Inflation as Cure-All

March 25, 1963

Unemployment took a turn for the worse in February, rising to 6.1 percent of the labor force, the highest in fifteen months. On the day this was announced there came a chorus of demands for a quicker and bigger tax cut, more government spending, bigger deficits, more inflation.

President Kennedy, following Labor Secretary Wirtz and AFL-CIO president George Meany, warned that this “intolerable” unemployment would grow worse unless Congress quickly approved his tax-cut proposals. The Democrats on the House-Senate Economic Committee called for a $6 billion tax cut this year instead of the President’s own plan for a mere $3 billion.

These Democrats, under the leadership of Senator Douglas of Illinois, support the Administration’s goal of a $10.3 billion net tax reduction over three years, but feel that the amount allocated for 1963 is too small. “The largest doses should be given when the patient is the sickest,” they say. And they add: “The widespread demands for stimulative tax reductions are, by the same token, demands for stimulative monetary action. Monetary policy must now help fiscal policy to do the stimulative job which, unfortunately, the monetary authorities haven’t done.”

This is an unmistakable demand for outright and reckless inflation.

WHY UNEMPLOYMENT?

Before it allows itself to be stampeded, Congress should ask a few questions. Why has unemployment gone to the highest level in fifteen months? Why is it 24 percent higher than the average for the Eisenhower Administration? (In the eight years from 1952 through 1960 unemployment averaged 4.9 percent.) Is this the way the New Frontier economics has “got the country moving again”?

What is the trouble? Is the money supply too small? It has increased 15 percent since 1953, when unemployment was only 2.9 percent. Haven’t there been enough deficits? The deficits since the end of fiscal 1953 have averaged $3.2 billion a year. And we have recently been doing much better than that. The deficit for fiscal 1961 was $3.9 billion, and for 1962, $6.4 billion. For the present fiscal year we are promised a deficit of $8.8 billion. and for fiscal 1964 of about $12 billion. Why, with all this new “purchasing power” pouring into the economy, does unemployment increase?

Could it be that “insufficiency of purchasing power” is not the cause of the unemployment? Could it be that unemployment is the result of encouraging unions to gain excessive demands? Isn’t the unemployment a sign that, in the lines in which it occurs, wage rates and labor costs are too high? Are some unions pricing their members out of the market?

DOUGLAS VS. DOUGLAS

This is what economists contend. And Paul H. Douglas, when he was a professor of economics, and before he got Senatorial ambitions, was among them. In 1934 he wrote a massive book called The Theory of Wages, in which he arrived at the conclusion that “if wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly rates so that the total income of the working class would be reduced.”

Applying this to the present situation, may not our unemployment of 6 percent indicate that wage rates are 2 percent higher than the productivity level that would permit full employment and maximum payrolls? (As 2 percent is an average figure, the assumption would be that most wage rates are not too high but that a few wage rates are much too high.)

Why is Senator Douglas, why is every member of the Kennedy Administration, completely silent on this possibility? Why does no one dare to ask whether full employment might not be restored by a little wage adjustment? Why is everyone shouting for tax reduction, spending increases, deficits, more inflation, all of which threaten the future of the dollar?

Of course we need tax cuts, particularly of the taxes on investment and production. But the only way to get them without courting a disastrous inflation is to slash intolerable government spending.