How to Buy More Unemployment

April 24, 1950

In the first three months of this year, according to official estimates, there has been an average of nearly 4,500,000 unemployed.

This is paradoxical and premonitory. For this unemployment, the greatest since prewar days, exists not in a depression but in the midst of an inflationary boom. It exists, in fact, in a period when the Administration boasts that personal incomes have reached the highest levels in our history.

Yet this paradox is not inexplicable. It is simply what discerning economists predicted was certain to happen if we continued to push up wage rates and labor costs faster than prices and productivity. And we have kept boosting labor costs recklessly through union policy, pension demands, government “fact-finding” awards, the Wagner-Taft-Hartley Act, and the new law jumping minimum-wage hourly rates from 40 to 75 cents last January.

The presumptive effect of this last factor is striking. Unemployment averaged 3,395,000 throughout 1949 and stood at 3,489,000 in December. This January it shot up to 4,480,000.

Does the Administration recognize the cause of this unemployment? Has it taken warning? On the contrary, it does everything to intensify the problem. In a message to Congress on April 6, President Truman called for a further increase in unemployment benefits. For existing unemployment he offered two explanations, both wrong. He explained that more people have been coming into the labor market every year. But they have been doing that since the beginning of our history, with the annual increase in population. Increased population means not only more people looking for jobs; it also means more consumers and consumer demand.

Mr. Truman’s other explanation is that “as new plants and equipment have been added . . . businessmen have been able to produce more with the same number of workers.” This assumes the immemorial fallacy that machinery creates net unemployment. But as man-hour productivity increases, prices go down or wages and profits go up, and per capita demand increases with per capita supply.

Because he makes the wrong diagnosis, Mr. Truman proposes the wrong remedy. We need not examine here the real revisions required in unemployment insurance. It is enough to point out that all Mr. Truman’s own arguments ignore the salient fact that as we increase the amounts and period of payment of unemployment benefits we encourage an increase in unemployment itself. The more we pay men who are idle, the more we reduce the penalties and increase the incentives for idleness. Mr. Truman wants to pay a man who has been earning $60 a week as high as $42 a week for not working. But if this man is offered another $60 job before his unemployment benefits expire, he may logically ask himself: “Why should I work for only $18 a week?” Or if he is offered a temporary $42 job: “Why should I work for nothing?”

Our national labor policy is, in fact, the equivalent of the farm price support policy. Government support boosts the price of farm products so high that part of the supply must remain unsold. The taxpayer is then forced to hold the unsold surplus. Government and union labor policy, likewise, pushes up wage costs to the point where part of the labor force must remain unemployed. Then the taxpayer must pay unemployment benefits to this idle labor. “Surplus” labor rots in storage like “surplus” eggs, butter, and potatoes.

The present American situation—of high unemployment even at the peak of an inflationary boom—is not unprecedented. Precisely the same anomaly occurred in Germany in 1927, and for the same reasons.^*

In 1927 economists like Gustav Cassel warned in vain that the German wage policy was senseless. Will such warnings today, in America, prove equally futile?

^*See The Economics of Illusion. By L. Albert Hahn. Sequier Publishing Co., New York. Pages 238–241.