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V FEDERAL RESERVE SYSTEM Office Correspondence Date February 2Pf IQJiJi To____ Chairman Eccles______________ Snhject:Material on Postwar Inflation gram Richard A. Muserave ft-Q ________and Deflation#_______________ I can attaching some material which I hope will be helpful for your discussion on Thipsdav night. It contains: w 1. A summary statement of: Deflation and inflation potentials in the transition period; the size of the gross national prod uct at full employment after the transition; the volume of consumers1 expenditures and investment that would correspond to this level of income; the chances of maintaining it* 2. A more detailed statement developing the points made in the summary, together with supporting material for the esti mates. In the suntooary, page reference is made to -she more detailed statement. Since I am scheduled for my army pre-induction physical examination tomorrow, I will not be in the office, but will be available all day on Thursday. If you wish to discuss some of the points tomorrow, Kenneth Williams and Everett Hagen, who has done a good deal of work on the post war estimates, will be available# INFLATION 08 DEFLATION AFTER THE WART X. The Transit ion Period It i« not possible to forecast, with any degree of eertainty, what eoonomic developmente in the transition period will be* There will be enormous potentials for both inflation and deflation, but whioh of the two will gain the upper hand id 11 depend upon sueh "unknowns" as ths rate at whiefe military re quirements will fall off, the political situation with respeet to the malmtenanee of controls, consumers* psychology, and so forth* On the whole, however, it appears more likely that the inflationary pressure on prises sill be reduced rather than increased dating the transition period. Below, the major defla tionary and inflationary factors in the picture are considered one by one. Since they are all interdependent, this is a rather artifleial procedure, but the problem is too oomplioated to oonsidor all the variables at ease* A* Deflation Potentials t I 1* (Sit in government spending! There are no— and fbr obvicus political reasons can be no— effieial foreeasts hew government expenditures will taper off at the olose of heetilltlee* TO indloate the possible range, oonsidor these alternatives, all of whioh may be possibles Federal Expenditures fbr War A* Rapid reduction Last TearFirst Tear Seoend Tear of War with After Defeat After Defeat 0emany of Oerneny of Oesnaiqr 85 1*0 15 Third Tear After Defeat of Oeimany 10 B* Medium reduction 85 60 35 20 C. 85 70 50 30 Slow reduction Case A would assume a rapid victory over Japan and loo costs of pewt-war adjust ments (ineluding policing of defeated countries, continued armament, and govern ment relief abroad)* Cases B and C would bo less optimistls* Obviously, ths deflationary impact of the outdown in government spending would be hnge in Case A, but even in Case I there would bo a drop in government expenditures of *25 billion for two successive years* Sinee taxes would most likely fall off somewhat, the deelino la the Federal deficit would probably be somewhat less* leverthelees, there would be chaip reduction in people's disposable ineemes derived from this souree* Even after allowing for reduoed corpora to savings and tax paymsnts (which mould follow the downward reduction in war production), disposable insomss (annual rates) over the two years would fail by, say, $35"*0 billlom* Consumption expendlturee would fall by loos, or say, 125,Million, sinee part of this lmeomo was previously savod, and sinee oonsunsrs are not free at present to spend all they wish to* Vevertheless, expenditures would dee 11me by on samount equal to l/u or more of elvillaa supplies mao sold* (Bote that this is the "gross deflationary" impact of rsduood government spending only, — the question of offsetting inflationary factors is considered later*) Xf this deficiency is net Bade up from other sources— auch at consume re* demand fin anced from reduced tarings, business investment, or increased production of consumers* goods— the present roluae of eirillsn production of about |90 billion could not be maintained, Prioes of goods now available in large quantities might in fact fall* end e downward spiral cf income and production would ect in. ?he argument at this point is not that such a spiral is likely, but that there will be a leeway for a substantial reduction in serlng (either out of current lnecs* or from aeeuamlated belsaees), which will not be inflationary by iteelf but which will merely fill the deficiency due to the cut In government speeding. 2. la pro4u«tlon cf W M a » n ' goo««. Ths nor* promptly th» technical rcecnrerslen process can be accomplished, the sooner Industry will be able to meet whatever demand develops. Increased production of consumers1 goods is thus the basic remedy for inflationary pressure on prices. It is true that increased production will else add to inecaws, but Its net effect will be less pressure on prices because not ell the additional income will be spent. The supply of goods end serviocs is thus increased more then the demand, end infla tionary pressure ie reduced. Thus, if consumers* goods production has increseed by, say, $20 billion a year after the wsr, end if sbout $15 billion of the additional Income is respent en consumption, the supply of consumers* goods, relative to demand, will here been inereaeed by $5 billion. The period required for reconversion will differ greatly by lndustrissi it will be more rapid for instance in textiles then in automobilee. Considering the speed with which eearersien to war production was accomplished (end there will be more incentive, fer business, to achieve prompt reconversion te peace time production), the peried required will hardly exeeed 2-8 months, depending on the industry. The facte that at the close of the war the raw material situa tion will with few sxoeptiens be very easy (witnees the current easing in mstals and wool supplies) end that cone plants will return to eirillsn production while the war is still on suggest that, on the whole, It will be poedble to resume peacetime preductlen very promptly* However, after reconversion is accomplished, ones more time will hare to go by until production la large quantities becomes possible, and in many eaees this may take as long as ths technical roeenYerclen iteelf. The extent to whioh increaeos In eirlllan output oan be expected to keep step with reduced war production (after allowing far some reluntary decline in the leber fCree sad hours sad hence in total production) will depend greatly upon the rate at which war expenditures are tapered off. In Case A (where the most rapid cutback In war expenditures is assumed) a sharp if temporary re due tt on In tote! output would certainly be unavoidable. In Case B, one oould ex* poet a much smoother trsnsltlsn while a quite gradual tapering off as in Case C should moke it technically possible to naintall total output at a high level. The more drastle end sudden the cut In government expenditures, the greater the chances that the pick-up of civilian produet ion will fall behind and that seri ous unemployment will Intervene. The ideal situation of course will be one la which the production cf eoneumere* goods is expanded as war production Is cur tailed and unemployment is avoided and controle arc maintained until goode now scarce are again en the market in large volume s. - 3 3* Liquidation of government supplies* A further deflation faotor will be government supplies which nay be liquidated and psesed on to the con sumer. Government supplies which may be put to civilian use (such as shoes* food stuffs, trucks, etc,) may be "estimated" in the neighborhood of $7 bil lion (this figure needs more checking), total government Inventories are estimated around #20-25 billion. If a heavy inflationary pressure should develop, much of these inventories could be liquidated, sinee under those considerations, they would not seriously narrow the market available for pri vate industry. fit i&fA&Uftfl fgtttBUlifi 1* <— ML t t m m i t t M M M H T i M » At the end of the war* Individuals will held a very large volume of liquid assets, and the longer the war lasts, the larger it will be. By December 31 of this year, tq$al~holdinsa of liquid assets by Individuals might approach $135 billion, fr-to 1/5 of this total being held in the form of demand deposits and currency. People with in* comes of under $5,000 will held perhaps fyttofcf the total. Should the war con tinue through 19^5» total holdings by individuals night rise to $J#5 billion. (This compared with probably less than #50 billion in 1939*) Considering these figures, it is evident that consumers have the financial wherewithal to start a terrific inflation should they decide to convert c sufficient mount cf their funds into eosnodities during a short period. But this is obvious srltlaetiei the real question is whether people can be expected to spend at sush an exoesolve rate. From our discussion cf deflation potentials, it follows that some substantial dissaving (or reduced caving out of current income) by consumers and business will be necessary simply for maintaining the purchase of consnecrs* goods at the wartime volums. Poll ow ing cur "medium* assumption B, and depending upon the amount of business investsent, it would appear that annual reduced savings, er dissavings by consumers of, say, 15*20 billion dollars could be absorbed without increasing inflationary pressures ever what they are now. The question thus 1st should we expect dis savings to be much in exeese ef such an amountT The mere fact that eonsvsaers will have large liquid balances dees not prove that they will use any or most of then. People normally held considerable amounts of liquid savings, and they have normally increased their holdings with a rising national income. If in 1939* with c national income of $70 billion, liquid holdings by lndlviduels were from $1(0 tc $50 billion, their heldinge might well be expected tc be larger if incomes are doubled and most individuals are in a higher income group. On the other hand, the increase in holdings has been extremely repid and people are net likely tc ohaage their savings habits suddenly. People may want to save less out of current incorns er to dissave from liquid funds (1) to maintain their stsndard ef living in view of a fallen in come} (2) to eatisfy postponed demands* accentuated by the desire "to selcbrate victory"i and (3) to shift into commodities beeeuee a pries riss is feared. - k- Type (1) or "maintenance dissaving" cannot have inflationary results by it* rery n»ture,«»-it will happen only where income £ fall sharply or people become unemployed* On the whole it is not likely to be large unless employment drops sharply, in which ease it will be a helpful rather than a hamful factor, particularly because dissaving of this type will be directed at commodities which will be available in large quantities* Type (2) or "backlog dissaving" is a more controversial iten* Many people will want to readjust their budgets when the wartime pressure for savings is relaxed and raise their consumption quota, particularly in order to meet some deferred demands* Apart from the demand of demobilised soldiers for clothing, and peopled desire to "celebrate" victory by rais ing their current consumption, backlog demand will be United to housing and consumers* durables* If pressed into a very short period, and if un checked by oontrols* backlog demands would surely be large enough to eause serious inflation in these areas* But is it likely that this will be the ease? The backlog desuind for durables (excluding housing) will hardly exceed $15 billion by the end of 19U+, or perhaps $20 billion by the end of 1S&5* If spread over a period as short as, say, three years, industry should be in a position to meet this demand* It is in fact unlikely that consumers will insist on buying their durables lsnediately* the anticipa tion that a wider choice cf goods and goods of superior quality will become available at a little later date should prove a strong Incentive tc postpone purchases a little further* particularly since during the war people found cut how much further the life of durables oan be stretched* Also, job un certainty likely to exist in this period should induce people tc postpone capital outlays until they sse how their financial position will develop* ?fem. ths whele it would appear that the combined deduction in current savings / plus drawing on balances would net be in exoess of, aay, $20 billion (annual rate)* And as pointed out, the economy could most likely abscrb such an amount without an increase in inflationary pressure* These considerations will, of oourse, not apply if consumers ere given reasen to expect that there will be a substantial rlas in prices and that they will be "suckers" to wait* Thus, if typo (3) or "Sachflucht" dissaving is permitted to develop, the lid is off end anything oan happen* It is thus extremely important that prices be kept from rising in this transition period* j Assuming strict controls tc be naintained, will people be willing tc postpone the bulk cf their "backlog dleeavings" until goods be eons available? An answer to this question mast in part be baaed on judgment, as well as on statistical data* ]!hs preesnt "guece" is yes, en the assumption that controls over prices end rationing arc maintained* 2* l,ct„,.tpqarM^Mffji ter H l t e w Daring the war years corporations have experienced an enormous Increase In liquid funds, partly due to cash addi tions to depreciation end other reserves, and pertly due to the retention of n addition to backlog demand lor durables, there will be delayed demand for housing, but • 5large profit®. For tho end of 19t|f liquid holdings by business are estimated at t&Q billion withaiWonrll/g of the total in the form of deposits and tho remainder in U. £. securities. Again theae funds are go large that their sudden disbursement may result in extreme inflationary pressures and again the question arises how much of these balances corporations are likely to use in the iseaediate transition period* and for what purpose. Corporations will clearly not spend unless they have a specific purpose for doing so* We may distinguish between three sain used* (1) expenditures for reconversion purposes* Including delayed maintenance, (2) expenditures for plant expansion, and (3) outlays on inven tories* Expenditures for reconversion and deferred maintenance in the manu facturing industry have been estimated between %6 and f7 billion (again thia figure needs more cheeking), to whieh will have tc be added another billion for necessary repairs in the railroads* Ahile these figures would indicate the amounts needed to put the manufacturing industry in shape, they would, of course, not ell have to be laid out immediately* and there is no reason to think that they will be laid out immediately* It will be to the interest of every producer to get goods onto the market as rcpidly aa possible, if necessary, with existing— though perhaps somewhat outmoded equipment— and to make replace ments a little later* Business— trads in particular— will be anxious to restock inventories* but the higher consumers' demand is* the greater the turnover ef goods will be and the lover the accumulation cf Inventories* If prise oontrols are maintained* speculative accumulation of inventories will be restricted* this is another Important reason why price controls should be retained during the transition* During the transition period it will be desirable to assure : that as ouch as possible of the new output should be made available to the con sumers promptly. Capital expenditures during the early reconversion period, while helpful in maintaining employment, are inflationary in nature* This proves a rather difficult preblent For sos» time* inflationary pressure nay well be greater if we succeed in maintaining a high level ef employment then if a drop is permitted* Again this points to the need for continued controls* so that we ahall be able tc afford a high employment transition period* 3. ta&Lasasl&i «tM s£ pr***du« ai5*u»«ion has been in overall terms rather than in tense ef specific ocsnaoditlss* fthlle ths preesnt appreach is probably more helpful in throwing light on the broader problem cf inflation or deflation* attentlen must also be given to particular price problems* Just as during the war pries pressures have been heavier on eome eonmoditiee and materials than on others, this will also be the oaee in the transition period* Bottlenecks and particularly heavy price pressures on certain finished goods will probably become more numerous because the number of "saaroe” commodities will be inoreaeed. Certain goo4s not at all avellabls now will again eome on the market while other articles will bseome available to a broader group. Frlee and rationing controls nay turn out to bocmse more diffi cult when the supply of goods beeoaes sufficient to nake rigid restrictions - untenable but is doubt that price period. I f vboy ply and anything not and are can 6 - yet sufficient to permit a free market. There can be no rationing controls need be continued during the transition not maintained, most of the above discussion does not happen. C^^H hgt Unemp 1oype nt?_ 7}je number of people to be shifted from war activities to peacetime- pursuits is enormous* In spite of plans to demobi lize the armed forces slowly so as not to swwup the labor market* it is likely that 7 to 9 million men will want jobs* In addition, jobs of something like 20 mill lor: civilian workers are now directly dependent upon war expenditures* Possibly 6 or 7 million of those jobs will disappear with ths war— jobs in Federal war agencies, in aircraft, shipbuilding, end in other industries pro ducing specialised military surplus and equipnent* Cf the remaining 12 or 13 million war workers, a large porportion could continue after reconversion, which may be instantaneous for some industries* in much the ssaie occupations by pro ducing ;,oods and servioes for the civilian market— if the civilian market is high enough. At the same tine, 3 to U million of the 7 million extra persons induced to enter the labor market by the war may withdraw from the labor force to return to school, housework, or retirement* Hours of work will drop be ok to normal or below, this roughly equivalent to the employment of 5 er 6 million persons. Allowing for all these factors* we shall be exceptionally fortunate if unemployment oan be prevented from rising abovo 10 million during the transition period* In terms of broad industry groups, It is clear that employnent in manufacturing cannot be sustained at anything like its present level of 16 mil lion. A decline of nearly l/j would not be particularly pessimistic for.this would still leave as many employed as in 191+0. Construction, trade, selfemployment, professional and personal service should increase above their war levels, although large changes even in these fields will take time. Establish ment of new small businesses will be handicapped for a period by the probable mmril ling ness of produoers to supply them materials and equipnent until old customers are satisfied. ?he most promising outlook is for construction, which if it returns to its wartime high would absorb about 1*5 million workers. Min ing, transportation, end public utilities are likely to reduce employment some what* but not enough to change the overall picture greatly. Agriculture may absorb some workers even though farming as a while will probably end the war with more workers than arc actually needed to satisfy cur food requirements. During the transition period the usual relationship between unemploy ment and inflation potentials will not hold. That is* it will bs quite possible for inflationary pressures to develop in certain areas while there still are a large number of unemployed. Thus a situation may arise in which the goveraeesfc will be confronted with the need for assuring eome Imesmc to these people (not all of them will have savings bonds to fall back en, particularly net the de mobilised soldiers) although this may accentuate the inflation problem. Muster ing out payments mifcht take eere of this problem to some extent* 7 Conclusions In the preceding pages wo have considered some of the major factors which, in the transition period, may reduce the pressure upon prices end others whioh may increase that pressure. Ths problem is a complex one and precise forecasts are out of the question. However, it appears much more likely on balance that the net change will be in the direction of a reduction in pres sure rather than an increase. (This refers to the picture in general, not to certain special items.) This conclusion in no way suggests that price and rationing controls will not have tc be maintained. Although the pressure may become less than it is now, it may still be large enough— particularly in same areas— to start sharp prise rises. If such price riees were permitted to develop, the whole picture might drastically change end pressures might become much heavier than they are new. Most likely the reduction in price pressures will be accompanied by a substantial reduction in employment. How far employment will fall in excess ef voluntary contraction is extres»ly difficult to foretell. Much will depend upon the element of timing*— the rate et which the various inflation and de flation factors gc into action. 11* The Post-Adjustment Period In the analysis below, it is assumed that by 1 & 7 the transition tc peacetime production will have been completed— except that perhaps labor will not have shifted fully to where peacetime employment is available, tfttemploymcnt of between 3 end k million persons is asaumsd, and the analysis then at tempts to determine whether at this level ef employment and income, forces will exist tending to fell the economy up to a condition where price inflation may threaten* er w h e t h e r the balance of forces will be contractionary cc that the level cf employment will tend tc fall* 1* Gross national product» taking account cf the normal increase in the labcr force year by year ef persons drawn inte the labcr force by the war who may remain in it. and cf sasualtics* it is estimated that the labcr force in 19U7 will contain about 60 million workers, (it contained 5U million in 19M>0 •Tcn if there are 3 to 1* million unemployed, there will be 56 tc 57 milllcn employed* She estimates below indicate gross national product fcr this level of employment* It should be noted that this falls short ef full employment. unless business conditions arc severely depressed, the length ef the work week will probably be about the same es in 19U0. (ace supporting statement 1, concerning labor force, employment, end hours of work in 19^7*) C'r-"rt .'Foiw't *3 Gross national product per worker in 19^0 was $2,100* The normal rate ot increase would bring it up to almost $2,500 by 1947* ia 191(0 prices, if hours of work are as long as in 19k0* But because there is apt to bo a lag after the war in regaining ths peacetime trend in product ivity, it is assumed here that gross national product per worker in 1 ^ 7 will he about 12,575 at l$kO prices, (See supporting statement 2.) Tho price level in 19U7 will almost certainly be higher than that ef 19^0. Svcn if a slight fall of civilian goods prices between 19L& and 191*7 is aasumed, prices in 1947 will be between 20 and 25 per cost higher than in 19k0. §r©sa national product per worker In 19^7 prices will then be between $2,650 and £2,970# Assualsg it to be $2,900, gross national preduct with 56*5 million employed will be approximately fit# billion* (see supplemental? statement 3*) It we* between $135 end £190 billion in 19k3* These figures may be succsarised es followsi Labcr force, 19^7# Unemployment assumed for 19li7 Employment. 19l*7 Gross national product per worker, 191+7 Gross nations!, product 60 million ♦ 3*1* million 56# 5 ml 11 ion $ $2,900 165 billion The labor force estimate underlying the tabulation above is a reason ably certain one except for the estimate of the number of workers d r a m Into tho labor force by the war who will remain in it* The eitlnste of increase la productivity is s minimum one. If the increase In preductivity by 191*7 is greater than that indicated, output will be greater (which would mean that ths danger of inflation will be less and the problem of maintaining employment will be more trouble sens;• if the at sumption concerning the price level in 1 & 7 is wror.>r, that will net greatly affect ths conclusions presented below* The numbers will bo changed, but net the underlying relationships* 2# laticaal maining after taxes in l$S7* income payments to individuals, and inoome re The table below shews ths epproximate levels of national Income, income payments to individuals, and intone remaining after texea, which will accompany this level of frees national product* Billions of Dollars Gross naticmal product 13 Loses business taxes depreciation, depletion, and charges to other business reserves 12 Satleaal income it Less* corporate profits retained k payroll tamos u Pluss transfer psyments by gtcsr— sal i isssae payments to ladlvltaels Lssst Individual direct temss 1acmes r— alilng after taxes m - 9 • These figure* indicate tote! tax receipts of 29 billion dollars by all units of government. It it assumed that the Federal government will re ceive |20 billion, and other unite of government 19 billion. This assumes a balanced Federal budget, except for deficit expenditures whioh may be needed to maintain employment. It sheuld be noted that If business texee are lowsr and taxes cm individuals higher then shown here, but the total tax bill is the seme, ths final figure, income remaining to Individuals after tans, will be unchanged* This is a basic figure, sinee ths level of sxpenditures for consumers’goods depends upon consumer incomes remaining after taxes. If retained corporate profits are greater than assumed here, total savings will be greater. 3* Consumers* cxpendlturoo. The first estimate below of consumer expenditures is an estimate of what expenditures would "normally" be out of income after taxes of 123 billions in the postwar period,— that is if the special wartime beeklog of desuind is disregarded. It is based on a study of pest relationships between consumer income end consumer expenditures. The estimate is discussed more fully in supporting statement I4.. Ihe estimates given are liberal estimates of expendi tures* It is felt that expenditures in the postwar period, aside from deferred demand, are fairly certain cot to bs higher then those shoen. dermal sxpendi tures st the level of inecne indicated may in fact be overestimated here by several billion dollars. Conmow r i no one* a fte r taxes, 19k7 Purehaass oft B illio n s o f D ollar• 121 IHonaal individual sa-rings 18 Temporary lows rod le r s l o f seTings Tfm figure for savings dees not imelude tbs savings ef sons consumers which are offsst by the purchase ef durable goods en installment credit by other oensuners* It is the ast savings cf a ll individuals taken as a group. To ths sxpenditures shewn sheuld be added purshasing due tc deferred demand, lbs possible swgnitude of this hes been much exaggerated in sens cur* rest discussions* Ths discussion in part I has referred tc the stocking up with clothing by sec end wonsn leaving the armed forces, during the transition period, and sens "celebration spending" during the sens perled. There is ne reeeea to assues any deferred rtensnri fer nondurable gceds after the transition ported, there w ill be a significcnt emcunt ef deferred rtsnewrt fer eonsuners* - 10 - durable*, ©von after the transition period* However, the lit billion dollars listed above includes the usual heavy prosperity purchasing, which in a sense is "deferred demend." Deferred demand in addition to this amount— due strictly to the war— has been estimated in Part I at a total of 15 billion dollars (excluding housing)* After the transition period, it eould hardly amount to more than U billion dollars a year for a few years, thus temporarily lowering the level of net consumer savings* This figure of eourse is a judgment, based on evidence inferior to that from which the "normal”relationships are derived* k. Savings and investment. Assuming the analysis above to be accurate, the magnitude of offsets to savings needed to maintain gross national product at an $160 billion level it as followsi G r o s s national product p ro d u c t Gross Governsent goods and G overnm ent expenditures e x p e n d it u r e s ffor a r go o d e and sservices e r r l o e s covered c o v e re d b t a x e s (including ( in e l u d i n g byy taxes p a y r o l l taxes) tax® a) payroll Consum er ""normal” n o r m a l" e x p e n d it u r e * Consvoaer expenditures Temporary deferred eonsumer consumer demand SSavings a v in g s w whieh h ic h must m ust be be off o f f ssot et B i l l i o n a of Billions o f Dollars D o lla r a 165 26 26 103 __^ !1 IBS 115 30 The 130 billion of savings whieh must be offset includes, in addition to the billions of consumer savings, just discussed, |i+ billions of undis tributed corporate profits and $12 billions of depreciation and depletion allowances* 5. Inflation or The discussion below attempts to estimate what the prospects are thst these savings will be more than offset by investment plus a Federal deficit, so that inflationary pressures will appear, or will be less than offset, so that unemployment will increase* Unlike the relationships between consumer inceeae and consumer expendi tures, the magnitude whieh total investment may attain is subject to only a rough estimate, sinee some kinds of investment depend on factors whieh cannot be foreeast with any degree of accuracy* the probable maxima* volume of domsstle investment in each of various fields is estimated below* The basis for each estimate is presented in supporting statement number 5* It should be emphasised that the level of inrestmsnt shown eould not conceivably be continued permanently, since some of it is due purely to deferred demand. Tbs level of housing con* struct ion shewn could continue for only say five years during a residential construction boom* It is far toe high for a permanent average level* similarly, the restocking of inventories and the making good of deferred maintenance are purely temporary procedures* it is assumed that both h&ve been geing cm during - 11 - the transition poriod. The inveBtraent shown for 19^7 merely assumes that the process of building up Inventories and of making good deferred maintenance will not have been completed before that year. Hcalmma Estimates of A n n u a l P o s t w a r Domestic Investment, Compared with Investment in 1939 If— IWW* ............................. mrntmmmmm (Billions of Dollars) Residential and farm construction Public utility construction Other business construction Public construction not included in public expenditures esti mated above* Producers* durable goods Normal Inventory accumulation Restocking of business inventories Deferred maintoneneo Deficiency of investment Maximum 19U7 9*0 2*5) 2-5) 2.0 9.5 1.0) l.C) 1.0 28.5 1.5 Estimated Actual 1939 in 19U3 3.0 A A <£*0 * 6.5 1.0 Since a deficiency of $1*5 billion in investment is indicated* the investment indicated would not sustain employment of 56.5 million unices accompanied fey a Federal deficit of $1*5 billion. Obviously, the estimates of investment given above may be in considerable error* They are Intended a« maximum estimates. But (assuming no deficit) even if investment is say $2 billion per year higher than indicated here* it would not necessarily in volve inflationary pressure, but would merely pull employment up close to the full employment level, which would be desirable* Temporarily, in 1%7# this might cause bottlenecks mad shortages (because labor was not available where needed) which might give rise to a tendency to boost certain prices, but these, except as they were caused by monopolistic situations, would be only temporary* Even if investajlent were k or 5 billion dollars higher than shown hero (which seems highly improbable) a moderate Federal surplus would readily absorb the excess purchasing power* If Federal war expenditures, including interest on the public debt, are down to $10 billions in 19^7* the total Federal budget would be about $25 billion, and the pro cent Federal tax structure would produce a surplus* If Hotei It Is assumed that public construction may total & billion, but that half of it will be paid for by tax revenues, so that only the ether half should be shown hero* Total public construction in 1939 (in I9h3 prices) was about 15 billion* - 12 - taxes are reduoed, or if war expenditures continue at a considerably higher figure, thfere may be a deficit* Inflationary prescure8 may thus appear if the following combination of circumstances occurs* 1. The estimate above of "normal" oonsumer expenditures (a maximum estimate) is fulfilled* 2* Deferred consumers* demend continue* at the rate of billion per ewtty1** 5* Investment occurs st ths high rates indicated above* 4* A Federal deficit of say 5 billion dollars e year continues. If the deficit is 2 billion dollars or less. Investment must rise even higher to produet inflationary pressures* It does not seem probable that all of these developments will materialise, but it oould happen* Supposing, as may eell be the ease, that investment and consumers’sxpenditures are somewhat lower than shown here, a Federal deficit of at least several billion dollars will be needed to maintain employment at a high level* 6. Lfct.r tr.ndt. Deflationary tendencies will soon gather force* The increase in productivity between 19^0 end 1947 was assumed above to be lew. on the grounds that the war temporarily retarded the peacetime trend* If ths estimate for 1947 1* correct, rapid increase in productivity in 1948 and 1949 (such as oesurred between ly£G and 1923) W expected* Such a riss in productivity will increase output and incomes and ths refore savings, and sc will make more difficult the maintenance of employment* A residential construction boom of the sics indicated might continue fer say 5 er 6 years. After that time, private residential construction would almcst certainly fsll by 3- or 4 billion dellars. even if presperity continued* A m re stocking of inventoris s and the making geod cf deferred maintenance will eome to an end sooner* thus, the basis problem net long after ths war will be tc maintain purchasing power, not tc present inflation* By (at most) 6 to 10 years after the war. this will probably be a very eerious problem* A d e f i c i e n c y cf even 5 or 6 billion dellars in offsets tc savings could ecusc income tc fsll fey several times that mount, which would mean serious unoaqploymemt* If that led to further curtailing of Investment, as it probably weuld, it would plunge us into a very deep deprcesion* - 13 ' Supporting Stctonanto to flart IX. X* labor Forcc, yt&ploynontj and ?-ours of Fork in I9k7. follows* She estlm te of tho sis# of tho Labor f oroo in 191*7 I t derive* no ifllnions lion* m force, 19 IS?U? 1*7 ""Bonal” 801m l” labor ferae* •iboorml" increase lncrooee doe due to «er nr •Abnormal" w*r u d per—wont disabilities war doethe end pomanent dlcabllitlee lMi>or tor—, 19m7 57.9 H - H w .9 - W .9 a ^ -s r .3 labcr force* 19U7 The eetimte of the normal Is her ftroe le e Ceneus Bureau estlmte ef the normal labor foroo in April 19^7, based on * eareful projection of pact trends. During tho «tr# aero then six million persons have entered the labor fierce la addition to tho normal number. Between throe and four sdlllcn of the* nay regain In the labor foroo* while minima unemplsymnt my fa ll to ft sdlllcn or loee daring poet* mar years* la nay s t ill be a good deal of frictional unemployment loft by ths mar — poolc o f lineuplcynmt la eounmltioe whioh mere expanded by munltlone productions, unemployment due to shifts bctmcm Jobs, etc* Conse quently, unemployment may be higher then 2 million during that year even under the best cf conditions* bat I f demnd fo r goods end services Is adequate* uncmplcy^ust A cdd bo lose than tho 5 tb k m ilieu asstmsd hers* Boars of no ik bssms eery short during tho doprccelcn* bat they In* creased during 1939* 19U> sad 19&* even before wartine shortages of lebor developed. I f a ll mar overtlm marc dropped, hoars could s t ill be longer on tho average the* la 19U>, Hence i f ao ccrlouc dppreeelen intervenee, hears of moik my bo expected bs bo as long in 1 9 as la 1$U>. Sofionc deprocsloa mould probably bring a dfcarp reduction la hoars c f movfc. 2, Annual laercaco la Groce Batloaal Preduot per ffoafcor. f . v. Her convenience* the year 19U> ic taken as a starting point la tho calculation* Orsss national product per m ifcer mas about 92*100 la 19^0. "his is ths flfsrs obtsinsd by dividing grsss national predict by the wmftsr ef percone gainfully employed. Output per murker lasreaece at different ratee la different lnduetriee and occupations. The rate e f Inereeeo la avsrage output per worker or per ana hour between my two years* therefore* depends partly en the d lttriM U m cf the labor fefee between Industrice. Groce national product per mn hour in i m r *a * * 2.5 per cent per year (compounded) between *99 osd w * Analysis ef trends in individual industries and e f the probable comporttlcn of output after the car eeggecte that except for tho teumerary offoetc of tfce mar* this rata c f Increase mill sontlnue i f mo have high level employment. With hours of m * as long as la 1?U>* this vould amunt to cn increase of 2,5 per cent per year per weifcer* During the last war, productivity apparently declined, end than re covered rapidly during tha ysare aftar the war, until it reached tha pre-war trend lint. on tha conservative assumption that this retardation may e^eur again, it is assumed hara that tha rata of 1 nersaee in gross national produst par worker between I9I& and 19 h7 will ba lass than that indie a tad by tha pre*ar trand* Zncraasa in gross national product per worker of 2*5 par ssnt par yaar would amount to 18.8 par oant between 19IP and 19U7 • Instead an ineraasa of 13 par oant is aesunsd. Gross national predust par aorlcar in I9I4O was about |2#100. Grass national p redact par vorkar in 19Itf in 19i^D prloas Is estimated hara at 15 par oant more, or about $2,575* It should ba natal that this is a minimum estimate. Whether it is tao low probably dapands aainly an tha degree to which industry has raoovorad by 19ltf fren tha disturbanaas oonnootad with demobilisation, reconversion, and relaxation from tha strain af war production. Tha ax tan t to whlsh nawtaahnlquas dovalopad in wartime hara baan adaptad to peacetime production will also ba influential. 3* ftrlaas in Iglff. Tha priaa laval usad in tha taxt la ths 19i*7 estinates Is 22 psr aant higher than that of 19U>« This is, of coureo, wore ar lass arbitrary. Ilia B. L. 3. aost of living index has risen by 22 or 25 percent slnaa 19^ 0, and tha Indax omitting rant has risen appreelably wore* Wholesale prises have risen by over 50 per ocnt. Construction oasts are estimated to have risen by betwsen 17 and 25 par oent, depending on t|w typo of oenstruetlen and the seuree ef the estimate. The aoouaptien that priees will be 22 per sent higher than in I9I1O should not be considered a foreeast. If it is thoaght that priees will ba higher than this, incomes will also be higher, and all ths figures relating to 19&7 presented la the tent should be raised. If it is thought that prises will be lower, the figures should bs reduced. In either sase, the relationships eheem will net be significantly altered. it* Coniaar expenditures. The estlaates of con siresr expenditures la 19iff acre derived by studying the relatlemehlp between tstal lnooao popw onts to individuals la the United States, and total expenditures fbr consumers’durable goods, nondurable goods, and services, fbr cash year fcetween 1909 and I9UI, and using ths relatleaship to ostiaate expenditures la 19b7* Deflated and unde f la ted figures, fbr each ccapcnomt of expeadlturee and for total expcadituree, were need. The data chew a veiy stable relationship between disposable lnsoas and consumer expendi tures. In addition, studleo of eeneumer budgets la 1955*56 end 19U1 ware examined, to determine what expeadituree would be la 19Ifl If aponding hablte had aet changed and if the proportional dletributlen of income was eppreAaately the eeme ae la 19Ul* The figuree need la the text arc the was tana reaeonable eetinate indi cated ty this analysis. It Is believed that the "true" figure le neither higher nor more than U billion dollare lower then the eetlaato preeented in the text. -/$■- H m offset upon consumption of too influonoos should perhaps bo o o m » aontod on specifically* Oao Is aigmtloa fra* A m to nonfarm t m t . This has occurred os o large eoale during the war. 1% ton*# to imreaee expend ituree relative to I m o w for tho country u * wholr, slnoo a nonfura family with a givoc olto inooae aponds a larger sharo of its incoee than doos a fans family. However, If conditions aro prosperous during post-war yea re, famors will reoolro a larger sharo of tho national ineose than before tho war. Sooauso fara families inoroaoo tholr savings sort than do aoafaim fawiliee, whan ineomea increase, this will tend to increaee tho proportion of ecneomer iaoomse which is saved. This influence will probably roro than offset that of ItnMsnftrs migration. Tho soonS lnflooaoo which deservee spociflo asmtion is that of aeo^auktod seviqgs. Apart fiom temporal? dissavings lamedlately aftor tho war, w}m&haws boon dlssmsood above, tho stoady (and fairly rapid) aoeussilotion of aavlnga may tond to encourage consumers as a pond a aomowhat largor sharo of tholr ourront lnsoasa than thoy would othsrwiso. This doos not moan, however, that aonaumor expenditures trill riao steadily in relation to iwooma. tiro other influences ad 11 tond to roduoo the proportion of lnoomo which la spent. O m is tho stoady lnsroaao la iaooas which goes oa year aftor year if high level employwent is iralntained aid tho eeonomle aya ten continue a to progroaa. As people shift iato higher lnoomo groups, tho percentage of lnoomo aavod tends to laoroaaa. The other la that if conecasere purehaee 11* billion dollars worth of consumers* durable goods per year (as is estimated la tho text) many families will gradually got stoeked up with durable goods, and la spite of tho Introduction of mow types of durable* expenditure for them may tsmd to A d i a omoahat. The increase la spend!ag out of our rent inoome duo to tho aooumnlatioa at sawings will almoet oertai nly not bo groat «iough la tho 1eager rua to mare than couatoraot theeo tiro influoacoa, aad may very probably not bo great enough to ftally oouatoraot them. 5m ^aaimum Satlmatoo of Imroatmant aftor tho Traaaltion Period. For convenience, tho table ia tho text is reproduced he ret Hawlaami Estimates of Mam al Hastmar Dcs»stie Investment Analysis of tho houeiag aupply of tho United Statoe ia 19$, at the oad of tho reeldemtlal eomatiwetiea boom, amd of houaiBg coaatruetioa aad growth la the number of flamilioa slnoo 1909# lmdieatoe that, owoa with tho <tl~ higher eon truction costs assuaed to exist after ths *»r, annuel residential (plus fern) construction of between 6 end 7 billion dollars for a ported of 5 years will leave the country ee v d l housed ae in 1929* In 1 9 9 < there was * surplus ef housing In ssany areas. Because of ths auoh higher level of lnooao, it is ostia*ted that reeldexstial pies fare construction aay roach a level of 9 million dollars annually for $ yocre. The level daring l g ^ W S was about 5 billion dollars. At the sad of such a boon, reeidcntial construction activity vcald cer tainly fall off by eay 2 to k billion dollars, even though preeperity centinued. Private public utility construction totalled about 1.5 per ocnt of the gross rational preduet during each year of the period 1923-1929. This was a period ef rapid utility expansion. The wawljaia cetiaate of private public utility construction after the war is derived by taking this per cent ef a gross national preduet ef fl65 billion. 3 Zf ether bueinees const ruction equalled the cans preportion of gross national preduet ae in 192it~19&9» It would eqpal 3U.0 billien per year. Because of ths large n usber of war plants which will be available, it seeas vary ireprobable that business e&netruetiee can reach that level. The estlsate is there A w e set at $8.5 billion. The cetiaate for public construction toe is gee red to the fevel ef 19SV1929. At that tiae there was great activity in reed and echool building. After this war there will prsbebly be propert ions H y lece school construction, but aore aunioipal utilities cad fUcllitles. The cetiaate of nsxjaaw snnusl public construction is li*.0 billien per ysar. Since however half of it will probably be covered by ten revsauee and has been included in the figure fUr public expenditure, only ths other half, |2.0 billions, is included la tte table ef invectacnt. Available figures fbr the laet six decades show that except during the 1930's the pinduction of preducers' durable goods — I.e., wash!nory end e<§sipacnt — has been a gradually increasing percentage of the grace national product. In 1919-1926# it was just under 6 psr cent of gross national preduet. Za 1909-36 the percentage was of course lower. Many ef the cnoraeas nuaber of aeehlnc tools produced durlag the war willbe ueefbl in peace tins product. Usriana production of preduscre' durables is therefore cetiaated at 6 per cent ef the greee national piutoet for a nuaber of yea re fUllevd.ni ths war. This yields an eetlatte of I9.5 billion in 19U7. This estlaste is probably high* Even when bueincee end fara inventories are at a satis factory level, they tend to expand soaewhat froa year te year during preeperity, ae the eoeaosdo system pregrcsece and income and expenditures increase. Xt is difficult te eet an exact figure on the rate of laorcaee duo te this expaaslca. The cetiaate ef |2 million per year asdc here m y he high. -/ 7 - Finally* it it AiauMd that for sorae jr«tn after tho transition period, restoeking of business inventories and the making good of deferred mainitnanee d l l continue. The estimate of $2 billion per year should be considered in oonneetion with the discussion of investment during ths transition period. Sows persons visualise waet amounts of deferred nalntencnoe of plant end equipment. The wear and tear ef war production wist however be considered in oonneetion with the large ear plant eonetruet'en program and large volume ef production during the war of smohine tools. The estimates given above of "ether business construction" and of investment in producers' durables Isave little room for additional deferred maintenance except en railreada.
@FedFRASER