1942: Income, National

Estimates of national income and national product are designed to serve as comprehensive blueprints of the economic operations of the nation as a whole. With economic mobilization for total war the prime objective of policy at the present time, interest in the use of these statistical aggregates has greatly increased because they constitute one of the basic tools for analyzing wartime economic problems.

National Income Defined.

The national income is the sum of the net earnings of the various factors of production derived from their participation in current economic production. It includes income in kind as well as money income but only so long as they are derived from productive activity in the economic sense. Many sorts of receipts which are considered income by the recipient, such as relief, unemployment benefits, pensions, gifts, capital gains or losses, and gains from illegal activities, are not included because they do not flow directly from current productive activity. In the case of all business incomes such as rents, corporate profits, or non-corporate business earnings, only the net incomes are included in the national income; that is, the incomes are counted after deduction of cost of doing business and after allowance for depreciation and business taxes. In the case of corporations, income and excess profits taxes are also excluded. The national income includes earnings derived from government activity as well as that of private business. However, it does not include activities which ordinarily take place outside the market process, such as the productive work of housewives.

In the course of the past year the Department of Commerce placed increasing emphasis upon its estimates of the gross national product because of their importance in the analysis of wartime economic problems. This aggregate consists of the sum of the market value of goods and services flowing to consumers, the value of the gross output of capital goods retained by private business, and the cost value of the goods and services produced or purchased by government. It differs from the national income in two important respects. First, no allowance is made for depreciation and other reserves which constitute business expenses in the computation of the national income. Second, it is computed before the deduction of business taxes whereas the national income is computed after their deduction. The reason for this is that the gross national product is designed to measure the market value of private enterprise production (which, of course, must cover the taxes paid by business) whereas the national income measures only net 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 defense program came in 1941, however, when the national income of the United States rose to $94,800,000,000, both a new high record in the nation's history and the largest increase ever achieved for a one-year period. With the actual outbreak of war after the Japanese attack on Pearl Harbor, military production goals were substantially increased in an effort to throw the full weight of our economic resources into the world-wide struggle. The result was a further phenomenal rise of the national income in 1942 to a preliminary figure of $117,400,000,000. Coming on top of the record level of national income of 1941 when a very high degree of utilization of resources had been attained, the further expansion in 1942 was particularly impressive. Of course, the expansion in both 1941 and 1942 resulted partly from a rising trend of prices, but the increased use of men and machines constituted the primary influence. The national income in terms of average 1935-39 dollars (that is, after adjustment for price changes) rose more than $24,000,000,000 from 1940 to 1942. Thus the nation had passed the goal which only a few years earlier had been held up as an almost unattainable ideal, a national income of $100,000,000,000. Even so, it was apparent that the maximum economic productivity had not yet been reached and that further gains would be made in 1943. At the end of 1942, Secretary of Commerce Jesse Jones, stated that he expected a national income of $135,000,000,000 in 1943, apart from the possible influence of rising prices in the course of that year.

Distributive Shares and Industrial Origin of National Income.

Owing to the fact that the expansion of economic activity associated with mobilization for war 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 have been very 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. In 1942 total salaries and wages exceeded $80,000,000,000 whereas only two years earlier the total had been under $50,000,000,000. This phenomenal increase reflects basically the very substantial rise in both the number of persons at work and the average hours of employment. In addition, the rising trend of wage rates and the relative shift in employment to the higher paid durable goods industries required in war production have tended to push up the wage and salary total.

In percentage terms, the largest gain among the distributive shares from 1940 to 1942 was the net income of agricultural entrepreneurs. The significant increase in agricultural production with record-breaking crop yields in 1942 contributed significantly to the income expansion. Rising prices, however, was the primary factor which more than doubled this component of the national income during the two-year period.

The component of national income which departed most from its usual behavior in times of industrial expansion was the net income of corporations. Ordinarily, it shows the largest percentage change with changes in the volume of industrial activity. In 1941 corporate net income made its usual substantial rise with the gain in total national income even though corporate income taxes were substantially increased in that year. In 1942, however, the large upward revision in the corporate income and excess profits taxes held down corporate net income to a little less than the 1941 figure. The conversion of many large industrial plants from peacetime to wartime production in the course of the year was also an important influence in limiting net profits, since this meant that for months at a time the plant had a large drop in production from which profits are derived.

The changes that have occurred among the various industrial groups in the economy have, in general, followed the pattern that is usual for times of expanding business activity. The commodity producing industries, agriculture, mining, manufacturing, and contract construction, have shown the largest percentage gains. The size of these gains has, of course, been extraordinary. From 1940 to 1942 agriculture and contract construction approximately doubled, manufacturing rose by more than 75 per cent and mining by almost 50 per cent. On the other hand, several changes brought about by the war have been unusual. The transportation industry, particularly railroad transportation, has been given and is accomplishing the greatest job in its history in connection with the war effort, with the result that income originating in this industry advanced almost 50 per cent. Then too, the increase in the armed forces of the nation led to an unusual increase in the income originating in government.

Gross National Product.

To see what changes have been wrought in the composition of national production, one must turn to the estimates of the gross national product. This information is particularly useful and interesting in time of war since it shows the changing proportion of total output being utilized for direct war purposes. This comparison of war as against nonwar output cannot conveniently be made with reference to the national income.

As with the national income, the preparation for total war has induced an enormous expansion in the gross national product. From a little over $88,000,000,000 in 1939, this aggregate rose to about $152,000,000,000 in 1942. In the two years of intense war preparation, 1941 and 1942, the gross national product increased by more than 50 per cent. With the expansionary movement continuing throughout 1942, the gross national product exceeded $165,000,000,000 at an annual rate by the final quarter of the year, a figure which not many believed possible only a few years earlier. Of course, rising prices have tended to inflate this aggregate of total national production but, nonetheless, an unprecedented flow of real goods and services has been the primary factor behind the record-breaking rise.

Supplying the basic stimulus in the increase of gross national product has been the flood of war expenditures by the Federal Government. These war expenditures for goods and services rose from an inconspicuous $1,400,000,000 in 1939 to approximately $50,000,000,000 in 1942. The intensified war production effort after the outbreak of war is apparent from the increase in war expenditures of almost $40,000,000,000 in the single year of 1942. These figures leave no doubt as to the tremendous strides made by the nation toward the goal of an all-out war effort. In 1942 almost one-third of the gross national product was being utilized in the war effort, whereas, only two years earlier, war expenditures constituted less than 3 per cent of the total. With a further rise in gross national product in 1943, it was anticipated that more than half the total would be represented by war expenditures.

Such was the extent of under-utilization of resources in 1941 that the substantial increase in war goods output in that year was achieved without curtailment of the major categories of civilian goods and services. As a matter of fact, striking advances were made in all types of nonwar production. Private gross capital formation reached the unprecedented total of over $19,000,000,000 even though the rearmament program was requiring large volumes of construction of producers' durable equipment. The nation enjoyed the best standard of living in its history as consumers' expenditures for goods and services totalled almost $76,000,000,000. Both durable and nondurable goods and services were at new high levels even after adjustment for rising prices.

In 1942, however, the tremendous demands of war production made fairly serious inroads upon most of the categories of nonwar output. As material shortages were intensified, both Federal and state and local government nonwar expenditures declined, principally in the fields of public works construction and purchases of durable equipment. The most striking cut, however, came in private gross capital formation, since the industries supplying goods of this sort were among the most readily convertible to the tasks of war production. Both private construction expenditures and business purchases of machinery and equipment were sharply curtailed and the precipitously rising trend of inventories was halted. Because of the requirements of the war program and because an increasingly large volume of exports was subsumed under the Lend-Lease program, there was a sharp decline in the nation's net export of goods and services on private account.

In the field of goods and services available to consumers, there had not, however, occurred the sharp shrinkage which had been widely anticipated. The actual dollar total of consumer expenditures was in fact higher in 1942 than in the previous year, although when adjustment is made for the price rise, it appeared that the real volume of consumers' goods had been curtailed a little. Sales of durable goods were in fact drastically cut; even the lower volume of 1942 was only made possible through the existence of previously accumulated inventories in the hands of business firms. The shortages of nondurable goods, however, had not been widespread and in many instances the availability of manpower had enabled production to be increased. This latter factor had also permitted continued expansion among almost all types of consumers' services.

By the end of 1942 it was evident that greater stringencies in the field of consumers' goods would exist in the following year. The manpower problem was due to become increasingly acute so that production for consumers might have to be curtailed in order to make a sufficient supply of labor available for the war industries and the armed services. Then, too, both the armed services and the allied nations would require greatly increased supplies of consumption goods, leaving a smaller total for our own civilian population. Finally, with stocks somewhat run down by the end of 1942, it was not likely that consumers' spending could be maintained as fully out of inventories in 1943.

Use of Consumer Income.

The disposition of the income of individuals strikingly illustrates the inflationary problem confronting the nation. Since most of the national income flows into the hands of individuals, the tremendous expansion of 1941 and 1942 led to a record volume of consumer income. In part this income was diverted to the government through higher taxes, but, even after the payment of taxes, the disposable income of individuals rose precipitously. The 1940 total of a little less than $74,000,000,000 had become almost $108,000,000,000 by 1942. On the other hand, the requirements of war production placed severe restrictions upon the available volume of consumers' goods and services that could be purchased with this income. As previously mentioned, the real volume of consumers' goods and services was not curtailed significantly by 1942. In fact, in that year, this volume was larger than it had been in 1940. Nonetheless, it could not expand to keep pace with the rising trend of disposable income. The consequence was severe pressure on the price level and the continuous growth in the inflationary gap which has entered so largely into public discussion of the inflation problem. The real volume of consumers' goods and services rose by $4,000,000,000 between 1940 and 1942, whereas the actual dollars spent increased by more than $15,000,000,000. This simply means that more than $11,000,000,000 of consumers' income was being dissipated in higher prices.

That this dissipation in inflationary price rise was not larger was due to a remarkable increase in the savings of individuals. These savings rose from $7,400,000,000 in 1940 to more than $26,000,000,000 in 1942, a figure vastly in excess of what might be considered normal for the existing level of income. The government restrictions upon consumers' credit, the nonavailability of many durable goods, and the war savings bond campaign all contributed to the abnormal rise in savings. These factors can be considered as reliable methods of closing the inflationary gap. On the other hand, savings also increased through the operation of price control and rationing since these controls meant that the consumer spent less for any given volume of goods than would have been the case in the absence of those controls. The existence of what might be called this restless volume of income or savings, a large part of it being held in the form of money, continued to exert a strong inflationary pressure and constituted a continuing danger.

State Distribution of Income.

It is interesting to note that, contrary to some expectations, all the states have participated substantially in the increase in income that accompanied the rearmament drive. While the increases in income among the states were not equal, they were not so far different as to cause any serious concern. There was not any clear-cut demarcation, such as between agricultural or industrial states, or between states in one section of the country as against those in another, of the states which received either the larger or the smaller increases in income. There had been some expectation that the few states which held the bulk of the primary defense contracts would benefit at the expense of the rest of the nation. There have been two reasons why this has not resulted. In the first place, through subcontracting and the purchasing of materials, incomes in all states are directly affected by the war production program. But even more important in distributing income throughout the land are the repercussions upon all industries and sections of war spending, for the incomes received by those attached to the war industries are, in turn, spent on the products of other industries so that the earnings of persons in all sections of the country felt their impact.

Size Distributions of Income.

During 1942 the National Resources Committee's study of the size distribution of income in 1935-36 was extended to cover 1941 and the early part of 1942 by the Bureaus of Labor Statistics and of Home Economics. In that table may be seen the striking results of the expansion of incomes since 1935-36 in the lifting of families from the lower to the higher size classes of income. In the earlier period the largest single group of income receivers was that which had incomes between $500 and $1,000. In both 1941 and 1942 the largest group was that receiving between $2,000 and $3,000. While more than half the families had incomes below $1,000 and almost three-quarters were in the group below $1,500 in 1935-36, by the early part of 1942 less than one-third of the families were in the smaller group and less than one-half were in the larger group. On the other hand, almost 40 per cent of the families had incomes above $2,000 in 1942 while only 16 per cent had incomes of this size in 1935-36.

It may be seen from the table that the families with incomes in the lower groups, particularly those under $1,500, received and spent a much smaller percentage of aggregate consumer income and expenditure in 1941 and 1942 than did families in these groups in 1935-36. This is merely a reflection of the fact that the number of families in these groups was so much smaller in the latter period than in the earlier. It does not mean that the lower income groups have failed to participate in the increase of the national income since by their very participation they were taken out of the lower income levels and put into the higher.

A new and fruitful source of information on the distribution of income by size is now becoming available through the returns of the Census of 1940 on wage and salary income. These data are being issued for every state, the tabulations by sex, occupational group and industry. Furthermore, it is expected that tabulations will be prepared on a family basis as well as for individual income recipients. This information is too detailed to be reproduced here but it can be obtained from the Census Bureau in Washington.

Mention might also be made of the fact that tabulations of income tax returns will presently become a valuable source of information in the distribution of income by size. Due to the reduction in the exemptions that have been made in recent years, the bulk of aggregate individual income and income recipients are now subject to tax and will, therefore, be represented in the filed tax returns. One may look forward to the tabulations of these returns to give information on the size distribution of income of hitherto unequaled comprehensiveness and accuracy.