The Price of Prosperity

The Price of Prosperity
A Realistic Appraisal of the
Future of Our National Economy
By Peter L. Bernstein
Publisher:JOhn Wiley & Sons,Inc
ISBN:978-0-470-28757-6

Reviewed By: Sanjukta Kar

Following the inflation period of 1946-1948, the postwar years saw an increase in pent up demand and increase in employment and consumer spending. During this time labor was in short supply, but new technology led to an increase in capital good production and by 1975 production grew threefold while population rose by less than 50%. The question then arises will the demand increase at par with output. There were predictions that unemployment will reach 10% by 1970 and 20% by 1980 if demand did not rise.

In such an unemployment scenario, some like J. M. Keynes believed that government spending should be undertaken when there is a lack of demand and should be reduced with an increase in private demand. Such spending will lead to purchase of goods and services thus creating employment. However, there is difference between government spending under democratic and autocratic government as pointed out by economist James Tobin. Our main focus in the context of either public or private spending is whether our well being or prosperity is increased or not. In other words, government spending does not add any burden to the private economy if the labor and resources are increased accordingly.

An increase in taxes promotes income and employment if volume of government spending with increased taxation is greater than the cut in private spending. If the opposite holds—increase in private spending due to cut in taxes greater than government spending the consumer demand should be a very strong driving force. Reduction of Taxes DO NOT decrease in corporate prices charged. Historically, higher taxes do not reduce people’s incentives to work less. United States showed a lower tax burden and a higher growth rate during the 1950’s than West Germany, Austria, Finland, Norway, France, Luxemburg, Britain, Netherlands and Italy.

The primary arguments against increased taxation are (1) Restricts our spending choice, (2) Stifles economic incentives and (3) Destroys growth by moving resources from private to public sector. But ee will all suffer without public services like toll roads, post office, parks . If the poorer citizens are charged according to their use they will face disaster as unlike the rich, the largest share of their income is spent in buying necessary goods.

Unlike private services public services sometimes run with a loss as it benefits the society. So the proposition of the Committee for Economic Development (CED) that people can achieve a better life without government spending and taxation is utterly meaningless.

The primary argument against government spending is that it is wasteful and inflationary. So taxes should be reduced so that private spending is increased. Let us focus on inflation which is caused by an increase in prices due to excess demand over supply. The high price induced inflation is due to the actions of union monopolies and corporate positions and not due to public spending and can be checked by utilizing the excess labor and resources in the economy which will increase supply in response to demand . Consumer demand can be constrained by levying taxes to curtail the excess demand, while full employment and utilization of resources are maintained.

The opponents of government spending points out that the creation of new money to finance investment caused inflation from 1955 to 1957 and as private investment increases consumer goods supply, these are not inflationary. But this view ignores the important public expenses that have to be incurred like improving roads, labor exchanges, defense goods etc.

Opponents of public spending also point out that it cannot cure cyclical unemployment, caused by changing business cycles. However, any attempt to increase output in the operating sector will have similar effect on the economy whether it is in the public sector or private sector. When it comes to structural unemployment, caused by technological innovation that eliminates certain jobs, relocation and retraining unemployed workers is important for the overall growth in the economy. If the private sector is growing slowly, it cannot absorb this

People realized the importance of a rise in public budget after a depression to restore order in the political and economic sphere. Though J.M. Keynes acknowledged the importance of public spending in the face of decaying private spending, Keynesian economists still points out the importance of withdrawal public spending when the private sector can support itself.

As opposed to a socialist economy (government determines more than its own needs for public services, decides prices of goods and services) a free economy like U.S. gives the private sector the full freedom to make its own pricing decisions. The government still regulates the economy by the introduction of antitrust laws like the interstate Commerce Commission, the Federal Trade Commission. Government intervention is still an important tool to provide relief to the poor. Government spending improves productivity, increases demand for goods and services and provides employment and adds to our economic freedom rather than curtailing it. As the government benefits the economy as a whole there is no reason to see any loss of individual freedom.