Thursday, May 18, 2017

Welding Irony, I: No Need to Bring In the State


We’ll not keep you in suspense.  The rather forced pun in the title of this blog comes from the fact that the article that suggested it, “When the Welders Came to Capitol Hill” (Wall Street Journal, A19) appeared on May 15, 2017, the one hundred and twenty sixth anniversary of the issuance of Rerum Novarum, Pope Leo XIII’s encyclical “On Labor and Capital.”
Representative Tom Snozzi (D, NY)
The piece by Representative Tom Snozzi (D, NY) zeroed in on how “America needs more of them [i.e., welders] and what they represent: good jobs at good wages.”  As the Hon. Mr. Snozzi expanded on his theme,
Census data show that in 2015 there were 105 million full-time jobs in the U.S., about 59 million of which paid less than $50,000 a year.  That’s not enough to raise a family and achieve the American dream.
Mr. Snozzi appears to put the blame on “[g]lobalization and technology.”  As he said, cheaper foreign labor and displacement of domestic labor by improvements in capital “rendered [the American workers’] stable, good-paying jobs obsolete.”  His solution?
Policy experts, economists and politicians (including me) have pushed college education as the solution.  We’ve argued the more you learn, the more you earn.  Yet minting more college graduates in the STEM subjects — science, technology, engineering and math — is only half the story.  The other half ought to be creating jobs that can be filled by graduates of high schools, trade schools, community colleges and union apprenticeships.
And how to do this?  Mr. Snozzi has the answer there, too:
The policy debates in Washington — over the corporate tax, the income tax, regulatory reform, infrastructure spending — should be centered on creating positions like these.  Republicans and Democrats should pledge to work together to create and fill, by 2020, five million new jobs that pay at least $80,000 a year. . . . [Americans] don’t need a massive infrastructure plan only because America’s roads, bridges, sewers, water lines and mass transit systems are in disrepair.  Americans need these things because they will create jobs at home and rebuild the middle class.
So why is this ironic?  Wasn’t it published on the anniversary of Rerum Novarum, the encyclical on the living or just wage, and that called for massive State intervention in the economy?
Pope Leo XIII
Not exactly.  An objective reading of Rerum Novarum reveals something very odd.  For example, regarding government intervention to create jobs or guarantee life’s necessities or anything else, right up front we read, “There is no need to bring in the State. Man precedes the State, and possesses, prior to the formation of any State, the right of providing for the substance of his body.” (§ 7.)
Now, admittedly, barely two years after Rerum Novarum the Panic of 1893 and the Great Depression of 1893-1898 hit the United States.  The Panic and the subsequent economic downturn were triggered and exacerbated by an inadequate banking system and an inelastic, debt-backed reserve currency — but that is a discussion for another day.  Our concern today is the remedy proposed by Jacob Coxey of “Coxey’s Army” fame and others: increase government debt to inflate the currency and finance public works to create jobs.
Twenty years before the U.S. government had done nothing to alleviate the effects of the Panic of 1873 and the Great Depression of 1873-1878 except restore a sound currency.  While the reserve currency (the National Bank Notes) was inelastic and debt backed, parity with the gold currency had finally been restored along with convertibility; the paper dollar and the gold dollar had the same value.
What brought the country out of the depression was bumper crops of cotton and wheat in the U.S. and the failure of the cotton crop in India and inadequate wheat harvests in Europe.  U.S. farmers had a market for everything they could produce.
"The Great Commoner," William Jennings Bryan
Nor did the government do anything during the Great Depression of 1893 to 1898 except start discussions on the need for monetary reform . . . which were derailed by William Jennings Bryan’s making “the Silver Question” the issue of the day.  What brought the country out of the depression was a repeat of 1878: bumper crops of wheat in 1897 and 1898 (the boll weevil was making inroads on cotton at this time) and failure of the wheat crop in Europe.  Once again U.S. farmers had a market for everything they could produce.
The push for monetary reform did not get under way until the man-made Panic of 1907, “the Bankers’ Panic,” revealed the deep flaws in a financial system without a central bank and saddled with an inelastic, debt backed reserve currency.  Enslaved by past savings, the currency was faced with supporting future growth, which is unsustainable in the long run — but, again, a topic for another day.
It wasn’t until the Great Depression of 1930 to 1940 following the Crash of 1929 that programs like those Mr. Snozzi recommends were put in place.  The New Deal was, to all intents and purposes, what Jacob Coxey had proposed in 1894: debauch the currency and issue government debt to finance job creation to rebuild infrastructure.
President Franklin Delano Roosevelt
The results of John Maynard Keynes's and Franklin Delano Roosevelt's New Deal are revealing.  In the 1870s and 1890s the government did nothing except restore or maintain a sound currency.  There were problems with it, of course, but nothing that was not fixed with the Federal Reserve Act of 1913 and the Sixteenth Amendment (yet another subject for another day: why a central bank and an income tax — although certainly not the way they are being used today — are essential and necessarily go together in a modern economy).  In both cases, the country brought itself out of the depression in five years due to increased production and a market for what was produced.
In contrast, the Great Depression of the 1930s lasted a decade — and included a “depression within the depression” — as a result of the artificial stimulation of demand by inflating the currency and increasing government debt.  The U.S. only pulled out of the depression when the country started gearing up for war and the government was buying everything that could be produced.
Thus, while we assume that Mr. Snozzi is well-intentioned, he is proposing a State-driven artificial solution that has been proven not to work, and ignoring a natural one that has worked at least twice in the last 150 years: Let the State provide equality of means and opportunity, while people meet their own needs.
Monday we’ll take a look at why Mr. Snozzi’s proposal is wrongheaded and won’t work.
#30#

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