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A p r i l 19, 191*4
Notes on t h e Subsidy Program
There e,re two d i s t i n c t t y p e s of s u b s i d i e s which have been
used i n t h e s t a b i l i z a t i o n program*
I'he f i r s t ; of t h e s e i s t h e d i f f e r e n -
t i a l subsidy which i s p a i d t o a few h i g h - c o s t p r o d u c e r s i n a g i v e n
i n d u s t r y t o o b t a i n t h e maximum p r o d u c t i o n of an e s s e n t i a l p r o d u c t .
R a t h e r t h a n r a i s e t h e c e i l i n g p r i c e of a p r o d u c t f o r t h e whole i n d u s t r y so t h a t t h e h i g h - c o s t p r o d u c e r s can o p e r a t e p r o f i t a b l y , t h e p r i c e
i s kept low and a s u b s i s y covering t h e d i f f e r e n c e between c o s t and
s e l l i n g price plus a reasonable p r o f i t i s paid t o the high-cost producers.
This t y p e of subsidy h a s been most f r e q u e n t l y used t o m a i n t a i n
a lower l e v e l of p r i c e s on b a s i c raw m a t e r i a l s , and t h e copper mining
i n d u s t r y i s p e r h a p s t h e b e s t example.
L i t t l e i s s u e has been t a k e n w i t h
t h i s type of subsidy since t h e wisdom of such a p o l i c y i s c l e a r l y e v i dent.
The second type of subsidy i s a g e n e r a l subsidy p a i d t o a l l
producers i n a given industry.
Because t h e a n t i - i n f l a t i o n a r y e f f e c t s
of such s u b s i d i e s a r e not so apparent a s a r e t h o s e of t h e d i f f e r e n t i a l
t y p e , c o n t r o v e r s y has been more or l e s s c o n f i n e d t o t h i s group.
s u b s i d i e s have been used f o r t h e most p a r t on food p r o d u c t s .
General
On
F e b r u a r y 11, 1 9 ^ * Mr. Bowles e s t i m a t e d t h a t t h e government was spending
| 1 , 2 5 0 , 0 0 0 , 0 0 0 on an annual b a s i s t o keep food p r i c e s from r i s i n g above
t h e i r present
levels.
D i r e c t savings from g e n e r a l s u b s i d i e s a r i s e i n t h e f o l l o w i n g
ways:
1.
A subsidy may be p a i d i n c o n n e c t i o n w i t h o n l y a p o r t i o n
of t h e s a l e s , w h i l e a p r i c e i n c r e a s e would a p p l y t o t h e t o t a l volume.
-
2.
2
-
A subsidy p a i d a t some stag© b e f o r e t h e r e t a i l
stage
p r e v e n t s pyramiding on a l a r g e r "mark-up tr which would r e s u l t from a
p r i c e i n c r e a s e , even though t h e p r i c e i n c r e a s e was equal t o t h e subsidy a t t h e e a r l i e r
J.
stage»
S u b s i d i e s may be i n f r a c t i o n s of c e n t s , but a p r i c e
i n c r e a s e i n t h e r e t a i l stage would have t o be i n t h e n e x t l a r g e s t
whole number.
E s t i m a t e s are a v a i l a b l e on the amount of d i r e c t
o b t a i n e d from s u b s i d i e s .
savings
Mr, Bowles e s t i m a t e d t h a t t h e $1,250,000,000
food subsidy program was r e s u l t i n g i n a d i r e c t saving from lower r e t a i l
p r i c e s of $378*000,000 over t h e c o s t of t h e
subsidies.
Much more important f o r t h e s t a b i l i z a t i o n program, however,
a r e t h e i n d i r e c t savings from t h e use of s u b s i d i e s , b o t h economic and
psychological:
1#
I f , i n l i e u of s u b s i d i e s , p r i c e i n c r e a s e s a r e allowed,
t h e r e l a t i o n s h i p between p r i c e s and wages i s broken.
The p r e s e n t p r e s -
s u r e s f o r h i g h e r wages would be i n t e n s i f i e d so t h a t t h e wage s t a b i l i z a t i o n program could n o t be m a i n t a i n e d .
Higher l a b o r c o s t s would mean
t h a t p r i c e c e i l i n g s would have t o be r a i s e d , and t h e i n f l a t i o n a r y s p i r a l
of h i g h e r p r i c e s - h i g h e r wages - h i g h e r c o s t s would be i n f u l l swing.
2.
Higher p r i c e s f o r goods e n t e r i n g i n t o t h e p a r i t y index
f o r r a r m e r s would mean h i g h e r p r i c e s on t h o s e commodities now c l o s e t o
parity.
T h i s , i n t u r n , means h i g h e r food p r i c e s f o r consumers.
3#
A p r i c e i n c r e a s e i n one a g r i c u l t u r a l commodity might l e a d
t o i n c r e a s e s i n a number of o t h e r p r o d u c t s .
For example, a h i g h e r p r i c e
- 3 f o r f e e d s may r o r c e r a i s i n g t h e c e i l i n g s on m e a t , p o u l t r y and d a i r y
product
I t i s i m p o s s i b l e t o e s t i m a t e w i t h any degree of p r e c i s i o n
t h e amount of i n d i r e c t
savings from t h e use of s u b s i d i e s because i t
i s i m p o s s i b l e t o determine t h e e x t e n t of t h e p r i c e r i s e which t h e y
prevent.
The magnitude i s i n d i c a t e d , however, by Mr» Bowles* e s t i m a t e
t h a t should a p r i c e l e v e l i n c r e a s e of 10 p e r c e n t t a k e p l a c e , i t would
mean a r i s e i n t h e c o s t of war m a t e r i a l s of over $6 b i l l i o n and i n t h e
c o s t of consumer goods and s e r v i c e s of a n o t h e r | 9 b i l l i o n .
I n Decem-
b e r 19i{2, Mr® Bowles s t a t e d t h a t t h e d i s c o n t i n u a t i o n of food s u b s i d i e s
would r e s u l t i n an immediate r i s e of 7 V e r
3 per cent i n t h e c o s t of l i v i n g .
i n food p r i c e s and of
Richard G i l b e r t has e s t i m a t e d t h a t
s a v i n g s , b o t h d i r e c t and i n d i r e c t , amount t o from f k t o $6 f o r each
d o l l a r of s u b s i d y .
(Oct. 1943)*
Estimates f o r Labor Force and Output Data. 1959 and 1947
(All d o l l a r f i g u r e s are i n 1943 prices)
1959
Labor f o r c e
53 m i l l i o n
Employment 1939
1947
Increase
60 m i l l i o n
7 million
58 m i l l i o n
14 m i l l i o n
44 m i l l i o n
"Full* employment laitf
Value of average output per
worker
$2,500
Gross national product, 1959
110 b i l l i o n s
"Full* employment gross
national product, 1947
I f gross national product i n 1947
f a l l s t o t h e 1959 l e v e l :
#2,925
2/
#425
170 b i l l i o n s
40 b i l l i o n s
2/
Employment w i l l be about:
41 m i l l i o n
Unemployment w i l l be $bout:
19 m i l l i o n
1/
TMs assumes t h a t 4 m i l l i o n withdraw from the wartime labor f o r c e and
t h a t 2,5 m i l l i o n stay i n the armed f o r c e s .
2/
This assumes an increase i n man hour productivity from 1959 t o 1947 of
about 1*5 per cent per year. This i s a moderate assumption i f compared
with the average annual increase of 2.5 per cent estimated f o r the
period from 1929 t o 1941•
3/
This unemployment f i g u r e assumes the same hours per working day as
applied i n 1959* I f hours are shortened i n order t o n share the work*,
the number of fuLly unemployed w i l l be l e s s . The employment and labor
f o r c e f i g u r e s do not include seasonal workers who come i n t o the labor
f o r c e only during the summer months (family workers on farms,
students, e t c . )
THE SUBSIDY ISSUE
The m a j o r p o i n t t o be emphasized i n t h i s subsidy q u e s t i o n
i s t h a t t h e a l t e r n a t i v e s are much worse t h a n s u b s i d i e s .
One can agree
t h a t s u b s i d i e s a r e bad i n p r i n c i p l e , b u t i n t h e p r e s e n t s i t u a t i o n ,
the
only r e a l choice i s between s u b s i d i e s and p r i c e i n c r e a s e s .
Nearly a l l of t h o s e opposed t o s u b s i d i e s argue along t h e s e
lines:
1.
Incomes are h i g h , p a r t i c u l a r l y l a b o r incomes, and con-
sumers can a f f o r d t o pay h i g h e r p r i c e s .
T h e r e f o r e , why should govern-
ment pay p a r t of t h e food b i l l s of workers who are a l r e a d y b e t t e r o f f
t h a n ever b e f o r e .
2.
S u b s i d i e s i n c r e a s e t h e c o s t of government and add t o t h e
n a t i o n a l d e b t which w i l l be passed on t o t h e r e t u r n i n g s o l d i e r s t o pay.
3.
S u b s i d i e s give a p o l i t i c a l advantage t o t h e p a r t y adminis-
t e r i n g them and t h e r e i s r e a l f e a r t h a t s u b s i d i e s w i l l be used t o buy
v o t e s or o t h e r w i s e t o apply p o l i t i c a l
pressure.
These arguments are a p p e a l i n g , but t h e y make sense only i f
one does not examine t h e a l t e r n a t i v e which i s h i g h e r p r i c e s .
Eigher
p r i c e s would t e n d t o break down t h e d e l i c a t e b a l a n c e between wages and
p r i c e s and between some p r i c e s and o t h e r p r i c e s .
I f t h i s balance i s
broken f o r any r e a s o n , t h e r e i s g r e a t danger of a s p i r a l d e v e l o p i n g .
The h i g h e r p r i c e s end wages w i l l l e a d t o s t i l l h i g h e r consumer incomes
which i n t u r n w i l l be used a s an argument t h a t consumers can a f f o r d
s t i l l higher p r i c e s .
Fundamentally s u b s i d i e s a r e not a sop t o l a b o r
but are of primary b e n e f i t t o t h o s e dependent on f i x e d incomes, i n c l u d i n g most of t h e middle c l a s s . • Organized l a b o r can p r o b a b l y t a k e
-
2
-
car© of i t s e l f f a i r l y well i n a price-wage race, but unorganized
workers and the millions of people l i v i n g on fixed incomes are the
ones who s u f f e r .
With the government buying almost half of the n a t i o n a l output, higher p r i c e s or higher wages means l a r g e r government expenditures
and a l a r g e r debt.
This too may be passed on t o the soldiers.
The
debt w i l l be g r e a t e r however i f p r i c e s r i s e than i f subsidies are
paid—how much g r e a t e r depending upon whether the s p i r a l can be stopped
a f t e r one round or continues f o r several rounds.
The f e a r t h a t subsidies may be administered i n such away as
t o buy votes or t o apply p o l i t i c a l pressure i s , of course, a r e a l fear»
I think t h e record shows t h a t there i s l i t t l e basis f o r t h i s f e a r .
Anything t h a t can be said to minimize t h i s f e a r should be h e l p f u l .
It
might be pointed out t h a t price increases can also be granted select i v e l y as p o l i t i c a l f a v o r s .
While the opportunities f o r p o l i t i c a l
manipulation are g r e a t e r i n the case of subsidies than i n the case of
price increases, there i s room f o r p o l i t i c s i n e i t h e r case and some
faithrmust be placed i n the honesty and f a i r n e s s of the people i n the
agencies administering these programs.
K.B.W.
@FedFRASER