the road back to prosperity

...In automobiles, total wages and salaries declined almost 9V2 per cent, while investment increased almost 50 per cent...

...Granted all these needs in public areas, private economic adjustments are vital to help overcome the current recession and to help maintain the full rate of economic growth which alone can translate our potentials into actuality and thus achieve our almost immeasurable capabilities for economic and human progress...

...Moreover, private and public economic developments interact...

...By slowing down the growth in the consumption of farm products, these wage and employment lags have contributed—though not nearly so much as the dismal national farm policy—to a more than 23 billion dollar lag in net farm operators' income during the same five-year period as a whole...

...Working families with annual incomes under $2000 spend about 70 per cent of their income for food...

...per cent annually to help maintain a full prosperity rate of economic expansion of nearly the same size...

...These goals represent a carefully measured and consistent estimate of our resources and needs, in balanced proportion for full economic growth...

...This is not because the American people have not wanted to buy things and improve their living standards...

...From January 1956 to November 1957, industrial production declined 2.8 per cent, but industrial prices rose almost 4Yz per cent...

...Wage earners are the big food consumers...

...On fronts related to international security and world peace, we need to expand per capita federal outlays for economic and technical development overseas from $12.51 per capita in the 1958 budget to almost $19 in 1960, measured in 1956 dollars...

...For example, comparing 1956 with 1955, leading food chains lifted their profits after taxes by 27 per cent, drugs and medicine firms by 30 per cent, and construction firms by 52 per cent...

...But for the period 1953-57 as a whole, total real wages and salaries expanded at an annual average rate of only about 3.1 per cent...

...This explains the vast unused plant facilities of today, ranging from 10 to 20 or even 45 per cent of capacity in some basic industries...

...The portion of this new budget devoted to major national security comes to a smaller part of our estimated total national production than in any year since the last year before the Korean War...

...Wage increases are usually proper when needed to help expand consumption, in line with growing productive power...

...It is believed that this recent price inflation was accompanied by an economy operating at an "excessively high" rate of basic economic activity, and that the recession has resulted from the need to engineer a slowdown to "more sustainable" levels of economic activity—a "healthy readjustment...

...demonstrated to be in the field of economics...

...But if we bury a part of our strength because we don't know how to use it, we may succeed ultimately in burying ourselves...

...Corporate profits by 1960 should be about 8V2 billion dollars higher than in 1957...

...These wage increases have not justified recent price inflation...

...In a more technical sense, the base of private economic performance provides the tax revenues which pay for public performance...

...During the period 1953-1957, when the whole economy expanded at the seriously deficient annual average rate of only 2.7 per cent in real terms, and when the lag behind full employment and full production was most substantial, non-agricultural average hourly wage and salary rates showed an annual average increase of 3 per cent in real terms, while non-agricultural output per employee hour grew at an annual average rate of only 2.1 per cent...

...It appears, too, that money wage rates have advanced much too slowly relative to prices, and that real wage rates in general have advanced much too slowly relative to the need for consumption, and relative to the actual real volume of profits and investment, regardless of whether they have advanced more or less than productivity...

...But when the whole economy is slack, and operating far below full employment and full production, productivity is adversely affected far more than wage rates, until an absolute recession occurs...

...In general, in a prosperous and growing economy, both of these objectives can and should be accomplished at a fairly stable price level...

...Despite some excessive relative shares going to some business units in a retarded economy, the whole business community—including these units—would have fared much better in absolute terms with full economic growth...

...During the 1949-1953 period, despite the Korean War, price inflation averaged very much less than during the recent period, although in this earlier period there was reasonably full employment and production coupled with a rate of overall economic growth almost twice as high as during the recent period...

...But later developments have refuted the notion that administered price inflation is caused by the high pressure of demand for products...

...This is partly because of increased distribution costs, due to improved processing and packaging of food, and to more services to the consumer at the retail market level...

...In fact, the real income after taxes, or buying power of the people as a whole, has lagged further and further behind their actual consumption...

...and dividends, personal interest income, and rental income of persons, about 51/* billion higher...

...Furthermore, this under-utilization of resources by the private economy, progressively deteriorating at least since 1953, has provided the main pretext for "not being able to afford" the public programs which in truth we cannot afford to do without...

...Adjustments in the private economy, while of central importance, require the favorable environment of appropriate national economic policies...

...In recent years, it appears that an adequate level of profits and investment in the means of production, relative to consumption, would have been achieved without the excessive price increases which have taken place...

...and doubled old-age assistance payments and old-age insurance benefits...

...electrical machinery production fell 1 y<i per cent and steel production fell 20 per cent, but prices rose almost 14 and 16V& per cent, respectively...

...If these trends, stimulative also to farm product consumption, were combined with an entirely new national farm policy moving toward parity of income for fanners, and toward strengthening the family-type farm, net farm operators' income could and should move by 1960 to a level about 8% billion dollars above the exceedingly low 1957 level...

...This is generally not true...

...In recent months, the investment boom has started to wane, even relative to wages and consumption...

...Inadequate wages for those employed, by affecting consumer purchasing power, have caused unemployment...

...and the growing consumption lag has been caused largely by a growing wage lag...

...This trend should certainly not have been interrupted during the most recent years, when new plants and new tools were being created more rapidly than ever before, when automation was making itself felt, and when both labor and management were enlarging their skills...

...In the period since the Korean War, consumption has needed to expand very rapidly, to catch up with consumption restraint during that war, and to provide markets for greatly expanded plants and machinery...

...Under the devastating hard money policy, comparing September 1957 with 1952, the interest rates paid to those who make short-term loans to our government were up more than four times as much as wage rates...

...Measured in uniform 1956 dollars, total wages and salaries need to rise gradually but vigorously to a 1960 level about 41 billion dollars above the 1957 level...

...With a moderate part of the 7854 billion dollar lag in total economic activity during this five-year period, and consistently with the other progress depicted above, we could have reduced immensely the deficiencies in school buildings, teachers' salaries, and medical care...

...In any time except total war, we do not need to sacrifice living standards in order to achieve national defense...

...Much of the public has been led to believe that, when price increases have followed wage increases, the price increases have been caused and justified by the wage increases...

...In vivid contrast, the recent price inflation from the start of 1956 until the most recent months—the fastest ever except in time of war or reconversion from war to peace—was the result mainly of the ability of highly selective "price administrators" to lift their prices in order to reach for high or excessive returns despite a slack economy and inadequate economic growth...

...To help restore and maintain full employment and full production, and to meet our imperative domestic and international needs, the federal budget needs to be made a bold weapon of progress rather than a defeatist weapon of regression...

...Comparing 1956 with 1955, total plant and equipment investment had expanded more than twice as fast as total wages and salaries in communications and public utilities, about 2J/2 times as fast in mining, and almost 14 times as fast in textile mills...

...In the first quarter of 1958, the whole situation has worsened greatly...

...In the consumer commodity field, the large and harmful price increases for almost all items similarly brought excessive and unneeded profit increases to leading large-scale enterprises...

...The previous discussion makes it very clear that wages have lagged seriously in this basic sense...

...m In view of constant agitation to the effect that such gains as wage earners have achieved have been injurious to farmers, these facts should be stressed: if not for rising wages and consumption, closely paralleled by rising consumer expenditures for food, the farmer would have been still worse off...

...From 1956 to date, the rapid price inflation (until the most recent months) has yielded extraordinary profit gains feeding the relatively excessive investment boom in producers' goods...

...Under the stimulus of full markets and our ever-advancing technology, productivity or output per man-hour by 1960 should be more than 16 per cent above the abnormally low 1957 level...

...To this, both industry and government can contribute...

...Similarly, wages have lagged far behind other types of income which feed investment...

...By the fourth quarter of 1957, a real wage and salary lag at an annual rate of more than 20 billion dollars came to 65 per cent of the lag in total consumer income...

...During the whole period 1953-57, total dividends increased 80 per cent faster than total wages and salaries, and total personal interest income about 110 per cent faster...

...This "healthy readjustment" theory accounts for the hard money policy, and other repressive policies now bearing their bitter fruits...

...These great priorities include national security, international economic cooperation, education and health, housing and resource development, farm restoration, and social security...

...The vital need for economic growth has been widely misunderstood...

...replaced one million slum dwellings with good homes...

...The trend has been acute in key large-scale industries...

...We have not had enough of anything, because we have not used fully the fantastic productive power which could provide us with enough of everything...

...The central errors in the predominant current thinking about wages, prices, and profits may be summarized briefly: • It is argued that wages have advanced too rapidly, and thus have been responsible for the recent price inflation...

...and from the third to fourth quarter 1957, they actually declined at an annual rate between 2 and 3 per cent...

...and in electrical equipment, radio, and television by 32 per cent...

...From 1956 to 1957, actual growth shrunk to less than one-fifth of the needed rate...

...Since 1953, total wages and salaries in real terms have needed to grow by better than 4V...

...This highly significant conclusion is strengthened when we look at recent price and profit trends in key large-scale industries...

...With an appropriate decrease in unemployment, taking into account the larger size of the labor force, there would be about 3.8 million more jobs...

...The time is long overdue for us all to realize that the way to lift productivity is to release our full technological capabilities, and that this depends upon a full employment and full production program, with wages and consumption attuned to this objective...

...With all of these programs, there would still be room immediately to lift the annual rate of national security outlays about 3 billion dollars above the recent level, measured in current dollars...

...This will lead some people to say that our first task now is to favor and stimulate investment...

...Yet this reduced economic function of the federal budget in general is being used as an argument against adequate growth of wages, farm income, social security, and other supports of private consumption...

...And in relative peacetime, we do not need to sacrifice the progress and enjoyments resulting from expansion of production and consumption in our private enterprise system, in order to accomplish the progress and enjoyments resulting from needed expansion of domestic public programs...

...By the fourth quarter of 1957, the annual rate of our total economic activity was more than 32 billion dollars too low...

...Under such circumstances, it appears that real wage rates grew more rapidly than productivity, not because wage rates grew too fast, but rather because productivity grew too slowly...

...Comparing the first three quarters of 1957 with the first three quarters of 1956, unusually large price increases have hiked profits after taxes by 8 per cent in total manufacturing, 9 per cent in petroleum products and refining, 17 per cent in automobiles and parts, and 22 per cent in iron and steel...

...The facts indicate this: when our economy is operating close to full employment and full production, and achieving a satisfactorily high rate of overall economic growth, the problem of wage rates rising faster than productivity hardly arises...

...In a fully expanding economy, these increased federal outlays would come to about 16 per cent of our total national economic activity in 1960, compared with an estimated 16.4 per cent in calendar 1957 and 17.4 per cent in 1953-1957...

...It is also desirable to examine whether wage rate increases have in fact outrun productivity gains, and if so, what this means...

...This new budget, despite the torrents of talk about how "big" it is, comes to a smaller part of our estimated total national production than in any year save two since the year before we began to feel the real impact of the Korean War...

...During the past five years, our total economic growth in real terms has averaged little better than half of the needed rate of growth for full prosperity...

...If we move year by year toward these practical goals, we shall have the means to fulfill amply all of our responsibilities at home and abroad...

...Wages and salaries, and consumer purchasing power, can be expanded both by higher rates of pay and by more employment...

...Profit increases are usually proper when needed to cover a fair return on equity and to cover their appropriate portion of investment in the means of production, in balance with growing consumption...

...in tobacco by 13 per cent...

...m During the last two years, total investment in plant and equipment has expanded out of all workable proportion to the expansion of wages and salaries and consumption...

...Even if in some cases the needed wage and price adjustments involved temporary relinquishment of what would be regarded as an adequate level of profits for the long run, these adjustments should nonetheless be made...

...This progress should be commenced substantially at once...

...Even in the fourth quarter of 1957, measured against full prosperity needs, the size of the investment lag was a small fraction of the lag in wages and salaries and consumption...

...Of course, when a recession begins, profits tend to slow down even faster than wages...

...The growing maladjustment between consumption and production could have been corrected if the wages which feed consumption had grown faster than the profits which feed investment in the means of production...

...The long-run trend of productivity in the American economy has been to grow at an accelerating rate...

...Similar conclusions are indicated by the long period running back to 1933...

...Now that this kind of business investment has outrun consumption, it would be sound financial and economic policy for business leadership to plow funds into the consumption field, as a wise investment in the restoration and expansion of markets instead of plants and machines...

...But it is also the result of the excessive profit margins of some processors and distributors...

...In the fourth quarter of 1957, the annual rate of this consumption lag accounted for more than 24 billion dollars of the lag of 32.6 billion in total economic activity...

...This malpractice has by now aggravated the unfavorable economic trends it sought to escape from...

...The essential superiority of our highly productive economic system is that we do not have to sacrifice one vital goal to achieve another...

...But the cause generally is inadequate wages and consumption...

...Thus, the increases in money wage rates in general appear not to have advanced at such speed as to be the cause of the recent price inflation, looking at it from the consumer buying or "demand-pull" side...

...Most key industries will need less funds than they have been using recently for new business investment in productive plant and equipment, until consumption catches up...

...These goals for public programs are entirely consistent with the goals for private progress already depicted...

...From the first half of 1956 to the first half of 1957, sharply rising sales by some leading industries were accompanied by sharply rising prices— an unwarranted procedure...

...The national debt would drop from almost 63 per cent of our total national production in 1957 to about 541/2 per cent in 1960...

...petroleum production declined 3.5 per cent, but prices rose 5.4 per cent...

...It also appears that total wages and salaries in recent years have not grown nearly rapidly enough to consume the product of full employment and full production at actual price levels...

...Wage earners are among those paying taxes to support these interest bonanzas...

...All of these prevailing beliefs are about as wrong as anything can be LEON H. KEYSERLING, former chairman of the President's Council of Economic Advisers, is a consulting economist and attorney, and president of the Conference on Economic Progress...

...And if wage earners, particularly those with low incomes, had done better, the acute deflation of farm income would have been less severe...

...They could not get it into their heads that, in our dynamic American economy, moving forward creepingly is really losing ground...

...There has been a generalized slowdown, which has been the cause rather than the result of the unsatisfactory productivity trends...

...in drugs, soaps and cosmetics by 18 per cent...

...Comparing the end of 1957 with the beginning of 1951, the parity index (representing prices, interest, taxes, and wage rates paid by farmers) has risen only 9.6 per cent, while prices received by farmers have fallen 19.3 per cent...

...And the reduced burden of national security outlays is being used as an excuse for crippling vital domestic programs...

...Comparing the third quarter 1957 with the first quarter 1956, plant and equipment investment had expanded more than four times as fast as wage rates in petroleum and coal products, more than nine times as fast in iron and steel, and almost six times as fast in electrical machinery...

...These goals, in a sufficiently expanding economy, can be achieved with a slight surplus in the conventional budget, and a substantial surplus in the cash budget, even with needed tax adjustment to stimulate the consuming power of low-income groups...

...Wages, prices, and profits, and their relationship to one another, are the prime conditioners of the performance of the private economy...

...Furthermore, farmers have been hurt far more by their falling prices than by rising costs...

...It is frequently stated that the culmination of the recent business investment boom, and adverse changes in foreign trade, rather than deficiences in wages, farm income, and other consumer purchasing power, have been the main causes of the current recession...

...From 1956 to 1957, this buying power grew only about half as fast as actual consumption...

...A total wage and salary lag of 45'/2 billion dollars, during the five-year period 1953-1957 as a whole, has interacted with a lag of 8V2 million in total man-years of employment during the same period as a whole...

...Such adjustments are needed now...

...Comparing the first three quarters of 1957 with the first three quarters of 1956, leading firms in food products and beverages lifted their profits by another 7 per cent...

...Thus, it appears that wage rate increases in general have not justified the recent price inflation...

...the road back to prosperity by Leon H, Keyserling TTIhe current economic recession ¦*- cannot be overcome, nor can many of the serious gaps in our prosperity from which we chronically suffer be closed, without great and immediate enlargement of the public programs which identify and serve some of our greatest priorities of national need...

...Progress and harmony in the private sectors of the economy are vital to the national morale which must be kept at a high enough pitch to sustain the desirable level of public exertions...

...This is the true source, along with our free institutions, of our innate advantage over the totalitarian states...

...But the President's new budget for fiscal 1959 meets neither the challenge of the economic recession, nor the challenge of permanent domestic public needs, nor the challenge of the world situation...

...But comparing the first three quarters of 1957 with the first three quarters of 1956, profits of large corporations increased more than 50 per cent faster than wage rates in all manufacturing, twice as fast as wage rates in petroleum and products, three times as fast in automobiles and iron and steel...

...There will be a more solid and sustainable economic improvement if business, rather than government, provides much of the initiative and momentum under current circumstances...

...Until the public mind is set straight on these matters, the chances to reverse the recession, and more important to achieve the imperatives of full performance on the private and public economic fronts, are not bright...

...It would enable us, between now and 1960, to build an average of more than 2 million new homes a year, to lift natural resource programs to about 50 per cent above recent levels, and to create a fully prosperous agriculture...

...Because of this, the true level of unemployment by the fourth quarter of 1957 was more than four million, contrasted with 2,800,000 in 1953...

...Great improvements in minimum wage laws are also needed...

...Instead, the consumption lag became worse, and during the past year, the actual expansion of consumption sank to a rate only about two-fifths the rate needed for full prosperity...

...unincorporated business and professional income about 6V3 billion higher...

...from 1956 to 1957, they expanded only 1.9 per cent...

...The current economic recession has occurred because these relationships have gotten all out of bounds, resulting in a level of private consumption (when added to demand through public expenditures) totally inadequate to absorb fully either our human resources or our other productive resources...

...By 1960, our population will be almost nine million higher than in 1957, and our civilian labor force about three million higher...

...Profound changes, not only on the public expenditure side, but also with respect to taxation, are essential...

...Furthermore, allowing for existing profit levels, accumulated reserves, and tremendous fixed assets, leadership industries in the main still have room to make the needed wage and price adjustments...

...Wages and salaries usually come to about two-thirds of total consumer income...

...These lags in employment and wages have contributed to a lag ever this five-year period of $1300 in the average income of all American multiple-person families in all occupations...

...For all of the essential domestic programs just mentioned, per capita federal outlays need to be raised gradually from less than $150 in the 1958 budget to more than $182 in calendar 1960, measured in 1956 dollars...

...By the fourth quarter of 1957, total consumer buying power was actually declining...

...Higher income families spend a smaller proportion, and this percentage drops to less than 20 per cent for families with annual incomes above $10,000...

...During the five-year period as a whole, corporate profits would have been about 12 billion dollars higher, unincorporated business and professional income about 6J4 billion higher, total sales to consumers about 5SYz billion higher, total private business investment about 12 billion higher, rental income of persons about 3% billion higher, and dividends about half a billion higher...

...The American consumer should also take note of the fact that retail food prices are 5.9 per cent higher now than at the beginning of 1951, while prices received by farmers are 19.3 per cent lower...

...The combined progress of workers and farmers, along with progress for other groups through an expanding economy and through other specific programs, should lift average multiple-person family income by 1960 to a level about $1,035 above 1957 for all families and about $2,065 above 1957 for farm families, measured in uniform 1956 dollars...

...Business has not hesitated to "plow back" enormous funds into investment in the means of production, although this has had an effect upon divided payments...

...At a full rate of overall economic growth, total domestic business investment by 1960 should be about 16 billion dollars above the 1957 level, with about 3V3 billion dollars of the increase going into producers' durable equipment, and about 8^2 billion going into non-farm residential construction in view of the enormous unsatisfied need for good housing...

...And unemployment resulting from other causes, such as the lag in farm income and the lag in public outlays for vital domestic programs and national defense, have added to the wage lag...

...These factors should result by 1960 in a level of total national production or economic activity about 81 billion dollars above the 1957 level, measured in uniform 1956 dollars...

...This would enable us by that year approximately to double the annual rate of total educational outlays from all sources and social security and welfare protection in all its forms, and to expand health facilities and services greatly...

...Per capita buying power declined in 1957 as a whole, and even more so in the fourth quarter...

...Wage increases have not hurt farmers by increasing the cost of the things they buy...

...For several years, many leaders in government and elsewhere spoke glowingly of "higher records than ever before," neglecting the ominous slowdown of the rate of expansion and its natural consequences...

...There is a widespread but misguided idea that full employment and full prosperity are necessarily inflationary, and that huge lags in employment and wages, consumption and production, are the necessary cost of price stability...

...We could have increased international economic assistance by more than half, and had the national defenses which we have been told we "could not afford...

...During the period 1947-53, when the economy expanded at an annual average rate of 4.7 per cent in real terms, non-agricultural hourly wage and salary rates rose at an annual average rate of 2.9 per cent in real terms, while non-agricultural productivity rose at an annual average rate of three per cent...

...The only cogent explanation of the sharp decline in the rate of productivity growth is that the growing insufficiency of demand for products, and the growing un-der-utilization of plant and equipment, have made themselves felt throughout the whole industrial process...

...But this confuses cause and effect...