Incompetence and Profits

Of all potential U.S. war weapons, none has been more completely orphaned than the profit motive. For fear it might be confused with its bastard cousin, profiteering, neither business nor Government has cared (or dared) stand up for it. Last week the House Ways & Means Committee prepared to abandon the orphan for the duration, reported favorably on a 94% excess-profits tax. For corporations in the highest bracket that means that every extra dollar of cost will actually cost only 6-c-.

For stable businesses, and inefficient producers, the House committee's proposal was more lenient than the Treasury's, for its higher excess-profits tax (94% compared to 75%) penalizes efficient businesses that are getting ahead in the world and its lower normal and surtaxes (40% compared with 55%) lighten the relative tax load on businesses that are sot in their ways. The proposal of the National Association of Manufacturers, for a 100% excess-profits levy (TIME, March 23), was even more calculated to freeze efficiency and competition out of industry.

It sounded fine and patriotic that industry should fall over itself to avoid making profits. It also served the useful purpose of making wage and farm price controls more politically palatable. But it ducked a burning question: can industry achieve maximum production and efficiency, can the U.S. get the most goods at the lowest cost, if the U.S. denies business rewards for proficiency? And can free enterprise survive for long without it?

In this month's Harpers' Magazine appeared a resounding No. Free-lance Economist Joseph H. Spigelman points out that, in this war, businessmen are so afraid of seeming to make too much money and are so shackled by "an enervating fear of the future" that they are voluntarily trading profits for "the joys of secure incompetence." When all the "convenient fictions . . . for concealing profits" (extra reserves, etc.) have been exhausted, "the businessman seeks refuge from high profits in high costs."

This, says angry Mr. Spigelman, means two things: 1) ballooning costs keep war production from reaching its real peak; 2) after the war, "a mighty alliance of all the incompetents" will demand continued Government protection for uneconomic wartime habits. If this comes to pass, the U.S. will find itself in "the most rigid and closed of socialisms . . . a tyranny of collective incompetence at least as disastrous as the nineteenth century tyranny of unbridled competence."

Spigelman recommendations: the Government should favor low-cost and high-profit enterprise with priorities and tax concessions, favor efficient management similarly with salaries and bonuses tied to production and profits. Last week a U.S. Department of Commerce report revealed that Germany had been doing just that: low-cost German industry gets exemption from excess-profits taxes in direct proportion to its productive efficiency.

But U.S. taxperts have given little thought to the 75-95% of every war production dollar that is manufacturing cost, far more to the 5-25% that is profit. Nor have individual profit necessities been much considered. The auto industry, for example, will come out of the war with a huge dammed-up demand for its peacetime product; but the machine-tool industry may have dug its own grave by producing enough capital goods for a generation. The railroads will face punishing new competition that can be met only if they are allowed enough profits now to scale down their debts and build up reserves for modern equipment.

Moreover, tax students point out that the entire U.S. wartime profit philosophy is in favor of (and hence tacitly supported by) the largest manufacturers, who can handle big contracts with a minimum of risk, can best afford to sit tight and "sacrifice" incentive profits. N.A.M.'s 100% tax proposal was least popular with its smaller members.

Yet, although profit is the handiest uniform measure of efficiency, the very word is politically unpopular, especially in wartime. The notorious firm of Jack & Heintz (TIME, April 6) is known in WPB circles as an efficient producer, but it preferred to conceal its profits as "bonuses" instead of showing them proudly and splitting them cleanly with the tax collector. Congressmen have the same profit phobia.

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