8

From the Government expenditure figures already presented, the total Federal Government take of goods and services may be as high as $59.0 billion in fiscal 1952, compared to $21.2 billion in the first quarter of the fiscal year (July to September 1950). Expenditures of State and local governments are not only rising but under the impact of civil defense programs are likely to continue to expand to about $22.0 billion in fiscal 1952.

The only segment of the demand for gross national product which has not yet been estimated under this procedure is business spending, whether for foreign or for private domestic investment. The former is small and will be assumed to remain relatively constant. An examination of the historical data with respect to the latter, that is, gross private domestic investment, shows that, although it changes much more violently than any other segment, rarely does it change in absolute amounts or in billions of dollars more than half of the absolute change in combined expenditures by consumers and government. If this relationship holds true in the present period, the level of gross private domestic investment which was $37.3 billions in fiscal 1950 and which promises in fiscal 1951 to jump by more than a third to $53.5 billion may rise further in 1952 to about $61.5 billion.

Despite controls over building materials and steel, the level of business investment may stay high. In the first place, industry is operating in many industries at rates exceeding normal rate of capacity, i. e., above the "peak" economic rate. Furthermore, Government programs as set up under the Defense Production Act and the tax amortization deductions permitted in recent tax legislation will tend to provide incentive to increased investment, especially for concerns subject to excess profits taxes. The lack of dependability of supplies and anticipated price increases will cause business to increase their inventories to the maximum allowed under present inventory rules of the National Production Authority. As a general rule, retained earnings after taxes and dividends will remain at current extraordinarily high levels. Credit, especially for so-called defense production, is freely available. Business spending for plant, equipment, and inventories will consequently be as high as controls over inventories and construction will allow.

To sum up, incomes from gross national product could rise from $284.3 billion in the first quarter of fiscal 1951 (July to September 1950) to $385 billion in the fourth quarter of fiscal 1952 (April to

* See table II, p. 58.

The detailed estimates and the calculations of possible price rises under a secondary inflation are as follows:

June 1952). These figures represent demands in current dollars under conditions of self-generating inflation. On the average, these estimates of gross national product correspond to an estimated total demand consumers plus business plus government) of $305.2 billion in fiscal 1951 and $364 billion in fiscal 1952. These figures imply a possible minimum inflation due to uncontrolled secondary effects of at least 20 to 25 percent by June 1952 even with price and wage controls striving to keep primary inflation in check. In other words, if no new fuel is put under the boiler at all (i. e., all wages and prices are frozen as much as possible at current levels) the fuel now there will drive the inflation thermometer up further by the amount estimated.

These estimates of the further effects of "hot money" already loose in the economy presuppose present direct economic controls, present tax laws, and persistence of normal relationships between various sectors of the economy. Precise accuracy is, of course, impossible but there are ample grounds for maintaining that these estimates, far from being "scare" figures, understate the dangers which this Nation faces from secondary or cumulative inflationary pressures already let loose even if further primary pressures are checked.

Two sources of secondary inflation have been completely ignored: (1) Abnormal shift of liquid assets of individuals and business into goods and services; and (2) further excessive increases in the velocity of circulation and volume of available money and credit. As of September 30, 1950, manufacturing corporations alone had cash amounting to $12.9 billion. All non-bank corporations and associations on December 31, 1950, held $60.5 billion of Federal securities while individuals held $67.2 billion. These Government securities are equivalent to cash. The total of these three items of liquid assets alone amounts to $140.6 billion A shift of as little as 10 percent of these assets to the ownership of goods and services would add $14.1 billions to the monetary demand bidding for that which the Nation can produce.

For every billion dollars of United States Government securities sold to the Federal Reserve System under the present pegging operations, bank reserves can be increased sufficiently to support additional loans by the banks of $4 billion to $6 billion. Clearly the estimates of possible secondary inflationary demand made above may well be excessively conservative, especially so if further secondary inflation is allowed to accelerate the current "flight from the dollar."

Primary inflation

How large are these primary inflationary demands resulting from an unbalance between incomes (demand) and supplies available to each sector of the economy: Consumers, business, and government? To make precise estimates requires much better data and more detailed knowledge of the interrelationships between various segments of the economy than is at present available. However, it is possible to translate various likelihoods into rough magnitudes.

As is well known, at any stated level of prices and output, incomes from gross national production are equivalent to expenditures for gross national output. Total incomes, therefore, in this primary demand estimate consist of the total supply of goods and services. estimated in table VII, page 73, revalued at current prices. Since our objective is to stabilize the price level at as near the current level as is feasible, total demand can be calculated upon the basis of the

income flows that result from producing the output shown in table VII at the prices currently prevailing in the December 1950 to January 1951 period. This would mean a dollar volume of gross national product of at least $325 billion.

Since total incomes derived from gross national production will also be equivalent to this $325 billion, how much will have no physical counterpart and hence be "hot money" in the pockets of consumers and of business likely to bid up prices? Basically, this depends upon how much of the physical output the Government takes. Wages and profits will be earned on the production both of civilian items and of defense items, yet consumers will spend their incomes (except for savings) mostly for consumable goods, and businessmen will spend their earnings and borrowings mostly for capital goods. Since the Government will be taking an increasing share of the gross production rising from the present levels of about 7 percent to one of about 16 to 20 percent by the end of fiscal 1952, there is bound to be more consumer funds than there will be consumer goods available and likewise an excess of potential business spending over the supply of capital goods available.

In making the estimates of primary demands, no allowance is made for taxes other than those provided for in the January 1951 tax schedules. If normal relations persist between the various incomes from the gross national product, the primary consumer demands in quantitative terms are estimated to be as shown in table IX, page 82. If gross national product be $325 billion, the corresponding national income may well be about $273.3 billion after making adjustments for capital consumption allowances, for indirect business tax and non tax liability, business transfer payments and Government subsidies, less current surplus of Government enterprises. If the national income is adjusted for elements of business income and Government income that do not flow to individuals, the estimate of personal income approximates $244.5 billion. At present tax rates this would mean disposable personal income of about $220 billion for fiscal 1952 and about $207.7 billion for fiscal 1951.

Not all of this disposable personal income would be spent on current goods and services. In periods of high prosperity and full employment consumers have shown a tendency to save an average of about 5 percent. During fiscal 1951 they apparently will save slightly less than this because of their rush to obtain durable and other goods, while the getting was good. For fiscal 1952, however, it may be conservative, in view of the lack of durable goods and other controls, to estimate that they will save no more than the 5 percent usually set aside for savings in other periods of full employment. If so, personal savings will be at least $11 billion in fiscal 1952 and about $8.9 billion in fiscal 1951. Therefore consumer demand for goods and services could amount to $198.8 billion for fiscal 1951 and $209 billion for fiscal 1952.

How much will be the demand of business for capital goods? This is much more difficult to estimate than consumer demand. On the basis of the post World War II relationship of profits adjusted for changing inventory values to total business activity, corporate profits might be about $44 billion in fiscal 1952 compared to about $41 billion in fiscal 1951. (See table X, p. 83.) In 1951 inventory profits may total about $4 billion but if prices are stabilized at about current

levels. nothing further needs to be added for inventory profits in 1952. At current corporate tax rates, corporate profits tax liability would amount to about $24 billion in fiscal 1952. At recent ratios of dividend payments to corporate profits after taxes, dividend payments can be expected in fiscal 1952 to approach $7.5 billion compared to the $10 billion which it is estimated corporations will pay out in fiscal 1951 and the $7.8 billion they actually paid out in fiscal 1950.

If to the resulting undistributed profits totals remaining after tax liability and dividend payments, there are added the capital consumption allowances available to corporations for spending and the amount of dissaving that they ordinarily make at current levels of activity (dissaving means a borrowing of corporations as a group from individuals or financial institutions) total business demand in 1952 may total about $51.3 billion compared to $47.7 billion in fiscal 1951 and to an actual $35.9 billion in fiscal 1950.

The demand of Government for goods and services is, of course, equivalent at current prices to Government expenditures as set forth in table II, page 58 (except for those items in the Federal budget which represent transfers of income to business and individuals and which have been included in the estimates of business and consumer demand. These include transfer payments, such as unemployment compensation and old-age assistance, net interest paid to individuals and business, and some small items to foreign loans, errors and omissions in translating from the Federal budget concepts to gross national product concepts used by the Department of Commerce.) In table II, the low assumption implies expenditures by the Federal Government of $65 billion, the middle assumption $75 billion, and the high assumption $85 billion. If these are adjusted for the income transfers indicated above, Federal demand for goods and services would amount to $49 billion (low), $59 billion (middle), and $69 billion (high). In addition, State and local governments, on the basis of past trends, can be expected to demand about $22 billion in goods and services regardless of what assumption is made as to Federal expenditures. To sum up the total of all demand (consumer plus business plus Government), the total demand would be $331.3 billion (low), $341.3 billion (middle), and $351.3 billion (high).

SECTION IV ESTIMATES OF EXCESS DOLLAR DEMAND

It is now possible to estimate the inflationary excess of demand likely to be generated under present economic controls over the supply of goods available at constant prices. Sections I and II provide estimates of the supply of goods and services likely to be available in terms of constant prices through fiscal year 1952. Section III provides an estimate of the money demand likely to be generated by increased economic activity and defense spending in that period even if present controls are fully effective. For each sector of the economy, an estimate of the inflationary excess is obtained by subtracting the supply or gross national product at constant prices from the amount of available dollars.

How much is consumer inflationary pressure likely to be? Its magnitude will depend on the amount of Government expenditures. If Government expenditures are low, the supply of goods and services to consumers will be high, so that the amount of excess dollars will be

low. If Government expenditures are high, the consumer supply of goods and services will be low and the inflationary excess high. As elsewhere in this report, "low" is defined in quantitative terms in table IX and the other tables on the basis of total Federal Government outlay in fiscal 1952 of $65 billion. A total of $85 billion is assumed to be "high," while $75 billion is assumed to be the middle estimate. Table IX shows that on these three assumptions, the inflationary consumer demand is estimated at $3 billion (low), $10 billion (middle), and $16 billion (high).

TABLE IX. Excess consumer inflationary demand on the basis of existing tar program, fiscal years 1950, 1951, 1952

1 Assumes Federal consolidated cash expenditures of $65 billion. Assumes Federal consolidated cash expenditures of $75 billion. Assumes Federal consolidated cash expenditures of $85 billion. Assumes prices stabilized at approximately Jan. 25, 1951, levels, with wholesale prices some 11 to 13 per cent above June 1950 levels, and retail prices 6 to 8 percent above June 1950 levels.

For fiscal 1950 the inflationary pressure was negative, prices declining by about 1 percent.

For fiscal 1951 the inflationary pressure will result in a substantial rise in prices of 6 to 8 percent; a larger price rise than indicated by the primary inflationary excess demand shown above because secondary spiralling effects have been permitted.

Source: The U. S. Department of Commerce, Bureau of the Budget, and the staff of Joint Committee on the Economic Report.