More Inflation to the Rescue

July 25, 1949

In his economic report of six months ago President Truman insisted on a further increase of taxes by $4,000,000,000 a year. Today he declares: “No major increase in taxes should be undertaken at this time.” In January he demanded stand-by price and wage controls, allocation of scarce materials, extension of bank-credit and installment-buying controls, and government construction of more steel capacity if private capital refused. The new report abandons these demands.

Mr. Truman’s dramatic reversals are an admission that he was wrong on many things in January. But they do not necessarily prove that he is right now. In January he thought quite rightly that a budget surplus was “essential to sound fiscal policy.” Today he thinks quite wrongly that “we cannot expect to achieve a budget surplus in a declining national economy.” This implies that the cure for every recession is a new dose of deficit financing.

I cannot join those, therefore, who regard the abandonment of the $4,000,000,000 tax demand as “reassuring.” It would really have been reassuring if accompanied by a proposal for at least an equal cut in Federal expenditures. So would the proposals for repealing the tax on the transport of goods and for liberalizing the carry-over of losses by corporations. But as they stand, these proposals are merely part of a program to give the American economy still another inflationary shot in the arm.

The President talks of his “anti-inflation program” of last January. This is an illusion. He never had an anti-inflation program. All he had was a program for more government controls to try to conceal the unpopular symptoms and consequences of monetary inflation. Even when Mr. Truman was “fighting inflation” by rhetoric, the government was conducting a highly inflationary bond-pegging program. As a corollary of this, it was following an inflationary cheap-money policy. The Federal Reserve authorities, though they wanted to control everyone else, fought tooth and nail the suggestion that Congress restore the reserve banks’ own reserve ratio to its former 40 percent instead of the “emergency” 25 percent. And even when Mr. Truman was ostensibly “fighting inflation,” he insisted on the biggest peacetime spending ever embarked upon by any nation in the history of the world.

But monetary inflation can keep a boom at its peak only if it goes on at an accelerative rate. There was a lull in our monetary inflation, and there then set in a “stabilization crisis,” though so far a mild one. And the only answer that Mr. Truman and his advisers can think of is another inflationary spree. Though Mr. Truman claims that we are “still operating at high levels of employment and production,” he nonetheless wants to embark on more deficit financing. Government economy is “out of the question.” “Nothing could represent greater economic folly,” in fact, than to cut government spending now.

Mr. Truman blandly tells us that a $42,000,000,000 annual budget, five times the peacetime budget even of the Roosevelt regime, is a “minimum.” He praises government extravagance: “The fact that public expenditures of Federal, state, and local governments are running at a rate of close to $60,000,000,000 a year is itself an element of great stability in the present situation.” Public expenditures of $120,000,000,000 one gathers, would provide twice as much stability.

The President and his advisers fail to recognize the elementary fact that the more the government spends the less the individual taxpayer has left to spend. Their public spending programs make no addition to real spending power. These programs can seem to work only as long as they create government deficits financed. by printing more money. This leads to the higher living costs that Mr. Truman and his advisers affect to deplore.

Mr. Truman’s midyear economic report reflects throughout a super-Keynesian, inflationist, controlist, and statist philosophy. And that is not “reassuring.”