Facing Both Ways

February 13, 1956

Like his Budget Message, President Eisenhower’s Economic Report seems to preach two mutually contradictory philosophies at the same time. It pays lip-service to government economy and free enterprise, and ends with scores of recommendations for increased spending and more governmental controls.

It is perhaps forgivable, especially in an election year, that the Administration should congratulate itself on the astonishing economic record of 1955, and imply that the result came about because, as Franklin Roosevelt once boasted, “we planned it that way.” “Full employment, rising incomes, and a stable dollar have been cherished goals of our society. The practical attainment of these ideals during 1955 was the year’s great economic achievement.”

But what caused this result? The report begins, modestly enough, by admitting that “lasting prosperity of the nation depends far more on what individuals do for themselves than on what the Federal government does or can do for them.” It adds: “Today we believe as strongly in economic progress through free and competitive enterprise as our fathers did, and we resent as they did any unnecessary intrusion of government into private affairs.” Then a qualification is added which, as it turns out, practically nullifies this statement. “But we have also come to believe that progress need not proceed as irregularly as in the past, and that the Federal government has the capacity to moderate economic fluctuations without becoming a dominant factor in our economy.”

Under the multitude of measures the report proposes, however, the Federal government would obviously become the dominant factor in our economy. For the President and his economic advisers are now apparently convinced that “wise and timely actions by the government” and “soundly conceived and well-timed governmental policies” can smooth everything out, give us exactly the right rate of growth, and “prevent a minor contraction from turning into a spiraling depression.” In order to do this, it seems that some 53 new laws or policies on the part of the Federal government would be required. Most of these would greatly increase Federal powers. They imply interventions in the private economy at a thousand points, and a constant stream of government subsidies and handouts.

Moreover, even the specific governmental policies proposed contradict each other. This is most clearly brought out in the recommendations for credit controls. The Federal government should be empowered to set “minimum down payments and maximum maturities on installment credit,” because “installment credit sometimes accentuates swings in the buying of automobiles, furniture, television sets, and other consumer durables, thereby exposing the rest of the economy to the hazards of widened fluctuations.”

But the same government that fears the too-rapid growth of installment credit, even when financed by private lenders at their own risk, has promoted an enormous housing boom by itself guaranteeing mortgages on shoestring margins that make the installment-credit terms on automobiles or television sets look like the acme of conservatism. It has forced Americans who want to invest in American corporations to pay down 70 percent of the purchase price, while it uses the taxpayers’ resources to encourage other Americans to buy houses for 7, 5, 2, or 0 percent of the purchase price.

The Federal Reserve authorities, bluntly, have not had the courage to exercise a sufficiently firm control over the total volume of bank credit. They have kept down interest rates below the levels to which they would otherwise have gone. It is this that has encouraged and made possible the huge growth in consumer credit. It is futile economically, and dangerous politically, to give governmental authorities the right to increase the total supply of credit to make it cheaper and easier, and then to ration the oversupply by stepping in to say who shall and shall not have credit and on what terms. This substitutes bureaucratic judgment and favoritism for the judgment of the market place.