From the 1962 Annual Report, United States Steel Corporation.
The year 1962 was one in which the nation’s total production, employment, and money income were all greater than they were in any previous year. The record was marred, however, by the failure of expenditures for new plant and equipment to be significantly greater than those of five years ago, by the persistence of pronounced unemployment, by the development of a large fiscal deficit where balance had earlier been promised, by one of the sharpest stock price declines in security market history, and by a continued adverse balance of payments situation resulting in further decreases in our already shrunken gold reserves. There has been economic improvement but its extent has proved far from satisfactory.
Underlying the disappointing features of the situation and in substantial measure responsible for them is the continued failure of profits and profit prospects to provide the incentives on which peacetime expansion of employment and production entirely depend. Corporate profits as a percentage of sales were only about three-fifths what they were in earlier postwar years; the percentage was scarcely better than it was in the depression year of 1954. The profit squeeze, and its origins, is thus of significant interest; it is of especial importance to the owners and employees of steel companies, because the steel industry is experiencing the profit squeeze and its consequences in more acute form than are many other industries.
For example, its profit margin on sales has, since 1958, been reduced by approximately one-third despite the fact that it shipped approximately one-sixth more steel. The 1962 profit margin was smaller than that of any nonwar year since the depression year of 1938. Its product prices have not increased since 1958; its hourly employment costs have increased by approximately 20 per cent; and it has been squeezed out of some markets so that it and its employees have lost to foreign producers some 6 to 10 per cent of the market they formerly supplied.
The critical importance to progress of profits and profit prospects merits public attention. Such attention is especially relevant in view of proposals being advanced to "cure" the unemployment and other adverse features previously noted. Involved may be important national policies with respect to taxation, government expenditures, international trade, monetary matters, labor, subsidies, and prices. These policies constitute a significant segment of the institutional framework within which the American economy functions and they may be at the present time of overriding importance.
It seems probable that present policies in these areas are at least partly responsible for what is regarded as unsatisfactory economic growth or so-called "high level stagnation." The prospect of their public and legislative review and revision thus holds the hope of alterations in them that will release the growth and employment incentives; it presents also the fear that, flinching from the supposedly unpopular, there will instead be dangerous resort to "easy-way-out" measures long since proven fallacious. Careful scrutiny is well warranted.
Profits and Employment
That the profit squeeze lies at the root of other unsatisfactory features of the situation is clearly evident in terms of ordinary observation, accepted economic principle, and the statistical record. In the matter of employment, for example, it seems clear that there is no dependable reason why any person ever hires another except that he values the service thereby received more highly than its cost to him. In the case of corporations which pay some three-quarters of all nongovernmental wages and salaries, this means that, within their financial capabilities, they will invest in tools of production and will, with alacrity, hire people when a profit from so doing is foreseen—a profit which is significantly greater, of course, than can be obtained by relatively riskless investment of money in, say, tax-exempt bonds.
Conversely, it follows that when the cost of hiring people is too high in relation to the prices at which resulting products can be sold, then they are competitively compelled to reduce their employment of people since loss is the only alternative. It is axiomatic that it is the prospect of profit, and it alone, that inspires the productive employment of people in the private economy; it is the dimming of that prospect that breeds unemployment and stops economic growth.
This principle has long been recognized by so-called conservative and liberal economists alike. For example, the late Lord Keynes in analyzing the unsatisfactory economic condition of his own country in 1931 wrote, "We live in a society organised in such a way that the activity of production depends on the individual businessman hoping for a reasonable profit, or at least, to avoid an actual loss. The margin which he requires as his necessary incentive to produce may be a very small proportion of the total value of the product. But take this away from him and the whole process stops. This, unluckily, is just what has happened. The fall of prices relative to costs, together with the psychological effect of high taxation, has destroyed the necessary incentive to production. This is at the root of our disorganisation. It may be unwise, therefore, to frighten the businessman or torment him further."
The principle is confirmed by the record. Shrinking profit margins go hand-in-hand with rising unemployment percentages. From 1929 to 1932 corporate profits as a percentage of sales declined from about 5 per cent to less than nothing; and the percentage of those unemployed increased from about 3 to 24. By 1936-37 the profit percentage of sales had risen to about 31/2; and the unemployment percentage decreased from about 24 to about 15. In 1938 the profit percentage dropped to about 11/2 and the unemployment percentage rose to 19. In the non-war years since then, as shown in the accompanying chart, the tendency for unemployment to increase as profits decrease is also clearly observable on the record. It is not mere happenstance that the postwar downtrend in profit margins has been accompanied by an uptrend in unemployment that now threatens to become chronic.
Restatement of Principle
Once it is recognized that employment rests wholly on the profit expectations of employers, that truth can be restated to serve as a validity check on policy formulation. For example, if labor leaders find themselves unable or unwilling to propose and pursue any policies that demonstrably improve employers’ profits or profit prospects, then by this default they contribute nothing to getting people back to work and instead tend to guarantee that unemployment will continue or increase.
Similarly, if legislators are unable to revise or devise tax or other laws that will demonstrably permit or promote improvement in the profit prospect, then they, too, contribute nothing to getting people productively re-employed. Similarly, if the administrators of law cannot conduct themselves in ways that avoid undermining confidence in the profit prospect, then they, too, contribute nothing to alleviate unemployment and permit economic growth.
Similarly, if professional economists engage in establishing "guideposts" for wage setting, then they should admonish that no increase in the general wage level is warranted when there is pronounced unemployment; for they, better than any other group in the land, must know that the presence of pronounced unemployment is in itself proof complete that the level of wages is already too high in relation to the level of prices at which the fruits of employing people can be sold.
Finally, if the profit and loss makers themselves cannot propose policies to unleash the profit incentive that will be considered on their merits, rather than rejected out of hand as self-serving proposals, then they, too, can contribute nothing.
The Root of the Trouble
Yet such policies must be evolved and established for, as earlier noted, the profit squeeze lies at the root of the unsatisfactory features of the economic situation. Thus, if profits are squeezed and unemployment thereby increased, the fiscal problem is aggravated; for the income tax bases are relatively diminished at the very time the welfare burden is enlarged. If large fiscal deficits should occur, then the unsettling question of their inflationary financing is raised; and should that question arise, then, in turn, the risk of undermining international confidence in the dollar’s stability is heightened.
If profits are squeezed, then not only is this source of job-creating expenditure for plant and equipment curtailed, but the ability and incentive to attract "outside" capital is simultaneously impaired and this, in turn, reacts to maintain or worsen the unemployment situation. If industries do not make modernization expenditures, then they must lag behind in international competitiveness; and this reacts to worsen our adverse balance of payments situation.
As Keynes said of his own country many years ago, the impairment of the necessary profit incentive to production is the root of our problems. If this situation is adequately corrected, it thus appears that little else is imperatively required; if it is not, then other measures must prove comparatively futile.
Origins of the Profit Squeeze
Some light on the appropriateness of corrective measures may come from noting the origins of the profit squeeze. They appear to be both economic and political. It is historical fact that great wars cause postponement of the production of numerous durable consumer, producer, and public goods not needed in the war effort. Such goods already in existence are made to last a little longer. The big backlog of demand created by World War II became the basis for a long reconstruction boom financed by "soft" money policies adopted during and inherited from that war. Following that war this country not only had its own backlogs to take care of but it undertook to aid reconstruction in other lands. Our government, through loans, gifts, or expenditures, has supplied some $120 billion of taxpayers’ money to foreign countries and people.
Under cover of the boom a great inflation in hourly employment costs was engendered; and total taxes have risen to near three times their peak wartime levels. During the boom and while scarcities and "soft" money still existed, prices could increase to cover the employment and tax cost inflations without extinguishing the profit margin reason for employing people.
Such booms end; and it now seems probable that basic world capacities and competitive capabilities were substantially restored or over-restored by 1957 or 1958 because, since then, basic commodity prices have been drifting slightly downward, and the international balance of payments has been seriously and regularly against us, as well manifested by shrinkage in our stock of monetary gold. Cost-covering price increases have met resistance from world-wide sufficiency of capacity. But the domestic wage inflation did not similarly halt. It has continued, thus intensifying the cost-price squeeze on profits and employment opportunities.
During the boom this country "geared" itself not only to satisfy normal living demands but to supply the great—but transitory—backlog demands. With the "catch up" demands satisfied there is overabundant ability, for a while, to meet normal living demands. Portions of manpower and industrial capacity are not now needed for the former purpose, and their competitive pressure on markets is part of the profit squeeze.
This need not be regarded with dismay. Instead, it represents opportunity; for, having overcome the ravages of war, resources are thereby released to speed innovations that spell progress, if we but have the wisdom to establish the policies permitting and promoting it.
The "Spending" Cure
It is sometimes supposed that increased government spending can cure economic troubles—especially unemployment. It is a seductive notion that must be regarded with much skepticism. As background it may be noted that government in the
Government expenditures are financed by taxation supplemented by borrowing. According to official government data, a little over half of the taxes are loaded directly or indirectly on business and inflate (by about one-quarter) the amounts that must be secured in the market place to cover the disbursements required for continued private production. The rest of the taxes are levied on individuals as a transfer of big parts of their buying power to government.
It is apparent that government has become a monstrous burden on the economy and that its costs constitute a big element squeezing profits. To suppose that by becoming a still bigger burden it would thereby improve profit prospects is, on its face, upside-down reasoning; for the opposite is called for. Part of the spending cure theory rests on the fallacy that by resorting to "deficiteering"—spending more than is collected in taxes—the nation’s so-called purchasing power can be increased with happy results for everybody.
But government cannot give purchasing power or anything else (except promises) to anybody without first securing it in some fashion from the governed; to suppose otherwise is to engage in arithmetic nonsense. It need only be noted that if government covers its deficits by borrowing—how else?—it thereby usurps sayings or credit resources that might otherwise be invested or utilized in employment-providing production of marketable goods. What is given through deficiteering is equivalently usurped through borrowing, and no new self-sustaining jobs come into existence; such jobs are created only when savings are productively invested in the hope of profit. The burden of government is best measured by the larger of its taxes or its expenditures; reductions in both are now called for.
In the 1930′s the deficiteering cure was tried out on a monumental scale and failed miserably in its purpose. For the fiscal years, 1931 to 1939 inclusive, federal deficits averaged 4.6 per cent of national income. In today’s magnitudes this would mean deficits averaging over $20 billion. It did not cure unemployment: in 1930, before the deficiteering, unemployment averaged 8.7 per cent; in 1939, following it, unemployment averaged 17.2 per cent. Only under the survival stimulus of war was unemployment reduced to less than 5 per cent in 1942.
It is now so generally accepted that it need only be briefly mentioned that our federal income tax structure could scarcely be better designed to extinguish the profitincentive, confiscate capital, and paralyze the growth processes. As the President of the
The war is ended; but the repression remains. The taxes are unfairly "loaded" against efficiency and profit-making. Income taxes on corporations are approximately equal to their combined dividends and reinvested earnings. When earnings are transferred to owners as dividends, they are taxed again as individual income—and this despite the fact that dividends, which are all that the risk-taking stockholders get from their corporations, are less than 4 per cent of national income. Inefficient or nonearning corporations pay little or no income tax and are thus, in effect, subsidized at the expense of the efficient. The steeply progressive individual income taxes, with rates running up to over 90 per cent, also could not be better designed to siphon off the savings margins of the more productive and efficient and to discourage the productive investment of what remains in profit-seeking ventures.
It follows that in the present situation, when profit incentive stimulation of innovation is sorely needed to stave off threatening stagnation, hardly anything can be considered more logical than reduction in the stifling burden of government taxation and expenditure and reform of the tax structure. In this connotation "reform" does not mean so-called "loophole" closing or taxation in additional areas which offset the effect of reduced rates. It means, instead, a general determination to substitute for present incentive-destroying taxation a more equitable system so that savings will be permitted and their confident investment in profit-seeking innovation will not be discouraged.
Since employment costs in the private productive economy are three times as great as the total taxes on business, it follows as a matter of arithmetic that changes in the wage level have three times the effect on profit margins as do changes of similar proportions in the tax level. It next follows that the leaders of labor with their ability to influence the wage level have it within their power to offset or to augment tax changes affecting the profit margin, or independently to establish a wage level in relation to prices that will speed re-employment of those now without work and provide opportunity for new entrants to the labor force. They have a responsibility in the matter which is indeed grave; it transcends partisan considerations.
Analysis of the situation enables one to assert with conviction that only as the prospect of earning profits improves will the manpower and resources of our land be fully utilized for economic growth. It further indicates that this can be achieved by stemming or reversing employment cost inflation and the rise in government expenditures, and by altering the tax structure to reduce or eliminate its features that undermine the incentives to engage in profit-seeking, employment-providing enterprise.
Reason for Pride
Business should be publicly proud when it is most profitable and efficient, publicly ashamed when it is least profitable and inefficient. There should be praise for the companies that, in free and fair competition, are most efficient. most productive, most profitable.
HENRY FORD II. What