Our Discompensated Economy

January 31, 1949

The three bulky documents that President Truman dropped on the new Congress—the annual message, the budget, and the economic report—all preached the same philosophy and made substantially the same recommendations. But of them all the economic report perhaps most clearly revealed the out-and-out statist philosophy that the President has now adopted. In it, as in his other messages, he continued to give lip service to “our system of private enterprise.” But every recommendation he made (except, say, those for the renewal of the reciprocal-trade agreements and the repeal of the oleomargarine tax) revealed complete lack of trust in the ability of that system to provide a balanced, orderly, and expanding production.

Our future, he said, must not be left to “chance”—by which he meant that it must not be left to free enterprise. No favorable outcome, he continued, will be realized “automatically”—by which he meant that it will not be realized by the self-adjusting processes of free markets. Far from recognizing the role of speculation in reducing price fluctuations, he blamed it for the fluctuations that have taken place. Throughout he demanded “positive” and “affirmative” action—which turned out to mean continuous government intervention in the economic process at every stage and at every point.

Mr. Truman assumed, in brief, not only that bureaucrats know better than the market what the general level of prices ought to be, but that they know better than the market what the relative price of one commodity should be to that of another, what the relative production of each commodity (e.g., steel) ought to be, exactly how high wages, interest, and profits ought to be, and what the proportion ought to be of consumer expenditures to investment expenditures. Last year industry, deducting inadequate depreciation charges, and at the peak of an inflation, reported an average profit of about 5 cents on every dollar of sales. Yet Mr. Truman does not hesitate to say that these profits “are in excess of the levels needed to furnish incentives and equity funds for industrial expansion,” What are the grounds for this ipse dixit? The extreme difficulty in recent years of raising new equity capital through the sale of common stock is surely not one of them.

But perhaps what is most disturbing of all in the President’s economic report is his refusal to deal seriously with the problem of inflation, or to recognize that it is primarily the government’s own policies that have been responsible for inflation. On the contrary, he not only defends but insists upon the continuance of the most inflationary policy now being followed—the monetization of the public debt through government bond pegging. This inflationary course is actually praised as a “contribution to the stability of the economy.”

The present situation underlines one of the fallacies behind the long-held New Deal theory of a “compensated economy.” The apostles of this theory insisted that it was the function of government to stabilize the national economy by spending heavily in times of depression and economizing or paying off debt in times of inflation. But even if the “compensated-economy” theory were not confused economically, it is completely unrealistic politically. For it fails to recognize that while nearly every government in power will seize upon any excuse to inflate in times of depression, it will almost never have the courage to deflate, or even to stop inflating, in the midst of an inflationary boom. No officeholder wants to assume responsibility for bringing a boom to a halt. Mr. Truman and his economic advisers today, while paying lip service to the idea of fighting inflation, constantly muddy the waters by pretending that there is an equal danger of deflation. So they advocate, at the top of the present boom, an unparalleled peacetime inflationary spending program.

The “compensated economy,” in practice, turns out to be not merely an uncompensated but a discompensated economy, in which the government itself does most to load the scales still further on the inflationary side.