THE ECONOMIC STATE OF THE UNION
By NICHOLAS DAVENPORT When the resources of a country are being over- strained a budget deficit can, of course, add fuel to an inflation, but when there is an economic slack expressed in unused manufacturing capacity and high unemployment, it is absurd to say that deficit financing is inflationary. The index of American production after the sharp rise of the last eight months is still nearly 4 per cent, below the level of December, I956—the steel industry is operating at 25 per cent, below capacity—while unemployment, after a sizeable fall, is still over 6 per cent, of the labour force. It is true that there has been a wage-cost inflation, but this is due to the fact that the bargaining power of the unions has been largely unaffected by the recession. The hourly wages of workers in the durable goods in- dustries, for example, where unemployment has been most severe, are over 3 per cent, higher than they were at the peak of the last boom. 'More and more industrialists,' says the Financial Times, 'are becoming sceptical of the ability of the Federal Government to break the wage-price spiral simply by means of tight money and fiscal restraint.' British industrialists came to much the same con- clusion after the dear-money regime of Mr. Thorneycroft.
At the moment American manufacturers are beating the wage-cost inflation by increasing out- put and productivity. Thanks to their improved mechanisation they have not re-absorbed all the labour they discarded. This in itself creates an economic problem—how to maintain demand in an industrialised community needing less, not more, labour when those employed have already satisfied their major wants. President Eisenhower is surely running the risk of unbalancing his economy still further if he blindly insists on re- ducing government expenditures to please banker friends and conservative Congressmen. He may end in slowing down the recovery and at the same time he may fail to protect his precious dollar.
It is not the size of government expenditure but the nature of it which is tending to upset the American economy. According to the President's message farm subsidies are running at over $5,000 million, or about two-fifths of all farm incomes. How far is the rise in food prices due to this ridiculous policy? By July the accumulated farm surpluses will reach $9,000 million and they will be costing the Government $1,500 million a year to store and handle them. Defence expenditure has now reached a total of $47,000 million if one includes provision for atomic energy and foreign aid. The President deplored the expensiveness of the new weapons—long-range missiles at $35 million each, nuclear-powered submarines at $:50 million and supersonic bombers 'worth their weight in gold.' A costly arsenal if it keeps the peace is, of course, cheap, but these huge defen expenditures are in themselves inflationary,
It is the 'follow through' from the present covery which can be endangered by a too has retrenchment and balancing of the Federal budge If the President's prophecy of 1960 as 'the n10 prosperous year in our history' is to be fulfill there must be a resumption of the capital invo ment boom which came to an end in 1957. f the moment the decline in capital spending private business seems to have ended and the lat figures indicate a slight—very slight—upturn. it is too early to be confident and investment pla fling might well be upset by the proposed cut / $3,400 million from the civilian budget. In fact,
1
the President is persuaded by Mr. McChesa t Martin of the Federal Reserve, who is all 1 ' dearer money, to put what he calls 'a stable doll31'' before an expanding economy he will run in! serious trouble.
It is not foreign distrust of the dollar whie, caused America the huge loss of gold last ye, of $2,284 million : it was a balance of paymen deficit due (in spite of a visible trade surplus) American transactions (including aid and invq, ment overseas) with the rest of the world. IF United States still holds just over one-half of' free free world's monetary stock of gold (haVi $20,000 million of the stuff) and of this pile t gold in excess of that required as cover for currency is over $8,000 million. True, this is I than what the United States owes, as banker, ., foreigners on official and private account (s11()/ term), but that is also the gold position of GO' Britain and no one distrusts sterling on t account today.
It is probable that American manufactu have now priced themselves out of some of t world's markets and if a bad slump in titd exports began to hurt the economy the Amer Treasury would have to discuss with its fello ,
icil members of the IMF a writing-up of the doll price of gold, hoping no doubt to persuade GrO Britain and Germany that their exchange rat could be adjusted to allow some depreciation the dollar. Pace Sir Roy Harrod I hope we shou always object strongly to any up-valuation of stefli ing, but the outcome might well be an agree
writing-up of the dollar price of gold to the great relief of the world's trading reserves.
As the State of the Union message is addressed to a world audience it is a pity that President Eisenhower did not add a word of welcome to the new convertible currencies of Europe. If a gold standard, not a dollar standard, is to be worked in future, the new rules must be clearly understood. These, in the present state of politics, flo not include fiscal operations designed to cause heavy unemployment.
Previous page
