Growth by Rhetoric?

February 12, 1962

Throughout the Economic Report of the President and his advisers run a multitude of supremely confident assumptions. They know just where the GNP is going to go. They know just how much economic growth we ought to have every year and just how to get it. They know the “guideposts” and formulas for fixing wages and prices. They know just what to do if things start to turn for the worse. All that is necessary is for Congress to surrender some of its constitutional powers and responsibilities now and turn them over to the President to use in an “emergency.”

“As 1961 ended, actual output was still $25 billion to $30 billion short of potential.” If we attained our “maximum,” GNP in 1963 would reach “approximately $600 billion.” “We should not settle for less” than a growth rate of 4½ percent a year. In fact, in November, together with our nineteen fellow members, “we pledged ourselves to adopt national and international policies aimed at increasing the combined output of the Atlantic Community by 50 percent between 1960 and 1970.” Well, as Shakespeare put it: “If to do were easy as to know what were good to do, chapels had been churches, and poor men’s cottages princes’ palaces.”

NEED FOR INVESTMENT

Economic growth depends on one thing: The volume of new investment—the amount of capital put into new machinery, plant, and equipment to increase productivity. In all the Administration proposals outlined in the Economic Report only one—a modest investment tax credit and revised depreciation allowance—is directly calculated to encourage increased private investment. Nearly all the other proposals would discourage it. They would increase government spending, increase deficits, and increase the tremendous burden of corporate and personal income taxes that already discourage and reduce our rate of economic growth. For they reduce incentives at the same time as they siphon off for nonproductive government spending the funds that would otherwise have gone into new investment.

The main assumption behind the Economic Report, in brief, is that the cure for unemployment is inflation, if you can only get enough of it. On this assumption the President asks for emergency stand-by power (1) to cut income taxes by as much as $10 billion a year and (2) to increase spending on public works by $2 billion a year. He also asks for longer and bigger unemployment benefit payments.

DEFICITS VS. JOBS

The assumption is that huge deficits are always a sure cure for unemployment. Nowhere in the report is there any reference to our experience in the ten years from 1931 to 1940 inclusive, when uninterrupted deficits averaging 3.6 percent of the gross national product (equivalent to $18.7 billion a year at present GNP levels) were accompanied by average annual unemployment of 18.6 percent of the total working force (equal then to 10 million and now to more than 13 million unemployed). Nor is there the slightest hint that unemployment may be the result of excessive wage rates or that anything effective should be done to mitigate union demands. Nor is there the slightest suspicion that higher and longer unemployment benefits might directly and indirectly increase unemployment.

Even if there were reason to think that the President’s proposed spending and taxing policies might reduce unemployment without increasing inflation, there would be no reason for Congress’s granting him stand-by powers. The President could always send an urgent message or call a special session and allow Congress to use its own judgment in the light of conditions at the time.

In brief, the President’s proposed policies seem likely to bring about precisely the opposite of the goals he wishes to achieve. They would slow down economic growth by reducing incentives to work and save and invest. They might increase rather than reduce unemployment. They would almost certainly increase inflation and thereby (together with his light-hearted suggestion that our 25 percent gold-reserve requirement might be repealed) undermine that confidence in the dollar which he is so eager to preserve.