Government Should Help Build Aggregate Demand

The spectacular advance of the American Economy from 1949 to 1953 has created a swell of optimism with respect to the possibilities of future growth and expansion. A Gross National Product of $500 billion, six to eight years hence, has frequently been suggested. Recently President Eisenhower himself referred to some such target.

The setting up of such a target represents a major advance in economic thinking. But there is still a school of economists who believe that the rate of advance achieved in 1949-53 cannot and should not be aimed at as a matter of deliberate policy. More explicitly, they believe that governmental policy should be directed toward the prevention of a collapse, but not toward the maximum potential rato of growth and expansion.

Need Demand

The target suggested above is, in my view, both feasible and desirable. It is a potentially realizable goal. But it will not just happen. To reach it requires a long-range program.

The assumption sometimes made that our potential rate of growth can automatically be reached may result in inaction. While talking bravely about automatic expansion, it could happen that we shall move sidewise or perhaps expand at a rate far below our potential.

Experience since 1949 reveals that the American economy responds magnificently to heavy demands placed upon it. It takes a lot of "fuel" to keep our highly productive economy going at full speed.

Professor Hansen taught at Wisconsin, Brown, and Minnesota before coming to Harvard in 1937. His numerous books include "Economic Policy and Full Employment" and "Monetary Theory and Fiscal Policy."

If we fail to reach our potential rate of growth in the years ahead, the trouble will not come from lack of productive resources--capital equipment, high level of technique, or an efficient labor supply.

If we fail, the primary cause will be inadequate aggregate demand. And there is no assurance that the economy, operating on its own steam, will generate adequate demand. Concerned as we must be with technical research and higher and higher levels of efficiency, we may not achieve our goal if we neglect this crucial requisite for growth and expansion. Foreign economies are often presented with different problems. But for the American Economy, the element of greatest uncertainty is the adequacy of aggregate demand.

By now everyone admits that the economy cannot be left to shift for itself alone without governmental support. This hard fought milestone in economic progress has by now been won. It is now official doctrine not only of New Deal Administrations, but of the Eisenhower Administration itself. The government can no longer stand by while the economy collapses into deep depression as in 1929-32.

Lending

The built-in stabilizers (social security, farm program, deposit insurance, widespread ownership of liquid assets including U. S. bonds) help to ensure against collapse. For expansion, however, an active program is needed including lending and guaranteeing operations by the government (housing, rural electrification, etc.), public investment projects (resource development, power, roads, health, education, etc.), tax rates low enough to ensure that full employment savings will find adequate investment outlets; and finally, a monetary policy that will ensure low rates of interest and ample liquidity for a growing economy.