BY SEVEN HARVARD AND TUFTS ECONOMISTS:
Richard V. Gilbert; George H. Hildebrand, Jr.; Arthur W. Stuart; Maxine Yaple Sweezy; Paul M. Sweety; Lorie Tarshis and John D. Wilson
Table of Contents
I The Crisis of the American Economy 15
II The Experience of the Last Five Years 24
III A Program for the Future 41
** A The Immediate Program 41
** B The Permanent Program 43
** ** 1 Consumption 49
** ** 2 Financing the Consumption Program 53
** ** 3 Investment 56
** ** 4 Financing the Investment Program 62
** ** 5 Monopoly and Its Regulation 74
** ** 6 Labor 79
** ** 7 Agriculture 84
IV Conclusion 88
This program grew out of a series of discussions on the economic problems facing America held in Cambridge, Massachusetts, during the winter and spring of 1938. Those taking part in the discussions and collaborating in drafting conclusions and recommendations were younger Instructors in Economics at Harvard University and Tufts College, students doing graduate work in the Economics Department at Harvard, and Fellows and Consultants in the Harvard Graduate School of Public Administration.
It is now nearly five months since the original draft of this book was completed, and many things have happened in the meantime. The Congress has established a Temporary National Economic Committee to make an exhaustive study of many of the problems for which we have sought to find solutions. A Fair Labor Standards Act, fixing nation-wide standards of minimum wages and maximum hours, is about to become the law of the land; and in this respect a promising beginning has been made toward fulfilling one of our urgent recommendations. But most important of all, an expanded program of government spending has already begun to furnish support for our contention—the very backbone of this program—that the government can, if it will, expand employment and restore the Nation’s real income of goods and services to prosperity levels. In spite of these momentous happenings, however, we have chosen not to alter the original manuscript except in points of factual or stylistic detail. We believe that our basic analysis and the conclusions which grow out of it become of greater importance with every day that passes, and we hope that such confirmation as the events of the past few months have afforded will help to carry this conviction to our readers.
Beside those whose names appear on the title page, there were several taking an active part in the work of preparing this book who, because of their present connection with various branches of government service, did not feel free to affix their signatures to recommendations on questions of policy.
In the March days of 1933, when the American economy seemed on the verge of complete collapse, a new President entered the White House, bringing with him a new conception of the role of government in our democracy. The sense of frustration and impending disaster which had pervaded the thoughts of Americans since the beginning of the great depression in 1929 was suddenly dispelled, and in its place there grew a feeling of collective strength and a new hope for the future. The advent of the New Deal under the leadership of Franklin D. Roosevelt marked the end of one epoch in American political history and the beginning of another.
The immediate task facing the New Deal was twofold: on one hand to stimulate production and employment; on the other to eliminate the most glaring abuses which the depression had revealed. These were the twin problems of recovery and reform. The measures which were adopted to achieve these ends were attended with a striking degree of success.
The results of this success deserve the careful consideration of everyone, for they were the opposite of what might have been expected. In the first place, the opinion began to develop, even among the New Dealers themselves, that once the necessary reforms had been instituted and the economic system put back on its feet, the traditional mechanism of private enterprise would be sufficient to provide the motive force of continued economic progress. In the second place, the political party on which President Roosevelt relied for backing proved incapable of maintaining its unity of purpose except when faced with a threat of imminent disaster. In precise proportion to the success of the New Deal in bringing about recovery, its backing in Congress dissolved into a mere conglomeration of warring factions, many of them bigoted and self-seeking in the extreme. Thus, despite the elections of 1936, which constituted an overwhelming popular mandate to press forward, the New Deal found itself stalled in economic indecision and political bickering. Under these conditions the door was opened to a new business depression which in the space of less than a year has assumed the proportions of a major catastrophe.
We believe that the time has come to analyze the events of the past five years against the perspective of America’s historical development and, on the basis of this analysis, to formulate a program for the future—a program which is consistent, rational, and clearly linked to our democratic traditions. We take as our starting point the conviction that the underlying objectives and methods of the New Deal were and remain sound and necessary to the future progress of the nation. The conception of government as the organized expression of the collective strength and aspirations of the great mass of the people has come to stay. The New Deal has not failed. Rather its great weakness has been a wavering adherence to its own principles. This and the hostility of its enemies have combined to produce the present setback. The duty of true progressives is, we think, plain: to rally around the banner of the New Deal, to recognize and correct past errors, and to unify their ranks for the next step forward. The analysis and proposals which we here present are designed precisely for the purpose of assisting them in the fulfillment of this duty.
An Economic Program for American Democracy
I The Crisis of the American Economy
The economic development of America may be divided into two periods. The first, beginning when the earliest colonists set foot on our shores, was the period of economic expansion. It came to a dramatic close with the collapse of 1929. The second period has so far been one of economic stagnation.
By economic expansion we mean an increase in the aggregate national output of goods and services. This aggregate, measured in terms of money, is called the national income, and to its formation individuals, associations of individuals, and governments all contribute. Throughout the nineteenth and early twentieth centuries the national income grew. There were, to be sure, periodic setbacks; but each successive trough was higher than the preceding trough, each successive peak higher than the preceding peak. From a total of a few score million dollars in the late eighteenth century the national income grew to the vast total of $83 billion in 1929, an expansion unrivaled in the history of the world. Why?
Basically the reason is simple and well known. The American people had a continent to settle and build up. Great cities were constructed, industries sprang up where none existed before, railroads and highways spanned the continent. The national income of each year included a substantial addition to the basic plant and equipment of the nation. The purchasing power distributed in this vast constructive adventure furnished an ever growing demand for articles of consumption. Rapid increase of population, resulting from an excess of births over deaths as well as from a steady stream of immigration, supplied the necessary labor force and constituted a seemingly ever expanding market for the products of industry. Quantities of manufactured goods were imported from the older industrial countries of Europe, partly in exchange for the products of American agriculture, partly for promises to pay in the future. Waves of great fortunes showed by their origins the dominant eco-‘ nomic activity of successive generations of American businessmen: first shipping and trade; then urban real estate; then railroads, finance, and the exploitation of natural resources; then industry and finance; and, finally, public utilities and finance – each in turn gave rise to a new crop of American millionaires.
During all this period government played the role of fairy godmother to the American businessman. The rich national domain was parceled out with the generous hand of an indulgent parentfranchises, rights of way, patents and other valuable privileges were to be had for the asking. Only occasionally did the government see fit to call a halt to excesses or intervene in the interests of the common man. And the American people, with few exceptions, held their peace, took the bad along with the good, and found the system satisfactory. Why? Because it worked. For all its waste, inequities, and injustices, this system did increase the national income, not only absolutely, but also per capita; it built up a continent and established the richest country on the face of the earth. For these things the American people were grateful, and they displayed their gratitude with unlimited tolerance and generosity.
From a world viewpoint the settlement and industrialization of the North American continent was the most spectacular achievement of western capitalism. It was, however, by no means the only such achievement. Everywhere the frontiers of civilization and trade were pushed outward. The manufactured goods of the European nations flooded the newly opened overseas markets; this was followed closely by machine technique hand in hand with the capital necessary to make it effective. In this way Africa, South America, Asia, and Australia were all brought within the ambit of capitalism, while on the European continent itself industrialism steadily spread into areas where formerly the modes of a simple agricultural economy had prevailed. Thus the economic systems of the whole world were geared to expansion, and their healthy functioning depended upon the continuation of the basic conditions of expansion: the availability of new lands and new markets. From this it follows that our analysis, while directed specifically to the development of the United States, applies, so far as broad principles are concerned, to the development of the entire capitalist world.
It must not be supposed that the changes which underlay the reversal of trend from 1929 to the present time came about suddenly and without forewarning. From small beginnings around the turn of the century, they cumulated, snowball-like, until by the end of the twenties they had altered the whole structure of our economy.
Two facts stand out as basic directives of the new course. The first, generally known as the disappearance of the frontier, spelled the end of expansion into new and unsettled territory. The second, a decline in the rate of population growth, served notice on American business that neither the labor force at its disposal nor the market for its products was indefinitely elastic. Taken together, these two facts could lead to only one conclusion: the extensive period of American economic development was coming to a close; henceforth development would have to be increasingly intensive in its character. The disappearance of the American frontier, moreover, presaged the end of world expansion into new areas. The fact of arriving at the limits of expansion was no less significant for the industrial nations of Europe than for the lands in which the event occurred.
The full implications of this great change were hidden from the view of contemporaries and are beginning only now to impress themselves upon observers of the economic scene. The field for intensive development was still immense. Our population was moving into cities which had to be built up and provided with essential public utilities; the automobile, bringing in its wake a vast demand for more and better highways, was the direct cause of a whole new set of social habits, and with them, of new needs. Businessmen and governments, extending past trends into the future, continued to make large outlays for the years ahead. In so doing they drew resources into the orbit of production and distributed enough purchasing power to provide the American people with a slowly rising standard of living in the present.
Then came the World War and its aftermath. For a decade and a half America became the provisioner of half the world. The promises to pay which had been made during the nineteenth century were bought back with goods and services; the trend reversed itself, and America accepted a mass of promises to pay with scarcely a thought as to how they could be met by the impoverished countries of Europe and South America. Agriculture boomed for a time, and then, following the cessation of the extraordinary wartime demand, slumped off never to recover. Industry continued to prosper throughout the twenties. The demand for housing and buildings of all kinds burst through the barriers which had held it back during the war years, and America experienced its greatest building boom. The national income continued to climb, reaching, as already pointed out, an all-time high of $83 billion in 1929.
Housing and automobiles were the backbone of the prosperity of the twenties. Houses were built to fill the gap occasioned by a still growing population and the cessation of construction during the war. Automobiles, along with a mass of subsidiary and complementary products, were produced for a predominantly new demand. In other words, the greater part of the houses and automobiles built during the twenties constituted a net addition to the nation’s total stock of those commodities, and only a relatively small part went to replace houses and automobiles which had worn out. When, during the closing years of the decade, the new demand became saturated, the replacement demand, though gradually increasing, was not nearly sufficient to maintain those industries on the scale to which they had been expanded. The backbone of the prosperity was broken: the great industries which had been primarily responsible for it ceased to distribute enough purchasing power, and quickly the whole economic structure collapsed.
What chance is there that these or other industries will resume the upward trend sufficiently to lift the whole national income onto a higher plane? The rate of growth of population has slowed down to a snail’s pace by now; cities have almost ceased expanding; the resumption of foreign lending on a large scale is out of the question; no new industries capable of leading the way are in sight. The country needs rebuilding, to be sure. But business can see no profit in tearing down what already exists no matter how inadequate it may be. Business operates for a demand it sees in the offing, not for a demand which its own activity can alone create. The failure to build for the future means a failure to distribute purchasing power in the present.
We reach the conclusion that the expansion of the nineteenth and early twentieth centuries was based on building for the future, which carried with it an adequate demand for consumable goods and services in the present. Building for the future was good business in an expanding economic universe with a rapidly growing population. When the limits of expansion had been reached, when the rate of population growth slowed down, building for the future became an increasingly hazardous adventure. Its volume contracted and with it the ability to buy in the present. Expansion fed upon itself in the past; contraction feeds upon itself in the present. These are the basic changes which underlie the reversal of trend from 1929 to the present.
The severity of the great depression of 1929-33 was due to the fact that upon a basic change in trend there was superimposed a violent cyclical downswing. The national income fell in 1932 to half its 1929 magnitude, and it might well have sunk even lower had not the Federal government, driven on by unparalleled distress among the people, embarked upon a spending program which put a bottom to the vicious spiral of deflation. Government spending initiated a recovery movement which carried through to 1937. But less than a year after the government began to withdraw from its active role of distributor of purchasing power, the economic system went into another tailspin, unmatched in steepness even by the collapse of 1929. At the peak of the recovery movement in 1937, national income was still 15 per cent below the 1929 level, while the number of unemployed— approximately 10 million—was perhaps three times the number unemployed in 1929. Had the national income grown between 1929 and 1937 at the same average annual rate as it grew between 1920 and 1929, it would have been nearly 40 per cent larger in 1937 than in 1929. Instead, it was 15 per cent smaller! If any demonstration were needed that a basic change has come over the structure of the American economy, surely this is conclusive proof.
II The Experience of the Last Five Years
The fundamental changes in the conditions of American economic life which we have outlined in the preceding section necessitate a redefinition of the objectives of public policy in the economic sphere. But in what direction should public policy proceed? What type of action is calculated to set the American economy once again on a course of expansion, to raise the national income, and to provide employment for idle human and material resources? The answer to these questions is to be found in a careful analysis of the events which have taken place since the advent of the New Deal early in 1933.
One of the lessons of the past five years has been the striking demonstration of the efficacy of public spending in promoting national well-being. Viewed merely in terms of the direct objects of expenditure—the provision of relief and temporary jobs to the unemployed, benefit payments to farmers, the development of useful public projects, and the restoration of the nation’s financial structure to solvency—the Federal government’s program of increased expenditures has been of inestimable social benefit. But these direct gains, important though they were, were less significant than the secondary effects of deficit spending in producing a marked expansion of general industrial activity and private employment. On the basis of a careful study of government receipts and disbursements, it has been computed that the net expenditures of the Federal government tending directly to expand the nation’s income averaged $3 billion a year from the middle of 1933 to the middle of 1936, as compared with an annual average of only $1.3 billion in the preceding three and a half years. By the latter part of 1936 the national income had reached a level equivalent to about $70 billion per annum as compared with $41 billion in 1932-1933; both the physical output of mines and factories and the average prices received by farmers for their produce had more than doubled; and some 8 million more workers were employed in private jobs than at the depth of the depression.
It can be shown that the increased flow of income which produced this recovery of industry and agriculture was not generated by forces emanating from business itself, but was predominantly caused by the outside stimulus of public spending. During the early phases of the recovery period the disbursements of business concerns in the form of income payments to individuals (such as wages and salaries, dividends and interest on borrowed capital), rose by a smaller amount than the income received by business from the sale of goods and services to consumers; the remaining funds were used to build up cash balances and to repay debt. Since the expansion of income disbursements by business to the community lagged behind the expansion of income from the sale of products to consumers, it follows that the stimulus to increased industrial activity and employment did not originate from forces within the business organism. Moreover, by 1932 or 1933 most consumers had lost or exhausted their accumulated savings, and many had exhausted their credit also, so that the stimulus to increased expenditure could not have originated with them. The conclusion is inescapable that the 1933-1937 recovery had its origin in the Federal government’s contribution to community expenditure, and that the whole process of cumulative expansion of income, output, and employment rested upon public spending as a foundation.
The decisive importance of public spending for national well-being has been further underscored by the events of the past year, when an abrupt curtailment of net Federal expenditures was followed by a severe contraction of economic activity. The net contribution of the Federal government to the nation’s income was sharply reduced in the latter part of 1936 and early 1937, and for the year 1937 as a whole there was no significant net excess of expenditures over receipts.* [ • The United States Treasury reported a deficit of $2,062,000,000 for the calendar year 1937, but the Treasury’s reported expenditures include large items which, from the standpoint of the Federal government as a whole, represent no outpayment whatever, and its reported receipts exclude important items of income. When allowance is made for these items, the Treasury’s true cash deficit was only $65 million. In other words, the Treasury’s cash receipts in the calendar year 1937 virtually balanced its cash expenditures.] The consequences of this sudden curtailment were not immediately reflected in the nation’s economic life, but in the late summer of 1937 there began the sharpest decline on record in industrial activity and employment.
In the light of this experience the hostility to public spending expressed by a large section of the press and by many groups within the community may at first seem surprising. According to these groups the success of a spending program should be judged by whether it produces a self-sustaining recovery movement, thereby paving the way for a cessation of spending and the emergence of a budgetary surplus. On this basis the spending program of 1933-1936 must be judged a failure, since private industry was unable to extend or even to hold its gains once the spending stimulus provided by the Federal government had been withdrawn. This attitude is so widespread that it is essential to explore thoroughly the misconceptions on which it rests.
It is frequently said that public spending in some fashion prevented “natural” recovery by impeding the resumption of private investment. This assertion is precisely the opposite of the truth. In fact, public spending generated the forces which led, in 1935, 1936, and early 1937, to marked growth in private capital outlays. In 1932 and 1933 private industry in almost every field found itself with plant capacity greatly in excess of what was required to meet the restricted consumer demand for its products. Faced with redundant capacity and little or no earnings, no business concern could consider further enlargement of its productive facilities. If we had waited until the nation’s industrial equipment had become so worn out or obsolete that industry found it necessary to increase its capital outlays despite the low level of consumer demand, we should have had a very long wait indeed.
Since business capital outlays could not have been increased in 1932-1933, in view of the then restricted level of consumer demand, we must conclude that the outside stimulus of public spending was urgently needed, and that such spending, at least in its initial phases, could not have precluded any private business outlays for plant and equipment which would otherwise have been made. Furthermore, after recovery had got under way, we find that public spending not only did not interfere with, but actually called forth, a large expansion of private capital outlays in many major industries. Capital expenditures by manufacturing and mining concerns to replace and expand their plant and equipment, after averaging $3.1 billion a year in the three prosperity years before 1929, had been curtailed by 1932-1933 to the level of $800 or $900 million a year, little more than one fourth the pre-depression level. Under the impetus of a rising consumer demand for the products of industry, such expenditures rose to $1.4 billion in 1934, $1.7 billion in 1935, $2.3 billion in 1936, and $3.2 billion in 1937. In addition, capital outlays in agriculture, for farm improvements and machinery, were as large in 1937 as in 1928 or 1929. In other words, the rate at which private capital expenditures were being undertaken in 1937 compared favorably in three important fields—manufacturing, mining, and agriculture—with that of the late 1920s, the high point of the American postwar prosperity.
Let us inquire how public spending operated to induce this revival of private capital outlays. As we pointed out earlier, the initial effect of government expenditures was restricted principally to the consumer goods trades. The industries manufacturing consumer goods, in view of their excessive plant capacity and their weakened financial position, at first disbursed to the community less than they received through the sale of their products. Only enough was paid out to cover enlarged requirements for labor and materials growing out of the expansion in demand. The income remaining over and above direct costs was used by business concerns to improve their liquidity, that is, to increase their cash and repay debts.
As consumer purchases continued to grow under the impetus of public expenditures, however, an increasing number of enterprises found their existing plant and equipment no longer adequate to turn out efficiently an enlarged output, and consequently they began to undertake plant modernization and enlargement programs. The automobile industry, which quickly felt the stimulus of greater consumer buying power, was the first major industry to enlarge its capital expenditures. In 1936 and the early part of 1937 many concerns not only used their current income from sales to pay for capital outlays and expansion of inventories, but obtained additional funds for these purposes by drawing upon their idle cash, borrowing from banks, or selling securities to institutional investors.
If the volume of private capital outlays in several important industrial fields was as large in 1937 as is here described, it may well be asked why the recovery movement did not sustain itself after the Federal government’s net contribution to community expenditure had been curtailed. This is, in many respects, the crucial question raised by our recent experience with public spending. In order to establish the basis for an adequate answer, it will be useful to indicate briefly the factors governing the flow of income within the community.
For this purpose, our society may be regarded as consisting of three groups—individual consumers and households, business concerns, and government. It is important to recognize that, except in periods of severe depression, the first group—individual consumers—ordinarily spends less on current goods and services than it receives as income, and that the gap between its receipts and disbursements usually widens as incomes increase. It follows, therefore, that either business or government, or both together, must disburse to the community more than they are currently receiving, and that this excess of disbursements must be both persistent and substantial if a level of national income sufficient to maintain full employment and a satisfactory standard of living is to be supported.
Until recently, this function of maintaining a continuing excess of disbursements over receipts has been largely, though not exclusively, performed by business. The excess of business disbursements over receipts, reflected in an increase of debt, was the counterpart of the enormous expansion of the nation’s capital equipment; it was chiefly through such disbursements that our cities, our factories and mines, and our transportation system were built. The growth in the nation’s income rested, therefore, upon the presence of abundant private investment opportunities, and new opportunities were continually provided by the discovery of new industrial techniques, the rapid growth of population, and the pushing back of geographical and economic frontiers.
However, as has been indicated in the preceding section, these underlying factors of growth upon which our economic life has depended in the past are no longer operative. The rate of population growth has slackened, the new techniques developed today in many cases involve less capital investment than the older methods which they are displacing, and the process of pushing back frontiers is now nearly complete. It is largely because of these and other similar basic changes in our national life, rather than because the New Deal was “disturbing to business confidence,” that private industry was unable to continue the recovery movement when the stimulus of government spending had been withdrawn.
Let us see more specifically how these considerations help to explain the contraction in incomes and employment which began in the late summer of 1937. We have shown that since the gap between the aggregate incomes of individuals and their current disbursements widens as incomes increase, private capital outlays must keep growing if incomes are to expand in the absence of public expenditures. In manufacturing and mining the replacement of worn out or obsolete equipment and the introduction of new and improved methods had gone a long way by the second half of 1937, and there was little room for further substantial capital expenditure in these fields. In several important fields, however, notably the railroads, the public utilities, and residential construction, capital outlays had shown only a sluggish revival during the recovery years, and it is necessary to examine the obstacles to further expansion in these areas.
With respect to the railroads, it had already become apparent in the 1920’s that this was a declining industry. Automobiles and buses were encroaching upon passenger traffic, while trucks and pipe lines were diverting freight business. Although much railroad rolling stock is worn out or obsolete, and its replacement by new equipment would enable the railroads to handle more economically the traffic which remains, the inflated financial structure of the roads—a legacy of generations of predatory manipulation of railroad finances—made it impossible, under conditions of a long-term declining tendency in traffic volumes, to obtain funds through the flotation of securities. The inflated capitalization and banker control of the railroads presented in 1937, and still presents, a major obstacle to substantial investment in this field.
Although the electric power industry, unlike the railroads, still appears to be relatively well situated from the standpoint of possibilities for long-term growth, its phase of youthful, spontaneous expansion came to an end in the decade of the ’20’s, and further vigorous growth in this industry must depend in the future much more largely upon wise public policy. Despite the frequent statements of public utility company executives that great expansion programs would immediately be undertaken if the holding company legislation were repealed and government competition in this field allowed to lapse, it appears that the generating and distributing capacity of power companies in 1937 was adequate, except in a few scattered localities, to provide all the power which the public could afford to consume at prevailing rates for electricity. During the present decade the previous rapid growth in electric power consumption has been checked; the rate of depreciation of capital equipment in the utility industry is slow, and much of the existing equipment is relatively new. These facts, rather than government policy, explain why capital outlays by the electric power industry in 1937 were only a little more than half as large as in the late ’20’s.
The popular impression that the electric power industry still contains enormous potentialities for future expansion is nevertheless well founded. Through the extension of power facilities in rural areas it would be possible greatly to increase the productivity of agriculture and to improve the well-being of our farm population. In addition, there still exists a large untapped demand for electricity among urban families, and the industrial uses of electric power have by no means been fully exploited. These enormous potential demands can be made effective, and this field for future investment opened up, only if the existing rates charged by private utility companies are greatly reduced. The only serious barrier to the realization of the growth potentialities of this major industry lies in the high and discriminatory rate policy of electric power companies. The Federal government’s public utility program furnishes the most hopeful means of breaking down this barrier. Rates can be pushed down to reasonable levels only through a continuing, vigorous application of the general policies which the government has pursued since 1933. These policies, far from preventing investment in this field, have brought nearer the time when extensive new investment for expansion can advantageously be undertaken.
In the field of residential construction also, there were serious obstacles in 1937 to a further revival of private investment activity despite the existence of enormous long-term potentialities for expansion. The living conditions of the urban poor are appallingly bad, and the provision of decent homes for this important group of our population ought to furnish a large field for capital expenditures for many years. City slums are no new feature of American life, however; the private building industry has never been able to make slum clearance a profitable enterprise, and this field is likely to remain untouched by private initiative. In other words, this great social need cannot be translated into effective demand without extensive governmental assistance, and activity in this field was confined in 1937 to a few government-sponsored projects.
The traditional domain of the private building industry—the construction of new homes for the mediumand upper-income groups—was held back in 1937 by several serious obstacles. Although the average rate of residential construction during the ’30’s has been little more than one-quarter of the average rate during the ’20’s, there has been no evidence in most of our cities and towns of a serious shortage of housing accommodations for the middle and upper-income groups. The declining rate of population growth, combined with the postponement of marriages during the depression and the movement of population from cities to rural areas, serve to explain the absence of large unsatisfied demands. In addition to this basic limiting factor, building costs were relatively high, interest rates charged by mortgage lenders were excessive, and the organization of the construction industry along local, handicraft lines was unfavorable to the development of efficient and economical methods.
During the past year government action has made some headway in removing the obstacles to a revival of house building. Sums have been appropriated for slum clearance; interest charges by mortgage lenders participating in the mortgage insurance system have been reduced; and, through recent government-sponsored housing projects, substantial strides have been taken in the direction of extending economical, mass production methods to home construction. The spotlight of publicity has been focused on the high level of building costs, and costs have, as a result, been perceptibly reduced. Because of the active steps taken by the government during the past year the impediments to a revival of construction activity have been diminished, and the outlook for this industry is more favorable than it was in 1937.
We may conclude that the opportunities for profitable investment in factories and mines had been rather fully exploited by the spring of 1937, and that there were serious obstacles to expansion in the other major sectors of private investment activity. Under these conditions the abrupt curtailment of net Federal expenditures in the second half of 1936 and 1937 was bound to produce a sharp contraction in income, employment, and output. This was especially the case since State and local authorities were no longer making capital expenditures for roads, schools, and other public construction projects at anything like the rate which had prevailed in the ’20’s. For a time speculative building up of inventories by business concerns and heavy installment buying by consumers served to delay the impact of reduced net Federal expenditures, but only to intensify the sharpness of the blow later on. In the summer of 1937 the cumulative contraction of the nation’s economic life set in, and the subsequent reduction in industrial employment and output was even sharper than after the 1929 collapse.
We have seen that public expenditures during the years 1933 to 1936 did produce a cumulative expansion of American economic activity and did generate a relatively large increase in capital expenditures in important industrial fields, notably manufacturing, mining, and agriculture. But owing to deep-seated historical causes having nothing to do with the spending program itself, private investment in other fields did not have sufficient potentialities for expansion, and did not respond vigorously enough to fill the gap left by the sudden curtailment of government spending in late 1936 and 1937. Consequently a violent contraction of national income was inevitable. This contraction did not indicate a lack of effectiveness of the 1933-1936 spending program, but, rather, demonstrated the indispensability of continued public spending under present-day conditions.
The implications of this experience for government policy should be plain. The government must assume responsibility for maintaining the national income at a sufficiently high level to assure full and effective utilization of our human and material resources if needless hardship and suffering are to be averted and a decent standard of life for the common man attained. The notion that public spending can safely be resorted to only as a temporary, emergency device must be abandoned. A program must be developed which recognizes the necessity for permanent public investment. The outlines of a program adapted to present-day requirements are set forth in the next section.
III A Program for the Future
(A) THE IMMEDIATE PROGRAM
The immediate problem facing America is to raise the national income to a level at which all of our resources will be employed; the long-run problem is to keep it there. Not much need be said about the immediate program. The foregoing survey of New Deal experience indicates clearly enough the direction in which the solution is to be found. The government’s contribution to incomes raised the national income from $40 billion in 1933 to $70 billion in 1936. A new spending program, provided it is undertaken on a large enough scale, will unquestionably have the same effect again.
The instruments for carrying it out are, moreover, ready to hand. First and most important is the Works Progress Administration (WPA). The WPA not only takes care of those who are most desperately in need, but in doing so insures that the money paid out will be promptly re-spent on goods and services. We urge, as the cornerstone of the immediate program, that the WPA be expanded as rapidly as possible to provide jobs for all unemployed workers who want them. This will involve an appropriation for the coming year of at least $3 billion (May, 1938). To supplement the WPA, public works projects of the Public Works Administration (PWA) type should be launched as soon as possible. Fortunately such action has already been proposed by President Roosevelt in his recently announced recovery program. As the immediate recovery program shades off into the long-run program for maintaining national income at a high level, work relief of the WPA type should largely give way to regular public works employment.
The current recovery program should be financed—just as the 1933-36 one was—through borrowing. Banks, insurance companies, and wealthy individuals have large cash reserves for which they can find no attractive investment outlets. In putting this money to work through its recovery program the government will be performing a vital economic function. No one will be the loser; rather, everyone will gain thereby. The very institutions and individuals from whom the money is borrowed will find their incomes increasing with the general increase in the national income. As to the government’s own finances, the increase in tax revenue will be far more than enough to meet the interest on the additional debt. From 1932 to 1937, $15.5 billion was added to the gross public debt. The annual income of the nation increased by $30 billion in the same period. As against an increase of only $258 million in the annual debt charge, tax revenues went up $4.4 billion per year. This was clearly a borrowing program that paid for itself handsomely.
(B) THE PERMANENT PROGRAM
The experience of the last five years has demonstrated that government spending can raise the national income to a prosperity level. The real problem is how to keep it there. This apparently is worrying many of the New Dealers themselves. For the moment their fears are held in abeyance; the immediate task is to get things going again. But a year or two from now—provided the present recovery program is carried out with sufficient vigor—the long-run problem will become acute.
Why do we anticipate trouble? Why is it not possible to rely on the national income to maintain itself at a high level once the government has succeeded in getting it there? The answer has already been given in the preceding sections, but it will be well to review the nature of the difficulty before outlining our long-run program for meeting it.
The national income can be looked at in two ways: according to the way it is spent, and according to the way it is earned. On the spending side the nation uses only part of its income for consumption purchases. The rest is saved, that is, it is withheld from consumption and either allowed to accumulate in a bank or is invested in securities, an insurance policy, or a personal business. On the earning side, the national income is received in part by those engaged in the production of goods for current consumption; in part, by people engaged in building durable capital structures. Wages, salaries, rents, interest, and profits paid out in the construction of houses, roads, railroads, public utility plants, and the like fall in this category. So long as corporations and individuals who have the power to spend money on capital goods decide to pay out at least as much as the whole country is simultaneously deciding to save, no serious difficulty develops. But this balance is precarious. There is no necessary equivalence between the two sets of decisions. On the whole, the country’s saving is inflexible—both because of the unequal distribution of income and the prevalence of saving through institutions. This means that an unfavorable change in the investment outlook causes little shifting from saving to spending on consumption.
Investment demand, on the other hand, is highly variable. Even in the period of its great expansion the American economy was subject to periodic setbacks because of temporary choking of investment outlets. Today the country is faced with a long-run change in trend. Private enterprise, even at its best, is unable to absorb the whole of the savings the country tends to pile up. In the absence of supporting measures by the government, the result is a collapse of economic activity and a decline in the national income to poverty levels.
The danger of such a decline can be attacked from two sides. On one side, redistribution of income from the saving to the spending sections of the community will reduce the country’s saving and increase its consumption. On the other, new fields for the investment of savings can be developed. A careful consideration of the country’s needs leads us to advocate an attack on the problem from both sides at once.
First, as to consumption. There can be no doubt that the lower-income families in the country need more money to spend on ordinary articles of consumption. According to an estimate of the Brookings Institution, even in 1929 about 70 per cent of the families in the United States had incomes of less than $2,500. Twenty-one per cent were below the $1,000 line. Clearly there was plenty of room even in that prosperous year for increased consumption on the part of the mass of the people. Had the then-existing government been looking for ways to maintain full employment of the country’s resources, there was plenty of opportunity for expansion in meeting the consumption needs of the mass of the people. There was no need to search for new and strange fields for investment.
On the other hand, it would not be good public policy at this stage in our national development to rely entirely on increasing consumption directly through redistribution of income as a means of sustaining stable prosperity. Most important of the considerations against such a policy is the fact that there are vast fields in which investment, particularly public investment, is needed. In some fields, notably the provision of low-cost housing, public investment is a necessary adjunct of a consumption-increasing policy. Since private enterprise has been unsuccessful in the provision of new housing for the lower-income families, public agencies must themselves undertake extensive housing construction if the dwelling standards of these families are to be raised. Large public investment in building schools and hospitals will similarly be necessary if the country is to provide itself with more adequate education and health services. Other investment fields—highway building, conservation of natural resources, flood control, city planning, and so forth—though less directly related to consumption, are just as important to the increasing well-being of the nation.
While the need for the capital goods which a public investment program can provide is the most important reason for urging its adoption, other considerations are pertinent. A sudden reorientation of the whole economy to production of consumer goods would be difficult, even if it were desirable. Large numbers of people have been trained in the capital goods industries, for example, the steel industry; whole communities have grown up around them; and vast amounts of specialized plant and equipment are devoted to them. The shift in emphasis from capital to consumer goods production should accordingly be as gradual as possible. With the program of public investment outlined here it need involve no actual shrinkage in the capital goods industries as a group. Such shift as is necessary can be accomplished entirely through a more rapid rate of growth in the consumer goods industries.
This program is designed to protect private enterprise in the traditional private sector of the economy. It proposes to do this by restoring the demand for the products of private industry through a vigorous expansion of the public sector. A moderate amount of income redistribution is entirely consistent with this aim. Too great an inequality in the distribution of incomes is a danger both economically and socially. This is recognized in principle in the country’s present tax rates and needs only to be translated into practice by making these rates really effective. On the other hand, an attempt to achieve anything like complete equality of incomes undoubtedly would be a deterrent to private enterprise. Nothing of the sort is proposed here. In the program which we shall outline below the wealthy will be permitted to keep for themselves as large a fraction of a given taxable income as they do now.
Furthermore, in connection with our proposals for redistribution of income, the distinction between the long-run and the immediate programs must be kept in mind. We do not advocate any redistribution of income on the present poverty level of national economic activity. For the near future we urge a policy of Federal borrowing and spending which will raise the incomes of all, rich and poor alike, to higher levels. It is only as these higher levels are attained that a moderate degree of redistribution will be desirable as part of a comprehensive program for keeping the economy on an even keel. The measures we propose do not involve reducing anyone’s income now or in the future. They are not even designed to prevent the further accumulation of wealth by those who have already accumulated vast fortunes. They are designed merely to keep the rich from getting richer at too rapid a rate. This is surely the part of wisdom if we are to maintain not only economic stability but also our political and social democracy.
A policy of increasing consumption through redistribution of income involves both expenditure and taxation measures. On the expenditure side we advocate:
a) Old-age benefits. The present old-age insurance law needs fundamental revision if it is to serve within the next decade as an instrument for increasing mass consumption. Under the law as it now stands, consumer incomes are being reduced by $500 million a year through the operation of the reserve provision. This amount will, moreover, soon be increased through the stepping up of the payroll tax. From 1940 to 1945 the excess of tax collections over benefit payments will average more than $800 million a year. Against this huge drain on the country’s purchasing power, no benefits will be paid out, according to the present scheme, until 1942. This relation between income and outgo must be completely changed if the system is not to be a continuing drag on prosperity. The whole attempt to build up a reserve is economically unsound and should be abandoned. On the other side, there is every reason to begin benefit payments immediately instead of deferring them until 194a. The country acutely needs the buying power such payments would provide.
We propose (1) that benefit payments start in 1939 and (2) that the method of calculating benefits be changed so as to give the beneficiaries reaching the age of 65 in the early years of the scheme equal treatment with those becoming eligible later on. Essentially this was what the English did when they introduced the contributory system in 1926, although their scheme differed somewhat in detail from ours. From the point of view of equity, it is unjust to people who are now nearing the retirement age to give them only a small part of the ultimate benefits of the insurance plan; and from the economic point of view, as already pointed out, a return of the funds being withdrawn from consumer incomes is urgently needed. We also urge that the benefits of the law be extended to include those employed in domestic service, agriculture, and the merchant marine.
b) Aid to education and health. We advocate Federal subsidies to raise standards of elementary and secondary education throughout the United States to levels prevailing in a few comparatively wealthy states, and to equalize access to higher educational opportunities.
A recent survey of health conditions conducted by the United States Public Health Service shows a wide gap between rich and poor in the adequacy of medical care received. The study also reveals a rate of disabling illness among the poor fully 30 per cent greater than among the well-to-do. In the light of these facts, it is clearly urgent that the Federal government, in co-operation with the medical profession, begin immediately to work out measures for providing adequate medical care and hospitalization for every person in the country.
c) Workmen’s compensation and social security services. There is ample room for the expansion of the aid provided in the Social Security Act for special groups, particularly dependent children, mothers, and blind people. Vigorous efforts should also be made to improve existing workmen’s compensation laws. Most of these laws are inadequate both as to coverage and as to the amount and duration of benefits paid. There is no worse reflection on the social callousness of a nation than its willingness to allow thousands of workers injured on the job—many of them permanently—to subsist on the meager sums provided by charity.
d) Unemployment compensation and relief. The unemployment compensation provided in existing State laws will be useful chiefly in tiding workers over short periods of seasonal or transitional unemployment. Even for this purpose the present laws are too restricted. Their coverage should be extended to include all workers now left out, and the waiting period required before benefits begin should be reduced to a maximum of one week.
More persistent types of unemployment, either cyclical or geographical, should be dealt with through a flexible but planned work relief program of the WPA type. The public investment program described in the next section cannot be expected to absorb workers in all localities to an equal extent. Nor is investment of this type well adapted to rapid expansion in periods when private investment falls off. In the WPA the country has developed an agency well equipped to absorb workers unemployed because of either special sectional or cyclical depression. The WPA has, moreover, been remarkably successful in giving employment which is socially useful as well as highly flexible. As a permanent instrument of economic policy it will serve the threefold purpose of providing for emergency unemployment, bolstering up buying power, and adding to the nation’s real wealth.
e) Wage and hour standards. Decent minimum wages and maximum hours for the entire country are essential not only to protect the workers’ wellbeing but also to support the consuming power of the great mass of the population. In certain industries and sections where wages are abnormally low and hours abnormally long, the setting of minimum standards, supported by the program of expansion to make these standards effective, will operate immediately to increase the incomes of those whose need and whose consumption intensity is greatest.
2. Financing the Consumption Program
The task of raising money for these expenditures is much less formidable than it appears. We frequently hear the argument advanced against further redistribution of income that it would necessitate an increase in rates on the larger incomes and that these rates are already so high that any increase would be self-defeating. Actually no increase in rates on the higher income brackets is required. What is needed is the strict enforcement of the present rates through abolition of the methods for wholesale evasion allowed by the present law. Rates on the middle-income brackets are relatively low—compared with England strikingly low—and can easily stand a moderate increase.
To make present rates effective, tax laws must be amended to provide for:
a) The effective taxation of undistributed corporate earnings. The best method of achieving this end is to require that all shareholders include in their taxable incomes their pro rata share of corporate earnings, whether distributed or not. If past rulings of the Supreme Court to the effect that undistributed earnings are not income in the hands of the stockholder cannot be reversed, the same purpose can be served by so raising the rates of taxation on undistributed earnings as to force, not merely to encourage, the full distribution of earnings in cash or other taxable form.
b) The complete elimination of tax-exempt securities which now provide means of escaping the progressive features of the income tax law. Mention has already been made of the necessity for substantial contributions from the proceeds of general taxation to the cost of social security benefits. Such contributions constitute, in fact, the backbone of our consumption-increasing program. As time goes on, the share of the cost borne by the Federal government out of income taxes should increase until eventually the regressive payroll taxes of the present Act are entirely supplanted. The long-run trend of policy should, in fact, aim at the general substitution of direct taxation based on ability to pay for the existing indirect taxes which play so large a part in local government finance and which almost without exception are regressive in their incidence. It is particularly desirable that taxes on articles of mass consumption be repealed wherever there is a reasonable prospect that the removal of the tax will actually result in lower prices to consumers.
There is no doubt that, with the restoration of the national income to a reasonably high level, the additional revenue furnished by the measures just outlined would be sufficient to provide for the consumption expenditures advocated earlier in this section. Recent estimates indicate that with a national income of $80 billion (the 1929 level) present tax rates would yield the Federal government somewhat over $8 billion a year. It is true, of course, that capital gains were larger in 1929 than they are ever likely to be again. Productivity has, however, increased since 1929, and it is a conservative estimate that full employment of our resources would yield a national income today at least 25 per cent larger than in 1929. With an income of $100 billion and present tax rates, revenue of $8 billion is probably an underestimate. The closing of known channels of tax evasion, the abolition of tax-exempt securities, and a moderate increase in surtax rates in the middle brackets, measures which we have already proposed, would add upward of $2 billion or more. This total of $10 to $11 billion a year would leave a margin over present expenditures for the permanent Federal contributions to old-age benefits, health, education, and the other services just advocated. The reduction in relief expenditures which would follow on the restoration of full employment would, of course, further increase this margin.
a) Rehousing and rebuilding America. We propose that the core of the long-range investment program be a fifty-year plan for rehousing and rebuilding America. Starting with the provision of decent housing for those who are now in slum areas, this activity should be broadened as time goes on to include the redesigning of cities and towns in accordance with sound principles of urban and regional planning.
The task is one to stir the imagination of the ablest and most enterprising spirits throughout the land. Its magnitude is tremendous. Estimates indicate that in New York City alone a two-billion dollar investment would be necessary to rehouse the people who are now living in sub-standard dwellings. The amount needed for the whole country would be from ten to fifteen times as large —an investment, that is, of a billion to a billion and a half dollars a year for the next twenty years. And housing is, of course, only part of the job that needs to be done.
American cities are poor in recreational facilities. Parks, playgrounds, and indoor recreation centers are far too scarce. The streets still provide the chief playground for children in the crowded sections of our cities. The urban populations of the country also need extensive suburban park areas within easy reach where they can enjoy real country air and surroundings.
Traffic facilities have not kept pace with the tremendous growth of traffic in the last twenty years. A rising level of incomes will impose still further strain on our already overburdened streets and highways. To relieve congestion it is particularly important that cities be provided with express highways carrying through traffic either around or over crowded districts. Rapid transit lines, either underground or over special rights of way, have been developed in only a few cities.
More adequate provision of such lines will both facilitate the spreading out of urban population and reduce the density of automobile traffic where it is now most congested.
The task indicated here is worthy of the creative genius of America. In the process of fulfillment, great opportunities will open up for the employment of the nation’s best talents. Architects and engineers, artists and craftsmen, organizers and planners will have a chance to exercise and develop their abilities, and the youth of the country will again find scope for its energy and ambition.
b) Conservation of natural resources and flood control. The term conservation applies broadly to the careful husbanding and use of all natural resources. We endorse this principle, but emphasize here its application to the nation’s soil, water, and forest resources, where appropriate measures will entail public investment on a large scale.
Soil, water, and forests stand in close physical relationship to one another. Shortsighted lumbering practices leave hillside slopes unprotected against heavy rains. Topsoil and humus are washed away, leaving barren, gullying land behind. Abnormally swollen streams and rivers damage areas below and add to navigation and water storage problems by silting of streams and reservoirs. Failure to conserve moisture in the arid West is largely responsible for wind erosion losses there; in other areas careless farming methods, like careless lumbering methods, have exposed unprotected soil to water erosion.
Direct damage caused by floods has been estimated to average $35 million annually in the United States. Indirect and intangible losses, though difficult to estimate, certainly exceed this figure. It is estimated that soil erosion is at present destroying about 200,000 acres of farm land each year and seriously damaging a much larger area. It is difficult to place an estimate on the total damage entailed by the silting of dams and reservoirs resulting from erosion and floods. Our forest areas, which afforded valuable watershed protection before they were cut, are being exploited today without adequate provision for replanting or the leaving of seed trees for natural restocking. This exploitation is going on at a rate which threatens the adequacy of our future national timber resources. In addition, forest fires which are in large measure preventable destroy millions of acres of valuable timber each year—from 1926 to 1930, 41 million acres of forest land were burned over annually.
A co-ordinated long-time public program is needed to halt this waste and destruction, to insure to future generations the adequacy of our forest and soil resources, and to control our water resources in the interests of beneficial public use. Thus far, the Federal government has made but small beginnings in a co-ordinated attack upon this problem.
The major lines of investment in such a program would be:
i. Reforestation, afforestation, and development of better protection against forest fires. In the socalled Copeland report of 1933, the U. S. Forest Service recommended a 20-year program for the planting of 25 million acres to meet only our most urgent watershed protection and forest replacement needs.
ii. Engineering works to retard surface run-off and to conserve moisture in arid regions. These works are needed mostly on agricultural and grazing land, and only to a lesser extent in forest areas. Such works would be, principally, contour terraces, check or retention dams in streams and gullies, and small ponds and reservoirs.
iii. The construction of larger dams in rivers and large streams. In a co-ordinated soil, forest, and water conservation program fewer dams for flood control purposes would be needed than at present, because the flow of water from the land would be retarded, and much of it would be permanently retained in headwater areas. However, many dams will be needed for flood control, and these will contribute also to improved navigation, electric power production, and to reclamation in the arid Western regions.
c) Education and health. As has already been pointed out in the consumption plank, the provision of adequate educational and health facilities for the whole population will involve the building of a large number of schools and hospitals. It will also involve in many cases the replacement of existing structures, which are worn out or obsolete, with modern buildings.
d) Railroads. Railroads present a special case. Attention has already been called to the two-sided cause of their present predicament. They have been losing traffic while at the same time their already large burden of debt has been growing larger. The margin between earnings and debt requirements is so slight that it is impossible for them to raise new capital. It is likewise impossible for the Interstate Commerce Commission (ICC) to force such a reduction in rates as to bring them increased traffic. The rate reduction, although socially desirable in that it would permit a fuller utilization of the country’s railroad facilities, would probably cause a loss in net revenue in the immediate future and hence cannot be enforced so long as railroad security holders enjoy their present legal protection. It would be cheaper for the country as a whole to have the government take over the railroads at whatever price is considered adequate to protect security holders and then reduce rates to a level that will attract an optimum flow of traffic. Such a policy, combined with a restoration of national income to prosperity levels, would bring so much additional business to the railroads that large investments in their rolling stock and permanent way would be necessary. The railroads could thus be made an important contributor to a sustained prosperity.
4. Financing the Investment Program
The long-range public investment program should be financed chiefly through borrowing. This will of course mean a steadily increasing total of public debt. To many people—perhaps to most people—the prospect is terrifying. The public debt, they say, cannot continue to increase forever. The government will never be able to pay it back. The burden of taxation will eventually become intolerable. These and other apprehensions are the result in part of confusion, in part of hostility to the extension of conscious social action in the economic sphere.
Much of the widespread confusion on the subject of debt arises from an understandable tendency on the part of the average person to reason from his own personal experience. The wage earner, the salaried worker, and the farmer know that so far as they are concerned debt usually means trouble. They certainly cannot go on increasing the amount of their debts indefinitely. They may be called on to repay all or a part of what they owe and they must be prepared for this contingency. They know, too, that any increase in their debts inevitably means the deduction of an additional slice from their income to meet interest payments. No wonder they consider debt something to be avoided and look with alarm at the continued increase in the debt of the whole nation.
Few people are accustomed to thinking in terms of the economy as a whole, much less in terms of the economy as an expanding organism. They could scarcely be expected, therefore, to realize that what applies to personal debt does not in the least apply to the business and public debt of the entire nation. The fault lies not with them but rather with the economists and publicists who have failed in their responsibility for educating the public on so important a matter.
If we look at the whole nation as a going concern, we see that its internal debts, business and governmental, are merely another aspect of its assets. Debt in the broad sense is the obverse of investment. This fact, taken for granted in business accounting, is entirely ignored in our present method of Federal budgeting. An expanding economy not only can, but must, continually increase the total volume of debt outstanding. The long-term debts of business and governmental agencies in the United States increased from $38 billion in 1913-14 to $126 billion in 1929. From 1921 to 1929 the increase was from $75 billion to $126 billion. This growth in debt was an inevitable accompaniment of the large volume of corporate and public investment that characterized that period. In the period of recovery since 1932, attention has been concentrated on the increase in the debt of the Federal government. For purposes of comparison with earlier years, however, it is necessary to look at the country’s entire debt. State and local governments, public utilities, railroads, and other business corporations should be included along with the Federal government. From 1932 to 1937, while the Federal debt was increasing by $15.5 billion, the State and local governments actually reduced their debt slightly, and the net increase in total corporate debt was probably not more than $ 1 billion. Taking $ 16 billion as a rough estimate of the increase in debt from 1932 through 1937, we get an annual average increase of $3.2 billion. This must be compared with the annual average increase of over $6 billion in the prosperous decade of the ‘twenties. Clearly, the total debt, corporate and public, has not increased by an excessive amount since 1932, if the experience of former years is taken as a basis of comparison.
Individual debtors do, of course, get into trouble by improvident borrowing. But for the economy as a whole, trouble comes only when the nation falters in the course of its economic expansion. Only in periods of crisis and depression is there a general questioning of the solvency of debtors. The expansion of debt at a rate sufficient to absorb the nation’s savings is both sound and necessary. This rate could be excessive only in the sense that the rate of savings itself was excessive. Thus, what we should worry about is not the increase in the debt but the increase in savings beyond the amount that can be absorbed by investment.
It is ridiculous to maintain that debt in general must be repaid. The mere attempt to repay debts all around would involve a liquidation of assets which would result in complete economic paralysis.
The objection may still be raised that it is improper to lump government debt with business debt. The supposed difference between the two rests on the following peculiarities ascribed to government debt:
a) Government debt is “unproductive.” Hence government borrowing to finance expenditure involves a waste of resources.
b) The public debt imposes a weight of interest charges on the community which, if the government goes on borrowing more and more, must eventually become intolerable.
c) The credit of the government is a delicate thing. It might easily be overstrained by a long continued increase in the public debt.
d) Increasing government debt must inevitably lead to disastrous inflation.
Let us consider these contentions in turn.
a) The notion that government borrowing is always unproductive is carefully nurtured by those who are hostile to public participation in economic affairs. A late English economist once referred to the curious habit of some people who praise a private company which borrows money to build houses, for “raising capital,” but who condemn a public authority, which does exactly the same thing, for “incurring debt.” Most of the argument against public investment, in fact, is on this level.
Attention has been called in a preceding section to the productive nature of the public investment projects advocated here. It is worth noting, too, that these projects are not designed for the exclusive benefit of any class or group in the community. Highways, conservation, flood control, cheap railroad service—all of these benefit the business section of the community fully as much as they do the great mass of consumers. Housing, health, education, and recreation, while directly aimed to increase the well-being of the lower-income families, indirectly are of immense value to the whole community. The mere fact that in the case of many of these developments the government will not charge specific individuals for the services provided does not affect their productiveness. When the government builds a bridge it is a matter of no significance, so far as the productiveness of the bridge is concerned, whether or not it posts men at either end with tin cans in their hands. It makes no real difference to the average person whether he pays for the goods and services he enjoys in the form of prices or of taxes.
Moreover, the public investment advocated here will not compete with private enterprise for the use of labor and material resources. Its effect, rather, will be to expand the total demand for labor and other resources to the point where all of them can be sure of finding employment. The public investment projects will thus involve no real cost to the community in the form of a sacrifice of private projects which might have been carried out with the resources employed on the public program. In the absence of the public activity, private activity would not be greater but, rather, smaller, because of the deficiency of demand for its products. This point is important to keep in mind for it is usually assumed implicitly in criticism of public investment activity that the public program is bidding productive factors away from private concerns.
b) The next item is the interest charge on the growing public debt (a charge, incidentally, of less than three per cent of the debt itself). First, certain misconceptions must be cleared away. The payment of interest on the public debt does not in itself constitute a deduction from the nation’s income. What the government raises in taxes to meet debt charges it pays out again in interest to the holders of its bonds. The extent to which a burden is involved depends on who holds the bonds. This point is of importance in considering the extent to which the debt will impose a burden on future generations. The same generation that pays the taxes inevitably receives the interest payments. It is thus up to each generation to determine by the way it apportions its taxes how much of a real burden interest payments on the public debt shall be.
Let us examine in more detail how interest charges may be made more or less burdensome to the community. If a small group of wealthy families holds all the government bonds and the rest of the community pays all the taxes, the burden on the great majority will clearly be at its maximum. Since this majority also comprises the bulk of the producers, the payment of interest on the debt would have the undesirable effect of transferring income from the productive to the idle members of the community. Even so, the real income of the working, tax-paying majority of the nation might well be larger with the debt than without it. If the sums raised by borrowing are spent on projects adding to the total of the nation’s real goods and services, as is proposed in this program, the debt will more than pay for itself (to say nothing of the vital importance of avoiding the waste and hardship implicit in allowing resources to remain idle). No one complained during the nineteenth century that the mounting total of interest payments due from this country to English and other foreign creditors was impoverishing the nation. Quite on the contrary, they looked with equanimity on the steadily growing debt, since they realized that it provided the essential means with which the productive equipment of the country was being built up. Similarly, Americans today need have no fear of borrowing from their own wealthy families to continue the process of improving and expanding the real capital equipment of their country. Even if the few receive all the interest and the rest of the country pay all the taxes, the real income of the rest of the country will steadily increase.
But there is no need for so uneven a distribution of benefits as that just assumed. In the first place, by no means all the public debt is held by or in the interest of the wealthy section of the community. Large amounts are held by banks, and the interest paid on them can be viewed as in part a charge to cover the cost of services provided the country by the banks. Secondly, there is no reason why the holders of government bonds should escape their fair share of taxation. The tax measures advocated above would go a long way toward making this elementary principle of equity an effective reality. The establishment of an equitable tax system will thus do much to reduce to a minimum the real burden of debt charges. It is still true that the wealthier members of the community will probably complain bitterly of the tax burden imposed upon them. They seem to regard every dollar of income they receive as theirs by divine right and to begrudge the payment of any of it to the government in the form of taxes. Recent experience has shown that they persist in this attitude even though the additions to their incomes, resulting from the government’s activities, are far greater in amount than the additional taxes they pay. A democratic government can, however, scarcely be deterred by such complaints. The policies we advocate will put funds, which would otherwise remain idle, to work increasing the nation’s real wealth. We propose that the people from whom these funds are borrowed be paid interest on them, even though in the absence of the public investment activity the funds would bring no return. Surely the wealthy section of the nation cannot legitimately object to bearing its fair share of the cost of such payments.
To sum up the argument to this point: We advocate a long-run program of public investment financed through the borrowing of savings which would otherwise go to waste. This investment will increase the real wealth of the country, both directly and indirectly, by increasing the demand for the products of industry. Having a market for its products, industry will be able to introduce the improvements in technology and methods of production which are continually being discovered. The result will be a steady increase in national income accompanying the increase in the public and private debt. If the policies advocated here are steadfastly pursued, the national income can reasonably be expected to increase at a sustained rate of $4 to $5 billion a year. This increase in the national income will be accompanied by a rise in the interest charge on the public debt of at most $100 million a year.
c) Government credit. It is important to realize that a threat to government credit is a political, not an economic, issue. Under modern conditions a large part of the investable funds of the country are in the hands of a few large financial institutions: banks, trust companies, and insurance companies. The men who control these institutions have it in their power, if they disapprove of a government’s program, to refuse to buy its bonds and hence “weaken its credit.” With the large excess bank reserves and surplus funds seeking investment, which characterize our present-day economy, such a refusal could only be considered political in its implications. Should such an eventuality arise, which it may be hoped is unlikely, the government would be forced to take measures to protect the community by extending the already recognized principle of public control over the financial system. The Federal Reserve banks would provide a first line of defense. But selling bonds to the Reserve banks would not be a satisfactory permanent solution. If the commercial banks should continue to refuse their co-operation, the public would clearly be justified in assuming control of the entire banking system.
d) The danger of inflation. The supposed danger of inflation can be disposed of briefly. The instances of runaway inflation usually cited—for example, the postwar experience in many European countries—all occurred in economies exhausted by long wars and straining their depleted resources to the breaking point. The proposals contained in this program are designed to meet the entirely different situation of an economy suffering from chronic under-utilization of both human and material resources. Until our resources are fully employed there can be no danger of general inflation. For when they are idle, additions to money expenditure mean additional men hired and additional goods produced. There is, under such conditions, no danger of a rapid rise of prices. Furthermore, the instruments of monetary control already at the disposal of the Federal government—for example, control over reserve requirements, taxation, and debt repayment—assure us that there need be not the slightest fear of inability to control any general price rise which might be regarded as excessive. Undue price rises may, it is true, occur in particular industries; but they are just as likely to occur in a prosperity initiated and sustained by private as by public spending. They must be controlled, not by a policy of permanent depression, but by advance planning for the elimination of physical bottlenecks and by measures of price control such as we propose in our next section.
5. Monopoly and Its Regulation
One of the most serious obstacles in the path of sustained economic recovery today is the widespread existence of monopolistic elements in our industrial structure. These monopolies are in a position to take advantage of any increase in demand by raising their prices. From a narrow view of self-interest such a policy is understandable; but from the point of view of the healthy expansion of the economic system as a whole its consequences are sure to be pernicious.
The essence of prosperity, whether it be privately or publicly induced, is an increasing volume of expenditure followed by an enlarged output of real goods and services. If, however, monopolies, bent on maximizing their own immediate profits, raise their prices in the face of increased demand, much of the force of the increased expenditure may exhaust itself in financing the same volume of trade at higher prices.
It follows that a program designed to raise the national income through stimulating directly and indirectly the volume of expenditure on useful goods and services must include measures to insure against excessive price rises in industries where free competition does not prevail.
We are opposed for two reasons to trust-busting as a method of solving this problem. First, because we believe that past experience has demonstrated the ineffectiveness of trust-busting. Second, it is our conviction that trust-busting, even if it were entirely practicable, could not be carried sufficiently far to restore competition without sacrificing those technical and organizational achievements which now for the first time in history make possible a real life of abundance for all. There is no better guarantee of man’s ability to solve the problems of a complex society than the amazing organizational achievements of our modern billion-dollar corporations. The trouble with the large corporation is not its size nor any lack of efficiency, but rather its lack of social responsibility. Tremendous power for good or evil is placed in the hands of a few individuals, and the logic of unrestrained profit-making too often insures that it will be used for evil. Our problem today is not to destroy these creations of the technical and organizing genius of mankind, but to find ways and means of harnessing them to the great task of promoting the welfare of the community as a whole.
There are two methods of attacking this problem. The first is through public regulation of prices and profits, a method with which we in America have had a long and varied experience. The second is public ownership, which has been tried relatively little in this country but which has been attended with considerable success in other English-speaking democracies, notably Great Britain and Canada.
In general, we recommend that where regulation has been-tried and found wanting, the method of public ownership be adopted; where regulation has succeeded or given evidence that it might succeed, it be retained and strengthened; and where neither method has been applied in the past, regulation be instituted. We feel that the railroads fall into the first classification, public utilities into the second, and other non-competitive industries for the most part into the third.
Railroads. As we have already stated, the most serious troubles of the railroads are not directly connected with regulation but rather are traceable to the fact that the roads have been steadily losing traffic to competing means of transportation. In spite of the fact that industrial production advanced in 1937 practically to the 1929 level, ton-miles of railroad transportation recovered to only about 70 per cent of the 1929 volume. The result has been a loss of revenue and a series of demoralizing bankruptcies. At the present time one-third of the nation’s mileage is in the hands of receivers and another third is on the verge of following into the bankruptcy courts. Most of the roads are seriously in need of modernization and improvement, but their credit is such that no new capital can be raised. Furthermore, the desirability of consolidating the roads of the country into a few regional systems is widely recognized, but the conflicting claims of private interest have so far effectively blocked action looking to this end.
Regulation is powerless to solve these problems. We therefore advocate that the roads be acquired by a National Railroad Authority clothed with broad powers to consolidate and improve the country’s railroad network. The outlays necessary to provide new rolling stock and equipment and to make up for long deferred maintenance should for a number of years to come constitute one of the most important parts of the program of public investment which we propose elsewhere. Furthermore, the considerable decrease in rates which it will be possible for the Railroad Authority to put into effect will operate to improve the health of the whole economic system.
Public Utilities. In the public utility industry, including electricity, gas, and communications, we believe that the Federal government can do much to improve and strengthen regulatory standards. The success already attained by the Federal Communications Commission in securing substantial reductions in long distance telephone rates is but an instance of what can be accomplished in this field. We do not, however, mean to suggest that public ownership should not play an important role here as well as in the case of railroads. In particular, we believe that the principle of the Tennessee Valley Authority should be vigorously extended to other areas where flood control, cheap electricity, and regional planning can do much to raise extremely low living standards; and that in such areas local authorities should be assisted to buy out existing utility companies at prices fair to both parties.
Other Non-Competitive Industries. In the case of all other non-competitive industries we advocate the establishment of Federal regulatory commissions. It is important to note that the task of such commissions in an expanding economy such as this program contemplates would be largely to prevent undue price rises, a task for which past experience suggests they are well suited. These commissions should head up to a coordinating body and should be given the task of assembling full information on prospective demands, plant equipment, and inventories on which intelligent long-range investment plans could be based.
We believe that the measures outlined in this section are essential to assure prices low enough to bring about a full utilization of our resources, to place investment in heavy industry on a sound and rational basis, and to insure the success of the various other measures advocated in our program. In sectors of the economy where small private enterprise prevails, the effect should be a vast extension of the field of opportunity and an effective removal of the oppressive power of private monopoly.
Ever since 1929 American labor has been suffering under the terrible burden of heavy and persistent unemployment. On the average, one out of every four persons willing and able to work has been unable to find a job. Moreover, the burden of unemployment falls not alone on those directly affected; it weighs as well on those fortunate enough to hold their jobs, dragging down their wages and threatening their security and peace of mind. It is clear that the elimination of unemployment is the primary and just demand of labor.
Our proposals for attacking the plague of enforced idleness have already been outlined. For it is important to recognize that a low national income and general unemployment are not two separate problems; they are rather the same problem looked at from slightly different angles. It follows that the measures we have advocated for raising the national income are at the same time measures for eradicating unemployment. Labor, more than any other group in the community, has a vital interest in seeing them adopted and pushed through to a successful conclusion.
The provision of jobs, however, is by itself not enough. Labor should also have an equal voice with employers in determining the payment for and conditions of work. In the absence of such equality, the freedom of contract, which is the basis of our economic order, loses its meaning and becomes a mask for exploitation and oppression. We believe that long experience has conclusively demonstrated that equality of bargaining power between employers and workers is realized in practice only when workers are organized in strong independent trade unions. For this reason we believe that it is the duty of government to do everything in its power to prevent employers from interfering with the rights of workers to self-organization, whether that interference be exercised inside or outside the place of employment.
The New Deal has recognized this duty and has taken steps of historic importance to implement its fulfillment. The National Labor Relations Act, courageously administered and enforced by the National Labor Relations Board, has done more to make real the guarantees of equality and freedom written into our Constitution than any measure adopted since the administration of Abraham Lincoln. Now that it is being made the object of a vicious and dishonest attack by the most reactionary elements in the community, it behooves the friends of liberty and progress to rally to its support. We register our wholehearted approval of the National Labor Relations Act and the National Labor Relations Board; any modification of either would be a blow to the rights of labor and a serious setback for the orderly processes of democratic government.
There is another field in which the Federal government must take energetic measures to protect the rights of labor, namely, the field of civil liberties, for interference with labor’s right to organize and bargain collectively has by no means been confined to the sphere of direct employer-worker relationships. The investigations of the Senate Civil Liberties Committee have revealed what may properly be regarded as a gigantic conspiracy between powerful employers and compliant, often corrupt, local authorities to deprive workers of their constitutional rights. The Federal government cannot escape responsibility for cleaning up this unsavory condition. The work of the Civil Liberties Committee must go on, and its findings must be made the basis for legislation which shall have as its aim the effective restoration of liberty to all our citizens regardless of their wealth or social position.
Since the beginnings of modern industrialism, workers have found themselves constantly under the threat of displacement by machines. Even in the periods of rapid economic expansion many workers suffered severe hardship in the process of adapting themselves to abrupt changes in the technique of production. Deprived suddenly of their jobs, they have been left to shift for themselves in an attempt to find new ones.
A serious problem even in the period of expanding employment opportunities, technological displacement has become a major catastrophe under conditions of economic stagnation. The worker thrown out of a job by a new method of rolling steel, or making tires, or picking cotton, is confronted with thousands of already unemployed workers in whatever direction he turns. Instead of a few months or even years of looking for a new job, the displaced worker sees permanent idleness ahead of him.
The general program we have outlined will create new job opportunities; it will give the displaced worker somewhere to go. But this is not enough. Steps must be taken to alleviate the hardships incident to the loss of one job and the search for a new one. In particular it is important that:
a) Workers participate through their own organizations in the determination of the rate and manner of introducing labor-saving devices.
b) An adequate, nation-wide system of employment exchanges be established.
c) A permanent Federal program of retraining be instituted, designed to give displaced workers the skills required to fill jobs in industries where labor shortages either exist or can be foreseen.
d) Unemployment insurance be paid on a scale adequate to maintain workers in the interval between jobs.
Finally, we believe that it is the duty of the Federal government to establish national standards regulating minimum wages and maximum hours per work week, extending special protection to women workers, and eliminating child labor. These measures should be specifically aimed to abolish sweatshop working conditions from American life, and to prevent the uneconomic migration of industry which at the present time is causing so much hardship and suffering to large groups of workers as well as to whole communities in certain areas of the country.
The major difficulties—low prices and surplus production—which beset American agriculture today are rooted in two basic causes: a low national income and a farm population which is larger than would be required to satisfy the demand for agricultural products even on a high level of national income. It follows that agricultural prices and incomes can be increased only by raising the demand for food and clothing on one hand, and by creating more industrial jobs for the surplus farm population on the other. But, as we have already demonstrated, rising demand and new jobs are simply the other side of an expanding national income. A permanent solution of the agricultural problem can be achieved only through a program designed to raise the national income such as we have already suggested.
It is worth stressing that we arrived at the same conclusion in analyzing the problems of labor. The basic need of both farmers and workers is for more income and more jobs. Their interests are therefore identical. Appearances to the contrary arise from the mistaken assumption that either group can better its position only by seizing a larger share of a fixed amount. More careful consideration, however, reveals at once the fallacy underlying such an assumption; the fact is that the most important condition of either group’s getting more is that the other should also get more. The national income must grow in all its parts or not at all.
While an increase in the national income is unquestionably agriculture’s most urgent need, it is clear that this cannot be brought about quickly enough to obviate the necessity for special measures to deal with various aspects of the problem. In particular, it is probable that control over prices and production will have to be retained for a transitional period the length of which cannot now be foretold. For this purpose—but only for this purpose—we believe the Federal government’s present policy as embodied in the new Agricultural Adjustment Administration (AAA) is well suited.
The seriousness of the plight of sharecroppers and farm tenants cannot be overemphasized. More than 40 per cent of the nation’s farmers have no equity whatever in the land they till, and of this group about one-quarter are sharecroppers in the Southern cotton and tobacco regions. The standard of living of tenants and sharecroppers is miserably low and gradually falling; proper care of the soil is perforce neglected. The existence of such poverty and degradation is a menace to the whole community as well as to the groups immediately affected. Some of the land at present worked by tenants and sharecroppers should be withdrawn from cultivation and its inhabitants resettled and retrained for the jobs which a rising national income will make available. In other cases the title to the land should be turned over to the tenants, either individually or in co-operative groups, under the supervision of the Federal government which should then supply adequate credit facilities at very low rates of interest. But, above all, the Federal government should devote a relatively large proportion of increased consumption and investment expenditures to raising the education, health, and material conditions of these impoverished groups. Once the vicious circle of poverty, ignorance, ill-health, and more poverty can be broken and the national income set upon an upward path again, the problem of tenant and sharecropper will appear in an altogether different perspective.
Finally, it should be remembered that more than one-quarter of all those gainfully employed in agriculture are farm laborers. The farm laborer is truly the “forgotten man,” neglected in Federal and State legislation alike, though his plight is surely as cheerless and discouraging as that of any other group in the community. We urge that the Labor Relations Act, the Social Security Act, and all State beneficial and protective labor laws be extended with the least possible delay to cover agricultural labor. The establishment of minimum wages and maximum hours for farm work should assist in eliminating the worst conditions of poverty and exploitation which now exist.
In this concluding section it remains only to emphasize the importance of prompt action along the lines laid down in order to arrest the disastrous trend of economic contraction and to set America once again upon the course of expansion and progress. The dangers of delay are strikingly brought home to us by the experience in other lands, where governments which refused to accept the responsibility for the proper functioning of their national economies have in case after case fallen victim to their own inaction, and where, in all too many instances, democracy itself has perished.
Here in America we can save our free democratic institutions only by using them to expand our national income. For private enterprise, left to its own devices, is no longer capable of achieving anything approaching full employment of our human and material resources. This the experience of the last decade has taught us. No one is to blame for this state of affairs; its explanation lies in the structural changes in the economies of the capitalist world which we have already analyzed. Those businessmen who profess to see the origin of our difficulties in uncertainty and fear of what the future will bring forth are simply mistaking symptom for cause. They lack confidence in the future because the future holds insufficient promise of profitable investment and expanded markets. The policies of government which businessmen are wont to hold responsible for their lack of confidence in the future arise in part from a desire to preserve to business its paying customers, in part from a realization of the necessity for eliminating serious abuses from our commercial and fiscal practices, and in part from an insistent demand on the part of the people that labor be given the same opportunity for self-organization that business has long enjoyed. Surely measures as wise as these would not prevent businessmen from providing for the requirements of an expanding economy, nor would their abrogation induce investment in the face of a contracting trend. President Roosevelt was entirely justified, we believe, when he recently stated that “the problem of bringing idle men and idle money together will not be solved by abandoning the forward steps we have taken to adjust the burdens of taxation more fairly and to attain social justice and security.”
The truth is that the businessman, caught in the toils of events he does not understand, is merely seeking to lay the blame on something he thinks he does understand, just as the savage in the face of mysterious forces of nature seeks to make them intelligible by inventing a host of gods and devils. But business is afflicted with a disease far more serious than government intervention in economic affairs. The malady of industry is the loss of customers and profits which only government intervention can restore to it. For the fate of business, like that of farmers and workers, is bound up with the trend of the national income. And it is clear by now that an outlay on investment and consumption adequate to raise the national income to higher and higher levels can be brought about only by a conscious social endeavor.
The need for immediate action to achieve this end cannot be overemphasized. For the danger exists that businessmen, obsessed with a devil theory of government, will attempt to use their economic power to suppress democracy and place in its stead a dictatorship supposedly dedicated to the fulfillment of their desires. Should they succeed, it would then be too late to correct a grievous error. For, like the sorcerer who could no longer control the forces of the nether world which he had called up by his spell, business would be overwhelmed by its own creature. Such a dictatorship would revive economic activity, but it would be activity devoted increasingly to producing weapons of death and destruction which must sooner or later be used to plunge the country into a holocaust of slaughter and bloodshed.