Monday, Aug. 18, 1958
Has the U.S. Learned Its Lesson?
IN Washington and Wall Street, the big worry is the galloping ghost of inflation, returning to haunt the U.S. economy even as it comes up out of recession. Said Chairman Raymond Saulnier of the President's Council of Economic Advisers last week: "Inflation is the problem now." But the U.S. could be thankful that inflation is not a far bigger problem--as it surely would be if the clamor for stronger antirecession measures had been heeded.
Only six months ago, the cry was that the Government was doing too little too late to cure the recession; now, with the economy on the upgrade, it is plain that a far bigger mistake would have been to do too much too soon. Says an Administration economist: "An antirecession policy is supposed to be dramatic, or you find yourself accused of having no policy at all. But just as important as what we did was our unwillingness to do some of the wrong things."
Almost everybody had a dramatic idea about what to do. The loudest cry was for a tax cut, ranging from $3 billion to $10 billion. It came from such disparate persons as Harry Truman and Herbert Hoover, such political opposites as Americans for Democratic Action and the National Association of Manufacturers, included some members of the Administration's own family. Arthur Burns, Saulnier's predecessor, called for "massive Government intervention" in the economy through both tax cuts and public works. The auto industry asked repeal of the 10% excise tax on autos. Others suggested huge WPA-style public-works programs, greatly increased Government spending. Such plans would have meant not only the loss of billions in tax revenues, but the addition of billions more to rising Government costs.
The Administration held out firmly against every such proposal, convinced that while recession was the immediate problem, the long-range problem was inflation. Now almost everybody else has come around to this view. Fortnight ago, the House killed a $2 billion public-works program that had once been a major Democratic antirecession measure.
But the recession is not entirely curing itself. The Government has given sizable help. Military spending rose from an annual rate of $8.5 billion in the third quarter of last year to more than $20 billion in the second quarter of 1958; equally important, contract letting was speeded up, causing contractors to go out right away and hire men, add equipment. Congress stimulated housing construction by giving an extra $1.9 billion to Fannie May (actually more than the Administration had asked for), provided extra unemployment benefits for an average of 13 weeks to those who had exhausted their regular benefits. The Government poured more money into highway construction, eliminated the transportation tax on freight, began fattening pay envelopes in June with the first installment of $1.4 billion in pay raises for military and civilian employees. States and cities helped by raising their expenditures more than 15% for the first eight months this year, to $5.3 billion. Because of increased Government spending, the U.S. budget switched in nine months from a $3 billion surplus to a $2.8 billion deficit, thus becoming a major inflationary force.
What the recession proved was that the built-in stabilizers of the U.S. economy have become stronger and more effective. Unemployment benefits have been widely extended, and payments have doubled since 1954 to $5 billion annually; the unemployed in some states now draw up to $60 a week. Gains have been made in old-age benefits, social security, retirement programs, and aid to the needy. Even more important, the U.S. economy has grown so huge and so diversified that a slump in one section, as in autos, can be largely counteracted by a rise in another, such as the $3.1 billion rise in farm income during the first half of this year.
As a result, buying power--normally the first casualty in a recession--remained so stable that overall retail sales were hardly affected.
What would have happened if many of the antirecession measures had been adopted? For one thing, this year's budget deficit would probably be $18 billion instead of the $12 billion expected. Even worse, such measures as massive public-works programs would have their full effect later this year or next year, when the recession presumably will be about over, thus adding explosive pressure to inflation. The most significant lesson to be learned from the recovery is that the U.S. economy has remarkable resilience, and has proved that it can right itself without massive Government spending or tax cuts. Said Saulnier: "We need to have patience, and not allow ourselves to get jittery. But I don't know whether we have learned our lesson or not."
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