Government v. Recession

ORGANIZED labor, most Democrats and some Republicans are demanding that the Administration "do something" about the business decline. The "something" usually includes a boost in individual income-tax exemptions, easier credit, and a massive program of public works. But most of these worriers overlook what the Administration has already done to combat a recession, notably in the fields of taxes and credit. Among the steps taken in the past year:

The Federal Reserve Board has cut bank reserve requirements, thus expanded bank lending power by $6 billion.

FRB has purchased short-term Government securities from the banks in the open market, thereby increasing the banks' lending reserves still more.

P:The rediscount rate, i.e., the rate at which banks may borrow from FRB, was cut last February; last week another cut (from 1 3/4% to 1 1/2%) was initiated in Chicago and okayed in Washington.

P:The Treasury has done its financing, not with the long-term issues the Republicans had hoped to use, but with short-term securities, to avoid siphoning off long-term investment funds for housing and other .construction.

As a result of all these measures, the interest rate on prime commercial loans has dropped from 2 3/4% to 2%. If needed, there is still more credit medicine in the bottle. The Federal Reserve, for example, could increase bank lending power by another $4 billion simply by cutting reserve requirements in New York and Chicago from 22% to 19%, to bring them in line with the lower requirements in other cities.

To nip inflation last year, the Administration cut spending sharply. The reverse of that coin has been an equally sharp cut this year in taxes. This has already put $6 billion a year into the hands of industry and consumers, including the cut in excise taxes, which was first opposed by the President, but finally approved "wholeheartedly." The Administration's tax reform bill now before Congress calls for another cut totaling $1.4 billion a year. Thus the total saving to taxpayers of $7.4 billion annually (less higher social security payments) would be the biggest one-year tax cut in U.S. history.

On top of deliberate antirecession measures, the Administration has been forced to take an inflationary step that had no part in its original plans. It has shelved plans for a balanced budget and resorted to deficit financing. Thus $3.3 billion in new money will be pumped into the economy because of the deficit this year. A deficit of another $3 billion is expected for the next fiscal year.

This kind of recession-fighting is not nearly so dramatic--or so easily understood--as a big public-works program. It also needs time to become effective. In 1949, for example, when industrial production dropped 18% and unemployment rose to 4,700,000, or more than 7% of the labor force (v. 5.8% today), the Truman Administration did nothing about public works. Instead, it took antirecession steps similar to those now taken by the Republicans. It cut bank reserve requirements, pegged U.S. bond prices to keep interest rates low, removed consumer credit controls. The budget, which had been running a surplus, began to run a deficit as tax receipts fell off. But industrial production did not start rising until a few months later.

Even if the current upturn in auto output, housing, retail sales and other fields should prove to be no more than a seasonal spurt, the Administration would find public works no fast-working wonder drug. In the Big Depression, it took 18 months after the start of the Government's public-works program to get the first 100,000 men on the payroll. Even by 1939, when public-works outlays of $3 billion equaled about 3% of the gross national product, there were still 9,500,000 unemployed. Public works equaling 3% of today's national product would total more than $10 billion a year, far more spending than now planned. Actually, the $40 billion a year being spent on defense production is, in effect, a gigantic pump-priming program. Another big trouble with an emergency public-works program now would be that it would stimulate the very industry that needs stimulation least, i.e., construction.

Despite the overall decline, there are many businessmen and economists who are against any emergency measures, such as public works, as long as construction is at record levels, individual liquid assets are at a peak of $300 billion ($6,500 for every family in the U.S.), and industry is expanding as fast as ever. They agree with Prudential Insurance Co.'s President Carrol M. Shanks, who thinks that the greatest danger to the economy "by all odds" is still inflation. The antirecession moves of 1949 needed time to stimulate the economy. In 1954, the antirecession medicines already given have not yet had a chance to take effect.

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