Postwar Output at Full Employment: A Rebuttal

Abstract

In the May number of this REVIEW Mr. Everett E. Hagen made some criticisms of a recent article of mine.' These criticisms I shall here attempt to answer. Mr. Hagen asserts that my assumes a decade of technological stagnation. That is not true; I merely recognize the fact that as defined by the Department of Commerce, is not a measure of the real but is a purely monetary concept, which cannot be reduced to terms of goods and services by means of price deflators, because it includes so many elements that have no price and in recent years so many that would have no value whatever in years of normal peacetime prosperity. It is not a measure of but of expenditures, confusing out of with out of capital, and not distinguishing between productive and unproductive. The gross product is increased by government deficits, no matter for what purpose incurred; the real product, the total of useful goods and services, which is the only proper measure of labor productivity, is not increased by government deficits unless those deficits are incurred for the production and not merely the redistribution of useful goods or services. A reduction in government spending in the next few years would reduce the gross or at least its rate of growth; it would not necessarily reduce and would likely cause an increase in the volume of useful goods and services produced. To a large extent the criticism just directed against gross product applies to national and to a slightly smaller extent it applies also to payments. Income include a large amount of transfer income, not resulting from current production by the recipients or by their property, such as pensions, interest on war debt, and payments by non-income-earning corporations out of their capital. Disposable income eliminates government pensions and interest on war debt in so far as they are paid for out of personal taxes; it also unfortunately eliminates currently productive governmental activities. To the extent that the real can be measured by calculations of income, and disposable income between them come closest to filling the requirements, but neither is as good as consumer expenditures or the sum of consumer expenditures and gross private capital formation. Something also might be said in behalf of gross less government deficits. My optimistic estimate shows the following annual rates of increase from I940 to I950: