‘Curing’ the Recession

May 12, 1958

It is not surprising to find politicians like Harry Truman and Lyndon Johnson blaming the recession on Republican “tight-money policy” and demanding “bold, prompt, confident action”—which always turns out to mean deficit spending and inflation. What is far more disturbing is to find committees of businessmen or economists plumping for the same inflationary policies.

I cite as outstanding examples the Committee for Economic Development and the Rockefeller Brothers Fund. The program committee of the CED called in March for increased spending for “public works,” but above all for “a large temporary cut in personal-income taxes to stimulate private spending.” This would mean “a cut of one-fifth in personal-income-tax rates”—or about $7.5 billion a year. “It is necessary that in a recession the budget be allowed to run a deficit. . . . The small decline in the money supply . . . should be halted and reversed.” If this is not a recipe for inflation I do not know what to call it. The Keynesian ideology concerning the cause and cure of crises is swallowed whole.

INFLATION AS REMEDY

Turn now to the report of the Rockefeller Brothers Fund. It has some sensible things to say about long-range tax reform and farm policy. It even has a sentence saying: “Business and labor must exercise restraint, the former in its pricing policies, the latter in its wage demands.” But it too recommends inflation as the cure for the slump. It advocates an immediate tax cut (amount unspecified). It wants to “accelerate public works,” and to set up “a permanent shelf of projected public works.” And it wants the Federal Reserve System to “increase the supply of money and credit as long as the economy is declining.”

Prof. Seymour Harris of Harvard, himself a Keynesian, has hailed the Rockefeller report as “virtually 100 percent Keynesian.”

For the long run, in fact, the Rockefeller report has even more inflationary implications than the CED report. The CED report looks only a year ahead, and proposes a tax cut only for that period. But the Rockefeller report looks forward for ten years, and what it looks forward to is steadily expanding government controls and government spending and a steadily expanding welfare state. It comes up with the remarkable discovery that an economic “growth rate” of 5 percent a year will lead to a bigger growth in ten years than a 3 percent rate or even a 4 percent rate. It assumes without argument that the way to get higher growth rates is for the government to spend more (and to tax us more to pay expenditures).

Of course if the government continues to inflate the currency and debase the dollar it can get (in dollars) any “growth rate” it wants. Let us remember that if there had been no inflation since 1939 (i.e., no increase in prices) the same real gross national product in 1957 would have been counted, not as $434 billion, but as only $194 billion.

RESTRAIN BOOMS

It is gratifying to turn to the sober analysis that one finds in the April survey of the Guaranty Trust Co. of New York. “The best way to prevent recessions,” the bank reminds us, “is to prevent booms, and the best way to minimize recessions is to restrain booms. . . . Booms generate unsound tendencies, including unwarranted expectations of future markets, excessive inventory accumulation, distorted price and cost relationships, outright speculation, credit strain, disproportionate production of different types of goods, and ill-advised investment.”

The recession, in brief, is itself part of a necessary corrective process. “The longer management clings to old methods, old products, and old pricing policies, the longer it will take to recover the lost markets. The more tenaciously labor insists upon maintaining or raising the cost of employment, the less employment there will be. . . . Sound incentives are derived from the removal of artificial restraints, not the administration of artificial stimulants.”

If space permitted, I should be tempted to quote this admirable discussion in full. But the rare voices making such sober diagnoses are drowned out by the swelling chorus of the inflationists.