1940: Income In The United States

National income in the United States was estimated at $73,700,000,000 in 1940. This value represented an advance of $4,300,000,000 over the total for 1939. It was $9,200,000,000 less than the national income in 1929 but was considerably higher than in any intervening year. It exceeded the depression low registered in 1932 by $33,600,000,000 and the previous recovery high in 1937 by $2,700,000,000.

National Income Defined.

National income is the net product of the national economy. It is the value of all the commodities and services produced by the nation's business enterprises in excess of the value of commodities and services consumed in the course of the production process. It includes the value of all products which are 'final,' in the sense that they either are ready, both in form and in place, for consumption or constitute net changes in stocks of goods held for future use. It includes the value of shirts and automobiles, government services and life insurance protection, transportation by bus, train, airplane and trolley, the services of professional men and religious institutions, the use of electric power and telephones in industry and in the home — the value of net production of all of these things during a given period and of thousands of others as well.

Value and Volume of National Income.

National income figures express the value of net production by the nation. The volume of net production also is very important. Because value is the product of unit price and unit quantity, changes in volume or quantity net production can be approximated by comparing changes in the value of net production with changes in the price level. If prices decline more than dollar national income, for instance, the net quantity of commodities and services produced may be said to have advanced because the decrease in value was more than offset by the fall in prices.

Prices of consumer commodities and services in 1940, as measured by the U.S. Bureau of Labor Statistics index of living costs for urban wage-earners, were more than 17 per cent below the 1929 level. Wholesale prices were down by 21 per cent. Neither series includes all of the commodities and services which are a part of the national net product, but they do serve as an adequate general measure of changes in the price level. They are, therefore, satisfactory for an approximate conversion of changes in national income values to changes in the quantity of net production.

While national income in 1940 was 10 per cent under the 1929 figure, price changes more than compensated for this difference in the value of net commodities and services produced in the two years. The price changes, in fact, apparently were great enough also to offset the population increase of 8 per cent during this period. Per-capita net quantity product — that is, real national income per person — was about the same in 1940 as it had been in 1929.

If there is a single purpose inherent in the national economic organization, it is the production of commodities and services. Out of such production, the nation's inhabitants both affect current consumption and set aside a stock of commodities for use in the future. National income is, therefore, the prime yardstick for measuring changes in the effectiveness with which the national economy is operating. A decline in real national income (net value of production adjusted for changes in prices) means that the nation has a lesser supply of necessities and luxuries upon which to draw for current requirements and a smaller pile of durable goods to reserve for future use, while an increase in real national income signifies that either consumption or savings or both may be expanded.

National income is not the sum of the money income of all persons in the nation and should not be so interpreted. Because the business community is so organized that the net production of each individual usually is paid for by a money transfer of equivalent amount, 'money income' sometimes is of about the same magnitude as national income. Money income often is received without the creation of equivalent net product, however, and many other types of monetary transfers similarly are quite unrelated to current production. Money incomes differ from national income. Each has its own significance and the two never should be confused.

Distributive Shares of National Income.

Since the right to the use and possession of all commodities and services always rests in the hands of individuals, however, an allocation of national income may be traced to different groups. These 'shares' of national income are the returns either transferred to or accruing to persons who supply the labor and capital which is utilized in creating the national net product. Persons supply labor and capital primarily in order to secure such returns out of the value thus created, and the reality of that purpose lends importance to measurement of the respective shares and the extent of changes from year to year.

Salaries and wages (62 per cent of total national income in 1940) measure the portion of the national net product going to employees. Almost all of salaries and wages is paid to employees in money, although small amounts take the forms of payments 'in kind' and sums set aside for old-age insurance reserves. Command over commodities and services necessarily is equivalent, however, since net production also is valued in the same money terms. The real significance of the monetary form of transfer lies in the manner in which money facilitates the exchange of products between those who participate in the production of one commodity or service and those who produce all other commodities and services, and the relationship between national income and salaries and wages would be about the same if money were not employed to facilitate production and exchange.

Other shares also are transferred in monetary form or accrue to individuals in some other way. Supplements to salaries and wages (4.7 per cent) include employer contributions to pension, retirement and unemployment compensation funds, work-relief wages, workmen's compensation payments, and so on, and are partially accruals to employed labor and partially transfers to unemployed persons. Net income of corporations (6.5 per cent) is the total current return on equity capital. Dividends (6.4 per cent) are paid from current or past net income and are amounts actually transferred to individuals. Corporate savings (.1 per cent) measure either values retained by corporations out of earnings or amounts paid out in excess of earnings, but accruing to stockholders in either case through changes in the net worth of their equities.

Net incomes of unincorporated businesses (17 per cent) are returns for the use of both labor and capital, since owners usually contribute both elements to the productivity of unincorporated enterprises. Entrepreneurial withdrawals in other respects are analogous to dividends and savings of corporations. Net interest (6.6 per cent) and net rents and royalties are returns allocated to long-term creditors and to owners of leased real property.

Corporate net income registered the largest percentage advance from 1939 to 1940. The improvement of 26 per cent resulted largely from a gain in production volume in the second year, since there was only a slight rise in prices. Because this gain in production was superimposed upon a fair level of capacity utilization in 1939, the increase in corporate profits was much greater than the rise in net production. Increasing business volume usually means a decline in unit costs of production, and the combination of higher unit profits and larger volume resulted in substantially higher net profits in 1940.

Employee compensation also improved, although by a lesser percentage that the gain in total national income. While direct labor costs per unit of production have some tendency to rise as production expands, other labor costs (as management costs, for example) tend to decline, and total salaries and wages generally are a lesser percentage of total national income in years of higher net production. The large labor element in net income of unincorporated enterprises explains the similar change for that share.

Interest rates are fixed by long-term contract, and debt volume does not change rapidly in response to business fluctuations. These two factors account for the relative stability of the return allocated to the holders of credit instruments. Net rents and royalties are more responsive to changes in business conditions but advanced only moderately from 1939 to 1940.

Industrial Origin of National Income.

These advances and declines from year to year and from one phase of the business cycle to another also may be examined in terms of the industrial origin of national income. Industrial origin figures indicate the net production of different industries. Each industry creates only a portion of the value of different products. When the production process (including distribution) is completed, the sum of net production by the different industries equals the total stock of commodities and services produced during the period and available for current or future consumption.

Changes in the Make-up of the National Income.

The major portion of year-to-year changes in national income arises through variation in the net output of commodity producing industries: Agriculture, Mining, Manufacturing and Contract Construction. These four industries, for example, together accounted for nearly two-thirds of the increase in national income from 1939 to 1940, although they provided little more than one-third of the national net product in 1939. The primary effect of the national defense program is concentrated in these industries, can be noticed in results for 1940, and promises to be even more apparent in 1941 and subsequent years.

Income originating in government has expanded in recent years with the growth in the volume of services performed by governmental agencies under regular appropriations and emergency work programs. Net production in other industries has been more stable. In general, industries producing services (Communications, Finance, Government, Service, and most of the Not Allocated group) have been providing, in total and as a secular movement over an extended period of time, a gradually increasing share of the national net product, while the importance of commodity producing industries has tended to decline.

National income has expanded rapidly during the last 40 years. Population growth and changes, including especially the increasing proportion of the total population in the age ranges of greatest productivity, have been very important factors conditioning this gain. The period also has been marked by expansion in the volume of capital utilized in production and by an increasing productivity per unit of labor utilized in production.

These are value figures, of course, and have been influenced heavily by changes in the price level as well as by variations in net quantity production. Prices were considerably lower in the earlier years and much higher in the middle years than they are today, and net quantity product has been much more stable than net value of output.

Income Payments to Individuals.

Income Payments to Individuals provide a measure of the current flow of purchasing power. Such payments include net salaries and wages (that is, after deduction of employee contributions to retirement and other funds), direct relief payments, social security benefits and other pension payments, workmen's compensation payments, veterans' compensation and pensions and amounts paid on account of adjusted service certificates, dividends, interest, net incomes of farmers and professional men, withdrawals from business funds by other owners of unincorporated enterprises, and net rents and royalties.

Income payments to individuals differ from national income, however, because the payments series includes funds flowing to individuals which do not in any way reflect directly the value of current net production of commodities and services. On the other hand, national income measures include certain values for which equivalent shares are not transferred directly to individuals (such as savings of incorporated and unincorporated businesses and employer and employee contributions to retirement and unemployment reserve funds), and these are not included in the income payments figures.

The seasonally adjusted index of income payments, although it contains some elements not related to current production, provides a comprehensive measure of changes in business activity from month to month or over any other short period of time. Movements for longer periods sometimes are influenced markedly by these non-production items, and their importance should be recognized in utilizing the figures for business cycle analysis. The index is useful primarily as a measure of changes in purchasing power.

From a high at 102.2 in August 1929, the seasonally adjusted index declined, almost without interruption, to 53.0 in April of 1933. Payments on adjusted service certificates in early 1931 provided the only break in this steady fall. Recovery after April, 1933, extended to June of 1937, when the index was 89.3, although additional payments on adjusted service certificates in 1936 pushed the index momentarily to 92.4 in June of that year. The Federal tax on undistributed earnings was responsible in part for the unusually high dividend figures in December of 1936 and 1937.

The decline from mid-1937 extended to June of 1938, when the index registered a low at 78.7. Initiation of unemployment compensation benefit payments in 1938 provided some support for total payments during this recession. A sharp advance in the fall months of 1938 was followed by a period of relative stability in the first half of 1939, but improvement was resumed in the second half of that year under the stimulus of conditions expected to arise out of the war abroad.

The index declined sharply again from January to April in 1940, but evolution of the national defense program began to have its effect thereafter. By the fall months, production on defense orders had created boom conditions in some industries and was so diffused through and to others that the seasonally adjusted index advanced to 95.2 in December. Coupled with the indicated price declines and the known increase in population, the standing of the index at the end of the year indicates that per-capita real purchasing power may have been at the highest level on record. (See also WORLD ECONOMICS.)