Great Depression: defending capitalism against anti-market myths, part II
Gerard Jackson
Steve presented the following figures as proof that Roosevelt's policies worked. Let us now give these statistics some flesh and blood. The period 1930-33 was aptly called the "Tragic Years," the years in which Hoover's interventionist policies (later reinforced and extended by Roosevelt) deepened and prolonged the depression.
Starting from March 1933 the American economy began to rally as confidence began to return, the banks reopened and inventories fell below a sustainable level and orderly buying by retailers started to emerge. The Fed's index of production (1923-25) rose from 60 in March 1933 to 100 in July.
Any student of depressions will recognise these movements. What is not generally understood is that the anticipated coming of Roosevelt's destructive NRA (National Recovery Act) further stimulated production as business accelerated production to avoid the NRA's business codes that would increase operating costs.
The NRA came into force in July and August, causing the Fed's production index to drop to 72 by November. From July 1933 to December industrial production dived 28 per cent. Roosevelt's economic illiteracy had raised labour unit costs by 54 per cent in the same period. (Charles Frederick Roos, who was director of research for the NRA before resigning, estimated that the Act's destructive wage provisions put about 500,000 blacks out of work.)
However, many companies came to ignore the Act's provisions and various codes once lawyers advised that the Act was unconstitutional. This combined with Roosevelt's spending initiatives helped raise the Fed's production to 84 by May 1934. Fortunately the Supreme Court came to confirm legal opinion and declared the NRA unconstitutional, outlawing it in May 1935.
The effect of the court ruling signalled a real economic recovery with unemployment falling from 9.1 million in 1935 to 6.4 million in 1937, iron and steel production exceeding the 1933-34 level by over 100 per cent, car production more than doubled the 1933 level and the Fed's industrial production index had climbed to 104 by December 1935, reaching 120 in early 1936 when it declined somewhat, settling above 115 where it remained until August 1937.
Nevertheless, the country was still in depression and the recovery, thanks to government intervention, was stunted, even though progress was being made. However, in 1937 tragedy struck when the Supreme Court upheld and enforced the Wagner Act. (This Act was really an extension of the Norris-La Guardia Act passed under Hoover.)
Trade unions were legally privileged, giving them enhanced powers which they abused. The court's decision allowed union action combined with government wage codes to significantly raise labour costs: unemployment was driven up from 6.4 million in 1937 to 9.8 million in 1938, driving the industrial production index down by 25 per cent within 12 months.
Once we put Steve's statistics into their true historical setting a very dismal picture emerges, one that reveals the true extent of Roosevelt's appalling economic mismanagement. Leaping from the disaster of the Hoover/Roosevelt years, Steve claims 70 per cent of wage
He provided the following figures which are supposed to be the average real weekly earnings of non-supervisory workers in private industry from 1965 to 1990. We have already established that wealth ratios in America have been relatively stable throughout this century, through both booms and depressions. Hence wealth figures are directly irrelevant to any discussion about wages.
What is relevant, however, is the ratio of labor to capital. It is fundamental in economics that there exists a tendency for every factor of production to receive the full value of its marginal product. What raises labor's productivity is increased per capita investment. In other words, capital poor countries have very low wages and hence living standards while capital rich countries have high real wages.
Therefore, the more capital there is relative to labor the higher wages will be and vice versa. If real wages for the mass of American wage earners have, as he and others claim, fallen then this is because per capita investment has fallen.
However, we must bear in mind that the average wage is a statistical construct. What we really have is a myriad of wage rates. What we should ask, therefore, is whether wage rates in general have been falling. The answer is no.
If this were so we should expect labour's portion of national income to have fallen whereas it actually rose from 68.1 per cent in 1965 to 74.2 per cent in 1970, a figure that has largely remained unchanged. Moreover, given the increase in per capita consumption that has occurred during the last 30 years, it strains credibility to argue that real incomes fell in the same period.
But even using the concept of an inflation adjusted average wage we find that from 1973 to 1994 hourly rates increased by 0.4 per cent per year while real gross hourly rates in corporations rose by 23.3 per cent from 1982 to 1988.
Critics mainly fail to recognise that the gross wage equals the employee's money wage plus all oncosts, which includes medical benefits, holiday loadings, etc. Therefore, what matters to the employer is not the form payments take but the total cost of hiring labor. This is why most wage figures understate the real wage.
Now the difference between the gross wage, as I have defined it, and take home pay is commonly referred to in economic circles as "the wedge" — and this 'wedge' has increased significantly, more than doubling between 1950 and 1980. This is an important fact that critics of the market tend to ignore.
I shall leave it to readers to ponder this convenient oversight. In addition, Leonard Nakamura, an economist at the Federal Reserve Bank of Philadelphia, estimated that since 1974 America's inflation rate has been overstated by 2 to 3 per centage points a year and hence real wages have risen by about 35 per cent.
The problem is that the inflation formula is not taking account of the huge range of new goods that are being produced, and that includes cars and televisions, for example. The most recent television model is not only an entirely different good from an expensive 1973 TV, it is also a superior good. That goes for cars too. Facts like these render Steve's income figures utterly valueless.
Now Steve stated the top 1 per cent got 70 per cent of the wage rises. As we have just seen, if we include oncosts as part of the gross wage, then Steve's claim falls down. Moreover, America's participation rate also increased which meant more people were entering the labor force via low productivity jobs.
This would have the effect of lowering the average wage without lowering real wages. However, the 1980s did see median incomes for all quintiles rise, which seems to puncture Steve's view of wage rises. Another point that one needs to bear in mind is the shift of wealth from non-taxable to taxable income sources (thus increasing the taxable income of the rich).
Of course, this is a good thing and exactly what was predicted by supply-siders, i.e., more people would expose more of their wealth to taxable activities if the tax burden was lowered. This action also has the effect making it appear as if the rich have suddenly acquired new wealth and income, when all they have done is reveal concealed sources.
Now Steve argues that "the '50s and '60s were the greatest economic boom in American history. Income equality was highest during these decades, when the top tax rate was close to 90 percent. In 1973, the economy slowed down. The top rate was cut from 70 percent in 1980 to 28 percent by the end of the decade, and income inequality reached 1920s levels." (I am never sure if he is discussing income or wealth).
The first thing to note is that his claim for income equality is not borne out by the facts. The following figures clearly show that the income proportions among the five groups have remained remarkably stable.
Readers should also note two important facts: First, people tend to overlook the rise in living standards, which are now vastly higher than those of 1950. Second, for some curious reason income tables are treated as static, meaning that an absence of income mobility is implicitly assumed even though income mobility is the norm.
(A curious statistical anomaly has been noted. Though the Census Bureau claimed that the lowest quintile of US households had an average income of $8,350 in 1995, the Consumer Expenditure Survey of the US Department of Labor showed that the average household in the same quintile had an annual expenditure of $14,607.)
Steve's comments on tax rates and income equality are nonsense. Because there is a tendency in a free market for everyone to earn the full value of his product, high marginal tax rates do not directly lower or equalise earnings.
What happens is that high earners are penalised by high tax rates. But even so, we can see that Steve's punitive 90 per cent rate did nothing in the '50s and '60s to equalise incomes. (I am distinguishing between incomes and wealth.) Now I have challenged a number of my critics to explain how so-called income inequality, i.e., differential market incomes, can drive down real wages. I am still waiting for a reply.
Capital and real incomes
That something unpleasant happened to the American economy in the 1970s is not usually disputed. But it should be remembered that economies are like huge ocean liners: when the engines go into reverse the ships still travel a considerable distance. So it is with economies.
The forces that usually drive down productivity take sometime to have a visible and significant effect. Our economic ship's engine is its capital structure, its fuel is savings and entrepreneurs build and navigate her. The 1960s saw the final triumph of Keynesianism with its high taxing, big spending and anti-savings policies.
Combine these destructive trends with increasing regulation of the economy (if the costs of regulations were counted as taxes, as they should, and added to government spending people would be stunned by the sheer size of government) and the decline in productivity becomes patently obvious.
Government can only expand by absorbing resources. But this basic fact is something our self-righteous statists refuse to consider.
Note:
One of my favourite economic stories is that of New York maidservants. In 1913 these girls averaged $3.50 per week. (Living expenses were, of course, provided by the employer.) The supply of these servants was maintained by a steady flow of young black girls from the South and young women from Ireland and Germany.
The war had the effect of cutting of the foreign supply of girls while taking others into factories and offices. This meant that from very early in the war these maidservants' wages began to rise as employers competed against each other for their services. By 1918 they were being paid $18 per week.
After the 1920-21 depression their wages dropped to $14 to $15. Adjusting for inflation, their real wages had more than doubled. The reason is not difficult to fathom. Immigration restrictions remained in force but an enormous amount of capital had been accumulated in those four years, a process that continued for a number of years.
It was this change in the labour capital ration that maintained these girls’ wage rates.
Great Depression: defending capitalism against anti-market myths, part I
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 7 February 2005
Year
1930
-9.4
Hoover
1931
-8.5
Hoover
1932
-13.4
Hoover
1933
-2.1
Hoover/Roosevelt
1934
+7.7
Roosevelt
1935
+8.1
Roosevelt
1936
+14.1
Roosevelt
1937
+ 5.0
Roosevelt
1938
-4.5
Roosevelt
1939
+7.9
Roosevelt
increases went to the top 1 per cent of the population, which once again owns 40 percent of America's wealth, while "about 80 per cent of the workforce is nonsupervisory work and its wages have been falling."
Fifths
1950
1960
1970
1976
1980
1990
5
42.7
41.3
40.9
41.1
41.5
44.3
4
23.4
24
23.8
24.1
24.3
23.8
3
17.4
17.8
17.6
17.6
17.5
16.6
2
12
12.2
12.2
11.8
11.5
10.8
1
4.5
4.8
5.4
5.4
5.2
4.6