A False Remedy
JULY 01, 1967 by HENRY HAZLITT
The country has been in a mild recession since the fall of last year.
In previous eras not too much concern would have been aroused by a comparable recession (which still leaves the gross national product at new high levels). Some readjustment within particular industries would have been taken for granted. But now, when a thousand doctors nervously take the pulse and temperature of the economy every day, any failure of any index to make a new high record every month causes alarm.
So the government rushes to the rescue. The rescue almost invariably consists of added doses of inflation. The government increases old spending programs and adds new ones. Never mind if government spending has risen in every one of the last eight years and is now at record levels. Never mind if there have been budget deficits in every one of the last seven years. The spending and the deficits must be pushed still higher. Interest rates must be forced down. The supply of money and credit must be increased.
All this is done on the assumption that we cannot have continuous full employment and prosperity without at least a little continuous inflation—and maybe, at times, a big shot of it.
The truth is that inflation is neither necessary for full employment nor sufficient to secure it.
What is necessary is a workable co-ordination of the price system. This entails a co-ordination of wages and prices. Individual wage rates must be at the levels at which the full labor force can be profitably employed. Prices must be high enough to keep a profit incentive, but low enough to permit the optimum volume of goods and services to be sold.
Wages and prices are always tending to reach these levels in free markets.
The half-truth in the Keynesian or inflationary theory is that if wages and other costs of production have got too high in relation to final prices, so that profit margins have shrunk or disappeared, an injection of new money or credit into the economy may sometimes raise final prices before it again raises wage rates and so temporarily restore profit incentives and production and employment.
But this kind of prosperity can be kept going only as long as prices and profits can be kept at least one jump ahead of wage rates. It becomes a constant race between the printing press and the demands of the labor unions. It is a race that can only end in gross distortions of income distribution, incentives, and production, in a balance-of-payments crisis, and in falling confidence in the dollar.
This disastrous inflationary race can be prevented only if the government has the will and the wisdom to prevent the continuous imposition of extortionate union wage demands.
This does not mean a wage freeze as in England. It does not mean antistrike legislation. But it does mean the repeal or thorough revision of our present one-sided Federal laws.
It means the removal of the special compulsions put on employers and the special immunities granted to unions. The employer must not be forced to bargain exclusively with one government-certified union. The unions must not continue to enjoy a special license to keep a plant closed by intimidatory mass picketing until their demands are met. The right to strike does not include the right to prevent anybody else from being offered or taking the job that the striker has voluntarily vacated.
Until we restore balanced labor laws, even continuous injections of more money and credit are not going to assure full employment because irresponsible unions will continue disruptive strikes and unreasonable wage demands.
Copyright 1967, Los Angeles Times, Reprinted by permission.