than depression...

...Yet many of these undertakings are impeded by a lack of capital...

...The proposition is dubious even on its own terms, but first one must ask if a trade-off between the two evils is really possible...

...The time to change is now...

...In reality, though, the deficit is not nearly as great as they allege, if the effect of inflation is taken into account...

...Yet here, too, the new Hooverites, who control the Federal Reserve Board in addition to the White House, are fighting for a policy based on noninterventionist concepts of questionable validity...

...Between 1950-72, expenditures by all government agencies rose from $70-$367 billion...

...Unfortunately, reducing the amount of money in circulation also tends to lower productivity, because businessmen adjust their expectations to the diminished demand brought on by the government's policies, and this is tantamount to increasing the money supply...

...The question then becomes: Will the state's deflationary restriction of the money supply outweigh the businessmen's inflationary tendency to cut back production...

...it has no remedy to offer to our current dilemma...

...because employment opportunities drew people from the country to the cities, urban systems of police and fire protection, sanitation and transportation had to be established to replace their simpler and less costly rural counterparts...

...During past depressions, many entrepreneurs, desperate for cash, sold their goods for little more than the cost of materials and labor, leaving part of their overhead uncovered...

...Their competitors were forced to follow suit to avoid being driven from the market, and prices fell...

...It is also likely to miss its goal of ending inflation...

...Can we, in our present circumstances, have less inflation by accepting more unemployment, and vice-versa...

...the burden fell primarily on children and grandchildren, secondarily on charity...

...It cannot explain the coincidence of inflation and depression that confronts us...

...And should the Federal Reserve refrain from increasing the money supply, we might trap ourselves in an underemployment equilibrium, albeit of a different kind than that foreseen by the Keynesians-one produced not, as John Maynard Keynes assumed, by an interest rate kept high through "liquidity preference," but by the lack of competition in conjunction with restrictive monetary policies...

...In other words, official outlays were five times as large in 1972 as in 1950, whereas the GNP was four times as large...

...Now, with the one important exception of health care, the task that remains for our administrators is the rationalization and systemization of services, not expansion...

...To be sure, it is undesirably high, especially since it forces the government to become a large-scale borrower on the capital market, and thus contributes to a rise in interest rates...

...People in general reveal a growing unwillingness to recognize that government is an indispensable instrument for achieving the amount of happiness that can be enjoyed in this very imperfect world, and organized groups increasingly oppose the authority enabling the state to fulfill its functions...

...New measures both of energy production and conservation (more public transportation, better building insulation) require considerable investment...

...Orthodox theory explains inflation as the result of too many dollars chasing too few goods (disregarding in this context how quickly money changes hands...