Party of Inflation

November 5, 1956

“Americans are on a luxury-craving and luxury-buying binge unsurpassed perhaps by any other period in U.S. history.” So concludes The Wall Street Journal, in a story supported by some startling examples. Sales are soaring of more expensive clothing, furniture, foods, liquor, foreign tours, jewelry, furs, Cadillacs.

Some of the reasons are obvious: The highest employment, weekly wages, and national income on record. Personal income has been running at an annual rate of $325 billion, compared with $306 billion in 1955 and only $227 billion as recently as 1950. But this is not the whole story. Americans in nearly all income brackets are on a huge spending binge, not merely because of their present prosperity, but because they assume that their current high incomes will continue or even increase. People do not mind paying high prices for luxuries this year, if they believe prices may be even higher next year. Now the Democratic candidate for President has been telling his audiences that they are “deeper in debt” than ever before. As a statement of fact this is correct. Installment debt outstanding in July of this year was $29.1 billion, compared with $18.7 billion at the end of 1952, and $6.7 billion at the end of 1947. Total consumer debt shows similar comparisons. And mortgage debt outstanding on one- to four-family nonfarm houses at the end of last June totaled $94.2 billion compared with $58.5 billion at the end of 1952, and with only $18.6 billion at the end of 1945.

WHY ‘DEEPER IN DEBT’?

But the implication of Stevenson’s “You’re deeper in debt” is the exact opposite of what he supposes it to be. People are borrowing more (and getting more credit) precisely because they are so prosperous and so confident about the future.

In Newsweek of May 7, I called attention to the late Lord Keynes’s belief that there is a “fundamental psychological law, upon which we are entitled to depend with great confidence . . . that men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income.” Leading disciples regard this “consumption function” doctrine as “Keynes’s most notable contribution” to economics. I pointed out, by a comparison of official statistics of national income and savings over the preceding eleven years, that American consumers acted in accordance with Keynes’s “fundamental psychological law” in only four of those years, and actually reversed the law in seven of them.

KEYNES’S ‘LAW’

Keynes went on to contend that his “law” applied “especially . . . where we have short periods in view, as in the case of the so-called cyclical fluctuations of employment.” Yet it should now be obvious that this is especially where any such law does not meaningfully apply, and where the very reverse is apt to apply. In a depression, people still employed tend to contract their consumption-spending even more than their income has fallen, precisely because they become unsure of the continuance of their jobs and income and suspect that the prices of what they buy will be even lower next month or next year. During “full employment,” on the other hand, many people, as now, tend to increase their spending by an even greater percentage than the increase in their incomes, and even go heavily into debt to buy consumption goods, because they are confident (rightly or wrongly) of the continuance and further rise of their incomes. They assume that the inflationary boom will continue and that consumer-goods prices will be even higher next year. They are borrowing dollars that they expect to pay off in cheaper dollars.

Yet Stevenson deplores this borrowing on precisely the wrong grounds, regards it as a symptom of depression, and recommends still more inflation (more government spending and tax cutting) to combat it. The Democratic platform itself condemns Republican efforts to curb inflation by raising the cost of borrowing as “the first time bomb of the Republican crusade against full prosperity for all.”

If the American people vote for the Democratic candidate for President they will vote for a racing inflation leading to a crackup.