Prosperity and Depression.pdf

506 Recent Developments in Trade Cycle Theory Part IIImoney spent by the government would be re-spent on consumption and,since the production of consumption goods can no longer expand (as itcould up to the point where excess capacity and unemployed resourceshad been absorbed), prices would have to rise. This is the dilemmawhich we· have had in mind: If government spending is continued, inflationis brought about; if spending is discontinued, investment demandcollapses and depression ensues. A mere -spending policy (even if it isdirected in.the right direction) cannot solve the problem of maintainingoutput without interruption. 1 That could be achieved only if governmentspending were coupled with a policy designed to control the rateof saving. In our case an increase in the rate of saving (reduction ofthe propensity to consume) would be required: if people could be persuadedor compelled to save more (e.g., by means of an appropriatetax policy), demand for investment could be maintained and at the sametime an excessive (or any) rise in prices of consumption goods prevented.This is certainly a much more difficult task than .a spendingpolicy pure et sirnple. The result of our analysis can be summarisedby saying that it is comparatively easy. to lift the economic system outof a deep depression, but that it is much more difficult to maintain thehigh level of employment and output which is reached at the end ofthe upswing.This situation has been considered as a (possible and likely) outgrowthof an ordinary cyclical expansion. The analysis permits, however,application to situations other than cyclical peaks and to types ofpolicies other than government spending. For example, if it were possible,when capital widening comes to an end at the top of a boom,to induce deepening of capital by an easy money policy (if, that is tosay, the short-run elasticity of investment demand for capital deepeningwith respect to the rate of·interest were high), the same dilemma woulda·rise: If the easy money policy is undertaken, inflation will ensue; if1 A. spending policy could, however, prevent the cumulative process frompushing output and employment far down. Although a fall in investment cannotbe avoided (except at the price of inflation), it could be prevented·from reactingupon consumption, consumers' outlay could be maintained and the cumulativeprocess arrested. This analysis sheds some light on the much debatedquestion of the cor;ect timing of a spending policy. Should spending be startedat once after the upper turning point (during Mr. Harrod's "breathing speU")or only after· some downward adjustments have taken place?