Monday, August 26, 2013

‘Stabilizing’ the Economy

President Truman’s recent economic report to Congress was a self-contradictory document, in which conflicting economic philosophies nestled cozily side by side. The report was full of expressions of faith in a free economy. Yet one recommendation after another was based on the assumption that the economy would not in fact be stable without government intervention and control at a score of crucial points. The phrase “consumer purchasing power” kept beating through the message like a tom-tom. The net result was a victory for the old New Dealers over the new Council of Economic Advisers.
For if there is any consistent basic assumption in the report, it is that the maintenance of “consumer purchasing power” is the one thing that matters. If this term means merely monetary purchasing power, it is naked inflationary doctrine. If it refers to real purchasing power (after price rises are allowed for) it confuses consequence with cause. It looks at everything purely from the consumer’s side. The problems of production below receipts from sales are ignored.

The president recommended that Congress should extend rent control beyond next June. The only reason he gave is that “a large increase in rents would substantially reduce consumer purchasing power.” But an increase in rents would not reduce national purchasing power at all. Landlords would have just as many additional dollars as tenants had fewer. The real difference would be that a larger percentage of the nation’s monetary purchasing power would go for rents, leaving a smaller percentage over for everything else.

The prices of other things (if there were no further monetary inflation) would fall to compensate for the rise in rents. The cost of living therefore would not on net balance increase.

Such a readjustment, it is true, would create strains in the economy. In many lines costs have already gone up to a point where producers could not absorb a price decline. This does not mean that it would be a mistake to remove rent control in June. It means, on the contrary, that it would be mistake not to make at least a beginning now in allowing rents to rise. For these economic strains will have been caused by the very fact that rent control in the first place was so much more stringent than any other form of price control.

To prevent a serious problem of readjustment to resume when rents are allowed once more to resume their normal relationships to the general price level, we should allow any future monetary inflation (if, as is probable, we fail to prevent such inflation) to be absorbed through a rise in rents instead of a still further rise in other prices. If we wish to continue rent control after June we must at least remove rent control from all houses not yet built, and allow at least a 10 or 15 percent increase in rents of existing apartments for the coming year.

The President wants social security benefits revised upward. These payments, he thinks, will “provide a desirable support to mass purchasing power.” If these additional social-security payments are financed by a budget deficit, they will simply produce the inflationary consequences that the President elsewhere in his report deplores. If the payments are financed out of taxes, as much purchasing power will be taken away by greater taxes as is added by the payments. There will be no net increase in “mass purchasing power.” On the contrary, bigger and longer unemployment insurance payments, as experience has shown, only buy more unemployment. This reduces production and real purchasing power.

The most topsy-turvy conclusion in the report is that: “In the present economic situation, it is clear that it would be unsound fiscal policy to reduce taxes.” The real conclusion, of course, is that it is entirely unsound fiscal policy to maintain such a fantastically high level of government expenditures. If expenditures were slashed sufficiently, then a substantial cut in taxes would still leave the desired surplus. The present level of taxation is a constant threat to production. It is a threat to the very maintenance of a healthy free enterprise system. Not unless the executive departments justify every dollar of the proposed huge $37,500,000,000 expenditure for 1948 can the President’s conclusion about existing taxes be accepted.

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