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May 6, 1940 In approaching economic problem*, I have searched always for solutions which will enable us to preserve what is most valuable in American life— our democratic Institutions and our private enterprise econoisy. I believe in the fundamentals of the American way of life. In this basic sense ay approach has been truly and deeply conservative, But if being a conservative meant spending one*s time vigorously ignor ing our problems, then I should not want to be identified by that label. I do not believe, for example, that unemployment can be cured simply by mumbling "democracy” every day before lunch. still be there when we are through. statistician or the politician. The unemployed will They are no invention of the Already we have become so used to their presence that some people are able to speak of there being only eight or nine or ten million of them. If our political and economic system is to be preserved, it must be made to work. There are other systems that do provide employ ment for all those who want it. The more highly we value the freedom and human dignity that only democracy and private enterprise can provide, the more insistent we must be that outworn formulas should be discarded. In an econosay whose potential wealth is greater than that of any other in the history of the world, there are millions of people without the opportunity of earning their own living. paradox cannot continue indefinitely. I am convinced that this Either we solve it within out democratic, private enterprise framework or sooner or later it will find -2- its solution in some other way. The problem cannot and will not remain unsolved. The problem is not essentially humanitarian. It has little to do with social reform or with any of the *class conflicts* that we hear so smeh about. There is a job of straight economic engineering to be done, and we should be able to face it in the same spirit that we would tackle any other job— coolly and without preconceptions* I’ve never met a businessman who felt that the typewriter was fatal to private enterprise and insisted on carrying on his correspondence in longhand. Yet it sometimes seems to me that the attitude of a lot of people towards economic matters is about as unprogressive as that* Machine-age think* ing about private business problems sometimes goes along with a sort of *hold-tight~and-hesve* thinking about broader economic problems. There is no difficulty in stating what the problem is* is simply that not enough goods and services are being bought. It Of course, businessmen will not continue to produce commodities unless someone is willing and able to buy the®. Several different explana tions have been offered for the inadequate volume of expenditure* but its importance is beyond dispute* Seme people tell us that the expenditure stream would flow freely again if only certain blockages were removed* Sither prices have frozen and do not respond to changing conditions, or costs are out of line with prices in certain crucial fields* The situation is some* times compared with a log jam, and we are told that if the key log could be found and blasted free, all the rest would follow. I accept most of the reasoning on which these conclusions are based. Certainly mal adjustments of this sort exist, and everything possible should be done to remove then* Many Government agencies are working along these lines. One need only mention the activities of the Department ©f Justice in the building field* Nevertheless, I cannot believe that these rigidities and mal adjustments are the heart of the problem* After we have done all that we can do in this direction, unemployment will still be with us. We have never had the sort of perfect competition in the past that the textbooks tell us about and we are not likely to have it in the future. Prices have never been completely flexible and there has never been a fine balance between costs and selling prices, could be brought about without a complete nothing of this sort reorganization of our economy* In the totalitarian states prices, profits, and even output can be controlled, but not in a democracy. In the past we have had reasonably fall employment in spite of some rigidities and maladjustments, and we can have it again* There is another group who tell us that the obstacles to re covery have all been created by the Government. These people say that taxes, or labor policy, or a general destruction of confidence have frightened businessmen to such an extent that they will not expand their operations under any circumstances. independent of consumer demand* I cannot believe that output is so If prosperity depended solely upon the state of mind of businessmen we might even discover that what they ate I ■.■* for breakfast would affect the production index. Shatever the condition of confidence say have been, investment was made in breweries in 1933 and is being made in airplane factories now. Why? Because there were people who wasted beer or airplanes and were able to pay for them. The figures on industrial earnings show that business is still very profitable when orders are available in sufficient volume. One sample of nearly 600 large corporations whose securities are listed on stock exchanges showed that in 1937, ratios greater than 15 per cent. 3? per cent of them had profit These ratios were calculated as a percentage of invested capital, including long-term debt, before the payment of interest and income taxes. tions had deficits and only than 5 per cent* 11 Daly 2 per cent of these corpora per cent showed profit ratios smaller Twenty-eight per cent had profits between 5 and 1# per cent and $2 per cent had profits between 10 and 15 per cent. of this favorable showing, the 1937 prosperity collapsed. In spite Profits were surely adequate but profits cannot be sustained without orders, and orders depend ultimately on consumer purchases. i The seme picture appeared again at the end of 1939. For another sample of 156 corporations, whose earnings records have been tabulated on a quarterly basis over a number of years, we find that earnings for the last quarter of 1939 were only about 8 per cent below the 1929 average and wore 8 per cent above the 1923 level. mate of unemployment never fell below Yet the Conference Board esti 8 million last year. Far from profits haring disappeared, it might even be argued that they hove been unusually high in relation to the volume of unused capacity and unemploy- -5 - Kd, the business baby seems to me much, healthier than many of its nurses would admit* Feed it and it will grow* plentiful, output expands. This is the food that is needed— orders* % When orders are explanation of why not enough goods and services are being bought is, I believe, much simpler and such more obvious than any of the others. It is merely this— that those who need the products of our factories and farms do not have enough money to buy them. certainly no lack of unfulfilled needs. There is But there is a clear lack of the buying power to make these needs effective, A recent study made by the Hational Resources Planning Board gives sone idea of the business stimulus that would result if our under privileged citizens were able to consume more. an extra $10 It is estimated that if billion were in the hands of the lower income groups, ex penditure on food would increase about $2 3/4 billion, on shelter about #1 1/2 billion, on clothing about and services. #1 billion, and so on for other goods All this would increase orders and give business people an incentive to expand their plant and equipment. Those figures are simply an example of what might be done. Now I would like to talk more concretely. I do not propose that the Government simply hand #10 billion to the lower Income groups. This would not be required, because every dollar of additional buying power enables manufacturers to sell more, produce more, and employ more workers it increases farm incomes, and it stimulates new construction. I do not have any single Utopian plan for bringing about full employment but I do have several specific suggestions. us a good distance along the road. Taken together these wosld bring For example, the Federal Government's social security program is actually withdrawing buying power from consumers by accumulating un necessary reserves. The reserve funds of tbs old-age and unemployment insurance systems were about $3 billion at the end of 1939, By the end of June 1941, they are expected to reach a level of about $4 3/4 billion, This means that they are growing at a rate of nearly $100 million a month. These reserves are accumulated from payroll taxes. This is a all drain on wages, and since wage earners spend almost/of their incomes, it is also a drain on the market for goods and services. In order to prevent this drain I suggest, first, that the pension system should be liberalized. A flat old-age pension of, say, $30 a month might be paid to every one over the age of 65, with the a exception of income taxpayers. This would make/sizable contribution to the buying power of an important group in the population, It would also simplify administrative procedure greatly in comparison with the present system. I believe that this pension should be provided regard less of the financial status of the recipients— with the exception that I have already mentioned. The unemployment insurance system should be liberalized in a similar way, la many States the duration of benefits is now absurdly short and the waiting period far too long. for 20 weeks Benefits should be provided at least and the waiting period should not be ever one Along with these changes I suggest that the Federal Govern ment should institute annual grants-in-aid to the States for public health and education. This would relieve some of the pressure that has forced so many States and cities to Introduce consumption taxes of one sort or another, In addition to these methods of raising consumer incomes I propose a substantial federal program of public works. of suitable projects available. the necessity for flood control. dangerous* There are plenty Every year we are reminded again of Our highways are still congested and the state of our housing is deplorable. There is plenty that needs to fee done and we have plenty of men and resources to do it. I have been told that we shouIdnH do such things because it isn#t the proper sphere of Government or because it will all be brought about automatically if only we wait long enough. What difference does it make whether we do these things this year or next, this decade or the next? The answer is that to allow productive power to remain idle is the greatest extravagance we can commit. Ihen we permit our labor and our material resources to remain unused, we are allowing ourselves to incur the most ultimate kind of economic loss. We simply cannot afford to put off until tomorrow useful work which could provide needed pur chasing power today. Along with the public works program should go a rationaliza tion of the Federal budget. At present, expenditures that result in the creation of capital assets have the same status in the budget as current operating expenses. This leads to a great deal of confusion -8 - about the national debt. You all know that when a private business borrows in order to expand its plant or equipment nobody is thrown into a panic. Yet, in Government budgeting practice no distinction is made between outlay for long-term improvements and current operating expenses. The result of this is simply to befuddle the public. Bren after all these things have been done there will remain fluctuations of business activity and employment. These may be seasonal or longer term. I suggest that the Government can most directly deal with this problem by guaranteeing a job to every one who wants and is able to work. These jobs would be at somewhat less than prevailing rates of pay, so that the Government would in no way compete with private industry for workers. Bat at this reduced wage there would always be some job for everyone able and willing to take it. This would set a lower level to the income of every worker— a subsistence income, so to speak, below which his earnings need not fall. Such a plan would bene fit not only the workers but those from whom they buy— that is, business people. It is good economics and excellent democracy. Many of you are certainly wondering by now hour these various projects are to be paid for. The first principle of their financing is that funds must be drawn to as large an extent as possible from those «ho would not otherwise spend them. Government expenditure increases the flow of income but we must be careful that the methods of financing used do not decrease the flow by an equivalent amount. In a period of acute depression almost any fora, of taxation will affect private expend iture. At such times borrowing is the appropriate method of financing. At higher levels of activity and income, however, it becomes possible to finance a larger share of expenditure from taxes that will have only minimum depressing effects on consumer outlay. By the time full prosperity is reached, it should be possible to finance the entire pro gram of Government spending through a well-conceived program of taxa tion* The first step toward this goal should be closing the loop holes in the present income tax. ished as soon as possible. be increased. Tax-exempt securities should be abol Rates on the middle income brackets should An effective capital gains tax should be restored and some method devised whereby undistributed profits could be taxed as a part of personal income. At the same time, Federal taxes that weigh upon consumption— particularly the payroll taxes— should be reduced. Along with this might go further Federal aid to the States, in order that the fiscal pressure which has led State governments to impose consumption taxes might be relieved* These steps taken together would produce a revenue system responsive to fluctuations in the national income and bearing only lightly upon consumer outlay. Here in the Unit ed States our potential wealth and our demo cratic institutions are the envy of other nations. The lives of our people can be freer and more abundant than anywhere else in the world* Yet these riches— natural and political— carry dangers along with their premise. The greater a nation’s resources, the greater the volume of goods and services that must be produced and sold if they are to be kept -1 0 - fully employed. than a poor one* A wealthy cansaimity Is more liable to unemployment la the same way, a democracy cannot apply the drastic and ruthless remedies that are available to dictatorships. These condi tions sake the problem more difficult, but they also increase the reward for solving it. Wealth and democracy create the problem* but they also point the way to its solution. Since we are a wealthy country, we can afford to Increase the incomes of our underprivileged citizens. a democracy, we cannot afford not to. Since we are
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