All Commentary
Sunday, August 1, 1971

Buying Up Surpluses

Mr. Hagedorn is Vice-President and Chief Economist of the National Association of Man­ufacturers. This column appeared in NAM Reports, May 24, 1971.

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?

  • Mr. Hagedorn was the Vice-President and Chief Economist of the National Association of Manufacturers.