What should be the objective of compensatory policy? Should it be to iron out all fluctuations, or should it allow mild ups and downs in business? Our discussion in the last paragraph has answered the question to some extent. If Congressional action must be relied upon, it is doubtful that action will be taken before some signs of depression have appeared.
And in the present state of our forecasting knowledge, it is doubtful whether it should.
Even if forecasting were good and action could be taken in time, it is not certain that complete stability should be the objective. It still remains true that trouble can be caused by price and wage maladjustments, which, if they are not to be perpetuated, should be allowed to correct themselves. There will continue to be shifts between industries and regions. It should not be national policy to prevent these changes, but they do involve depressions in some segments of the economy.
There is no reason, however, why these changes which should he allowed to occur should have secondary depressing effects. There are no grounds for the belief that a general depression does anyone any good. The best way to avoid secondary effects is to reduce tax rates. I conclude, therefore, that tax reduction should always be part of anti-depression policy.
One further point: foreign investment policies should not be undertaken as compensatory devices. It is essential from the point of view of good international relations, that lending policy be designed to help carry out foreign policy and not domestic policy. There is the strongest political temptation to export unemployment. But in the interests both of domestic stability and international harmony, it should be resisted.
It is much easier to propose a feasible legislative program of fiscal policy to offset deflation than to propose one to prevent inflation. While strong political forces can be mustered to relieve a depression, innumerable obstacles and pressures appear when any attempt is made to cut inflation. My conclusion therefore is that fiscal control of inflation must depend on prompt abandonment of anti-depression measures and the anti-inflationary safeguards that are built into the long-run program.
In the field of compensatory action, I believe fiscal policy must shoulder most of the load. Its chief rival, monetary policy, seems to be disqualified on institutional grounds. This country appears to be committed to something like the present low level of interest rates on a long-term basis. There is not much room for reductions to alleviate depressions, and it seems generally agreed that, with the national debt at its present size, any appreciable increases in rates would cause serious financial disorders. No one has been prepared to suggest an increase in long-term rates to check the present inflation.
Other methods of adjustment, such as anti-monopoly policy, belong clearly to long-run rather than to compensatory policy. While many economists have recommended elimination of monopolies in times of depression, few, if any, have been willing to urge an increase in monopoly to check a boom.
I have some hopes that in the area of administered prices big business may come to practice private compensatory fiscal policies. The practice of accumulating reserves in prosperous times and disbursing them as dividends when current profits are low is all in the right direction. A stable dividend policy could be supplemented and strengthened by a fluctuating price policy. It can be argued that the present inflation of food prices would be less if managed industrial prices were higher, and that these higher prices would be justified if there were assurance of sharp price cuts in the event of a depression. Attempts by government to enlist the aid of business management have not been successful in the past. They are not likely to be in the future so long as government retains its ambivalent attitude toward the question of monopoly control.
Although this discussion has not been optimistic, the least that can be hoped for is that more government action will be taken to mitigate depressions in the future than was taken in the past. Built-in flexibility is now more potent; it is unlikely that tax rates will ever again be raised with the onset of depression; and the political demands for government action will be more insistent. Finally, the long-run budget will be a much higher proportion of the national income than it was before the war. . . .
The type of policy suggested here would require the use of an extraordinary budget in addition to the regular budget. In my view, the regular budget would represent the long-run program on the expenditure sides. It would, however, reflect the effects of built-in flexibility. Of course if the total program were designed to achieve full employment in the ensuing year, there would be no such effects. The extraordinary budget, on the other hand, would show the effects of the special revenue and expenditure measures proposed by the President. Depending on the time when action was required, it might not even be submitted at the same time as the regular budget.
I know that extraordinary budgets are anathema to many authorities whose objectives are the same as mine—to improve the budgetary process. But I can see no other way to do justice to the requirements of good budgeting and an effective and well-timed fiscal policy. The use of an extraordinary budget would permit separation of that part of the budget which can be the subject of long-run planning from the programs that must be adopted in response to immediate needs. With the extraordinary budget, compensatory measures could be dropped more easily after the need for them had passed than if they had become part of the regular budget.
The economist will doubtless be irritated with the intrusion of public administration into this paper, and the public administrator, if he reads it, with the economic jargon. The political theorists will consider it naïve. However, someone must try to bring together the fruits of political, economic, and administrative theory if we are to have a successful fiscal policy.