Rearmament: Too Much, Too Soon
Will the present plan to rearm Western Europe against Communism bring a disastrous inflation and reduce the living standards of our allies? A foremost American economist, Lament Professor at Harvard University, SUMNER H. SLIGHTER believes we must recapture the vision and common sense that inspired the Marshall Plan. Drastic changes, he says, should be made in the huge outlays recently authorized by Congress.
by SUMNER H. SLIGHTER
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THE present rearmament programs of the North Atlantic Treaty Organization and the United States are reversing the philosophy and policy of the Marshall Plan.
The policy of the Marshall Plan was to build up resistance to Communism by helping the people of Western Europe to raise their standards of living and thus to give them solid hope for better things to come.
The Marshall Plan helped the United States to win friends and allies because it led the people of other countries to associate American policy with better living standards for themselves.
Since the fighting in Korea, the rearmament programs have been so large that they threaten the standard of living of the people of Western Europe. Hence, rearmament is causing America to be associated in the minds of Europeans with economic disorders and with austerity.
This is a serious blunder from the standpoint of the United States. Undoubtedly rearmament on a large scale is necessary to check the spread of Communism, but alone it is not sufficient. Indeed, rearmament must be regarded as only a secondary part of the program to defeat Communism. Men will not refrain from embracing Communism or from sympathy with it simply because they are well protected from attack by Russia. Communism appeals to men who see little or no hope for better living standards. Hence, a rearmament program that weakens men’s hopes for better living standards is self-defeating. It plays into the hands of the Communists.
All of this means that the anti-Communist policy of the United States must be based upon the premise that Western Europe must have both guns and butter — that living standards must continue rising even in the face of rearmament. At a time when Russia is attempting to convince the peoples of the world that America is their enemy, this country cannot afford to turn from the Marshall policy of raising their living standards and adopt new policies that undermine those standards.
There are three principal reasons why the rearmament program threatens the living standards of Europe. One is that armament demands considerable quantities of goods, leaving less of the product of European industry for civilian consumption. Proposed defense expenditures in 1951 or 1951—52 are 13.4 per cent of the national income in the United Kingdom, 9.3 per cent in France, and 7.0 per cent in Italy. In the United States, defense expenditures this year will be about 17 per cent of the national income, but it must be remembered that per capita real income in Britain is little more than half that in the United States, in France less than one third, and in Italy less than one fifth.
A second reason why the rearmament program here and abroad threatens the living standards of Europe is that it has raised the prices of Europe’s imports faster than the prices of exports, so that more output must be used to pay for imports. By July, 1951, the import prices of Britain, for example, were 42 per cent above the 1950 average while export prices were only 22 per cent above. The problem of paying for imports is aggravated in the case of Britain by the fact that the metal and engineering industries, which in 1950 accounted for half of Britain’s exports, will have to divert about one fourth of their capacity to defense goods.
The third reason why the rearmament program threatens living standards in Europe — at least the living standards of a large proportion of the industrial and white-collar workers — is that it is causing inflation. Between June, 1950, and September, 1951, the wholesale price level rose 25 per cent in Britain and over 20 per cent in France. Between June, 1950, and August, 1951, the index of the cost of living rose by 11 per cent in Britain and by 22 per cent in France. All of this has happened already, and yet on the Continent increased output of defense goods has scarcely begun.
Increases in living costs in turn stimulate wage movements that cause prices to advance still further. If prices outrun wages, discontent among workers is bound to be stimulated. In Britain, weekly wages have advanced 9 per cent in the last year while the cost of living has increased 11 per cent.
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WHAT should be done? More efficiency, a smaller proportion of output devoted to capital goods, control of international allocation of raw materials, loans or gifts from the United States — all of these would help, but they would fall short of being a solution. Let us examine their possibilities briefly.
1. More efficiency. Output per man in European industry has increased rather rapidly between 1947 and 1950 — by 20 per cent in Britain, 23 per cent in France, 30 per cent in Italy, 18 per cent in Belgium, 18 per cent in the Netherlands, 9 per cent in Denmark. In Britain output per man is 26 per cent above pre-war, in Italy about 6 per cent; in France and Denmark it is up to pre-war. Europe is benefiting from the large capital expenditures that have been made since the war as well as from progress in management methods. But gains in efficiency can hardly come fast enough to meet the needs of rearmament. Furthermore, rearmament itself, by creating bottlenecks, retards the rise in productivity. The most serious bottlenecks are coal and steel, and these are aggravated by rearmament.
2. Diversion of output from capital goods. Ever since the war about one fifth of the output of Western Europe has been devoted to the replacement and increase of capital, in comparison with around one eighth before the war. This high rate of capital formation has been necessary to make up for destruction and undermaintenance during the war. Could not the output of consumer goods be raised by cutting the proportion of production going to capital formation?
Undoubtedly the rate of capital formation will have to be reduced somewhat because part of the capacity of the metalworking industries will need to be devoted to armaments. Western Europe exports capital goods to pay for imports of food and fibers. So there is no real possibility of helping consumers by cutting the output of capital goods. Perhaps in France, Western Germany, and Italy a larger part of the output of the heavy industries could be put into housing. In these badly overcrowded countries nothing would improve the political climate more than the building of large numbers of new houses by next summer. Such construction would also help eliminate bottlenecks in production — shortages of coal, for example, resulting from too few dwellings in mining towns and too few men in the mines.
3. Control of the supplies of raw material. The International Materials Conference, now operating in Washington, cannot, of course, prevent large reductions in the civilian use of sulphur, zinc, copper, aluminum, tin, and other scarce materials, but it can help to bring about a fair distribution of the supplies and perhaps limit the rise in prices. Many times the world has learned that an economy with thousands of independent enterprises, each free to work out its own solutions of problems, adapts itself to shortages with surprising success. Hence, shortages may limit production less than has been feared. The British rayon industry, for example, seems to have carried on surprisingly well in face of the sulphur shortage.
4. Gifts and grants from the United States. Foreign military and economic aid from the United States, for which $7.3 billion has been appropriated, will mitigate the impact of rearmament upon European economies. In order to protect Europe against inflation, it is desirable that military aid be broadly interpreted, that strategic materials and equipment, including coal, coke, and machine tools, be considered to be military aid and that military aid be available to finance housing for miners and workers in strategic industries.
All of the above steps would help protect the economics of Western Europe from being seriously weakened by rearmament, but these steps would not be sufficient. They would not avert a drop in the living standards of a large part of the population in Western Europe. Three principal additional steps should be taken. One is to place defense orders in countries which now have idle resources, thus giving them a chance to earn dollars and other foreign exchange. A second is to reduce the planned rate of defense expenditures in most countries of Western Europe for the next two years. A third is to cut the proposed increase in defense outlays in the United States in 1952 and 1953.
1. Placing defense orders where there are unemployment and idle capacity. In Belgium and Western Germany there is idle steel capacity, in northern Italy idle metalworking capacity; and in all of these places there are large numbers of idle men. The rearmament program gives Belgium, Western Germany, and Italy an opportunity to increase substantially their earnings of dollars simply by putting idle resources to work. But the United States must see that this happens. It has two opportunities to do so. One is by its grants of military and economic aid. The other is by purchasing for its own defense program. Tanks or guns for Britain may well be made of Belgian steel in northern Italian plants thus helping Britain maintain her exports of machinery. If paid for by American military aid, the production would help Belgium and Italy earn dollars. To this extent the output of defense goods would strengthen those economies.
In addition, the United States should buy defense goods or defense goods parts for itself from those sections of Europe where there are unemployment and idle rapacity. Such a policy would do more than accelerate the out put of military goods; it would help in the fight against Communism because it would enable European workers to earn a higher standard of living for themselves.
2. Reducing the planned rate of defense expenditures by Western Europe. This reduction is bound to happen. European countries, particularly France and Italy, have not yet recovered sufficiently from the war to undertake, for at least two or three years, a large rearmament program.
3. Reducing the rate of defense output in the United States for 1952 and 1953 below the planned levels — from about $95 billion a year to about $55 billion. This would mean an increase above the present rate of defense expenditures of $15 billion a year instead of the planned increase of $25 billion. But why would a reduction in the planned increase of defense expenditures in the United States help Europe? For the simple reason that the United States is such a large part of the world economy that a great rise in the demand for goods here considerably affects the prices that all other countries must pay. Che output of the United States is substantially more than twice the combined output of Britain, France, Italy, Germany (Western Zone), Belgium, the Netherlands, Denmark, and Norway. The proposed rate of mililary spending in this country in 1952 is almost as large as the combined national incomes of Britain and France. A slower rate of defense expenditures here will help prevent the prices of Europe’s imports from rising faster than the prices of her exports.
A sizable reduction in the large planned increase in defense expenditures in 1952 would not be incompatible with a step-up in immediate military effectiveness during that year as has been recommended by General Eisenhower. It would simply mean spending more on weapons and I less on the make-ready for the production of weapons in 1953. Nor does a smaller rise in defense outlays in 1952 mean a cut in the ultimate size of the defense program. I am simply proposing that the program be spread over more years.
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CAN the planned increase in defense expenditures in Europe and this country be cut without inviting attack by Russia? I believe the answer is “Yes.” Certainly there is great opportunity to increase ihe amount of effective defense obtained per dollar of defense expenditure. Furthermore, it is difficult to reconcile the proposed increases in defense spending with our best information about the strength of the Russian economy. The United Nations has estimated the output of Russia at substantially less than one third that of the United States. In other words, the United States is economically the equivalent of more than three Russias. So inefficient is Russian agriculture that about 35 million male workers are employed there—one for about every nonagricultural worker. In the United States there are more than seven nonfarm workers for every farm worker. As a result of the use of so many workers in agriculture, Russia has 20 million fewer nonagricultural workers than does the Enited States. The effect of agricultural inefficiency upon Russia’s military potential is obvious.
In the summer of 1950, Emanuel Shinwell, the British Minister of Defense, in a speech before Parliament, estimated that Russia was then spending about 13 per cent of her national income for military purposes. Let us suppose that Russia trebles the proportion of her national income spent on military purposes. She would still be spending only about 35 per cent as much as the United States proposes to spend in the coming fiscal year. Indeed, the proposed expenditures on defense by the United States in 1952 and 1953 are almost as large as the entire output of the Russian economy! Undoubtedly a dollar spent on defense in this country buys less real defense than an equivalent expenditure in Russia. The armed services of the United States, however, cannot be so inefficient that our security is threatened unless our defense outlays approach the entire national product of Russia!
It is time to halt the retrogression in the quality of thinking on national security and foreign policy that has characterized the United States for more than a year and to recapture some of the vision and common sense that inspired the Marshall Plan. The conflict against Communism will not be won by the military or by military strength. Necessary as great military strength may be, the military program is only of secondary importance. The principal instrument against Communism must be economic policy. No other instrument will help hundreds of millions of people in all parts of the world to raise their standard of living. And unless the poverty-stricken millions of the world have hope for a better life, they will be ready to accept a philosophy of revolt — it may be Communism there and it may be extreme nationalism somewhere else, but in any event it will jeopardize the peace of the world.
The new Mutual Security Agency, headed by Mr. Harriman, should be more an economic agency than a mililary one. If the plant increase in our defense outlet is cut by about $10 billion during the next year, a part of the saving should be devoted to promoting economic recovery throughout the world. Henceforth it should be plain to all countries that the United States proposes to fight Communism primarily by helping to raise productivity, and thus living standards, in those countries that are willing to do a reasonable amount to help themselves.