Jobs by Inflation?

March 12, 1962

The President has sent to Congress, accompanied by a letter urging its passage now, a pre-drafted “Stand-by Capital Improvements Act of 1962.” The proposed law would give the President authority to spend $2 billion on expanded public-works programs whenever government unemployment figures signaled a slump. Projects would be designed to create jobs, inject Federal money quickly into the economy, draw state and local matching funds after it, and expand consumer purchasing power.

Congress is being asked, in effect, to transfer in advance part of its power of the purse to the President. The President’s argument for having these stand-by spending powers is that, if a recession gave statistical signs of beginning, Congress would be incapable of acting soon enough. It is hard to see any force in this argument. In the event that statistics took the turn the President now contemplates, he could send an immediate emergency message to Congress on the day the discovery was made. If Congress were not in session, he could call a special session within a week. Congress could then act.

CONGRESS CAN BE QUICK

The President, therefore, must either think that Congress is incapable of acting promptly, or that it might not wish to do so. The historic record shows that the first assumption is not true. Congress has repeatedly declared war within a few hours after being asked to do so by a President. In the early weeks of the Roosevelt Administration, in 1933, laws were often enacted within a day or two after they were proposed. On May 25, 1946, when President Truman asked Congress for authority to draft striking railroad workers into the Army, the House voted the same day to grant him the powers he had asked (an action fortunately later rescinded by the Senate).

If, however, the argument is that Congress may not wish to authorize the increased spending at the time when the trigger conditions envisaged by the proposed stand-by law occur, that is the best of all reasons why Congress should not enact a self-paralyzing law now. This is asking it to vote now not to trust its own future judgment, but to agree to be bound in advance to authorize an automatic response to a statistical barometer without knowing the full circumstances of a future situation.

If we turn from the political imprudence of the proposed law to its economic consequences, we find that it rests on all the old pump-priming fallacies—on the assumption that a net increase in jobs is always created by bigger deficits, achieved either by more spending or by cutting taxes—on the assumption, in other words, that more jobs can always be created by injecting more money into the economy—in plainer words, that the total number of jobs can always be increased by more inflation.

KEYNESIAN FALLACY

This is the fallacy on which governments all over the world have been operating for the last generation, and especially since Lord Keynes built up an elaborate rationale for it in 1936. Those who believe in it forget that heavy unemployment has frequently occurred in the very midst of a major inflation. That increased deficit spending will bring on more inflation is practically certain; but whether it creates more jobs will depend on whether or not prices rise faster than wage rates and increase profit margins. The Administration remains persistently blind to the effect of excessive wage rates in causing the unemployment of which it complains. Such wage rates, instead of being allowed to correct themselves, would under the proposed law be subsidized with Federal funds.

The only direct employment provided by the President’s automatic pump-priming plan would be in the construction industry. But construction workers might be those in least need of subsidy. Today they earn an average of $3.24 an hour, compared with an average of $2.36 in all manufacturing and $1.71 in retail trade.

Finally, the projects on which the $2 billion would be spent would be projects dreamed up just to spend the money. For the inference is that if the unemployment thermostat did not hit the trigger levels, we could get along without the projects.