Chapter VII. Can Europe’s “Needs” Be Measured?

11.There is no scientific or objective way of measuring either Europe’s “needs” for aid or our “available resources” for supplying it. The report of the Paris conference of sixteen nations does not solve this problem. Any total arrived at must be arbitrary or sheer guesswork.

Two ideas have been tenaciously held in connection with American aid to Europe. One, embodied in the Marshall proposal, is that Europe ought to find out and tell us precisely how much it “needs,” either in terms of specific goods or in over-all terms of dollars. The other, put forward by those who fear the possible dimensions of the Marshall plan, is that the United States ought to “make an inventory of the resources it has available to contribute,” either in terms of specific goods or of dollars.

The mere effort to compile such inventories of “needs” or “available resources” will have an important educational effect, and therefore it cannot be entirely fruitless. But we will do well to recognize from the very beginning that there is no scientific or objective way of measuring either Europe’s needs or our available resources for aid.

What standard are we to adopt, for example, in measuring Europe’s “need” or “deficit” or “shortage”? Some pre-war level of European consumption? Are we to support Europeans in the pre-war style to which they were accustomed? Is the calculation to be based, then, on “minimum standards of health and decency”? How would we apply such “minimum” standards? As averages? If so, in order that everyone might get the minimum, Europe would be obliged to adopt a totalitarian system of complete equality of personal or family incomes regardless of anyone’s contribution to output. Under such a system the last incentive to restored production, except the threat of the firing squad, would be destroyed.

Would America, then, be expected to make up the deficiencies for all those in Europe who had less than the calculated minimums—while those in Europe who had more were allowed to retain that more? If so, the whole burden of making up such deficiencies would fall on Americans, and none on better-off Europeans. And if the problem is primarily one of relieving poverty and under-nourishment, what of the superior claims on our charity of India, Latin America, Africa, China?

It may be thought that the problem is more amenable to solution in terms of shortages of specific goods. But how are these shortages themselves to be measured? Shortages in relation to what? We should know from our own experience that price-fixing can create any conceivable number of shortages. Whenever the price of any commodity is held by government edict below the level that a free market would bring, there will be a shortage of that commodity. Production and supply will be discouraged, consumption and demand stimulated. It is impossible to know what the “real” shortage is when market prices are not free. If the supply of product X is short in relation to the supply of products A, B and C, this lack of balance may be wholly the result of government price-fixing. If a given product is short in relation to its pre-war supply, the first question that must be raised is whether that supply could not be increased by allowing the price to go up to stimulate production. The second question is whether it is in any case the duty of United States citizens to make up a European deficit of any product below its pre-war supply.

Such questions are enough to show that there is no scientific standard by which Europe’s need for aid can be measured. Any “estimate” must be at best arbitrary, if not the sheerest guesswork.

THE SIXTEEN-NATION REPORT

THE REPORT of the Paris conference of sixteen nations in response to the Marshall proposal does nothing to shake this conclusion. Let us begin with the over-all estimates that these nations put out of their needs—or rather of what they call their combined prospective “deficit”—over the next four years.

The report places this deficit at the huge sum of $22,440,000,000. Elsewhere in its text it mentions the need of some $3,000,000,000 for currency stabilization loans. These appear to be outside the foregoing total. If we add them we get a grand total of $25,000,000,000 as the estimate of the outside “needs” of these countries for the next four years. When we put on top of this some $15,000,000,000 that the United States will have spent since V-J Day by the end of the present year in the attempt to rebuild Europe, it brings the bill to the staggering total of $40,000,000,000.

How much validity do these “deficit” figures presented by the sixteen European nations really have? The original total that the sixteen nations arrived at, we must remember, amounted to more than $29,000,000,000. (And this apparently did not include the $3,000,000,000 estimate for currency stabilization.) Not until after our State Department privately protested that this sum was too large was it reduced to $22,440,000,000. The estimate eventually published presumably meets our State Department’s demands, in that it is lower than the original estimate, and tapers down each year. But suppose our government does all that is now demanded of it, and Europe’s economy nevertheless still breaks down? Will we not be told that it was our fault—that our aid was “too little and too late”—that these were not Europe’s real estimates of its needs, but merely slashed figures put forward to conciliate the State Department and an “economy-minded” Congress?

Even apart from this, what reason is there to take seriously these estimates of annual deficits? The report itself declares: “Unfortunately, the size of the problem has proved greater than was expected. The disruption caused by the war was more far-reaching and the obstacles to recovery more formidable than was realized even six months ago.” But if the sixteen nations admit that they then failed to guess right even six months ahead, what reason is there to suppose that they are now guessing right four years ahead? And if (as we must suspect) the deterioration in those six months was not the result of a war that ended more than two years ago but of new factors, and primarily of the unsound economic policies followed by European governments in those six months, then the prospective European “deficit” could be either much greater or much less than the figures presented, depending upon the future policies followed.

It is impossible, moreover, for any nation to predict its future trade deficit by adding together its future “requirements” of specific goods. For such “requirements,” as we have already seen, are arbitrary except in relation to some standard, and the standard adopted must itself be arbitrary. If there were some nation as much more productive than the United States as we are than Europe, we could no doubt submit a very impressive list of “requirements” to it, including veterans’ housing, railway freight cars, steel, automobiles, and the principal foodstuffs and raw materials that we import, including sugar, coffee, rubber and wool.

There is no such thing, finally, as a predestined trade deficit independent of loans from outside, of internal inflation, of price-fixing, of tariff policies, of trade controls, of domestic production, of price levels and of foreign exchange rates.

To examine simply the first of these factors—loans from outside—it should be obvious that the economic causation is precisely the reverse of what the sixteen-nation report tacitly assumes. It is only gifts, credits or loans from outside that permit a trade deficit to continue. Otherwise the only trade deficit that is possible is one that is paid for by the sale of foreign securities or foreign currencies previously held or by the direct shipment of gold. In the long run imports and exports balance, not because a nation’s production goes up or down, or because some set of brilliant bureaucratic controls makes them balance, but simply, as John Jewkes of the University of Manchester has put it, as “the result of the insistence of people upon getting paid for what they sell.” If we extend no further gifts or credit, the outside world cannot continue to have a trade deficit. It is the loans and gifts themselves that will chiefly determine the size of the future European net trade deficit with us.

EUROPE’S FOUR-YEAR PLAN

THE REPORT of the sixteen European nations is a skillful presentation of the case for heavy and immediate financial aid from the United States. Many Americans have been impressed by its diplomatic tone, its “painstaking” estimates, and its “calm and measured” language. But the more the report is examined the less assurance does it give that these nations are even yet prepared to abandon the economic restrictions that have been chiefly responsible for bringing on the present crisis.

Throughout the report there is constant emphasis on production “targets.” We are told precisely how much bread grains, potatoes, sugar, meat and milk these countries intend to produce in each of the next four years; precisely how many tons of coal and steel, and how many kilowatt hours of electricity; precisely how much they intend to expand oil-refining capacity, inland transport and merchant fleets. We are proudly told that “these production programs, taken as a Whole, represent an expansion of output similar in general scale to that achieved by the United States in the mobilization years 1940-1944.”

There seems to be an implication here that to set a target is almost as good as to reach it. Surely the sad fate of the British targets so confidently published in February of 1947 ought to have sufficiently underlined the difference between ardent hopes and cold realities.

The whole concept of government “production targets” is in origin totalitarian. It is part of the modern mania for imitating Russian Five-Year Plans—an imitation that is the sincerest flattery to Communism. Why should the Russian Communists doubt the superiority of their system when they see nearly all of Europe aping one of its basic features? For only under a collectivist concept is it considered the function of government officials to say just how much shall be produced of each major commodity. It is of minor importance that the guesses of the bureaucrats are almost bound to go wrong. Far more serious is the fact that the mere setting of government production targets is in effect a way of setting aside the free market, setting aside a free economy. It is a way of telling the consumers that the things that are produced, and the relative proportions they are produced in, are not to be determined by their own demands but by what government bureaucrats decide in advance is good for them.

The supreme irony is that the only country in the world today that is really producing anything—and for whose goods the rest of the world is therefore clamoring—is almost the only country that does not have government production “targets,” but merely turns out goods in the volumes and proportions determined by supply and demand, free prices and free profits. But just as the rooster Chanticleer was convinced that the sun could not rise until he crowed, so European bureaucrats are still convinced that there can be no production unless they first of all set production targets.

Implicit in production “targets” is the whole system of price control, rationing, allocations, government licenses, prohibitions and decrees. There is no indication in the sixteen-nation report that this dictated economic system is to be abandoned, certainly not in the near future. Only once in the report is it admitted that the system of price control “is likely to jeopardize production.” But this delicate hint is not elaborated, nor is any conclusion deduced from it. Under present circumstances, the report assumes, “stability cannot exist unless it is constantly reinforced by controls and rationing.”

In short, European bureaucracy still believes at bottom what our own OPA believed, that price control cannot be abandoned “until supply catches up with demand.” What this overlooks is that artificially low price ceilings in themselves increase demand and reduce production and supply, so perpetuating the very shortage that they were designed to counter. In the European system almost the whole mechanism of economic self-adjustment has been destroyed. Neither prices nor wages nor exchange rates are free to move to the points where they can tell the truth about the ever-changing relations of supply and demand and restore equilibrium between them. The inevitable result is a chronic shortage of goods and a chronic trade deficit.

The only important elastic element left in the world is American prices, which must now bear the full brunt of world inflationary demand. And when they respond to the process of trying to take on this disproportionate function, an outcry is raised not to free the markets of Europe but to suppress market freedom even here. To the extent that this is done, we may be sure that we shall not only lose our economic freedom, but make shortages and rationing worldwide and permanent.

FOUR LINES OF ACTION

MANY commentators have been impressed by the “four lines of action” upon which the European recovery program is based. As presented in the report these four points are:

1.Starting production effort by each of the participating countries, especially in agriculture, fuel and power, transport, and the modernization of equipment.

2.The creation and maintenance of internal financial stability as an essential condition for securing the full use of Europe’s productive and financial resources.

3.The development of economic cooperation between the participating countries.

4.A solution of the problem of the participating countries’ deficit with the American continent, particularly by exports.

As statements of goals, these points are beyond criticism. What country, indeed, would not wish to increase its production, to maintain internal financial stability, to get cooperation from other countries, and to terminate a condition of economic dependence on outside help? The real problem to be solved, however, concerns the methods likely to achieve these goals. And it is precisely here that the report gives most grounds for misgiving.

The report of the sixteen nations is not altogether without sections that give some reason for hope. One of these is the sympathetic discussion of customs unions. It is admitted, however, that at the moment such discussion is rather academic. The report itself reminds us that a customs union can only be achieved by “progressive stages over a period of years.” What is perhaps not so well recognized in the report is that a customs union is impossible between controlled economies. To have really uniform tariffs the members of a customs union must have a uniform currency, or at least currencies freely convertible into each other in any amounts at fixed rates. The countries embraced in the union must also have uniform prices for commodities, differing only by transportation costs—which means that they cannot have separate price control, rationing or allocation systems.

Of more immediate bearing are the sections on inflation. The report contains the significant admission that “the growth of money incomes develops with cumulative force when it is fed by inflationary financing of budget deficits.” It contains the definite promise of the French Government that “the year 1948 will see the end of all new borrowing from the Bank of France,” and the promise of the Italian Government that “it will approve no new expenditure unless provision is made for revenue to a corresponding amount.” These pledges are important. They should not be minimized. But it will not be easy to fulfill them. For they mean the imposition of unpopular taxes, and they probably mean also the abandonment or reduction of expenditures popular with powerful groups, such as those on food subsidies, nationalization subsidies, new social security schemes, and big government capital investment programs. It remains to be seen whether the governments of France and Italy will prove strong enough to carry out these pledges.

OUR “AVAILABLE SURPLUS”

HARDLY less difficult than determining Europe’s “needs” is the problem of determining the “available surplus” of American goods for foreign aid. Is this surplus to be measured by whatever income we may have above the average European level? Is it assumed to be our duty to lend or give enough to reduce us to that level? Will the wealthier European countries then be equally willing to reduce their incomes to that of the poorer countries, and these in turn to the Asiatic level, until the whole level of world incomes is equalized?

If not, what is to be the standard for measuring our surplus? Is it to be measured in specific articles? But the articles of which we have a “surplus above our own needs” are for the most part the articles specifically made for export trade. If we simply give away those articles, then with what can we buy the articles that we need to import—such as sugar, coffee, tea, cocoa, wool, rubber, hides, silk, newsprint, and a thousand other raw materials or finished products? It is precisely with the proceeds from our surpluses that we make up for our shortages. We can, of course, give the outside world more food and other products than it is able or willing to pay for with its own exports to us. But we can do so only by consenting to go with less ourselves, by submitting to higher taxes and by forcing up prices here, perhaps dizzily, as a consequence of reduced supplies.

The most impressive effort so far made at this writing to estimate the resources that we have available to help Europe appeared in former President Herbert Hoover’s letter of June 15, 1947 to Senator Styles Bridges, Chairman of the Senate Appropriations Committee. This letter, without attempting to set exact limits to our contribution, showed what the serious effects on our economy had been of our contributions up to that date. It emphasizes some of the considerations that have just been outlined, in addition to summarizing the post-war contributions already made.