Stampede to Inflation

March 24, 1958

The President began with some sound and brave words in his March 8 letter to the Republican leaders of the House and Senate. The function of the government, he declared, “must necessarily be to stimulate private production and employment, not to substitute public spending for private spending, nor to extend public domination over private activity.” He expressed concern “over the sudden upsurge of pump-priming schemes” urging “wholesale distribution of the people’s money in dubious activities under Federal direction.” Having said all this, he proceeded to recommend a whole nest of pump-priming schemes, with wholesale distribution of the people’s money on loans, grants, and spending on dubious projects.

Just two days before this letter, the Federal Reserve Board ordered another cut in the discount rate from 2¾ to 2¼ percent. Two days after the letter, Vice President Nixon suggested a tax cut that would enlarge the deficit. Most of the Democrats in Congress complain only that these inflationary measures are not big enough. Even Republicans demand the scalp of Secretary Benson for suggesting some moderation and sense in farm price supports.

Both political parties, in short, are getting panicky. Both are urging policies which, though reckless, are unlikely to cure unemployment.

INSURANCE VS. RELIEF

The President recommends that Federal funds be used to “extend for a brief period” unemployment compensation benefits for workers who have exhausted their existing benefits. Some Democrats call for an extension to 42 weeks, compared with the 26 weeks or less in most state laws.

Our whole system of unemployment benefits needs basic reexamination. Present proposals may pervert what set out to be an unemployment “insurance” system into a glorified Federal relief system. Once the Federal government starts contributing funds, it will be called upon for more and more. The “insurance” may become a Federal relief system permanently. If we recall the history of “emergency” farm relief, the “emergency” RFC (now alias SBA), “temporary” veterans’ benefits, “temporary” foreign aid, and the constant expansion of Federal grants-in-aid, we will not deceive ourselves about the “temporary” character of the present proposal.

The purpose of unemployment insurance is to mitigate the hardships of unemployment without increasing or prolonging unemployment itself. We are losing sight of the second half of this objective.

ESCALATORS VS. JOBS

But the reason why even reckless inflationary measures may not cure the present unemployment is that the basic cause of the unemployment is being ignored. This is the excessive height to which the hourly wage rates of powerful key unions have now been pushed. As Prof. Ludwig von Mises recently reiterated: “The height of wage rates at which all those eager to get jobs can be employed depends on the marginal productivity of labor. . . . If wage rates, either by union pressure and compulsion or by government decree, are raised above this height, lasting unemployment of a part of the potential labor force develops.” Even Sen. Paul Douglas, in 1934, when he was still an economist, concluded in a 625-page book on wages: “If wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly rates so that the total income of the working class would be reduced.”

Today, not only do excessive money wage rates show no signs of being adjusted to present realities; they are still rising because of built-in escalator contracts. In its December Monthly Labor Review, the Department of Labor tells us that “approximately 4 million workers in about 530 major bargaining situations will have their pay increased in 1958 by amounts specified in agreements negotiated in earlier years.” This includes not only built-in “productivity” or other automatic increases, but automatic increases based on the rise of the Consumer Price Index. Even further monetary inflation cannot cure unemployment by raising prices when it increases wage rates even more.