Buying Up Surpluses
AUGUST 01, 1971 by GEORGE HAGEDORN
Mr. Hagedorn is Vice-President and Chief Economist of the National Association of Manufacturers. This column appeared in
There are presently before Congress two proposals which make an interesting combination. One proposed measure would seek to relieve unemployment by creating large numbers of public service jobs; this would involve the expenditure of some $4 billion in government money during the next four years. The other proposal would raise the statutory minimum wage from its present level of $1.60 to $2 an hour (or even more in some variants).
What this combination reminds us of is the course of action government pursued for many years in the field of agriculture price supports. Prices of certain agricultural products were set at a higher level than they could have commanded in the market without government intervention. This meant that more was produced than markets would absorb at that price. The "solution" was for government to buy up the surplus at the taxpayers’ expense and store it away.
The two proposals we have mentioned as currently before Congress would, in combination, have a similar effect on the labor market. The increase in the legal minimum 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 government and assigned to public service jobs, at the taxpayers’ expense. 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 either of these two proposed measures as a serious mistake in economic policy. The two together represent an approach to manpower problems which is both costly and futile. The nation would simultaneously be making unskilled 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 opportunities for unskilled labor would advocate making it more expensive—which would be the obvious effect of an increase in the minimum 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 intended to help the unskilled members 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 supporters 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 performing 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 performing 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 continue.
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 describe 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 workers who are displaced by imbalances between labor costs and prices in the private sector is a good way of preventing the imbalances from ever disappearing.
Where Does It End?
Government programs for taking 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 numbers of "public service" jobs, although proposed as an emergency measure, might become a permanent 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 commitment to take surpluses off the market clearly necessitates government restraints on the customary freedoms of individuals.
When the government undertook to support the prices of certain farm products, they were eventually forced to impose acreage 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 support the labor market, see a rationing of the right to hold a job?