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October 26, 1957 QAvATVa The current situation Business activity is declining at anfilarialTig rate* The basic cause of thia unfortunate development was the great wave of forward buying initiated by the rapid advances in costs and prices last winter* It now appears that the maintenance of productive activity until August was attributable to production in excess of conaimer demands. Hational income failed to increase after Oay. tee factor responsible for this was that the expected growth in incomes and baying power arising frost increased expenditures for residential construction failed to materialise* owing to the excessive advances in construction costs. Another is the lower level of the Governments expenditures and the higher level of tax receipts* He are now entering upon a period in which production is falling short of current sales while efforts are being made to reduce inventories* But as production declines unemployment in- creases, Is unemployment lncreasesf income and consumer demands fall off* As sales decline and profits diminish expenditures for new plant, equipment and maintenance will decline* Thia is the vicious deflation^ ary circle of 1923-52* The budget and business Shen the Government disburses more to the community than it collects in taxes, It adds to national buying power and the demand for the products of industry* The excess of spending over tax receipts in the years 1955-S6 was the primary factor in increasing national income, in increasing Federal revenues, in increasing national demand for goods and, hence, in finally making it profitable to aake additions to plant capacity in 1936. 3he Federal contribution to national birring power was particularly heavy in 1958* Even if we assume that only half of the bonus bonds that were cashed resulted in current consumer expenditures, the excess of activity-creating expenditures over activity-decreasing tax receipts amounted to t4 billion* there has been a drastic decline in the present calendar year* For the first nine months the excess, calculated on the saa© basis as in the previous year, amounted to |822 aillion* At the present tiae it la negligible. On the basis of the recently revised budget estimates* it is anticipated that instead of a Federal contribn-* tion to the growth in national buying power there will actually be an excess of tax collections over disbursements of an activity~stimLating nature in the second half of the current fiscal year* Jithough the revised budget estimates for the fiscal year 1958 indicate a technical deficit of #700 nillion, they actually anticipate an excess of tax collections over disbursements to the community of nearly $400 million, this remit is attributable to appropriations of over $1 billion to various trust funds* Brom the viewpoint of business conditions, it is theftcoaoialcsurplus* rather than the bookkeeping deficit that is significant* At a tine when the national income is shrinking the Governsent is seeking to raise revenues and cut expenditures* this rarely -5- intensifies the deflationary trend* la lire in danger of starting again the hopeless attempt to increase Federal revenue© when the national revenue ia ehrinking* the attempt failed in 1929-52* It will fall again* The only condition under which the Federal budget can be technically balanced in 1959 la a reversal of the present deflationary trend* figroli cations of current developgents Unless direct positive action ie taken, there ia no good reason why the national income should not continue to decline. Burable goods* shortage© will not lead to increased activity for the sufficient reaeoa that the decline In consumer demands is fast converting ahortagea into surpluses end deficient capacity into excess capacity* A farther decline in production and increase in/employment will check the rice in rente and aake the construction outlook even more unfavorable, the present unfavorable rent-building coot relationship will be perpetuated* The Republican Party was wrecked by relying cm wishful thinking that bueineas would turn up, while at the same time pursuing policies that intensified the depression* Ihe Democratic Party can likewise be wrecked if it makee the same mistake. aericus for m The situation today is too to rely on wishful thinking* A drastic and long-continued recession at this time would discredit the whole Sew Deal* Ve m a t take action now to sake certain that we do not enter upon another downward wpiral* Effective action takes* now would be mil4 -4- ia comparison with tiiat required If the present trend* are allowed to gather momentum. Effective action w&a unduly delayed last winter to check coat and price advances* We are now reaping the consequences* If effective action la again delayed at this time, the repercussion* on our whole social, political, and economic structure are difficult to foresee*
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