Building Up Surpluses; G. Hagedorn

What this combination reminds us of is the course of action gov ernment pursued for many years / in the field of agriculture price supports. Prices of certain agri cultural products were set at a higher level than they could have commanded in the market without Mr. Hagedorn is Vice-President and Chief Economist of the National Association of Man ufacturers. This column appeared in N AM Reports, May 24, 1971. government intervention. This meant that more was produced than markets would absorb at that price. The "solution" was for gov ernment to buy up the surplus at the taxpayers' expense and store it away. The two proposals we have men tioned as currently before Con gress would, in combination, have a similar effect on the labor mar ket. The increase in the legal mini mum wage would maintain an artificially high price for labor particularly the unskilled segment of the labor force. The resulting surplus of labor would then be taken off the market by govern ment and assigned to public serv ice jobs, at the taxpayers' ex pense. The public would be paying to buy up surplus labor in much the same way as it has paid to buy up surplus grain.

We would regard enactment of 460 1971 BUYING UP SURPLUSES 461 either of these two proposed meas ures as a ser{OUB nliBtake in eco nomic policy. The two together represent an approach to man power problems which is both costly and futile. The nation would simultaneously be making un skilled labor less employable in the private sector, and offering them make-work jobs in government. It is hard to see how anyone would be better off, and the taxpayer would most certainly be worse off. With Friends Like These . ... Both proposals are advocated by the reputed "friends of labor." But we wonder why anyone who desires to create more job oppor tunities for unskilled labor would advocate making it more expen sive - which would be the obvious effect of an increase in the mini mum wage. The labor market is not exempt from the elementary rule which applies to any market - the more costly you make whatever it is you wish to sell, the less you are likely to sell of it. Raising the price which must be paid for an hour's work by an unskilled worker is the surest way of cutting down on his chances for employment.

The proposal for creating new public service jobs, although it seems to have been primarily in tended to help the unskilled mem bers of the labor force, also provides that up to one-third of the jobs in any area may be filled by unemployed professionals - with annual salaries up to $12,000. The argument used by support ers of this approach is that, since there are useful things that could be done in the public sector, and since there are unemployed people in the country, it is a good idea to bring the two together. In that way the unemployed people would have jobs and would be doing something that needs to be done. But we must assume that the services these people would be per forming would be of very low priority and impossible to justify by any ordinary comparison of costs and benefits. If that were not so, the case should have been made for them in the ordinary process of budget making.

The answer to this may be that it is better for people to be per forming low-priority functions than to be doing nothing at all. That answer might have some validity if it were not for the fact that government make-work jobs impede the process by which job opportunities are created in the private sector. Their effect is to preserve, rather than correct, the economic distortions which led to unemployment in the first place. Buying up surpluses is a way of insuring that surpluses will con tinue.

462 THE FREEMAN August Keeping unemployment to a minimum may be simply described as preserving a reasonable balance between supply and demand in the labor market. And this requires a reasonable balance between what employers can get for their output and what they have to pay for their labor . We won't try to de scribe all the factors which may affect that relationship - they range over the whole subject of economics. But one thing is sure: providing a protected refuge in government employment for work ers who are displaced by imbal ances between labor costs and prices in the private sector is a good way of preventing the imbal ances from ever disappearing. Where Does It End? Government programs for tak ing surpluses off the market whether of farm products or of labor - are easy to start but hard to terminate. We would fear that measures for creating large num bers of "public service" jobs, al though proposed as an emergency measure, might become a perma nent burden on the taxpayer.

Their effect would not be that more jobs would be available, but that more of the available jobs would be in government and fewer in the private sector. More people would be performing low-priority functions in government, and fewer would be working in the private sector where the market enforces more exacting standards of usefulness. The analogy with the farm price-support program suggests some other disturbing possibilities. In both cases, a government com mitment to take surpluses off the market clearly necessitates gov ernment restraints on the custom ary freedoms of individuals. When the government under took to support the prices of cer tain farm products, they were eventually forced to impose acre age restrictions to keep supply down to manageable proportions. This amounted to -a rationing among farmers of the right to produce certain products. Will we, as the logical consequence of a government undertaking to sup port the labor market, see a ra tioning of the right to hold a job?

~ HENRY HAZLITT WORLD INFLATION FACTORY THE LATEST CRISIS in the foreign exchanges illustrates once more the inherent unsoundness of the International Monetary Fund system. That should have been obvious when it was first set up at Bretton Woods, N. H., in 1944. The system not only permits and encourages but almost compels world inflation. There follows a reprint of the article I wrote in Newsweek of October 3, 1949, at the time of another major world monetary crisis. I do this to emphasize that today's crisis could have been predicted twenty years ago. It is not merely the result of mis takes in the recent economic and monetary policies of individual nations, but a consequence of the inherently inflationary insti tutions set up in 1944 under the leadership of Lord Keynes of England and Harry Dexter White of the United States. In an epilogue I discuss the measures needed to extricate our selves from the present international monetary crisis and to prevent a repetition.