Paying for Armaments

THE size and nature of the expansion of our armaments still remain a mystery. If the American people desire a two-ocean navy and an air force large enough to give real protection to the entire Western Hemisphere, the original cost may possibly be 10 billion dollars. Certainly the 2.5 billion dollar armament appropriations, recently requested by the President in addition to the regular budget estimates, would be only a small part of the initial expense. Germany is estimated to have spent 6 billion dollars on armaments in 1938 alone.

If the program of armament expansion is to serve its purpose, most of the expenditures must be made within the next two years or less. During the last several years the receipts of the Federal Government have been about 6 billion a year and the expenditures about 9 billion. An increase of 3 billion on armaments in the next year would raise expenditures to 12 billion and thus double the federal deficit. If, in the following year, expenditures on armaments were raised by another 2 billion, the deficit for that year would become 8 billion — almost as much as the entire present expenditures of the government! In addition, the annual expense of maintaining the expanded navy, army, and air force is likely to be over 3 billion — a sum about as large as the entire budget of the Federal Government in 1929.

How can these immense increases in expenses be met, and what repercussions will they have on the industries of the country and our standard of living?

With 9 million unemployed out of 55 million would-be gainfully employed, and with many others employed only part time, it ought to be possible, in theory at least, to produce the needed armaments and to maintain them out of the existing idle capacity of industry.

Two million of the 9 million unemployed represent the irreducible minimum of seasonal unemployment. Hence, the real amount of slack in the labor force is about 7 million, plus some parttime unemployment. Furthermore, the

7 million unemployed are undoubtedly below the average in native ability. Nevertheless, it seems certain that they, together with the part-time employed, could increase the national output by about 12 per cent, or little better than

8 billion dollars. In addition, there are at least 2 million people in agriculture (and probably more) who could be shifted into industry with no effect more serious than a reduction in some of the agricultural surpluses that are putting the Federal Government to considerable expense. Such a shift would add over 2 billion dollars to non-agricultural output. An annual increase of 10 billion or more in non-agricultural production ought to make it easy to achieve a stupendous expansion of armaments without lowering our existing standard of living.

Unfortunately there are formidable practical obstacles in the path of achieving this theoretical ideal. Most obvious of all is the fact that few of the 9 million unemployed are skilled men. Hence, in order to obtain the skilled men needed for a large and quick increase in armaments and in the machines and plants with which to produce armaments, it will be necessary to shift skilled men from their present work, thereby reducing the output of goods for current consumption. It is not ordinarily realized how acute is the shortage of skilled men in the country. In 1930, there were about 5.9 million skilled workers in various trades. Of these about 1.2 million have died or retired, and at least 400,000, and possibly more, have been promoted to supervisory positions or have left the trade. No one knows what proportion of these losses have been replaced, but probably not more than half. This indicates that t he country has at least 800,000 fewer men now in the skilled crafts than in 1930. In the meantime, the number of would-be workers has increased by 6 million. At least half a million new skilled workers need to be developed without delay, exclusive of those needed in the army and navy. Incidentally, there is little foundation in fact for the popular superstition that the lack of skilled men is due to the opposition of unions. On the contrary, it is due to the shocking failure of American employers to give boys a chance to learn trades.

Rut the lack of skilled workers is not all. The country also lacks plant. Even if demand were to expand solely along traditional peacetime lines, there would not be enough plant and equipment for all of the 6 million persons who have been added to the would-be gainfully employed since 1930. The reason is that during the last decade expenditures on plant and equipment have been extremely low. The shortage of plant and equipment becomes more acute when the increase in demand does not assume traditional forms but is concentrated in new directions, on such things as ships, airplanes, machine tools, guns, and tanks. If industrial production were further expanded by moving 2 million agricultural workers into industry, the shortage of plant and equipment would be still greater. To some extent shortages of plant can be met by operating two or three shifts, but the possibilities of doing this are limited. If we desire large quantities of airplanes, guns, tanks, and ships in a hurry, we shall have to get part of them by temporarily reducing our consumption of certain things, particularly automobiles.

The problem of getting a large and sudden increase in armaments is only partly a problem of training men and building plants. It is also a financial problem. How shall we pay for 10 billion dollars’ worth of armaments in two or three years? The money might be raised in ways which produce a great contraction in production and employment and which add to our idle resources, or it might be raised in ways which stimulate employment and production. Hence, whether larger armaments are produced by reducing existing standards of living, or by putting idle men to work and increasing our plant, will depend in part upon how the program is financed.

To pay for the initial increase in armaments solely out of taxes is clearly undesirable. Suppose, for example, that the government were to increase its expenditures for armaments in the coming fiscal year by 3 billion, and in the following year by 5 billion. These are huge sums, but they are smaller than would be needed for a two-ocean navy and an air force only half as large as the 50,000 planes the President suggested.

One reason for not financing this large expenditure solely by taxes is that the entire cost would then fall upon the existing standard of living. New taxes of 3 billion would mean that the government would have that much more to spend and the people that much less. Certainly, in so far as our supply of skilled men, plant, and equipment permits, we should produce armaments by expanding production, not by reducing present living standards. But this is not all. The sudden imposition of 3 billion dollars of taxes this year, by its effect upon the sales and profits of many industries, would produce a contraction of business spending, and hence in consumers’ incomes, of considerably more than 3 billion. Consequently an attempt to pay for a large increase in armaments solely by taxes would reduce the standard of living of the country by far more than the expenditures on armaments.

Nevertheless, some increase in taxes for armaments is desirable. One reason is that our limited supply of skilled labor and our deficiencies of plant make it necessary to reduce the existing living standards moderately in order to get armaments in a hurry. Another reason is that a large deficit increase created by expenditures for assets of very short life (such as armaments) would be dangerously disturbing to business unless accompanied by some provision for meeting the cost of eventually replacing these assets. Congress, therefore, was right in proposing an immediate increase in taxes of about a billion dollars a year.

To the extent of perhaps one to one and a half billion a year, it ought to be possible to pay for armaments through economies in the government. The opportunities for such economies are enormous. In the last six years, for example, the government has spent over a billion dollars for 2200 million ounces of silver which are virtually useless to us. Certainly we can no longer afford this sort of nonsense. At least 400 million dollars a year might be saved by curtailing public works which have little real importance. Expenditures for public works increased from 472 million in 1933 to 1229 million in 1939. Another 200 million a year could be saved by the elimination of unnecessary personnel. The civilian personnel of the Federal Government has nearly doubled in the last ten years — in 1929 it averaged about 559,000, and in December 1939 it was 988,000. On the present scale of operations of the government, a 10 per cent saving in payrolls would yield about 200 million dollars a year, and it could be made with a gain, not a loss, in efficiency. If the armament program is planned so as to increase employment, a reduction in relief expenditures would be possible. This, however, could occur only gradually. Furthermore, it must be remembered that the siflingof the unemployed which has been going on for six or seven years has concentrated a large part of the least employable in the WPA. Hence, an eventual reduction of expenditures for this agency to 500 million is all that can be expected. All in all, the possibilities for economies in the present operations of the government range from a billion to a billion and a half a year.

Suppose that additional taxes of a billion a year were levied and that economies of another billion were achieved. These would still fall far short of the needs of an armament program of 3 billion for the fiscal year of 1941, and 5 billion for 1942. Obviously a large increase in the deficit is inevitable.

This increase has both a bad and a good side. Its bad side is that (1) it discourages long-term investment, and (2) it may create a dangerous increase in demand deposits. The discouraging effect of a large and persistent deficit upon long-term commitments by business has been a matter of observation during the last five or six years. Deficits raise the level of current operations in the industries where government purchasing occurs, and this obvious fact has led to the conclusion that a deficit is always stimulating. But this is not true. When the deficit is large and persistent, as ours has been, business men conclude that large new taxes will be necessary to balance the budget. No one can predict what these will be or how they will affect particular lines of business. Consequently the direct stimulus of the deficit to current business is offset by its effect in discouraging long-term commitments.

A large increase in the deficit for the purpose of buying armaments which will last only a few years makes the balancing of the budget more remote than ever and the eventual levying of large new taxes more imperative than ever. To prevent enterprise from being discouraged by uncertainty over the nature of new taxes, provision should be made at once for taxes sufficient to pay for the new armaments before they have become obsolete and must be replaced. Up to this moment the public has no information concerning the probable life of the new equipment and, therefore, its annual replacement cost. The taxes of a billion a year which Congress is about to impose will be more than sufficient to meet the annual replacement cost of the armaments that will bo purchased in the fiscal year just beginning. Additional taxes, however, will be necessary to cover the replacement cost of armaments to be purchased in the following year. The sooner the nature of these taxes is known, the better.

During the last six or seven years demand deposits have nearly doubled, and they are now about, 20 per cent above the level of 1929. Were they to circulate at a normal rate, they would create a speculative boom of great intensity. There would be a sharp rise in prices, a great volume of speculative buying, and ultimately a severe collapse. It is desirable, therefore, that the deficit made necessary by armament expansion be financed in so far as possible without adding to the dangerously large volume of demand deposits. This means that it should be financed with the minimum expansion of bank credit. It ought to be possible to avoid a large expansion of bank credit because of the abundance of idle funds. As production expands and generates more income, current savings will increase. Part of the savings made possible by the rise of incomes should go into financing the deficit. It would bo particularly desirable for wage earners and small business men to put into government savings bonds a considerable part of increased incomes which they derive from the expansion of armaments.

The good side of a deficit is that it makes possible an increase in expenditures and hence permits us to produce armaments to some extent by increasing the output of industry rather than by reducing living standards. At least a deficit will do this provided it is financed, not by saving more out of present incomes, but by drawing on idle funds or by saving more out of the increased incomes generated by the expansion of production.

The conclusion which follows from this analysis is that the original cost of armaments should be financed in three ways — by taxes, by economies, and by deficit. The proportions will depend upon how fast we wish to get armaments and how rapidly we are able and willing to increase the number of skilled men and to add to the capacity of our plant. To the extent that we must curtail current consumption because we wish armaments in a hurry and because we lack enough skilled men and plant to produce them without reducing current consumption, armaments should be financed by taxes and economies. On the other hand, to the extent that armaments could be produced by utilizing idle capacity, we should finance them by a deficit — subject to the qualification that a deficit, is most effective in stimulating business when accompanied by sufficient taxes to remove uncertainty as to how the budget will eventually be balanced.

The expansion of armaments presents long-run problems as well as temporary ones. The cost to maintain a two-ocean navy and an air force sufficient to defend this hemisphere would depend, among other things, upon the magnitude of the forces against which defense must be provided, but the cost of 3 billion dollars a year, suggested above, is certainly not excessive. Since this is 2 billion more than we have been spending on the army and navy, and since the deficit in recent years has been running over 3 billion a year, the government may eventually have to find over 5 billion in order to keep its budget in balance.

It has been suggested that perhaps one to one and a half billion might be found through economics. An increase in the national income to 80 billion would raise the yield of present taxes from about 6 billion to 8 billion. That would still leave 2 to 2.5 billion to be obtained. The only place that it can come from in the long run will be taxes. Obviously an enormous military and naval establishment will confront us with a tax problem far greater than we have ever faced in our history.

The need for additional revenue in enormous volume plainly requires a broad and careful reconstruction of the tax system of the country. It ought to be possible for the government to take a considerably larger part of the national income with even less discouragement to enterprise than is produced by existing taxes, because these taxes have been designed, not to avoid discouraging enterprise and employment, but to avoid arousing the voters. Our taxes weigh too heavily upon the people with very small and very large incomes and upon corporate profits, and too lightly upon persons in the middle income brackets.

Revision of the tax system for the purpose of getting far more revenue with less discouragement to enterprise will severely test the capacity of our democracy to manage its affairs. If the change is to be accomplished with a reasonable degree of success, Congress should authorize the appointment of a national tax commission selected from the ablest men in public and private life to study the problem and 1o recommend the best ways of providing the government with more revenue and of reducing the tax deterrents to employment, and enterprise.

The government’s need for more income requires that the government do a far better job of encouraging private investment, because the yield of any given system of taxes depends upon the volume of investment. In recent years a dollar of consumer income has had less than half the power to evoke an increase in private investment that it had in the twenties. The government’s need for funds requires that it do all in its power to raise the capacity of consum T income to stimulate an increase in investment.

A final word should be said about the relation of hours of labor to the armament problem. In view of the shortages of many types of skilled labor, would it not be desirable to amend the WalshHealey Act and the Fair Labor Standards Act to make penalty overtime begin, for a limited period (say two years), at forty-eight hours instead of forty or forty-two, and to make t he penalty rate time and a quarter instead of time and a half? Mr. Roosevelt, seems to oppose this. But the question will bear more careful scrutiny than Mr. Roosevelt seems to have given it. There are 15 million workers subject to the Fair Labor Standards Act — about one third of the persons now actually employed. This is their country no less than anyone else’s. Their security is at stake as much as that of anyone else. What would they lose by working forty-eight hours a week? They would give up some leisure, but they would gain security and they would be paid for the extra hours at standard rates.

The executives of the government and industry are not restricting themselves to forty or forty-two hours a week. The 10 million farmers of the country are not limiting themselves to forty or fortytwo hours a week, and never have done so. At a time when more production is needed in a hurry, why should the Fair Labor Standards Act be permitted to create a privileged class that jeopardizes the security of its own members and of everyone else? Either the security of the country is threatened or it is not. If it is not, then our immense expenditures on armaments are an inexcusable waste. If it is, then the maintenance of a forty or forty-two hour week is a criminal betrayal of the safety of the country.