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57 (First Rovision) Compensatory Fiscal Policy I The competitive capitalist system under democratic political forms lias come upon evil days* In spite of increased aggregate production and much larger potential production, we have acute unemployment, acute shortages of material goods for many persons; and, more important, we lack a feeling of security upon which the building of a good life depends. II The magnitude of surface symptoms suggests that the causes of our difficulties must be fundamental. Measures to be constructive must bo correspondingly fundamental. Ill Among several important causes, one clearly seems to bo that the relation botween purchasing power and production has been incompletely understood, and, accordingly, the role of the national state in relation to purchasing power and production has boon erroneously conceived. Although this misunderstanding has been general and has existed for a lopg time, an acute condition has only recently appeared. That it has been so long deferred is due to the fact that until recently govornments have been converting national assets (the national domain) into purchasing power. This purchasing power, supplementing that arising directly from production, has mitigated somewhat the deplorable conditions which have existed since the industrial revolution. IV The conception of the role of the national state (whether democratic or totalitarian), in relation to purchasing power and production, is uiriorgoing profound change. This chango is basod on two separate but related considerations! 1. The operation of a private, competitivo, capitalist system, basod in part on private debt (credit) involves nocossarily from time to time increasos and decreasos in aggregate purchasing power with no corresponding incroaso or dooroase in potential production. The consequonco is unemployment and distorted price relationships that are morally and politically destructive. Therefore, for these changes in aggregate purchasing power, (arising from the vory nature of privato enterprise), the national state must compensate in the management of its budget, or otherwise. 2. The effect of the application of science and technology to production is to increase potential production. This increase in potential production does not of itself insure either (a) that there will bo corresponding increase of purchasing power, or (b) if there be such increase in purchasing power, that it will be spent on consumption, or invested, in now plant. Unless and until the increase in potential production results in increased purchasing power, and this increased purchasing power spent on consumption or invosted in now plant, tho result v/ill be unemployment, and partially idl$ plant. Accordingly, to insure full production, the national state must be prepared to insure the necessary purchasing power through the management of its budget, or otherwise. In summary, a private, competitive, capitalist system with progressive technological improvement requires on tho part of tho national state deliberate action of a compensatory character af fecting purchasing power. -3 V The necessary compensatory action is most readily taken by the national state through tho management of tho national budget. Compensatory managanont of the national budget requires correlation of policy in handling all national measures affecting money, credit, taxation, and expenditure. VI The principle of tho compensatory budget requires an important extension of tho cacmon concept of the function of taxation. Tho compensatory effect of the budget is produced, not by tho absolute level of income or expenditure psr se» but by tho magnitude (and method of obtaining) tho not cash deficit or surplus. This deficit or surplus may be altered either by changes in disbursements or by changes in receipts. It follows thorofore that taxation, in providing revenues to the national state, concurrently gives one method of controlling tho size of the deficit or surplus. That is to say, taxation provides a mechanism whereby purchasing (and investing) power in private hands can bo reduced or increased in amounts and in a manner conforming to general public policy. It follows similarly that the expenditures and disbursements of tho national state, in providing for tho common services, concurrontly gives another method of controlling tho size of the deficit or surplus. That is to say, expenditures and disbursements provide a mechanism whereby purchasing and investing power in private hands can be increased or decreased in amounts and in a manner conforming to general public policy. VII A number of questions of public policy are involved in the administration of a compensatory budget• 1. What should be the absolute level of income and disbursement about which variations take place? 2m What should be the magnitude of the deficit or surplus at any particular time, and what agency should make this determination? Shall the operation be applied to expenditure, or to income, or to both, and to what degree? M-* Shall the direction of increased (or reduced) purchasing power be toward producers, or toward consumers, or toward both, and to what degree? If toward producers, which? If toward consumers, which? VIII The importance of the policy questions raised above may be judged by relating the gravity of the present position to the magnitude of current production possibilities. Wo can produce annually with reasonably full employment, ninety billion dollars worth of goods and services; we are in fact producing slightly more than sixty* A current deficiency of production and of purchasing power of about thirty billion dollars annually is indicated. If we allow for expenditure or investment to turn three times a year, in order to raise purchasing paver thirty billion dollars, ten billion dollars in the aggregate v/ould need to bo added to current lovols by public and private,enterprise to secure reasonably full employment and production • -5- Private enterprise can hardly add more than at the rate of four billion per year this year* Even this figure assumes high activity for housing, utilities, railroads, and industrial investment. This leaves at least six billion dollars per year of production that the federal government has available to work with this year, this being at this time the indicated appropriate deficiency of net (cash) disbursements over income on whatever absolute level. The adoption of a compensatory budget policy raises certain difficulties and dangers. 1. The problem of timing is a difficult one at best. Existing mechanisms for expenditure and for taxation were not devised with such policy in mind and are clumsy for the purpose. 2. Bottle necks will develop. They will disappear. Foresight will reduce their number and severity. 3. Unless a reasonable degree of competition is maintained, there is likelihood that the great benefits of full production will go to organized groups best able to take toll on increased purchasing power. M-. Strikes and lockouts, reducing production, might defeat the program. 5. Over-emphasis on fiscal policy, particularly in its initial successful phases, might cause neglect of other measures necessary and proper for satisfactory restoration of private employment. 6. Public misunderstanding may result in loss of confidence. The implications of the policy are so foreign to conventional ideas, and to ideals of private prudence, that great resistance of both an intellectual and moral nature will be encounterod. -67. The most serious danger is that of congressional interference with budget planning, of over-appropriating and under-taxing on a purely political basis. We do not have the tradition of an executive budget as in England. We neod the item veto provision badly. The proposed Fiscal Advisory Board will be a protection as it develops prestige. The dangers hero, though very real, must be faced and risked for the sake of the benefits that may result. X Although a number of measures are desirable to secure the benefits which seem attainable, among those measures the adoption and administration of a compensatory budget policy is indispensible. The benefits to bo gained are very great. These ares 1. Reasonably full employment,. an increase of about 50% in production and therefore in the material standard of life. There would be a marked increase in the consunption of agricultural products. 2. Elimination of wide swings in employment and production would have a marked influence on the stability of employment. No insurance scheme, though necessary, can substitute for security itself. 3. Fuller use of industrial and agricultural overhead will result in a reduction of average costs. The saving will bo divided between profit, wages, and lower prices. 4. With reasonably full employment, adequate purchasing power, and near capacity production, many problems now appearing to call for government intervention orcontrol might solve themselves. In other words, tho assuning of control by the national state (the authority for which is generally conceded) over monqtary and contral fiscal policy in this manner would lessen the demand and noed for central -7government control in other parts of the economy, 5m An opportunity is provided to direct the first fruits of this increased production into socially useful channols, such as public health, education, old age security, slum clearance, etc. 6. In time it would be possible to restore to employment many young people, many older people, and many women. Not only would their contribution in production bo of great importanco, but present enfcrcod leisure is demoralizing to individuals and to the community. 7* Reasonably full employment and production would simplify the problem of American attitude toward foreign trade. We are in a position to roceive goods and services from abroad on balance for a long time if we can organize to receive thorn. This, cf course, would contribute to friendly international commercial relations. Boardsloy Ruml Soph ember 26, 1938 ESTIMATED EXPENDITURES FOR NEW DURABLE GOODS, IN CURRENT DOLLARS (Millions of Dollars) Totals All goods covered Producers > Producers* Telephone Transit Other utilities Mining and manufact. Commercial bldgs. Agriculture Housing Automobiles Public Railroads 7,270 914/ 7,560 1,212 V 347 617 268 447 132 204 123 162 155 181 2,831 3,540 500 657 1,329 1,364 1,800 1,122 1,660 2,038 3,810 4,400 Consumers Electric power Consumers' Household goods 1919 1920 13,867 15,944 5,685 7,172 1921 1922 1923 1924 1925 12,833 15,337 19,809 19,972 21,753 4,385 4,919 7,013 6,736 7,151 6,898 8,764 11,201 11,374 12,496 1,550 1,654 1,595 1,862 2,106 536 433 1,072 879 742 288 408 738 844 787 230 266 320 386 387 100 151 180 133 123 137 236 245 355 300 1,945 2,097 2,818 2,535 2,815 600 645 735 761 990 549 683 905 843 1,007 1,841 3,115 3,980 4,244 4,754 1,367 1,819 2,641 2,470 2,702 3,690 3,830 4,580 4,660 5,040 1926 1927 1928 1929 1930 22,788 22,002 22,645 23,315 18,714 7,846 7,516 7,821 9,127 7,473 12,790 12,126 12,363 11,786 8,464 2,152 2,360 2,461 2,402 2,777 876 760 663 840 859 718 738 701 793 855 407 399 460 620 616 116 130 135 135 124 380 427 348 369 298 3,220 2,918 3,254 3,990 2,827 1,177 1,206 1,181 1,186 997 952 938 1,079 1,194 897 4,314 4,064 3,813 2,623 1,456 3,116 2,652 2,890 3,253 2,038 5,360 5,410 5,660 5,910 4,970 1931 1932 1933 1934 1935 13,369 7,712 6,828 9,228 11,362 4,473 2,258 1,868 2,792 3,464 6,327 3,622 3,637 4,619 6,159 2,569 1,832 / 1,323|/ 1,8172/ 1,739£/ 365 175 108 224 197 555 265 120 137 179 410 255 167 180 195 132 61 46 78 117 243 141 72 77 92 1,665 826 866 1,436 1,712 582 274 143 165 209 521 <T61 346 495 763 1,005 282 204 214 585 1,402 780 963 1,325 1,954 3,920 2,560 2,470 3,080 3,620 1936 1937 15,464 17,732 4,592 6,311 8,296 2,576|/ 8,950 2,47l£/ 314 525 256 425 250 390 109 101 120 150 2,342 3,200 272 360 929 1,200 1,160 • 1,280 2,496 2,570 4,600 5,100 17 Excludes special war-time military construction. 2/ Work-relief expenditures deflated to a "regular equivalent" basis. Estimates compiled by George Terborgh
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