The needed emphasis on consumption A current or prospective deficiency in total private demand might, depending upon circumstances, call for primary emphasis on either consumption-stimulus or investment-stimulus. The period ahead, if it should have the characteristics suggested here, will call for the former shading of emphasis. This conclusion, in which many other analysts seem to concur, does not reflect any "prejudice" against business investment. Consumption is, of course, the principal objective of economic activity. But conversely, the rapid economic growth which supports increasing consumption over the long run also requires high and rising rates of business investment. The emphasis upon consumption is simply a reflection of recent relationships between the two principal components of private demand, is meant to apply only to the 3-year period under consideration, and during that period is believed to reflect the best interests of business itself. It should be noted that, after mid-1950, the Council placed even more emphasis upon expanding certain types of business investment than did many members of the business community, and that the Council also placed more stress upon restraint of consumption than many others did. Before proceeding to a more detailed analysis of investment-consumption relationships, two side notes should be inserted. In the first place, in discussing the balance between investment and consumption, the following paragraphs deliberately by-pass the subject of "investment" in housing. The latter, so far as the demand for the products of industrial capacity is concerned, is more properly treated in connection with the consumption side of the balance. It is separately discussed later on in this Review. Secondly, the following discussion may seem to overlook the possibility for demand stimulation in the field of net foreign investment. But even under the most sanguine assumptions, the scope for adjustment in this sector is small in comparison with possible demand needs of the domestic economy. And more important, the United States' international economic policy, of which our net foreign investment will be partly the resultant, should not be shaped primarily in the interests of general domestic stability and economic growth. Regarding these objectives, its direct impact in any case can be only marginal, although with respect to the Nation's vital objectives of international political stability and free world strength its international economic policies may be all-important. Because these issues might be distorted and would be unduly submerged in the present analysis, they are treated separately in chapter V of this Review. The investment-consumption balance and sustainable business investment rates. Both consumption and investment can grow continuously in an expanding economy, if they grow in a balanced relationship with each other. But there is a limit to how far either investment growth or consumption growth can outrun the other without pausing for the laggard to catch up. Eventually, if investment runs ahead for a time, a new balance must be struck between the newly expanded productive capacity which it creates and consumption expenditures. If, in the absence of such an adjustment, a weakening in total demand is forestalled temporarily by an additional step-up in new investment, the underlying problem is only postponed and deepened. Certainly it is true that the years since 1945 have witnessed a varying but unbroken investment boom-a boom, it should be emphasized, which, in the broadest terms, has been admirable and needed. The Nation entered this period having suffered a private investment famine, first in the thirties and then during the war. Capacity for civilian production was thoroughly inadequate to satisfy the new income levels achieved during the war, and business proceeded to expand it at a very high rate. Because of the very fact that this ratio of new investment to the total economy represented the reduction of a previous shortage as well as growth, it was unlikely that it could be maintained indefinitely. And then on top of this postwar recovery in civilian capacity, the postKorean mobilization program has laid on an accelerated rate of defenserelated investment. Meanwhile, although consumption levels since 1945 have been high, total real per capita consumption has increased very little. In relative terms, as a percentage of disposable income, consumption was not extraordinarily high in the postwar pre-Korean period, despite the fact that it too was subject to the additional stimulus of accumulated shortages. (See chart 28.) And as a percentage of total production, consumption held fairly steady in the neighborhood of 69 percent up through 1950, and then, under the joint impact of the security program and a higher savings rate, tumbled to about 63 percent in 1951 and 1952—the latter at a time when fixed business investment as a percent of total output remained at or somewhat above its high postwar pre-Korean rates. It would be dangerous to try to identify any single ratio between private investment and consumption that would be uniquely compatible with a balanced economic growth at some particular annual rate. However, the rough comparisons just indicated seem to justify a presumption that some relative gain in consumption sooner or later will be necessary. And various closer, but still not exact, analyses of the relationships between the economy's stock of capital equipment and such variables as gross output and the manhours of labor employed seem on balance to confirm this impression. Stimulating investment via consumption. The net conclusion that the Council draws is certainly not that, to avoid slack demand during the period ahead, encouragement of investment is to be avoided. Some additions to investment beyond the prospects outlined earlier are to be hoped for and, as indicated in the discusssion of policy below, sought by positive measures. The conclusion is simply that if a large increment of private demand is needed by 1955, it is most unlikely that the bulk of it can be achieved in the form of additional private investment. And even if by some quirk of circumstance it could be, it might well be an unhealthy adjustment, simply postponing further the day of reckoning. The same considerations lead back to a very familiar point-one which recent business surveys have often uncovered: A vigorous growth in consumption may not only be the primary requisite for a successful adjustment in the economy as a whole; it may also be the most effective means under present circumstances for stimulating additional investment itself. Particularly under the longer-run capital budgeting practices which many businesses have adopted, business investment is heavily dependent upon the prospects for the scope of markets-perhaps even more so, within limits, than upon the short-run prospects for profit margins. In a very real sense, a reasonable policy emphasis upon consumption raising may be the best single course that can be devised for supporting and strengthening investment. The investment-consumption balance and price-income relations. There is a price-income side to the consumption-investment story already outlined. Broadly speaking, the economy may be thought of as including three groups of income receivers-businesses, consumers, and government. Government, in turn, gets its income from businesses and consumers, for the most part via taxes. A rise in prices relative to wages, other things being equal, increases before-tax business earnings relative to before-tax personal income. A shift in this direction tends to favor investment relative to consumption when the general business outlook is good; conversely, a rise in wages relative to prices tends to favor consumption-unless there is an offsetting change in taxes. If business taxes rose at the same time that before-tax business earnings increased, for example, business would not keep its relative gain of income from consumers; it would simply serve as a channel for transferring that income to government. If there is need for an increase in consumption relatively faster than investment—as it now appears there will be during the next few years— a variety of income adjustments might support such an adjustment in expenditures. Some would involve a direct shift of spendable incomes from government to consumers, via either consumer-oriented tax reductions or increased government transfer payments to individuals. But another method-and the one which lies within the province of private price, wage, and other income adjustments-would involve a relative shift from before-tax business incomes to consumers' incomes, via either wage and salary increases or consumer price reductions. If such a shift were made in the absence of parallel tax adjustments, it would mean, of course, some reduction of after-tax profit margins (although, as is emphasized below, not necessarily of dollar profits in the long run). If it were coupled with business tax reductions, it could simply mean a shift to consumers of income which previously had been going to government. Table 14 shows that the increases in real disposable personal income in the postwar period have been relatively small, and suggests the need for improvement. In this connection it is interesting to note chart 29, which indicates that during the period over-all, contrary to the common impression, TABLE 14.-Indexes of gross national product, personal consumption expenditures, and per capita disposable personal income, constant price. 1 Estimates based on incomplete data; Council of Economic Advisers. Sources: Department of Commerce and Council of Economic Advisers. (See appendix tables B-2 and B-10.) average hourly earnings in manufacturing, adjusted for consumers' price changes, have not risen faster than the economy's general productivity gains, but instead apparently have lagged significantly. CHART 29 CHANGES IN OVER-ALL PRODUCTIVITY Since World War II, average hourly earnings in manufacturing TOTAL GROSS NATIONAL PRODUCT, 1952 PRICES, PER MAN-HOUR FOR ALL EMPLOYED PERSONS 2/ DEFLATED BY THE CONSUMERS' PRICE INDEX. SOURCES: DEPARTMENT OF LABOR AND COUNCIL OF ECONOMIC ADVISERS. |