Economic Policy and the Demands of Labor

...In the three years from 1964 to 1966 inclusive, GNP grew at the extremely vigorous rate of about 5.5 per cent a year, and the rate of unemployment dropped from 5.2 per cent to 3.8 per cent...

...it provides an important rationale for policies to curb excessive profits...

...The full employment and steady economic growth which can provide such benefits is not likely to be achieved, however, without further institutional changes—without more adequate longrange planning techniques which maintain a viable balance between investment and other demand sectors and anticipate and prepare in advance to meet the needs for skilled manpower and other resources which require a long lead-time to produce...

...These and a host of other selective measures make it unnecessary for the nation to rely upon a reservoir of jobless human beings as a means of combating inflation...

...When they rise that rapidly, not even a 5 per cent increase—the increase which the Machinists succeeded in winning last year and which many regarded as outrageously high—will yield the 3.2 per cent increase in purchasing power which presumably the guideposts would provide...

...Moreover, aside from a few verbal appeals, it did nothing to reduce prices—not just to roll back proposed increases—in industries which enjoyed rapidly advancing productivity (reductions called for by the guide posts in order to offset rising prices in a number of low-productivity industries and achieve overall price stability...

...Subsequently, President Johnson ordered such expenditures pruned even further...

...Michael Harrington points out: "It's possible for Washington to stimulate the economy by favoring the corporate rich—and it's possible to stimulate the economy by solving the social problems and fulfilling the economic needs of the vast majority...

...Under the circumstances, it appears that America's disadvantaged will continue to receive "small payments on large promissory notes" and that the Great Society will continue to be more myth than reality for a long time to come...

...Nevertheless, there is good reason to believe that, given certain institutional changes, full employment can be made reasonably compatible with relative price stability and that such compatibility can be achieved without imposing an inequitable burden upon those who can least afford it...

...We are moving more and more into sharp and raw confrontations...

...This is the tragic consequence of one of the most serious miscalculations in our history...

...it encourages a steadier and more sustainable pace of investment in modern machinery...

...without greater Presidential discretionary authority over fiscal policy...

...And, in its Economic Report in January of this year, it looked forward to a rate of economic growth of no more than 4 per cent in 1967, a rate which, at best, could only maintain unemployment at exist ing levels...

...A number of proposals have been made to close this escape route from social responsibility...

...In its 1964 Economic Report the Council of Economic Advisers stated, "The guideposts called for [price] reductions in those industries whose trend productivity gains exceed the national trend...

...They have not shared equitably in the gains made possible by increasing productivity during recent years—not even by the Administration's guidepost standards...

...Steady growth at full employment levels reduces the ratchet effect which occurs when prices shoot up during periods of recovery and remain rigid during periods of stagnation...

...Discretionary increases in federal civilian expenditures," says Heller, were "dwarfed" by the tax cut...

...The disparities have been so striking that Gardner Ackley, Chairman of the Council of Economic Advisers, felt compelled to warn a Chamber of Commerce audience last May that "now that profits after taxes...

...In a year in which gross national product rose by 5.4 per cent, the real buying power of the average factory worker's weekly take-home pay actually declined...

...This shift of billions of dollars from "public to private sav ings" was offset, in part, by a $3 billion payroll tax increase—a form of taxation which imposes a dispropor tionate burden on lower incomes...

...The "major form of dividend," Heller pointed out, was a tax cut of $19 billion—a cut which included $3 billion in special investment incentives and an additional $3 billion in corporate income tax reductions (and, according to estimates made by others, a similar amount in income tax reductions for persons in upper-income brackets...

...In fact," it says, "profit margins not only should be lower than in the boom phase of a cyclical economy but should be reduced on the average because operations in such an environment carry lesser risk...

...Despite the conservative nature of such measures, the economy responded well in overall terms...

...and without an end to the senseless dichotomy between monetary and fiscal policy-making which now prevails...

...Wouldn't a 4 per cent rate of growth in GNP, an Administration goal which understates the economy's potential for growth at full employ ment, stunt the growth of the fiscal dividend required to eliminate poverty in a tolerable period of time...

...They include: 1. Tripartite efforts to reduce price pressures in critical sectors of the economy such as construction, transportation, and medical care via greater research and development, improvements in training programs, better vesting provisions to encourage greater labor mobility, reductions in seasonal fluctuations, and other devices...

...From 1960 to 1965 the real hourly compensation of all employees in the private economy (including salaried employees, including fringe benefits, including employer contributions for social insurance, and even before the deduction of taxes) went up 2.6 per cent, not 3.2 per cent, as they would have, had the guideposts for prices and wages been fully implemented...

...The wage guideposts tied increases in compensation to trend increases in productivity without any allowance for higher living costs...

...We need, as Harrington says, "to stimulate the economy by solving the social problems and fulfilling the economic needs of the vast majority...

...As the AFL-CIO and others have argued, the wage-price guideposts, the government's major inflation weapon until 1965, was inequitable in its formulation and proved inequitable in practice as well...

...In spite of a lengthened workweek, the weekly take-home pay of a factory worker with three dependents, after taxes and after adjusting for price changes, dropped three-tenths of one per cent in 1966...

...Another proposal would create a special government agency with the continuing function of providing information concerning price, wage, and productivity developments in specific industries, and of calling attention to situations in which price reductions were justifiable...

...For one thing, the Administration's determination to push toward genuine full employment waned quickly...

...In manufacturing, the corresponding real increases were even less...

...This is one measure of how workers have been short-changed in recent years and it helps to explain why they are now determined to obtain some perceptible improvement in their own standard of living when the rest of the nation is moving ahead, and why wage settlements this year are likely to be higher than they have been in the past...

...Moreover, in view of the change in the Washington poli tical climate, even the President's modest proposals remain in doubt...

...There is no evidence that the guideposts had an equal effect upon prices...

...5. More encouragement and aid for consumer cooperatives and consumer action groups...

...The Council of Economic Advisers wel comed the slowdown in growth during the spring and summer of 1966 even though it meant no further decline in unemployment...

...By downgrading social priorities, the monetary policies of the Federal Reserve Board and the wage policies pursued by the Administration last year have preserved the symmetry of the measures adopted to achieve both economic expansion and economic restraint...

...The latter can only become a reality if the measures adopted to achieve both economic stimulus and restraint give top billing to the nation's real social priorities...

...A plausible argument might have been made for the thesis that a 5.5 per cent rate of real growth, the average rate of the past three years, was undesirable in 1967 because it could be achieved only with an excessive rise in prices...

...Enormous benefits have been granted to corporations and to individuals in the upper-income brackets through accelerated depreciation allowances, special tax credits for investment, and corporate and personal income tax cuts...

...One might have argued convincingly instead for a rate of growth which continued to whittle away at unemployment at a somewhat slower pace...

...When prices rise as they did last year at the rate of 2.9 per cent, a 3.2 per cent increase in money terms leaves a worker with only a 0.3 per cent increase in purchasing power...

...The formula devised by the Council in effect compelled labor to pay for the failure of business to abide by the guideposts...

...Even more striking are the figures which show how badly production workers alone fared...

...Professor Otto Eckstein told a meeting of the American Economic Association last December, it is striking that every econometric wage equation devised by scholars sofar—and this now includes at least half-a-dozen studies embodying different product and labor market variables—substantially over-predicts the rate of wage increase in the last severalyears...

...The real cost of the escalation of the war in Vietnam is not measured in dollars and cents...

...What's more, the Administration sought to achieve its aim in part by curbing the growth of demand in areas of the greatest social priority— the very areas which had been shortchanged when expansionary measures were being adopted...

...How to do this is far less of a problem, I am convinced, than the willing Hess to do it...

...Furthermore, in the absence of the kind of organized political pressures referred to earlier, future economic stimuli are more likely to take the form of tax cuts which give only minimal and indirect aid to the millions still living in poverty, rather than the kind of massive expenditures called for by the Randolph Freedom Budget...

...it avoids the increases in unit costs which put pressure on prices at low levels of utilization...

...However, there is a real question as to whether the technique used to achieve the "Johnson consensus" would prove as successful if the war in Vietnam ended tomorrow or whether it would have held up even if we had not become so deeply involved in Vietnam in the first place...

...are provid ing the highest sustained rate of re turn on owner's equity in our modern history, it is time to ask whether a further rise in the share of profits in the national income is in the interest either of the health of the nation's economy or in the interest of business itself...

...are inappropriate...

...It is fair to say that large industrial enterprises thus far have not widely heeded this advice...

...Other positive and constructive ways of reconciling full employment and price stability have also been suggested...

...It is true that the Administration succeeded in rolling back a few proposed price increases, but it failed to prevent many others from exceeding the guideposts...

...As a result, the distribution of income has grown more unequal...

...4. Elimination of state fair-trade laws which permit manufacturers to dic rate the minimum prices at which retailers can sell their products...

...Would the trickle-down approach of stimulating the economy by tax cuts to the well-to-do and using part of the resulting fiscal dividend for "small payments on large promissory notes" really be enough to resolve the "conflicts between labor and capital and between the races" indefinitely...

...With regard to the latter, the Council of Economic Advisers points out that in a steadily expanding economy "the profit margins which were feasible only in the boom stage of a boom-or-bust economy...

...III A few months ago Walter Lippman, describing the basis of the "Johnson consensus" under which "the conflicts between labor and capital and between the races were assuaged and tranquilized," declared: During President Johnson's honeymoon period—say up to the spring of 1965—a comparatively small war in Vietnam and the small beginnings of the war against poverty were paid for easily out of the revenues of our expanding economy...

...In spite of their obvious unfairness in equating money wage increases with real increases in productivity and ignoring or minimizing factors other than productivity which are relevant to the determination of wages, the guideposts succeeded in depressing wage increases significantly below what they had been in similar periods in the past...

...In the process, ironically, it contributed significantly to the increase in the consumer price index which occurred last year...

...they were 2.2 per cent annually during 1960 to 1965 and only 1.9 per cent last year...

...Given their magnitude, however, the proposed increases offer little hope for significant progress...

...It's more likely that billions of dollars of the most vitally needed goods and services and hundreds and thousands of badly-needed jobs will be sacrificed on the altar of price stability...

...it is the lack of massive, organized pressure to implement such ideas boldly and fully...

...The need for giving major recognition to social priorities in applying measures of restraint is equally obvious...

...And in 1966, this all-inclusive measure of real hourly compensation of all employees rose only 2.9 per cent...

...Some three years later, the advice still remained widely unheeded...

...The Tax reduction of $19 billion was less than two-thirds of the $32 billion increase in federal expenditures during the period...

...2. Government stockpiling of key materials for price stabilization as well as for defense purposes...

...Furthermore, can any Administration which stops short of realizing the economy's full potential because of the fear of inflation avoid "sharp and raw confrontations" even in peacetime...

...The Board pushed interest rates up to their highest level in 40 years, brought on a recession in housing, and forced a number of local government agencies to abandon their plans to build schools, hospitals, and other badly needed public facilities...

...For all practical purposes, the Administration had decided to call a moratorium on further reduction in unemployment...

...This was the estimated amount by which federal revenues would have exceeded federal expenditures under conditions of high employment and rapid growth if no changes in tax or spending policy had occurred...

...In contract construction, the sector in which wage increases appear to be shockingly large to some people, the increase in the buying power of weekly take-home pay was less than 1 per cent last year...

...One such proposal would establish a price review board which would impose no mandatory controls but would require advance notice of price increases contemplated by dominant firms in key industries and make public its findings concerning the justification of such proposed increases...

...For the most part, the expansionary measures adopted by the Kennedy and Johnson Administrations have been of the former kind...

...In fact, one may be justified in viewing with some degree of skepticism the possibility of restoring and sustaining a "Johnson consensus" even in an America without war...

...For the fiscal year 1967 Congress appropriated approximately $1 billion less than it had previously authorized for Great Society programs...

...Often overlooked is the fact that an economy which achieves full employment and grows steadily thereafter at a rate corresponding to its potential, generates certain anti-inflationary forces of its own...

...Thus the poor were provided with tangible small payments on large promissory notes, and this gave them hope and patience...

...1I For the coming fiscal year, the Administration has proposed modest increases in Great Society expenditures...

...Most economists are now quite ready to admit that our kind of economy can avoid depressions permanently and a number are even willing to argue—in spite of an impending downturn—that recessions are neither inherent nor inevitable in a mixed, though essentially capitalist, economy...

...Unfortunately, there is little basis for believing that this Administration, or any other likely to succeed it in the near future, will adopt such measures to curb inflation while seeking to operate the economy at full blast...

...And at this point, following the pattern of the Eisenhower Administration, the Johnson Administration responded with measures of restraint which, like the expansionary measures preceding them, showed little regard for the nation's major social priorities...

...At the same time, the well-to-do and the rich never had it so good and in addition they had a fairly substantial hope that they might be given another tax cut with still better things to come...

...However, as Heller, himself one of the chief architects of this program, observed, most of the spending increases went for defense and space purchases and for "automatic increases in interest, social security benefits and grants-in-aid...

...When prices rise, a 3.2 per cent increase in money terms is not 3.2 per cent in real terms...

...But it has been a limited revolution, a conservative and, in a sense, even a reactionary one in terms of the measures used to achieve both economic expansion and restraint...

...What is striking is not that the rate of wage increase was lower than in the mid- or early 1950s, but that the rate of wage increase was lower by over 2 per cent a year than the equations based on the postwar relationships would have predicted...

...Emphasis added...

...For the six years 1961 to 1966 as a whole, the total compensation of all employees in the private economy fell more than $50 billion— more than $8 billion per year—short of the amount it would have been if the incomes of all employees had risen sufficiently to provide them with a real hourly increase of 3.2 per cent a year, the increase required under the guidepost formula to maintain the proportionate shares of labor and nonlabor income...

...Would a continuing shift in income shares in favor of incomes from property and against income from labor be acceptable even in the face of an absolute increase in labor income...

...This is what happened to labor income in a period of expanding economic activity...

...3. Additional government yardstick undertakings similar to the TVA in sectors of the economy under oligopoly control...

...The priority that the Administration accorded to price stability and to improvement in the balance of payments, however, was so overriding that it was willing to call a complete halt, for an indefinite period of time, to any further reduction in unemployment, precisely when tighter labor markets were beginning to open up job opportunities for the most disadvantaged Americans...

...The nation's wage policy was equally misguided...

...Where competition does not exist, justifiable wage increases and taxes upon employers to pay for social legislation have too often been passed along to the public via higher prices...

...Wouldn't an overall rate of unemployment of 4 per cent, a rate substantially higher than any reasonable definition of full employment in the U.S., mean the continuation for a long time to come of depression-like levels of unemployment for Negro youth and others...

...As a result, workers have been shortchanged...

...Walter Heller, former chairman of the Council of Economic Advisers, has described how "the federal government deployed $48 billion of fiscal dividends (at annual rates) between the second half of 1960 and the second half of 1965...

...Corporate profits after taxes, on the other hand, have risen almost twice as fast as Gross National Product and about twice as fast as the compensation of all employees...

...Ackley knew, of course, that excessive profit could lead to an excessive and unsustainable volume of investment and to inflationary pressures in the capital-goods sector...

...The misdirection of resources resulting from the war and its social consequences are indeed tragic...

...The great problem in America is not a lack of constructive ideas for attacking poverty and meeting the needs for public facilities and services...

...In any case, whatever its political consequences, the formula for achieving a "Johnson consensus" is clearly not the formula for achieving a truly great society as rapidly as the nation's resources permit...

...Nothing, however, has happened in the postwar period to indicate that capitalist economies, even in modified form, have the capacity not just to avoid economic downturns but to bring actual output up to potential output, to keep it there, and to achieve, at the same time, a generally acceptable degree of price stability and a distribution of income which is not, to use Oscar Gass's phrase, "against good conscience...

...He knew, moreover, that no self-respecting trade union could allow itself to be straitjacketed while no controls were imposed upon executive salaries, professional fees, dividends or interest, and while profits were soaring beyond the wildest dreams of businessmen...

...The real cost is that the surpluses of an expanding economy have been swallowed up and this has removed the lubricants and the cushions against the conflicts of interests and the rivalry of ideologies...

...As the unemployment rate approached 4 per cent, however, inflationary pressures began to mount...

...They also make it unnecessary to demand that workers settle for less than a fair share of the gains of advancing productivity (as the Council of Economic Advisers has done, first, by refusing to adjust its wage guideposts for changes in the cost of living and, more recently, by opposing the spread of escalator clauses in forthcoming negotiations...

...As a result, as long as there was any increase in prices, workers would be short-changed if they accepted an increase in compensation equal in money terms only to the guideline productivity figure...

...In addition to such basic changes in policy-making machinery, the nation needs more effective machinery for dealing with price problems in highly concentrated industries...

...A revolution in economic policy-making has taken place...

...There is less certainty and agreement even among liberal economists about how to restrain inflationary pressures without sacrificing the goal of full employment or resorting to onesded wage restraints and reductions in public expenditures...