Our Best Defense

THE next ten years will be a crucial period in the economic and political life of the United States. Within this time major economic adjustments will have to be made and the country must master several economic problems for which solutions cannot be much longer delayed without grave consequences. Within this decade also, important economic trends must be halted or retarded if the community is not to be confronted with formidable new problems or even to be basically transformed. Finally, before the end of this period the course of the cold war will have largely determined the relations between the United States and Russia.

When so much is at stake, the particular interests of members of this or that trade or industry or economic group must have less than their usual effect on national policies. The cost of parochial and shortsighted thinking will come high in the fifties, and such thinking may even threaten the security of the country itself. The first and most important step toward meeting the problems of the crucial decade is to see clearly what decisions must be made and how limited is the time within which solutions for the problems must be found.

Of the major economic adjustments that must occur before the end of the decade, two stand out in importance. One is the adjustment in the prices of farm products to long-run conditions of supply and demand; the other is the adjustment of our foreign trade balance to the needs of this country and of the rest of the world.

Prices of farm commodities rose more than any other group of prices during the war. In order to stimulate the output of much-needed food products, the government promised the farmers that floors would be kept under price’s of agricultural commodities for two years after the war. This period has long since passed. Nevertheless, in the current budget year the government is spending about 1.4 billion dollars keeping up the prices of farm products. As a result, the prices of most agricultural commodities are far too high to clear the market, and large surpluses of corn, wheat, eggs, potatoes, and other commodities are piling up. These surpluses are bound to increase so long as the government spends large amounts each year to keep prices of farm products high.

Eventually the support levels will have to be lowered so that they become effective only in times of abnormally low demand — and possibly in periods of temporarily large supply. The politicians will postpone facing this unpleasant reality, but before the end of the decade, support prices will have to be reduced to the point where they do not generate large surpluses and do not force the government to limit the output of agriculture.

Can the prices of farm products be permitted to find a level consistent with supply and demand without temporarily causing a drop in production and employment throughout the economy? Will not the drop in agricultural commodities cause businessmen to curtail buying until the effect on the economy is clear? Will not the postponement of buying cause a more or less general weakening of prices and thus further postponement of buying?

Copyright 1950, by The Atlantic Monthly Company, Boston 16, Mas. All rights reserved.

If the adjustment occurs at a period of general expansion, it will probably have little effect upon business in general. Food and, to a less extent, textiles are bought for current consumption. Hence the prospect of lower prices for these commodities is not likely to induce much postponement of buying. Furthermore, the rise of 19 million in population during the forties, the greatest increase in our history, will keep the demand for food strong in the immediate future. Particularly important in sustaining the demand for many kinds of food will be the great increase in the number of young people between ten and twenty years of age. There will be about 40 per rent more persons between these ages in the population during most of the decade of the fifties than there were during the forties. Finally, lower food prices will to some extent sustain activities in the non-agricullural parts of the economy by releasing dollars For the purchase of houses, automobiles, television sets, and many other things.

Within the next decade either the purchases of the rest of the world from the United States must take a decided drop or imports of this country from abroad and its foreign investments must rise. The balance of payments problem is not a new one, but it has been aggravated by the Second World War. Furthermore, the cold war between Russia and the United States has made the problem even more a political one than an economic one. In this cold war the United Stales will be grievously handicapped in winning the strong support of other countries if they continue to have trouble in selling us their goods. The market of the United States represents about 40 per cent of all of the markets of the world, but in 1949 only about 4 per cent of the demand in this huge market was met by imports. Rising sales to this country would open up enormous opportunities to other countries to raise their standard of living by purchasing more goods from us.

There is no assurance that the balance between exports and imports will be met by a rise in imports rather than by a fall in exports. This country, it is true, has made large reductions in many duties, and foreign currency devaluations have further reduced foreign costs of production in terms of dollars. Nevertheless, additional reductions in duties by the United States are needed especially reductions on textiles and food products. Technological progress and the rapid rise in the population of the Fniled States during the last decade have greatly raised the rate at which the United States is consuming many raw materials. Substantial increases in imports of oil, iron ore, copper, lumber, and many foodstuffs would be in the national interest.

In a few lines foreign manufacturers can provide a better product at a lower price than can American makers. Swiss watches are not the only example. The British are ahead of the United States in developing some types of commercial airplanes and ought to be able to make large sales to American airlines if Americans are willing to buy British planes. Quite promising is the prospect of a great growth in imports of finished products by large American department stores, chain stores, and mail-order houses that know American markets and are in a position to put foreign producers to making goods especially designed to meet American needs and tastes. After all, it is usually the distributor, rather than the manufacturer, who best knows what consumers desire. Furthermore, the costs of distribution are far less to an American buyer who purchases from scores of foreign manufacturers than to a single foreign maker setting up his own arrangements for entering the American market.

Now that large reductions have been made in the American tariff and most foreign currencies have been substantially devalued, there are great opportunities to transform importing of finished goods from a luxury business to a business dealing in articles for mass consumption. Furniture from Scandinavia, glass from Belgium, Germany, and Italy, gloves from Italy, hardware and leather goods from England, are examples of the way in which the standard of living in this country might be enriched. If goods are made to specifications provided by American buyers, considerable quantities of staple articles, such as shirts, socks, and undergarments, might be made abroad. Such a trend would arouse political opposition within this country, but this opposition would be weakened by the fact that the success of other countries in making sales here would increase their demand for the multitude of goods that America can make better and more cheaply than any other country.

2

Two major economic problems must he mastered by the United States if private enterprise is to retain or win back the confidence of the peoples of the world. We must demonstrate that private enterprise can avoid severe ups and downs in employment and production, and that it can provide a reasonably satisfactory level of employment. A large part of the community is prepared to demand drastic changes in economic institutions if these two tests are not met.

If no serious contraction of employment occurs during the fifties, the community will undoubtedly be prepared to believe that the battle against instability has virtually been won and that severe depressions are things of the past. Likewise, if employment expands about as rapidly as the labor force for the next ten years, the community will be prepared to drop its fears of economic stagnation.

I believe that the economy will avoid severe recessions from now on. Great progress has been made in removing several important causes for recessions. The banking system has been strengthened, and banking difficulties are not likely in the future to aggravate the contraction of business, as they have done in every severe depression of the past. A revolutionary change has occurred in our monetary system. No longer are short-term business debts the principal source of money supply, and no longer will repayment of these debts reduce the money supply at the very times when this would do the most harm. Government fiscal policy can now be counted on to be a stabilizing influence, at least in periods of contraction.

The spread of unemployment compensation has diminished the tendency for drops in employment to produce drops in incomes and hence in the demand for goods. Finally, businessmen have apparently gained much in sophistication, and hence are less inclined to behave in ways that aggravate the ups and downs of business. The continuation of a period of expansion is less likely today than twenty years ago to make businessmen expect a further continuation of expansion — in other words, to make them more and more optimistic. Unfortunately, it cannot yet be said that the continuation of a period of contraction makes businessmen less and less likely to expect a continuation of contraction. To the extent that businessmen avoid the errors of optimism and pessimism that have contributed so much to economic instability, the ups and downs of business will be mitigated.

Will business be able to keep employment expanding at a satisfactory rate as the labor force increases? I do not know. It will be harder to do this than to prevent recessions. The cold war on the whole will help sustain employment. But a high degree of enterprise will be required, and a strong desire to expand markets and to get more business. Thus far, most large concerns have tried to grow still larger. Government criticism of “bigness" may deter some important enterprises from going after new business as energetically as they might. And many trade associations have been attempting to inculcate the idea among their members that it is wrong to be too aggressive in seeking more business, especially by price cutting.

A revolution needs to be brought about in the thinking of many businessmen similar to the revolution that is needed in the thinking of many wage earners. Some workers limit output because they think that there is just so much work to be done and that, if they do too much, they or someone else will have less employment. Likewise, some businessmen think that there is just so much business to be had and that, if an enterprise tries to get more business, it will not increase the total amount of business. If this kind of thinking were prevalent, it would keep down the amount of enterprise in the community and would prevent the achievement of a satisfactory level of employment.

There has been no dearth of new enterprises — in fact the number of concerns per 1000 of population is greater today than it was in 1900. But the mortality among newly founded concerns is high: a large proportion do not last more than two years. If a substantially higher proportion survived, competition would be keener and the economy would be more progressive and dynamic.

Fortunately, the business community is becoming aware of the importance of improving the quality of business births and of reducing the mortality of new concerns. Business schools are paying more attention to the problems of owneroperated businesses and thus are training men to go into business for themselves as well as to become employees of large concerns. Venture capital organizations, prepared to supply funds and advice to promising ventures, are becoming a business in themselves. Hence the prospect is good, though perhaps not bright, that by 1960 private enterprise will have demonstrated that it can increase the number of jobs at a satisfactory rate.

3

THERE are three major trends that must be halted or substantially retarded during the next decade if the economy is not to be basically transformed or if it is not to be confronted with grave now problems. Those trends are the rapid rise in government expenditures, the rapid spread of government intervention in business, and the drop in the influence of businessmen in the conummunity.

In the last twenty years the expenditures of the Federal government have increased about thirteenfold while the dollar value of the output of the country has increased about 2.7 times. Since 1947 1948 when the outlays of the Federal government reached a post-war low, they have grown about 27 per cent. If Federal expenditures were to continue 1o grow at the same rate as in the last two years, they would more than treble by 1960, and would be about 150 billion dollars a year. Such an enormous increase in government expenditures would hardly be tolerated, but attempts to retard the rise will provoke many sharp conflicts.

One way to reduce government expenditures is to cut the large amount being spent to keep the prices of farm products high. Another is to reduce the large outlays on trade school education for veterans — expenditures which are of scant use to the veterans and which finance many “schools” or “training courses” of little or no educational value. Another is to reduce the purchases of realestate mortgages by the government. In the present fiscal year such purchases are costing about 1.3 billion dollars, There is no reason why private capital should not finance the real-estate industry.

Finally, a major area of private investment can be opened up and substantial relief given to taxpayers by financing through-highways by tolls instead of by taxes. The country badly needs a modern system of limited-access highways for through-traffic. Indeed, its present highway system may be roughly compared to the state of the railways at the time that Commodore Vanderbilt started to unite short fines into large systems giving through-service. The provision of America with modern highways financed by tolls can open up enormous investment opportunities and at the same time lighten the load of the taxpayers.

In view of the multitude of demands that are being made upon the government, I believe that at least a slow rise in government expenditures is inevitable. The rise, however, should be prevented from exceeding the rate of increase in the national product. If prices do not rise, that would mean that the Federal budget in 1960 would be in the neighborhood of 55 billion dollars, including a substantial increase in armaments.

The last two decades have seen a rapid spread of government regulation of industry. A great new body of controls has grown up in the field of industrial relations. The government now decides what is the proper bargaining unit; it appoints boards to recommend the terms of settlement of the most important disputes; to some extent it regulates the terms of trade agreements, as when it prohibits the closed shop and regulates welfare funds. Another new body of regulations is in the capital market.

In addition, the government has become the largest lender of money in the country. The government also guarantees an enormous volume of private loans. Government regulation of prices has greatly expanded. The government imposes the minimum wage now in most of interstate commerce. It spends hundreds of millions in supporting agricultural prices. It virtually guarantees an income to some industries, as when it buys the entire silver output of the Uniteel States at a price well above the market price.

I do not assert that all of these regulations of the government are bad though a few of them, such as the buying of silver, are completely bad, and others, such as the support of the prices of farm products, arc badly designed. I do not expect to see any big area of regulation by the government abandoned. If the spread of government intervention in economic activities continues during the next decade as rapidly as in the last twenty years, the year 1960 will see the United States a far more completely regulated economy than it is today. Can this spread be substantially retarded?

That is a close question. Certainly the rate of intervention would be greatly retarded if industry were to maintain steadily rising employment and to increase employment as rapidly as the labor force rises. The expansion of the labor force will be much faster after 1960 than during the next ten years. Pressure for regulation of potential monopolies would be diminished by success in improving the quality of business births and in increasing the proportion of new concerns which survive. Greater enterprise in supplying private funds for new ventures would limit the intervention of the government in the capital market. More vigorous private enterprise in the real-estate field would limit the government’s activities in that area. If employers and trade-unions were to agree on basic rules to govern industrial relations, a considerable withdrawal of government from that field might occur.

The strong individualistic traditions of the United States tend to bring about government intervention. These traditions make it hard for business concerns and trade-unions to practice self-restraint. Furthermore, they make it hard for enterprises and trade-unions to compromise. The machinery for collective bargaining exists in most industries and it settles most disputes, but a high proportion of major disputes are settled by employers and trade-unions only after a government agency has suggested the approximate terms.

The third major trend that needs to be halted in the next decade is the sharp drop in the influence of businessmen in the community. During the last twenty years the decline in their influence has been startling. During the decade of the forties, businessmen regained a small amount of their lost influence through the excellent production record of industry during the war.

Certainly if businessmen continue to lose influence, their voice in the community will count for little by 1960. It will not be easy, however, for them to acquire more influence. They are living in a community in which nearly four out of five workers are employees. Such a community is much more interested in the problems of employees than in the problems of business. Trade-union membership, which has increased from 8.9 million in 1940 to approximately 15 million at the present time, will continue to grow. By 1960 unions will probably have 20 to 25 million members. While the membership of trade-unions has been growing rapidly, the number of stockholders in corporations has been showing little change. There are now more than twice as many union members in the country as stockholders.

For businessmen to recover some of their lost influence, employment must be high and steady. Doubling the number of stockholders in corporations between now and 1960 should be regarded as a minimum goal. Corporations can hardly expect their problems to command widespread interest in a community where fewer than one out of ten adults are stockholders. Successful industrial research, bringing out new products and cutting the cost of making old products, enormously contributes to the prestige of business. If industry by 1960 raises the national product from the present level of about 240 billion to 300 billion or 325 billion dollars (at present prices), the influence of business will be enormously enhanced.

Is it really important that businessmen regain some of their lost influence? I think that it is. They see many problems or aspects of problems that other groups do not see. Hence, they help produce better-balanced and better-informed public policies. Furthermore, some community interests are more effectively represented through businessmen than through any other group. One of the most important of these is the interest of the country in more production. Other parts of the community seem to be primarily interested in how the output of industry is divided. The chief exponents of the need for more production are the businessmen.

The need for more output is accentuated by the multitude of demands being made on the economy for more goods and services. The trade-unions are asking that wages be raised faster than engineers and managers are able to increase output per manhour. In addition, the community is being asked to support its non-workers more and more liberally. In 1949 there were approximately 60.1 million employed workers plus about 30 million housewives (who are producers) supporting a population (including themselves) of about 149.2 million. Hence each worker, on the average, had to meet about two thirds of the cost of supporting one non-worker.

4

THE demands on industry for more production are being enormously enhanced by the cold war. As Russia increases her productive capacity and raises output in the satellite nations, her outlays on the cold war will rise. Our resources devoted to this purpose must increase also. Fortunately, the cold war will stimulate technological progress and, to that extent, will help the country to raise its capacity to produce.

The United States has been inexcusably slow in discovering that it is engaged in a cold war with Russia and that the coöperation between the two countries during the Second World War was merely a short truce. Thus far, the struggle has been going slightly in favor of the Russians.

No end of the cold war is in sight. The assumption of some policy makers that the Communist world will eventually be weakened by internal decay or dissension is a precarious one. Russia appears to be getting stronger, not weaker. As the conflict becomes more intense the United States must expect to raise substantially the amounts that it spends on defense. Certainly no one should be surprised if the defense outlays by this country have nearly doubled by 1960.

I venture no opinions on how the cold war can best be prevented from becoming a shooting war. So long as the Russians are convinced that they are winning the cold war, they have no good reason for converting it into a shooting war. Hence, a continuation of their successes would undoubtedly assure world peace for some years to come.

How would a turn in the tide affect the outlook for pence? One possibility is that a series of notable successes by the United States might convince the Russians that they needed to precipitate a crisis. Of course, they would not do this if they regarded our successes as very temporary and if they expected a second turn in the tide.

A second possibility is that a series of successes by the United States might cause the Russians to consider themselves too weak to precipitate a crisis. But although the effect of success by the United States in the cold war is quite unpredictable, the United States must strive to turn the title. Another decade of Russian success would simply mean that a shooting war, if it occurred, would come under conditions dangerously disadvantageous to this country. I am not saying that a shooting war is inevitable. I am saying that even though success for us in the cold war may not make the task of our diplomats easier, the United States cannot afford to continue to lose the cold war.

It would carry this discussion too far afield to explore specifically how the United States can best meet the many adjustments and problems that will be crowded into the next decade. The discussion of the several problems, however, has indicated again and again the importance of two things: great increases in production and a large rise in imports.

In a world where our strength and institutions are being closely compared with those of Russia, a steady and substantial rise in output is the best answer that the United States can give to those who question its strength or the merits of its economy. Of special importance too is an enormous increase in imports during the next decade. Such an increase would both reduce the cost of the cold war to us and help us win the war.

Most important of all. as I have pointed out, is a clear understanding of the problems that must be met and of how much is at stake. The adjustments and problems of the nineteen-fifties demand that Americans identify their individual interests as never before with the interests that are common to all members of the community. In this fateful decade the special interests of various occupational, industrial, and regional groups must not interfere with the efforts of the nation to make its economy strong and stable and to win friends abroad by helping other countries to become strong and stable.