Piano and the Stool

July 28, 1958

In 1936, Prof. Jacob Viner, reviewing John Maynard Keynes’s new book The General Theory of Employment, Interest, and Money, ventured a prediction that has proved, at least in part, remarkably prophetic:

“Keynes’s reasoning,” he wrote, “points obviously to the superiority of inflationary remedies for unemployment over money-wage reductions. In a world organized in accordance with Keynes’s specifications there would be a constant race between the printing press and the business agents of the trade unions, with the problem of unemployment largely solved if the printing press could maintain a constant lead and if only volume of employment, irrespective of quality, is considered important.”

There may be some doubt whether the problem of unemployment has been “largely solved.” But we have certainly been trying to solve it since 1936 in accordance with Keynes’s specifications, and we have certainly embarked upon a race between the printing press and the trade unions.

Take the current recession. There has been some recovery from the bottom. Moderate increases have occurred in industrial production, retail sales, housing starts, the factory work week, and total employment. Particularly striking has been the maintenance of personal income, the rise of farm income, and the continued high level of consumer spending.

PLANNED INFLATION

But it is precisely the maintenance of high personal monetary income, in a period of smaller output, that points to the existence of inflation. With the index of industrial production down about 10 percent from a year ago, wholesale prices have risen and the consumer price index for this May was 3.3 percent higher than in May of 1957. The development that has caused most optimism in some quarters—the recent rise of the stock market to new high levels for 1958—finds a more plausible explanation in the fear of further dollar-erosion than in the trend of corporate earnings.

The 1958 inflation, like all inflation, is not the result of some inescapable plague. It is the deliberate creation of governmental policy. Part of this is the approval by Congress of inflationary spending programs, to be paid for by a deficit expected to reach $10 billion to $12 billion in the current fiscal year. Part of it is the result of Federal Reserve policies reducing bank-reserve requirements and forcing interest rates once more down to ultra-low levels (with Treasury bills yielding less than 1 percent). These policies have been reflected in an increase in total bank deposits and currency of $10 billion between April this year and a year ago.

WE ADJUST TO REUTHER

But has all this inflation worked? Has it, in fact, cured unemployment? True, the official estimate of employment was 920,000 higher in June than in May. Yet because of the flood of new graduates looking for jobs, the estimate of unemployment rose to 5.4 million, a seventeen-year high. This unemployment is still largely concentrated in such industries as automobiles and steel, with the steel industry still operating below 60 percent of capacity. American automobiles and steel are being priced out of a full-capacity market by high prices caused by excessive production costs. Yet instead of any move to lower wage rates to adjust to reduced demand, the powerful nation-wide unions in these industries have been forcing wage rates to new high levels.

A famous European clown used to have an act in which he would try to play a grand piano but find himself persistently thwarted because the stool was always in the wrong place. Whereupon he would try futilely to push the piano around to adjust it exactly to the stool. This is the Keynesian prescription. This is how we are trying to cure the present recession. We have legally made the unions so powerful that they can dictate their terms to the nation. Instead of, say, some 10 percent of the workers adjusting their excessive wage rates to the realities in their own industries, 170 million people are being forced to pay higher prices for everything in an effort to adjust the whole economy to the demands of the Reuthers and McDonalds. Meanwhile most of our politicians remain studiously ignorant of the real situation.