Paying For The War* I. The Control of Consumption A Problem of Social Justice This is the first of two articles in which Mr. Keynes propounds a scheme of compulsory savings designed to reduce purchasing power in war-time, when production falls short of need, and to release it afterwards, when the position is reversed. By J. M. Keynes The Times, Tuesday November 14, 1939, p. 9, 10.
Nothing is more certain than that the wages bill of this country will increase. More men will be employed, and sometimes, as a result of “dilution” at a higher grade of work than that to which they are accustomed; tey will work longer hours and at overtime rates; and it is to be expected that a demand for labour in excess of the supply will result in sporadic, and perhaps widespread, increases in wage rates themselves by at least some figure such as 5 or 10 per cent. Already in October coalminers, textile workers, agricultural labourers, and (in prospect) railway workers were given a rise. An increase in the purchasing power of wage earners by at least £500.000.000 is to be expected; and by the time we have reached our maximum effort a much larger increase than this would be inevitable. Failing special measures to the contrary, a substantial proportion of this sum will be spent in the shops and elsewhere.
It is the declared policy of the Government to keep the prices of consumption goods as near as they can at the pre-war level. If they succeed, it follows that the purchasing power of the working classes will command in the aggregate substantially more goods than before, even if a general rise
* The 2 articles are published on http://eurodos.free.fr/cocnet with the kind permission of The Times.
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of wages is avoided. And if a further rise of wages is allowed, to compensate for any higher cost of living resulting from this expansion of demand, the situation will be correspondingly aggravated. For all that the outside observer can observe, the problem thus created – the central problem of the home economic front, a problem which requires for its solution the coordination of price policy, budget policy, and wages policy – has not yet been faced.
It is arguable that the present rate of Government expenditure of (say) £2.500.000.000 a year is compatible with the maintenance of something not much worse than the pre-war standard of working class consumption. At least it will be so arguable when we are no longer reducing our productive capacity by an extravagant A.R.P. Policy out of proportion to the protection gained. But no one can suppose that we can afford an appreciable improvement over the pre-war standard. And any further increase towards our maximum war effort must be at the expense of pre-war standards of consumption.
Thus the working classes will have a substantially larger money-income than before, but they must not, at the best, consume any more than they did. For the wise and just solution of this problem the leaders of the working class must be taken into earnest and sincere consultation. An economist may be able to help by indicating the alternatives which are open to us. But the choice between them must depend on political and human considerations about which every one is entitled to his opinion.
Remedies There are three genuine ways of reaching equilibrium, and two pseudo-remedies. The first pseudo-remedy is by rationing. If there is so great a relative lack of an essential article of consumptionn that a reasonable rise in price cannot restore equilibrium between supply and
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demand, we must have recourse to rationing. But against a general increase of purchasing power rationing is useless. It merely serves to divert demand from the rationed to the unrationed article. Rationing is always a bad method of control because it has to go on the assumption that every one normally spends the same amount on a given article; and even apart from the intolerable bureaucratic burden which is involved, this characteristic puts out of court a system of universal rationing applied to all articles. The second pseudo-remedy is an anti-profiteering measure, which exalts into undue prominence the least significant cause of rising prices. Therfore those whose first thoughts run to rationing and anti-profiteering have not begun to discern the real nature of the problem – namely, that the aggregate of purchasing power is increasing faster than the available supply of goods.
Let us turn to the three genuine remedies. All of them have to be applied in some measure, but the degree to which we depend on each it is more difficult to decide. The first is to allow prices to rise. Some rise in price is inevitable. Indeed, in spite of all efforts to the contrary, the cost of living has risen by 6½ per cent in the first month of the war. But some rise is also desirable. For otherwise, as a result of the depreciation of the exchange, the increased cost of transport and insurance, and the rise of prices abroad, the goods would have to be sold at a loss, quite apart from higher costs at home. There is an important distinction between a higher price corresponding to the higher world prices and a still higher price which is out of relation to the rest of the world. It is unlikely that we can avoid some further rise up to (say) 20 per cent above pre-war, due to both causes. But if we were to depend on this remedy alone, the rise in prices sufficient to restore equilibrium would be beyond all reason and endurance. The yield of the excess profits tax would gain, but most of the other consequences would be bad. We cannot avoid the “vicious spiral” of rising prices and wages merely by attending to the cost of living; for the first step of the spiral's ascent can begin just as well at the wages end, and this, perhaps is what happens more often. But an excessive rise of prices will
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assuredly set such a process in motion. Apart from this there are grave disadvantages in this method, except in strict moderation. A rising cost of living puts an equal proportional burden on every one, irrespective of his level of income, from the old-age pensioner upwards, and is a cause, therefore, of great social injustice. Moreover it is largely futile unless we recast our wages system. The rise in prices helps only to the extent that it is greater than the rise in wages. But there are to-day many wage-rates linked by agreement with the cost of living, so that the two move together.
The second genuine remedy is taxation. But to help solve our present problem it must involve taxation of the working classes. Three-fifths of the net expenditure on consumption (after deducting normal saving and taxation) is by those whose incomes are less than £250 a year, and it is this class whose incomes are likely to rise by upwards of 15 per cent.
Not much more can be expected from the existing indirect taxes. A general turnover tax [10] seems to be the only unexplored source of substantial revenue from working-class incomes. A turnover tax on non-essentials deserves closer examination than it has yet received. But not too much must be hoped from it. It would be a heavy administrative task to introduce it for the first time in a war when the bureaucratic machine already creaks and groans. Like a rise in prices, a general turnover tax falls with equal proportionate weight on all levels of income, and must, if it is to yield enough, fall with intolerable severity on the lower levels. So far as revenue from staple goods is concerned, the best and easiest plan is for the Government to resell at prices which yield a profit some at least of those articles of which it is monopolizing the distribution. Whether this be regarded as remedy by price raising or remedy by taxation, the benefit will accrue to the Treasury with the least possible addition to the existing machinery and without leakage.
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Ethics of Borrowing The price remedy and the taxation remedy are alike in depriving the working class of any benefit from their increased earnings. Yet a large portion of the earnings now in question represents increased effort on their part. The third remedy is free from this objection.
It is conventional nowadays to talk about the justice and wisdom of paying for a war almost entirely out of current taxation without borrowing. We all know that such a thing is impossible; but many people seem to think that it would be just and wise to do it if we could. The argument is that the major part of the expenditure has to be met out of increased current effort and diminished current consumption, so that for the community as a whole it makes no real difference how it is financed, while the method of taxation avoids future complications. But a little reflection will show that the reason why it is impossible entirely refrain from borrowing is also a reason why it would not be just and wise to do so. It makes all the difference in the world to each individual personally whether the excess of his income over his consumption is taken from him by tax or by loan. To him personally Government stock is an addition to his wealth, to his security, and to his comfort facing the future. It gives him a claim over the future resources of the community. Someone will have to meet this claim. But this someone is not necessarily himself, and, even if it were, it may suit him better and install less sacrifice to part by instalments with his personal resources and to possess meanwhile a title to wealth which he can realize in case of need. Moreover, even in war we cannot afford to dispense altogether with the economic incentive to effort – which a too exclusive financing by taxation would involve. We have already got dangerously near to this in the case of the entrepreneurs, and we must not make the same mistake with the working classes. There is a fatal family resemblance between bureaucracies in Moscow, Berlin and Whitehall; and we must be careful.
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The community at war cannot allow the individual of the working class to make a greater immediate demand on the national resources than hitherto; and it may have to ask of them a reduction. But that is no reason why they should not be rewarded by a claim on future resources. For the individual that is what wealth is. If it is physically impossible to reward the labour of the working class by immediate consumption, we should welcome and not reject the opportunity thus given to make its members individually wealthier.
The third remedy, therefore, is to distinguish two kinds of money-rewards for present effort – money which can be used, if desired, to provide immediate consumption and money the use of which must be deferred until the emergency is over and we again enjoy a surplus of productive resources – that is to say, current cash on the one hand and on the other a blocked deposit in the Post Office Savings Bank. This is the general idea behind the third remedy. Part payment by the second part of money is, during the emergency, the only way by which the real earnings of the working class can be increased. Can their leaders be made to see clearly this elementary fact ? To the details of the proposal on these lines I will proceed in a second article.
To be continued
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Paying For The War II. Compulsory Savings A Detailed Plan In this second of two articles Mr. Keynes proceeds to give the details of his scheme of compulsory savings during wartime By J. M. Keynes The Times, Wednesday November 15, 1939, p. 9, 10.
At the end of our first article we were left with the conclusion that the working class, taken as a whole, can only enjoy an increase in real earnings, if they are prepared to accept deferred payment. Each individual may dislike postponing his own consumption, but he will gain from a similar postponement by his fellows. If every one spends, prices will rise until no one is better of. The increased earnings of the working class will not have benefited them one penny, but will have escaped through higher prices and higher profits, partly into taxation and partly into the savings of the entrepreneur class. Here, therefore, is the perfect case for compulsion; for general compulsion will benefit all its victims alike. A chance is given us to use the opportunity of war finance – an opportunity always missed hitherto – to increase the individual resources of the working class and not merely of the entrepreneur class.
The following are the details of my proposal: (1) A percentage of all income in excess of a stipulated minimum income will be paid over to the Government, partly as compulsory savings and partly as direct taxes. The percentage taken will rise steeply as the level of income increases. (2) The following table illustrates the kind of scale which might be proposed, though it Copyright © The Times, November 1939
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would have to be more complicated so as to avoid sudden jumps: Annual £150 £150 £250 £500 £1.000 £2.000 £5.000 £10.000 Above £20.000
income
not
exceeding Per cent of the excess over a stipulated income 20 25 30 35 40 50 60 70 80
£250 £500 £1.000 £2.000 £5.000 £10.000 £20.000
The stipulated income, which would be free of the levy, might be 35s, a week for an unmarried man, 45s. for a married man with an addition of 7s. 6d. a week for each child. Thus an unmarried man with 40s. a week would contribute Is. a week, while a married man with two children would pay nothing until his income was above 60s. a week. There might also be a provision similar to that in the most recent Finance Act to provide mitigation or exemption where a man's income had fallen substantially below its pre-war level. (3) A part of this amount will be credited to the individual as a deposit in the Post Office Savings Bank. The balance will be used to discharge his income-tax and surtax, if any. The percentage of the levy credited as a savings deposit will fall, and the percentage taken as taxes will obviously rise, as the level of income increases. For example, if we take the level of income-tax and surtax which will be in force in 1940-41 for a married man with two children, who's income is earned, with £300 a year or less, the whole of what he pays will be credited to him in the Post Office Savings Bank and will remain his property. At £500 the total levy will be £105, of which £77 10s. will be credited to him and £27 10s. retained to pay his income-tax. Thereafter the percentage of the levy which is credited to him falls steadily, until at an income level just over £20.000 out of a levy of £16.000 only £3.000 (in round figures) is credited to him and £13.000 is taken in taxes.
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The following are further illustrations: - An unmarried man with 50s. a week will have to save 3s. a week : a married man with two children and £5 a week must save 10s. and pays no income-tax, and with £1.000 a year he must save £107 10s. a year and pays £180 income-tax. These do not seem to be extravagant demands in time of war and may be not altogether to his disadvantage. If his life is insured or if he owes instalments to a building society the above demands will be reduced correspondingly, as is explained below. (4) The sum credited in the Savings Bank, which will carry 21 per cent. interest, will be blocked for the time being, and will not be available, generally speaking, for current expenditure or as security against loans. But the holder will be allowed to use them to meet pre-war commitments of a capital nature, such as instalments to a building society, or for hirepurchase, or to meet insurance premiums. He can also use them, with the approval of a local committee, to meet exceptional and unavoidable expenses, arising for example, out of illness or unemployment. They would be available to meet death duties.
After the War (5) The deposits will be unblocked and made freely available to the holder, probably by a series of instalments, at some date after the war. The appropriate date for release would have arrived when the resources of the community were no longer fully engaged. Such releases would help us through the first post-war slump, and would give us time to concert more permanent plans. There would be perfect efficiency in this. The people could enjoy the consumption to which their war efforts had entitled them at a time when this would cost the community nothing, since the resources required would otherwise be running to waste. (6) The machinery for collection would be the same as for National Insurance in the case of wage-earners, with employers stamping Post Office Savings books at a rate appropriate to the week's earnings subject to quarterly adjustment by the Post Office should earnings have
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fluctuated; and the same as for income-tax in the case of others, the total lump sum due under the above scale for both purposes being deducted at source at the standard rate of income-tax (i.e. 7s. 6d. in the £), subject to subsequent adjustment by the Revenue in the individual case exactly as at present for the purpose of allowances and surtax. Thus no new machinery would be required. (7) I am not able to estimate accurately the amount of the compulsory savings which would result. The figures given above, which are only illustrations, might bring in a yield of at least £400.000.000 over and above income-tax and surtax, a yield which may seem less than one would have supposed at first sight. This is because so large a part of working-class incomes is exempt even under this proposal. A stiffer scale would [10] bring in a correspondingly large return. But it is not suggested that the problem of purchasing power can be solved by this means alone. It is a proposal supplementary to the other remedies – more efficacious than any other conceivable increase in taxation, and nearly as good as a 10 per cent fall in real wages, while doing no lasting injury to working-class consumption. Above all it is a new fiscal resource capable of further extension if our exigencies increase. (8) This scheme would not obviate a programme of normal borrowing out of voluntary savings additional to the above. For resources will accrue in the hands of banks, insurance offices, and the like; and Government loans can be subscribed out of company reserves, out of unexpected depreciation moneys, out of sinking funds and sundry repayments, and out of capital release by the sale of foreign investments, and the reduction of stocks, none of which will be subject to the levy. To some extent the levy will come out of income which would be saved in any case. No more can be claimed for it than that it would appreciably ease the Treasury's task. (9) It might be thought fair that those serving with the Forces should be credited with additional pay by the same method. We cannot afford to pay them more now, but we can afford them
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the reward of deferred consumption.
The Alternatives I see much social justice and social efficiency in this system. At present our resources of production fall short of our needs; the time will come when the position will be reversed; and it is therefore only sensible to reward current effort out of future surplus capacity. Meanwhile we retain a reasonable incentive to present effort, and the commitments of the community among its own members are spread a little more equally. In judging this scheme critics must compare it with the alternatives. The income group between £3 and £10 a week is scarcely touched by direct taxation and cannot be relied on to restrict its consumption when its incomes are increasing. Some method must therefore be found for restricting the use of purchasing power on present consumption, which covers this group. Are there any alternatives except those which we have considered?
The method of compulsory saving is
incomparable better for the class with incomes below £500 than to deprive them of their reward by high prices or taxing, while for the higher incomes the practicable limit of direct taxation is already reached. Moreover there will be great social advantages in spreading the inevitable increase in the National Debt widely among every class in the community. All methods of war finance are open to objections. But this new one offers some positive advantages on the other side which will not go unnoticed, I hope, by the leaders of the Labour Party. When the Chancellor of the Exchequer does not deliberately choose a positive method he will inevitably slip into inflation merely by hesitating. *** Concluded: the first article appeared yesterday.
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