V. Riding on the Inflation Crest

for government securities. No such function was originally intended or written into the statutes of the Federal Reserve System. It is a pretext and fancy name to cover up the reality, which is to per mit Washington to indulge in fiscal irresponsi bility. To eliminate the last shred of doubt about the ultimate and effective cause of inflation, consider the following. In April, 1959, the union of 1,250, 000 steel workers put up extravagant claims, esti mated as a billion dollar "package." Marriner S. Eccles, former chairman of the Federal Reserve 39 AN INFLATION PRIMER Board (and a one-time rabid New Dealer) com mented: "If all of the other workers of America more than 65 million-were to demand and re ceive these same benefits, it would add 52 billion dollars to the cost of goods produced. There would be nothing 'creeping' about the resulting infla tion." And that would not be the end of it; rising prices would call for further wage-cost increases, and so on.

The point is that an important wage boost tends to give the entire wage structure an upward impetus, and, unless the additional costs are some how offset, the price level will tend to rise, too.1 But where would a majority of entrepreneurs find the cash with which to pay? They could scarcely have the money tucked away to add 10 per cent or more to their labor costs. Nor would the con sumers want to deplete their savings or default on their taxes and debts. The enhanced wages could not be paid unless the banks came to the rescue of the public and the central bank to the rescue of the banks. Short of a substantial shot-in-the-arm, markets and prices would break and massive un employment develop. The history of inflation offers innumerable cases which show that the most elaborate and automatic spirals cease to operate as soon as the credit flow to feed them stops. The cost-push theory of inflation assumes that costs are the sole, or main, determining factor of prices, as if demand had nothing to do with it.

40 RIDING ON THE INFLATION CREST What about subsidized prices? Surely the unions are not to be blamed for the fact that in the country with the world'sgreatest surplus of farm output-and with official farm stockpiles worth some $10 billion-basic farm-commodity prices are up to 50 per cent higher than they are on the world markets. THE FALLACY OF BUILT-IN STABILIZERS The money-printing press is the source of the wage-push and of all other inflationary phe nomena, including the fake devices to protect the economy against a depression. Social Security benefits, guaranteed annual wages, long-term wage agreements, cartelized (minimum) prices, redeemable savings bonds, and so on, have been presented to the public as built-in stabilizers to provide cushions against.a depres sion. They.provide nothing of the sort. They are just some of many pretexts for inflating the cur rency. For example, the reserves of the Social Security program, built up by contributions of the "insured," consist of government bonds that would have to be sold-to the banks, presumably.

Guaranteed wages guarantee nothing; they merely imply that there will be sufficientcash flow forth coming to sustain them. There are, indeed, stabilizers that can stop the inflation. They are not built in by law or by policy; they are part and parcel of the free mar41 AN INFLATION PRIMER ket's automatism, and they are very effective, as shown by the recurrence of recessions which inter rupt the spiraling process of inflation. However, as soon as the cycle goes in reverse, a money out pour is let loose and the genuine stabilizers are swept away. THE PRODUCTIVITY DEBATE Coming back to the spiral: time and again the unions claim that their wage demands need not affect costs. All they are asking for is more money for more output, supported by statistics to show the rising "productivity" of labor. For good measure, the claim was confirmed by no less an authority than General Motors Corporation. The great automobile maker beat the gun by offering in 1952 an annual productivity wage escalator-a memorable case for big business cooperating with a big union at the expense of the public.

There was a byplay, too. GM agreed to the (compulsory!) union shop, selling its employees' freedom of choice down the union river. Output per man-hour or man-day has risen and keeps rising in many branches of manufacturing. But the productivity argument is a rationalization to surround labor's inflation-borne power of coer cion with a halo of economic (and ethical?) sanctity. The trouble is, in the first place, that wages rise in all industries, whether or not there is an improvement in efficiency. Barbers, beau42' RIDING ON THE INFLATION CREST ticians, florists, repair men, house painters, and morticians get wage boosts with no perceptible increase of output per man-hour. In fact, "serv ices" take a growing share in total employment and lead in the successive increases of the cost of living. 2 What is meant by labor productivity? The number of physical units produced per man-day or man-shift is a convenient statistical device to measure efficiency, but it has no more to say about labor's contribution to the productive process than has the ratio of energy units used (or of dollars of capital applied) to the volume of output. If it takes but one man to do the job of two, it is most likely because of technological or organizational progress brought about by fresh capital invest ment, new inventions, managerial skill, or better utilization of resources rather than by any effort of the workers who attempt to reap the benefits.

The very concept of labor productivity is open to question. In a plant, is it the average output of all workers or of the actual machine operators only that matters? For an industry as a whole, what does.average productivity mean in the face of vast differences' among· individual plants? Over a period of time, ratios between labor input and product output become irrelevant if qualitative product improvements occur or if the product changes altogether. Is physical productivity sig nificant, or productivity in terms of dollars? The 43 AN INFLATION PRIMER pitfalls are legion. Exact measurement is impos sible. LABOR DISINCENTIVES BY INFLATION The spurious remuneration of labor's "pro ductivity" is worlds apart from true incentive wages. By the latter, the enterpreneur pays for more or better work accomplishment. By the former, he buys peace for a while, often paying more money for less work. In the one case, there is a distinct relationship between work done and and payment received. In the other case, labor is frequently paid for someone else's accomplish ment. In the workers' eyes, the credit for their raise in income goes to the bargaining, if not extort ing, union that exploits the inflation-swelled de mand for the products, and little or no credit is given to the capitalist, manager, salesman, or engi neer who may be truly responsible for the en hanced productivity.

The outcome does not even provide durable peace between management and labor. Suffice it to mention that, between 1956 and 1958, wages in the basic steel industry went up 19 per cent while eutput per man-hour declined 7~ per cent; by mid-1959, the industry was hit by a nation-wide strike, the seventh in fourteen years. More is at stake than wage rates, more also than fringe benefits. (The latter rise at times faster than do even the wage bills.) More is at stake than 44 RIDING ON THE INFLATION CREST disputes and strikes. If costs per unit of output mount despite huge capital investments in ever more productive equipment, it is because of a further reason: the union-sponsored restrictive practices. Featherbedding, make-work, and simi lar devices, reminiscent of the medieval guild sys tem, reach extraordinary intensity under creeping inflation, spreading cost increases throughout the economy. They amount to providing-on the rail roads, especially-permanent jobs at full pay to men who work productively only part of the time or not at all. These practices (legalized by the courts1) frustrate technological progress, the ulti mate source of higher wages and lower pricesl Time and again, this erosion of productivity is accompanied by slowed-down labor effort, a high level of labor absenteeism, and an excessive rate of labor turnover, all typical by-products of over full employment.

PRODUCTIVITY AND CAPACITY TO PAY Wage boosts bear a very tenuous relationship, if any, to productivity. For the period from 1939 %Increase in %Increase in %Increase in Average per Hourly Earnings Hourly Earnings Man-Hour without Fringe plus Fringe Productivity __B_en_e_fit_s_ Benefits Basic steel industry. . . . . . 64 201 211 Railroads.. . . . . . 86 185~6 190 All manufacturing industries. . 48.8 214 * ·Complete data not available. In 1956, total fringe benefits paid by employers amounted to $12.2 billion. 45 AN INFLATION PRIMER to 1956, the following figures of the Bureau of Labor Statistics speak clearly. The union bosses are never at a loss for an an swer. Look at real wages-money wages corrected for changes in the dollar purchasing power they say, and you will find that labor productivity outpaced them. The fact is that when hourly pay rises at the annual rate of about 5.3 per cent and per man-hour productivity increases by 2.3 per cent, the result is a 2.9 per cent net annual increase of unit labor costs. That is what happened to American manufacturing over a sixteen-year period. This is called wage inflation; it ought to be called: inflation carried on the "wings" of the unions. The unions not only generate the infla tion through political action, but they also carry the virus and accelerate its spread. Since the 1930's generating, carrying, and accelerating the inflation seem to be their outstanding func tions in the whole industrial world. The tech nique is the same almost everywhere: the use of their inflation-borne, unchecked power to extort monopolistic results.

If labor's "productivity" does not justify claims for higher wages.and fringe benefits, then the in creased cost of living will do-increased since the last wage blowup that preceded the price rises. If that argument is too transparent, the unions still may fall back on "ability to pay," which means, in essence, that you have to pay me simply because 46 RIDING ON THE INFLATION CREST you have, or are supposed to have, enough money to give me what I want. What if profits decline? Why, of course, my wages have to be raised in any case. Heads I win, tails you lose. 1. Actually, wages do not rise in a uniform fashion, nor do prices. "Those who can raise prices most readily, or increase wages most effectively, or escalate themselves to a position of neutrality, get more and more of total income, while the un sheltered get less."-Federal Reserve Bank of New York, Monthly Review, June, 1959. 2. Between 1949 and June, 1958, the average "retail" price increase was 35.4 per cent for services and 15.9 per cent for merchandise.

47 VI THE CONSUMER (AND TAXPAYER) BE DAMNED WHO PAYS THE BILL? Who carries the cost of inflated wages and fringe benefits, of shorter hours, of two men doing one man's job, and so on? There are several possibili ties. The added cost may be offset by technological progress and labor-saving devices; it may be shifted on the consumer by higher prices or lower quality of goods, or on the taxpayer if the govern ment steps in with subsidies; or it may come out of profits. Inordinately rising unit labor costs cannot be offset indefinitely by economies in production and distribution. Some unions resist stricter work rules and new equipment. Labor-saving devices may not be available or may be too expensive, and the financing difficult. The incentive for their installation is lacking if the Inanagement realizes that any economies achieved are bound to call for fresh wage requests. The result may be fewer jobs and/or more intensive work requirements. Sooner or later, labor "pays" by what is called techno logical unemployment: higher wages for fewer workers.