Page 13


A Public Service Message from the American Income Life Insurance CompanyExecutive offices, Waco, TexasBernard Rapoport, Pres. constant development of techMques to improve productivity. In this year the capital markets have been under great strain to supply funds to meet the financing requirements created by the huge federal budget deficit. Massive federal borrowings have strained the markets but have not yet created a dangerous credit crunch because private borrowings have dropped dramatically as a result of run-off of excess inventories resulting from the lessened demands of the recession. Even so, a number of potential borrowers have been unable to obtain needed financing at reasonable rates. As the period of inventory liquidation by industrial and commercial firms ends and as companies are forced to rebuild inventories, expand receivables, and implement previously delayed capital improvement and expansion programs, the private sector will again become a net borrower in our capital markets. If at that point the government’s need for capital financing is not dramatically reduced through a massive reduction in the federal deficit, we will be faced with a situation in which there is far too little capital available to meet the needs of all who seek it. “Crowding out” will begin. Interest rates will be bid up viciously as private companies begin to compete with the government for the limited supply of available funds. Since federal government paper has the highest possible security position and can pay whatever the market requires regardless of the cost, government needs will be satisfied first. If there is anything left it will go to the giant companies with AAA and AA credit ratings. The medium-sized and smaller companies will be frozen out of the long-term capital markets at virtually any price. Those who can will turn to their banks. As it becomes apparent that we will have to either expand the levels of bank financing capabilities through the mechanisms of the government printing presses or hold to relatively non-inflationary levels of monetary expansion, the compromise choice will be made, in part because Of the fears of a resurrection of the recently overcome recession; and money supply targets will be exceeded. When the Federal Reserve increases money supplies beyond targeted rates, inflation will begin to accelerate. However, since the government will be trying to balance off the need for greater money supplies against the inflationary results of overly rapid increases in that supply, there won’t be sufficient funds made available to satisfy all legitimate economic needs. A credit crunch will again occur in which small and medium-sized companies will be unable to obtain funds for the capital expansions needed to meet increasing levels of consumer demand. This will create an excess of demand over supply and a rapid run-up in prices. It will also prevent the installation of those types of new capital facilities which increase productivity and, as labor rates accelerate rapidly in order to keep up with the new inflationary pressures, labor costs will skyrocket as the new equipment needed to increase productivity to offset higher labor rates will not be installed. As industrial companies frantically bid for scarce funds, driving interest rates up, there will again be an outflow of funds from the savings and loan institutions ending what small pick-up there has been in the real estate industry. Small and medium-size firms will find themselves starved for capital, unable to meet their expansion needs, and in many instances unlikely even to meet their current capital requirements for financing receivables and inventories. A wave of mergers will take place in which those larger companies with sufficiently strong capital. bases will be able to absorb the weaker capital-deprived companies. The anti-trust sections of the government will protest this wave of consolidations while the Congress and the Administration go on with their irresponsible spending policies that make the consolidations absolutely essential. By late 1977 or mid 1978 we will be in the midst of, the worst inflation in our history with annual inflation rates and prime interest rates both in excess of 15%. The inevitable correction that follows this spree could rival the depression of the 30’s and could conceivably mark the end of the free enterprise system as we know it in the United States. This extraordinarily bleak scenario is what I see of the economy of the United States for the next four years. It is an exaggeration of the future I foresaw in 1972 \(in an article I wrote for “Los followed by massive recession for 1974 and 1975. What can we do if we are to prevent this result? My guess is that rather than deal with the root causes of the problem our politicians will seek, as they always do, to please theirconstituents while offending as few voters as possible. If they seek this type of solution they will refuse to face up to the need to cut the financial demands of government and instead will impose strong wage, price, credit and export/import controls on the economy to prevent runaway inflation of prices. But bear in mind that each set of such controls deprives us of some of our liberties. The first imposition of wage and price controls will be relatively popular because it will seem as if it offends primarily the corporations who are the easy whipping boys of our society. As is usually the case, too little attention will be paid to the distortions created by wage and price controls. From my own personal observation the recent wage and price controls caused enormous dislocations in inventory managements, capital expansion, product line planning, and most important removed many of the incentives which cause the private sector to keep its costs down and to rationally determine the allocation of its capital funds amongst various product alternatives. In order to allow wage and price controls to have any conceivable chance of working in this country we will have to adopt stringent export controls because we found in our last experience with controls that it is a simple matter for a company whose price is controlled in the United States to export its product to Europe or some other market where there are no controls on the price. We saw the ludicrous situation in phenol \(a critical chemical in certain forms of plastic was 180 a gallon and producers were able to sell phenol in Europe on an uncoirtrolled basis for three and four times the controlled price. This caused American consumers to go to Europe to buy back American phenol at prices in excess of 800 a gallon in order to keep their production lines going. Thus, the “liberal” economists who advocate the value of wage and price controls while at the same time advocating free trade, are engaging in the worst form of hypocrisy since it is their own policies which may well pose the biggest threat to free trade. Similarly, once we have imposed wage and price controls and export/import controls we will next face the question raised by many leading Democrats in the Congress, “How can we go on allowing our limited available capital to be squandered in frivolous areas of our economy?” These Congressmen advocate that the best thing is to create a government bureaucracy to decide where capital should be allocated, what needs are “frivolous,” what projects are socially desirable and undesirable, and other such decisions. In my judgment, when we tie up the economic sector of our society in a totally planned and government administered fashion, the next step is political planning and administration of our liberties and our .lives. I have become pessimistic enough to believe that we will voluntarily choose the planning and controls approach as the solution of our economic problems, thereby emulating the British and voluntarily abandoning the economic system which has proved itself the most productive system ever devised. In my opinion there are two primary reasons for the failures that are being blamed on our economic system. The first is the weakness of our politicians and the excesses of social welfare policies that