(ii) The Economy Report (Aug. 15, 1931)

The Report of the Economy Committee can be considered from several points of view. It is an exceedingly valuable document because it is a challenge to us to make up our minds one way or the other on certain vital matters of policy. In particular it invites us to decide whether it is our intention to make the Deflation effective by transmitting the reduction of international prices to British salaries and wages; though if this is our intention, it would be absurd to pretend that the process can stop with school-teachers and policemen. The Committee's Report goes too far or not far enough. But this is not the question which I wish to discuss here. I would like to confine myself to what has been so far, as it seems to me, a neglected aspect of the Report.

The Committee show no evidence of having given a moment's thought to the possible repercussions of their programme, either on the volume of unemployment or on the receipts of taxation. They recommend a reduction of the purchasing power of British citizens partly by the reduction of incomes and partly by throwing out of work persons now employed. They give no reason for supposing that this reduction of purchasing power will be offset by increases in other directions; for their idea is that the Government should take advantage of the economies proposed, not to tax less, but to borrow less. Perhaps at the back of their heads they have some crude idea that there is a fixed Loan Fund, the whole of which is always lent, so that, if the Government borrows less, private enterprise necessarily borrows more. But they could not believe this on reflection, if they were to try to translate it into definite, concrete terms.

Their proposals do not even offer the possible advantages to our trade balance which might ensue on a reduction of industrial wages. For there is nothing in what they propose calculated to reduce the costs of production; indeed, on the contrary, they propose to increase them by raising the employers' insurance contribution.

Let us try, therefore, to write the missing paragraphs of the Report and to make some guesses as to the probable consequences of reducing purchasing power in the manner proposed.

Some part of this reduction of purchasing power may be expected to lead to a reduced buying of foreign goods, e.g. if the dole is cut down, the unemployed will have to tighten their belts and eat less imported food. To this extent the situation will be helped. Some part will be economised by saving less; e.g. if teachers' salaries are cut down, teachers will probably save less or even draw on their past savings, to maintain the standard of life to which they have become accustomed. But for the rest British producers will find the receipts reaching them from the expenditure of consumers (policemen, school-teachers, men on the dole, etc.) reduced by the balance of, say, £70,000,000. They cannot meet this loss without reducing their own expenditure or discharging some of their men, or both; i.e. they will have to follow the example of the Government, and this will again set moving the same series of consequences, and so on.

The net result would necessarily be a substantial increase in the number of unemployed drawing the dole and a decrease in the receipts of taxation as a result of the diminished incomes and profits. Indeed the immediate consequences of the Government's reducing its deficit are the exact inverse of the consequences of its financing additional capital works out of loans. One cannot predict with accuracy the exact quantitative consequences of either, but they are broadly the same. Several of the Committee's recommendations, e.g. those relating to Roads, to Housing, and to Afforestation, do indeed expressly imply that the whole theory underlying the principle of Public Works as a remedy for unemployment is mistaken, and they ask, in effect, for a reversal of the policies based on this principle. Yet they do not trouble to argue the case. I suppose that they are such very plain men that the advantages of not spending money seem obvious to them. They may even be so plain as to be unaware of the existence of the problem which I am now discussing. But they are flying in the face of a considerable weight of opinion. For the main opposition to the Public Works remedy is based on the practical difficulties of devising a reasonable programme, not on the principle. But a proposal to reverse measures already in force involves a denial of the principle as well as of the feasibility.

I should like, though it is rash, to make, if only for purposes of illustration, a very rough guess as to the magnitudes of the more immediate consequences of the adoption of economies of £100,000,000, carried out on the lines of the Committee's recommendations. I should expect something like the following:

  1. An increase of 250,000-400,000 in the number of the unemployed;
  2. A decrease of, say, £20,000,000 in the excess of our imports over our exports;
  3. A decrease of £10,000,000 to £15,000,000 in the savings of the general public;
  4. A decrease of £20,000,000 to £30,000,000 in business profits;
  5. A decrease of £10,000,000 to £15,000,000 in the personal expenditure of business men and others, who depend on business profits, as a result of these profits being less;
  6. A decrease of £5,000,000 to £10,000,000 in the aggregate of capital construction and working capital and other investment at home entered upon by private enterprise, as a result of the lower level of business profits, after allowing for any favourable psychological effects on business "confidence" of the adoption of the Committee's recommendations;
  7. A net reduction in the Government deficit not exceeding £50,000,000, as a result of the Budget economies of £100,000,000 being partly offset by the diminished yield of taxation and the cost of the increased unemployment.

The actual figures I have used are, of course, guess-work. But (2) + (3) + (4) - (5) - (6) = (7), where (7) is the net reduction in the Government deficit, is a necessary truth—as necessary as 2 + 2 = 4. There is nothing rational to dispute about except the size of the various items entering into this equation. It might be held by some, for example, that there would be an increase under (6), instead of a decrease; and if there were a large increase of this item—which, however, could not, in my judgement, be maintained with good reason—this would make all the difference in the world to the expediency of the policy proposed.

At the present time, all Governments have large deficits. For Government borrowing of one kind or another is nature's remedy, so to speak, for preventing business losses from being, in so severe a slump as the present one, so great as to bring production altogether to a standstill. It is much better in every way that the borrowing should be for the purpose of financing capital works, if these works are any use at all, than for the purpose of paying doles (or veterans' bonuses). But, so long as the slump lasts on the present scale, this is the only effective choice which we possess, and Government borrowing for the one purpose or the other (or a diminished Sinking Fund, which has the same effect) is practically inevitable. For this is a case, fortunately perhaps, where the weakness of human nature will, we can be sure, come to the rescue of human wrong-headedness.

This is not to say that there are not other ways in which we can help ourselves. I am not concerned here with the possible advantages—for example—of a Tariff or of Devaluation or of a National Treaty for the reduction of all money incomes. I am simply analysing the results to be expected from the recommendations of the Economy Committee adopted as a means of reducing the uncovered deficit of the Budget. And I should add, to prevent misunderstanding, that I should prefer some of their recommendations—for they have done their work in detail with ability and fair-mindedness—to most kinds of additional taxation other than a tariff.

My own policy for the Budget, so long as the slump lasts, would be to suspend the Sinking Fund, to continue to borrow for the Unemployment Fund, and to impose a Revenue Tariff. To get us out of the slump we must look to quite other expedients. When the slump is over, when the demands of private enterprise for new capital have recovered to normal and employment is good and the yield of taxation is increasing, then is the time to restore the Sinking Fund and to look critically at the less productive State enterprises.

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