Business Looks Ahead

A GLOOMY picture of the outlook for industry in America has been painted before the National Economic Committee in Washington. The prolonged and persistent depression which began in 1929, it is said, is not an ordinary slump from which we may soon expect to recover by normal process. It marks the end of an era in America — the end of our period of rapid expansion. The extraordinary growth of industry in this country was made possible, it is said, mainly by two things — the development of our natural resources and the rapid growth of population. The natural resources of the country are now pretty well developed and the growth of population is declining. Indeed, within a generation the population of the country is likely to become stationary. As a result, attractive investment opportunities are no longer sufficient to absorb the savings of the country. If people save more than industry is willing to invest, part of the savings pile up in idle deposits. This means that they do not become demand for goods, which, of course, means that they do not become demand for labor. The chronic unemployment that has plagued us during the last ten years will not disappear until we put to work each year the amount that the country attempts to save.

The problem of putting the savings of the country promptly to work in a period of slow economic expansion confronts us, it is said, with the necessity of making far-reaching changes in social policy. One proposal is that the government drastically reduce current savings by heavier taxes on personal incomes; a second is that the government stimulate private investment by undertaking to insure loans by private banks to small enterprises; a third is that the government put idle savings to work by a great expansion of public investment.


It would not be easy for the government to force large reductions in the savings of the country. Increases in the surtaxes since 1932 have made our taxes on large incomes the highest in the world. In fact, the rates on incomes above $50,000 are now so high that they probably discourage investment more than saving, because they virtually prohibit very wealthy men from venturing their funds in risky and pioneering ventures. It is by such pioneering, however, that the profitability of new processes and new products is demonstrated to more timid capital. About all that can be done by taxation to reduce savings by the wealthy is to abolish tax exemption on new issues of government securities, but this step would affect savings only very gradually and over a period of years.

Half of the saving of the country is done by persons in the middle brackets — receiving from $5000 to $50,000 a year. Taxes on these brackets are low and are bound to be greatly increased, but the effect on the volume of savings will be small. Suppose that taxes on incomes from $5000 to $50,000 were increased sufficiently to yield in very good years about a billion more than in 1936. This might be done by an effective rate of about 6 per cent on incomes between $5000 and $10,000, 12 per cent on incomes between $12,000 and $25,000, and 18 per cent on incomes between $25,000 and $50,000 — rates which are low by foreign standards. Recent studies, however, indicate that only about half of additional income-tax payments by persons in the middle brackets would come out of savings. As individual savings in good years amount to ten billions or more, a reduction of half a billion would be a mere drop in the bucket. Plainly, the prospect of solving the problem of oversaving by taxing away savings is not bright.

The proposal for government insurance of private loans is simply another way of reducing the rate of interest. It misses the essential difficulty, which, according to the forecasters of stagnation, is the lack of attractive uses for funds. Experience over the last ten years has amply demonstrated that, when the outlook for profits is unsatisfactory, the volume of investment is not responsive to reductions in the cost of loan capital. Government insurance of bank loans would be most used precisely when it would do the least good and the greatest harm — namely, at the peak of booms. Any severe depression might see the government heavily burdened with the defaults of loans made during the period of careless optimism, and the necessity of meeting these obligations would substantially restrict the government’s ability to fight the depression.

What about the expansion of public investment as a solution of the problem of oversaving? This policy represents an important departure from the idea of a temporary deficit in order to ‘prime the pump.’ The pump, it is now said, will not prime, at least not beyond a certain point. Consequently, temporary deficits are not sufficient. The deficit must be permanent, the budget must never be balanced. Persons who express alarm at a perpetual deficit are told that their ideas of accounting are antiquated. It is necessary to distinguish between current expenses and the acquisition of assets. If money is spent to increase the wealth of the country, what difference does it make whether the government or private industry borrows it? Surely it is no worse for the government to go into debt to build a public road than for a railroad to go into debt to build a private road. Debts which are matched by growth of assets are not bad, and it makes no difference whether they are public or private debts. This is the socalled capital budget espoused by Stuart Chase in the September Atlantic.

As a matter of fact, there is much to be said for a capital budget. If properly administered (a rather big ‘if’), it would require the government to do two things that it has never done. One is to charge itself depreciation. A second is to draw a sharp distinction between assets which increase the tax-paying capacity of the community and those which consume taxes without helping us to pay them. Buying a consumers’ good on the installment plan is not investment, regardless of whether it is an individual buying a refrigerator or a government buying a park or a building that is mostly monument. It is precisely here, however, that the capital budget would break down. Since there is no SEC to regulate the politicians, and since the public watches expenditures from borrowed funds less carefully than expenditures from taxes, the temptation would be great for pork-hungry Congressmen to put into the category of ‘investments’ all the useless ‘improvements’ that would not bear strict scrutiny. In the course of a generation a perpetual deficit would present us with a stiff tax bill for interest, maintenance expenses, and depreciation on a large collection of public ‘white elephants.’

But the fact that a real capital budget, if attainable, would be good accounting does not mean either that government borrowing is an efficient way of stimulating business or that a perpetual deficit is necessary to absorb savings which industry cannot use. Seven years of ‘clinical test,’ as Mr. Chase would say, during which the deficits have rolled up to twenty billions without reducing unemployment by as much as one fourth, has demonstrated that government borrowing is a feeble stimulant to business. The explanation is simple. Obviously it does little good for the government to start idle dollars circulating if they do not continue to circulate. And plainly they will not continue to circulate if the outlook for business is poor. On the other hand, if the outlook for business is good, dollars will start circulating without help from the government. The efficacy of deficits, therefore, depends upon whether they do very much to change the business outlook. Our experience indicates that their effect is limited, and particularly that they do not go very far in offsetting such obstacles to expansion as unfavorable cost-price relationships or ill-advised public policies. Deficits, therefore, however unavoidable they may be in times of depression, are a poor substitute for a direct attack on the obstacles to expansion.

The crucial question, however, is not whether temporary deficits are an effective way of stimulating business but whether a permanent deficit is necessary to put to work dollars that industry will not use. Is it true that the decline in the growth of population and the disappearance of the frontier threaten us with stagnation? Is a permanent deficit the only way to avoid chronic unemployment? No economic question before the country is more important, but a definite answer is impossible. There are too many unknowns. No one knows the future trend of savings, no one knows how rapidly technological discovery will create new investment opportunities, no one knows how rapidly during the years ahead capital will be destroyed by war, no one knows whether public policies will encourage or discourage private investment. At the best, however, the assumption that only government borrowing will save us from chronic unemployment rests upon a pyramid of assumptions for which the evidence is extremely unsatisfactory. And skepticism is inevitably aroused by the fact that never, not even in 1929, has the national output per man, woman, and child reached $700 a year. This seems a strange point for investment opportunities to become scarce. With the output of goods so small, it would seem easy to invent many new products and many new ways of bringing existing products within reach of a larger part of the population.


Before surveying the evidence, let us note that prophecies of stagnation have been provoked by every major depression of the last hundred years. The fact that these predictions have been wrong in the past does not, of course, mean that they will be wrong this time. It does remind us, however, that forecasts of the long-run growth of industry (and hence the long-run demand for investment funds) are likely to be too pessimistic because the rise of unborn industries, or even of very new industries, cannot be foreseen. An interesting example of this pessimistic bias occurred forty years ago. In 1899, the Equitable Life Assurance Society sought the opinions of the most prominent financiers of the country as to the outlook for interest rates over the next twenty years. With two exceptions, all of the replies forecast a decline. And yet, with these two exceptions, the forecasters were wrong. The reason for their error is obvious. In 1899, none of the forecasters could foresee the remarkable growth of the electric utility and automobile industries, which created a huge demand for investment funds. Likewise when we, in 1939, attempt to peer into the future, none of us can see the new industries that will rise during the next forty years.

The prophets of stagnation assume, among other things, that the growth of the national income will be accompanied by a substantial rise in the volume of saving. This sounds sensible and it may be true. It runs counter, however, to recently observed tendencies. In Great Britain, for example, there has been a spectacular drop in the volume of saving during the last generation. This is partly due to stiff increases in taxes, but not entirely so. The same tendency has appeared in the United States. Between 1923 and 1929, the national income increased by 20 per cent, but the volume of saving seems to have declined. People preferred to spend a larger part of their incomes on durable consumers’ goods (automobiles, radios, household appliances), recreation, vacations, education, and medical care — all rapidly expanding industries. An end to this tendency is not in sight. It must be remembered that the number of consumers’ goods and services is constantly growing and that they are being offered at more and more attractive prices.

The tendency for saving to diminish will be accentuated by the changing age distribution of the population and the steadily falling age of retirement. Saving is done by people who have jobs, and savings are partly consumed by people who have retired. By 1960, the number of persons in the saving-consumption group (65 and over) will almost have doubled, but the number in the savingmaking group (19 to 65) will have increased but little. All in all, it would not be surprising to see the proportion of the national income available for new investment drop from 15 per cent, the rate of the twenties, to 10 per cent or less. An even greater drop has occurred in Great Britain.


In the past, much of the demand for investment funds has been created by the increase in population. The decline in the growth of population is likely to have profound repercussions upon our economy, particularly certain branches of agriculture. It may substantially reduce the demand for investment funds, but this is by no means certain. When families are smaller, they will spend less on necessities and more on luxuries. Since tastes for luxuries change, there will be a perpetual demand for new plants to make these goods. It is true that in the immediate future there will be only about 500,000 new workers (net) entering industry each year and requiring working places, equipment, and tools. In the twenties there were over 700,000 a year and in the first decade of the century there were 800,000. Technological change, however, has been increasing the amount of capital that can be advantageously used per worker. It is three times as large as it was in 1880, in dollars of constant purchasing power, and it may be expected to grow.

Contrary to popular impression, slower population growth is likely to stimulate rather than diminish the demand for housing, the largest single outlet for savings, because only when families are small can they afford to live in houses which they own. Indeed, the recent housing boom in England has been based in part upon the fact that families are smaller. The population of England and Wales increased between 1910 and 1930 at only one third the rate in the United States and is now almost stationary. Nevertheless, during the last ten years and in spite of the depression, England and Wales have constructed virtually as many dwelling units per 1000 families per year as the United States built on the average during eight years of building boom in the twenties. Only 28 per cent of the British dwellings were erected with government aid. In the Netherlands, where population is also increasing less rapidly than in the United States, the number of new houses per 1000 families has been greater than in Great Britain, and the proportion constructed with government aid considerably less.

Men seem to have a perpetual propensity to be alarmed over the state of population. A century ago, when population was rapidly growing, people were disturbed about this and economists wrote books about it. Now we are equally alarmed about the opposite phenomenon. Great Britain and Sweden, however, have done well in the face of a decline in population growth farther advanced than ours, and France has prospered in the face of a virtually stationary population. It is well to be cautious about predicting that dire consequences will follow from the refusal of the workmen of the country to raise larger families than they can decently support.


The principal reason for doubting that saving will outrun investment opportunities is the fact that our capacity to discover new products and new ways of bringing old products within the reach of more people is growing rather than diminishing. In the first decade of the century, industry succeeded in raising the per capita national income (in terms of constant prices) about 12 per cent; between 1920 and 1929, it increased the per capita income 32 per cent. This does not look like stagnation. In 1939, industry had seven times as many people employed in research as in 1920, and a third more than in 1931, and the expenditures of its laboratories were seven times as much as in 1920 and half again as high as in 1931. Curiously enough, hardly a year before the Temporary National Economic Committee was told that we are threatened with stagnation the National Resources Committee published an elaborate survey of prospective technological developments which warned us that we are threatened with a dangerous amount of technological change!

The dynamic possibilities of technological discovery are tremendous. It has already been mentioned that invention has greatly increased the amount of capital that can advantageously be used per worker. Discoveries are constantly making it advantageous for business enterprises to replace present equipment with new. When this occurs on a large scale, the demand for new funds may be very great, particularly when, as in the case of the railroads and some of the steel companies, depreciation allowances themselves have been invested in the very kind of equipment that has been rendered obsolete.

Still more important is the success of technological discovery in reducing the prices of goods and enabling thousands to buy things they have never before been able to afford. This, of course, means a demand for plants to make these goods. Obviously the increase of 32 per cent in per capita income between 1920 and 1929 meant a huge demand for plants to make goods that formerly had been beyond people’s reach. A 10 per cent reduction in the price level brought about by technological discovery would produce a demand for about 10 per cent more plant. This would mean about twenty billion dollars in investment opportunities.

Finally, technological discovery increases the demand for investment funds by creating entirely new products which, of course, must have new plants built to make them. With our research facilities greater than ever, it would be strange if the decade of the twenties were the last time in the country’s history that the purchasing power of the per capita annual income was raised nearly one third in less than ten years.

The growth of American industry has been greatly stimulated from time to time by the rise of large new industries — railroads, automobiles, electric utilities. One frequently hears it said that America needs another large new industry. An important reason for rejecting the prophecies of oversaving is that such an industry can easily be created, provided the public insists on breaking down the obstacles (mostly man-made) that stand in the way. The industry is cheap housing. Indeed, a fouror five-room house selling for $3000 (or costing with taxes about $30 a month to carry) would in efifect be an important new product, quite the equivalent of the automobile and capable of giving the country a vigorous period of prosperity lasting, with the usual minor cyclical movements, for twenty to thirty years. Some idea of the potentialities of housing is suggested by the fact that during the twenties the expenditures on housing were over half again as large as the increase in the net investment in plant and equipment by all of the industries of the country.

The war makes progress in the development of cheap housing more important than ever, because, when hostilities cease, America will need a new industry to cushion the letdown from war demand — as the automobile industry and middle-class housing did following 1920. The most promising cushion is cheap housing. No one thing will bring it, but the four most promising ways of reducing the cost of housing, in order of their importance, are (1) design (which includes new materials and new methods of construction); (2) lower real-estate taxes; (3) lower material prices; and (4) lower labor costs.

The development of new and practical designs takes time, as experience in creating the cheap automobile indicates. Until the last four or five years, the attention of builders has not been concentrated upon the development of cheap housing. Considerable progress in design has been made, and it may be expected to continue. Building codes are an obstacle to new and cheaper materials and methods in some places, and little has been done to modernize them.

High real-estate taxes are the next most important obstacle to cheap housing. The Detroit Bureau of Governmental Research estimates that the average tax rate based on true values in 274 cities in 1937 was $26.90 per thousand, or about 25 per cent of rent or rental value. This means that the present real-estate taxes are equivalent to a 25 per cent sales tax on shelter. Everyone knows what an outcry would be provoked by a 25 per cent sales tax on food, fuel, or clothing. When shelter is burdened with a sales tax of 25 per cent, is it surprising that people put up with old shelter and avoid heavy new tax liabilities by refusing to spend money on new housing? Surely there is no reason why sources of local revenue should not be broadened to make it possible to cut real-estate taxes in half.

The prices of building materials seem to be sadly out of line with other prices. In view of the building boom of the twenties it is instructive to compare present prices of building materials with pre-war. In 1939, they were 68 per cent above 1914, but wholesale prices in general were only 27 per cent above 1914, and the wholesale prices of finished products only 29 per cent.

Information on labor costs in building is fragmentary and unreliable. Union scales are about 6 per cent above 1926, which was the peak year of the building boom, and the cost of living is about 11 per cent below 1926. On small work in many cities, however, the union scale is not paid to most crafts. Consequently, it is doubtful whether labor costs can be said to be excessive on small work. Quite different, however, is the situation on large projects where union scales are enforced. Unfortunately the government, by its policy of paying the prevailing rate, has virtually offered the labor organizations a premium to raise their scales at a time when the building industry has been depressed.


The greatest doubts over the capacity of industry to absorb the country’s savings spring from uncertainties over the nature of public policy. On balance, will it be a help or a hindrance to investment? Few forecasters of stagnation discuss this topic. This is strange, because here they will find the best arguments for their case. In fact, it is easy to become quite pessimistic over the investment outlook by letting one’s imagination play over some of the possible developments of public policy. Certainly one seems quite safe in concluding that public policy will be of decisive importance in determining whether or not the country will be confronted with a problem of chronic oversaving. There are three principal dangers. One is that public policy will become an instrument for protecting a large number of special groups against change and new forms of competition; a second is that government will impose new costs on industry faster than enterprises can increase their capacity to bear them; a third is that the government will discourage enterprise by attempting to raise too large a part of its revenue from taxes on corporate income.

A dominant tendency of the age is the disposition in all countries of the world to substitute the decisions of legislatures and boards for the results of markets. Most of this intervention is an attempt by the community to enforce its ideas of fairness upon industry—to protect small concerns from unfair competition, to protect customers from shoddy goods and exorbitant prices, to protect investors against sharp practices, to protect employees against oppressive conditions. The disposition of the government to intervene in economic matters gives small groups an opportunity to use the government for their own purposes. These groups are likely to seek protection against change or against new forms of competition — as when the railroad unions wrote a provision into the Emergency Transportation Act of 1933 that the position of no employee in service at a given date should be made worse by any action of the coördinator of transportation, or when material dealers and building tradesmen seek protection in building codes against new materials and methods of construction, small retailers against the competition of chains and super-markets, glass container manufacturers against the use of paper milk bottles, or the business enterprises of one state against the competition of concerns in other states. Unless the public learns to test the wisdom of intervention by its effect upon the community as well as upon the special group, the government will gradually be converted into a powerful agency for defeating the work of technology, for protecting the existing against the new. This means, of course, that it becomes an agency for limiting investment opportunities and creating a problem of oversaving.

Another powerful tendency of the times is the imposition of new and stiffer obligations on industry — higher and higher minimum wages, shorter hours, more liberal pensions, vacations, unemployment compensation. Everyone will agree that these standards should be steadily improved. The question simply is, ‘How fast?’ Here there may be a conflict between the employed and the unemployed, because the number of people whom industry can employ is limited by the terms on which they must be hired. The people who have jobs are naturally eager to have their conditions improved, even though that retards the absorption of the unemployed. Since the employed greatly outnumber the unemployed, their interests are likely to mould public policy more than the interests of the unemployed. This, of course, means that the government again becomes an agency for limiting employment and restricting investment opportunities.

Since 1929, the expenditures of the government have increased over two and a half times. Contrary to popular impression, recovery will not greatly reduce these expenditures. As the demand for public services grows, the expenses of government will continue to rise. The government is strongly disposed to meet its pressing needs for revenue by heavy taxes on corporate income, for the simple reason that corporations do not have votes. In the last ten years the tax on corporate income has roughly been doubled — partly by increases in the nominal rate and partly by changes in the law which raise the effective rate. For the year 1936, for example, corporations paid almost the same income tax as in 1929, although their profits were only half as high as in 1929.

The heavy burden on corporations is indicated by the fact that for 1936 the government collected almost the same amount on corporate profits of 5.1 billion dollars as on personal incomes of nearly four times that amount. No tax could be worse for the community than a tax on business profits, because by reducing the expected return on any transaction it reduces the opportunities for investment and the willingness of managements to make commitments. And no tax could be more regressive, because by discouraging enterprise it falls largely on the unemployed. Probably the greatest single contribution that the government could make toward full employment would be to cut the corporate income tax from 18 per cent to 10 or 12 per cent and to make up the loss by higher rates on persons in the middle income brackets. The tax would still fall on substantially the same persons, because when the income of corporations is taxed it is really the stockholders who pay the bill. Certainly if the government continues to limit the opportunities for investment by heavier and heavier levies on corporate incomes, technology may well fail to provide sufficient outlets for the country’s savings. There is no protection against the possibility that public policy will be a serious obstacle to the expansion of investment except a widespread understanding throughout the community that industrial expansion concerns, not simply investors, but everyone — the young man who wishes to get a good start in industry and a favorable opportunity to advance, the wage earner who wishes to sell his labor in a sellers’ market, the farmers who number one fourth of the gainfully employed but receive only one eighth of the national income and who badly need larger markets.

If the country is able to see that all groups have a stake in encouraging investment and expects this to be an important objective of public policy, then it seems reasonably clear that we can avoid oversaving and chronic unemployment. This is the crux of the matter. The difference between the nineteenth century and the twentieth is not that sufficient expansion to absorb our savings was possible then and is impossible now. The difference consists in the nature of the obstacles to expansion. In the nineteenth century, expansion depended upon the willingness of thousands of individuals to endure the hardships and dangers of life on the frontier. Today it depends upon the ability of millions of persons to see their common interest in the encouragement of investment, and their willingness to subordinate a multitude of special interests to the achievement of that supremely important general interest. By policy we can make ourselves rich or poor. By policy we can make it easy for the technicians to produce expansion and the opportunity and security which go with it (for the three are inseparable), or by policy we can shoulder ourselves with a crushing burden of chronic unemployment that will compel radical changes in our institutions and will threaten the existence of civil liberty itself.


One concluding observation. Even before the outbreak of the war it was clear that the next boom was not likely to be halted by oversaving. The prospect was that the next boom would be halted by ‘bottlenecks.’

During the last ten years, five million persons have been added to the would-be gainfully employed. The training of skilled workers, however, has proceeded at far below the normal rate, and in most trades there are fewer skilled men today than in 1929. Likewise, during the last ten years the purchases of capital goods by industry have been largely for replacements. Little has been done to adapt the plant of industry to the new currents of demand that revival will produce. Consequently, our plant today is far too small for our potential working force — probably by well over ten billion dollars. Unless a great, deal of training and plant construction promptly occur, not more than six million of the ten million unemployed can be absorbed without uncovering many shortages of skilled men and of plant capacity — shortages that would produce a spiraling of prices and an accumulation of inventories such as in the past have been both the culmination of the boom and the basis for a recession.

The outbreak of the war greatly increases the danger of bottlenecks. Although the demand for raw materials is likely to affect our economy less this time than in the first world war, the demand upon our fabricating facilities will be very great. The more the impact of the war upon our industries takes the form of a rise in prices, costs, and debts, the more difficult will be the problem of adjusting the American economy to the post-war world. Hence, the basic objective of our economic policy should be to make the response of our industries to the war as far as possible an expansion of production rather than a rise in prices, costs, and debts. Credit control and changes in fiscal policy (even if the government is willing rapidly to reduce its deficit) would be ineffective in halting a rise in prices, and the speculative excesses which go with it, once numerous bottlenecks appear. Vigorous encouragement to the elimination of bottlenecks in both labor and equipment is probably the most important single step that the government can take to protect our economy against the war and its aftermath.