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However, while study of data on corporate profits (see appendix tables B-34 and B-38) and other business earnings confirms the need for some relative shift of before-tax income from business to consumers, it raises doubts as to the extent to which such an adjustment can feasibly be made in the absence of tax reductions. Before the last half of 1951, after-tax corporate profits were generally above historical levels. But recently, the ratios of after-tax profits to sales have for the most part been significantly below earlier postwar levels. It is not very likely that many businesses whose after-tax margins currently are below the present average will narrow them further. On the other hand, a general effort to return these net margins to their earlier and much higher levels, at a time when a shift toward consumption is needed, would be unfortunate and self-defeating.

The implications are clear: (a) The room available for general transitional price and wage adjustments may be partially dependent upon business tax adjustments; and (b) in the absence of such tax adjustments, an opportunity for helpful price and wage adjustments will center mainly in those industries and firms where present profit margins are relatively favorable. Roughly speaking, in the manufacturing sector this opportunity seems greatest—in terms of product-among durable goods producers, and in terms of size among the largest corporations.

WORKABLE LINES OF POLICY Private price and wage policies

Turning now to the various lines of policy which are available, it is logical first to take up private price-wage policy, because it is perhaps best attuned to the broad preference priorities previously established. Adjustments in price-wage policy afford the greatest amplitude for private action as an alternative to public compensatory action.

It is possible that the development in business and labor circles of an effective and coherent price-wage policy can raise real consumption several billion dollars annually. Such private “policy,” it should be noted, is by definition the province of decision-makers in the so-called "administered price” sectors of the economy. It would be imprudent to rely solely upon this answer to the deflationary risk-for one thing because, as the following analysis suggests, the scope of the opportunity for helpful price and wage adjustments may in turn depend partly on what happens to business taxes. Yet the contribution which private price and wage policy can make should not be overlooked.

Needed wage adjustments. In line with the above analysis, the specific wage and price considerations of a longer-run character which the Council wants to suggest may be set down as follows:

In the case of wages: First, in the event of a weakening in demand, wage cutting should be avoided. While such an adjustment may temporarily ease the situation of an individual firm, it can set off a dangerous chain reaction.

Second, during the period ahead, wage adjustments should continue to do their long-run job of helping to distribute the increased incomes resulting from improved productivity. As was said in the Economic Review of January 1950, with a growing potential for national output, the only way to translate this potential into actuality is to distribute more goods. If the price level is to be kept reasonably stable when the economy is in balance, then the increasing purchasing power necessary for expanding markets must come mainly in the form of consumer incomes rising in accord with improved productivity. And since wages constitute the bulk of personal income, the preferable general formula-once wages, prices, and profits are in a workable relationship—is for money wages to increase with productivity trends in the whole economy.

Third, while this long-run wage policy should be continued and more firmly established, it would be impractical and undesirable generally to strive for average wage increases in excess of productivity gains. The aggressive seeking of large wage increases under conditions of market weakness or theatening weakness would prompt abnormal industrial strife. And if won, increases in excess of productivity gains would subject many businesses to extraordinary cost pressures at a time when these would be most discouraging to new business activity. Wage policy, by and large, should stick to the job of helping to maintain the price-income balance and thereby the consumption-investment balance. In the price-wage sector, it is primarily the function of prices to help correct the balance. These general principles may have exceptions in some industries or business situations.

Needed price adjustments. The present challenge to managers to develop self-enlightened merchandising programs which also serve the needs of general stability, is a very real one, and it is not remote. Instead this is one strand of policy which, in the coming months, can safely anticipate the problems ahead without any serious risk either to those who make the venture or to the economy generally.

If a substantial deflation of economic activity should materialize, lower prices sooner or later would be inevitable. The need is for those in a position to do so—and in a position where such action will do the most good-to choose deliberate, anticipatory, and selective price reductions and other forms of aggressive merchandising. This is a positive means of avoiding the general economic break which might be the consequence of cautious or standpat pricing. And this general recommendation can be somewhat particularized.

First, for a variety of reasons, the suggestion is directed especially at the manufacturers of consumer goods. Even under present tax rates, opportunities for margin squeezing exist in many consumer lines. This is evident from profit data, and is suggested by the recent weakening of many raw materials prices relative to manufacturers' prices. Among consumer goods, the opportunities for promotional price reductions and for expanding markets for new and improved products may be especially great in case of

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consumer durables, although they do not end there. Moreover, the relatively stable character of distributors' percentage mark-ups tends to result in even greater absolute reductions at the retail level and thus bring about an added stimulus to buying.

Second, there is a need for more flexibility and willingness to experiment on the part of manufacturers. A high degree of conservatism, bred of a decade and more of sellers' markets-cautiousness in estimating demand elasticities, in estimating probable operating levels for price-making purposes, in adhering to stereotyped profit margin rules, and in experimenting with new products—may prove self-defeating. The scope of the demand for new or lower priced products can never be fully known in advance, but it can be explored.

Third, as long as the excess profits tax remains in force, for those manufacturers whose marginal tax rates are high and who at the same time can accept relatively minor reductions in after-tax margins, the tax provides a relatively costless and riskless umbrella under which the periment with promotional pricing and products aimed at untapped markets. Moreover, as implied earlier, if and when business taxes are reduced, it may be a mark of wise management to view the tax savings, not as a means for boosting margins back to earlier levels, but rather as an opportunity for developing markets via lower prices and product improvements.

To reemphasize, in conclusion, what was stated earlier, reductions in profit margins during the period ahead need in no sense conflict with a stable and indeed increasing level of absolute profits. In order to provide the needed growth in sales volume, a relative increase in the portion of national income going to disposable personal income seems necessary. In providing an increasing real volume of sales, margin reductions are far from being a dampener on profits. Anticipatory price adjustments tend, at the least, to prevent a fall in total profits with declining sales, and to stimulate the growth in the economy which is needed to improve dollar profit positions. Such anticipatory adjustments are far removed from the disorganized downspirals in prices which feed on themselves and contract rather than expand markets. Appropriately timed price changes should forestall rather than initiate this process.

Supporting public policies. Besides encouraging helpful private wage and price adjustments during the next 2 or 3 years, the Federal Government can help to make the economic environment more favorable for the kind of private adjustments which have been outlined.

First, if healthy wage adjustments are to help support the transition, it will be important that changes in industrial relations law do nothing to undermine the collective bargaining position or general morale of labor.

Second, Federal legislation may, to a significant degree, determine the effectiveness of retail price competition, and, as a result, the extent of the impact which promotional pricing at the manufacturing level would have on consumers. To a considerable extent in recent years, it has been the aggressiveness of chain store, mail order, and department store merchandising which has kept a keen edge on retail competition. It is essential that the Government undertake a thoughtful review of its antimonopoly and market regulating policies to guard against any progressive blunting or weakening of competition in consumer markets. Private investment policies

Promotional pricing and aggressive merchandising, by increasing sales and sales prospects, would themselves tend to react favorably on business investment. In addition, looking ahead toward 1955, private investment may be strengthened more directly by certain private and Government policies. The need is for positive and energetic search for new and expanding investment lines, for opportunities in the less developed regions in this country and abroad, and for the fuller exploitation of potential markets for existing products and services.

As chapter III has indicated, there are many growth possibilities which will open up in the next few years to the vigorous enterprise which has characterized the American economy more notably perhaps in the last decade than ever before. These fast growing lines, for which future growth prospects appear bright, include many newer ones such as man-made fibers other than rayon, plastics, magnesium, synthetic rubber, antibiotics, air conditioning units, television sets, combination washer-driers and other household equipment, and frozen foods. Many older lines such as aluminum, gypsum board, rayon, fertilizers, certain acids and other chemicals, and tractors are also growing rapidly. These promising prospects include, not only raw materials, capital equipment items, and both durable and nondurable consumer goods, but also a variety of services such as air freight and passenger business, motor courts, electric power, and telephone service. Other fast growing activities are quality improvements in established products such as power steering and automatic transmission mechanisms on automobiles, and electronic devices used to control industrial operations. Undoubtedly numerous other industries and products, now barely on the horizon of economic possibility, will move into the range of active business development within the next few years.

What may private business on its own initiative do to bring about the fullest realization of private investment opportunities, both for growth and stabilization purposes?

First, private business can maintain and expand the whole range of its activities which come under the heading of research and development. In 1951, some 1.2 billion dollars was spent directly by private industry for this purpose, with additional large amounts being spent on industrial and related research through Government. Many of the more progressive firms devote relatively high percentages of their sales revenues to research and accord research an important place in managment.

Second, the practice already widespread among business leaders of programming investment several years ahead, often 5 to 10 years, might advan

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tageously be adopted more widely. With business generally in a strong financial position, this would serve to promote growth and stability at the same time. It permits more orderly financing, more regularized purchasing programs, and sets a condition for more stable and longer-term wage and other agreements with labor.

Third, more careful surveys might be made of the markets for present and possible new products and services. This would provide a firmer underpinning for both research and development and long-range investment planning. Again, many firms undertake this kind of analysis, but it could well be done more generally.

Fourth, existing business firms, especially those looking to the establishment of new plants or branches, as well as persons contemplating the formation of altogether new firms, would do well to examine carefully the prospects for their particular operation in some of the less developed areas of the country. Relatively rapid growth in population and incomes in the Southwest and the Far West, for example, mean better market prospects. In the old South, the momentum of the industrial development which has gained strength in recent years, plus the rapid increase in income, point to this part of the country as a desirable location for many types of business, operating at wage rates compatible with those in other areas. In the older industrial areas of the Northeast, especially New England, most strenuous private efforts are being made, and will have to continue to be made, to move from the older textile and shoe industries toward new and rapidly growing lines such as electronics, research services, electrical and machinery lines, among others.

While first reliance should be placed upon privately initiated action to strengthen investment, there are many Government measures which may be taken to encourage private investment, and which do not add much if anything to Government expenditures. First, basic research and experimentation carried out by Government can provide the technical basis for private investments. For example, technical and economic research in synthetic liquid fuels has reached the point where private investors are now actively interested in the establishment of synthetic liquid fuel plants. Second, credit guarantees of various sorts on the part of Government, such as in housing, provide a stimulus to private investment. As noted later, the terms on which such credit is guaranteed may be altered to encourage investment. Third, in certain instances, the extension of certain socially desirable Government regulations may, as a by-product, induce private investment. For example, State and city governments may require through ordinances that both municipal and industrial water pollution control measures be taken. Fourth, properly timed tax reductions, discussed subsequently in this Review, can be a potent force for maintaining investment-particularly under present circumstances, those which expand consumer markets.

The smaller business segment of the economy might be aided by a further

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