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64
April 26, 1939

MOTES ON FISCAL POLICY

I. Educational Task of Economists
One of tli© difficulties in pursuing a fiscal policy designed
to meet the needs of the situation I have been describing ia to be
found in the lag of the development of ideas behind the change in
economic conditions• Most people hare been brought up on a set of
economic doctrines and concepts which are appropriate to a period of
rapid economic expansion and unlimited investment demand. The idea
that saving should be encouraged and consumption restricted in every
possible way, that the Government should adhere strictly to a balanced
budget, that private investment must necessarily lead the way toward
higher levels of national income-~ell these ideas are products of a
period of economic expansion and heavy investment demand*

It is under-

standable that people have difficulty in adjusting themselves to a
change in conditions which calls for a new set of concepts and a new
orientation of policy.
The task of economists in educating the public to the requirements of present-day economic conditions is both vast and urgent. The
question inevitably arises; Have they done and are they doing all that
they might toward the fulfillment of this task?




Several specific

-2-

illustrations might be given of the confusion which has resulted from
the intellectual lag I hare just mentioned, and of the serrice economists
could render in clarifying the issues involved.
Perhaps most common of all complaints at the present time is
that business men lack confidence and hence are unwilling to undertake
investment expenditures. Many economists say that, although they
personally agree as to the necessity and wisdom of much that the Administration has done, they feel it has none the less retarded economic
recovery because of its adverse effect on business confidence*

This

is particularly true with respect to Government deficit spending, which
can only be beneficial so far as the actual conduct of business is
concerned. Deficit spending increases consumer incomes and hence is
bound to increase the effective demand for the things business men have
to sell.

It is surely an irrational sort of fear that would make busi-

ness men limit their capital expenditures because the demand for their
products is being sustained and increased. To the extent that such
fears do exist—their Importance is unquestionably much exaggerated—
economists have an extremely important educational job to do*

It is

up to them to show that in reality business men are mistaking the cure
for the cause. Fundamentally, the current lack of confidence arises
from the same set of circumstances that make public investment necessary.




-3-

Another example of public confusion is famished by the reactions to the texra Government spending*

According to the attached

account of the Gallup poll on spending, 61 percent of the people
interviewed said that they thought the Federal Government is spending
too much*

This public reaction appears, however, to be the product of

a vague feeling that "spending* is bad rather than a desire to see
specific types of expenditure cut*

A later poll asked specifically

about various major categories of expenditure*
those interviewed was:

The question put to

"Do you think Federal spending should be reduced

by 10 percent on?"—there followed the list of items. Over 80 percent
of people answering the question said they did not favor any reduction
in either defense outlays or in the money spent for old-age pensions*
Sixty-two percent were opposed to any reduction in farm benefits.
Slightly over half, 53 and 57 percent, respectively, did favor a reduction in public works and in relief*

The only large majority for

reduction was on the item "Ordinary Operating Expenses"—again, a
general rather than a specific category*
Relief Is the outstanding specific item where a majority—
though not a large one—favor reduction*

The reasons for this attitude

have been clarified by a more recent poll in which the Gallup Institute
asked the question:

"Do you think there are any persons on relief in

your community who could get jobs in private industry if they tried?"
Sixty-nine percent of those interviewed answered, "Yes"*




Asked about

what proportion of persons on relief they thought could obtain jobs
if they tried9 these people named an average figure of 25 percent.
Such a response is clearly based on a general impression gathered from
newspaper stories and the like rather than on specific information
about employment opportunities*

People who are familiar with actual

conditions report with striking unanimity that jobs simply are not
available. Actually the number on relief is less than half the number
out of work. Some 800,000 people hare actually been certified as in
need and capable of doing work on WPA, whom the 1PA is unable to employ.
Many of these people are meanwhile cut off from local assistance.
II. Flexibility and Forecasting
The difficulties of accurate business forecasting are well
known. Constant efforts should be devoted to improving sources of
information and techniques of prediction but even with considerable
progress along these lines, a large element of uncertainty is bound
to persist. The Budget prepared in November and December 1938 had to
cover expenditures and receipts in the first half of 1940. This means
that successful fiscal policy must contain a considerable amount of
flexibility. At the present time there are many obstacles in the way
of proper flexibility. Congress has lately moved in the direction of
depriving the Executive of discretionary power in the control over
expenditures. Likewise little progress has been made toward the




•5-

important objective of long-range appropriations for public works and
work relief.

Commendable attempts have been made, especially by the

National Resources Committee, to plan ahead in laying out and analyzing
projects, but efforts have been handicapped by the scattered cooperation
of State and local authorities.
Recently the local governments have even been moving in the
opposite direction and abolishing, for reasons of "economy*, some of
the planning boards that had already been set up. Violent fluctuations
in the activity of industries, such as automobile, steel, and textile
make it essential that the Government have machinery for rapidly
absorbing people thrown out of work by wholesale layoffs. This is one
of the important reasons why the WPA type of program should be continued
since employment on long-range, heavy public works cannot be varied
quickly enough to counteract such shifts in private employment.

III. Administrative and Legislative Efficiency
Our governmental machinery is not well adapted to the needs
of the present time. In the Executive branch of the Government it does
look as though progress were being made. The passage of the Reorganization Bill and the President's recent Executive Order are milestones on
the road to a more efficient and better coordinated administrative setup.

In the broader sphere, however, the outworn system of checks and

balances still holds sway. Friction between the Executive and the
Legislature has in fact been increasing in the last year or so. Ye are




beginning to see again the disadvantages of divided responsibility
which has hampered the operation of our Government in critical periods
of the past.

(1918 to 1920, 1930-32 are striking examples.)

People frequently make the mistake of thinking that criticism
of our cumbersome governmental machinery is a criticism of democracy
itself. There could be no greater mistake than the identification of
democracy with a particular organization of the governmental instruments
through which it functions. Other democracies, England and Sweden are
notable examples, have long since abandoned the elaborate system of
checks and balances which we still insist on preserving. Far from
being weakened, democracy has been strengthened in these countries by
the more efficient functioning of their governmental machinery.
The Executive must necessarily prepare and initiate legislation.
And yet, under our setup members of the Administration are unable to
explain and defend their proposals on the floor of Congress itself.
The position of the top administrative offices is a doubly difficult
ones

On the one side they are forced by circumstances to concern them-

selves with legislation although they have no recognized status in this
field. On the other, they are loaded down with the burdens of purely
administrative jobs of running the vast departments and agencies which
they head. So much of the time andfchergyof these officials is taken
up with administrative and personnel detail that they are unable to
perform adequately their other function of policy foxmulation with its
inevitable accompaniment of political strategy and political responsibility.




April 26, 1939*
SOMB POTEOTLALITIES IS THE FIELD 0? FOBLIC INVESTMENT
1«

Public Bousing

It is estimated that there are seven and a half million families
in this country who are at present ill-housed and are in the lowest
income third of the population, for whom new houses will not be built
by private enterprise*

If we assume that 60 percent of this number,

or four and a half million families, could be housed over a fifteenyear period, this would amount to 300,000 housing units a year*

At an

average price of #3,500 per unit this would amount to about $1 billion
a year of public investment of non-coiqpetitive nature*
2* Hospitals
According to the Technical Committee on Medical Care, there is a
need for about 400,000 additional hospital beds today* which would
cost #1*1 billion*
3*

Drainage Basin Programs

According to the Report on Drainage Basin Problems and Programs,
based on the findings of forty-five joint Statfc and Federal basin committees, there is a need for 3,484 pollution abatement and sewerage
projects, costing #667 million, and 2,678 water supply projects, costing
#567 million*

These are in addition to necessary Federal projects for

the conservation of water resources of #891 million*
4*

Other lion-Federal Public Works

As of January 18, 1939, there are a list of applications of the
Public Works Administration for projects aggregating #1,775 million
for which no money was available*




-2-

5. Miscellaneous Self-Liquidating Public Wo A s
(a) Plans have been developed by the Bureau of Public Roads for
revenue-yielding types of public investment, such as toll roads, tunnels,
bridges, municipal express highways and boulevards through congested
areas, etc., aggregating nearly $S§ billion*
(b) Rural rehabilitation loans9 farm tenancy loans9 TJ. S, Maritime
Coomission loans, rural electrification, etc*




April 27, 1959*

SOME POSSIBILITIES FOR THE EXPAHSIOH OF PRIVATE IHVESPtENT

A

B* Manufacturing

It is not generally appreciated how small relatively is the outlet for savings afforded by necessary capital expenditures in mining
and manufacturing*

Annual expenditures of $3 billion in the years

1925-28 in this field for new plant and equipment were not only adequate to replace equipment, but also to add greatly to the productive
capacity in these years*

In 1957 capital expenditures in mining and

manufacturing amounted to slightly over #5 billion*

The Index of

Production would have to be between 120 and 130 for some time before
we could reasonably expect to get #4 billion of expenditures in this
field*

It is true that a lot of the equipment is out of date, but

this is always true, as various surveys in the Twenties indicated*
2*

Utilities

The 1929 volume of capital

in the utilities (includ-

ing electric power, telephone, transit and others) amounted to nearly
#2 billion*

In 1937 it amounted to slightly over |l billion*

The

main determinant of investment in this field, particularly in electric
power, appears to be output in relation to generating capacity*

De-

tailed analyses of prospects for capital expenditures in each of the
main utility fields that have been made in the Division offer little
hope that the yearly volume of expenditures will exceed the 1929 figure
even if full employment is attained in the next few years*




-2-

3*

Railroads

Throughout most of the twenties, the yearly volume of capital
expenditures by railroads amounted to between #700 million and #900
million. The retirement of equipment in excess of additions in the
past eigit years has created a real backlog of demand should railroad traffic increase. On the other hand, the absence of secular
growth in freight traffic, the increasing efficiency of equipment
and the poor financial condition of many roads, tend to hold down
capital expenditures*

St may be doubted, therefore, whether the

yearly volume of expenditures, even under the influence of full employment, will exceed #800 million*

The volume in 1937 was #500 million.

4. Residential Construction
It is apparent that the volume of capital expenditures that can
reasonably be expected to occur in mining and manufacturing, utilities
and railroads, even under the most optimistic conditions, will not
begin to provide the necessary offsets to the savings of a high national income*

Prospects in private residential building, therefore,

are peculiarly important. It has been estimated that, in addition
to the normal growth in families, there is a special demand for housing of around one million units arising from the after effects of
the long depression*

Assuming that this demand could be made up

evenly in a five-year period, and that the normal yearly growth of
500,000 families is met9 a housing market for some 750,000 units is




-3-

available.

This would amount to between #3. 5 and #4 billion yearly.

The attainment of this yearly volume, however, depends upon the
failure of costs to advance significantly, upon the growth in consumer income, and upon the present backlog being made up. Given
these favorable factors, a larger volume of construction than just
mentioned would depend upon demolitions of existing structures.
Evidently, this is the most promising field for capital expenditures.
5. Other Capital Expenditures
It is problematical whether the special factors that gave rise
to a yearly expenditure of nearly #2 billion in the late twenties
on commercial buildings and construction by non-profit institutions
(churches, colleges, etc.) will be duplicated In the near future.
Capital expenditures in agriculture, which amounted to $1 billion
in 1937 as contrasted with #960 million in 1929, may be expected to
increase little further.
Conclusion
When a canvass is made of the possible outlets for savings in
the various fields of private capital expenditures, it becomes* evident
that the total that could reasonably be expected on thaJaasls of full
employment. does not add up to enough to match the savings even of an
#80 billion national income*







April 26f 1939

APPROXIMATE PERCENTAGE 07 CAPACITY
VARIOUS IHPJSTRTES AEE OPERATIN&

Steel

500

Cotton

85$

(on basis of 80 hours,
2-sfcift week)

Automobile
Cement

65 - 70$

April 26f 1939

SOCIAL SECURITY CKHJjECTIOBBS ASP JEHEETT PA3MEMTS
(Accrual basis)

1937

1938

1939

Title Till (old age) collections
Old age benefits

579
1

*513
10

*555
*25

Unemployment collections
(State and Federal)

687

•930

*975

22

437

*495

1,243

*996

Unemployment benefits plus
Administrative grants
Net withdrawal

•Estimated




*1,010

April 26f 1939

SOURCES 0? FPHDS TOR CAPITAL S2PEHDITDBES OH PLAHT AMD
BQPIPliENT.l9g9-1937

Producers1 Capital Outlays
Financed From
Stock
1929
1937

150

Long-term
700

Other
Sources
7,600
6,450

It nill be observed that even in 1929, the peak year of producers9
capital outlays, "other sources*, comprising mainly depreciation aceourit s
and retained earnings, furnished the overwhelming bulk of funds for expansion*

The capital needs of all industry offered only a net outlet

for &§- billion of long-texm fixed interest-bearing investment*




BOPSIMG COISTRgCTlOU AMD MOTOR V f T l . e PRnngCTIOM
EffTi
IU GREAT BRITAIN. 1950-1957

Housine Construction
Tear Siding
Number in 000's | Index
in Sept.
162
195
202
218
514
519
540
557

1950
1951
1952
1955
1954
1955
1956
1957

Scarce:

100
120
125
154
194
197
210
208

Motor Vehicle Production
Nnaber in 000*s ( Index
257
226
255
286
542
404
461
508

100
95
98
121
144
170
194
214

Total Motor
Vehicles in i
(000)
1,560
1,588
1,645
1,759
1,874
2,071
2,272
2,462

Britain In Recovery, British Association Research Committee, The index
was computed from the production figures.




April 26, 1939

S H U T SINCE 1929 TOTEABD TAXES WITH BEPRESSITO EFFECTS ON COHSOMPTION

(Amounts in millions of dollars)
1958
1929
Percent
percent
to total Amount to total
Amount

Taxes bearing primarily on
consumption
Othertaxes
Total taxes and customs

1,055
2,485
3,540

29*8
70*2

100.0

Detail
Taxes primarily on consumption:
Payroll taxes:
Direct Federal collections
Deposits by States
Total
Tobacco and liquor taxes
Manufacturersf excise taxes
Customs
Other taxes:
#
Corporate income tax
Personal income tax
Estate and gift taxes
All other

3,415
3*370
6,786

755
748
1,503
447

6

12.6

02
.

602

17.0

1,236
1,096

34.9
31.0
1.7

62
91

26
.

50.3
49.7

100.0

11.1
22*0

22.1

1,136
417
359

16.7

1,337

1,286

19.7
19.0

417
330

4.8

6.2
5.3

62
.

* Inolud.es excess-profits tax
The trend of State and local taxation lias been in the same direction. The States raised about $600,000,000 from general sales taxes,
liquor and tobacco taxes in 1936, sources of revenue which were of
negligible importance in 1929. In addition State gasoline tax collections amounted to #256 million more than in 1929. Collections from
those various sources hare, if anything, increased since 1936.




April 26f 1939

TWESBSEffi OUTLETS:
1928 and 1937
(Millions of dollars)

Total
Producers*
and
Durable
Mfg.

Utilities

Bailroads

Commercial
Buildings

Residential
Bousing

Inventory
Change

Foreign

1928

8,751

3,254

1,644

673

1,181

4,000

•

100

7,318

3,200

1,036

525

367

1,450

•4,000

- 24




Change in
Consumer
Debt
800

•725

1937

Net Contribution
all Gov.
units

801

1,000

CASH-POSITION OF 133 INDUSTRIAL CORPOKATIONS 1/
Dec. 31f 1935 to Dec. 31, 1938

Cash
December
June 30,
December
June 30,
December
June 30,
so,
December

31, 1935
1936
31, 1936
1937
31, 1937
last*
1938
31, 1938




$327,336,000
336,216,000
356,960,000
QAn.rmn
309,459,000
325,134,000
374,159,000
374,iog,ouo
482 ,973,000
2/482,973,000

Marketable
securities
#153,145,000
163,307,000
128,891,000
nnn
135,323,000
147,377,000
121,654,000
111,353,000

Total
#480,481,000
499,523,000
485,851,000
aar
nnn
444,782,000
472,511,000
495,813,000
594,326,000

1/ Sample of large and medium-size industrial corporations
which publish semiannual balance sheets — automobile
companies excluded because of large seasonal fluctuations.
2/ Increase in part accounted for by security issues.

CASH HELD BY 49 LIFE INSURANCE COMPANIES
(with 92$ of the Admitted Assets of
All U. S. Legal Reserve Companies)

December
December
December
December
December
December
December
December
December
December

31,
31,
31,
31,
31,
31,
31,
31,
31,
31,

1929
1930
1931
1932
1933
1934
1935
1936
1937
1938

#117,657,000
126,158,000
149,316,000
291,058,000
416,337,000
557,608,000
761,737,000
785,608,000
667,316,000
750,000,000 (est.)

1/ Estimate by Association of Life Insurance Presidents.




Corporate Profits
and the Hational Income
Mat corporate profits, excluding intercorporate dividends,
amounted to #1*7 billion in 1935, #S.9 billion in 1936, and were
probably running at the rate of #5 billions in the first three
quarters of 1937*

Corporate profits in manufacturing alone in

1936 were actually as high as in 1927 ~

$2.6 billions —

although

the national income was #10 billions less and the extent to which
plant capacity was being utilized was, of course, considerably
less.

This suggests that profits for non-financial corporations,

on the basis of an #80 billion national income, will considerably
exceed the profits of 1929, and hence that the savings of the
commnity on this score would be larger than in 1929*