The Prospects Are Bright

by SUMNER H. SLICHTER

1

THE most conspicuous fact about recent views of the American economy has been their excessive pessimism. The pessimism was started by the Great Depression of the thirties which led many people to believe that private enterprise would never be able to bring about full recovery. The pessimism was not destroyed by high employment during the Second World War. On the contrary, many people believed that the end of the war would be quickly followed by severe unemployment. When a boom instead of a depression followed the war, the pessimists postponed the date of the inevitable slump. It would come, they said, as soon as the pent-up demand that accumulated during the Second World War had been met. The Korean War and the defense program have simply delayed the test of the capacity of the economy to demand as much as it can produce.

The actual performance of our economy has far outrun even the most optimistic expectations. In 1947, for example, the Twentieth Century Fund published a scholarly and monumental work in which it predicted that by 1960 there would be 60 million people at work in this country and that the total output of the economy (when measured in dollars of constant purchasing power) would be about 57 per cent above pre-war. As early as 1951, however, employment (not counting the armed services) was 61 million and output was 67 per cent above pre-war—well above the predictions for 1960! In 1953 output was 79 per cent above pre-war.

Although the pessimists have a perfect record of being wrong, they continue to predict grave troubles ahead. Now that the shooting has stopped in Korea and the government has announced that it hopes to cut defense spending by about $12 billion a year within the next three years, the pessimists again warn us that demand is about to fall short of productive capacity. Our huge defense expenditures may be likened to an enormous public works program of $50 billion a year. If this program is cut by $12 billion a year, where, they ask, will the demand come from to offset this decrease?

As a matter of fact, the prospects for the American economy are now even brighter than they seemed to be when the war stopped nearly nine years ago. These bright prospects should not be obscured by the fact that there are adjustments ahead — provided, of course, that international developments permit the government to carry through its planned cuts in defense spending. The bright outlook of the economy is partly the result of accident, but in the main it is due to developments inside the economy itself. Let us look at the reasons for these prospects, but before we do so let us clear up any possible misunderstanding about the adjustments that will be required if events permit the government to make big cuts in defense spending.

These adjustments will turn out to be much smaller than many people fear. The reason is that, while the Korean War and the cold war have substantially increased money incomes, they have also greatly increased tax collections. Defense expenditures today are running about $35 billion a year more than just before the start of the fighting in Korea, but tax collections have gone up nearly $30 billion a year. Tax payments by individuals have risen much less than personal incomes, but the resulting growth of personal incomes after taxes has enabled corporations to pass on in the form of higher prices most of the increases in the corporate income tax. In consequence of tax increases falling directly on individuals and those passed on to individuals in the form of higher prices, only $17 billion of the rise of $58 billion in annual personal incomes between 1950 and 1953 represented a gain in the purchasing power of individuals.

All of this points to the conclusion that if the hoped-for cuts in defense spending can be made, tax cuts will make possible a rise in private demand almost as large as the drop in public demand. Part of the gain in private demand will come through wage increases made possible by cuts in the corporate income tax. The government’s hopes for cutting defense spending strike me at the moment as somewhat optimistic, but if they can be achieved, American consumers will be able to buy about 5 per cent more goods, and the consumer goods industries will have to turn out that much more output. Unemployment may be higher than the abnormally low rate of around 2.5 per cent of recent years, and there will certainly be less overtime work than there was in 1953. But the principal effect of a drop in defense spending will be to shift i he demand for goods, not to reduce it.

2

I HAVE said that the longer-run prospects of the economy are extraordinarily bright. In part, these bright prospects are the result of the rapid rate at which population has been increasing. The rapid growth of population must be regarded as a more or less happy accident from the standpoint of the expansion of the economy. Certainly no one planned the increase or even foresaw it. And no one knows how long the spurt in the growth of our population will last.

In the decade of the forties the rate of population increase doubled, jumping from 7.2 per cent in the decade of the thirties to 14.8 per cent —almost as high as during the decade of the twenties. If the rate of increase of the first four years of the fifties is continued, the rate for the decade will be 18 per cent and population will grow by 27 million, in comparison with 9 million in the thirties and 19 million in the forties. Part of the increase in population is probably due to causes that will not continue, like t he rise in the proportion of the adult population who are married from about 60 per cent in 1940 to 70 per cent today. Thus far, however, there have been no signs of a drop in the rate of increase. Apparently the customary size of family, after declining for many decades, has again started to grow. In 1951, third-child births were 80 per cent more numerous than in 1940, and about 31 percent more than in 1947, and fourth-child births were 63 per cent more numerous than in 1940 and 32 per cent more than in 1947.

In many countries of the world, where the accumulation of capital is going on quite slowly, the increase in population is a great economic burden which helps to keep the people poor. Indeed, for many countries there is no hope for a higher standard of living unless the rate of population increase is drastically checked. Even the United States might raise its consumption of goods somewhat faster if the rate of population increase here were lower. There can be no doubt, however, that the rapid growth of population in the United States makes it easier to maintain a high and rising level of employment. This result follows for two principal reasons. First, the rapid growth of population increases the demand for investment-seeking funds — funds for houses, streets, roads, schools, water systems, sewerage systems, factories, mines, and farms to produce necessities. Second, the rapid growth of population tends also to hold down the volume of personal savings. With investment opportunities tending to outrun savings, some investment is financed by credit instead of out of current incomes. The result is that expenditures tend to exceed recent incomes. This is plainly a condition that greatly facilitates the maintenance of a high level of employment.

But the bright prospects of the economy do not rest only upon the accidental and perhaps temporary spurt in population. The principal reason for the bright outlook for our economy is the enormous development of industrial research. It is well known that research has been expanding at an extraordinary rate, but few people are aware of how astonishing the growth has been. Actually the expenditures on organized research in industry in the eight years beginning with 1946 have been more than twice as large as the total for all previous years up to 1946. In all the time prior to 1946, industry spent a little more than $4.6 billion on research; but in the last eight years, industry has spent $9.5 billion on research. And the expenditures of the government on research, which have been nearly $11 billion since the beginning of 1946, are also more than twice as large as all research outlays by the government before 1946.

Everyone knows, of course, that industrial research has great economic importance, but the economic implications of research are not well understood. The difficulty seems to be that most people think of research only as an instrument for increasing the capacity of industry to produce goods. That, of course, is an important aspect of research. No less significant, however, is the effect of research on the demand for goods. Research is bringing about a revolutionary change in the American economy because it is giving indusl ry far greater control over the demand for goods than industry has ever before possessed. Thus the rise of research is removing the specter of inadequate markets thai has haunted businessmen since the Great Depression and that has led many economists to fear that the economy is threatened with stagnation.

How does research affect the demand for goods? In three principal ways. First, by creating new kinds of goods or improved goods. The new goods encourage people to spend a high proportion of their incomes on current consumption — in other words, to save a smaller proportion of their incomes. Second, by increasing the need for machines and buildings to make the new kinds of goods — the TV sets, the air conditioning units, the new kinds of fabrics —thus stimulating spending on capital goods. Third, by developing new methods of making goods, thus reducing the life of existing capital and increasing the amount that it is advantageous to spend on replacements. In these several ways, technological research tends to raise spending for consumption, new investment, and replacements, and thus to bring about an expansion of spending.

Is there any assurance that technological research will increase the demand for goods as rapidly as it increases the capacity of industry to make goods? In other words, can we be certain that in the kind of dynamic economy which rapidly changing technology creates, supply will not outrun demand? The answer is that we cannot be absolutely certain. It is possible in theory for supply to outrun demand even in an economy with a high level of industrial research. But such a result, is extremely unlikely. One reason is that technological progress gives favorable bargaining opportunities to unions which they are quick to seize. Hence, a considerable part of the gains of technological progress quickly produces larger money incomes. A second reason is that nearly half of technological research is devoted to creating new products or processes. A recent study of research in 191 large firms shows that about 44 per cent of the research expenditures had the purpose of creating new products or processes. New products, if intended for personal consumption, tend to stimulate consumer buying and to discourage saving. And new processes are likely to require more complete scrapping of old plant and equipment and thus larger investment expenditures than mere improvements in existing processes require. With saving being limited by the development of new products and with investment opportunities being increased by the development of new processes, the demand for investment funds will tend to outrun the volume of savings, and thus expenditures will expand. Hence, although one cannot assert that spending will inevitably increase faster than supply, the chance that it will is high indeed.

The huge research expenditures of the last eight years have not yet had time to produce a large quantity of commercially usable new or greatly improved products and processes. But such improved products are on their way and are a good reason for expecting the next few years to be unusually rich in new products and in new investment opportunities. Consider a few of the enormous unexploited markets that research has recently brought into existence—• the markets for air conditioners, dishwashers, home freezers, clothes. driers, and waste food disposal units. There are about 43 million homes in the United States wired for electricity. About half of these homes have television receivers. By 1960, it is safe to predict, more than four out of five homes will have television sets and many will have more than one. Furthermore, color television will have brought about the retirement of a large proportion of present sets. Less than 5 per cent of the wired homes have air conditioning units, but sales are increasing by leaps and bounds. In 1953 they were larger than the total of all years prior to 1953. By 1960 half of all wired homes will probably have at least one air conditioning unit and many will have several. About one out of four homes has an electric freezer. Sales of these per year increased by 70 per cent between 1948 and 1953, and a continued large increase seems certain. Fewer than four homes out of a hundred have an electric or gas clothes drier, but sales of driers in 1953 were more than seven times as large as in 1948. A little more than 3 per cent of wired homes have electric garbage disposal units. Sales in 1951 were nearly double sales in 1948. By 1960, sales of garbage disposal units will undoubtedly be double what they were in 1951.

The automobile market and the refrigerator market are ordinarily thought of as quite close to saturation, but this is not true. If the automobile industry were to decide that its prosperity required the scrappage and replacement of 4 million cars a year instead of about 3.5 million as now, a stepped-up research program could undoubtedly improve the new cars so substantially that the scrappage of old cars would rise. The homes of the country contain about 38 million electric refrigerators. These refrigerators are ponderous and bulky pieces of equipment which take up too much room and which are poorly designed for storage, so that one frequently has difficulty in finding the article one desires, or even in knowing what is at the back of the deep shelves. Improvements in insulation and design will bring about drastic changes in refrigerators and thus will render virtually all of the present clumsy and inconvenient refrigerators obsolete.

The real significance of industrial research is that, for the first time in the history of private enterprise, business is able within wide limits to control the demand for goods. It cannot do this without limit or on extremely short notice, but its ability to develop new and better goods is now so well established that it can set production and employment goals five or so years ahead and expect, by the method of discovering and developing new products and new methods of production, to achieve those goals. Hence, fears that demand cannot be expected to expand rapidly enough to provide sufficient jobs are out of date. They reflect lack of familiarity with the new control of demand that technology has given to industry. This new control over the longrun trend of demand enables us to view the economic future in a new light — not with a mixture of hope and fear because anything might happen, but with quiet confidence that the demand for goods can be made to grow as rapidly as our capacity to produce goods.