Pledges vs. Policies

February 13, 1961

The President and his economic advisers seem to think that the integrity of the dollar can be defended chiefly by uttering the right phrases. So Mr. Kennedy “pledged” himself once more to take no action “to increase the dollar price of gold from $35 an ounce” or “to impose exchange controls” or “to distort the value of the dollar in any fashion.” And then he proposed a gigantic spending program that would unbalance the budget, accelerate inflation, and precipitate a crisis that would lead either to a complete drain of our free gold reserves or the very exchange controls or rise in the dollar price of gold against which he was pledged. It is as if a debtor, whose current liabilities already exceeded his quick assets, were to pledge himself to repay on demand 100 cents on the dollar and then go off on a spending spree.

What ails the dollar today is not a “deficit” in the balance of payments or the loss of gold. This is merely a consequence of our past and future-feared inflation. The dollar can be saved only by abstaining from further inflation. Mr. Kennedy’s cure is to step up the inflation.

His remedy is the result of a wrong diagnosis. This is not merely his personal diagnosis. It is that of all his advisers—of the Galbraiths, Samuelsons, Sprouls, the authors of practically all his task-force reports. It is, in fact, simply the Keynesian diagnosis that has bewitched the New Dealers of the last quarter century.

MORE INFLATION

To these people the greatest economic disaster that can befall a nation is unemployment. But it never for a moment crosses their minds that this unemployment may be the result of excessive wage rates or excessive labor costs that endanger or wipe out profit margins, that raise prices in the domestic market to a level that reduces demand, or costs to a level where we can no longer meet foreign competition. Never do their remedies for unemployment contemplate the slightest downward adjustment in any wage rate, no matter how out of line it may be. On the contrary, they insist on labor-relations laws and minimum-wage laws calculated to push money wage rates still higher.

And then they proposed to make these high wage rates payable by further inflation, which is to raise prices and “increase purchasing power.” This purchasing power is always to be increased by increased government spending, by bigger government deficits. And though they are always demanding “faster economic growth,” their concern for increased purchasing power or increased incentives for job-creating investment, for enlargement or improvement of our productive plant, is at best secondary. Their primary demand is increased purchasing power for consumption. “The fairest and most effective step the Federal government can take to help fight the recession [the words are from the Samuelson report] would be to expand unemployment compensation benefits. Such expenditures go to those who need them and will spend the money promptly.”

BUILT-IN UNSTABILIZER

So item No. 1 on the economic agenda is to increase and prolong these benefits—to “provide unemployment benefits of at least one-half of the employee’s earnings,” and to “extend the term of benefits to a minimum of 26 weeks in all states, supplemented by an additional thirteen weeks during periods of high national unemployment.”

But will bigger and longer unemployment benefits tend to reduce unemployment—or to increase and prolong it? May not this so-called “built-in stabilizer” be in fact a built-in unstabilizer? When we make bigger and longer payments to the unemployed we reduce the spur on the individual to seek a job promptly and the pressure on union leaders to accept more workable wage rates. We increase the rigidity of wage rates in the downward direction. In brief, we tend to increase and prolong unemployment as we increase and prolong the subsidies we pay for it.

Mr. Kennedy’s spending program will endanger the dollar still further. This is the most harmful thing he could do. It would not only undermine American prestige but disrupt international trade, confidence, and monetary stability.