Economics and The Public Welfare

Chapter 73

The Effect of Governmental Economic Planning Upon Employment and the Utilization of Our National Productive Powers

In a preceding chapter we have seen the sudden collapse of the partial recovery of 1935-1937 and the sudden, extraordinarily severe and precipitous break both in the volume of business and in stock market prices running through the autumn of 1937 into the spring of 1938. At its best, the recovery, 1935-1937, did not bring levels of industrial production as high as those of 1929, seven years before. The Federal Reserve Index of Industrial Production (1923-1925=100) reached a high of 125 in 1929, while its peak in the 1935-1937 revival (reached in late 1936) was 121. This had never happened before in our history. Always in our past, following a major boom and crisis, we had reached new highs before another serious setback came.

The Record of Employment and Unemployment. The following table is borrowed from the authoritative studies of the National Industrial Conference Board.1 It covers the years 1900 to 1939, inclusive.

Total Unemployment in the Labor Force (In thousands)
	Total labor force	Employment	Unemployment	Unemployment as per cent of labor force
Annual Average
1900	29,025	27,378	1,647	5.7
1901	29,959	28,238	1,721	5.7
1902	30,905	30,405	500	1.6
1903	31,842	30,319	1.523	4.8
1904	32,605	31,175	1,430	4.4
1905	33,653	33,032	621	1.8
1906	34,647	34,790	-143*
1907	35,631	34,875	756	2.1
1908	36,580	34,284	2,296	6.3
1909	37,454	36,735	719	1.9
1910	38,133	37,580	553	1.5
1911	38,668	37,097	1,571	4.1
1912	39,089	38,169	920	2.4
1913	39,500	38,482	1,018	2.6
1914	39,789	37,575	2,214	5.6
1915	40,083	37,728	2,355	5.9
1916	40,314	40,127	187	0.5
1917	40,752	42,685	- 1,933 *
1918	41,088	44,187	- 3,099 *
1919	41,159	42,029	- 870 *
1920	41,897	41,339	558	1.3
1921	42,445	37,691	4,754	11.2
1922	42,966	40,049	2,917	6.8
1923	43,760	43,011	749	1.7
1924	44,549	42,515	2,034	4.6
1925	45,009	44,192	817	1.8
1926	45,962	45,498	464	1.0
1927	46,939	45,319	1,620	3.5
1928	47,914	46,057	1,857	3.9
1929	48,354	47,925	429	0.9
1930	49,025	45,216	3,809	7.8
1931	49,664	41,551	8,113	16.3
1932	50,182	37,704	12,478	24.9
1933	50,830	38,086	12,744	25.1
1934	51,402	41,002	10,400	20.2
1935	51,879	42,357	9,522	18.4
1936	52,382	44,783	7,599	14.5
1937	53,011	46,639	6,372	12.0
1938	53,699	43,600	10,099	18.8
1939	54,393	45,314	9,080	16.7

* Such negative unemployment arises statistically from the fact that persons are drawn into the labor force during periods of increased labor demand who are not reckoned as members of the labor force.

In the period covered by this table before the first World War, the worst percentage of unemployment was in the year 1908, following the panic of 1907. Unemployment in that year averaged 6.3% of the labor force. There were 2,298,000 workers unemployed in that year. In 1906, the year before the panic, there was actual negative unemployment, meaning that persons were drawn into the labor force who did not ordinarily belong there, because of increased labor demand. In 1910 unemployment was reckoned a little over 500,000 men, or 1.5% of the labor force. In the crisis, unprecedented in gravity, in 1921, which followed the collapse of the postwar boom, unemployment reached 11.2%, the heaviest in our history to that date, but the figure dropped rapidly to 1.7% two years later, in 1923.

A 2% unemployment is really full employment, when we allow for seasonal unemployment, sickness, shifting of jobs, and that very considerable part of our population which is unwilling to work all the time, and prefers to rove occasionally.

The bad year, 1930, shows unemployment of 3,809,000, or 7.8% of the labor force. The years 1931 and 1932 were years of extreme depression with the percentage of unemployment running 16.3% and 24.9% respectively.

The Explanation of the Record. We have discussed the years 1931 and 1932 very fully in preceding chapters, and have seen that the extreme depression of these years was due to the extremely bad Governmental policies of the Harding, Coolidge, and Hoover Administrations.

Prior to 1924 we had not regarded it as a Federal Government function to make employment. Employment was a matter for the people themselves to work out. Beginning with the Federal Reserve purchases of Government securities in 1924, we have had Government policy directed increasingly toward making employment. The explanation of the good figures for employment prior to 1924, and of the desperately bad figures for employment which followed 1929, is to be found in precisely this fact. Under an old-fashioned Federal Government, which, in financial matters, was concerned primarily with its own solvency and with the protection of the sound gold dollar, the people themselves solved the problem of employment amazingly well. When the Federal Government took over and undertook to solve the problem for them, grave disasters followed.

President Roosevelt inherited a terrific volume of unemployment. He did not cure it. The figures for 1933 are worse than the figures for 1932. The years 1933 to 1939, inclusive, show unemployment exceeding 10,000,000 for three years, including 1938, and show unemployment exceeding 9,000,000 for five years out of the seven. In only two years of the Democratic New Deal period prior to the outbreak of World War II did the annual average figure for unemployment get below 8,000,000. And in the best of these two years, namely 1937, the figure stood at 6,372,000, which is 12% of the labor force, as compared with 11.2% of the labor force in the year of extreme depression, 1921.

The historical record is damning. The New Deal, viewed as an economic policy designed to promote employment, is condemned by the historical and statistical record.

Retarded Technological Progress and Impaired Capital Equipment. From the standpoint of the full utilization of the productive capacities of the American people, the contrast between the old, unregulated economy and the New Deal economy may be tested by two other sets of very significant figures. The degree of unemployment does not tell the full story. The amount of slack in the industrial situation is partly a matter of unused labor, but it is also a matter of unused capital and unused technological knowledge. The New Deal policy, as we have seen, had made capital timid in the extreme and had greatly retarded the application of new technology. Obsolescence in American industrial equipment had grown to a startling extent in the great depression and in the early years of the New Deal. I quote the following from H. G. Moulton as descriptive of the situation in 1935:

“In many lines of industry there has been an enormous amount of ‘deferred maintenance’ in equipment, and there has been a steadily increasing obsolescence. The American Machinist has made three ‘Inventory and Obsolescence Surveys,’ at five-year intervals, in the field of metal working equipment. On the basis of a survey covering 1,345,447 major items of machine tools, presses, forging machines, and welding equipment, the following trends are revealed. In 1925 the amount of such equipment over ten years of age, and hence defined as virtually obsolete, was 44 per cent; in 1930 the figure was 48 per cent; and in 1935 it was 65 per cent.

“There has been almost no expansion of new plant, and there has been comparatively little replacement of wornout and obsolescent capital structures. The amount of new capital issues for the purposes of financing new plant and equipment declined from $3,446,000,000 in 1930 to $262,000,000 in 1933. The data with reference to the decrease in the production of goods destined for capital equipment . . . also definitely point in the same direction.” 2

The revival of 1935 promised to improve this situation, but the undistributed profits tax of 1936 proved a powerful deterrent. As shown in a preceding chapter, American corporations paid out in dividends more than their total profits in 1936 and 1937, while the acute depression of 1938, even after the repeal of the undistributed profits tax, greatly reduced incentives to make large capital outlays. We came into the period of the second World War with a heavy obsolescence, a large body of unused technological ideas, and a great deal of idle capital, and, as shown by the foregoing table, with 9,080,000 men unemployed, on the average, in the year 1939.

The figures from the American Machinist, which Moulton cites, look worse still in the year 1940. The following table shows the trend.

Percentage of Metal Working Equipment Over 10 Years Old
Year	Per Cent
1925	44
1930	48
1935	65
1940	70

It may be said, with respect to these figures, that the year 1925 perhaps represents a somewhat better than normal situation, inasmuch as there had been, in the years 1921-1923, an immense spurt in the utilization of new technological ideas and in the installation of new machinery. But the deterioration from 1930 to 1940 is very great.

Slack in American Industry; 1914 versus 1939. Instead of the 3% to 4% per annum increase in industrial production which we ought to have had between 1929 and 1939, the year 1939, as shown by the Federal Reserve Index of Production (1923-1925 = 100), stands well below 1929. There was immense slack in American industry in 1939, an immense amount of unused capacity in manpower, in technological knowledge, and in idle money.

Percentage of Slack in 1914. We have seen in an earlier chapter a rather precise measurement of the extent of the slack in industrial capacity in 1914 as compared with 1916, when the country was working at full capacity and straining its capacity in response to unlimited war demands from Europe. The figures given in that earlier chapter, taken from a careful study by Frederick C. Mills, are repeated on page 492.

The year 1914 was not a good year because we had a sharp shock at the outbreak of the war in August, but in that year the slack as shown in Mills’s figures was relatively low. Production increased 20.6% in the two years following, and construction 11.3%. We may rest the case primarily upon the year 1916. It was, without interruption, a year when demand was pressing us to the limit of our power to produce. The years 1917 and 1918 are complicated by the withdrawal of the soldiers. The years 1919 and 1920 are complicated by the depression in early 1919 and by the crisis in the latter part of 1920. But the year 1916 has no such complication. In production it stands 20.6% above 1914. There was no slack in production in 1916. But this does not mean that there was in the bad year, 1914, 20.6% of slack, because in two years we would normally expect a substantial growth in productive capacity amounting to 3% or 4% per annum. The amount of slack in the subnormal year 1914 was thus not over 14%.

Physical Volume of Production and Construction, 1914-1922*
Year	Total volume of Production	Total Volume of Construction
1914	100	100
1915	113.7	97.9
1916	120.6	111.3
1917	125.5	93.8
1918	124.5	64.9
1919	116.7	88.7
1920	124.5	48.5
1921	103.9	91.8
1922	121.6	139.2

* Frederick C. Mills, Economic Tendencies in the United States, New York, 1932, pp. 188 and 191—Bases changed from 1913 to 1914.

Percentage of Slack in 1939. In contrast, the slack in 1939, the year in which World War II broke out, was appalling. If we accept the new Federal Reserve Index of physical volume of production (1935-1939=100) we get an increase between 1939 and the peak year of production, 1943, from 109 to 239, or 119%. Subtract 3% per annum from this for the four years (representing normal growth for the four years), and we would still have an increase of 107%. This would mean a slack of over 50% in our utilization of our industrial resources in the year 1939.

It may be observed, moreover, in making this comparison between 1914-1916 and 1939-1943, that the base year 1939 was radically improved by the outbreak of the war, the latter months of 1939 showing a sharp acceleration in production, whereas the base year 1914 was sharply deteriorating after the outbreak of the war, the latter months of 1914 showing a real depression.

The contrast between the two periods is not so great as these figures would indicate. The criticisms which General Leonard P. Ayres and others have made of the new Federal Reserve Index of Production, based as it is in part on man-hours rather than physical output, are valid criticisms.

How great a difference there is between production measured in man-hours and production measured in physical output is strikingly shown in an address by Mr. Andrew T. Court before the National Industrial Conference Board on September 26, 1946, published in the Commercial & Financial Chronicle of October 3, 1946 (page 1677). Mr. Court, criticizing the new Federal Reserve Index of Industrial Production, says that according to this computation, July 1946 automobile production was 78% above the 1935-1939 average. The actual production in July was about 300,000 cars and trucks compared with an average of 335,000 units for the 1935-1939 period, or down 10% rather than up 78%. The Government’s production index is not based on the number of cars and trucks actually manufactured. Rather the index is estimated on the basis of the number of hours for which the employer pays. It is possible that Mr. Court’s figure for physical output should be revised upward on the ground that in July, 1946, the automobile accessory industry was operating at a disproportionately high level, supplying replacement parts, but no such revision could justify the new Federal Reserve Index figure.

There is valid ground for thorough distrust of the new Federal Reserve Index, and it should not be used. We use here instead General Ayers’s figures as presented in the long chart, “American Business Activity Since 1790” (17th edition, March, 1944) published by the Cleveland Trust Company. This series has the advantage of giving us comparable figures for 1914-1916 and 1939-1943. In the figures which accompany this chart, General Ayres gives monthly figures for percentage fluctuations above or below an estimated normal. We have averaged these monthly fluctuations to get the percentage, plus or minus, for the year. The year 1914 shows an average of -5.25%. The year 1916 shows an average of +13.75%, making an increase of approximately 19% from the bad year 1914 to the year of unlimited demand and full production, 1916. As General Ayres’s figures make allowance for estimated normal growth, it is not necessary to make any adjustment to allow for this factor, as we have done for Mills’s figures and the new Federal Reserve Index, above.

For the year 1939 General Ayres’s figures show an average of -12%, and for 1943 an average of +38%, with respect to the estimated normal. This would mean an increase of 50% in production with respect to normal between 1939 and 1943, indicating an appalling slack in 1939.

A very able statistician has supplied figures based on the methods of the old Federal Reserve Index of Production (1923-1925=100), which show for the years 1914-1916 an increase of 30% and for the years 1939-1943 an increase of 71%. Here again we must make allowance for normal growth. Assume this to be 3% per annum for each period. Then the 1914-1916 increase would be 24%, and the increase for 1939-1943 would 59%.

Yet another computation, taken from a private index of industrial activity, adjusted for long term growth, would show 1914 at 4.2% below normal and 1916 at 13.6% above normal, giving a percentage increase of 18.6% between 1914 and 1916. The same index shows 1939 at 8.5% below normal and 1943 at 48.6% above normal, making an increase during the four years of 62.4 per cent.3

Three Sets of Figures Converge. Three significant sets of figures thus converge in the condemnation of Governmental economic planning under the Republican New Deal and under the Democratic New Deal: (1) the table for employment and unemployment, from 1900 to 1939, inclusive; (2) the figures showing the rapidly growing percentage of metal working equipment over ten years old; and (3) the figures showing how little slack there was in the utilization of our industrial capacity in the year 1914 as contrasted with the degree of slack in the year 1939. All of these figures justify condemnation of Governmental economic planning as robbing us, year after year, of the production which we might have had and the consumption which we might have enjoyed had we had the old, flexible, unregulated economy.

In 1939 we had idle men, idle money, and idle technological ideas on an appalling scale. The war set them to work, but it took the war to do it.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
• 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.