Freeman

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A Reviewer's Notebook: Out of Work

The best thing for government to do in dealing with unemployment is to leave it alone.

MARCH 01, 1993 by JOHN CHAMBERLAIN

After last fall’s election George Bush said he beat himself. But history asks of Bush no such abasement. History tells us that when unemployment is high, presidential incumbents always lose.

In a fantastically detailed book called Out of Work: Unemployment and Government in Twentieth-Century America (New York: Independent Institute, Holmes and Meier, foreword by Martin Bronfenbrenner, 326 pages, $27.95 hardcover, $16.95 paperback), Richard Vodder and Lowell Gallaway controvert Bush’s assessment. I’ll take Vedder’s and Gallaway’s word for it. They seem to know every bit of evidence about unemployment going well back into the nineteenth century. Their conclusion is that government action aimed at eliminating unemployment of more than seven percent defeats itself. The best way, they say, to reduce unemployment is to do nothing.

In 1929, when Herbert Hoover was running things, we had an activist who had fed the Belgians and Russians. He thought he knew everything about stabilizing markets by government interference. The word that went out from the White House was that money wages should not be cut. High wages would maintain purchasing power. The purchasing power fetish, with Hoover’s sanction, became the orthodoxy of the time. When Franklin Roosevelt took over, he saw no reason to change things. After all, he had been an activist too.

Simply put, this meant that there was a bottom rigidity to a key factor of production. The free market was not allowed to work.

To force things, deficit financing was resorted to in various combinations. The National Industrial Recovery Act set prices under the so-called Blue Eagle until the Supreme Court invalidated it, but this was by no means the end of the high-wage story. The Wagner Act, the Social Security Act, the Fair Labor Standards Act, all contributed to maintaining high labor costs. The Smoot-Hawley tariff added a protectionist bias that provoked foreign retaliation. American employers went along with Franklin Roosevelt (Ford and Thomas Edison were with them), but only up to a point. When a person could not earn the minimum wage he was understandably jettisoned.

Quoting from a National Review summary of their book, Vedder and Gallaway say that “market forces tend to end recessions naturally by forcing a fall in the adjusted real wage . . . .” The 1920-21 recession, infinitely worse at the outset than the Great Depression, dissipated itself within a year under “do nothing Presidents” (Woodrow Wilson was too seriously ill to pursue his natural inclinations, and Warren Harding wasn’t interested).

The Great Depression, by contrast to that of 1920-21, got worse after continual market meddling. More recently, the 1982 recession lasted only about a year, with no special attempt on the part of the Reagan administration to end it. As labor markets softened, real wages fell.

Vedder and Gallaway take four vivid impressions from reading American macroeconomic history. One is that the worker needs prosperous capitalists to provide for job opportunities. The second is that government efforts to reduce unemployment must worsen the problem. The third is that long-term improvement in living standards requires improvements in productivity, better understood by reading Adam Smith than John Maynard Keynes. The fourth impression is that “experts” are dangerous and should be listened to skeptically. Being “kinder and gentler” by approving a morass of new environmental, civil rights, minimum wage, and other legislations has hurt American workers. The “experts” are to blame.

As they keep reiterating, Vedder and Gallaway are bent on keeping government out of it. They pound this in: the best thing to do in dealing with unemployment is to leave it alone.

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March 1993

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