1941: Income, National

Estimates of national income in the United States are designed to serve as a comprehensive measure of economic activity. With the nation striving to achieve a vast output of goods and services for the war effort, interest in and use of this statistical aggregate had greatly increased because of its direct relation to many problems of government and business economic policy.

National Income Defined.

The national income is formally defined as the net value of the economic goods and services currently produced by the private and public enterprises of the nation. As the proper use and interpretation of national income statistics require an understanding of the concept behind their compilation, the precise meaning of every word in this definition must be kept in mind. National income measures only the 'net value' of output in that the goods and services used up in the production process are not included; it includes only the value of the final products themselves. Allowance is made in the net value of output for business charges for depreciation and depletion, as well as for taxes paid by business to all government units, whether passed on to the consumer in the form of higher prices or not. The concept is limited to 'economic goods' and, consequently, such services as those rendered by housewives or by volunteer workers are not included. Furthermore, the national income covers only 'currently produced' goods and services, so that such income receipts as relief, unemployment compensation, pensions, gifts, capital gains or losses, and gains from illegal activities are excluded. Finally, the concept measures the economic activities not only of 'private' enterprises but of 'public' as well, so that both Government and business output is included.

National Income from 1919 to 1939.

After the 1920 peak of the economic boom associated with the first World War, there was a short period of liquidation reflected in the low national income figure for 1921. There followed the almost uninterrupted prosperity of the 1920's, during which period the national income was raised year after year to the high point of $83,365,000,000 in 1929. The advance over these years is an indication of widespread technological development as well as of the increase in labor and capital utilized. With the onset of what was probably the worst depression in United States history in the early 30's, the national income declined by more than 50 per cent to the low year of 1932. A period of economic recovery from 1933 to 1939, interrupted only by the recession of 1938, did not witness the re-attainment of the 1929 level of national income, even though substantial gains were made. This is evidence that substantial under-utilization of available productive resources continued through the year in which the peace of Europe was again broken.

As this short description of the fluctuations in national income relates to the value of goods and services, it reflects changes in the general level of prices as well as changes in the physical quantity of output. For the value of output obviously equals the various quantities of goods produced multiplied by their current prices. From the standpoint of the economic well-being of the nation, the influence of price changes on national output is to some extent irrelevant, so that it is desirable to use a measure of the national income after adjustment for changes in the purchasing power of the dollar for that purpose.

Over longer periods of time, the influence of price level changes is much more marked and more likely to lead to misconceptions. It may be noted that the level of the real national income during the decade of the '30's does not suffer so much by comparison with the '20's as does the national income in current dollars. This simply means that the general level of prices has been much lower during the past 10 years than in the previous decade, and that this fact largely accounts for the generally lower level of the value of national income. Real income in both 1937 and 1939 exceeded that of 1929, although its money value was considerably lower. Over the two decades, 1919 to 1939, the physical quantity of goods and services represented by the real national income rose 50 per cent, whereas the current dollar value shows less than a 5 per cent increase. Inasmuch as productive resources were far from fully utilized in 1939, this 50 per cent gain in real output is a striking indication of the technological advance and increased efficiency of labor over the period. Of course, this does not mean that the 50 per cent figure is entirely attributable to technology since there was more labor and capital being used in the production process in 1939 than in 1919.

Changes in population are also of considerable importance from the standpoint of the economic well-being represented by national income, since the more persons there are to share in any given output, the less there will be for each. Real income per capita in 1937 and 1939 approximately equalled that of 1927 and 1928. Over the two decades that followed the first World War, however, it may be noted that about one-half of the 60 per cent rise in aggregate real income was reflected in a gain in per capita income.

War Stimulus to National Income.

The spectacular rise in the national income from 1939 to 1941 clearly indicates that the opening of the second World War marks the beginning of a new phase in our economic life. The change came when the military developments abroad led the nation to undertake the huge rearmament program to make this country the 'arsenal of the democracies.' The rise in the national income during 1940 of over $5,000,000,000, is largely attributable to the inauguration of the defense program in the middle of that year.

The full impact of the rearmament effort, however, came in 1941 when the national income of the United States rose to a new record high, making the largest increase in the nation's history for a one year period. The preliminary estimate of national income for 1941 was $94,500,000,000 as against the 1940 total of $77,098,000,000. Even more impressive is the fact that from the start of the defense effort in June of 1940 to December 1941, the national income rose from an annual rate of $74,000,000,000 to an annual rate of about $100,000,000,000. This gain resulted partly from a rising trend of prices, but the increase in output was very substantial even after adjustment for the price factor.

Thus, by the end of 1941, the country had achieved what a few years earlier appeared to be almost unattainable, a national income of approximately $100,000,000,000. Yet this had been done without the fullest utilization of our labor and material potential. As the requirements of the war necessitated the greatest possible production and the utilization of all available resources, it was evident that the national income would rise well over $100,000,000,000 in the course of the all-out war effort that was being made in 1942.

Inasmuch as the stimulus to the rise in national income in 1941 was rearmament expenditures, the output of war matériel represented a much larger share of national income than in previous years. In 1940, government outlays for national defense were less than $3,000,000,000, representing less than 4 per cent of the national income. In 1941, however, national defense expenditures were approximately $13,300,000,000, representing almost 15 per cent of the national income. The rising tide of the war effort was so great, in fact, that by the end of 1941 national defense expenditures represented about 20 per cent of the current flow of national income.

Nonetheless, the rise in total output over this period was sufficiently large to permit a substantial gain in the civilian goods available for both consumption and investment purposes. Through the utilization of idle capacity, that is, both the flow of war matériel and civilian goods increased materially. It is estimated that consumers' purchases rose by over $8,000,000,000 in 1941, though this is partly accounted for by the rise in prices. Toward the close of the year, however, the military demand for materials was making inroads upon the supplies available for consumers' goods industries, particularly in the case of civilian durable goods. With the prospect in view that the military program would require about half of the national income in the fiscal year 1943, it was apparent that the output of goods for civilians would be curtailed during the duration of the war.

Because the percentage of national income represented by war expenditures has become widely used to indicate the magnitude of the war effort, it is well to keep in mind certain defects of this comparison. It is a reasonably good method for measuring the progress of the war effort on the economic front over time in one particular country, but it is not well adapted for the purpose of international comparisons. Nor can the total of war expenditures be subtracted from the national income for the purpose of showing the volume of goods and services remaining for civilian uses. There are two reasons for this. In the first place, the national income measures the net value of current output, while war expenditures do not represent net value in the same sense. In the second place, the national income measures only current production, whereas the total of war expenditures includes purchases out of existing stocks of both domestic and foreign capital. It is only because of these factors that the percentage of war expenditures to national income can get so high as 60 per cent, as it has in the case of Great Britain and Germany. The purchases for war purposes out of the current national product in the case of Great Britain, for example, have been about 40 per cent, as compared with 60 per cent for total war outlays. It is not likely that the percentage of national income represented by war expenditures in the United States will be so large as those mentioned for Great Britain or Germany, since there is little possibility of our liquidating assets abroad and not the same pressure for liquidating domestic capital.

Distributive Shares and Industrial Origin of National Income.

Due to the fact that the expansion of economic activity associated with the rearmament program has been in many respects similar to the durable-goods investment booms of previous periods, the changes since 1939 in the composition of national income, both by distributive shares and industrial origin, have been similar to those which usually characterize a business upswing. The largest absolute increase among the distributive shares was that of salaries and wages, primarily because they account for so large a fraction of total income. The factors in the increase in salaries and wages have been the substantial gain in employment, the lengthening of the work week, and the rise in average wage rates. Net income of corporations recorded the largest percentage gain over the period, even after deductions for the substantial increase in Federal tax liabilities. The large rise in corporate income associated with the smaller gain in dividend payments resulted in positive corporate savings estimates for both 1940 and 1941, the first since 1929. Noncorporate income has also increased substantially, the total for 1941 being well above the level reached in 1929. The gain in agricultural income was particularly sharp in 1941, due to the substantial rise in farm prices during that year.

With the nation exerting considerable effort to increase the output of war matériel and the industrial facilities for producing war goods, striking gains were recorded in the net output of the manufacturing and contract construction industries from 1939 to 1941. In percentage terms, the output of these industries increased much more than the national total. The net value of manufacturing production advanced more than 60 per cent and that of contract construction almost 100 per cent during these 2 years, in comparison with a rise in total national income of 30 per cent. The necessity for increasing the size of the armed forces and the output of government shipyards and arsenals accounts for the continuation of the upward trend in the value of net government product — a trend which has been one of the major characteristics of the past decade.

In analyzing the industrial composition of the national income, it should be kept in mind that the breakdown refers to industries and not to products. In some cases the distinction is very important, as in transportation. The value of product shown for the transportation industry relates specifically to the activities of transportation companies, the largest segment of which is the railroads. It does not include all the trucking operations, for example, of manufacturers and retailers who operate fleets of trucks in connection with their business. The decline in this industry since 1929 does not mean, therefore, that the nation is using less transportation, but that the transportation companies have had a smaller dollar volume of business.

Income Payments to Individuals.

National income is not the sum of the money receipts of all persons in the nation and should not be confused with it. A series designed to measure the current flow of purchasing power to individuals is Income Payments. Income payments to individuals differs from national income because the payments series include funds not derived from services rendered in the production of currently produced commodities and services. On the other hand, the national income includes sums for which equivalent shares are not transferred to individuals, such as savings of incorporated and unincorporated businesses and employer and employee contributions to retirement and unemployment reserves. These sums not transferred to individuals are not included in income payments. The income payments series is made up of net salaries and wages, direct relief payments, Social Security benefits, workmen's compensation payments, veterans' compensation payments, dividends, interest, withdrawals from unincorporated businesses by owners, and net rents and royalties.

Since the measure of income payments, both in dollars and in the form of a seasonally adjusted index, is available on a current monthly basis, it provides a comprehensive indicator of changes in business activity over short periods of time. It is well known, for example, that the volume of retail trade is closely correlated with the index of income payments. For the duration of the war period, however, great care will have to be exercised in the use of the income payments series, since taxes are going to take a larger share of the individual's money income.

It may be noted that the changes in income payments over the course of the business cycle are somewhat less severe than the changes in national income. This reflects the fact that business savings, not included in income payments, fluctuates much more violently than any other element of national income, and that payments of direct relief, not included in national income, fluctuates inversely to the business cycle. The sharp rise in business activity under the stimulus of the rearmament program is clearly revealed by the advance in the index of income payments since the middle of 1940. From June of that year to December 1941, this index advanced on the average of almost 2 points a month, the most phenomenal rate of increase on record. It is significant for the economic outlook that no signs of tapering off appeared up to the end of 1941. For the interpretation of the continued rise, however, it is important that the influence of rising prices was much greater in the latter half of this 18-month period than in the former.

Size Distribution of Income.

In recent years several significant studies of the size distribution of individual income have become available. More than two-thirds of the consumer units of the nation had incomes of less than $1,500 per year in 1935-36, and their total expenditure was in excess of their income. The units with income of less than $3,000 per year, constituting more than 93 per cent of total consumer units, accounted for almost 80 per cent of total consumption expenditures although this group received less than 70 per cent of total income.

The concentration of income in the higher brackets tends to increase as total income expands and to decline as total income declines, largely because a substantial proportion is derived from investments which are more variable than other forms of income returns. There is little evidence from this study to indicate any fundamental change in the degree of concentration at the highest income levels over the period from 1926 to 1937. (See also BUSINESS; PUBLIC FINANCE; WORLD ECONOMICS.)