Dr. Russell is Director of the
The word "democracy" now has a rival for popularity; it is "economic growth." and like democracy, economic growth seems to mean whatever the user wants it to mean. Ordinarily, the growth of our economy is measured by the gross national product figures, and thus refers to total national spending (government and private) without regard to what the spending is for. By that popular measurement, however, we shall see that a decrease in our material level of living can occur during a period of high economic growth, as is often the case during wartime. Obviously, that type of growth is not what one ordinarily has in mind when he thinks of a prospering economy.
To avoid such confusion, I define economic growth as any increase in the production of goods and services that consumers want and will pay for voluntarily. If economic growth (that is, a higher level of living) refers to anything else, the term becomes not only meaningless but actually misleading.
For example, as I have defined it, an increase in the production and sales of canning machinery, hula hoops, and vacation tours represents real economic growth; we consumers want them, are willing to pay for them ourselves, and are confident that they increase our level of living in one way or another. Otherwise we wouldn’t buy them. But the current inclusion of the cost of bigger armies and more bomb factories in our economic growth figures is surely a distortion of what we all visualize when we speak of a growing economy. For clearly, those projects mean that fewer (not more) goods and services are available for our daily consumption. While I am highly in favor of giving up a part of my income to build nuclear submarines, surely it is misleading to add the cost of them to our economic growth figures, as is now done.
Gross National Product
Millions of intelligent and responsible persons are obviously in disagreement with my definition and concept of economic growth. Most economists and practically all officials of the
According to them, any increase in the capacity to make tanks or hydrogen bombs should be included, along with houses and bread, as economic growth. The building of dams to water deserts to grow food to be stored in surplus ships are all included in our economic growth. As now measured, our gross national product (and thus our economic growth) could be increased dramatically if our government printed the money to pay unemployed workers to tear down one-half of all the houses in the
Since governmental decisions and activities now play such a prominent part in our economic growth, perhaps a comparison of how the American economy has performed under different degrees of government control would be of interest at this point. You understand, of course, that it is impossible to find two periods in economic history that are truly comparable. Further, measurements such as gross national product are, at best, merely rough and often erroneous estimates of what happened in the economy as a whole in the past. So while these statistical devices are of some value to economic historians, the figures must be interpreted with extreme care.
Variable Growth Rates
Economic growth figures for the
That fantastic growth record accounts for the oft-heard statement that the level of living in the
Mercantilism in Early
Most of us are unaware that the
Throughout the War for
On the state level, the politicians generally continued their customary controls over wages, hours of work, working conditions, and apprentice regulations. They encouraged certain businesses and professions with tax concessions and subsidies. They discouraged, and sometimes prohibited, other professions and businesses.
The evidence is clear that the economy of the
The philosophy of mercantilism (that is, a type of controlled economy) came under increasing attack during the last quarter of the eighteenth century. The free market philosophy that was formalized by Adam Smith in his Wealth of Nations in 1776 found increasing acceptance in both
A Century of Rapid Growth
The most fantastic material growth record the world has ever known then began in the
Some persons claim that our rapid growth and high level of living were due primarily to our vast areas of land. But several other nations with vast areas of land continued to stagnate during the same 100 years.
Others point to our vast mineral, forest, and water resources. But that hardly explains why other nations with similar natural resources made little if any progress.
Nor are Americans innately more intelligent than the people of other nations. Nor did they work longer hours here than elsewhere. Nor did they begin with a stock of machines and factories (capital) that was not available on equal terms to others.
After considering all possibilities that might account for our rapid growth rate during those 100 years, I am forced to the conclusion that the primary reason was our essentially free market economy and the "hands off" policy generally followed by our government.
Back Toward Intervention
But just as the philosophy against government controls over the economy began to find increasing acceptance around the end of the eighteenth century, just so did the reactionary philosophy for a return to government controls begin to find increasing acceptance in the
State regulation of wages, hours, and general working conditions grew apace. The labor union movement gained millions of members and became a powerful force in the economy. Even so, our economy was still the freest in the world, and it continued to forge ahead for the next 30 years at about the same rate of growth and increasing level of living as those of the preceding 70 years.
Then came the stock market crash in the fall of 1929. It was another of those setbacks that invariably follow an expansion of credit and "paper investment" that are based on inflation instead of real savings. In previous similar occurrences (1907 and 1921, for example), the policy of our government had still generally been to do nothing during such periods of business failures and increased unemployment. Thus, as usual, those two "money and credit" depressions quickly ran their courses—the unsound investments were liquidated, and the economy surged forward again. But by 1929, a new philosophy concerning the purpose and functions of government had been accepted by most of our political leaders and the American people in general.
Prelude to the "New Deal"
A direct result of this new (actually, old and reactionary) philosophy was a sharp increase in positive government action to get our economy rolling again. The Republican President, Herbert Hoover, rushed in with his Reconstruction Finance Corporation to help business, and thus to prevent unemployment. He also advanced and supported several agricultural programs to help the hard-pressed farmers. He encouraged the idea of shorter hours of work in order to decrease production and keep prices high. He also encouraged industrial leaders to keep wages above the competitive free market level. He clearly endorsed the concept of creating prosperity and economic growth by deficit financing and make-work projects.
In short, contrary to what is generally believed, Mr. Hoover fully committed the powers of government to the positive task of ending the recession and, as he phrased it, to put two chickens in every pot. But under increased government controls and spending, the recession turned into a depression and became worse, year by year. By 1933, our level of living had dropped back to that of 1906, as measured by gross national product on a per capita, constant dollar basis.
Then Mr. Roosevelt took office, with still greater controls over the economy to make it move forward again. He increased sharply both deficit spending and make-work projects. The depression continued. There was a partial recovery in 1936-37, followed by another crash in 1938. More than ten million persons were still looking for jobs. In fact, mass unemployment—and a sharply reduced level of living for the American people—continued in an extreme form until we went to war in 1941.
These facts and comparisons cannot correctly be used to prove that the longest and most severe depression in our history was positively caused by government intervention in the market place, even though one may logically suspect that such is the case. But these figures do prove one thing beyond any shadow of a doubt: While there may or may not have been other reasons for the continuation of the depression, our level of living positively declined during that 12-year period of increasing controls and deficit spending by government to get our economy rolling forward again.
World War and After
It was not until 1942 and our all-out war effort that the actual gross national product reached a level that was in harmony with the long-time growth rate of 18301930. At that point, and for the next three years, the growth rate as measured by gross national product leaped forward to new levels. Much of the growth was real; that is, more products per capita were produced for consumption. But the products that caused most of the increase—tanks and battleships—contributed nothing to our level of living. If, as I recommend, the growth rate were measured only in real terms of voluntarily-bought houses, cars, clothing, and similar products, our per capita level of living was still low in 1945—in fact, lower than the 1929 level per capita, even though the nation’s total production that now counts as economic growth had increased markedly.
Now let us see what happened to the growth rate and level of living under continuing government controls and deficit financing from the end of World War II through 1962. During about half of that period, we made considerable progress. But throughout that 18-year period, our rate of growth has been well below the 1830-1930 average. Only during the Korean War was there any marked increase in it, as measured by gross national product. But once again, that temporary spurt was due primarily to the production of guns and bombs, which hardly add to one’s level of living. For the past five years, the actual annual growth rate for the increasingly controlled American economy has been well below one per cent per capita—less than one-half what it was in the comparatively free economy that generally prevailed for the 100 years before 1930 and the initiation of positive government action to move our economy forward. Further, that disturbing decrease in our long-time rate of growth has included a heavy and still increasing amount of government services that few people really want or are willing to pay for.
Disposable Personal Income
So even when we use the socialistic measurement for economic growth—that is, all production, government or private, wanted or not wanted—our economy has not performed at all well under government direction. A more realistic measurement of economic growth—one that is reasonably close to the measurement I recommend—is the money you and I have left after taxes to spend for goods and services we want. So here is the comparison for disposable personal income in constant dollars per capita for two periods of the same length—1897 to 1930, and 1930 through 1962.
That figure doubled itself between 1897 and 1930 in our essentially free economy. Even with the tremendous immigration that occurred during that 33-year period, real per capita take-home pay increased by at least 100 per cent. But since 1929—during the following 33-year period—disposable personal income has increased by only around 65 per cent.
Our government is now engaged in an extensive program to increase our faltering rate of economic growth and level of living. The actions already taken, and those proposed for the coming years, are markedly similar to the measures followed by the government from 1930 through 1945—that is, deficit spending, inflation, and make-work projects, plus a huge increase in armament production. Most definitely, those measures were a failure then, as measured by the production of consumer goods and services to increase our level of living. I can find no logical reason to suppose these schemes will be any more successful now.
Statistically, however, the government has the power to increase our rate of growth considerably—if we count every product or service that the government buys or produces (wanted or not wanted), as is now the case. By the customary and popular means of deficit financing and inflation, our government can indulge in all sorts of grandiose "economic growth" projects—urban redevelopment to tear down large sections of our cities and build them back again, draining swamps and irrigating deserts in order to increase the amount of arable land we can pay people to keep out of production, trips to the moon, increased production of all the items that are used to fulfill our foreign aid commitments, more price supports and subsidies that consumers won’t willingly pay, and so on through 10,000 and more similar projects. All of these will probably increase our gross national product, and thus will also increase our economic growth rate as now measured.
"New Frontier" Psychology
Personally, I fail to see how any of these projects can truly increase our level of living by producing more goods and services that consumers want and are willing to pay for. But, worse still, and in spite of the sad record of government interventions in the economy in the past, most of us now look to the federal government as the mainspring of our economic well-being. If you doubt this, ask the next five persons you meet what they think would happen to our economy if the "cold war" suddenly ended and our military machine were dismantled within the next year, even with a corresponding decrease in taxes. Ask any economist what he thinks would happen to our gross national product and employment levels if the government immediately reduced its nonmilitary spending by one-half, even with a corresponding across-the-board tax cut. Ask those who are protected against both foreign and domestic competition, and those who receive subsidies, what they think would happen to total production in our nation if their subsidies and protection and government guarantees were removed. Put those same questions to the top management of the privately-owned corporations all across the nation. Nearly all the answers will be the same. That is, whether or not it is true, they honestly believe that if our government discontinued any or all of those things, our economy would be in serious trouble.
Now stop and think! Our economy is in serious trouble, and it has been in trouble most of the time since the government began directing and controlling it so extensively in 1930.
More than one-third of our national income is now taxed away and spent by government on all levels, and we have serious economic difficulties. Suppose the government taxed and spent one-half of our incomes; would that solve any problem now before us? Surely the answer is no.
Suppose the government were in total control of our economy, instead of merely in partial control; do you imagine that we consumers would thereby get more goods and services we want? Again, surely the answer is no.
When you get right down to it, though, those are the only two positive actions that our government can take to "get our economy moving." That is, our officials can tax more and spend more—directly, or indirectly by means of planned inflation. And they can impose more controls. Those are the only positive "economic growth" weapons in the government’s arsenal. Yet, beyond any shadow of a doubt, our rate of economic growth has been comparatively low under increased government spending and controls in the past. But in spite of that record, millions of sincere and good Americans are imploring our government to take positive action to get us moving again—with more spending and more controls!
But What Do They Cost?
Now it is logical to assume, of course, that the increase in some economic services that have been traditionally provided by government actually does represent real economic growth in much the same sense as similar private services. For example, education is a service that all parents want for their children. And presumably, we are willing to pay for it—in whatever form the bill is presented to us. This applies also to highway construction, fire departments, and to perhaps one or two other products or services for which the government has assumed almost total responsibility. But even when government does provide consumers with services they want and are willing to pay for—services that actually do increase our material level of living—there is no positive way to measure their economic values. And even at best, I am confident that we are paying more for them than would be the case in a market economy.
Now I am well aware of the claims advanced by the disciples of John Maynard Keynes concerning the secondary (or multiplier) effects of government spending, even when the spending is for the production of goods that cannot be used in our daily living. That is, the persons who are paid by government to produce the goods for our military and foreign aid programs will, in turn, use the money to buy consumer goods and services. That new or increased consumer purchasing power will thus contribute to real economic growth in the sense I have defined it.
That appears to be the reasoning behind the present Administration’s planned deficit of $12 billion or so for next year. But if we are to avoid continuing inflation, the government must first tax the money away from the people. If that fiscal policy is followed, the tax payments will necessarily decrease the taxpayers’ ability to purchase consumer goods and services themselves, or to invest in the growth of our factories and machines. Thus any new jobs and production created by government spending from taxes will merely replace the jobs and production destroyed by the taxes themselves.
An Illusion of Progress
If the spending is by deficit financing and inflation instead of taxation, it is true that the result is often a pseudo prosperity, for a short period of time. Then, since the increased industrial activity is based primarily on government spending and inflation, the stimulating effect is brought to a halt as soon as prices catch up with the increased money supply. Many formerly profitable investments then become unprofitable. Thus, in order to keep the illusion going, the economic pump must be primed again and again—as has clearly been the case in the
To help us decide, this final fact from economic history should also be considered: I cannot find even one historic example to show that a controlled economy has ever resulted in a higher level of living than a comparable free economy over a significant period of time. I can, however, find many examples to the contrary. The most dramatic one currently is, of course, the comparison of East and
I am convinced that we American people are not now following a realistic path toward economic growth when we turn to government "to get us moving again." We forget that the only positive ways the government can use to attempt this are to tax, inflate, spend, and control—that is, to leave you with less real money to spend, and to restrict the ways you can spend what you have left. Thus we are clearly not choosing the means and policies that will increase the long-time production of goods and services that we consumers want and are willing to pay for. I am convinced that the only possible way to accomplish that goal is to reject totally the restrictive influence of government controls and ownership and deficit spending, and to return to the free market economy that is the hallmark of a responsible and prosperous people.
The Greater Contribution
The proper purpose of the economist-tractarian is not that of selling whole schemes of immediate action but that of influencing, if he may, the course of democratic discussion and thus perhaps affecting the course or long-term direction of action rather than the detailed, immediate steps.
HENRY C. SIMONS
Federal Tax Reform