Immature Economy

A prime theorem of many New Deal ideologists is that the U. S. economy is mature, past its years of automatic growth. According to this view, frontiers can no longer be depended on to absorb the country's excess capital--the only way to keep the economy going is by heavy taxes on savings and surpluses, to recirculate wealth through a widening program of Federal works. Leader of this school of thought (called the "deficiency school" because it thinks the private outlets for new investment are deficient) is Economist Alvin Hansen of Harvard.

Against this gloomy hypothesis, U. S. businessmen are instinctively arrayed. Most of them, had they heard of it, would belong to the opposed "deterrent school," led by Professor Sumner H. Slichter, also of Harvard. Economists of the "deterrent school" believe the economy would resume its normal expansion soon enough if the deterrents to expansion, governmental and otherwise, were removed. But U. S. businessmen in this debate have been forensically slow-footed.

Last week, with a 413-page volume called Capital Expansion, Employment, and Economic Stability, august Brookings Institution of Washington threw its weight on the Slichter side of the scales, against the doctrine of the mature economy. Product of a two-year study directed by Brookings' president, orbicular Harold Glenn Moulton, it broke no new argumentative ground, offered no new documentation for economists. But to businessmen it served the useful purpose of asserting learnedly, with charts and logic, principles that most of them accept on faith. Some contentions:

> The increase in U. S. population (although the rate of increase is declining) and the need of raising living standards offer ample basis for large-scale, private-capital construction. In the next 40 years the bulk of present housing facilities should be replaced, new facilities should be prepared for a probable increase of 22,000,000 to 55,000,000 in population. Estimated average annual outlay: $3,500,000,000. Better housing facilities might conceivably run the annual total to $6,000,000,000.

> To put the U. S. productive plant back into tiptop shape, and to take care of increasing population, would cost $22-26,000,000,000. Examples of capital-expansion needs: 61% of U. S. industrial machinery in 1937 was over ten years of age (compared to 44% in 1925); less than 5% of U. S. locomotives (end of 1938) were "strictly modern," 52% are over 24 years old; more than 60% of the steam capacity of power plants will need replacement or rebuilding within a few years.

> To put the U. S. productive plant back into tiptop shape, and to take care of increasing population, would cost $22-26000,000,000. Examples of capital-expan sion needs: 61% of U. S. industrial machinery in 1937 was over ten years of age (compared to 44% in 1925); less than 5% of U. S. locomotives (end of 1938) were "strictly modern," 52% are over 24 years old; more than 60% of the steam capacity of power plants will need replacement or rebuilding within a few years.

> New technologies and new industries--chemicals, plastics, synthetic fibres and textiles, photoelectric cells, airplanes and air transportation, television, air conditioning--have tremendous potentialities for a widening economic horizon.

> The mature-economists' contention that large industrial organizations can now finance their own capital requirements from "internal sources" is exaggerated. Even so moderate a business recovery as that of 1936-38 sent many a well-heeled company to the money market: U. S. Steel Corp.. $100,000,000 for modernization; Monsanto Chemical, $5,000.000 for "working capital and plant expansion''; Standard Oil of New Jersey, $50,000,000 for "capital expenditures,'' etc.

Lining up firmly with the "deterrent school," the Brookings report described some familiar deterrents:

> Government taxation policies have driven investors to tax-exempt bonds, away from risk investments.

> Time lost in complying with SEC rules has increased market risks in issuance of new securities; legalistic requirements have increased the expense of flotations, particularly of small issues: access to the capital market is further complicated by vagueness of SEC rulings and indefiniteness of penalties.

> Deficit spending and the growth of the public debt have made U. S. citizens unwilling to make long-term capital commitments. Investors, says Brookings, fear an ultimate "breakdown of public credit."

> Competition of public lending agencies (RFC, HOLC, etc.) with private institutions has worked against private risk of capital.

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