Unemployment, Unions and Inflation: Of Causation and Necessity

At a meeting of the Mont Pelerin Society a few years ago, a controversy arose over the inflationary role, if any, of unions. Among the celebrated free-market economists present, all members of the Society founded by Friedrich Hayek shortly after World War II, Milton Friedman led a group which contended that since inflation is strictly a monetary phenomenon, and since unions do not control the money or credit supply, there can be no sense in accusing the union leaders of bringing about inflation, no matter what other sins they might be guilty of. Lawrence Fertig took the other side, with an assist from the English economists present, who pointed out that unions, especially in England, are considerably more than merely worker-representatives in disputes with employers, and that they have a great deal of influence one way or another, directly or indirectly, over the monetary policies of government.

I contend here that Mr. Fertig and the Englishmen were correct — in fact far more correct than they themselves believed. I will show that unions not only can bring about inflation, but that they absolutely must do so in order to survive in the present context of policy and law, at least in the United States, if not everywhere in the western world.

Admittedly, unions alone cannot cause inflation, and if unions disbanded, inflation might still occur. Nevertheless, I will show that right here and now — current national labor policy being what it is — unions are driven by the instinct of self-preservation to join with other forces to bring about inflation and that, moreover, they rank today among the most powerful and pervasive of all the inflationary agencies in the country.

In a different setting, some other impulse may take over the inflationary role that circumstance, policy, and law presently assign to unions. For so long as we have fiat money and legal-tender laws we shall have inflation. Politicians and bureaucrats, in office or aspiring, will never be able to resist the temptations extended by the exciting possibilities inherent in what amounts to a license to engage in counterfeiting. Who could?

But while another agency may in another time provide the impetus — or flick the inflationary switch — unions at present fill the role. They constitute the pre-eminent political pressure group in the country, and all their pressures coalesce to produce conditions in which the inflationary measures so congenial to power-hungry bureaucrats and demagogic politicians become politically propitious if not mandatory.

Some define "inflation" as a general increase in price levels, others as any increase in the money supply, whether or not such an increase results in generally higher prices. Let us call the first usage "price-inflationism" and the second "money-inflationism."

In this paper I adopt the "money-inflationist" definition, and I do so because it advances and clarifies analysis — a plenty good reason for preferring one definition over another — while the price-inflationist usage fails to do so, or to do so as well. Thus a price-inflationist is likely to believe that he has exhausted inquiry when he discovers (if he ever does) that a necessary pre-condition to a rise in the general level of prices is an increase in the quantity of money (in the broad sense) greater than the concurrent increase in productivity. He is likely to announce that the cause of inflation has been located and that the cure lies simply in keeping the money machine from cranking out excessive increases in the money supply.

There is a fine and perhaps even appealing technical rigor to the analysis, but it is nevertheless seriously deficient, and if one adopts the money-inflationist definition, this deficiency appears immediately. Whereas the price-inflationist may say that inflation is caused by an abnormal increase in the money supply, the money-inflationist says that inflation is an abnormal increase in the money supply. Thus, whereas the price-inflationist’s causal search ends quickly, the money-inflationist’s only begins with his definition. The price-inflationist stops thinking when he concludes that abnormal increases in the money supply cause prices to rise generally. The money-inflationist, on the contrary, is compelled to begin thinking at the point where the price-inflationist stops.

The money-inflationist must ask himself: what is it that induces a nation to want — or even merely to accept — a policy of deliberately tampering with the quantity and hence the objective exchange value of money (in the broad sense which includes all fiduciary media)? Surely the laws against counterfeiting bespeak a general understanding among the citizenry of the seriousness of counterfeiting as a species of theft. Consider the comments of Tom Buell, the Tory counterfeiter, in Kenneth Roberts’ novel, Oliver Wiswell, written about the Revolutionary War from the point of view of American loyalists. Completely contemptuous of the rebels and of the mob rule and demagogy favored by many of them, Buell sneered at the near-worthlessness of their fiat currency and considered the dollar bills he produced on his own press in every significant respect as good as those which Congress forced people to accept as legal tender. Said Buell of the Continental forty-dollar bill:

That’s all it’s worth now…. That’s all it’ll ever be worth, after a few more people find out what it’s worth, meaning nothing. My forty-dollar bills are just as good as Congress’ forty-dollar bills, neither me nor Congress having anything to make ‘em good with, so I got just as much right to issue ‘em as Congress has. The rebels called themselves a government, didn’t they, even though you and I and a million other Americans didn’t want ‘em to do it, and knew they hadn’t any business to? All right: I’m a government, too, Oliver! I’m the government of New India, up on Passamaquoddy Bay! This money of mine, it’s the legal currency of New India, and I raised it by taxing myself. If I was a private individual, I’d be more careful; but being as I’m a government, I’m privileged to make a God-damned fool of myself in any way I choose, especially by spending a lot more money than I’ve got or ever will have, and promising to do things that I ain’t got a chance of doing.

Neither politicians, nor bureaucrats, nor citizens are about to accept Buell’s position and allow free printing of dollar bills. While that much is obvious, its implications and the questions they raise are not. Why do we all approve of the laws prohibiting counterfeiting while the vast majority of Americans — including distinguished economists — continue to approve the activities of the Federal Reserve Board, even though, from the point of view of economic law, there is no difference between an increase in the monetary supply brought about by discreet counterfeiting and one brought about by the Federal Reserve Board. (I would go further and say there is no difference from the point of view of sound law, either, but that is another subject.)

If, when I flick the switch, the light goes on, is it not meaningful and, in a certain sense at least, correct to say that I have caused the light to go on? I have not been the sole and sufficient cause; there have been many others: the architect, the building-contractor, the electrician, the scientists who learned something about the natural forces which we call electrical, the natural forces themselves, and on and on to the impenetrable and inexplicable mystery which the ancients called the unmoved mover.

Yet it remains true that I have been the specific cause in the particular case. For despite their significance and the indispensable character of their contributions, the other elements in the causal chain did not produce the result; but for my willed and deliberate action the light would not have come on. I, therefore, have been the cause that matters; they, relative to me, have been only the conditions within which my causal impulse has been operative.

In the same way, unions are among the causes that matter in producing inflation. To repeat, if we were to abandon fiat-money policies, unions could not bring about inflation; but then nothing else could, either — except reinstatement of the fiat-money system. In the kind of fiat-money system we have, the Federal Reserve Board, the printers it employs, the paper manufacturers, and the other means by which it transmits its money-and-credit increasing policies — they all occupy the same position that the architects, electricians, natural laws, and so forth occupy in the production of light when the switch is flicked.

Let us call them conditions in which causes may be operative, rather than causes themselves. The term "cause" we shall reserve for teleological agents — persons who bring about certain results because those results are congruent with or necessary to their purposes.

Instead of stopping with the Federal Reserve Board and its quasi-counterfeiting capacities, then, we must ask: who or what turns the Federal Reserve Board on? When we have answered that question we shall have fixed responsibility for the inflation we are suffering now.

The ultimate cause — the prime mover — is, speaking comprehensively, the desire to have a booming economy, in which there are high wages, high profits, and no unemployment, combined with the belief that poverty and unemployment must be combated by easy money, or by deficit spending which amounts to the same thing.

To sum up the discussion thus far: in the fiat-money system now operative in the United States, increases in the money supply may be the immediate "material cause" of inflation, but the ultimate causes lie in those agencies whose activities bring about states of affairs which prevailing opinion believes can be cured only or best by inflationary increases in the money supply.

This is not the place for a detailed description of the many ways in which prevailing law and policy create in unions the power to secure for their members wages and other labor returns higher than those which would prevail in free labor markets. A brief account of two of the most significant features will have to suffice as illustrations.

The first and in my opinion the most significant source of monopolistic union power derives from the virtually universal failure of governments in the United States to prevent unionists from violently excluding competitive workers. A great deal of nonsense is heard on this subject. It has been fashionable, for example, to say that "labor violence" is now a thing of the past, and that such violence as existed in the past was mainly the doing of vicious anti-union employers. Both assertions are sheer fabrications.

There is at least as much violence going on now in labor relations as there ever has been, maybe more — and this in spite of the fact that relatively few employers, having learned the sad lessons of the past, dare come to a confrontation by operating plants during strikes. If they do, you can win money betting that there will be violent attempts by the strikers to keep the plants from operating. And in the past, exactly as now, the aggressors have always been the strikers and their union leaders. Consider the fate of the "liberal," pro-union, pro-collective bargaining Washington Post in its recent dispute with its printers.

Such occasional employer violence as has existed has always been in the nature of self-defense, a fact which emerges from even the many biased histories of labor violence, if closely read. For the authors of such works are really saying that employers are in the wrong when they "provoke" union violence by rejecting demands for a "living wage," or when they hire private police to protect their plants against violent strike aggression.

Employers would be guilty of the aggressive kinds of violence common to unions only if they went forward violently to compel strikers to return to work. This they have never done, and have never even been accused of doing.

As exclusive bargaining representative, the union is, so long as it retains such status (an important qualification, as we shall see), what may be called an intra-unit monopolist. It is the only agency that the employer may legally deal with over wages, hours, and other terms and conditions of employment. The employer may not even discuss with dissident employees in the unit any subject which comes within the legally mandatory bargaining range.

If the collective bargaining comes to a bona-fide "impasse" (a literally indefinable condition) the employer is privileged technically to offer directly to the employees the same wages and other terms and conditions which the union has rejected, but if he departs from them at all he is certain to be held guilty of an unfair practice and ordered to resume bargaining with the union. Probably other more or less serious penalties will be imposed.

If he is guilty of no unfair practice during or after the impasse, he is privileged to lock out the unionists, and they are privileged to strike. However, if there is a strike, and if the employer attempts to keep the business going during the strike by offering striker-replacements terms of employment which the union has rejected, in 99 cases out of a hundred there will be vandalism and violence —which the police will in more cases than not be either unwilling or unable to prevent or control.

Of the numerous cases I have read about or observed first hand, I can say with confidence that in not a single one has a resisted strike been free of violence and intimidation, overt or covert. By necessary inference, the terms and conditions of employment negotiated under the regime of the exclusive representation principle, complemented by the virtual legitimization of union violence in bargaining impasses, must therefore be regarded as containing a monopoly premium. Labor costs under such a system must be higher than they would be in freely competitive labor markets.

Collective bargaining must not only produce a monopoly premium in the form of labor returns higher than those which would have been forthcoming from individual bargaining. Much more importantly, from the point of view of the union leadership, the existing union members must be convinced that they have made such a monopoly gain. Otherwise they will leave the union, and the union leadership would, by virtue of the laws which gave it to them, lose their status and power.

Hence union leaders under current labor law and policy are driven to a never-ending career of monopolistic wage-setting. This is another way of saying that they are doomed eternally to use every political, economic, and physical measure available which will tend to (a) produce as many employment opportunities for their members as possible and (b) to eliminate as many contenders for those employment opportunities as possible. Like all monopolists, unions must be interested equally in the shape of their demand and supply curves.

Besides their vital interest in eliminating as much competitive labor as possible and expanding job opportunities to the greatest possible extent for their own members, union leaders are driven by one more unremitting goad: they must keep alive the destructive myths and superstitions upon which class-warfare thrives.

If the union leaders for one moment admitted to their members the obvious truth that employers and employees are bound together by the strongest bonds of mutual and reciprocal self-interest known to mankind — perhaps exceeding even the family bond — the party would be over as far as the union leaders were concerned. They might continue to exist in certain special cases, but as founts of the kind of glory, power, opulence, and influence which they now enjoy, they would be ciphers.

Once employees learned that they have deeper and more permanent common interests with their employers than they do with their union leaders, unions as we now know them would be no more. Hence, the third of the ineluctable necessities which account for the inflationary activities of unions is the necessity to discredit and to undercut the business community and to deride the rights and privileges indispensable to the survival of the enterprise system.

A standard economic analysis holds that unions cannot be responsible for inflation because if they push labor costs and hence prices above market levels in the sectors where they have monopoly power, the ensuing unemployment, owing to labor mobility, tends to push wages and hence prices down in the competitive sectors. Thus no general increase in wages and prices (and no "inflation" as that term is often defined) occurs. As Albert Rees put it, unionism "alters the wage structure in a way that impedes the growth of employment in sectors of the economy where productivity and income are naturally high and that leaves too much labor in low-income sectors of the economy."

All right as far as it goes, the analysis does not go far enough. The economics are sound, but the more significant political analysis is nonexistent. Unions are not content to let the unhampered market take care of the unemployment they have created. They are not content to do so because they cannot afford to do so. Experience and common-sense economics have taught them that their positions are fatally threatened whenever and wherever they leave labor markets free.

Unions cannot afford to have vast numbers of unemployed overhanging the labor market, even if they are able to erect impenetrable monopolistic walls around the sectors of the labor market that they wish to control. The free enterprise system is too flexible, too resilient, too adaptable, too mobile. If they leave freedom anywhere, the stultified, monopolized areas will soon die, as the textile industry has died in New England only to emerge more productive than ever in the still nonunion South. The only way they can retain their monopolies, the union leaders have found, is by destroying these characteristics of the system, and hence the system itself. Never take the anti-communist, anti-fascist protestations of the union leaders and their economic advisers and apologists seriously. They may not know what kind of a system they are building, but disinterested observation should certainly be able to see how their efforts, intentionally or not, are destroying the enterprise system.

What has to be grasped here is that if unions do not in one way or another either exclude people entirely from labor markets or bribe them to quit looking for work, the enterprise system is bound to put them to work, provided the private sector is allowed to retain some of the capital it creates. One might think that unions would find it desirable to promote all political measures designed to provide ever-increasing private-sector employment: reduction of corporate taxes, elimination of capital-gains taxes, allowance of realistic accounting, removal of nonsensical and debilitating regulatory schemes, and so on. The only possible reason for their thus far successful opposition to such obviously beneficial policies is that they cannot afford to either let the enterprise system run loose or admit that capitalists and entrepreneurs are by far the best if not indeed the only members of society who can be called uniquely consumer-servants. If they allowed the enterprise system to run loose, it would soon seal them off, leaving them in little pockets of scar tissue, and the action would move to the areas in which they lacked monopoly power.

In fact, something like that is going on right now. In spite of our determined efforts over the last generation to destroy the enterprise system, it is still producing and, closer to our purpose, it is simply going around the unions. Consider companies such as I.B.M. with no unions at all; G.E., no more than half-unionized; the construction industry, where unions are losing ground day by day; the printing industry, likewise. Consider also the flight of the textile industry to the nonunion South, already mentioned. Consider finally that even in the representation elections often rigged by the National Labor Relations Board in favor of unions, year after year at least one-half of the votes, and usually more, are against union representation.

Yes, indeed, union leaders, like all legally sheltered monopolists, have much to fear from the unhampered market economy.

While innumerable examples of destructive political action by unions are available, let us focus attention on only two of their most recent endeavors. The first is the common-situs picketing bill. Readily available facts demonstrate that the unions spent enormous sums in the form of political contributions to get the bill passed. Its obvious purpose was to preserve as many jobs as possible for unionized construction workers —jobs which the unions themselves had helped to destroy directly by the monopolistic wage structures in construction that they have created and indirectly by the many measures they have supported which have contributed to the general debility of the economy.

Persons unfamiliar with the field might find it hard to believe that unions should be interested in pushing a bill which, but for the President’s veto, was bound in the long run to hurt rather than help the construction industry. The explanation is simple. The unions are not interested in the health of the construction industry — or for that matter any other industry; despite their protestations, they are not interested in full employment. They are interested only in such employment as strengthens or preserves their power base. And that is why they pushed so hard for the common-situs picketing bill. It would have reduced private construction employment, but, and this is the only thing the union leadership cared about, it would have reinforced their monopolistic control of such employment as remained. And they would resort to further political action to soak up the unemployment attendant upon the situs picketing bill.

The six-billion-dollar public works bill, also passed overwhelmingly by a union-dominated Congress but vetoed, provides an example of the way in which unions thus act to soak up by political means the unemployment they play a critical role in creating by the exercise of legislatively granted monopoly powers. There can be no doubt about the fact that the unions were the most powerful and persistent lobbyists for this measure, for again available records attest to the influence they exerted. And again there can be no question but that the unions pushed for this bill because it promised to relieve some of the unemployment among union members that the unions have themselves created.

Observe the political trap. On the one hand, unions cannot possibly push for measures which would encourage the growth of private capital without exposing the myth by which they survive — the myth, that is, that workers and employers are natural antagonists, that the "trickle-down" theory of universal prosperity is a cruel hoax. On the other hand, they cannot push for public-works and other governmental spending programs financed only by taxation, because in order to keep their bamboozled members, already overtaxed as they are, they must resist higher taxation of the "middle class," and they know that the rich, no matter what union demagogues say on the subject, are already taxed to the limit.

Albert Shanker, president of the American Federation of Teachers, documented this point in a recent news release in which he expressed "strong support" for a bill in Congress which would provide emergency aid to local school districts facing severe budget crises’. Everybody knows that the teachers’ unions are mainly responsible for the budgetary crises of the schools. Everybody also knows that local taxation has about reached the limit and that everywhere local communities are voting down bond referenda designed to produce public-school financing. In these conditions, Shanker had no alternative but to support legislation which would provide federal-government financing of the local public-school deficits.

And where is the federal government to get the funds with which to finance all the unemployment which the unions are compelled to create if they wish to retain power? Let us review the ground we have covered, adopting the point of view of a union leader who is naturally concerned to preserve the economic and political powers which have accrued to him:

·   a. He has a monopoly position from which he derives satisfying economic affluence and heady political influence.

·   b. This monopoly position absolutely depends upon a conviction among the workers he represents that they derive greater returns from collective bargaining than they would from individual bargaining.

·   c. Such a conviction can be preserved only by persuading workers (i) that employers and free labor markets are their natural antagonists and (ii) that militant unionism is the only possible means of achieving higher than market wages.

·   d. Higher-than-market wages cannot possibly be gained without creating significant unemployment.

·   e. The workers unemployed by monopolistic wage structures cannot be left free to overhang the market, for if they are it will be impossible for unions to produce monopolistic wage settlements. In short, the union leaders must strive endlessly to immobilize the competitive or potentially competitive workers, and they must do this by governmental subsidies and proscriptions, not by measures which encourage the growth of private capital.

·   f. Thus unions must push endlessly for minimum wage laws, tariffs, ever-increasing unemployment compensation, high and early pensions, profligate welfare programs, and all other conceivable devices for keeping potentially competitive workers out of labor markets.

·   g. At the same time, they must find some way to maximize the employment of the number of members they need in order to preserve a credible economic and political power base.

·   h. Since state, local, and federal tax sources are now for all practical purposes exhausted, only one source of funding remains: federal deficit-spending financed by inflationary increases in the money supply.

It will be useful, I believe, to conclude with a discussion of a union-backed measure which ties the unions even more closely to the inflationary process. I refer to the Humphrey-Hawkins Full Employment Bill. A recent story in The New York Times about this bill shows how it provides us with a perfect paradigm. The Times said that:

Representatives of three centers of influence in the Democratic Party —the A.F.L.-C.I.O., the Congressional Black Caucus, and Senator Hubert H. Humphrey of Minnesota — have been quietly negotiating for weeks in an effort to draft legislation that would commit the Government to create a job for everyone who wants to work.

The obvious purpose of the bill, as it seems to me, is to rid the unions forever of any fear that they will be held responsible for the unemployment they create. An equally obvious purpose, though not yet completely worked out, is to eliminate any possibility that the Federal Reserve Board will ever pursue deflationary policies, or even merely anti-inflationary policies. As The Times story has it, the bill:

…would augment the Employment Act of 1946… by requiring the President to propose and Congress to pass, each year, specific numerical goals for employment, economic growth, and changes in the price level…

The subjects to be covered by the annual economic policy resolution would include the monetary policy to be followed by the Federal Reserve System.

There you have it. The Federal Reserve Board has been called an engine of inflation. Because of union sponsorship of the Humphrey-Hawkins Bill, The Times story suggests that there is no hope of getting the A.F.L.-C.I.O. "to agree to any provisions… that appear to be imposing restrictions on the ability of unions to seek higher wages for their members." So if the Federal Reserve Board is an engine of inflation, we know who the engineer will be. And this should put an end to debate over the causation issue.

One of the more repugnant features of these unlovely times is that the union leaders who have succeeded in selling so many intellectuals a bill of goods are in their petty pursuit of affluence and influence getting away with measures which not only abuse simple workingmen but also are likely to destroy the economy. A particularly ugly touch is added to this repulsive picture by the cooperation of the Black Congressional Caucus. There can be no doubt that the big monopolistic unions have been the worst enemy that Amerian blacks as a whole have had since 1865. If the Humphrey-Hawkins Bill is passed and enforced, the condition of American blacks is likely to be even worse than it was before 1865. They are likely to become permanent wards of the State, and it won’t make things any better that we’ll all be in the same position.