How Eisenhower Plans to Deal with Depression:
Wait-and-See, Followed by What?
We have been having an economic recession, though it is a matter of debate as to how severe, and of what likely duration. From its onset, public opinion has watched the White House with intense interest, concerned not only for corrective measures for the present situation, but for some revelation of the direction of administration thinking on how to deal with this central economic problem of our society. A. H. Raskin reports here on the record of the Eisenhower administration so far in this area, and on the conflicting governmental philosophies within the administration that have seemed to prevent the shaping of any clear policy.
“Prosperity is just around the corner.” The old Hoover slogan has become the watchword of the Eisenhower Administration in appraising the recession that has shaken more than a million workers out of their jobs since the beginning of the year.
True, there is good reason to believe we shall turn the corner a good deal faster than we did in 1930 and 1931. But if we do, it will not be because the government has been any more enterprising or imaginative in setting the forces of recovery to work than it was when the last Republican President lived in the White House.
We have heard a lot about the Administration’s readiness to act if things get bad enough, but any disposition to put what the President calls a “slambang” economic program into operation always yielded to the confidence that the horrid specter of unemployment would go away if nature were allowed to take its own course.
The continuing high levels of prices, personal income, and building activity indicate that this expectation will prove right and things will get better—for a while. A pick-up in the next few months is probable, but many economists fear it will spend itself by the end of the year. Along about Thanksgiving Day we may be heading into a new slump of more menacing proportions than the present one.
What happens on the international scene will, of course, have a vital bearing on that possibility. If the hydrogen bomb gets out of control or the warfare in Indo-China takes a Korea-like turn, our economy will start operating under forced draft again. If anything serious is done about disarmament (though nothing in the Soviet attitude makes that appear a course we could pursue with safety), acute economic distress will become a certainty.
The immediate question is whether the Administration has been justified in its belief that nothing special should be done to halt the current recession—and whether it can be trusted to do anything to forestall the greater recession that threatens to come at the year’s end. The answer involves an estimate of the general economic philosophy that animates the White House and the implications of that philosophy in terms of the Administration’s ability to cope adequately with any serious dislocation of our business structure.
But no such analysis is complete unless it recognizes that there are contradictory elements at work in the Republican party and in the President’s official family, that policy is being shaped by men whose differences in viewpoint are so deep-rooted as to be virtually irreconcilable. Thus a question as fundamental as that of basic philosophy is the extent to which intra-party conflicts tend to stifle any action because the President’s principal advisers cannot agree on what the aims of action should be.
The intensity of popular concern over the Republicans’ ability to maintain a high level of industrial prosperity has been one of the most striking aspects of the present downturn. Actually, the dip in jobs has been less severe and less sustained than in the recession of 1949-50.
During that first postwar decline in business, the official count of jobless approached the five million mark, without allowance for several million others who were on reduced work-schedules or who by pulling out of the job market altogether eliminated themselves from technical classification as unemployed workers.
Two million workers drew all the unemployment insurance checks they could legally get in 1949, and 800,000 of these wound up the year still out of work. Since it takes half a year of idleness for a worker to exhaust his benefit rights in most states, and since the early months of 1950 offered an even gloomier employment prospect than did 1949, the situation was one that might have been expected to touch off a great clamor for decisive federal action.
In fact, there was very little clamor. Massachusetts and Rhode Island appealed to the White House to bail out their depleted job insurance funds, but their plight was more an outgrowth of a speed-up in the rate at which textile firms were moving south than a special symptom of the recession. For the rest, most people seemed content to accept the explanation that the pent-up wartime demand for consumer goods had been satisfied and the country was going through a healthy shake-out from the souped-up industrial standards that had prevailed in the decade of preparedness, mobilization, and reconversion.
How it all would have come out in the normal operation of economic affairs with a Democratic President and Democratic majorities in both houses of Congress, no one can tell. The Korean Communists struck across the Thirty-eighth Parallel when 1950 was half done, and unemployment quickly ceased to be a problem. The Truman Administration had insisted everything was well under control even before that, but some of its own economists were predicting a rise in joblessness just a few weeks before Korea exploded.
The first recession since the Republicans moved into Washington as senior partners has produced much swifter and shriller pressure for the government to “do something” than beset President Truman four years ago. Obviously, much of the pressure is politically generated. The Democrats and their labor allies feel that unemployment is the Republican Achilles’ heel.
Pictures of apple-sellers and bread lines in pre-Roosevelt days were a mainstay of the campaign that unions carried on in 1952 in their unsuccessful effort to arrest the Eisenhower tide. Now that joblessness has become a worry again, they expect their warnings that the Republicans were “the party of depression” to take firmer hold among unionists, small businessmen, and farmers. It is foolhardy to write these warnings off solely as politics. They reflect a very genuine fear among union leaders, and many people who have no connection at all with unions, that the Republicans are basically incapable of giving the country an expanding economy and thus warding off the insecurity of recurrent slumps.
This fear stems from a belief that Big Business is in full command in the capital, that the Republican tax program and all other federal policies are tailored to provide maximum gain to wealthy individuals and large corporations, and that an economy of scarcity, rather than abundance, is the inevitable result of the Administration’s tendency to measure the country’s good by the yardstick of what best serves corporate greed.
How justified is this belief? In my opinion, such a monolithic conception of what is going on in Washington is only slightly less fanciful than the idea that labor was running the country under Roosevelt or Truman. I share the view Norman Thomas set forth in COMMENTARY last month that the Eisenhower program embraces many of the concepts of the much reviled Welfare State, including most of all the idea that concern for human welfare is an essential function of government.
The President summed it up this way in his State of the Union message: “In a modern industrial society, banishment of destitution and cushioning the shock of personal disaster on the individual are proper concerns of all levels of government, including the federal government. This is especially true where remedy and prevention alike are beyond the individual’s capacity.”
Of course, the notion that he is any kind of New Dealer pains the President. He prefers to describe himself as one who is liberal in matters affecting people, and conservative when it comes to spending. (Would that be a cut-rate New Dealer?) But, semantics aside, there is little in the Eisenhower approach to such issues as social security and government responsibility for human welfare that does not square with the ideas of his Democratic predecessors.
At this point, however, a few qualifications are in order. The profundity of the President’s understanding of economic and social problems is not awe-inspiring, however noble his instincts may be. Moreover, his basic attitude toward questions like social security appears to have undergone a change since he arrived at the White House, and one wonders how much of his present cordiality represents conviction and how much the influence of the speechwriters he imported from the Time-Life-Fortune College of Welfare Capitalism.
The circle of advisers physically closest to the President in the White House itself includes men who believe that the chief thing wrong with the New Deal was that the Democrats made a botch of carrying it through. They feel that the Republicans can trim the budget, cut government interference in business and labor, and still improve on the Democrats’ record in helping people put a little more sunshine into their lives.
The man on whom the President leans most heavily for information about the state of business is in this group. He is Dr. Gabriel Hauge, Eisenhower’s personal economic mentor, whose opinions usually accord greater weight to human considerations than the more doctrinaire estimates that come from the President’s official Council of Economic Advisers. Hauge probably comes closer to the New Deal mind than anyone in the White House. Dr. Arthur S. Flemming, director of the Office of Defense Mobilization, whose association with high-level government planning started in the Roosevelt-Truman days, and Maxwell Rabb, a member of the White House secretariat with an avid interest in labor and improved race relations, also fit into the “liberal” category.
These Republican eggheads may not be rainbow-chasers, but neither are they yearners for the dear, departed days of laissez faire. They are more sympathetic to states’ rights and decentralization of government power than has been fashionable since the NRA Blue Eagle sank its talons into the corpse of Hooverism twenty-one years ago. Similarly, they shy away from direct controls on prices and wages as instruments to combat inflation. They prefer instead to put their trust in such weapons as higher interest rates, rigid credit curbs, and other devices
for tightening the money supply. What distinguishes them from the orthodox old-line Republicans is their philosophic acceptance of the tenets of the Full Employment Act of 1946. They are receptive to the idea that the government’s taxing and spending powers represent a decisive economic lever that should be used unreservedly to counteract industrial recessions.
When they turn their imaginations loose, the members of this wing of the Eisenhower brain-trust sometimes come up with ideas at which the most arrant New Dealers would blanch. One member of the 1952 campaign entourage recalls a night at the President’s home on Morningside Heights when the talk turned to specifics for dealing with “a CIO depression,” one that had its severest impact on steel, autos, electrical manufacturing, and the other industries in which the CIO has the bulk of its membership.
Before anybody quite knew how they got there, these “bold conservatives”—to use a phrase Hauge coined to define his brand of economic thinking—were discussing in all earnestness the applicability of an ever-normal granary plan for factory industries. In essence, this plan would carry over to manufacturing the basic elements of the Wallace-Brannan price-support policies for farm products. The government would guarantee to buy up factory goods when consumer demand fell below a fixed level. This would keep all companies in business and not allow the big ones to swallow up their less efficient competitors when things got tough. At the same time it would keep people employed in their regular jobs and prevent a disastrous slump in spendable personal income. No one seemed too concerned over what would happen to the products the government might have to buy. They could be shipped to underprivileged people overseas, dumped, or simply “plowed under” like Henry Wallace’s corn, potatoes, and little pigs. Needless to say, all this was strictly bull-session talk after a hard siege of campaigning. But it does indicate that some free-wheeling imaginations have survived the change of political climate in Washington.
The Dewey wing of the party is aligned with this group. Its principal spokesmen in the Cabinet are Secretary of Labor James P. Mitchell and Attorney General Herbert Brownell. More often than not, Vice President Richard M. Nixon throws his influence on the liberal side. He is no great shakes on economic theory, but those who have been close to him say he accepts wholeheartedly the notion that the Republicans must identify themselves with people, not purse strings, if they are to stay in power.
But this group is by no means dominant either in the White House or in Congress. The two most forceful Cabinet members are Secretary of the Treasury George M. Humphrey and Secretary of Defense Charles E. Wilson. They get strong support from the Cabinet “politician,” Arthur E. Summerfield, who was Republican National Chairman before he became Postmaster General, and from Secretary of Commerce Sinclair Weeks.
All four are “little government” men. They are convinced that the less the government does to get in the way of business, the better off the country will be. They feel that the surest way to promote an industrial upturn is to revise tax policy in a way that will stimulate private investment in new plants, improved machinery, and industrial research. Their most cherished goal is a balanced budget based on a curtailment of federal functions, and a sharp reduction in taxes. In this, they reflect the hopes of the business community. The members of this group remember that the depression of the 30′s, even more than the period of global conflict that followed it, provided the impetus for an unparalleled expansion in the day-to-day role of government and in the permanent cost of government operations. They have been reluctant to allow the present decline to upset their plans for whittling down this bureaucratic juggernaut.
This philosophy gets a sympathetic ear in Congress. The Congressional Republicans still take their spiritual leadership from the late Senator Robert A. Taft, whose economic views often fell to the right of his father’s. However, the imminence of an election always brings out the Santa Claus streak in a Congressman, no matter how conservative. If the Administration had sought to communicate any sense of urgency about the unemployment picture, Congress would have responded. No such pressure was exerted; no one around the President—New Dealer or Old Dealer—felt there was anything to worry about. The result was that all the hollering for measures to end the downturn came from the Democrats. Even such relatively non-controversial projects as the President’s recommendations for encouraging a broadening of state unemployment insurance systems failed to excite any active interest among the Republicans on Capitol Hill.
The big problem in putting an anti-recession policy into effect is the necessity for deciding whether you will try to revive the economy from the grass roots or let prosperity filter down from the top. It is, I believe, an oversimplification to say that this means a choice between helping people and helping business. Actually, the aim of the first approach is to help business by helping people, the aim of the second is to help people by helping business.
In the first case, government policy is directed toward the stimulation of mass purchasing-power on the theory that the most effective way to spur trade and create additional jobs is to expand the market by putting more money into the pockets of people Who will spend it.
One way to do that is to increase individual exemptions under the income tax law. The Democrats, against vehement Administration pressure, have been trying to push through a $200 rise in personal exemptions this year, and another $200 rise next year. Union statisticians have estimated that this would be the equivalent of a direct wage increase of $3 a week each year. The CIO is all-out for the change, which it estimates would bolster buying power by $8 billion a year. The AFL favors the same approach, but it would be satisfied with more modest increases in the exemption rate.
Another device for increasing purchasing power lies in liberalization of social security, unemployment insurance, and minimum wage laws. The Administration has come through with an excellent program for improving the old age insurance system, both in adequacy of benefits and scope of coverage. It has made clear its belief that the unemployment insurance system needs the same kind of overhaul, but its diffidence about trespassing on the prerogatives of the states has taken most of the steam out of this program.
On the minimum wage, the Administration has backed away from any action at all this year. The President has set forth his agreement in principle that the wage floor should be raised from the present 75-cent level and millions of additional workers brought under the law’s protection, but he has accepted the judgment of his Council of Economic Advisers that it would delay recovery to do this while business is shaky. This is just the reverse of organized labor’s thinking on when higher minimums should be enacted. The unions are convinced now is the time to act.
Still another money-in-the-pocket approach is the direct creation of jobs by government through public works. There are thousands of urgently needed projects across the country that could be built without valid complaint that they represented a return to leaf-raking or made work. However, the appropriateness of such measures to combatting a slump like the present one is open to question for reasons that have nothing to do either with their merit or their unbalancing effect on the budget.
Construction has been by all odds the healthiest section of the economy in recent months. Even with the government pulling out of the housing business, building activity was at record levels in the first quarter of the year. In fact, business was so good that forecasts of total construction for the year were revised upward from $34 billion to $36 billion. Especially heartening was the fact that there was no cutting back of industrial and commercial building plans, the area in which lack of confidence about the future would reflect itself most acutely. With construction booming, it would make little sense for the government to pump billions of dollars into this field as a means of pulling manufacturing and other sections of industry out of their torpor.
The alternative to a basic policy of building up mass purchasing power is a policy focused on encouraging business to modernize its productive facilities, experiment with new products, develop new industries, and expand its operations generally. Secretary Humphrey has pointed out that it does no good to increase a man’s tax exemptions or cut his tax rate if the man does not have a job. Accordingly, the Treasury Department has put its focus on tax changes intended to foster business investment and business expansion.
These include a faster write-off of the cost of new plants and a revision in the formula for figuring depreciation on new equipment. In effect, these policies are directed at establishing the idea that plant construction and improvement is a socially beneficial project, in which the government should be a nonvoting partner. The same idea was involved in the accelerated amortization plan for new industrial facilities in the war years.
Tax preference for stockholders also figures in the Administration’s plan. Here the aim is to eliminate double taxation of dividends on the theory that it is unfair to have a corporation pay a tax on its earnings and then have the individual shareholder pay another tax on the same earnings when he gets them in the form of dividends. Again the motivating thought in the Administration’s mind is to make private investment more attractive and in that way stimulate a job-creating expansion of industry.
None of the tax proposals are specifically rooted in the recession; all reflect the Treasury’s idea of a sound tax program for the long haul. Even on that basis, they are too heavily weighted in favor of the people at the top of the economic pyramid. It is at least as plausible to argue that manufacturers won’t expand if they don’t see an assured market as it is to contend that tax cuts don’t help people if they have no jobs. Most steel companies are convinced their industry is already over-expanded. They see no profit potential in boosting their capacity; their interest in new construction is in retiring inefficient old plants and replacing them with new ones that require only a fraction of the old manpower. And the same thing is happening in other American industries. In terms of the productivity of our economy, it is a desirable trend. It means we can produce more at lower cost, and that has always been the secret of our industrial preeminence. But the process is self-defeating unless there are enough buyers to keep our factories busy and create an ever expanding need for workers. Production and consumption must keep in step. When either gets too far ahead of the other, we are in bad shape.
The whole problem of investment is an incredibly complex one. Our tax laws have always made it possible for established businesses to apply substantial sums from their regular income to plant research, modernization, and enlargement. That minimizes the need for outside funds, except in new ventures. Mutual funds, pension trusts, and union welfare funds have opened up important new sources of investment capital that seem only dimly recognized in the Administration’s plans. The idea that there is something particularly immoral about the double taxation of dividends has aroused loud outcries on the labor-liberal side. The President’s critics recall that his campaign speeches were replete with references to the fact that there are 151 taxes on a loaf of bread, 206 on an automobile, and 150 on a lady’s hat. They can’t understand why the Republican’s post-election concern has shifted from multiple taxes on bread to multiple taxes on dividends.
In any event, the whole premise on which the Administration tax bill rests will be negated if we do not climb out of the recession and stay out of it. Industry will not expand and people will not invest unless the economic skies are reasonably bright. That brings us back to our original question: has the government been right in not doing anything positive to counteract the present drop in business?
I think the answer is no. The fact that the most reliable economic barometers point to an early upturn does not justify the policy of inaction that has prevailed over the last six months. In that period we have lost more steel than would have been lost in a six-week steel strike. Similar losses have taken place in the output of automobiles, household appliances, farm equipment, and other goods.
Hundreds of thousands of workers and their families have been exposed to the hazards of idleness or reduced pay checks. Government estimates put unemployment at 3,725,000 in March, and labor economists felt this figure was at least a million too low when account was taken of temporary layoffs and short work weeks. Business failures went up, too, setting a postwar high of 926 in February. The consequences of this economic blood-letting have been adverse in both their domestic and international implications.
Our rising standard of living is built on an increase of two to three per cent each year in the productivity of our economy. The blacking out, for an extended period, of nearly one-third of our steel production and a general drop of about one-tenth in over-all industrial output cancels out that improvement for this year. Equally damaging has been the opportunity the slump afforded the Kremlin to undermine the confidence of other nations in the stability of our economic structure. With the fantastic destructive capacity of nuclear weapons making it less and less likely they will ever be used in war, our productive resources and the fruitfulness of our economy represent the free world’s principal bulwark against Soviet expansionism. For our own sake and for the world’s, we must dispel the notion that our economy operates on the lines of a roller-coaster.
As Professor Sumner H. Slichter of Harvard has pointed out, conservatism does not consist in assuming that the most optimistic expectations will turn out if we simply coast long enough. That is gambling, not conservatism. Actually, the one move that represented a positive government contribution to easing the recession was made over the Administration’s protests. That was the cut in excise taxes on furs, luggage, jewelry, cosmetics, and a long list of other items. But the cut would have been better if it had been carried to the point of total elimination of these sales taxes. The argument that the government could not afford to lose the revenue ignores the fact that the government loses tax income when business is off, so that a hastening of recovery would tend to offset any direct loss that would accompany the lifting of excise levies.
To a regrettable degree, the Republicans have become prisoners of their own slogans. They are so concerned with moving toward a balanced budget that they avoid the realization that the government is the only force with the concentrated resources and power to exercise a significant influence on the trend of the economy. In social terms an investment of two and a half billion dollars to prevent a million people from losing their jobs is a good buy. Had the Administration recommended the wiping out of all excise levies at the beginning of the year, it would have knocked that much off its anticipated income, but the result would have been more revenue from all other taxes than is now in sight.
What does all this indicate about Dwight D. Eisenhower the economic man? The answer was imbedded in his own remark about his attitude toward men and money. His approach to economic issues is a mixture of head and heart, with the public purse ruling his head and human sympathies ruling his heart. When the men around him assure him we are in a “rolling readjustment” or an “inventory recession” or something else that carries no apparent threat of mass privation, his impulse is to do nothing and let industry work out its own solution. The niceties of tax theory—the virtues of the George Humphrey “trickle down” approach to prosperity versus the Hubert Humphrey “fountain up” tack—are beyond him. He is ready to stand on the idea that the best way to guarantee jobs, high wages, and an increase in goods, services, and national wealth is to encourage business to grow.
What would happen if the country went into a real nosedive? Would the President’s attitude change? I put the question to a White House intimate with a high degree of political and economic sophistication. Here is his answer: “If it becomes evident that there is real suffering in the land, the President’s human sympathies will come to the fore. He won’t ask, how much money is there in the Treasury; he will say, feed the hungry. He will not listen to those who talk of fiddling with the interest rate or long-range programs to stimulate industry; he will do things to put money into people’s pockets. He will lean on the advice of those who talk in human terms; the day of the theoretical economist will be over.”
This appraisal indicates the need for a fundamental qualification in our thinking about the kind of Welfare State we have in this country. Apart from manifestations like social security, which have become so built into our structure that no one thinks of suggesting their elimination, we live under what might be described as a reluctant or emergency variety of Welfare State. The Democrats and Republicans disagree on how much government should do for the people outside of periods of crisis, but basically none of us welcomes the broadening of government power, except when we are scared.
There is, of course, a constant tug-of-war for special privilege, in which every section of the population seeks to use government for its own ends. But the essential framework of our Welfare State has been frozen since Roosevelt retired Dr. New Deal in favor of Dr. Win the War at the outset of World War II. The drive for social reform had lost its forward push even before that; it never regained it.
The policies advocated by Truman and Eisenhower may appear to have little kinship, but what comes out of this Congress will not be radically different from what came out of its Democratic predecessor, except for those measures specifically designed to deal with the Korean war emergency. The Republicans suffer from split personality on economic matters, but they have no monopoly on this condition. The Democratic party, with its Dixiecrat and New Deal wings, has more than a touch of schizophrenia. It does a much better job of uniting on liberal policies when it is out of power than it does when responsibility for running the country is in its hands.
Looking ahead economically, there is room for concern whether the President, with his predilection for believing that business is more competent to make sound decisions than government, will recognize the signs of trouble soon enough to ward off acute hardship if we do run into a serious storm. Fighting off a depression becomes much more difficult if the government keeps finding excuses for failing to act until breadlines and privation make the collapse obvious.
And there are other areas in which we can hardly rely on the “let business do it” philosophy. Will the government do anything to minimize the economic upheaval that is bound to accompany the adaptation of atomic power to civilian use? Such traditional energy sources as electricity and coal may be tossed on the slag heap in a comparatively few years. Manufacturing and transportation may undergo profound changes. What about the decentralization of our industrial plants and the breaking up of our great population centers to prevent their annihilation by nuclear attack? We are currently involved in a great controversy about whether the development of the hydrogen bomb was deliberately delayed. But we are not doing a thing about getting people out of the cities that have been rendered obsolete by these weapons of mass destruction. These are titanic problems that we have been pushing under the rug since Hiroshima.
If our only answer to a minor recession is to wait it out, is it any wonder that we have no better answer to something really big?