The history of human progress clearly reveals that problems of long standing have remained problems primarily because erroneous and misleading beliefs about them block the way toward advances in knowledge. When the cobwebs of misconception and error are finally swept away and the light of truth is allowed to shine in, the solution is not long delayed. The development of medicine, for instance, has been one long continuous struggle against prejudice and ignorance, both within and without the medical profession. As long as plagues were believed to be Divine punishment inflicted on a sinful people, no significant progress toward overcoming them could be expected. As long as microorganisms were believed to be spontaneously generated, the development of preventive medicine was definitely inhibited. As long as malaria was attributed to “bad air”, the murderous anopheles remained unchecked.
It is not surprising, therefore, to find that the lack of progress toward a solution of the unemployment problem is due to the same cause. In fact, with all of the effort that has been put forth, and the innumerable plans and programs that have been devised and tried out for this purpose, it seems hardly possible that the answer could have been missed unless this were another case of the same kind: another instance where the most strenuous efforts have been fruitless because they have been directed into the wrong channels. And this is just what we find when we undertake a detailed study of the situation. After careful and accurate analysis, the inescapable conclusions are that the accepted ideas with respect to the basic principles governing employment are almost one hundred percent wrong, and that the answer to the employment problem can be found in just about the only place where no one has looked for it.
It is only natural that a statement of this kind should be received with considerable skepticism. There is a general impression that the strenuous efforts put forth by a myriad of individuals and organizations over a long period of years must have explored every nook and cranny of the subject, and it is hard to believe anyone who claims to be approaching the problem from a new direction. But this is a case where we can apply the old legal maxim that “the facts speak for themselves”. The new theory of employment developed in Chapter VI points directly at the place where additional self-supporting employment can be found, and clearly indicates the type of program that must be set up to take advantage of these employment opportunities. Both the program that will be outlined in this work, and the source of jobs which it taps, lie far outside the field that has heretofore been explored by those attempting to devise methods of expanding employment.
The first departure from previous theory lies in the demonstration that employment is independent of the state of business, even though in practice both are usually affected simultaneously by the same primary factors. It has commonly been assumed that business prosperity and full employment go hand in hand, and the great majority of the plans that have been suggested for the reduction of unemployment are indirect measures which attempt to reach their objective by stimulating business activity. Our analysis shows, however, that the presumed correlation between employment and normal business prosperity does not exist. Full employment, under existing conditions, cannot be reached except near the top of an unhealthy boom, which must inevitably be followed by a recession and a recurrence of unemployment. A stable, prosperous business situation without a boom, as matters now stand in the absence of any direct employment program, necessarily involves a substantial amount of unemployment because of the effect of the survival limit.
The importance of this point cannot be overemphasized. It definitely rules out all of the proposals for achieving full employment by indirect means. Some of these indirect programs may be quite useful in an auxiliary capacity. Countercyclical measures, for example, are capable of eliminating some of the most serious unemployment, if properly applied. But such measures will not assure full employment. On the contrary, by preventing booms they may make a certain amount of unemployment permanent unless accompanied by further action directed specifically at creating employment. Only a direct employment program can assure permanent full employment.
It was demonstrated in connection with the discussion of employment theory in Chapter VI that the volume of employment is definitely a function of the survival limit. It necessarily follows that no program can be successful in providing full employment unless it does reduce the survival limit in one way or another. Those who have not gained a clear understanding of the concept of the survival limit may find this statement hard to accept. Some will point to the fact that an inflationary price rise has no effect on the producer’s fixed costs, yet it does increase employment. But the survival limit is not determined by the fixed costs alone; it depends on the relation of fixed costs to total costs. Inflation increases profits, and thus lowers the survival limit by reducing the percentage of fixed to total costs. Deflation, acting in the inverse manner, increases the survival limit, with the result that business failures and unemployment both rise.
It may seem to other skeptics that assigning the unemployed to public works or other government jobs created for employment purposes is a very simple and easy way of evading this principle. But the truth is that the creation of such jobs constitutes a very radical lowering of the survival limit. It has been dropped to zero, since there is now no requirement that any actual values be produced.
In private industry each enterprise must produce enough to pay wages, taxes, rents, and interest; otherwise it fails. As an illustration, the total of these fixed cost items for a certain firm may amount to twenty five dollars per day per employee. If the goods that are produced are only worth twenty dollars per day per employee, the business must cease operating. There is no way by which it can continue paying out twenty five dollars for every twenty dollars that it takes in. But after killing off the enterprise that was able to produce twenty dollars in values for every day’s labor, we turn around and put the former employees on “made work” of some kind which probably does not produce more than two or three dollars per day in values, if it produces anything at all. As the system now stands, the twenty dollar work under private auspices is prohibited because the survival limit is twenty five dollars; the two dollar public work is possible because the survival limit on government projects is zero.
Obviously this policy is absurd. It is permitted to exist only because the true principles governing employment have not heretofore been recognized. Once the dominant role of the survival limit is understood, the answer to the employment problem is self evident. We must lower the survival limit in private industry in some manner that will enable us to employ our surplus labor on twenty dollar production when sufficient twenty five dollar production proves to be unattainable. A program set up on this basis will not be a burden on the general economy in the manner of unemployment benefits or government “made work”; if properly designed it can produce sufficient definite and tangible values to make it self supporting.
All of the facts that have been uncovered in this study of the fundamentals of the employment situation point consistently to the conclusion that additional work of sufficient productivity to pay its own way can be found only within the boundaries of private industry. Here alone do we require labor to be more than self supporting under normal conditions, and hence this is the only place where there is any reservoir of additional self supporting jobs that can be tapped by an auxiliary employment program. The individual enterprise system carries a heavy load of community overhead expense—taxes and capital costs—and all work coming within the scope of the system is normally required to bear its proportionate share of these overhead costs as a condition of survival. Each enterprise that utilizes labor must produce not only enough values to pay the wages of that labor but also enough additional values to cover taxes and capital costs. But in between this normal productivity requirement, the normal survival limit, and a lower productivity level at which the work would merely be self-supporting (that is, would produce only sufficient values to pay wages) there is a vast amount of potential work which can be called upon to provide fully self sustaining employment for those who would otherwise be unemployed, and would carry none of the overhead burden in any case.
Socialistic or communal projects cannot provide such work as long as the normal production operations are being handled by private enterprise, because activities exempt from the requirement that they must meet the productivity standard established by the highly efficient individual enterprise system simply do not meet that standard. Public works cannot solve the problem because work justified on its own merits does not fit into an employment stabilization from a time standpoint, and any additional work originated for employment purposes is necessarily low in value.
It should again be emphasized that when we put the unemployed on public works projects we are cutting down our potential consumption of goods for personal use and buying public works instead. It makes no difference whether we spend from current income or borrow the money; we still construct public works only at the expense of other goods that we could have produced and used. So far as the public projects may be preferred to private goods, this is entirely in order. The taxpayers are perfectly willing to deny themselves some personal luxuries to build schoolhouses, for example. It is doubtful, however, if any substantial expansion of public works for employment purposes would ever be approved by the public if the facts were thoroughly understood. But if we assign the erstwhile unemployed to jobs in private industry which produce enough values to be self-supporting, there is no diversion of taxpayers’ income away from other goods, even though these jobs do not stand the normal proportion of the community overhead expense. The auxiliary employment stands entirely on its own feet, and the workers for whom new jobs are created are paid from the values which they have produced by their own efforts.
It may not be clear at first glance why there should be a fundamental distinction between public employment and private activities that involve exactly the same kind of work. We can see the difference, however, by looking at a typical example: housing. If the government builds a housing unit as a part of a “slum clearance” project, the cost is assessed against the taxpayers sooner or later, and the income available for the personal use of those taxpayers is decreased by this amount. They have bought slum clearance instead of goods for their own use. From a social viewpoint this may be a more commendable use of the purchasing power, but economic science passes no judgment on such questions. As students of economic realities we merely note the very evident fact that public works are an item of expense to the taxpayers. But if the house is built under private auspices, it is sold on completion to someone who gets the same kind of utility from it as from any other goods for his own individual use. This purchaser stands the cost, and no burden is imposed on the taxpayers.
Most of the professional economists of the present day are preoccupied with sociological objectives, and favor enlargement of government spending because they regard many of the expenditures currently falling within the so-called “public sector” much more favorably than they do any increase in consumer expenditures. It must be conceded that there is something to be said on behalf of many of the changes in priorities that these economists are advocating, just as it could be argued rather persuasively that the nation would be better off if we consumed more milk and less beer. However, these questions are not relevant to the employment problem, and should not be injected into matters of employment policy.
Identification of the true cause of unemployment, an excessively high survival limit, points directly at the way in which the goal of full self-supporting primary employment can be attained without any unnecessary sacrifice of productive efficiency; that is, we must take steps to lower the survival limit just enough to reach the full employment goal, and no farther. But we cannot accomplish this reduction by resetting a dial or by passing a law. We must take some action or actions that have an effect on the survival limit. There are many possible actions of this kind, just as there have been many actions, aimed at altogether different objectives, that have resulted in raising the survival limit to its present excessively high level. Our task is to select, from among these various possibilities, a combination of measures that will enable us to reach the employment objective with the least possible detrimental side effects.
Aside from the socialistic solution, dropping the survival limit (the productivity requirement) to zero, and accepting the inevitable decrease in productivity, there are three general types of measures to be considered: (1) measures which will prevent loss of jobs by reason of the downswing of the business cycle, (2) measures which will enable enterprises that are self supporting, but cannot meet the normal requirement that they be enough more than self-supporting to make a substantial contribution to the community overhead expense, to continue operating and providing employment, and (3) measures which will create new self supporting jobs.
As indicated in Chapter VIII, the application of countercyclical fiscal and monetary policies, in accordance with the theoretical understanding that is now generally accepted among economists, will be adequate, if properly handled, to prevent cyclical losses of employment. Our analysis indicates that further clarification of the theoretical basis of these countercyclical policies will enable increasing their effectiveness very substantially, but this is a matter that can be left for later consideration, inasmuch as the information that is now available, and is not subject to serious dispute, is sufficient for present purposes. No other measure of type 1 needs to be considered, and the balance of this chapter will therefore be devoted to an examination of possible measures of type 2.
The most obvious type 2 action is to make all business taxes (federal, state, and local) payable out of current earnings only. The present policy of giving the tax collector the first claim against the income of a business enterprise is nothing short of absurd. In the 1930 depression, for instance, many businesses that would have been able to meet their payrolls and general operating expenses were forced to close their doors, and add their employees to the growing relief rolls just because they could not produce enough additional values to pay interest and taxes; whereupon the bondholders ceased getting their interest, and the government ceased receiving tax payments, just the same. At a time when unemployment was the most serious problem facing the nation, an immense number of fully self supporting jobs were eliminated simply because they were not more than self-supporting.
And this manifest absurdity is not confined to depressions. It is a continuing process that is a heavy contributor to unemployment throughout good times and bad. For example, a pending reorganization plan for the Penn Central Railroad contemplates abandoning about half of the 20,000 miles of track now included in the system. And why? One of the primary reasons, so the news media report, is that the railroad is unable to earn enough to pay its taxes. So half of its facilities will be abandoned, an immense capital investment will be wiped out, a very large number of jobs will be eliminated, and when the smoke clears away there will be no collection of taxes on this half of the business because there will be nothing left to levy taxes on. Nor is this the whole story. It is conceded that some of the lines scheduled for abandonment supply essential services, and the government spokesman quoted in one news release says that these will have to be replaced in some manner or other by the government or by local interests (at a loss, of course). In other words, if the existing policies are maintained, and this proposed abandonment project is carried out, the governmental agencies that are involved will actually be paying for the dubious privilege of destroying thousands of self supporting jobs.
This graphic example not only illustrates the need for more “cushion” in the operation of business enterprises—something that will offset the increasing rigidity of the wage structure and permit a number of the enterprises that are just below the present survival limit to continue operating and furnishing employment—but also points very clearly to one of the first actions that ought to be taken to reduce the survival limit and provide the additional cushion. General taxes on business should be made a contingent claim, like income taxes or non-cumulative preferred stock dividends, to be paid when and if there are earnings available for the purpose, rather than mandatory items that have to be met even if they kill the enterprise.
A particularly important point in this connection is that in many cases the inability of an enterprise to meet the normal requirements is only temporary. New undertakings, for instance, usually have to pass through a lean period in which expenses are high from the start while the volume of business builds up slowly. If the available funds are insufficient to meet these initial losses, as often happens, the enterprise simply collapses financially before it ever gets a fair start. Eliminating taxes while there are no earnings, together with some further assistance, if needed, of the kind that will be discussed in Chapter XII, will enable a certain percentage of these businesses to get through the critical period and take their places as full participants in the economy. Similarly, many firms encounter temporary adversity, for one reason or another, and here again, the tax exemption will be needed for no more than a limited time. In all probability, the present situation of some of the railroads is in this temporary category, as there are clear indications that economic factors are beginning to shift back in favor of rail transportation. Providing self supporting employment for the otherwise unemployed segment of the labor force is a very profitable measure even where the necessary waiver of the normal contribution to community overhead has to be permanent, and this fact that, in many instances, the need for the waiver will be no more than temporary is a significant plus factor that makes the proposed program all the more attractive.
This proposal for assessing business taxes only against earnings will undoubtedly be greeted with a chorus of disapproval from the anti-business element, particularly from those who do not want to see the existing defects in the individual enterprise system corrected, because they want to replace it with some form of collectivism. But these individuals raise no objection to applying this same principle by way of the income tax—indeed, they are usually among the strongest supporters of high corporation income taxes—and if the principle is acceptable in the one instance, extending it to some additional taxes can hardly be open to legitimate criticism. Contrary to what these opponents will probably allege, there is no “giveaway” involved; the community is far better off financially by not collecting these taxes, and thus permitting the hard pressed enterprises to continue operating and furnishing employment which is fully self supporting, even though it is not more than self supporting, as normal employment in private business is required to be.
Reduction of fixed interest financing.
A major obstacle in the way of meeting financial emergencies, particularly in the case of the railroads, utilities, and other enterprises with large fixed capital investments, is the inflexibility of bond interest. Profits may disappear completely, and general expenses may sometimes be cut, but unless the bondholders get their regular payments right on the dot there is trouble, with bankruptcy looming at the end of the road. It is beginning to be recognized that this lack of flexibility in bond interest is inimical to the public welfare in times of stress, and recent changes in the bankruptcy laws have sharply restricted the ability of the bondholders to enforce their claims to the extent of closing down the debtor’s business. Under the present laws, the bondholders are often forced to compromise and accept less than the contract rate of interest, regardless of their own inclinations in the matter. This development of public policy, which is likely to expand in scope in the future, is a step toward lowering the survival limit and enlarging the business cushion. The general approval with which it has been received suggests the possibility of going still farther in this direction and imposing drastic restrictions on corporation financing by means of bond issues, perhaps to the extent of prohibiting this type of financing altogether. The result would be a substitution of preferred stock for bonds, and a very substantial decrease in the rigidity of corporate financial structures.
Of course, such a policy would increase the costal capital for business purposes, at least temporarily, but this should not be a serious objection as long as all corporations are subjected to the same regulations so that the competitive situation is not altered. It would be necessary to liberalize the rules governing the type of investments permissible for insurance companies and other institutions of a fiduciary nature to enable them to follow this change from bonds to stocks, but again this is no serious obstacle. The tendency is already in that direction, and stabilization of business by eliminating unemployment would make the preferred stocks of well-established concerns better risks than their bonds are now, with the possibility of a serious depression always hanging over them. As in all changes of this kind, it would be desirable to make the transition gradually to give business time to accommodate itself to the new conditions.
One possible means of reducing unemployment that is quite popular among economic theorists is that of making wage rates flexible, so that when production income declines wages can be adjusted downward to restore the equilibrium between income and expense, instead of laying off workers and reducing volume. It should be noted, however, that this is not the kind of wage flexibility that was discussed in connection with the development of the theory of employment in Chapter VI. The latter did not involve periodic adjustment of wage rates in general as contemplated by the economists; it referred only to the setting up of a program under which it would be possible for different enterprises to pay different wages for the same kind of work.
In earlier eras the wage structure possessed both kinds of flexibility. There were no important restrictions on the ability of the producers to control wages except the overall governing factor of competition. Consequently, in periods of recession, when the use of labor became relatively less profitable and a labor surplus developed, wage policies varied. Some of the more prosperous concerns maintained the previous level of wages, but there was nothing to prevent less profitable enterprises from hiring surplus workers at some lower rates which made it possible for these businesses to continue operating in spite of their reduced income. In recent years, however, there has been a marked stiffening of the wage structure, due largely to the efforts of the labor unions, supported strongly by public sentiment, expressed not only through sympathy with the unions in wage controversies but also through legislation and public pressure on employers. As matters now stand, there is a strong resistance to wage cuts under any circumstances, and also a growing tendency to level out all wage differentials between employers by means of industry-wide wage settlements.
This increased rigidity of the wage structure is unquestionably one of the major reasons for the growing seriousness of the unemployment problem. Forcing the less efficient producers (who, like the poor, we will have with us always, for no matter how much we may raise the general average there will still be some below others) to pay the same “union scale” as their more fortunate competitors simply drives the weakest of them out of business, and this same lack of wage flexibility makes it doubly difficult for new enterprises to take the places of those that fall by the wayside.
It is apparent, therefore, that the possibility of improving employment conditions by increasing the flexibility of wage rates and thereby lowering the survival limit deserves serious consideration. Since two distinct kinds of flexibility are involved, it is desirable that we should study each one independently. Let us first examine the advisability of making the general level of wages variable so that it can conform to the ups and downs of the business cycle. This is the proposal that has strong support from the economic profession.
In beginning a discussion of this subject it is necessary to have a clear understanding of the basic fact that unemployment is a result of powerful and impersonal economic forces, not of voluntary anti-social actions on the part of the employers. In spite of repeated assertions to the contrary, reduction of the working force is an action that is taken by business enterprises only with great reluctance, except in the special case where the labor requirements are decreased by technological advances. Reducing the amount of direct labor in the absence of such improvements means reducing the volume of production, and in view of the persistence of fixed charges and overhead costs, lowered volume has serious effects on profits.
Indirect labor, such as that used for maintenance purposes, does not have the same immediate effect on production volume, but such work cannot be omitted or postponed without incurring substantial additional costs. Failure to keep maintenance up to normal often necessitates ultimate expenditures far in excess of those which would have been required to carry out a normal orderly maintenance program. Reduction of employment in either the direct or indirect category is therefore directly contrary to the desires of the ownership and management of the producing organizations. As a rule the producer will take a very substantial cut in profits before he will reduce employment to any significant degree, and when he gets down to a certain minimum he will let profits disappear entirely and even dip into his reserves, if he has any, to meet an operating loss before he will make any further cuts or close down altogether. The record shows that during the worst of the 1930 depression a large proportion of the business enterprises of the country were actually operating at a loss.
The particular significance of these points is that profits and producer reserves, together with producer income taxes, form a cushion by means of which some of the business shocks are absorbed and not transmitted to employment. Unfortunately for the effectiveness of this cushion, however, only the strongest producers have adequate reserves, and a very large number of the weaker ones are operating so close to the zero profit mark even in good times that they have no appreciable profit margin either. This raises the issue as to whether it might be desirable, for the sake of continuity of employment, to vary wage rates in accordance with business conditions and thereby widen the business cushion, so that producers could still continue to operate and provide employment even though income dropped somewhat below the level that would otherwise force the weaker enterprises into bankruptcy.
Careful examination of this proposition, however, shows that it applies the regulation in the wrong place. This type of wage flexibility is aimed at overcoming the effects of cyclical business fluctuations, and to the extent that it is effective it achieves the necessary equilibrium between production price and market price by manipulating the former to meet the antics of the markets. This is contrary to all sound principles of regulation. What is needed is a governor at the place where the fluctuations originate—the markets—so that the net result is a smoothing out of the cycle rather than an attempt to keep both ends of the machine dancing to the same tune. Furthermore, if we eliminate the business cycle entirely by countercyclical measures, as we can, and should, do, the principal argument for this kind of wage flexibility is no longer valid. If there are to be no variations in general business conditions there is no merit in providing a method of modifying wages to conform to such variations.
When we turn to the second type of wage flexibility, we are confronted with a different situation. In this case the proposal is that arrangements be made to permit the less profitable enterprises to pay somewhat lower wages than their more efficient contemporaries, instead of following a rigid “union scale” or conforming to “prevailing wages”. This would have the effect of lowering the survival limit and enabling some of the concerns in this class to continue operating and providing employment when they would otherwise be forced out of business. Unlike the other wage proposal just discussed, this program would be effective in any stage of business prosperity, for even at the peak of a boom there are producers going out of business because of inability to make both ends meet.
When considered purely from the employment standpoint this proposal is sound. It accomplishes the necessary lowering of the survival limit in a direct and effective manner. But the remedies for economic ills are like the remedies for physical ills in that we cannot judge them entirely on the basis of their effectiveness in accomplishing their primary purposes. We must also look at their side effects. The strongest objection to this type of wage flexibility is that it is unjust to the employees of the less profitable enterprises. While the trend to industry-wide bargaining has been due in large part to a belief that there are some tactical advantages to be gained by large-scale negotiations, there has also been a growing recognition of the inequity involved in paying one man less than another simply because he happens to be employed by a less profitable enterprise. Of course, the same situation still exists, in an even greater degree, between different industries. An individual who happens to be working in an industry that is favorably situated from the standpoint of pricing its product is often paid more than twice as high a wage or salary as an individual doing exactly the same kind of work in a less favored industry. But the continued existence of a social inequity in one place does not alter the fact that elimination of that inequity in another place is a step forward. Reestablishing wage flexibility between employers in the same industry would undo what has been accomplished in this respect, and we must therefore conclude that, from an overall standpoint, this would not be a satisfactory method of accomplishing the desired reduction of the survival limit.
As time goes on, no doubt still other methods will be devised for reducing the survival limit for the benefit of those business enterprises that are just below the level of productivity at which they can continue operation under present conditions, and each such suggestion should be considered on its merits. As matters now stand, however, the changes in policies with respect to taxes and fixed interest financing appear to be the most desirable type 2 measures for inclusion in the initial phase of a full employment program.