Readjustment Without Inflation
AUGUST 01, 1958 by LAWRENCE FERTIG
Mr. Fertig is a columnist on economic affairs, New York World-Telegram and Sun and other Scripps-Howard newspapers, in which this column first appeared June 9, 1958.
If this recession should end soon I without the government creating additional $7 to $10 billion inflationary deficits financed by the banks, there will be some red faces around the country. Important voices have been warning us that catastrophe would strike unless the government manufactures more spending money immediately and adopts "crash" programs.
Many legislators, including Senators Humphrey, Douglas, and Javits, have urged big, across-the-board tax cuts or public works or both.
It must be remembered that deficits resulting from a giant-sized tax cut would be piled on top of the $10-$12 billion deficits already in sight for next year, thus creating further inflationary tinder of colossal proportions. It is to the credit of President Eisenhower and Secretary of the Treasury Anderson that they resisted this pressure for a powerful, inflationary stimulant now and decided to give the economy a chance to make voluntary adjustments.
Many people have forgotten that a free enterprise system has the capacity for self-adjustment if it is given half a chance. There is now prevalent the theory that no readjustment of consequence should be permitted to take place. How prevent it? Simply let the government print enough new money and create enough new demand to overcome all the inefficiency, the uneconomic wage rates, the overpricing, the overoptimism and malinvestment — in short, all the economic distortion — that developed during the previous period of inflationary expansion.
The only thing wrong with this solution is that the new inflationary impetus wears off just as the last one did, and an increasing dose is urged to prevent a bigger depression next time.
The factors of both demand and supply used to be considered of prime importance in a sound economic system. But some people talk as if this is no longer true. "Aggregate demand" is the only factor worth considering, they say. When recession sets in — whatever the cause — just create enough demand (by inflation, of course) and everything will be all right.
The fact that current demand is stifled because costs and prices are in crying need of adjustment, and that we have tried to go too far too fast, is claimed to be of little importance.
Those who have been recommending "crash" programs to increase consumer income and consumer demand must explain some interesting facts. People have money, but they are using it in their own way.
The Survey of Current Business published by the U.S. Department of Commerce says, "Personal income in April, at a seasonally adjusted annual rate of $343 billion was $11/2 billion above that of March and up nearly $2 billion from April of last year." People spent over $108 billion on services in the first quarter of 1958 — $2 billion more than during the third quarter peak last year.
Personal consumption expenditures in the last quarter were at the annual rate of over $281 billion, just a shade under $283.6 billion in the peak quarter of 1957. Furthermore, people are curtailing their debts and putting aside more than ever in liquid savings. For the first four months this year the nation’s 520 mutual savings banks reported an $811 million deposit gain, which was over 80 per cent higher than the same period last year. In the face of these facts, can it be claimed that people haven’t enough money?
Advocates of "crash programs" want to bolster the sale of consumer durable goods like automobiles and capital goods used in plant and equipment for industry. But if the public got a $7 to $10 billion across-the-board tax cut, can anyone predict where that money would flow?
Consumers might still hesitate to buy more automobiles because they are not convinced that the value is there. Businessmen might still hesitate to spend more for new plant and equipment while prices are so high and so much excess plant capacity exists. One thing is quite certain, though. A large percentage of the new money would go into precisely those areas where rising prices are a grave concern to every family of workers, thus increasing the upward pressure on these prices.
The new money would seek to buy more services, more foods and pushing the cost of living index up. As a consequence, would there not be a rising clamor for price controls?
Since rising costs and rising prices are a problem even during this recession, the problem would be accentuated many times as the currency is increasingly inflated. In this column a month ago we said, "The big question is not will we get recovery — but will we get it without injuring ourselves vitally in the process?"
"Will our remedies be worse than the disease itself? After all, our remedies adopted in the last readjustment (1953-54) caused the conditions which are responsible for the present decline." The American public wants sound progress — not temporary will-o’-soft goods, all of which have been the-wisp, inflationary prosperity.
Fido, the State
How pleased we were with little Fido! His very presence, and an occasional growl, left us free to pursue our interests, unmolested by thieves or other human parasites.
But Fido is still growing, and more and more shows streaks of meanness toward us. He’s eating us out of house and home, consuming more than ever had been taken by thieves. And worse yet, he considers himself our lord and master, so big and powerful that we’ve no idea how to put him back in his place.
Now we see where we made our mistake. Knowing little about watchdogs, we had bought ourselves a cub lion!
L. E. R.