We can consider compensatory devices according to whether they are (1) "built-in," (2) administrative, or (3) legislative.
(1) "Built-in" Devices. Built-in flexibility of the budget is achieved when certain programs fluctuate by law in a way that will offset private economic fluctuations. If our long-run policy is consistently carried out, the behavior of the budget will automatically tend to offset ups and downs in the private sector.
With a progressive income tax, for instance, a larger proportion of the national income is taxed when national income is high than when it is low. It therefore operates automatically to check booms and depressions. The social security system accumulates funds at high levels of income when tax receipts exceed benefits, and it decumulates at low levels when tax receipts fall off and claims for benefits rise. The agricultural pricesupport program automatically expands and contracts as farm prices rise and fall.
These examples indicate that there is already some built-in flexibility in the federal budget. Any scheme for extending Social Security benefits will bring more such flexibility. It may become feasible to tie tax rates to some economic indicator, but at present we do not have sufficiently precise knowledge of economic interrelationships to make this feasible.
Built-in devices commend themselves highly on budgetary grounds. Their automatic operation means that they come into opeartion without the need for hasty political or administrative decisions. Long-run policy can be preserved intact.
However, these arrangements cannot be relied on exclusively if we want full compensatory action. For a considerable amount of inflation, or unemployment, as the case may be, must take place before they come into effect with any force. They can mitigate but cannot prevent inflation or deflation.
(2) Administrative Devices. It has often been suggested that the executive should be granted discretionary power by the Congress to vary the rate at which programs are carried out or the rates at which taxes are collected.
The Congress does habitually make appropriations for more than one year for long-run construction or procurement programs, and the executive does have the legal authority to control rates of expenditure from year to year. But these programs prove in practice exceedingly difficult to adapt to changing economic conditions. In many cases it takes one or two years for programs to become fully reflected in construction activity. Once a program has been enlarged, it is difficult to contract it without waste, to say nothing of resolute opposition from all interested parties.
In the past, government corporations, such as the Reconstruction Finance Corporation, have provided the administration with a flexible instrument of policy. However, by the Corporation Control Act of 1945, the Congress asserted its determination to exercise greater control over government corporations; and the tendency now is to bring the corporations under stricter budgetary control rather than to exempt them from it. Here there is a conflict between the long- and short-run points of view. From the long-run point of view, there can be no question that the programs of the corporations should be subject to regular Congressional approval; but if that is done the executive is deprived of a useful countercyclical weapon.
It seems very doubtful that Congress would agree to give the President discretionary power to alter tax rates. It also seems to me doubtful that the President, from a political point of view, would want it.
On the whole, therefore, I believe that the practical possibilities of administrative devices are strictly limited.
(3) Legislative Devices. I conclude that apart from built-in flexibility, we must rely for compensatory action on measures that are passed by the Congress. In fact that seems to be in line with the intention of the Employment Act, which makes the President and the Congress partners in their responsibility for economic stability.
Anti-depression action will, I believe, require special requests by the President for appropriations to carry out special projects such as roads or housing, or to provide relief in the case of distress. It should also require special action to reduce taxes on a temporary basis. This seems all very similar—painfully similar, some will say—to what was done in the 'thirties. But there can be a difference. The 'thirties were a highly experimental period. Many things that were tried had to be rejected. Some that were retained were badly executed, and some were misdirected. The difference can be achieved by advance preparation. We shall probably never have a blueprint on the statute book. But it is possible that the Congress could pass a tax law in advance—to be put into force by a joint resolution. And the Executive can, and, under the Employment Act, presumably will, get its plans ready. So long as the imaginative vigor of the 'thirties is not lost, a much better job can be done next time we are confronted with depression.