The Economy
The Rich American Voter
By NICHOLAS DAVENPORT
SIR ALEC must be envying President Johnson the eco- nomic part of his elec- tion address. The racial problem apart, the Ameri- can voter has certainly never had it so good. In the second quarter of this year personal in- comes increased by $7,000 million—to an annual rate of $488,000 million—but thanks to the tax cut disposable incomes increased by $12,000 million, the largest quarterly in- crease on record. This brings the increase in disposable incomes in the six months to $20,000 million. Of this nearly $15,000 million Was spent and $5,500 million saved. All this money rattling in the American pockets must surely improve the re-election chances of Presi- dent Johnson—the Wall Street darling—on November 3. If Barry Goldwater were elected, the collapse in the stock markets would bring back fears of another 1929 slump.
The American economy under Democratic Management has achieved what no other capital- ist system has done—continued expansion with- out price inflation. It started with the big ad- vantage of a huge unused capacity, but the re- covery has now lasted over three and a half Years and is still going strong. While our own index of industrial production has lapsed into stagnation after only eighteen months of expan- sion—having been stuck at 126 since January— the American index has been steadily rising and for the eight months ended August gained nearly seven points to 133.5 against a gain of only 1.3 points in the second half of last year. This Puts the rate of American industrial growth at over 5 per cent a year, which is amazingly good in the fourth year of recovery. The unemploy Ment ratio has dropped to 4.9 per cent.
Of course, there are some warning signals. There could be a dock strike on the East and Gulf coasts at the end of September when the contracts expire. In the last few weeks the motor Workers have won what is regarded as an in- flationary wage contract from Chrysler and Ford and this is likely to be extended to General Motors. This involved for 1965-66 an annual increase in wages of a little over 4 per cent against the 3.2 per cent 'guide lines' recom- mended by the Government. But the motor in- dustry could easily offset this advance in costs by greater 'Output and improved productivity. The manufacturers have had a wonderful year and they expect to do even better in 1965 than In 1964, which will probably end with a record Sale of 7.8 million home-made cars. They are introducing this autumn the 'most sweeping changes in styling' since 1955—the awful 'slab look' seems predominant—and as the Chrysler President said : `No similar industry-wide model change in the past has ever failed to bring a strong stimulus to sales.' The best stimulus is, of course, tax cuts plus price stability. With their huge profits the motor companies could hardly dare to raise prices. So the incredible motor in- dustry, now virtually concentrated in three big groups, carries the booming economy along. Each year more cars are made,, more cars are Junked.' As more than 5 million cars are now scrapped each year, apart from the accidents
(against 3.7 million in 1955), the replacement demand makes for a steady trade.
The steel industry, which is producing a record 125 million tons this year, is always a potential source of trouble. It is thought that the motor manufacturers and other users will start stock- piling in case of a strike next spring and that the steel companies will put up prices to discourage it. This would • raise hell, but there is a good chance that the managements and workers will decide to open negotiations over the next labour contract well ahead of time in order to avoid a stockpiling upset.
What seems certain to carry the expansion of the American economy well into 1965 is the upsurge in capital spending. Businessmen have been so encouraged by the boost to consumer spending given by the tax cuts and by the more liberal depreciation rules which the late Presi- dent introduced that they have been revising upwards their •plans for spending on plant and machinery. At the moment of writing these projected capital expenditures are 13 per, cent above the 1963 totals and may soon be even higher (General Motors alone plans to spend $1,000 million next year). The gap between capacity and demand is gradually being closed and there is even a shortage of skilled labour re- ported in some trades. This suggests that the Federal Reserve may want to apply the dearer money brakes after the election to deter stock- piling. So far, the President has been able to keep the Federal Reserve in order—'it would be self- defeating,' he said, 'to cancel the stimulus of tax reduction by tightening money'—but he would be on safer ground if he could initiate, on British lines, a big long-term programme of social investment which would keep the economy moving upward when the present consumer- durable boom dies down.
Wall Street, of course, has moved into new high ground and every week some well-known stock marks up a record price. General Motors, which was as low as 771 this year, has just crossed the 100 level. Chrysler, which is regain- ing its lost share of the motor market, has moved up from 381,- to 66. Only an investment dollar premium of over 10 per cent has restrained British investors from plunging into the Ameri- can market. Seeing that American manufactur- ing companies raised their earnings in the first half of the year to a level 18 per cent above that of a year ago there is solid ground for a Wall Street boom. The Dow Jones index is now at its all-time high of 872. Who would vote for Barry and see it fall to 766 (its January low) when it is pretty certain that if Johnson is re- elected it will move during his next term to 1J000?
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