Jobs by Inflation?

March 6, 1961

We are in a recession. Unemployment is alarmingly high. We must act. “I hope we can get action as soon as possible.”

Thus the Kennedy Administration. And what is this action we must take so precipitously? It is more government spending in all directions—on unemployment compensation, crop price supports, housing, highways, depressed areas, veterans, social security, Federal aid to education, and scores of other projects. It is lowering interest rates and increasing loans. It is, in a word, inflation.

Behind this proposed remedy is the same theory that has dominated the economic policy of most Western governments, especially our own, for the last quarter century. It is the theory made popular by union propaganda and the late Lord Keynes.

Keynes himself recognized that raising wage rates would only increase unemployment. He left-handedly conceded that unemployment might exist because real wage rates were already too high in comparison with prices and demand, so that the outlook for profits was too bleak to encourage full employment. But he argued that a direct lowering of money wage rates would be so strongly resisted by the unions as to politically impossible. Therefore the only way to lower wage rates to a workable level was to lower the value of money. The way to do this was to inflate, to print more money, and so to raise prices and monetary demand to a level at which full employment would be possible again.

WHY NOT FOREVER?

This is the process to which we have resorted again and again in the last 28 years. Economically, it has seemed to work. We have had continuous inflation, but we have also (at least since 1942) had fairly continuous employment. Politically, it has kept whatever Administration was in power from having to face up to the problem of how to halt constant union wage demands and increases that exceeded the gains in labor’s marginal productivity at the existing level of prices. We have floated ourselves out by ever new doses of inflation.

Well, why can’t we do it again? Why can’t we keep it up forever?

One reason it is especially dangerous to try it again now is that we have done it so much in the past that we have undermined international confidence in the dollar. Our labor costs of production on some items have been raised to a point that is pricing them out of the world market. American capital is being invested in new plants abroad rather than at home. Our existing inflation has already caused a deficit in our balance of payments. We have been losing gold at a dangerous rate. Further inflation will only intensify the problem.

DESPERATE RACE

And we can’t keep inflating forever because the process inevitably becomes accelerative. With every dose of monetary inflation and increase of prices, the unions make demands for still further wage increases to keep up with or get ahead of the latest price increase. Each round of wage increases leads to another dose of inflation to pay the new wage level. There is a perpetual and increasingly desperate race between the printing press and the union demands.

Yet the whole race is needless. What is necessary for full employment is the coordination of wages and prices, at whatever average level. If this coordination does not exist, if a new dose of inflation simply touches off a new round of wage hikes, then the inflation is futile, even as a short-term expedient.

What labor is chiefly suffering from today is too many victories. It is no mere coincidence that unemployment now is highest in lines in which wage rates are highest. As compared with average wages of $2.30 an hour in all manufacturing industries, wages in automobile plants are $2.87 an hour, in steel mills $3.02, in bituminous coal mines $3.27. But in the excited calls of the Kennedy Administration for “action,” there is complete silence regarding wage rates. They are treated as irrelevant.

Yet not quite. Among the proposed remedies for unemployment are higher and longer unemployment benefits and higher minimum wages to keep wage rates up or to force them still higher.