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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