Sense on Policy

A conglomeration of top-drawer U.S. business thinkers last week addressed themselves to the state of U.S. business. Notable was the fact that in an unprecedented wave of speeches, the talk seemed to make unusually good sense. Three were particularly outstanding.

Fiscal Policy. In Manhattan, before the Steel Founders Society of America, Beardsley (pay-as-you-go) Ruml, R. H. Macy treasurer and New York Federal Reserve Bank chairman, discussed U.S. fiscal policy. Said he: fiscal policy is the one important area of Government activity about which business--and the U.S. as a whole--can logically be "apprehensive."

"B" Ruml insisted that businessmen who fear a so-called "compensatory" fiscal policy because it implies vast Federal deficits in bad years should remember that such a policy also calls for public debt retirement in boom years as a brake on the overexpansion of private industry.

But his most telling remarks were directed at public planners who concentrate on the deficit side of compensatory fiscal planning by pushing public works as the cure-all for depression. He said that public works can, at the most, only "even out the activities of the construction industry"--a fine thing, but no economic cureall.

Planner Ruml thought the U.S. would do better to concentrate its main attention on the tax system, in looking for positive ways for the Government to help stabilize the business cycle. He concluded with a tax question containing its own answer: "Why not leave at home, for expenditure by the individual, income that otherwise would have to be pumped out again in order to maintain high employment?"

Financial Policy. General Motors' famed policymaker, Alfred P. Sloan, made an address to the Detroit Economic Club. Before he stopped talking, Alfred Sloan had ranged over the whole spectrum of postwar problems facing U.S. industry. His pro-competition, pro-full employment, pro-internationalism views are by now standard for all but the most die-hard Old Guardsmen. But almost buried in his long speech was a concrete new thought about how private industry might re-examine its own fiscal policies.

One thing that has always tended to exaggerate slumps and spurts in the business cycle--and to keep prices high just when lower prices are most needed to stimulate demand--is the fact that cost accountants figure overhead per unit of output by the simple process of dividing each year's overhead by the number of units sold. This inflates profits in boom years, deepens deficits in bad years. Why not, said Industrialist Sloan, figure overhead costs as a long-term average based on annual productive capacity?

Inflation Later. The week also produced a notable fog-clearing statement about postwar inflation. Harvard's distinguished pro-business economist, Sumner Slichter, in a special supplement to the autumn Harvard Business Review, explored the probabilities of a dangerous inflation after the war. He concluded: 1) the danger of the now-famed, and admittedly enormous, '"inflationary gap" has been grossly exaggerated; 2) the danger of an all-out postwar inflation is lessened by the fact that price control today has been "fair" rather than "perfect"; 3) the admittedly huge liquid funds in consumers' and corporations' pockets will give U.S. industry an unheard-of five-to-ten-year opportunity for high production and profit.

Sumner Slichter's study, liberally strewn with tables, footnotes and no-one-knows-for-sure warnings, was mainly an attempt to differentiate between "hot," "warm" and "cold" savings: i.e., to isolate that portion of the total gap between wartime income and expenditures that can really be expected to inflate prices. His cheerful conclusions came from the fact that his computations showed much larger "warm" and "cold"' savings (war bonds, reduction of short-term debt, etc.) than "hot" ones (cash and demand deposits)* He believes that the average U.S. citizen is going to want to hang on to a lot of his wartime savings, at least until he can find real value to spend them on. His real fear is that industry will unwittingly upset the applecart. His reasons:

> "The long depression and the poor recovery in the United States have badly distorted the ideas of businessmen (and of public officials and some economists) concerning what levels of production and employment are normal. Consequently, in the years immediately following the war most business enterprises are likely to plan too little production rather than too much."

> "Business concerns may be successful in converting 'cold' savings into 'hot' at precisely the times when demand for goods is overtaxing the productive capacity of industry," by the simple process of timing their production and sales without regard for the state of the whole economy.

* Professor Slichter assumed that half of U.S. individuals' war bond hoard would be "warm," half "cold," suggested in passing that the "cold" part was "a challenge particularly to the building-construction industry."

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