Hair of the Dog

February 24, 1958

It is only a few weeks since the President reported that the nation’s output of goods and services in 1957 totaled $434 billion, the highest figure on record. In December 1957, moreover, the average hourly earnings of manufacturing workers, at $2.11, were also the highest on record. But suddenly, overnight (if you believe the Democratic speeches in Congress), we are in a cataclysmic depression. Mass unemployment and starvation stalk the land, forcing soup kitchens and bread lines. (It is true that official estimates of unemployment rose to 5.8 percent of the labor force in January as compared with 5.2 percent in December.)

The Democratic politicians are almost praying for a depression so they can have the privilege of saving us from it this November, and again in 1960. And they have not the slightest doubt about the remedy. It is, as you might have guessed, for the government to spend more money. Especially we must start more “public works.” The question is not whether they are needed, but how much “employment” they will provide, and how much they will add to “purchasing power.” It is assumed that every dollar spent by government somehow magically multiplies itself in increasing national income. Given this theory, economy in government is not only unnecessary but antisocial and wicked; and squandering and waste are the height of economic wisdom.

NO MAGIC IN DEFICITS

It seems necessary to point out all over again that the government-spending theory has been repeatedly disproved in practice. In the fiscal year 1944, the Federal government spent $95 billion; in the fiscal year 1947, it spent only $39 billion. Here was a drop in the annual spending in this three-year period of $56 billion. A budget deficit of $51 billion in 1944 was also turned into a budget surplus of $754 million in 1947. Yet instead of a recession in this period there was a substantial increase in employment, wages, and prices. Again, in the fiscal year 1953, the Federal government spent $74 billion; and in the fiscal year 1955, only $64 billion. The budget deficit also dropped from $9.4 billion in 1953 to $4.2 billion in 1955. Yet in the calendar year 1955 the gross national product increased $28 billion above that of 1953.

I have repeatedly tried to explain in this column not only that the government-spending nostrum or government-deficit nostrum does not work in practice but that it is theoretical nonsense as well. This leads us to the depression remedy that the “conservatives” and Republicans are now suggesting, which is a cut in taxes. President Eisenhower has said that he would favor a tax cut to brake the recession unless the economy turns up by midyear. Now a tax cut would at least have several advantages as compared with an increase in expenditures. It is a smaller invitation to reckless government spending. A wisely made tax cut, moreover, could increase incentives. But this is not what anybody is suggesting. What is being mainly suggested is an increase of $100 or more in the personal income-tax exemptions which would take millions of people off the income tax entirely, leaving the confiscatory rates on higher incomes and the excessive rates on job-giving corporations.

WAGERATES AND JOBS

The President wisely pointed to the danger of “going too far with trying to fool with our economy,” and implied that he would want such a tax cut only if it would not be inflationary. But the very purpose of such a tax cut would be to resume inflation. What is proposed, in short, is a cut in taxes without a cut in expenditures, to increase the size of the deficit, and to get “recovery by deficit.”

The worst of all remedies for the recession is that proposed by Walter Reuther and the AFL-CIO. It is a further increase in wage rates to “increase purchasing power.” As I pointed out here last week, a further increase above present peak wage rates would simply increase costs of production, squeeze out more profit margins, price more goods and more labor out of the market, increase unemployment still more, reduce payrolls, reduce labor’s total income, and turn recession into real depression.

The country may well pray to be saved from its saviors.