IV. The Vicious Spirals

A continued process of this sort is bound to bring about a trend of rising prices unless the 28 THE VICIOUS SPIRALS excess money vanishes into hoarding (which it is not likely to do). Yet it was many years before the public showed signs of awakening to the inflation threat and to the role the money element plays in it. Even now, a variety of arguments is being offered to evade the money problem by blaming the rise of prices on symptoms of the inflation rather than on the underlying cause. Some economists still deny that rising prices have any thing to do with the quantity of money thrown on the market. They argue that the funds accumu late in the banks, which do not rush to make loans just because they have the money on hand. There must be a legitimate demand growing out of real production to induce the banks to lend. It is one thing, they say, to lead the horse to water-quite another thing to make it drink.

One wonders whether the expert who argues this way has ever taken a horse to the trough. If he did, just how lorg did it take before the horse developed a "legitimate" thirst? The parable does not do jus~ice to the horse, which never drink~ more water than it currently needs. But men plan by future prospects, real or imaginary. A heretofore submarginal demand for a bank loan beco$.es creditworthy when future earning prospects brighten-as they may in the light of a sustained flow of purchasing power in the channels of tr4de. It may take time, but an excessive money supply cannot fail to increase the 29 AN INFLATION PRIMER demand for goods and services except in a depres sion, when it is used to liquidate an excessive vol ume of private debt. COST-PUSH INFLATION? When prices rise, few people take the trouble to look up the statistical data about debt monetiza tion and bank-credit expansion. Still fewer seem to be aware of the causal relationships. What they do see is a sequence that has become virtually fixed: wages jump first, commodity prices limp behind ·them. Hourly wage rates fell slightly be tween 1929 and 1933, whereas the price level took a 40 per cent beating. But pretty soon both started to rise, wages leading the procession.

Then, during World War II, prices were "frozen" by controls, but pay rates could not be restrained. As the controls were scrapped toward the end of 1945, inflation· took, within two years, a 30 per cent toll of the dollar's purchasing power in retail trade, paralleling simultaneous wage boosts. Ever since, price movements have lagged behind wage increases, as summarized in the fol lowing table. Notice at once in the table that the data do not include fringe benefits paid by employers. These may amount to as much as 20 per cent of the wage bills, and they too keep mounting. Of course, costs may have a decisive influence on prices, and labor is the number-one ingredient 30 THE VICIOUS SPIRALS of costs. If labor's remuneration goes up faster than its productivity, prices tend to follow, calling in turn for compensation by higher wages, and a vicious cost-price spiral gets under way. But why do wages rise? There are two stock answers in (political) circulation. According to the one, pre sented largely by union spokesmen, labor merely claims its share in the rising profits which business MAJOR PRICE MOVEMENTS AND FACTORY WAGES SINCE WORLD WAR II(Indexes: 1947-49 =100) Wholesale Prices Average Consumer Industrial Hourly Prices All com-commodi- Earnings modities ties (Mfg.) Postwar inflation January 1946 ..... 77.8 69.6 72.1 $1.003 January 1948 ..... 101.3 104.5 102.0 $1.302 Per cent change ... +30.2 +50.2 +41.5 +29.9 "Relative stability"

January 1948 ..... 101.3 104.5 102.0 $1.302 June 1950 ........ 101.8 100.2 102.2 $1.453 Per cent change ... +0.5 -4.1 +0.2 +11.6 Korean inflation June 1950 ........ 101.8 100.2 102.2 $1.453 June 1951. ....... 110.8 115.1 116.2 $1.599 Per cent change .. +8.8 +14.9 +13.7 +10.0 "Relative stability" June 1951 ........ 110.8 115.1 116.2 $1.59 June 1955 ........ 114.4 110.3 115.6 $1.87 Per cent change ... +3.3 -4.2 -0.5 +17.6 Creeping price rises June 1955 ........ 114.4 110.3 115.6 $1.87 June 1958 ........ 123.7 119.1 125.3 $2.12 Per cent change ... +8.1 +8.0 +8.4 +13.4 -Source: U.S. Department of Commerce, Bureau of Labor Statistics. draws by the upward "administration" of prices and by the ever rising "productivity" of the work31 AN INFLATION PRIMER ers. According to another school of thought, the trade-unions enjoy monopoly power and use it ruthlessly. This supposedly causes the price infla tion, which then provokes fresh credit demand, to be· supported by debt monetization. We start on this second theory.

The large unions (and some of the small ones) do have a monopolistic position, though not be cause of the right to organize and to bargain on an industry-wide scale. Whether there is one union covering the entire steel industry or twenty five organizations in as many districts or plants makes little difference in bargaining power. How can one forbid unions to co-operate, either in re questing identical pay boosts or in going on strike simultaneously? Where, indeed, should the geo graphic or professional lines be drawn to dis tinguish the monopolistic from the legitimate kind of union without being arbitrary and depriving the workers of their fundamental right to organize and to protect their legitimate interests? Industrial conflicts are as old as the modern in dustrial system. Wages went up during booms before there was collective bargaining by unions. What has distinguished the American labor market since the New Deal legislation of the 1930's is the loss by the worker of his right to choose the men to represent him, or to bargain for himself. Once a union is recognized by the National Labor Board as the bargaining agency, the member is, 32 THE VICIOUS SPIRALS in effect, coerced into accepting a leadership that may be in the hands of racketeers. In a majority of states even the "right to work" can be denied the employee who refuses to join a union and to pay dues. Hence, a monopolistic position is achieved, strengthened by resort to the intimida tion of nonconforming members, use of strike breakers, violence, and mass picketing, extortion from employers, unfair secondary boycotts, and corrupt and criminal practices. By their methods of restraining trade, the unions violate written and unwritten rules of the free market. Referring to two of the most powerful unions, a Senate com mittee's (minority) report stated in early 1960: "Corruption, misappropriation of funds, bribery, extortion and collusion with the underworld has existed in the V.A.W. as in the Teamsters .... "

The unions, it seems, are above the law. And the law, or its administration, actually protects them~ 1 Yet the monopoly power of the unions is not the decisive force that drives labor costs in the strato spheric direction. Just how high could the general level of wages-not just in individual industries go in the face of consumer resistance to higher prices, if people's pocketbooks were not replen ished again and again by.freshmoneyshots-in-the arm? Patently, the magic circle of higher wages, higher prices, still higher wages, and so on, would break at the ultimate hurdle, the consumer's ability to pay. The trouble is that the total of in33 AN INFLATION PRIMER comes is being artificially maintained and ex panded. If consumer incomes falter, the govern ment steps in by disbursing funds or guarantees for public works, public housing, road building, farm subsidies, commodity stockpiling, foreign aid, mortgage credits, social security, and many other welfare objectives. The open and concealed subsidies, handouts, and "contracyclical" financial contraptions come out of the government's credit and the taxpayers' pockets, supplemented and sup ported by debt monetization, thus setting bank credit on the expansion road. That does it: Rising labor costs are not the ultimate cause of the inflationary drift. They are a prime transmis sion line that connects the money inflation with the price inflation. The cause lies deeper, in the political arena where the unions' ultimate re sponsibility enters. The unions are the prime moving and lobbying force behind the official spending and money-manipulating policies which result in over-full employment and labor shortage.

When the demand is strong and the supply short, the price tends to go up. That is what the nation's strongest pressure group puts over with an un canny ability to sublimate its own unenlightened interest-the union officials', not the workers', in terest-into national eminence. It· uses ruthlessly the vote-commanding power of a superorganiza tion, plus the influence provided by the multi million dollars of members' dues at the bosses' 34 THE VICIOUS SPIRALS free disposal. The worker's interest is lower prod uct prices, steady employment at good pay, more savings to finance more work opportunities, all of which is negated in the long run by union policies. To be sure, there are other pressure groups groups of organized business and farm; veterans; bureaucrats; special interests in construction, mining, shipping, and shipbuilding; exporters, mortgage lenders, educationalists, and a host of other lobbies--..that pull the inflationary strings for the benefit of their respective niches in the welfare stafe (while preaching the gospel of free enter prise). A "liberal" intelligentsia contributes its share in confounding a confused public. (Some literati still judge industrial capitalism in the light of the bygone sweatshops or of monopolies predat ing the Sherman and Clayton acts.) But organized labor delivers the strongest, most vocal, and most aggressive lobbying force on the inflationary side.

BUILT-IN INFLATION Inflation is being brought about by the com bined efforts of pressure groups in and out of the Congress. Such groups are largely responsible for current budget deficits as well as for inducing the central bank to monetize debt and to sustain an excessive flow of purchasing power-at a cumula tive rate averaging 6 per cent or more, double or treble the rate at which the real output of the na tion is growing. 35 AN INFLATION PRIMER Unions or no unions, boom or recession, wage costs are bound to rise when the growing money supply appears on the market place as an artificial ly boosted demand for labor's services. Employers' resistance to union claims is stymied in an eco nomic climate saturated with the expectation that the money tokens are readily forthcoming-if the consumer will not pay, the government will. Higher pay (often for less work) and more fringe benefits in one industry with rising labor pro ductivity spreads to others in which no progress in efficiency obtains. And every rise in costs that helps to force prices upward becomes embedded in the price structure by way of comtractural escala tors~ automatically adjusting wage rates to each fractional increase of the cost-of-living index. Nor is that the only vicious circle set in motion by the ceaseless or recurrent process of debt monetiza tion.

A most significant effect of the wage-price infla tion is the temporary incentive for new (mal-) in vestments in plant and equipment. Business is "pushed" into labor-saving devices in order to economize on labor costs, and it is being "pulled" into false capacity expansion by the growing de mand for products, a consequence of higher money incomes and of a deceptive prosperity. As prices climb and the inflationary mentality spreads, a further motive becomes operative: the urge to hedge on the inflation. The cumulative effect 36 THE VICIOUS SPIRALS would be a runaway inflation, if the process were not interrupted every third year or so by a reces sion, with each interruption sharper and more painful than the last. An overheated economy burns its bearings, as it were, by running up against labor and capital shortages and losing its flexibility, while overexpansion boomerangs in declining profits.

With jerks and screeches, infl~tion progresses. Under the cloak of immunity from the penal code, from the la'"ws of corporation and monopoly regulation, even from the Constitution's provision for the individual's liberty to join ,or not to join private organizations, the unions proceed to drive the economy toward inflation. But there is a price to be paid. In the jingle of K. E. Boulding (1951): We all, or nearly all, consent If wages rise by ten per cent It puts a choice before the nation Of unemployment or inflation. The choice is not between depression and infla tion, as the advocates of 2-5 per cent annual price increases pretend. The choice is between mone tary stability on the one hand, and inflation with recurrent mass unemployment on the other. The fiscal and monetary "stabilizers" pre scribed by the (unwritten) code of inflation are in full operation. But the law of supply and demand asserts itself: 5 per cent of the (overpaid) labor force stays unemployed in the midst of super37 AN INFLATION PRIMER booms, "liberal" credits, and $135 billion total public expenditures a year.

1. The 1959 labor legislation somewhat moderates unions' power, though not essentially. The unions remain in control of the labor supply, under the cloak of the union shop, and they are practically exempted from prosecution even for crimi· nal action. They still can control labor efficiency under the protection of "work rules,H grievance procedures, etc. State and local authorities, often even the courts, favor unsavory union practices. 38 V RIDING ON THE INFLATION CREST SPREADING THE INFLATION Inflation is a monetary phenomenon pure and simple. There is no such thing as an inflation by "wage-push," or by "profit-push." Both are con sequences, not ultimate causes. It is not rocking the boat that makes the storm, but the rocking helps to sink the boat. The cause is the excessive volume of credit, sparked by the debt-monetization practices of the central bank under the self-assumed function, since 1938, of "maintaining an orderly market"