The Postwar Outlook For Business


By SUMNER H. SLICHTER, Lamont University Professor, Harvard University and Chairman of the Research Advisory Board

Broadcast over WABC., October 31, 1944

Vital Speeches of the Day, Vol. XI, pp. 122-124.

THE federal government is now spending about $90 billion a year. Within two years after the war its expenditures will drop to $25 billion a year. This will be the greatest and swiftest disappearance of markets in history. Within a year after the fighting against Japan, six million men will leave the Armed Service, 1.5 million will leave civilian government jobs, and 3.5 million will be laid off by plants making combat munitions. Of nine million additional men making war goods, perhaps half will be laid off at least temporarily. With the government rapidly withdrawing from the market, is there any chance that enough jobs can be found for returning service men and dismissed war workers? Can private spending possibly rise fast enough to offset the drop in public spending?

Two facts stand out conspicuously. One is that the unsatisfied needs of American consumers and of American business are piling up to all-time highs. The second is that purchasing power has also reached new highs. Let us first

consider needs. Take automobiles, for example. At the time of Pearl Harbor, with six million people unemployed, Americans were driving 28 million automobiles. Today the number is down to 23 million, and cars are leaving the road at the rate of five thousand a day. When the war ends, say early in 1946, we shall have seven million fewer automobiles than we had at the time of Pearl Harbor.

Over six hundred articles of iron and steel have not been made for civilian use since early 1942. Most household electrical goods, for example, have not been made for civilian use since April, 1942. The accumulated need for these good$ may conservatively be put at twice the number of units sold in 1940. This means an accumulated need for

3.5 million vacuum cleaners

7.2 " clocks

23.0 " radio receivers

5.0 " refrigerators

10.3 electric irons

3.1 " washing machines

1.5 " waffle irons

1.8 " heating pads

3.7 " percolators

4.5 " toasters

The war has stimulated marriages with the result that a million more couples than normal have been married during the last four years. A high proportion of the 6,600,000 couples married during the last four years have purchased little household equipment. The accumulated need for household goods after the war will reach new highs. During the last four years the construction of permanent dwelling units has fallen behind the increase in families—in fact, families have increased by 750,000 more than permanent dwelling units. When the service men come home, the country will experience one of the most acute housing shortages in its history.

Great and pressing needs for goods become demand only when backed by purchasing power. And I have said that purchasing power has been reaching new highs. During the last four years individuals have saved $100 billion, as much as they would have saved in fourteen years at the 1940 rate. They have increased their cash, bank deposits, government securities, and other liquid assets far more during the last three years than during the entire previous 150 years of the republic.

Business enterprises have also greatly increased their purchasing power. Despite the great rise in the tax liabilities of corporations, their net working capital has increased by over 60 per cent since 1939. By the end of the war it will probably be double 1939.

But will individuals and business concerns be willing to spend their enormous purchasing power freely after the war? That is the crucial question. Many people believe that the swift drop in government spending will leave consumers too frightened and dazed to spend their money. This is a possibility, but I believe a remote one. If it were to happen, men would be behaving in a new way. There have been revolts of consumers against rises in prices and there have been sudden refusals to spend after spending has been going on furiously for several years and after consumers have piled up huge debts. Never, however, have people whose consumption has been severely restricted for several years, and who in the meantime have accumulated unprecedented amounts of purchasing power, refused to use their money to satisfy their needs when goods became available. When goods are obtainable, money will be spent faster than it is being spent today. That is why it is important when fighting ceases that conversion to civilian production be made quickly.

Let us suppose that 57 million people are working after the war and that their working week is about 7.5 per cent shorter than now. Will they be able to produce enough to meet the demand? At present efficiency they would produce about $156 billion of goods a year. National, state, and local governments will take about $31 billion of this product, leaving $125 billion available for private consumption. Will this be enough to meet the demand of individuals and business concerns?

The incomes of 57 million persons (at present prices and wages) would be about $130 billion. After paying personal taxes people would have $118 billion left to spend on goods or to save.

How much would they spend? Let us begin by asking about nondurable goods. If gasoline, beefsteaks, milk, butter, cheese, cigarettes, silk, nylon, fuel oil, and scores of other things had been available in 1943, if people had had time to take vacations, if ten million service men had been civilians buying their own food and clothing, would not the market for civilian goods have been at least 10 per cent higher than it was? When this rate of spending is adjusted to an income of $118 billion after taxes, a postwar demand for nondurable goods of $90 billion is indicated. On durable consumer goods people spend about 10 per cent of their incomes after taxes. This would indicate a demand of nearly $12 billion. In addition, account must be taken of the deferred demand for durable goods which I have estimated at double the quantity sold in 1940. If this deferred demand is spread over four years, it will average $4 billion a year Despite the housing shortage, many people will await clarification of economic conditions before starting to build. Consequently, residential building may be no greater in physical volume than in 1939, or about $2.6 billion at present prices.

What quantities of goods will business demand? Replies from 150 concerns indicate that expenditures on replacing equipment will run 1 1/2 depreciation allowances, or about $10 billion a year. Plant construction, in physical volume, may for awhile be no higher than in 1939, or about $4 billion a year at present prices. Restoration of inventories will take about $3 billion a year for three years. Our surplus of exports over imports will scarcely be less than $3 billion a year. This would be considerably smaller than the export surplus which followed the first World War.

All of this adds up to a total demand of goods by government, consumers, and industry of about $160 billion, or $4 billion more than the output of 57 million people at present efficiency. Evidently postwar demand for goods is likely to test the capacity of American industry, but business enterprises, by improving efficiency, should be able to meet the demand.

What will happen after most of the deferred demand for automobiles, other durable consumer goods, and industrial equipment has been met and after the large amounts of accumulated repair work have been completed? At that time the maintenance of high employment will require stimulation of demand by the introduction of improved products and by a great rise in industrial construction and in residential building. Fortunately greatly improved products are on the way, and should be on sale within three years after fighting ceases. Given sensible reforms in taxes, there should be a great rise in residential and commercial building because the potential demand is enormous.

An investment of about $2 in factories, mines, railroads, public utilities, stores, office buildings, and inventories is required for every dollar of consumers goods produced each year. If consumers spend about $25 billion more for goods than in 1940 (in terms of 1944 dollars), the country will need to increase its industrial plant, equipment, and inventories in the first five or ten years after the war by possibly $50 billion.

Certainly with 57 million people working and spending their incomes, most large cities will need some new hotels. People are not going to line up, as they do now, for rooms, and eventually sleep in sample rooms. And people will not line up in restaurants as they now must do. Hundreds of good restaurants will be needed. The present high levels of factory employment have been achieved only by working many people nights. With 57 million people employed after the war, the number of non-government jobs will be two million more than it now is. These people will need places to work and machines to run. In most industries they will not be content to get employment opportunities by working nights, and employers will not be disposed to pay night-shift premiums if the demand for goods seems to be fairly permanent. Hence a large volume of factory construction will be needed. Furthermore, in competition with modern one-story factories, many old multiple-story factories will be obsolete.

The demand for housing should also be large. With the national income about 35 per cent above pre-war, millions of people will be unwilling to put up with present housing. Most of the demand for new housing comes from families receiving $2,000 a year or more. In 1925, our best housing year, these families spent 12 cents out of each dollar of income on new housing. At this rate, the annual demand for housing should run nearly $9 billion a year.

My remarks may seem unduly optimistic to you because for a decade before the war we were living in a repressed economy without realizing it. We accepted the levels of 1929 as a yardstick without making allowance for long-term growth. Some people thought that the United States had become old and could no longer expect to grow very much. And yet, all of the old countries of Europe, except France and Poland, made a better recovery than did the United States. By 1937, when Britain was producing 16 per cent more than in 1929, industrial production in the United States was still 6 per cent below 1929.

To protect ourselves against economic defeatism we need a yardstick to measure the industrial progress of the country. Let us take a modest yardstick—15 per cent increase in per capita output every ten years. In every decade of our history, except the thirties, we have done better than that. This rate of progress would mean that the gross national product should rise from $156 billion shortly after the war to $187 billion by 1950, to $229 billion by 1960, and to $275 billion by 1970.

Let us keep clearly before us these great potentialities of our economy. Awareness of them will help us keep our sights high; it will stimulate confidence in our power to achieve it; it will encourage us to insist that public policies foster pioneering and expansion.