6. Mitigation by Tariff
(i) Proposals for a Revenue Tariff
(March 7, 1931)
Do you think it a paradox that we can continue to increase our capital wealth by adding both to our foreign investments and to our equipment at home, that we can continue to live (most of us) much as usual or better, and support at the same time a vast body of persons in idleness with a dole greater than the income of a man in full employment in most parts of the world—and yet do all this with one quarter of our industrial plant closed down and one quarter of our industrial workers unemployed? It would be not merely a paradox, but an impossibility, if our potential capacity for the creation of wealth were not much greater than it used to be. But this greater capacity does exist. It is to be attributed mainly to three factors—the ever-increasing technical efficiency of our industry (I believe that output per head is 10 per cent greater than it was even so recently as 1924), the greater economic output of women, and the larger proportion of the population which is at the working period of life. The fall in the price of our imports compared with that of our exports also helps. The result is that with three-fourths of our industrial capacity we can now produce as much wealth as we could produce with the whole of it a few years ago. But how rich we could be if only we could find some way of employing four-fourths of our capacity to-day!
Our trouble is, then, not that we lack the physical means to support a high standard of life, but that we are suffering a breakdown in organisation and in the machinery by which we buy and sell to one another.
There are two reactions to this breakdown. We experience the one or the other according to our temperaments. The one is inspired by a determination to maintain our standards of life by bringing into use our wasted capacity—that is to say, to expand, casting fear and even prudence away. The other, the instinct to contract, is based on the psychology of fear. How reasonable is it to be afraid?
We live in a society organised in such a way that the activity of production depends on the individual business man hoping for a reasonable profit, or at least, to avoid an actual loss. The margin which he requires as his necessary incentive to produce may be a very small proportion of the total value of the product. But take this away from him and the whole process stops. This, unluckily, is just what has happened. The fall of prices relatively to costs, together with the psychological effect of high taxation, has destroyed the necessary incentive to production. This is at the root of our disorganisation. It may be unwise, therefore, to frighten the business man or torment him further. A forward policy is liable to do this. For reasoning by a false analogy from what is prudent for an individual who finds himself in danger of living beyond his means, he is usually, when his nerves are frayed, a supporter, though to his own ultimate disadvantage, of national contraction.
And there is a further reason for nervousness. We are suffering from international instability. Notoriously the competitive power of our export trades is diminished by our high standard of life. At the same time the lack of profits in home business inclines the investor to place his money abroad, whilst high taxation exercises a sinister influence in the same direction. Above all, the reluctance of other creditor countries to lend (which is the root-cause of this slump) places too heavy a financial burden on London. These, again, are apparent arguments against a forward policy; for greater activity at home due to increased employment will increase our excess of imports, and Government borrowing may (in their present mood) frighten investors.
Thus the direct effect of an expansionist policy must be to cause Government borrowing, to throw some burden on the Budget, and to increase our excess of imports. In every way, therefore—the opponents of such a policy point out—it will aggravate the want of confidence, the burden of taxation, and the international instability which, they believe, are at the bottom of our present troubles.
At this point the opponents of expansion divide into two groups—those who think that we must not only postpone all ideas of expansion, but must positively contract, by which they mean reduce wages and make large economies in the existing expenditure of the Budget, and those who are entirely negative and, like Mr. Snowden, dislike the idea of contraction (interpreted in the above sense) almost as much as they dislike the idea of expansion.
The policy of negation, however, is really the most dangerous of all. For, as time goes by, it becomes increasingly doubtful whether we can support our standard of life. With 1,000,000 unemployed we certainly can; with 2,000,000 unemployed we probably can; with 3,000,000 unemployed we probably cannot. Thus the negative policy, by allowing unemployment steadily to increase, must lead in the end to an unanswerable demand for a reduction in our standard of life. If we do nothing long enough, there will in the end be nothing else that we can do.
Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit. There are two ways of doing this—by increasing the demand for output, which is the expansionist cure, or by decreasing the cost of output, which is the contractionist cure. Both of these try to touch the spot. Which of them is to be preferred?
To decrease the cost of output by reducing wages and curtailing Budget services may indeed increase foreign demand for our goods (unless, which is quite likely, it encourages a similar policy of contraction abroad), but it will probably diminish the domestic demand. The advantages to employers of a general reduction of wages are, therefore, not so great as they look. Each employer sees the advantage to himself of a reduction of the wages which he himself pays, and overlooks both the consequences of the reduction of the incomes of his customers and of the reduction of wages which his competitors will enjoy. Anyway, it would certainly lead to social injustice and violent resistance, since it would greatly benefit some classes of income at the expense of others. For these reasons a policy of contraction sufficiently drastic to do any real good may be quite impracticable.
Yet the objections to the expansionist remedy—the instability of our international position, the state of the Budget, and the want of confidence—cannot be thus disposed of. Two years ago there was no need to be frightened. To-day it is a different matter. It would not be wise to frighten the penguins and arouse these frigid creatures to flap away from our shores with their golden eggs inside them. A policy of expansion sufficiently drastic to be useful might drive us off the gold standard. Moreover, two years ago the problem was mainly a British problem; to-day it is mainly international. No domestic cure to-day can be adequate by itself. An international cure is essential; and I see the best hope of remedying the international slump in the leadership of Great Britain. But if Great Britain is to resume leadership, she must be strong and believed to be strong. It is of paramount importance, therefore, to restore full confidence in London. I do not believe that this is difficult; for the real strength of London is being under-estimated to-day by foreign opinion, and the position is ripe for a sudden reversal of sentiment. For these reasons I, who opposed our return to the gold standard and can claim, unfortunately, that my Cassandra utterances have been partly fulfilled, believe that our exchange position should be relentlessly defended to-day, in order, above all, that we may resume the vacant financial leadership of the world, which no one else has the experience or the public spirit to occupy, speaking out of acknowledged strength and not out of weakness.
An advocate of expansion in the interests of domestic employment has cause, therefore, to think twice. I have thought twice, and the following are my conclusions.
I am of the opinion that a policy of expansion, though desirable, is not safe or practicable to-day, unless it is accompanied by other measures which would neutralise its dangers. Let me remind the reader what these dangers are. There is the burden on the trade balance, the burden on the Budget, and the effect on confidence. If the policy of expansion were to justify itself eventually by increasing materially the level of profits and the volume of employment, the net effect on the Budget and on confidence would in the end be favourable and perhaps very favourable. But this might not be the initial effect.
What measures are available to neutralise these dangers? A decision to reform the grave abuses of the dole, and a decision to postpone for the present all new charges on the Budget for social services in order to conserve its resources to meet schemes for the expansion of employment, are advisable and should be taken. But the main decision which seems to me to-day to be absolutely forced on any wise Chancellor of the Exchequer, whatever his beliefs about Protection, is the introduction of a substantial revenue tariff. It is certain that there is no other measure all the immediate consequences of which will be favourable and appropriate. The tariff which I have in mind would include no discriminating protective taxes, but would cover as wide a field as possible at a flat rate or perhaps two flat rates, each applicable to wide categories of goods. Rebates would be allowed in respect of imported material entering into exports, but raw materials, which make up an important proportion of the value of exports, such as wool and cotton, would be exempt. The amount of revenue to be aimed at should be substantial, not less than £50,000,000 and, if possible, £75,000,000. Thus, for example, there might be import duties of 15 per cent on all manufactured and semi-manufactured goods without exception, and of 5 per cent on all food stuffs and certain raw materials, whilst other raw materials would be exempt. I am prepared to maintain that the effect of such duties on the cost of living would be insignificant—no greater than the existing fluctuation between one month and another. Moreover, any conceivable remedy for unemployment will have the effect, and, indeed, will be intended, to raise prices. Equally, the effect on the cost of our exports, after allowing for the rebates which should be calculated on broad and simple lines, would be very small. It should be the declared intention of the Free Trade parties acquiescing in this decision to remove the duties in the event of world prices recovering to the level of 1929.
Compared with any alternative which is open to us, this measure is unique in that it would at the same time relieve the pressing problems of the Budget and restore business confidence. I do not believe that a wise and prudent Budget can be framed to-day without recourse to a revenue tariff. But this is not its only advantage. In so far as it leads to the substitution of home-produced goods for goods previously imported, it will increase employment in this country. At the same time, by relieving the pressure on the balance of trade it will provide a much-needed margin to pay for the additional imports which a policy of expansion will require and to finance loans by London to necessitous debtor countries. In these ways, the buying power which we take away from the rest of the world by restricting certain imports we shall restore to it with the other hand. Some fanatical Free Traders might allege that the adverse effect of import duties on our exports would neutralise all this; but it would not be true.
Free Traders may, consistently with their faith, regard a revenue tariff as our iron ration, which can be used once only in emergency. The emergency has arrived. Under cover of the breathing space and the margin of financial strength thus afforded us, we could frame a policy and a plan, both domestic and international, for marching to the assault against the spirit of contractionism and fear.
If, on the other hand, Free Traders reject these counsels of expediency, the certain result will be to break the present Government and to substitute for it, in the confusion of a Crisis of Confidence, a Cabinet pledged to a full protectionist programme.
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