Salvation by Deficit?

February 3, 1958

At his press conference of Jan. 15, President Eisenhower declared that if revenues in the fiscal year 1959 failed to come up to the optimistic expectations of his budget message, the economy would require “a needle rather than a checkrein.” And he let it be explicitly understood that by a “needle” he meant deficit financing.

This statement cannot be dismissed as a mere slip of the tongue. The President’s 199-page Economic Report expresses the same philosophy, though in a more guarded way. The report pays the customary lip service to “policies that will help prevent inflation” and maintain “a free competitive economy.” But it ends with more than 40 recommendations, nearly all of which, if adopted, would either be inflationary or extend still further the domain of government intervention and creeping socialism. The two outstanding exceptions are the proposals to extend the Trade Agreements Act and to lower price supports on basic agricultural commodities.

THE ROTTING DOLLAR

The report boasts in its opening paragraph that the nation’s output of goods and services in 1957 totaled $434 billion, and personal income $343 billion, and that “both were 5 percent larger than in the preceding year.” Only later are we explicitly told that “four-fifths of this increase was accounted for by rising prices,” and that therefore “in physical terms, the increase was only about 1 percent.” This shows the deceptiveness of national income figures. Germany, in 1923, could boast that its national income had increased about a trillion times over its national income in 1913, for the simple reason that inflation had reduced the value of the mark to one-trillionth of its prewar value.

In spite of its length, there is no mention in the report itself of the extent to which the value of the dollar has declined since 1939. But from tables in the back of the report we can find, by making our own calculations, that wholesale prices at the end of 1957 had risen 136 percent as compared with 1939; that the consumers’ price index in the same period had risen 105 percent (reducing the purchasing power of the dollar to less than one-half); that the total supply of money and credit, as measured by total bank deposits and currency, increased 260 percent in this period, and as measured by demand deposits and currency had increased by 282 percent.

The price rise, in short, came in spite of a great increase in the production of goods. It has been solely the result of money-and-credit inflation. It is government policy, and not “unwarranted” price or wage increases, that is primarily responsible for this. It is money-and-credit expansion that makes price-and-wage increases possible, if not inevitable.

FAITH IN DEFICITS

This faith in the efficacy of deficit financing and inflation is apparently even stronger in most of the Democrats in Congress. Representative Wilbur D. Mills, the chairman of the powerful House Ways and Means Committee, thinks that before the end of the year we may have to reduce taxes, “even though it would mean deficit financing,” to get us out of the slump.

Yet the belief that employment and sound prosperity depend on or vary with the volume of government spending or deficit financing can be disproved both by logic and statistics (see this column, Newsweek, Oct. 3, 1955). Contrary to nearly everything now being said in Washington, inflation does not necessarily increase employment. It has this effect (following unemployment) only if it makes prices rise faster than wage rates. What is essential is a working equilibrium between wages and prices. When that exists, we can have full employment without inflation. But if wage rates rise faster than prices, squeezing out profit margins, we can have heavy unemployment even with inflation.

Salvation does not lie in deficit financing or monetary inflation. It lies in maintaining fluid and functional relationships between wage rates and prices. We can do this chiefly by ceasing to confer special monopolistic powers and immunities on labor unions. But we cannot squander ourselves into prosperity. And we cannot assure prosperity by still further eroding the value of the dollar.