Unemployment Ahead
Samuelson had taken his first step into national journalism when, on July 20, 1944—the day when the plot by German officers to assassinate Hitler failed—he submitted an article to The New Republic.
Still working at the Radiation Laboratory, he introduced himself as someone who had worked at the NRPB for two years prior to its demise, and who had been concerned about the unwarranted air of optimism that was building. Economists in Washington, he claimed, were anticipating “a postwar period in which private industry would be able by itself to create a high level of prosperity.” “I consoled myself,” he wrote, “with the thought that as the postwar became more imminent, this illusion would be dispelled. Unfortunately a recent trip to the Capitol suggests that this is not yet the case.”37 During August, he discussed this paper with Bruce Bliven, the editor of The New Republic, who suggested that he had been too hard on Washington economists, whom he had not named.f In response, Samuelson presented himself as someone who had once been a Washington insider but was no longer. “A little over a year ago,” he wrote, “I attended my last dinner meeting in Washington.”38 At this meeting, attended by presidential assistants and heads of spending and planning agencies, he had discovered that no one was concerned about the absence of a “shelf of public works projects” that could be implemented should there be a postwar depression. He conceded that complacency might be fading as the war's end approached, but stood his ground:I can testify from personal experience that among many persons, themselves engaged upon estimating transitional unemployment, there has been a rather remarkable optimism.... I myself checked with people at the Federal Reserve Board, the Department of Commerce and the Bureau of the Budget. In the last few weeks I have been doing informal consulting for a unit in WPB [War Production Board] charged with making estimates on these matters, and it was only with the greatest difficulty that I was able to make anyone believe that national income might fall by as much as 23 billion.
To me, some of the recent public utterances of so good a New Dealer as Ezekiel are quite incomprehensible.39f. Samuelson claimed not to have given names because his observations were based on confidential material that he wished to respect.
He might now be an outsider, but he still had contacts that enabled him to report insiders' views with confidence.
Samuelson responded by accepting many of Bliven's suggestions, deleting some passages and simplifying others, and making the piece more topical by mentioning the conflicts between the WPB and the military, including references to WPB staff who had resigned in protest against military interference with their work.40 He also added a chart to illustrate the problem, taking it from a recent article in the Federal Reserve Bulletin4 It turned out that the article had to be split into two parts, and Bliven asked whether he could provide some pictograms to illustrate it. Samuelson was unable to provide pictograms, though he provided two charts, of which one was eventually used in the second part. “In normal times,” he wrote, “I would make more strenuous efforts to take care of such matters, but working from eight-thirty to six on military matters makes this quite impossible.”42
The first installment of Samuelson's article was published on September ιι, under the title, “Unemployment Ahead: A Warning to the Washington Expert.”43 It began with a description of how a recent trip to Washington had brought home to him how soon the war was likely to end.
Happily, we are entering upon a time when the end of the war in Europe is in sight. Each day's newspaper makes this more and more clear, but its real imminence was only brought home to me by a recent trip to Washington, the first in a year. Everywhere I went I could smell cuts in war production; in the corridors of the Social Security Building, where WPB [War Production Board] dollar-a-year men are still a dime a dozen; in the sweltering “temporaries,” where OPA [Office of Price Administration] dignitaries hide; and the scent had even penetrated the marbled tabernacle of the Federal Reserve Board.44
With this paragraph, Samuelson established himself as an outsider, albeit one familiar with the corridors of power.
Munitions production was being cut, stockpiles were high. General Brehon Somerville was pushing for production of heavy trucks, airborne radar, and heavy bombers, disagreeing with Donald Nelson, head of the WPB, on the need to start planning for reconversion; but if the war went well, Samuelson explained, even Somerville would have to come around. Private businesses were becoming less enthusiastic about bidding for military contracts, anxious not to get left behind in the race to peacetime production. Ship construction might hold up, owing to the continuing naval war in the Pacific, but Samuelson thought that there would soon be “about a 40-percent slash” in military production, reducing production by $25 billion a year. This was roughly the amount by which consumption fell from the peak of the 1920s boom to the depression of the 1930s—a massivefall.The effects would be even bigger than this because of the multiplier, “that bit of glorified common sense which economists of all schools now largely recognize.”45 Suggesting he was doing no more than articulating a commonsense view that his readers would readily accept, he turned to a criticism of the economic experts in Washington.
Once acquainted with the above facts, any reasonably well informed layman... will instantly recognize that a serious storm is on the horizon. If we can expect this from the amateur, what can we presume to be the view of the professional Washington economist, the full-time expert with all of the statistical resources of the government at his disposal, the experienced executive whose official responsibility it is to foresee and forestall by appropriate policy measures all threats to our prosperity? Surely he has an elaborate set of plans, ready to go into effect the moment the emergency arises. Or at least he must be working frantically to make good the deficiency before the zero hour is upon us. Unfortunately, this is not the case.46
The diagram Samuelson had taken from the Federal Reserve Bulletin, projecting alternative scenarios for production and unemployment after the war, was then reproduced.
Although it was not converted to a pictogram, the magazine’s staff had added pictures of a factory and an unemployed worker, head bowed as he contemplated the possibility of hard times ahead. Unfortunately, Samuelson continued, the Washington economist could not see what ordinary people could see and was not devising measures to combat unemployment: “His digestion is good, and at night he experiences no nightmares.”47 Economists did foresee some problems, but only temporary ones. He saw this as paradoxical because only a few years earlier, as academic economists, they had been preaching the dangers of secular stagnation.gSamuelson made it clear that he was not critical of economists in general. The public needed to know that economists had performed an extraordinary task during the war.
It has been said that the last war was the chemist’s war and that this one is the physicist’s. It might equally be said that this is an economist’s war.... [T]he Washington economist has done an excellent job,
g. The doctrine of secular stagnation was in this period strongly associated with Hansen and his younger colleagues. See Backhouse and Boianovsky 2016.
either in comparison with reasonable expectations or in comparison with the business executives who have been called to the government service. At a time when bureaucracy is anathema, it is well to emphasize that no administration in history has commanded the services of men of equal zeal, honesty or competence.48
After discussing whether economists had much influence on policy (concluding that some policies stemmed directly from economists’ recommendations), Samuelson explained why economists in Washington had got so out of touch.
Nevertheless, perhaps because of his successful wartime preoccupation with scarcity of supplies, shortages of manpower and resources, excesses of purchasing power and inflationary gaps, the Washington economist has for the moment lost his perspective concerning the immediate postwar problem....
The Washington economist lives in a world frequented by his own kind. I know, for I have lived in that happy world. When he hears that someone else has arrived at the same optimistic estimate as his own, he takes this to be independent corroboration of the truth of his view instead of realizing that it is simply a reflection of his own last week’s expression of opinion. This process of mutual infection and amplification of opinion is cumulative and self-aggravating, so no wonder his conviction grows without bound.49The article ended with another homely touch, the story of an investment counselor who made a careful estimate of the effects of the end of the European war and took his conclusion, that incomes might fall from $150 billion to $110 billion, to Washington, only to be laughed at. “Why, you talk like Leon Henderson [the unpopular head of the OPA who, after the 1942 election, retreated to a career in business], who thinks that there will be eight million unemployed.” It was, Samuelson concluded, Henderson’s strength and salvation that he was not considered “an economist’s economist.”
Immediately after the article appeared, a friend from Samuelson’s Chicago days, Jacob Mosak, wrote from the OPA to congratulate him. “I think most Washington economists have needed the warning for a long time,” he wrote. “I have argued along the same lines for about a year.”50 He added that people at the OPA had been very pessimistic about the postwar outlook, both in the transition and in the long term, enclosing a clipping from the Washington Post that quoted an estimate of the likely multiplier in the coming years. Samuelson replied that it was reassuring to discover that they were in agreement, and he explained to Mosak the multiplier he had calculated for the WPB.51
The problem was that the consumption function could not be estimated from past data: personal and corporate tax schedules had changed, and some elements of consumption would be independent of income in the reconversion period.
Taking separate account of personal and business saving, and the different tax rates on individuals and businesses, Samuelson calculated a multiplier of ι⅜, from which he concluded that it was “fairly safe” to assume it must be somewhere between ι½ and 2. He then added, “Keynes says that a man working by himself can dress up the most God-awful moonshine. I would be interested to know if I am completely wide of the mark.”The New Republic published the second installment of Samuelson’s article, bearing the subtitle “The Coming Economic Crisis,” a week after the first.52 Reminding readers of the complacency of the Washington expert he had discussed the previous week, he listed various grounds for optimism. The First World War demobilization was unplanned, yet it did not produce complete disaster; there was a backlog of deferred demand, owing to very high wartime savings waiting to be spent; memories of unemployment were fading; and there were the wonders of new technology—“television, [F]livver planes, synthetics, air-conditioning, plastic autos.”53 There was merit in all these arguments, but Samuelson explained that they missed the point that wartime prosperity was fueled by $100 billion of government spending—the equivalent of two Tennessee Valley Authorities every day. Using language common to interwar business cycle theory, he argued that this was “artificial” prosperity. It was based on increased production of automobiles, aircraft, ships, and electronics that could not possibly be sustained after the war. It might sound terrible to say so, but the fact was that war did generate prosperity.
To the civilian population the war period is scarcely more real [than the depression years].... Even more precious than the augmented family weekly takehome is the enhanced sensation of personal security which a high level of effective demand has created. In the last war, many observers were shocked to hear the frank assertion, “Say what you will, this war has made many a happy home.” It is a sad commentary upon our peacetime management that the same feelings should be entertained today by more people than would care to admit it.54
However, even to those experiencing it, this prosperity seemed transient and insecure. The feeling would soon be exploited by those wanting to deny that war really had produced such a massive increase in production.
I predict that the campaign to debunk wartime increases in production, which is just beginning, will swell into a mighty chorus. We shall be told that war prosperity was an illusion; that we did not produce what we did produce; that even if we did, such output is incommensurable with civilian goods and proves nothing about peacetime real incomes, etc., etc.
There were even some people who feared the return of full employment.h There was an urgent need to demonstrate that high peacetime income was possible.
Returning to the theme with which he had begun his first article, he argued that so long as policymakers were aware of the grave situation ahead, common sense would guide them.
Let them [the policymakers] proceed in a common-sense way from their own diagnosis of the origins of wartime prosperity. Let them disregard the shibboleths, inconsistencies and confusions of so-called orthodox finance. Let them do these things, and they will not need the advice of high-powered theory or statistics to determine in which direction correct policy lies.55
His most specific advice, entirely consistent with common sense, was that adjustment should come slowly: cuts in government spending should not run ahead of civilian expansion by more than $10 billion. “Economically, the war did not begin with Pearl Harbor. Nor will it end with the defeat of Japan. Our economic system is living on a rich diet of government spending. It will be found cheaper in the long run, and infinitely preferable in human terms, to wean it gradually.” It would be possible to achieve slow adjustment by stockpiling obsolete munitions, but much better to embark on a substantial program of social security and worthwhile public construction projects.
Despite Samuelson’s targeting of Washington economists, Morris Livingston of the Bureau of Commerce wrote to compliment him on his articles, to which Samuelson replied that he greatly valued the contributions coming from Livingston’s office.56 He received a follow-up letter from Mosak, who said that they had calculated the multiplier in essentially the same way as Samuelson.57 He enclosed a copy of a paper on “Forecasting Postwar Demand,” which he had presented a month earlier at a session of
h. Samuelson did not explain why it was feared. It is possible that it was believed that full employment would lead to inflation, or simply that it would be associated with an unwanted degree of planning.
the Econometric Society and the American Statistical Association meeting, to which Livingston and two other economists had also contributed.58 Mosak estimated that by 1950 (a date chosen to allow time for reconversion), potential national income would be $200 billion; and to ensure that there was sufficient demand for this to be realized, there would be a need for policies to raise the propensity to consume well above pre-war levels, as well as government spending to meet the gap that private investment would be unable to cover. The point was that the government should guarantee full employment—something that private sector bodies could not do.59
Samuelson’s response to Mosak's article was that he was “a little startled” by the amount of government spending required to maintain full employment.604 He had one suggestion to make—that Mosak should consider the possibility that by 1950, the consumption function might have shifted upward, something that would be likely if reasonably full employment had been maintained for a few years (if people became more confident about high incomes they would have less need to save).’ Having said that, he immediately qualified it by saying that there was no “mysterious hand guaranteeing a miraculous increase in consumption habits precisely sufficient to meet our needs” and the war might even have increased thriftiness. The significance of this is not so much the precise arguments as the uncertainty about what would happen; for all Samuelson’s emphasis on there being a stable consumption function, he recognized that major changes to the system, such as wartime and the transition to peace, could significantly alter consumption behavior.k
i. Mosak did not specify the level of government spending required; it depended on what was assumed about private investment.
j. Another statement reminiscent of what Friedman was later to label the permanent income hypothesis.
k. Though Samuelson will presumably not have seen this until the proceedings were published in January 1945, the same conclusions could be drawn from the discussion at the session on September 14, where Mosak had presented his paper (Roos et al. 1945). Charles Roos had argued that the uncertainties were sufficiently great that the type of national income studies produced by Mosak should be regarded less as forecasts than as guidance similar to that provided to a company by its operating accounts.
A set of accounts was invaluable in diagnosing the health of a company, but it was not a forecast. Leonid Hurwicz raised the possibility of structural changes in spending patterns and Everett Hagen noted that there might be no reliable way to forecast consumption.