Can Government Spending Cure Unemployment? There Is One Way Out

I

BEFORE accepting the theory that the investment of a dollar of savings can do more to create employment than can a dollar of additional consumer spending,¹ one may well ask why the savings already available have not been more effective in creating employment. Many people assert that, although savings have increased, little benefit in the way of additional employment has as yet resulted.

This is a very pertinent point. But the explanation of it is simple. The stoppage of the flow of new savings into industry is not due to economic causes, but rather to man-made obstacles. This situation can be corrected at will.

The mere existence of savings does not assure reëmployment of idle workers. Savings create employment only when they are invested as new money in business and industry. Such investment of savings, which usually takes the form of loans to business and industry, is based primarily upon confidence. The very word ‘credit,’ in fact, is derived from the Latin credo, which means ‘I believe.’ Hence, if the potential power of savings to create new employment is to be released, everything possible should be done to foster confidence in the safety of new investment.

Instead of creating this sorely needed confidence, recent Government policies seem almost deliberately calculated to destroy it. Business and industry are harassed by investigations which all too often are persecutions rather than impartial inquiries. Through the adroit use of publicity which emphasizes exceptional cases, a general impression has been created that most business is crooked. The entire profit system has been deprecated. The threat of greatly increased taxes on business profits has been raised — not for the purpose of putting Government finances in order, but to create a new social and economic system. The Government, through the Tennessee Valley Authority and other agencies, competes actively with its own citizens in the field of private business. It thus threatens the value of billions of dollars of existing private investments. An exceptionally stringent Securities Act — though sound in its intent — has made it exceedingly difficult for savings to find investment outlets in productive enterprise. Uncertainty as to the ultimate value of the dollar continues to exist.

Is it any wonder that such an atmosphere fails to breed the confidence necessary to prompt the placing of savings in new capital investments? To decide this question, let the reader answer for himself this further question: ‘If you had $1000 of hard-earned savings, would you invest them now in a business enterprise if to the normal risks of a period of poor business there was added the further risk that the deliberate policies of the Government might destroy the value of your investment? ’

Savings are currently available in substantial amounts. But, instead of flowing into new loans and investments that would create employment in the capital-goods industries when the proceeds were spent by the borrowers, such savings either take flight to foreign markets or press for investment in existing high-grade securities, or in new tax-exempt securities, issued by governmental bodies for unproductive purposes. This rush of ’scared’ money to cover merely sterilizes savings, for such issues do not represent new productive investment. They do not increase private employment. Moreover, as a result of Government efforts to force money rates down, the prices of such issues are artificially high. Thus we have the present anomaly of record high prices and low yields in a few security issues at a time when new capital investment is almost at a stalemate. There has been a fair volume of refunding issues, brought out by corporations seeking to reduce their interest costs on issues already outstanding; but such issues do not represent new investment. Issues for new capital purposes have been extremely small in volume.

II

The Administration, ignoring the latent employing power of private savings, evidently believes that spending by the Government itself can create needed reëmployment. Billions of dollars have been spent in the last few years in support of this theory, and it might be well to examine the results to date before spending additional billions.

The people who propose Government spending as a cure for the depression tell us that their method increases individual consuming power, which, they claim, in turn creates additional employment. The fallacy of this theory that increased consumer spending will cure unemployment was completely discussed in the first article of this series. By far the greatest part of our unemployment unfortunately exists in industries which make things that the individual consumer does not buy. Increased purchases of butter, clothing, and other items of individual consumption cannot reasonably be expected to create employment in industries making steel, machinery, and building materials. And the results of the Government’s spending programme to date clearly prove the futility of such a programme.

In the fiscal year 1933, the Government spent approximately $474,000,000 for Public Works; in 1934, approximately $656,000,000. The estimated expenditure for 1935 is $1,356,000,000. This indicates a total of $2,486,000,000 for the three-year period, and the budget estimate for 1936 calls for a further expenditure of $4,341,000,000. This enormous spending programme was initiated on the theory that it would create a great amount of employment, but the record clearly shows that the laying out of these staggering amounts has not created enough jobs to make any substantial impression upon our unemployment problem.

The expenditure of approximately $2,500,000,000 in the three years of the Public Works programme to date has resulted in the average employment, both direct and indirect, of less than 700,000 people annually. And in December 1934 the total number of people employed through Public Works disbursements had declined to 380,000.

The futility of Government expenditures for Public Works as a cure for unemployment was aptly phrased by Congressman Ludlow (Democrat) of Indiana, member of the House Appropriations Committee. In the Congressional Record of January 24, 1935, Congressman Ludlow is quoted as follows: —

When I asked recently how many persons had been put to work as a result of the $3,300,000,000 former Public Works programme, the personnel director of the Public Works Administration gave the number as less than 900,000. At this rate it would require an expenditure of about $44,000,000,000 to give temporary, synthetic employment to the 11,000,000 persons now out of work. This, in my judgment, shows the absolute futility and utter hopelessness of the Public Works programme as a means of solid national recovery.

The average annual employment of 700,000 people as a result of the Public Works programme unfortunately does not represent a net gain in the total number of people permanently employed in gainful occupations, for the gain of 700,000 has been more than offset by a loss in private employment, so that the total number of people unemployed was greater as of May 1, 1935, than in October 1933 when the Public Works programme began. This decrease in private employment has resulted chiefly from Government policies that hamper the action of private business.

Moreover, the great majority of people employed through Government expenditure are not working on self-sustaining projects. This means that their jobs will disappear as soon as Government spending stops. And ultimately there must be an end to expenditures of such size. Employment given by such methods is merely a palliative, not a permanent cure.

In October 1933, just before the Government’s Public Works programme was announced, a study made by the National Industrial Conference Board showed that the total number of unemployed workers in the United States was 9,645,000. A later study by the same organization showed that as of May 1, 1935, — eighteen months later, — the total number of unemployed had increased to 9,711,000. The billions of dollars spent by the Government between those dates obviously failed utterly to accomplish the wholesale reëmployment of workers that was the alleged justification for the programme.

There can be no doubt that the Public Works programme and other Government policies have hampered the reëmployment of workers by private industry. Between March and July, 1933, almost 1,700,000 people went back to work in private industry chiefly as a result of the natural forces of recovery. But from the start of the Government spending programme, in October 1933, to May 1, 1935, the employment of people in private industry has not only made no further gain, but has actually declined.

Here we have a ridiculous situation. What has happened, in effect, is that at a cost of at least $2,500,000,000 about 700,000 workers have gained employment as a result of Public Works expenditures. But meanwhile total unemployment has increased. So far as the problem of unemployment is concerned, we are running on a treadmill under a constantly increasing burden of debt. We are paying billions, piling up Government debt, and getting nowhere. The question is how long we can continue to pay such colossal sums for the mere privilege of losing ground.

The Administrator of Public Works apparently realizes that expenditures to date have been merely a drop in the bucket. But the increased debt required to fill the bucket to overflowing presumably does not alarm him. The following is quoted from the Congressional Record of April 15, 1935, and is the conclusion of a speech made by him at the Wharton School of Finance and Commerce of the University of Pennsylvania: —

The real difficulty has been that not enough money has gone into the Federal P. W. A. programme. You cannot do the work of $15,000,000,000a year with $3,700,000,000spread over two years. Some people either expected too much or they cannot forgo even a poor opportunity to criticize.

Lacking divine power, the Administrator could not perform a loaves-and-fishes miracle. Fortunately, Congress has just made an appropriation for the continuation of the Public Works programme. The country may be assured that we are not turning backwards. We are not even halting in our tracks. We are driving straight forward, our hands on the plough, following the furrow that we hope and believe will turn the soil for such a harvest as will add to the peace, prosperity, and happiness of the people.

Fifteen billion dollars a year to create jobs that cease to exist for the most part unless a similar expenditure follows each year thereafter!

III

The second argument of the advocates of Government spending is that the Government’s programme of Public Works assists the capital-goods industries in which reëmployment is most needed. To a certain extent, this is true. But the amount that can be contributed to such industries by any programme of the Government is so small that it offers no solution to the problem of unemployment in those industries.

In normal years, the purchases of capital goods by private industry run from $25,000,000,000 to $35,000,000,000. Currently, however, the volume of such purchases has fallen to about 35 per cent of normal. As compared with this deficiency of from $16,000,000, 000 to nearly $23,000,000,000 annually, there seems no way in which the Government, under any conceivable programme of Public Works, could possibly contribute more than $2,000,000,000 a year to the capital-goods industries, unless it owned and operated all industry and made the same investment that private industry would normally make. The reason for this is that there cannot possibly be a sufficient volume of public works to provide a greater annual expenditure for capital goods. Therefore the outside limit of Government expenditure is insignificant as compared with the normal purchases of capital goods by private industry.

Moreover, public works constructed by Government expenditure, except in so far as they invade the field of private business, are usually nonproductive. They are more likely to represent liabilities than assets. Therefore when the Government sells its bonds to its citizens to finance such projects, thereby using the savings of the people to finance the Government’s deficits, the effect is merely to transfer the use of such savings from productive private investment to nonproductive Government enterprise. This factor of sterile investment would alone be sufficient to condemn a Public Works programme as unsound from a longrange point of view, even if it solved the problem of unemployment in the capital-goods industries, which it clearly cannot do.

Another argument advanced in defense of Government spending is that the deficits incurred by the Government build up bank deposits and create a pressure of credit which must eventually be used to finance private enterprise.

Government deficits, met by the issuance of enormous amounts of Government bonds, do, of course, result in increases in commercial bank deposits. But the theory that bank deposits should be thus artificially inflated in order to increase the supply of bank credit is entirely fallacious, because it rests upon a policy of reckless spending and deliberately created governmental deficits. The enormous penalties and dangers involved in such deficits far outweigh any possible advantages to be gained from an increase in bank deposits. In fact, the mounting deficits of themselves tend to destroy the very confidence which is the basis for the increased use of credit and savings.

Furthermore, the type of credit chiefly needed is for financing the purchase of capital goods. This is not the sort of credit that the commercial banking system can properly grant in any substantial volume. Such credits are long-term and not truly liquid, and should not be granted in large amounts by banks which have to repay their depositors upon demand. If the growing pressure of mounting bank deposits finally induces banks to make loans of that sort in heavy volume, a frozen commercial banking system will be the probable result.

The record shows clearly that Government spending as an instrument of recovery is almost wholly ineffective. Some slight beneficial effects of a temporary character may be directly traceable to the programme. But billions have been spent, and not even one unemployed person out of ten has been given a temporary job. And the few jobs which are created are more than offset by the destruction of general confidence in private business as a result of the growing Government deficits.

The fact remains, as a recent President shrewdly observed, ‘The only way for an unemployed man to get a job is for somebody to hire him.’

(In his next article, Mr. Douglas will discuss the reasons for apprehension regarding the continuous deficits of the Government)