Employer of Last Resort; H. Sennholz

Johnson declared his "war on pov erty," which was to liberate some twenty percent of the population. President Jimmy Carter, during his term of office, waged his special war on poverty. All three made the pov erty of some 40 million Americans the central issue of their public pol icies. Indeed, all presidents have echoed a deep concern for the poor. And yet, the poor are still with us. Their faces have changed, but their numbers hardly ever vary. Armed with poverty statistics, their spokes men suggest that past government 49 50 THE FREEMAN January efforts were half-hearted and inde cisive. The war, they argue, must be carried on with unrelenting vigor and dedication until victory is won. They would make government the employer of last resort. Poverty in America Other observers may draw en tirely different conclusions. They may object that the poverty data it self may be erroneous and mislead ing. When compared with living con ditions throughout the world there may be no poverty at all in the U.S.

Most Americans have never seen the true face of poverty, which is visible in many other countries. It reveals hunger, disease and early death. In the U.S. even the least productive members of society live in relative abundance and comfort when com pared with their counterparts abroad. Among his foreign peers the American pauper is an object of envy and the U.S. the target of pauper immigration. American poverty statistics are built on levels of income. Families earning less than a stated dollar amount are defined as poor or pov erty -stricken; families earning more are believed to be above the poverty line. A brief observation of the living conditions of the American poor, however, may suggest a different conclusion. It may reveal that forty percent of poor families own their own homes; eighty-six percent of these "very poor" homeowners have no mortgage debt. Some fifty percent have liquid savings of $500 or more.

In Harlan County, Kentucky, the heartland of depressed areas, it was found that eighty-eight percent of the poor families have washing ma chines, sixty-seven percent have TV sets, forty-two percent have tele phones, and fifty-nine percent own cars. (Newsweek, February 17, 1964, p.20) Most Americans now designated as poor and indigent would resent the label if they actually· knew that the poverty warriors are talking about them. As a graduate student at New York University and a part-time ac counting clerk, I never earned more than $1,500 a year, which sufficed to pay $35 tuition per credit and put me through school. Even as a young col lege instructor, the poverty defini tion included me. With all my heart I resent this supercilious and derog atory description of those important years of my life. It is obvious that the poverty politicians who are accus tomed to spending billions of other people's money have lost touch with economic reality and the meaning of life.

In every society some people are more prosperous than others, some are poorer than others. In the eyes of a critical observer, anyone who earns less than he does, may be poor. To a millionaire anyone with less than a million may be a pauper. To 1985 EMPLOYER OF LAST RESORT 51 a poverty warrior anyone who be longs to the last 10 percent, 20 per cent or 30 percent of income earners may be poverty-stricken. In fact, the concept of inequality of income and wealth always comprises the poor. Government, Cause or Cure Lengthy unemployment may im poverish a person and put him in a poverty bracket. More than seven million Americans are mostly un employed, suffering declining in comes and living conditions. Alarmed L.t such statistics, the pov erty warriors managed to pass the Humphrey-Hawkins Full Employ ment and Balanced Growth Plan Act of 1978. And yet, unemployment continued to rise. Defining "full"

employment as no more than 3 per cent adult (4 percent overall) un employment, the warriors are now proposing to reach that level by us ing government as employer of last resort. Most government programs seek ing to alleviate poverty are treating the effects of unemployment; they never touch the causes. In fact, they completely reverse the cause and ef fect relationship by depicting the federal government as a source of employment rather than a primary cause of unemployment. They blame commerce and industry for the un employment and call on government to correct the evil. They propose to grant more power to politicians, officials and bureaucrats and call for extensive government intervention. And yet,by confusing cause and ef fect they fail to accomplish their stated objectives and even make matters worse. During years of rad ical government intervention un employment actually rises and lev els of living usually fall.

The champions of government power and intervention are sadly unaware that government is the pri mary cause of unemployment. They do not understand that employment is a price and cost phenomenon, and that mass unemployment is the in evitable effect of any government measure that directly or indirectly raises labor costs. A law or regula tion that boosts Social Security taxes, unemployment compensation taxes, workman's compensation taxes, or in any way raises the cost of labor, reduces the demand for la bor and creates unemployment. Boom and bust policies conducted by the Federal Reserve System may generate cyclical unemployment. Minimum wage legislation may deny employment to the least pro ductive workers. Labor legislation that grants restrictive powers to labor unions may bring stagnation and unemployment to unionized industries. Minimum wage legislation bars millions of young people from the la bor market. Although they have lim ited training and experience, the 52 THE FREEMAN January Employment, Unemployment and Government Projects compiled by Bettina Bien Greaves A booklet of articles, study questions and a bibliography of other readings concerning the national high school debate topic: Resolved: That the federal government should provide employment for all employable United States citizens living in poverty.

Useful to students of labor relations, regardless of age or school affiliation. 100 pages plus cover with index, attractively bound Postpaid for orders paid in advance $3.50 Order from: The Foundation for Economic Education Irvington-on-Hudson, N.Y. 10533 federal government may issue an or der that they be paid a minimum rate of $3.35 per hour. Moreover, it forces employers to pay a number of fringe benefits, from Social Security to national holidays, which may boost the worker's employment costs to $5 or $6 per hour. If a person does not add this amount to production, if he fails to cover his employment costs, he is a candidate for un employment. Before the days of minimum wage legislation high school and college students were always welcomed by commerce and industry. From the first day of vacation to the last, young people used to work in offices and stores, workshops and factories, working their way through school or supplementing family income. U n fortunately, these ways of the past have given way to minimum wage legislation, which condemns young people either to remain in school, to join the armed forces, or be unem ployed. At $5 or $6 an hour there may be no economic demand for their services.

Minimum wage legislation is the evil product of a political system that bestows favors and benefits on some classes of people at the expense of others. It favors the employment of 1985 EMPLOYER OF LAST RESORT 53 skilled workers who are earning more than the minimum by denying employment to unskilled workers earning less. This is why labor unions representing skilled workers are fervent champions of minimum wage legislation. Business Provides Employment Poverty warriors like to depict business as the culprit behind pov erty and unemployment. In reality, business is the only genuine source of production, employment, and in come. It is bidding for labor in order to serve its customers. It eagerly em ploys labor as long as it is "produc tive," that is, its net addition to out put is positive. In other words, as long as it does not cost more than it is producing, labor is in great de mand. When it costs morethan it is adding to the production process, when it takes income from investors and entrepreneurs, when it becomes "destructive" to employers, it is dis charged. In this case production is more productive without it.

Governments and unions are for ever raising labor costs and thereby causing unemployment. Business is adjusting continually inorder to pre vent the unemployment. When the federal government raises its Social Security exactions and state govern ments boost unemployment compen sation taxes, which may signifi cantly raise the cost of labor and thus the rate of unemployment, business is straining to prevent the unem ployment through cost adjustments. It may seek to offset the mandated costs with other cost reductions. In particular, it may reduce fringe ben efits, delay inflation adjustments, elicit greater effort and draw out more efficient production. Whenever and wherever business is successful in offsetting the boost in labor cost it succeeds in preventing threaten ing unemployment. If laws, regula tions and work rules prohibit the cost adjustment, business has no choice but to layoff loss-inflicting workers.

Production is more productive with out them. It is no coincidence that the strong holds of unions are also the centers of unemployment. In the steel and auto industries the union rates are more than double the market rates of industrial wages paid for similar labor throughout the American la bor market. Union rules generally deny efficient use of labor and pre vent cost adjustment. Ugly strikes by angry workers further increase labor cost. It cannot be surprising, therefore, that unionized industries are barely managing to stay afloat in an ocean of unemployment. Job Programs Destroy Jobs The unemployment generated by governments and unions is as severe and persistent as the force that is causing it. It is holding millions of Americans in its sinister grip and re54 THE FREEMAN January ducing them to poverty. To make government their employer of last resort is to put the culprit in charge and urge him to continue his transgressions. He will create more unemployment than he will provide jobs through a variety of make-work schemes. Facing mass unemploy ment, government may launch leaf raking and snow-shoveling pro grams, build highways and public buildings, embark upon slum re moval and urban renewal, or engage in any other economic activity. It may ostentatiously hire thousands of idle workers and become their em ployer of last resort. Unfortunately, the politicians who launch the pro grams and the poverty warriors who advocate them, are blissfully un aware of the consequences of their policies. They completely overlook two inevitable effects that tend to destroy more jobs than government can create: 1. When government appears on the labor market and engages idle labor it tends to support or even raise the labor costs that are causing the unemployment. It is removing the pressures for readjustment. By plac ing purchase orders for steel, auto mobiles, trucks and tanks it gives employment to idle steel and auto workers. But it also sustains their wage demands that exceed market rates, and thereby reinforces the cause of unemployment. Govern ment tends to prolong and intensify the suffering of idle workers by en couraging them to cling to unpro ductive labor costs.

2. Government has no source of income and wealth of its own. Every penny spent is taken from someone. It may be exacted from taxpayers, borrowed from lenders, or snatched from inflation victims. If it takes $50,000 to give employment to one idle worker, taxpayers, lenders or in flation victims must be reduced by that amount. Their reduction con sumes business capital, which in turn lowers labor productivity. Fall ing productivity, together with rigid labor cost, render more labor "un productive" and cause it to be un employed. And even ifit were to con sume no business capital, and labor productivity were to remain un changed, the losses suffered by tax payers and inflation victims would force them to curtail their consump tion and the employment they would otherwise provide. While govern ment may create one $50,000 job, which under bureaucratic condi tions and circumstances would be a low-cost job, it probably destroys the jobs of two or three workers serving taxpayers and inflation victims.

Federal Assistance Reduces Levels of Living Government reports are quick to point out that government assis tance is sustaining those truly in need. According to one study, with1985 EMPLOYER OF LAST RESORT 55 out any kind of assistance forty -one million people, or 18.8 percent of the population, would live below the poverty level. Cash assistance alone allegedly cut this number in half. If in-kind transfers are included, 13.5 million Americans are left in pov erty. If medical care is included in the calculation, the poverty level in cludes only nine million people, or 4.1 percent of the population. (Press Release, Executive Office of the President, Office of Management and Budget, March 12, 1982) In 1983 Federal cash programs supported 24.5 million elderly peo ple living in retirement, 4.3 million disabled workers and their depen dents, and 8.9 million survivors. They provided Medicaid and Medi care assistance to 47 million aged, disabled and needy Americans, ap proximately 20 percent of the total population and 99 percent of those over 65. They granted housing as sistance to 3.4 million American households, and subsidized approx imately 95 million meals per day, or 14 percent of all meals served in the country. They made available 6.9 million post-secondary awards and loans to students and their parents, and provided training for almost one million low-income disadvantaged people. They paid supplemental al lowances to more than 7 million peo ple, unemployment compensation to more than eight million, and granted food stamp assistance to 18.6 million individuals. Government sustained 3.5 million men and women on ac tive military duty and their depen dents, and some 27 million civilian employees and their dependents. Al together, some 80 to 90 million Americans are dependent on tax dollars.

The Burden of Dependents Whatever their numbers, the de pendents weigh heavily on the eco nomic well-being of their supporters, the taxpayers, lenders and inflation victims. Their inactivity and ab sence from economic production keeps society poorer than it other wise would be. It visibly reduces the levels of living of the providers, dis courages their productive efforts, and deprives them of the funds needed for productive investments. Surely, there cannot be any doubt that 80 to 90 million dependent Americans constitute a heavy bur den on productive Americans. Poverty warriors are encouraged by these transfer statistics. If 80 to 90 million Americans already are enjoying full support, another 7 to 10 million may not upset the transfer system. The warriors may be right. But they, too, must admit that there are limits to the burden the remain ing producers can carry. All transfer systems have limits beyond which economic production is bound to de cline and poverty is certain to multiply. I Occupational Licensing Dirk Yandell IN these "deregulatory" times, the ingenuity of governments and spe cial interest groups in constraining free enterprise is astonishing. Re cent legislation has continued to block entry into particular markets by requiring governmentally pro vided licenses as a condition for op erating in those markets. The licen sing of professional and occupational special interest groups is a signifi cant affront to a free economy. Li censing is defended by its propo nents as a means of ensuring minimum standards of competency or quality. More often it has been used as a means of restricting entry, to limit competition and preserve the high wages earned by the existing group of practitioners.