LAGGARD RECOVERY

Otago Daily Times, Issue 23896, 25 August 1939, Page 4

LAGGARD RECOVERY

POSITION IN UNITED STATES

PURCHASING POWER THEORY Discussing the present economic position of the United States under the heading “Laggard Recovery in America,'’ the Economist of July 1 has something to say that should be of peculiar interest to New Zealand. It is hardly surprising, says the Economist, that there should be a mood ot discouragement in the United States. The mood will be familiar to those Englishmen who remember the years of the 1920’s when Great Britain, alone of the nations of the world, seemed to be incapable of making progress: and the subsequent course of economic history in this country might serve as a cure for American pessimism That pessimism is. for the moment, taking the shape of asserting that the United States, being a “ mature economy, is incapable of finding sufficient outlet for its savings. The theory is familiar enough on this side of the water; indeed, it is of English origin.

It is perfectly true that in a community whose standard of living and, therefore, standard of saving, is high, but which is failing to expand in numas rapidly as before, there is a

tendency for ■ the volume of capital that is invested to fall short of the savings that the public would wish to make, with the result that the savings run to waste, purchasing power is limited and unemployment is created. It is also perfectly true that the pace of expansion of the United States is now very much smaller than it used to be. Out of these materials the theorists of the New Deal have constructed the doctrine that it is the duty of the Government to repair the deficiency in the private investment. of capital by sponsoring the public investment of capital. ... The truth is that the volume of private investment of capital that will be undertaken is not an absolute figure. It depends, for one thing, on the rate of interest at which money can. be borrowed. It also depends, importantly, on the apparent profitability of investment. There is no difficulty on the first score in America: money is very cheap and very plentiful. But there is serious discouragement to investment under the head of profitability. There is an inadequate volume of investment, and therefore an excessive volume of unemployment, because it is not made worth while to sink money in fixed capital—in a word, because profits are too low. . The Cost of Labour To the outside observer, in fact, it seems that the unprofitability of investment in America to-day is not mainly due to any of these causes land still less, of course, to any politicallyinspired “ strike of capital ”), but to a simple factor which, as the New York correspondent of the Economist

has pointed out, receives amazingly little attention —namely, the extreme costliness of new investment. In American industry generally, and more especially in the construction industries, the cost of labour has been forced up to a very high level. This has been done in pursuance of what used to be called the Doctrine of High Wages, and is now better known as the Purchasing Power theory. It is a wholly admirable endeavour to raise the purchasing power of the people, and though the wage-earners are only half the people, they are the economically dominant element. But it is questionable whether the best way of increasing the purchasing power of the workers is always to raise their rates of wages. Between 1929

and 1938 the average hourly earnings of American workers (according to the figures of the National Industrial Conference Board) increased by 23 per cent. Relatively to the movement of average wholesale prices, the increase was no less than 49 per cent. But payrolls—-the total *v amount of money paid out in wages—fell, according to the official index, by 18J per cent, in the same period. To place two figures in juxtaposition is not to prove that the one is the cause of the other.

But it is at least suggestive that, while wage rates in Great Britain rose over the same period by. less than a third of the American increase, British payrolls (as far as they can be calculated) increased by 20 per cent, instead of the American fall of almost the same proportion—and this in the country which is the - more •“mature” of the two. These figures present at the very least, a case for investigation. They suggest the possibility that, as a result of shorter hours and correspondingly increased hourly wage rates (and it is the hourly rate of wages, not the daily or weekly earnings, that determines labour costs), the cost of capital goods has been pushed up so high that the payrolls of the working class as a whole are not sufficient to support them. It does not pay to provide houses, machines and other capital equipment for the working man, because he has made them too expensive for his own means. Economic Cook-book In the past six years most of the recipes in the economic cook-book have been tried at least once, says

the Economist. We have had the depreciation of the dollar and the deliberate enhancement of the price of silver, the fostering of monopolies through the N.R.A., and their prosecution by the Department of Justice, fiscal economy, and deficit financing, pump priming and yardstick building, public works and work relief. . The only remedy that has not been tried is a sustained attempt to lower the costs and encourage the expansion of the capital goods industries whose coma is. by common consent, the root cause of the laggardliness of recovery. It might be worth trying.