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April £» 19S7* FISCAL K&ICY IM 5HS PPSWXSG Desirable course of business Zt would be highly desirable for consumer decKinds to increase as rapidly as, but 90 ware rapidly than our ability to Increase production, so that production and exaployaont would continue to expand with little, if any, advance in prices* In this way the upturn could be prolonged, people on fixed incomes would not suffer from a rise in the cost of living* inventory and conaodity speculation would be avoided, Interest rates would raaain low, and there would be a better chance of avoiding a subsequent drastic recession* ^Difficulties and dangers $here was so much excess plant capacity and unemployed labor of all types and skills from 1954 to 1936 that increased production could quickly respond to increased dssaands with no advance of prices* condition has now changed* This Although all the excess plant capacity has not yet been absorbed and there is still a large number of unskilled unemployed* within recent aontha practical plant capacity has been reached in m m & basic lines and the supply of skilled labor has apparently been pretty wall absorbed* capacity* She steel Industry is operating at practical If denend In the steel consuming industries expands wore rapi&ly than additional steel capacity can be built* the consequence will be an impetus to price rises, forward buying, duplication of orders, end the mergence of boom psychology, which may readily extend to other Industries* Demand to satisfy the enormous volume of capital and housing AW deficiencies accumulated in the past seven years may be superimposed in too short a ti-a© on the demand to satisfy normal growth requirements* The problem is essentially one of timing. steal copper* given tine* workers, given ti^e* We can produce nor© We can obtain foore skilled building trade Tha danger Is that the demand for goods may increase too rapidly for additional goods to bt$ produces* so that prices villi rise rapidly In a sellers* jactrfcet* If the recant rate of increase in cosasodity prices should continue it will be slsaost iiaposeiblu to prevent an eaeeessivf cyclical rise in interest rat^s and a fall in bond prices. All the predictions of e continuance of Xo* interest r^vfces were based on the assumption of a continuance of orderly revivals Kxporioncw in the j &t has been thot a rising trend of ecsaso&ity prices has always been accompanied by rising interest r&tes* Hox> the? denser m y be minisiised# At this stage or the business cycle end for the next few years it appears desirable to restrain the rate of increase of consumer demands by widening the difference between consumers* incomes and spending on consumer goods* The most effective *&y of accomplishing this is through increased taxation* Just ss a bddgetary deficit results in en increase in consumer spending, so a budgetary surplus, in tho present circutastances, wuld tend to moderate the m t e of growth in spending* It would* on the one hand, laeen th&t out of a given increase in inecsaes less will be spent on consumer &oods* This would reduce tho pressure on deficient plant capacity in tho capital goods industries* It would* os the other hand, m&tm that through federal debt retirement more money $?ould be available for investstent* This trould tend to restrain the rise in interest rates and fall in bond prices* On general social grounds it wuld be undesirable to impose additions! taxes on the low lneoao groups* through social security taxes, indirect taxes and customs duties, thoir tax burden is already high* The surtax rates on ths highest income brackets appear to be about as hi^h as th*3 traffic will bear* Tim Intermediate incone brackets, those froa $5,000 to $50,000, could, howovor, very well stand additional taxes. More tax collections f m s this group would result in a reduction in ^nsussption without hardship and would, through federal debt retirement, result in art increase in the savings of the nation* The importance of prompt action The theory of a compensatory fiscal policy, which has been followed by this Auraixiistration, implies higher taxee end debt retirements v&an the recovery movement has become aelf-generatins end threatens to proceed at too rapid a pace to be eustained* reached^ This stage haa no1^ been If additional income taxes are lapoaed in this session of Congress they will not be collected until 1938. If action is delayed until the next session, there will be great pressure against any retroactive levy against 1937 income© so that it is likely that the tax would not become operative until 1939, ishich nay ha xsueh too late to be effective* It would be foolhardy on our part to count on isore Xhnn three or four years more of the upward Bcnraasmt* four years* It ha® already been uu&or ray for If the recent price morzm&m should. contl3sue, th$ upswing i&ay eorae to an even sooner* If* therefore* additional t^xen are not isrposocJ at this ti?se there ^111 bo grave danger th^t the upward movement become disorderly, co&raodity prices, ths cost of lining, and interest rates will rise, a&d Ke will rater the next depression harlzig mad© little progress in reducing the dobt built up in th© previous oxie*
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