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American Economy Can Beat Russia

Faculty Experts Approve Limited Controls at Present

By Douglas M. Fouquet

Since the outbreak of the Korean war, the United States has moved in partial war mobilization. Many have warned that these steps are not enough, that direct price and wage controls are needed immediately to check inflation. Others have raised serious questions about the ability of the American economy to support large arms expenditures for what may no an indefinite period.

This week the CRIMSON questioned seven of the University's best informed economists on the problems of economic mobilization and winning the "economic cold war." They are: Sumner H. Slichter, Lamont University Professor who has already written several articles and speeches on this subject; J. K. Galbraith, professor of Economics and a deputy director of the Office of Price Administration during World War Two; John T. Dunlop, professor of Economics who in February was a mediator in the Coal Strike; Edward S. Mazon, Baker Professor of Economics and dean of the School of Public Administration; Alexander Gerachenkron, associate professor in Economics and member of the Russian Research Center; John D. Black, Lee professor of Economics and an authority on agriculture; and Seymour E. Harris '20, professor of Economics and an expert in such fields as "welfare economics."

Today's article on the economic efforts of the cold war is the sixth in this fall's series on the current international situation. A seventh and concluding article will stress the political and sociological implications.

With prospects likely that the United States is in for an indefinite period of mobilization for defense, Harvard's economic experts find themselves in general agreement that the American economy can support prolonged arms and foreign aid expenditures and that it has every chance of outlasting Russia in a production contest that may last indefinitely.

Moreover, the economists agree--with many varying reservations--that so far this country has followed the right trail in setting up limited economic controls and abstaining from such direct measures as rationing and full price and wage controls.

The Production Contest

The cold war, even if it becomes much "hotter," is unlikely to weaken seriously such a dynamic and progressive economy as that of the United States, most of the economists point out in their comments, emphasizing America's high levels of output and national income.

Associate Professor Gerschenkron, Harvard's top authority on the Russian economy, estimates "very roughly" that Soviet national income today is about 90 billion dollars a year; this is only slightly more than a third of the corresponding American figure. Consequently, this strength, plus enormous comparative flexibility, should give the U. S. economy "a great edge," Gerschrenkron believes.

"For only a small relative percentage of our national income, we should be able to outbuild and outlast the Soviet Union," Dean Mason remarked, "even though the Russians have the head start."

Far from making the United States weaker through adding to our outlays, Russian policy may be making America stronger, Professor Slichter suggested. "The more intense the contest becomes," he said "the greater will be the stimulus to technological progress and the faster will be the expansion of our productive capacity."

"But it is important that the country substantially increase this productive capacity," Slichter warned. "Otherwise every increase in military expenditures would force a reduction in the standard of living of the people," he explained.

Accelerating the rise in productive capacity is even more important today than the problem of stopping inflation, Slichter feels. As a result he is strongly dedicated to any mobilization steps which will encourage investment and technological research. One of his strongest convictions, therefore, is that the draft should not curtail the training of young scientists.

Like all his colleagues, however, Slichter is also disturbed about rising prices and the inflation threat. But even so, he maintains that "it would be a mistake to control prices in ways that prevented substantial and continuous expansion."

Price Controls Opposed

While there is debate on whether inflation control or production encouragement is the number one goal, everyone agrees that economic controls are the means to the end. And there is also complete agreement that the current policy of "indirect controls" is the right policy to follow now.

"Direct" controls, notably price ceilings, drew fire for varying reasons. Professors Galbraith, Harris, and other argue that price controls should be held off as the all-out emergency measure, and Mason points out that the public would not obey them unless a real emergency existed. Slichter feels price ceilings would be particularly inappropriate "in a long-run production contest which may last for years and which the United States must win by rapidly expanding its output."

Professor Galbraith, who in the last war was a deputy price administrator and who still keeps in close touch with Washington, favors strong indirect controls today, built around high taxation. Backing current Administration policy, he points out that high taxes can and should cover all the increased governmental spending, thus wiping out the inflationary effects of the war expenditures, And he feels profits will be high enough to encourage heavy production.

Wage Measures

Again, on the subject of wage controls, no one was pressing for immediate action. "This is the stage where we can only study the problem," Professor Dunlop said, "while a lot of things work themselves out." Among these are the future Korean settlement and the resulting level of national military expenditures, as well as the November political elections.

"When we know the level of military expenditures and can more accurately appraise inflationary pressures, any stabilization program involves the three stages: voluntary self-controls, indirect fiscal controls, and direct wage and price controls," Dunlop said. "These direct controls will be used only after the others have been shown inadequate."

He added that at the moment he does not foresee any serious strike threats.

"Sooner or later," Professor Slichter warned, "collective bargaining may produce results that the country finds intolerable." At some stage, he said, "The community will probably have to insist that restraints be placed upon the freedom of unions and employers to make wage bargains that determine the price level."

Galbraith would reinforce the high taxes with indirect controls, such as those already imposed on consumer and real estate credit, as well as certain "selective" price controls on crucial materials like copper and rubber. But the "heavy artillery" of blanket price controls must by all means be held back, he said, until we have some idea of a terminal point. "Price controls become less effective the longer they remain in existence," he explained.

Not only does Professor Galbraith want to make the most of taxes and other fiscal controls now, but he wants also to be sure defense dollar are being spent efficiently. "Before Korea we were spending enough but not wisely. The Administration needs to set up a continuing civilize authority to check that our defense money is buying machines and armed units instead of just paying for a large overhead."

High tax policy drew universal support, especially from Mason and Harris, but Slichter made certain reservations about the nature of the taxes imposed. "The tax increase proposed so far produce a mixture of good and bad effects," he said. "No one knows what kind of excess profits tax will be passed, and it will be difficult to draft one that does not severely limit the capacity of industry to expand."

Opposes Pay-As-You-Go

Slichter criticized the Administration's pay-as-you-go tax policy on the grounds that it would not stimulate personal saving. If instead the government sold bonds to individuals, be said, "the economy would be in a stronger position at the end of the contest with Russia." He added that a bond would need to carry a high interest rate so that it would be attractive during the current period of rising prices.

There were a number of criticisms raised against various kinds of indirect controls, although the consensus was that the government was moving in the right direction with its moderate anti-inflation measures. Several faculty men asked for stronger indirect control now, although Professor Harris thought "a heavy dose of taxation" would almost be enough by itself to eat up any current surplus of purchasing power. Harris added that the country could still continue welfare expenditures, but pointed out that too much "would be inflation."

Professor Black, viewing the agricultural sector of the economy, said selective price controls might soon be needed on such currently high-demand items as wool and beef. "But until things are much clearer," be said, "we should continue to encourage dairy production and not rush to convert our feed reserves into meat." We may also need more farm machinery, he added, because the demand for labor will probably draw workers from the farms to the factories.

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