Tuesday, March 30, 2010

Own the Fed, Part XIII: Full Employment

With the end of the Second World War the triumph of Keynesian economics seemed absolute. The end of the Great Depression with the war appeared to have validated the New Deal. As a result, the transformation was complete of the American economy from the ownership-centered system epitomized by Abraham Lincoln's 1862 Homestead Act, to the near-universal wage and welfare system supported by massive government spending financed by debt-backed money created by the Federal Reserve System.

Nowhere was this new orientation more evident than with the passage of the Employment Act of 1946 (15 U.S.C. § 1021), introduced by Congressman John William Wright Patman of Texas. The Act was, in essence, another misdirected New Deal-style attempt to assign the State responsibility for every person's individual good and guarantee equality of results rather than equality of opportunity. Keynesian economics with its emphasis on full employment relies absolutely on the realignment of the Federal Reserve from an institution founded to provide the private sector with sufficient liquidity, to a vehicle for financing government deficits.

Ironically, Wright Patman was a vocal opponent of the Federal Reserve System. In a supreme political paradox, Wright Patman made a point of attacking the very institution he needed to achieve his goal. Had Wright Patman instead used his considerable influence to push for returning the Federal Reserve to its original purpose, there is every possibility that the goal of full employment would have been reached naturally, especially when adding in the later recommendations of Louis Kelso and Mortimer Adler for expanded ownership found in The Capitalist Manifesto (1958) and The New Capitalists (1961).

The statist orientation of the Employment Act is obvious. The chief purpose of the Employment Act was to vest the federal government with primary responsibility for economic stability. In the Keynesian paradigm, "economic stability" means full employment achieved through monetary policy (manipulation of interest rates and reserve requirements), and application of fiscal tools (taxation and spending) to maintain the economy in equilibrium.

This is not the place to examine the deficiencies of the Keynesian paradigm or the inadequacy of the monetary and fiscal tools used to attempt to reach and maintain equilibrium. We have already done that sufficiently in preceding postings. The question we want to address at this point is the assumption that "full employment" necessarily means employment of everyone in a wage system job, and the fact that full employment so defined cannot be attempted without massive State intervention in the economy financed by central bank monetization of government deficits.

Keynes realized that full employment as he defined it and under his assumption of the necessity of existing accumulations of savings to finance capital formation could not be achieved other than by a centrally planned and controlled economy. To do him justice, socialism was likely not a goal Keynes sought as an end in itself. Trapped by his assumptions, however, especially his dogmatic faith in existing accumulations of savings, Keynes could not see any other way to make the system work. Control of the economy was to be achieved through manipulation of money and credit. This could only be done by vesting effective ownership of the total wealth of the nation in the State, to be exercised by State control over money and credit through the central bank. (General Theory, op. cit., V.24.iii; cf. Thomas Hobbes, "Propriety of a Subject Excludes Not the Dominion of the Soveraign, But Onely of Another Subject," Leviathan, XXIV.)

The Employment Act of 1946 had its origin in the Full Employment Bill of 1945, introduced by Senator James Murray of Montana. The bill had three primary elements: 1) Every American "able to work and seeking work" is entitled to regular, full-time employment as a basic right. 2) The establishment of a central planning mechanism, the "National Production and Employment Budget," to identify potential areas in which spending and investment might be expected to fall short. 3) Federal government encouragement of private sector initiatives backed up with government money when necessary. All three elements would have put control over the private sector in the hands of the federal government.

The bill was defeated, but the problem remained. With the end of the war, unemployment was expected to soar once again as returning servicemen and women reentered the workforce. The problem was how to stimulate the economy, create jobs, and prevent another economic downturn such as had occurred after the Civil War and the First World War. The trick was to keep the economy going at wartime levels during peacetime, and somehow ensure that the presumably limited supply of investment capital (the accumulated pool of existing savings) was not diverted into speculative ventures, but directed toward genuinely productive investment.

Keynesian economics, credited with bringing the United States out of the Great Depression, was the basis for formulating an approach intended to safeguard against future economic downturns. Of the various factors contributing to swings in the business cycle, Keynes identified investment as having the most significant effect on aggregate demand.

Keynes decided that the only way to fine tune the economy and keep everything running smoothly was to increase aggregate demand by redistributing mass purchasing power by inflating the currency. This would spur additional investment, as well as provide the financing for new investment through "forced" or "involuntary" savings that shifts purchasing power from consumers to producers by increasing prices. Moulton conclusively proved this theory false in The Formation of Capital in 1935, but the New Deal and the Second World War had confirmed Keynesianism and its reliance on redistribution of existing wealth over the operation of the real bills doctrine and Say's Law of Markets as the new economic orthodoxy.

The idea is that if you need more investment to create jobs, you inflate the currency. If inflation gets too high, you either don't inflate quite so fast, or deflate the currency, with the unfortunate side effect that unemployment increases. When that happens, the government should redistribute existing wealth to make up for the jobs that are lost, either distributing welfare directly, or subsidizing job creation.

This program would be impossible without the full cooperation of the central bank operated in conformity with the tenets of the Currency School instead of principles of commercial and central banking: the Federal Reserve System. In no other way would the federal government be able to redistribute through inflation without formally abolishing private property, or by instituting confiscatory taxation based on the assumption of effective State ownership (shades of the "single tax" proposed by Henry George in Progress and Poverty, New York: The Robert Schalkenbach Foundation, 1992, 406).

Consequently, Wright Patman introduced the Full Employment Bill of 1946. The original version of the bill established a wage system job as a basic right of every American, and mandated the federal government to do everything in its considerably expanded authority to reach full employment. An important feature of the bill was to require the president of the United States to submit an annual report to Congress as a supplement to the national budget. This report, the "Economic Report of the President," would estimate the projected employment rate for the coming fiscal year. If the projected employment rate was less than the full employment rate, the bill authorized spending mandates to attain full employment.

Opposition to the bill fell into three basic categories. 1) A significant number of congressmen believed that the free enterprise system naturally included swings in the business cycle (which is true under the assumption that only existing accumulations of savings can be used to finance capital formation). Government spending to compensate for swings in the business cycle could only be justified in the most extreme cases. A few congressmen believed that a free enterprise economy would reach full employment without government intervention (yes — given the removal of barriers to full participation in the economic process, especially barriers to ownership). 2) Other congressmen believed that neither the government nor anyone else could accurately forecast unemployment. 3) At least a few congressmen were wary of the idea that the federal government could guarantee full employment. After a good deal of politicking that removed the absolute guarantee of full employment (as well as the word "full" from the title of the bill) and the mandate for spending to reach that goal, President Truman signed the Employment Act of 1946 on February 20, 1946.

Even though the Act as passed was something of a shadow of what Wright Patman intended (fortunately so, from the standpoint of fiscal responsibility and attempting to limit the State to its proper role), the Employment Act was an extremely important piece of legislation, one of the most significant legislative acts of the 20th century. The significance was twofold. One, the Act established that the federal government has power over the entire economy. Two, the government was encouraged to "promote maximum employment, production, and purchasing power." This latter laid the groundwork for a union of the public sector and the private sector that culminated in the "Great Society" programs under President Johnson in the 1960s. The Act also created the Council of Economic Advisors to assist the president in formulating economic policy, as well as the Joint Economic Committee to review economic policy.

Although the Employment Act of 1946 ended up being a set of suggestions rather than a list of mandates and guarantees, the effect was to increase the power of the federal government enormously, especially over the Federal Reserve System. The Act officially recognized the federal government as being directly in charge of national prosperity, with the tacit understanding that the Federal Reserve would be the means of financing the effort. With the passage of the Act the United States officially abandoned its commitment to promoting widespread direct ownership of the means of production.

Still, while effectively a surrender to the dogmas of Keynesian economics, the Full Employment Act was, in a manner of speaking, only a matter of form. Lincoln's original Homestead Act of 1862 addressed only a single type of productive asset, land, by its nature limited. It left untouched the growing problem of the increasing concentration of ownership of industrial and commercial capital. By the early 20th century this had become a serious problem.

In a process chronicled by one of President Theodore Roosevelt's "Trust Busters," Peter Stenger Grosscup, Judge of the United States Circuit Court of Appeals from 1899 to 1911, in a series of articles in popular magazines, (See, e.g., "How to Save the Corporation," McClure's Magazine, February 1905; "Who Shall Own America?" American Illustrated Magazine, December 1905; "The Rebirth of the Corporation," American Illustrated Magazine, June 1906; "The Corporation and the People," The Outlook, January 12, 1907.) people were losing ownership of small farms and shops at an increasing rate. They were becoming completely dependent on wage system jobs for either the greater part or the totality of their subsistence.

The Great Depression and the vastly increased demand for labor in the Second World War effectively finished off small ownership in the United States. The war spurred technological advances not even thought of in previous generations. The country achieved the only period of genuine full employment in the 20th century. The vast majority of the production was not in the form of marketable goods and services, however, but war material. Further, ownership of the means of production was concentrated in very few hands.

As we have seen, Keynesian economics assumes as a given that ownership of the means of production must be concentrated, and that the vast majority of people should not own:

I see, therefore, the rentier [small owner who lives off the income from investments] aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution. (The General Theory of Employment, Interest, and Money (1936), VI.24.ii.)
Instead, people should rely solely on wages and welfare for their consumption incomes. According to Keynes, the maldistribution of ownership of the means of production that forces people into the wage system is not only a given, but a desirable state of affairs. (John Maynard Keynes, The General Theory (1936), VI.24.i.) As he stated in The Economic Consequences of the Peace, the 1919 book that established his reputation,
The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably. (John Maynard Keynes, The Economic Consequences of the Peace (1919), 2.III.)
Consequently, the emphasis switched from making the economy productive in as efficient and cost effective manner as possible, to employing as many people as possible, whether or not their labor was actually necessary as an input to production. The Department of Labor began to assume a far greater importance than the Department of Commerce, and government policy became almost completely integrated into the wage system approach to economic growth and development.

Aside from the Dow Jones Industrial Average — a misleading and grossly inaccurate measure of economic performance — the unemployment figures became one of the most important leading economic indicators studied by academics and government policymakers. Given the reliance by the federal government, academia, and the economic establishment on unemployment data, the unemployment rate is one of the most critical of our leading economic indicators. The U. S. Department of Labor Bureau of Labor Statistics defines unemployment as a leading economic indicator in these terms: "An estimate of the number of payroll jobs at all nonfarm business establishments and government agencies. Information is also provided on the average number of hours worked per week and average hourly and weekly earnings."

According to the Bureau of Labor Statistics, the reason unemployment is such an important leading economic indicator is that the growth of employment and hours worked presumably provides important information about the current and likely future pace of overall economic growth. Trends in average hourly earnings provide information about supply and demand conditions in labor markets, which may provide signals about the overall level of resource utilization in the economy.

Obviously, using unemployment as a leading economic indicator assumes the validity of Keynes's assumption that most people can only gain income through wages and welfare, not ownership, and that a stable economy can be established by concentrating on full employment, rather than full production as was achieved in the Second World War, and on full ownership, as was the goal of the Homestead Act of 1862.

Thus we have the misguided focus on "job creation" without first asking whether the jobs are necessary. Artificial job creation is simply a complicated form of redistribution. If employers are given direct cash payments from the State, the money can only come from taxing other people directly and thereby reducing their income, or by inflating the currency by printing money, thereby reducing everyone's real income through the "hidden tax" of inflation by making each unit of currency purchase that much less. If an employer is given a tax credit, that is, a dollar-for-dollar reduction in the tax liability, that simply means other taxpayers must make up the shortfall, or the State must print more money, with the same results.

The bottom line is that, unless jobs are created naturally because the labor is needed as an input to increased production, job creation only divides up a shrinking pie into smaller and smaller pieces. Keynes's approach is ultimately self-defeating. Unless production increases, you won't need additional labor input, and real aggregate income will not increase: in accordance with Say's Law of Markets, production equals income. Instead, all you will accomplish is to redistribute what already exists.

From a theoretical standpoint, perhaps one of the biggest problems with the obsession with the unemployment rate is that it fails to take anything other than labor into account as a factor of production. Traditionally, economists have listed the factors of production as land, labor, and capital. Nowadays, many economists add entrepreneurship and "human capital." When measures of "productivity" are given, however, the role of the factors in the economy is ignored, and the statistic is given exclusively in terms of labor productivity, leaving out land, capital (human or otherwise), and entrepreneurship.

The effect of measuring productivity exclusively in terms of output per labor hour distorts the contribution by the other factors of production, and places what may be too much importance on the unemployment rate as a measure of economic growth. The approach of Louis Kelso is a more realistic — and therefore more useful — way of looking at the matter.

Kelso divided the factors of production into two, the human (labor), and the non-human (capital — including land and natural resources). Instead of measuring productivity in terms of output per labor hour, Kelso used the concept of "productiveness," that is, an expression of the pro rata contribution of each economic factor to production, as measured by the market-determined value each factor contributes to the overall production process. In contrast, "productivity" measures economic output strictly in terms of one factor (labor) alone, while treating the contribution of technology and other forms of productive capital as irrelevant for income distribution. (See Louis Kelso, Two-Factor Theory: The Economics of Reality. New York: Random House, 1967.)

In an age in which labor as a factor of production is decreasing rapidly relative to the contribution by capital, using the traditional understanding of productivity can lead to patently ridiculous conclusions. As Dr. Robert H. A. Ashford describes one such scenario,
Consider the effect on the productivity calculation when the numerator is company elevator output, or some national or other output aggregate, but the denominator is the remaining operators. When the remaining operators are the denominator, productivity is increased because the same or more service is being delivered by fewer operators and so a lower labor cost. The alleged increased productivity is, of course, ludicrous. In reality, the remaining operators are working as before delivering the identical service in the same time. They are not working any more productively. To the contrary, only capital (the automated elevators) is doing more work and, as a percentage of the input, labor is doing less. Productivity is further increased as the number of operators decreases. Productivity increases even further [with one operator]. Productivity leaps skywards with just a single part-time operator. It then goes on an astronomical rise when there is a part-time operator doing only a few minutes' work each day. With no operators, productivity has risen to infinity! (Binary Economics: The New Paradigm. Lanham, Maryland: University Press of America, 1999, 150-151.)
Emphasis on labor as the sole factor of production has the expected effect of exaggerating the importance of a wage system job, and of denigrating or even ignoring completely the importance of widespread ownership of the means of production as a necessary complement to wage income to distribute income.

This misdirection, even misunderstanding of production and distribution leads to an overemphasis on full employment of labor in wage system jobs as the goal of an economy, rather than full employment of all resources and participation in the economic process as worker, owner, and consumer.



nail-in-the-wall said...

Here is what Louis Kelso had to say about the Full Employment act of 1946, or I should say one of many, many things Kelso said about employment in the Two-Factor Theory: The Economics of Reality, with a brilliant subtitle; How to turn eighty million workers into capitalists on borrowed money;

"The marvelous success story of the Keynesian (forever trickle and Top Down) new economics is built upon the suppression and obscuring of the distinction between economic employment and non-economic employment. It measures economic performance by the degree to which the economy achieves undifferentiated full employment and annual increase...The increase may represent goods and services that are utterly useless to man; they may even consist of goods and services intended to do nothing but to kill, cripple and to squander precious natural resources in the process." ~ Louis Kelso, 1967

“The Full Employment Act is full toil and waste for all forever

Great series Michael, I trust it will be completed before the “Own the Fed.-Rally” on Tax-Slavery Day, April 15, 2010 in Washington D.C.

Expanded Capital Ownership Now - ECON 1.0

Guy Stevenson

Michael D. Greaney said...

I think this "diagnostic" portion will be completed by then, and we might even get into some of the prescriptions of what should be done to correct the situation. We do, however, need to go into greater detail that will be possible at the Fed Rally on April 15, which all are invited to attend.