Wrong Diagnosis, Wrong Remedy

August 15, 1949

The Administration’s diagnosis of this (and every other) recession and its suggested cure are based on an ultra-Keynesian ideology. Recessions or depressions, the Administration now implies (following Keynes, who was following Marx), are caused by a falling off or deficiency of consumer buying power, especially of worker buying power. Therefore the cure is simple. Have the government pump more buying power into the system: force up wage rates further, launch still more “public works,” spend the taxpayers’ money lavishly, run into deficits, expand credit, and print more money.

The government’s own official statistics now discredit its analysis and its remedies. What happened in the first half of this year? Did workers’ incomes drop? No, concedes Mr. Truman in his midyear economic report: “Real earnings generally were maintained.” Then did total consumer income drop? No, again: “Personal income of consumers after taxes decreased only about 1 percent from the level of the last half of 1948. Since consumers’ prices dropped 2 percent, real income did not change significantly.”

Did the government neglect to run into deficits? Still no. “Cash payments by the Federal government ran at a rate more than 20 percent higher than in the first half of 1948. . . . All governmental units combined showed a cash deficit in the first half of 1949 at a seasonably adjusted annual rate of $2,400,000,000, in contrast to a surplus at a rate of $12,100,000,000 in the corresponding period of 1948.”

Yet the government’s proposed remedies today are a still further boost in wages “to maintain the purchasing power of workers,” “positive actions . . . to enlarge consumer purchasing power,” bigger government spending, and bigger deficits. Cuts are to be made at only two points—prices and profits. “While price reductions are desirable,” says Mr. Truman, “they should not be attained at the expense of wage cutting.... Businessmen have a great opportunity to maintain production and sales volume by adjusting prices downward, even at the cost of temporarily reduced profits.”

The Administration, in short, has two distinct sets of economic principles—one for prices and the exact reverse for wages. It sees that excessive prices reduce volume of sales. But it refuses to admit that for precisely the same reasons excessive wage rates create unemployment. As the leading element in costs, excessive wage rates must either force up prices to the point where sales volume drops, or wipe out profit margins.

In the first three months of this year profits of manufacturing corporations after taxes averaged about 6 cents in every dollar of sales. Not a very fat margin to tamper with, even if it were uniform. But this 6 cent average concealed a variation between industries ranging from 10.3 cents in petroleum and coal products down to 2.2 cents in leather products. And it concealed, of course, far wider variations among particular firms.

When profits are reduced, therefore, even “temporarily,” it doesn’t mean that businessmen accept a narrower uniform profit margin. It means that the profits of the marginal firms are wiped out altogether. They turn into losses. Losses force shutdowns. It is this that creates unemployment. This unemployment means that the total income and purchasing power of the wage earners is not increased but drastically reduced by excessively high wage rates. The Administration’s wage-boosting policy can only intensify the very unemployment and recession that it is supposed to combat.

“The only ultimate source of sustained profits,” says the President, “is sustained employment and purchasing power.” This puts the cart before the horse. The truth the Administration has forgotten is that the only ultimate source of sustained employment and purchasing power is sustained profits. You do not achieve full employment by destroying the rewards and incentives of the very people who provide employment.