Myth of Perpetual Boom

November 9, 1953

The air is full of talk of “recession,” and yet we are still close to what is so far the highest point in the greatest inflationary boom in our history. Look at some of the figures in the latest monthly statistical report of the President’s Council of Economic Advisers. In July, August, and September of this year the country’s gross national product—its total output of goods and services—was running at the tremendous annual rate of $371,000,000,000. This was a slight shade under the rate of $372,400,000,000 in the preceding quarter, but was otherwise the highest on record, comparing with $348,000,000,000 in 1952 and (just for one flashback) with $91,300,000,000 in 1939.

Other comparisons conform. Employment in the third quarter was at the highest level in our history—63,000,000. Unemployment was estimated at only 2 percent of the labor force. Average hourly wages in manufacturing, at $1.77, were also at a record high. So were estimated annual corporate profits before taxes.

Why, then, all the jittery talk about recession? Apparently because every index is not at an absolute peak. Net farm income this year is estimated at about $12,500,000,000, as compared with a postwar average of $14,500,000,000. Cattle raisers, it is true, have been hit hard. But what leads such a situation to be discussed as a sort of national crisis, calling for immediate action at the public expense, is a new ideology.

The assumption seems to run through most public discussion today that we must never tolerate or permit a recession or a readjustment in anything. The reason so many of us talk this way is that we have become convinced that we now know how to prevent depressions or recessions and there is no excuse for not doing so. This explains such statements as President Eisenhower’s: “Never again shall we allow a depression in the United States.”

But do we in fact know how to prevent any future depression or to curb any present recession? Certainly the most popular assumption about how this can be done is wrong. It is assumed that what principally determines the level of economic activity is the volume of government spending. But if Federal spending were slashed from $72,000,000,000 a year to $50,000,000,000, for example, and if taxes were cut correspondingly, the taxpayers would have as much more to spend as the government had less. What would take place, other conditions remaining unchanged, is not a decline in total demand but a shift from a demand for defense items and governmental goods and services to a demand for more civilian goods and services.

If the absolute level of government spending determined the issue, then there would have been a huge depression when Federal spending dropped from $98,700,000,000 in the fiscal year 1944–45 to $60,700,000,000 in the fiscal year 1945–46, and a still worse depression when it fell to $39,300,000,000 in 1946–47. Here was a drop of nearly $60,000,000,000 in the rate of government spending within a two-year period. Yet instead of there being a depression, employment and national income rose.

What has produced these ever-rising monetary totals, these miracles of national income and prosperity, has been, simply, inflation. This is sufficiently pointed up by the new record-high level in the cost of living. The inflation has been brought about by continuous budget deficits (not the same as the volume of spending) and, more directly, by the continuous increase in the supply of money.

But inflation is not a guaranteed way of keeping full employment and averting a recession. On the contrary, it “works” only as long as prices keep ahead of costs and maintain profit margins. If wages shoot ahead of prices, there will be unemployment in spite of inflation. And inflation, contrary to present popular assumption, cannot be “planned” or controlled. Sooner or later it gets out of hand. Those who, under the pretense of “preventing deflation,” would try to keep the inflationary boom whipped up to new peaks, are recklessly playing with fire.