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ROBERT L. STEWART

INDUSTRIAL ECONOMIST
1412 PARK CENTRAL BUILDING
LOS ANGELES 14, CALIFORNIA
ADAMS 3 - 2 0 0 8

February 22, 1950

SPECIAL M m O FOR
Mr. Marriner S. Eccles
Dear Sir:
The enclosed copy of my Demurrer to the ^Report on "Federal
Expenditures and Revenue Policy for Economic Stability" by the Princeton Panel of fourteen eminent University Economists, may be of seme
interest to you since the recent publication of the fourth annual
Report of the Council of Economic Advisers.
You doubtless noted in Mr. Keyserling1s Report, his frank
adoption of "Communism, Socialism, and the American System". This
is, I believe, the first official recognition of the existence of
"three principal systems or schools of thoughtft in economics and
establishes the tripartite concept to replace the former generally
held monistic theory. Mr. Keyserling is to be congratulated on making
many notable advances since his prize-winning thesis in the Pabst
competition in 1944.
In this connection I would cite a paragraph from Mr. Frank
Altschul's NPA pamphlet #69:
"We must be willing to re-examine the most trusted economic
theories of the past in order to determine whether they
furnish sure guides to conduct today."
—otherwise there is extreme danger in college classrooms of unwittingly
conditioning and predispositioning the minds of our coming business men
toward Socialistic schemes and propaganda.
I am hoping that definite responses to the final paragraphs
of the Demurrer now will be forthcoming lest its enemies charge that
the iimerican System today seems to be in the hands of citizens who
are generally capable but who appear to be partially blind in the
economics spectrum.
//

Yours sinc^fely%a

^Copies of the Report of Hearing heldTSeptember 23, 1949 on "Federal
Expenditure and Revenue Policies" (#96773) may be had from the Joint
Committee on the Economic Report, Senate Bost Office, Washington, D.C.




ROBERT L. STEWART

INDUSTRIAL ECONOMIST
1412 PARK CENTRAL BUILDING
LOS ANGELES 14. CALIFORNIA
ADAMS 3 - 2 9 0 6

November 29, 1949

Senator Paul H. Douglas,
Senate Office Building,
Washington, D.C.
My dear Senator Douglas:

NPA Report on "Federal Expenditures and
Revenue Policy for Economic Stability."

I understand you are prepared to receive for consideration
from'me a Demurrer to this Report, prepared by a Panel of fourteen
eminent university economists under the auspices of the National
Planning Association, of which I am a member.
I therefore offer a general summary of observations and
append a brief discussion of important phases of the Report by way
of support and amplification:
1.




The central proposal of the Report appears to be a
matter of taking hold of a very large bull by a set
of very large and complex horns I
old friend the Business Cycle•

The bull is our

The Panel proposes

that the Government shall undertake to control the
movements of the Business Cycle by means of "countercyclical fiscal action'1.
To students of the Business Cycle this sounds very
much like optimistic idealism of a very high order•
Can it be possible that the Panel assumes that your
Committee is entirely oblivious of certain very
pertinent facts concerning the situation:
that the Government cannot exercise
foresight;
that in economics, its prophets are
generally unreliable;
that it can act only after the event; and
that all large bodies are known to move
slowly - very slowly.

- 2 -

2m

In any event it seems certain, if for no other reason,
that "counter-cyclical fiscal action" will fail becausef
as outlined, it deals entirely with the "effects" instead
of with the underlying "causes" that threaten economic
stability.

3»




"Counter-cyclical fiscal action" as proposed includes
tax manipulation and Government spending to relieve
unemployment.

Against these measures it can be success-

fully argued that nothing in economic history can be
cited to show that either of them ever has contributed
anything to economic stability.

Also if the Government

should initiate spending policies to distribute purchasing power so as to relieve any large measure of
unemployment, this in all probability would start a
deflation snowball rolling that might quickly drive the
Government out of office*
There is also the proposal to start large scale public
works to aid in re-establishing economic stability*

On

account of ever-increasing mechanization the effectiveness
of this measure is now open to serious question.

Con-

struction works, and I speak with considerable experience,
are not susceptible to prompt starts and stops without
serious economic loss.

In addition it is difficult to

make good road builders out of CIO auto factory workersj
and mass migrations and l&fge scale work changes are
possible only under conditions familiarly associated with
the Soviet Union•

- 3 -

4*

I believe it is imperative to inquire how it is possible
to formulate proposals for economic stability without
first precisely defining the term "inflation", as wide
differences of opinion exist as to its import and
applications*

5o

The foregoing seems to point to the conclusion that the
resources of the science of economics, as presently
constituted, are inadequate to cope with all the practical problems that arise in connection with economic
stability.

A more comprehensive viewpoint seems to be

necessary®

It may be possible that experts in the field

of coordinating Management might be of help to the "hard
pressed legislators".

One of the first steps might be

the appointment of a Commission to make recommendations
as to a fixed equitable proportion of the total national
income that should be spent by the Government.

DISCUSSION

The Report recalls to mind the report on exactly the same
subject by the Committee for Economic Development issued in December
1948• It may be noted incidentally that five members of the Research
and Policy Committee CED are members of the Board of Trustees NPA and
that Dr. Jacob Viner, Past President of the American Economic Association, is on the Research Advisory Board CED and is one of the members of
the Princeton panel; also that Professor Sumner H# Slichter had
reservations regarding the latter section of the Report.
It is therefore rather startling to find that the recommendations regarding taxation in the NPA report are a complete reversal of
those in the CED report.




4

In the CED report, page 36, the recommendations for the
first order of business in both inflation and deflation is precisely
to "Hold taxes stable" which of course means "Do nothing wifrh taxes."
Whereas the whole tenor of the proposals in the new NPA report
emphasizes the policy "Do almost everything with taxes." The fact
remains, however, that taxes are a headache and not a universal
cure-all.
If, however, it is assumed that the Government by using its
power of tax manipulation actually can ensure economic stability and
that a reduction in taxes can increase employment, in accordance with
the NPA premise, then the fallacious conclusion that taxation is the
prime cause of unemployment, seems inevitable. In this connection it
is disclosed, page 6 (Report of Hearing) that taxes are now nearly 25%
of the gross national product. This indicates that the industrial dog
has a 25% "tax" tail and that it is fervently hoped and expected this
monstrous tail will somehow find a way to wag the 75% dogl
It is stated, page 6, that "tax collections tend . . . to
lower prices." This surely requires some explanation regardless of
whether the word "lower" should be taken as a verb or an adjective.
If high taxes can make low prices, every industrialist in the country
will welcome the information.
Probably the most challenging innovation is on page 6. There
we read "Annual budget balancing is, thus, both difficult and unsound
in principle." Every controller and CPA in the country will be struck
by the implications of this statement. If an annual balance sheet is
a "must" with our largest corporations, why not with the Government?
One of the reasons given for abandoning annual budget-balancing
is that instead of a year, the period should be the "full span of the
business cycle." Theoretically this span is supposed to be from 3 to 5
years but experts seem to agree that the typical cycle is much shorter,
and no means have been discovered for determining just what it actually
will be. So the question arises why introduce an unnecessary factor of
indefiniteness into the proposals which is certain to cause discord
and confusion?
It must however be noted that the science of economics is now
inextricably bound up with and qualified by possibly a dozen other
sciences of front rank importance, such as management, banking, law,
politics, insurance, accounting, taxes, production, sales, etc., and
without the advice and cooperation of experts in these highly technical
fields, policy pronouncements by economists are apt to be merely unilateral statements tkat may easily be misleading and often dangerous.
On page 8 we are introduced to "automatic flexibility" in
fiscal policy. This is defined as "a tax system such that revenue
under a given set of tax rules will fall sharply if unemployment
develops". By "unemployment" is presumably meant a total unemployment
figure of 5,000,000 persons» Whether it be this figure or some other,
and whether there be "automatic flexibility" or not, it seems to be



- 5 -

axiomatic that when there is a marked drop in employment, tax revenue
will also drop under any tax system that will not be held unconstitutional by the U. 3. Supreme Court.
In general terms it may be agreed that economic stability
means the elimination of the violent swings of the business cycle.
However after a quarter century of intensive investigation and research,
it is now pretty generally conceded that the business cycle is absolutely unpredictable and has the appearance of being erratic and
irrational. Some people even seem to feel that the swings of the cycles
most probably are in the hands of fickle and inexorable Fate!
This
apparently has forced upon many honest and well-intentioned minds the
idea that if this country is to be preserved from extermination by
chain reactions that might arise from a particularly violent swing of
the business cycle, it is imperative that all major economic controls
be promptly vested in the Government.
Traces of this trend of thought are to be found in various
places in the report. On page 8 for example, it is stated that
"Government must not shirk the responsibility". On page 8 there is
the remark that "Legislative process is necessarily too cumbersome"»
On page 9 is the call for "granting to the Executive wider discretionary
authority". And finally on page 6 is the previously mentioned plea for
abolishing the annual budget-balancing and for introducing certain
"flexibilities" that would be governed by the discretion of the Executive.
It is evident that all this adds up to a recommendation for a further
turn to the left and is a preliminary to the introduction of a policy
that inevitably would place the country firmly in the hands of a
Socialist regime.
The undisclosed reason back of this appears to be that giving
the Government maximum control of the economy is thought to be somehow
the only way to get some kind of a national economic cyclone cellar
for use when the fury of the winds of depression threatens to destroy
us. This on analysis will be found to be a futile and forlorn hope
based on wishful thinking.
Furthermore newspaper writers have found that the words
"Socialism" and "Socialist" have now lost most of their kick as scare
headline material. The truth is that due to various insidious and
sometimes largely unconscious efforts, Socialist ideas are now accorded
e certain tolerance in the minds of average citizens• What is not so
generally known is that the claim that a Socialist government for this
country is inevitable, can be completely and rationally refuted.
Briefly summarized, the difficulty in the past has been that
economists have largely been engaged in viewing the economy piecemeal
and in detail* What is needed is a more comprehensive view of the
economic organism as a complete and operating whole* In addition,
the call today is not only for "economic stability" but for rational
and consistent progress in all constructive phases of economic life.
The reason for this is that a stable and static condition implies
death and dissolution.



- 6 -

In this view the idea emerges that all spending by Government —
payrolls and purchasing — is a liability, for it takes over, through
taxation, the "new money" from the productive units and spends or
dissipates it — "sinks it without leaving a trace," if you please.
When the Government spends more than the amount of "new money" taxed
from the productive units, it is in the "red" or in a state of imbalance.
This country can adjust to a greater imbalance than any other, but there
is a limit beyond which lies disaster.
A vital factor in viewing the economy as a whole is the
importance placed upon what is known as "production" or the gross
national product of the economists. This production, or turnover, is
relatively secondary. What is of prime and paramount importance is the
"net" — the "new money" which is produced and is the excess of the
income over the outgo. In the 1930fs we had the peculiar phrase
"profitless prosperity". This is now seen to be economic fiction and
a gross contradiction in terms. When the primary emphasis is upon net
income instead of upon gross production, the entire economic situation
is re-oriented and transformed. Instead of mere mechanical multiplication of output, we create the opportunity for the introduction of all
the finesse, genius, and proficiency that is included under the potent
term "American Management".
On the other hand, the Government, unless it attempts to invade
Industry, cannot produce a cent of "new money". It is a spending agency
pure and simple. The Government operates exclusively by orders and
directives issued by the "top brass" which requires the setting up of
rigid routines and standard practices. This is the cause of the
monumental and incredible loss and waste that are associated with all
governmental operations. When it is suggested that "flexibility1* can be
introduced into these operations this is a call for Management; but in
Government, Management is relatively non-existent and unknown.
Management belongs essentially in Industry and provides the
competitive individual means for insuring that income shall be in excess
of outgo, a condition which has no parallel in Government. Thus the
whole genius of Industry is to so spend a dollar that it returns like
the Australian boomerang to its spender, with a little profit-dime
attached. But when Government spends a dollar, it remains spent!
It may be argued- that certain governmental operations save
money for the public and "money saved is money gained". The only items
that can be reckoned as actual savings in governmental operations are
those which directly reduce costs for the producing units. All other
savings are in general only "deferred spending". Under no circumstances
can they be classified as "spending for production".
It is evident from this that the proposal to defeat deflation
and unemployment by government spending amounts to an attempt to extinguish a fire by pouring oil on it. It creates greater imbalance,
hence still greater inflation.
As a matter of economic and political policy, the size of the



- 7 -

Government payroll is of increasing importance. The "security" it
affords constitutes a constant and perhaps irresistable attraction for
many citizens. But every worker who transfers from the payroll of a
productive unit to a Government payroll adds a double burden to the
economy. And the greater the number on Government payrollsf the greater
the danger of psychological imbalance and panic, particularly when resort
is had to the deficit financing, which is not considered any hazard for
a Socialist regime •
It is tacitly implied in many quarters that economics is a
complete and unitary science with a philosophy that has worldwide and
universal applications. The fact is that it embraces three principal
systems or schools of thought which apply specifically to certain
definite geographical and political areas. There is the British system,
exemplifying the economics of Socialism from Adam Smith to Lord Keynes;
the Soviet system, presenting the economics of Marx and Lenin; and the
American system featuring the economics of Management under the free
enterprise system.
The principles, concepts, and formulas of each of these systems
are native, peculiar, and non-transferable; and the utmost confusion and
dislocation occurs when attempts are made to impose those of one system
upon any of the others.
As a preliminary to the consideration of a policy that will
insure both economic stability and continuous progress, may I suggest
that the eminent panel of economists consider why this country has
achieved 99-44/100$ economic self-sufficiency and how it is able and
willing to bail out nearly all the bankrupt national economies of the
world including those of most of its former competitors.
This inevitably leads to the question of profits. What is the
basis of profits and how are they produced under our American System?
There is much confusion of thought on this subject.
The next consideration is the apparently limitless possibilities
of industrial production in this country. Coupled with this is the
baffling anomaly of producing better goods while increasing wages at
intervals and constantly reducing costs and selling prices. This is the
American system operating at full blast right before our eyes. How is
it done, gentlemen?
Respectful

bmitted,

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SUPPLEMENTARY NOTE:
___
j ,
Fiscal policy, in principle and under thejfeur^p^antraditioj
is the last mainstay of the capitalist classjwhose one interest is tile
interest rate. Under the American SysteffiT" fiscal policy can have only
a psychological effect upon the producing units, and this would be of
negligible significance.




ROBERT L. STEWART

INDUSTRIAL ECONOMIST
1412 PARK CENTRAL BUILDING
LOS ANGELES t4. CA£!FORNfA
ADAMS 3 - 2 8 0 8

December 28, 1949

Mr. David Lawrence,
U.3 .NEWS & WORLD REPORT,
24th & N Streets, N.W.,
Washington 7, D.C.
Dear Mr. Lawrence:
The statement, "Civilian Control or Militarism" by the
Research and Policy Committee, CED, in your issue of December 23,
raises by indirection a fundamental issue.
I quote the Preamble of a most important document:
"We, the people of the United States, in order
to form a more perfect Union, establish Justice,
insure domestic tranquility, provide for the
common defense, promote the general welfare,
and secure the blessings of liberty to ourselves
and our posterity, do ordain and establish this
Constitution of the United States of America."
A reading of this makes it clear that the CED in effect
charges, and presents detailed evidence to prove, that the Constitution has become endangered and is threatened with annulment.
Let it be stated, however, that when the provisions of
Articles 1, 2, and 3, and their legal implications, are fully
recognized and enforced, this country is completely equipped to
resist all attempts to make changes in the fundamental character
of the government and the institutions established under the
Constitution,
Why then has the CED found it necessary to sound the
alarm? Because, possibly, of the basic tendency of the military
authority - the "Soldier" - to become a law unto itself and thus
as a matter of principle to recognize only policy and rules of its
own making.
This, it should be noted, is also the standard procedure
of the present-day Communists. They have demonstrated that when
the "Soldier" and the "Political Policeman" combine forces there
is, in all countries except the
little to prevent the
establishment of the "garrison-police state."
Why the proviso "in all countries except the U.S."?
Because here we have demonstrated (in industry) that we possess




- 2 -

powers of inestimable value that have permanently secured for
us national economic self-sufficiency - and probably much more.
We have removed economics from the realm of the academic and
given it power and authenticity in the world'of production. More
specifically - and these are exclusive features of our American
System - we have devised efficient means:
1.

To ensure profitable performance under perpetually changing conditions.

20

To bring true coordination into management
and so deliver it from the terrific loss
and waste that has been inevitable under
the rigid "line and staff" system adopted
from the military code.

3.

To definitely cope with the Law of Diminishing Returns.

Both the "Soldier" and the "Political Policeman" seem,
to date, to be completely oblivious of the existence of these
saving graces and to this may be attributed all the excesses and
blind blundering for which they have been responsible for as long
as anyone can remember.
I submit that the Constitution is still valid, potent,
and completely effective and that the only 'danger is that intelligent people may be so blind to the real situation that they can be
propagandized into panic and despair and thus be conditioned for
trading the real security of the Constitution for the vain promises
of the ambitious promoters of the "garrison-police state".
Yours since:

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