"...What will be the practical outcome of the opposition to a policy of full employment by government spending in a capitalist democracy? "
(i) opposition on principle to government spending based on a budget deficit
(ii) opposition to this spending being directed either towards public investment -- which may foreshadow the intrusion of the state into the new spheres of economic activity -- or towards subsidizing mass consumption
(iii) opposition to maintaining full employment and not merely preventing deep and prolonged slumps.
. . The necessity that 'something must be done in the slump' is agreed; but the fight continues, firstly, as to what should be done in the slump (i.e. what should be the direction of government intervention) and secondly, that it should be done only in the slump (i.e. merely to alleviate slumps rather than to secure permanent full employment).
time and again the conception of counteracting the slump by stimulating private investment arises by lowering the rate of interest, by the reduction of income tax, or by subsidizing private investment directly in this or another form.
That such a scheme should be attractive to business is not surprising. The entrepreneur remains the medium through which the intervention is conducted. If he does not feel confidence in the political situation, he will not be bribed into investment.
And the intervention does not involve the government either in 'playing with' (public) investment or 'wasting money' on subsidizing consumption.
It may be shown, however, that the stimulation of private investment does not provide an adequate method for preventing mass unemployment. There are two alternatives to be considered here.
(i) The rate of interest or income tax (or both) is reduced sharply in the slump and increased in the boom.
In this case, both the period and the amplitude of the business cycle will be reduced, but employment not only in the slump but even in the boom may be far from full, i.e. the average unemployment may be considerable, although its fluctuations will be less marked.
(ii) The rate of interest or income tax is reduced in a slump but not increased in the subsequent boom.
In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy.
In the new slump it will be necessary to reduce the rate of interest or income tax again and so on.
Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy.
The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.
In addition to this fundamental weakness of combating unemployment by stimulating private investment, there is a practical difficulty. The reaction of the entrepreneurs to the measures described is uncertain. If the downswing is sharp, they may take a very pessimistic view of the future, and the reduction of the rate of interest or income tax may then for a long time have little or no effect upon investment, and thus upon the level of output and employment.
3. business leaders and their experts (at least some of them) would tend to accept as a pis aller public investment financed by borrowing as a means of alleviating slumps.
They seem, however, still to be consistently opposed to creating employment by subsidizing consumption and to maintaining full employment.
This state of affairs is perhaps symptomatic of the future economic regime of capitalist democracies.
In the slump, either under the pressure of the masses, or even without it, public investment financed by borrowing will be undertaken to prevent large-scale unemployment.
But if attempts are made to apply this method in order to maintain the high level of employment reached in the subsequent boom, strong opposition by business leaders is likely to be encountered.
lasting full employment is not at all to their liking.
The workers would 'get out of hand' and the 'captains of industry' would be anxious to 'teach them a lesson.
Moreover, the price increase in the upswing is to the disadvantage of small and big rentiers, and makes them 'boom-tired.'
In this situation a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. The pressure of all these forces, and in particular of big business -- as a rule influential in government departments -- would most probably induce the government to return to the orthodox policy of cutting down the budget deficit. A slump would follow in which government spending policy would again come into its own.
This pattern of a political business cycle is not entirely conjectural; something very similar happened in the USA in 1937-8. The breakdown of the boom in the second half of 1937 was actually due to the drastic reduction of the budget deficit. On the other hand, in the acute slump that followed the government promptly reverted to a spending policy.
