13 JUNE 1958, Page 27




A CHANGE has come over the economic scene in the United States. When I last wrote on this subject I had high hopes of the new Secretary of the Treasury, Mr. Robert Anderson, who, having gone on record that it was perhaps more important to stop till recession than it was to stop

the inflation, was not opposed to

making tax cuts even if it meant increasing the budget deficit. I had supposed that the President would take his cue from his en- lightened financial minister. But it now appears that both have shifted their ground, that both believe it to be more important 'right now' to stop inflation than recession. As for tax cuts they have set their faces against any such thing and are prepared to introduce bills to restore the re- ductions in excise taxes and company taxation which were automatically being made this July.

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The cause of this volte-face is traced back to le recent visit of the German finance minister, )(Actor Erhard. The Professor is said to have told he President that America might survive a defla- Fon but that it would never survive an inflation. This wild and foolish remark, coming from a Ger- man who is supposed to know everything about inflations, is believed to have made a profound impression on Mr. Eisenhower, who is not sup- lased to know very much about economics. But it is at least surprising that Mr. Robert Anderson should have fallen for such a dangerous reversal °f the truth. For while it is important for Western Governments always to take disinflationary action when an economy is veering towards inflation it - equally important for them to avoid adopting in uncompromising 'hard money at all costs' deflation if a dynamic and contented society is ? be preserved as the alternative way of life to -°111munism. Confidence in capitalism is a tender plant that needs careful watering.

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There is, of course, more to the Presidential '',11allge of heart than the influence of an itinerant Inman professor. Wages are still rising. Under ',Ting contracts wages will automatically go 'Pin the steel industry on July 1 and in aluminium In August 1. A price rise may follow. When the ?resent dispute in the motor industry is settled here is bound to be another wage lift for the t utemobile worker. Personal incomes actually .°se in March and April partly because farm „ ..'eftes increased, partly because Government Benefits and unemployment compensation offset the decline in the total of wages and salaries. This has ne doubt encouraged the President to believe rt a wage-cost inflation is still the paramount Danger. At the same time he has been told by his !)(Perts that by the end of the year Government Tending will have increased by $3,000 million we-thirds on defence) and State and local '°vernment expenditure (on new highways, etc.) 3 Y $2,000 million, which is said to be sufficient inu offset the expected decline in business spend- J.011 factories, plant and equipment. It is even 'aid that next year the Government will be spend- 'n8 g through budget deficits about $10,000 million more than it will be extracting in taxation. All this as convinced both Treasury and President that 3tax remissions are necessary. To reinforce the c inven- tories is said to be coming to an end and re- stecking should cause the economy to pick up with-

out any need for further pump-priming on the part of the Government. So the bottom of the recession has been reached—in the wishful think- ing of the Treasury official. When unemployment dropped in May below 5 million—from 7+ per cent. to 7.2 per cent. of the labour force—and employment began to improve more than season- ally and steel operations picked up to over 55 per cent., that was the end of the argument, but it was not, they will find, the end of the gold outflow.

But others do not feel so complacent as the President and his Secretary of the Treasury. A joint Congressional economic committee has just issued a report expressing fears that there will be no quick upturn in the economy, apart from that caused by some stocking up, and that un- employment may rise to 7 million by the middle of next winter. Full employment is unlikely to be reached, it said, 'before mid-1959 at the earliest and might not be achieved until late in 1960.' I have not seen the full report of this committee but 1 know that estimates have been circulating pointing to a reduction in business capital expendi- tures of $8,000 million in 1959 as compared with 1957. When business confidence has been badly knocked it is not easy to restore the old tempo of industrial investment.

The story is current that M r. Eisenhower is very angry with the moguls of Detroit and lays on them responsibility for the prevailing recession because they have stubbornly insisted on turning out cumbersome and expensive automobiles which the public do not want to buy. if they would only tool up for a smaller and cheaper model, he feels, the slump would end. General Motors and Ford are said to be launching such a model this autumn and if they have a popular success there may well be some revival in car sales. But there is more to the recession than mere consumer resistance to the motors of Detroit. Statistically, there seems to be a change in consumer tastes— a shifting away from spending on cars and house- hold durables towards spending on leisure and services. If that is a truer explanation of the reces- sion it may mean a prolonged decline in capital expenditures. An excess industrial capacity has been built up on the false assumption that growth in consumer durable expenditures would be con- stant. This situation will not be corrected by cheaper money but by carefully distributed capital expenditures by the Government calculated to increase consumer incomes and expenditures. Wall Street, by its bullish behaviour, shows that it has quite misinterpreted the outlook.