1938: Income In The United States

References to a national income of 60 billion dollars or 80 billion dollars, or of a goal of 100 billion dollars or more, bewilder the average reader and even most persons who quote the figures. It is difficult to comprehend such a magnitude or the precise meaning of such large totals. Despite the general lack of understanding and the misinterpretations relating to the use of statistics of the national income, ever increasing importance is being attached to these data. This may be explained by the comprehensive nature of the figures, since the product of all economic activities is included in the measurement of the national income.

The National Income.

The national income for any year may be defined as 'the net value of all goods and services produced by the economy within the year.' Also, it may be expressed as 'the value of goods and services available for consumption resulting from all economic activities performed within the year.' Again, it can be viewed as 'the value of all goods and services consumed plus the value of net increases in the national wealth.' It includes not only the net value of output of commodity-producing industries but also the value of the services of commodity-handling industries and service-creating industries. The contribution to the national income of each industry or producing unit represents the gross value of output of that unit less the value of all raw materials and capital equipment it consumed in the productive process.

There has been a marked increase in the national income since the turn of the century. The upward trend has suffered only two substantial setbacks. The postwar depression resulted in a decline in the national income of approximately 25 per cent from 1920 to 1921. The unprecedented severity of the depression subsequent to 1929 is evidenced by the decline in the national income from $81,000,000,000 in 1929 to only $40,000,000,000 in 1932. The recovery movement from 1932 to 1937 brought a total national income of $70,000,000,000 in the latter year, the highest level since 1929.

In 1938 a decline of approximately 12 per cent was recorded in the national income. This was the result of a short but precipitous decline in business activity which began in the fall of 1937 and continued into the second quarter of 1938. A steady and measurable recovery occurred in the final half of 1938.

When estimates of the national income are divided by the total number of men, women, and children in the United States, the extent of increase from 1900 to date is reduced somewhat. From a level of $241 in 1900 and $324 in 1910, the per capita national income rose to more than $600 in 1919 and 1920. In each of the seven years from 1923 to 1929, inclusive, the per capita income exceeded $600 per year with a peak of $668 recorded in 1929. By 1932 average income had declined to $320, the lowest point in more than two decades. The recovery movement brought about an increase to $540 in 1937. In 1938 the per capita income again fell below the $500 mark.

Price Influences.

While the dollar income figures are of considerable value, they are not a wholly satisfactory measure of changes in welfare nor of variations in the quantity of goods and services produced and available for consumption. Fluctuations in real national income are important in attempting to evaluate trends and fluctuations in the productivity of the economy. There are two conceivable methods of measuring real income. One measure would require the conversion of all goods and services produced by every industry into a common unit, the value of which itself was invariable. To date, no such unit has been found. The other alternative relates to the use of a general price index for deflating or adjusting the dollar income figures to a fixed price base. Unfortunately there is no single price index sufficiently representative to permit satisfactorily converting the dollar income figures into real income figures.

A comparison of the year-to-year changes in dollar income and in the cost of living makes it apparent that a substantial part of the variations in the dollar income figures represents pure price changes. Thus, from 1915 to 1920, the total national income increased slightly more than 80 per cent and the per capita national income increased 68 per cent, whereas the cost of living rose more than 90 per cent during this same period. This would indicate that the real national income in 1920 was lower than in 1915, but the limitations of the cost-of-living index do not warrant an unqualified acceptance of this indication. Throughout the 20's the cost of living remained fairly stable whereas income increased substantially, indicating a marked rise in the quantity of goods and services produced in the United States during that period.

The declining price level accounted for a substantial portion of the 50 per cent fall in national income from 1929 to 1932. In 1932 the cost of living was 25 per cent lower than in 1929. Subsequent to 1932 the total national income as well as per capita income increased substantially more than did the cost of living. The figures tend to reveal approximately the same total real income in 1937 as in 1929. As a result of an increase in population, however, the per capita real income in 1937 no doubt continued well below that of 1929. A decline in real income in 1938 was favorably comparable with the much greater decline in income relative to prices.

Income Paid Out.

Another measure of income is entitled 'income paid out'; it is comprised of wages, interest, dividends, entrepreneurial withdrawals, and net rents and royalties. These payments represent compensation to individuals for the efforts and services they render to business enterprises in the form of labor, management, capital, and land. In some years the national income or income produced is greater than income paid out, business enterprises retaining part of their net product. This excess, or amount retained, has been termed 'positive business savings.' In other years business enterprises pay out more than they produce; and the difference, which is termed 'negative business savings' represents a draft upon the resources of business enterprises.

During the 1920's subsequent to 1921, moderate positive business savings occurred in each year. As a result of the much greater decline in national income than in income paid out after 1929, negative business savings rose to more than 8 billion dollars by 1932. The recovery after 1932 was more pronounced in the national income, and negative business savings were substantially reduced from 1932 to 1937. In 1938 preliminary figures indicate an increase in negative business savings.

Industrial Sources of National Income.

Available data do not permit a satisfactory analysis of the industrial sources of the national income prior to 1919. The commodity-producing area of our economy, including the agriculture, mining, manufacturing, and construction industries, appears to have declined in relative importance over the past two decades. These industries accounted for nearly 45 per cent of the national income in the three years 1919 to 1921 as compared with about 35 per cent in 1935 to 1937. On the other hand, the service-creating division, including finance, government, service proper, and miscellaneous, increased in relative importance from less than 30 per cent in 1919 to 1921 to 41 per cent in 1935 to 1937. The commodity-handling industries, trade and transportation, have shown a moderate decline in the proportion they contribute to the national income. Of the specific industrial categories, agriculture has shown the largest relative decline, and government the largest relative increase.

Over the period 1919 to 1938 the manufacturing industry alone accounted for nearly one fourth of the net product of the nation. It is of interest to note that such basic industries as mining and contract construction accounted for only about 2 per cent and 4 per cent, respectively, of the national income for the past two decades.

Shares in Income Paid Out.

Considerable interest attaches to data showing the distribution of income to various segments of the population. Labor income generally accounts for nearly two thirds of total income paid out and an additional one-sixth goes to entrepreneurs (self-employed persons and owners of unincorporated enterprises). The remaining one-sixth is received by those who provide land and capital. While these statistics are valuable for measuring the return to the various factors of production, the recipients of each type of income are not distinctive groups. Many individuals receive more than one type of income.

Over the period since 1919 shifts in the distribution of income paid out have been only moderate. Within most industries labor's share has tended to decline; but, for all industries combined, labor income has risen slightly in relative importance. This results from the marked increase in the importance of service and government in the economy, in both of which labor income represents a large percentage of income paid out. Entrepreneurial withdrawals have tended to decline as a share in total income paid out, largely because of the declining importance of agriculture. Total return on effort, including both labor and entrepreneurial income, has not varied substantially relative to total income paid out.

Both dividends and interest have increased moderately, whereas net rents and royalties have declined slightly in relation to the total. Interest payments, representing a fixed return, increased sharply in relative importance during periods of depression. Dividends, on the other hand, decline both absolutely and relatively when business activity is curtailed.

Comparisons with Other Countries.

Although scattered statistics of income are available for a great many foreign countries, comparisons are difficult. Seldom are the definitions or the scope of the measures similar. It is often necessary to rely on artificial exchange rates in converting the incomes of different countries into the monetary unit of one country. Also, comparable figures on the cost of living are not available for most nations, and this further limits the validity of the figures.

The $688 per capita income of the United States in 1929 was higher than the average for any other country in the world. Canada, Great Britain, Switzerland, and Australia all varied from about two thirds to three fourths of the United States level. In Germany and France the per capita incomes were less than half the United States average, and in Italy average income was less than one fourth of that in the United States. In the late 1920's many countries, including Japan, Hungary, Rumania, Venezuela, Peru, Bolivia, and India showed incomes of less than $100 per person.

For the year 1935 average income in Switzerland was higher than in the United States. In that year Switzerland was enjoying a new high level of prosperity, and the United States was just recovering from a severe depression. The figures for single years must be used with caution because the same stage of the business cycle does not exist simultaneously in all countries. Generally, it may be stated that the per capita national income of the United States is higher than that of any other country; followed by Canada, Great Britain, Switzerland, Australia, Argentina, and Sweden as a group. France and Germany fall in the next lower group with the southern European and most South American countries still lower, and the far-eastern countries lowest of all.