Do profits reduce purchasing power?-Even though profits are not excessive, ey might still be regarded as undesirable if they withdrew purchasing power - otherwise restricted the economy. This might be true if profits were salted way in some hidden cache. What actually happens is quite different. In 1946, about 45 percent of corporate profits were distributed as dividends. he shares of most large American corporations are widely held and the ividends are consequently widely distributed. Some of the largest stockolders are institutions or scientific, educational, or charitable foundations. n the case of the wealthy stockholders, current high taxes take the bulk of ny dividend income. While this redistributes income, it does so at the expense f a continuing supply of risk capital. Most critics admit that corporate profits, to the extent that they are distributed s dividends, do not reduce purchasing power. They focus their objections upon he portion that is retained. Even the Federal Government, at the time of the Il-designed undistributed profits tax, subscribed to some such misconception. As matter of fact, however, retained earnings as a whole do more to encourage usiness spending, to stimulate economic activity, and to expand purchasing ower than do the amounts paid out as dividends. Undistributed profits may be used to add to working capital or may be invested n plant and equipment. If retained as working capital, it is generally in response o a higher rate of activity that requires more work in process, greater invenories, larger pay rolls, and more credits to customers. Or, retained earnings nay be used to finance new investment in plant and equipment. As I have pointed but before, such expenditures in the construction and heavy industry field are he most effective stimulants of economic prosperity. In 1946, despite the record level of business profits, the amount retained was insufficient to finance the large requirements for plant, equipment, and inventories. As a result, we had during the year more than a $4,000,000,000 expansion in bank loans to business, and about $3,000,000,000 of security issues for new capital. In addition, cash and Government securities were drawn down by as much as 7.5 to 10 billion dollars in order to finance business needs. It must be clearly realized that business cannot maintain a high rate of investment unless prospects are good for a sustained period of reasonably satisfactory profits. Responsible management does not undertake to expand facilities unless they can show some profit. Nor are corporations able to accumulate funds without making profits or to raise them in the financial markets without a good profit record or attractive prospects. My conclusion, therefore, is that the best way to "promote maximum employment, production, and purchasing power" is to see to it that business enterprise has the incentive and the means to support a high level of business spending. This, in turn, depends on the ability of business to earn and retain adequate business profits. In short, if we are to have an expanding economy I believe that we need to adopt more constructive and favorable attitudes and policies with reference to business and business profits. Mass purchasing power.-There are some people who do not agree that the most desirable and effective way to insure a high level of employment is to encourage business spending. They would adopt a fundamentally different approach; namely, an effort to maintain mass purchasing power by (1) increasing the level of Government expenditures; (2) raising wages and reducing prices at the same time; and (3) maintaining a tax system that is very burdensome for business and for risk capital. It is worth noting that the advocates of these policies are generally of the same group that in 1945 predicted unemployment of 8,000,000 during the reconversion period. Those who advocate steps to increase mass purchasing power generally base their case on the fact that, since early 1945 or mid-1946 the cost-of-living index has increased more than have wages and salaries. They conclude that this portends, for the near future, a situation in which consumers will not be able to buy the output of the economy. Such a comparison of price and wage changes is of doubtful validity in supporting the claims of vanishing buying power. Conditions in the base periods, whether early 1945 or mid-1946, were very unusual. We were still living in a war economy, with its characteristics of widespread scarcities of consumer goods, high levels of individual savings, artificially low prices, down grading of quality, lack of standard merchandise, together with black markets and black-market prices in some fields. What we have seen in recent months is the return to a situation in which demand and supply are permitted to have their customary effects on prices. It is worth noting that some of the greatest price increases have occur in commodities for which the consumer sets the price. On the other h many manufacturers have set prices well below what the traffic will bear. need only cite the case of automobiles, where high consumer demandi forced prices of new-used cars to substantial premiums over the manufacture prices. Thus, in many cases, high prices are a reflection of the high level buying power. It does not appear plausible to me that we can have hea consumer buying, rising prices, and a shortage of purchasing power, all at same time. The wage and price comparisions would be more meaningful if made betwe periods in which commodities were available in the markets under compara conditions. Comparisons between such periods show results contrary to '; trends during the reconversion months. For example, compared with prew years, the average earnings of workers have increased substantially more th has the cost-of-living index. I know of no evidence that wage earners, as a group, have lost ground recent years. In both the last quarter of 1946 and in the first quarter of 19 wages and salaries comprised almost exactly the same percentage of nation income as they did in the 1920's or in the prewar period from 1935 to 1939. The proposals to increase mass purchasing power by more Government sper ing, higher wages, and a more steeply graduated tax structure embrace fundamental fallacy, namely, the notion that subsidizing consumption and e sumer buying power can build real prosperity. We have had some fairly rec experience that illustrates the futility of these proposals. Experiments in the 1930's.-In the 1930's we tried most of the proposals no being advanced to increase mass purchasing power. Our experience with Go ernment spending is well known. From a level of about $3,500,000,000 p year in the early 1930's, the budget rose to about $8,000,000,000 in the later year of the decade. These expenditures were first regarded as a temporary expedie required to prime the pump of private enterprise. The theory was that t spending would be reduced as business activity increased. Later in the decad when the ineffectiveness of Government spending as a pump primer became a parent, the emphasis was shifted, and the concept of economic maturity w advanced in order to provide a justification for a permanent program of Gor ernment spending. 1 Efforts to increase mass purchasing power did not stop with Governmen spending. The idea of raising wages in order to support prices and deman was aggressively supported, and the power of organized labor to enforce demand for higher wages in the midst of widespread unemployment was enhanced. E addition, corporate tax rates were increased in 1932, 1935, and 1938, and a ta on undistributed corporate profits was made effective for 1936 and 1937. T' individual tax structure was revised to make the system more burdensome, an the maximum surtax rates were increased from 20 percent prior to 1932 ) 75 percent in 1935. These were the means by which the policy of raising mas purchasing power was implemented in the 1930's. Results in the 1930's.-The results of these policies are well known to â of us. Only for a brief period in 1937 did the volume of physical productio" || rise to a level above that reached in 1929. Unemployment averaged more tha 8,000,000 for the years 1935-39 and even in the best year averaged 6,400,000 This record of failure is conclusive. It convinces me that we do not want t revive these policies. The pump-priming theory did not work; Government spending did not e courage business spending. On balance, this program and the measures that accompanied it did much to destroy the incentives and the means for private capital investment. Expenditures for construction and on producers' machinery and equipment averaged about 40 percent lower in 1935-39 than in the latter part of the previous decade. The policy of high wages resulted in increased costs, contributed to inflexibility of prices, and made difficult price reductions that might have increased sales. A wave of labor trouble and wage increases in 1937 was followed by a rapid rise in unemployment in 1938. Increases in taxes during the 1930's made less attractive that assumption of risk which is necessarily associated with private investment. Tax exemption became more valuable with each rise in the tax rates, so that more and more investors became less and less interested in risking their funds in new enterprises, and preferred the relatively secure haven of Government securities. Finally, business was called upon to adjust itself to a variety of new laws and regulations. Many of these were required to correct the mistakes of Gov nment and business during the 1920's. But the very vigor with which their actment was espoused, the all-inclusive nature of some of the changes, and e extreme manner in which some of the acts were administered, contributed a break-down in business confidence. In turn, this delayed our recovery. Shall we repeat our experiences of the 1930's?-This record of failure convinces e that a repetition of the policies of the last decade would be no more successful is time. Government spending is already much greater, both in absolute mounts and relative to the dollar volume of business in the country, than it was decade ago. Those who would espouse further increase in Government spendg from present inflated levels must assume the burden of proof. It is their ligation to demonstrate, conclusively, that Government shows greater wisdom its spending than do those who must pay the bill. Over a period of years, wages have been increased as labor productivity has sen. Gradual increases in wages and price reductions have been the means hereby the benefits of our productive system have been translated into higher andards of living. However, rapid and substantial wage increases, not ac›mpanied by increases in output, raise costs without increasing the supply f goods, and constitute a tax on the mass of consumers. Those who favor making our tax system even more steeply graduated apparntly ignore the tremendous increases that have occurred in the war years in e tax burdens upon those of modest means, and the confiscatory nature of the resent tax rates for those of large incomes. An individual in the $10,000 income racket can keep only 68 cents of each dollar of additional income; at $21,000 he an keep only 50 cents; at $90,000 he can keep but 20 cents. And it should not e forgotten that these rates also apply to dividend income, even though the orporation tax rate is double the high point reached in the 1930's, and more han three times the rate of the early 1930's. It is probably true that our present tax structure has carried the principles f progressive income and estate taxation, which are now generally accepted, o such an extreme as to endanger the very system of profit motives on which hey rest. The effects of these tax policies take time to make themselves apparent, and for a time the economy can live on its accumulated fat. Over a period of years, however, the effect can only be to erode and wear down the stock of risk capital, and to impede the flow of new risk capital on which American enterprise has depended in the past for its pioneering, its new ventures, its new industries, and its ultimate success. Summary. To summarize my point of view: 1. Although continued business readjustments lie ahead, demands on heavy industry are so great that a business downturn comparable with that of 1920-21 appears unlikely. However, if high employment and economic activity are to be sustained over a period of several years, business spending for plant and equipment must be encouraged. 2. The experience of the 1930's proves that a policy of low profits, sharply increased wages, higher taxes, and more Government spending does not achieve high employment and prosperity. 3. Fortunately, there are large accumulated latent demands for business plant and equipment. Recent scientific and technological progress has opened new vistas for a high and expanding level of business for a long time to come. 4. In order that these strongly favorable factors can be fully effective, Government policies should be directed toward stimulating the incentives and maintaining the ability of business, large and small, to continue programs of plant expansion and modernization. 5. The accumulation of risk capital must be permitted; its investment in business enterprise must be encouraged. 6. For the Federal Government, these policies are surely the only effective and the least expensive means of achieving the aims of the Employment Act of 1946. The CHAIRMAN. If there is nothing further, we thank you very much, Mr. Colt. I am informed that this room has been promised to a housing association tomorrow, so the committee will meet at 10 o'clock in the Finance Committee room, which is room 312, right next door to this room. (Whereupon, at 3:30 p. m., the committee adjourned until 10 a. m. Wednesday, June 25, 1947.) URRENT PRICE DEVELOPMENTS AND THE PROBLEM OF ECONOMIC STABILIZATION WEDNESDAY, JUNE 25, 1947 CONGRESS OF THE UNITED STATES, JOINT COMMITTEE ON THE ECONOMIC REPORT, Washington, D. C. The committee met, pursuant to call, in room 312, Senate Office ilding, at 10 a. m., Senator Robert A. Taft (chairman) presiding. Present: Senators Taft (chairman), Flanders, and O'Mahoney; presentatives Herter, Patman, and Huber. Also present: Staff members Charles O. Hardy and Fred E. Berist, and John W. Lehman, clerk. The CHAIRMAN. I think you had better go ahead, Mr. Hoffman. e meeting will come to order. Are you going to summarize this tement? Mr. HOFFMAN. Yes. The CHAIRMAN. All right. Go ahead, then. TATEMENT OF PAUL G. HOFFMAN, PRESIDENT, STUDEBAKER CORP., SOUTH BEND, IND. Mr. HOFFMAN. My name is Paul G. Hoffman. In response to your ide-open and somewhat dangerous invitation to express my views economic policy, I prepared a written statement which has been bmitted to you and which, I might add, is mercifully brief. I pe you will read it. My oral testimony will consist solely of quotations of statements om that document, to which I wish to give particular emphasis. hile the views I hold stem from discussions with my fellow busiessmen and the economists associated with the Committee for Ecoomic Development, I accept sole responsbility for this statement. First, I would like to emphasize the importance with which we in ED regard the work of your committee and the President's Council f Economic Advisers. We have high hope that the result of your work and that of the ouncil will be the development of a coordinated and progressive rogram of measures designed to meet the responsibilities of the 'ederal Government for a more stable and prosperous society. I would like to say, Senator, that I sincerely believe that the work f this joint committee may affect not only our own economy but the world economy in a most significant manner. CED defers to no one in the pride we take in the accomplishments f our American brand of capitalism and in our determination to help 65210-47-pt. 1- -5 61 |