Out of Work; Unemployment, Government and Bishops.

OUT OF WORK; UNEMPLOYMENT, GOVERNMENT & BISHOPS

St. Antoninus Institute

President Clinton just succeeded in having both houses of Congress approve his budget. A few weeks ago, his "job creation bill" did not pass. Still, the budget is claimed by Democrats to be a good step in the direction of growing the economy—read create jobs. Out of Work—Unemployment and Government in Twentieth-Century America by Richard K. Vedder and Lowell E. Gallaway, Holmes & Meier, NY: 1993, is a book which brings much common sense on the issue of the power of government to create jobs. The Church knows how to create jobs. And that is not with bishops and bishop conferences asking governments to interfere in the economic sphere but by doing what she knows best: being a leader in matters of faith and morals—however intelligently and effectively applied to the economic sphere.

The Example Of 1945-46

The authors advance the following example: After World War II, the US government released 12 million Americans from the Armed forces into the job market while simultaneously slashing government spending. There were predictions of severe underemployment at the time, but unemployment never rose over 4 percent.

Although Keynesian analysis attributed the smooth conversion to a peacetime economy to pent-up demand by consumers, consumption spending in 1945-46 rose only $14 billion, barely 20% of the fall in government spending.

Spending on automobile and major consumer goods in early 1946 was still well below normal peacetime levels, much less abnormally high levels.

Still, non-manufacturing civilian employment rose by more than 10 percent during the period.

The reason millions of news jobs could be created when there was under consumption by normal standards is that real wages fell and government involvement was reduced.

Other Examples

The newsletter Intellectual Ammunition draws the following lessons from the aforementioned book:

From 1900 to 1929, a period during which the government assumed absolutely no responsibility for employment, the average rate of unemployment was under 5 percent.

The period with the most expansionary fiscal policy, 1930 to 1959 had the highest average rate of unemployment in the U.S. during the 20th century. The massive unemployment of the Great Depression, rather than representing the failure of capitalism, resulted from too much government intervention. Herbert Hoover efforts to raise real wages generated unemployment 28 percent higher than it would have been if real wages had remained constant.

Franklin D. Roosevelt subsequent New Deal prolonged, rather than alleviated, the Depression. Without the negative impact of the new federal labor laws, Social Security, and unemployment compensation, the unemployment rate would have been 6.7 percent instead of the 17.2 percent. The Employment Act of 1946 made the eradication of unemployment a federal government priority. Nearly fifty years later and despite massive government involvement, unemployment remains a more significant problem than ever.

The Kennedy administration of the early 1960 adopted Keynesian economic theories. However the highly successful expansionary policies of the 1960 caused long-term damage to the economy, bringing about the stagflation (stagnant economic situation) of the 1970s and early 1980s.

During the 1970s, unemployment assurance payments raised the unemployment rate by nearly one full percentage point. Welfare and other forms of public aid also increase unemployment. For every one percentage point increase in the proportion of the GNP devoted to public assistance, the unemployment rate increases one percentage point. From 1989 to 1992, average business employment taxes increased 16.2 percent, contributing substantially to the recession, especially as it impacted small business.

The lowest jobless rates across the United States are found where government assistance is least, keeping other factors constant. For example, states with higher worker compensation (Ohio, Massachusetts, and California for example) or welfare (Michigan, New York and Louisiana for example) have produced higher unemployment.

Recent Government Efforts Destroy Jobs

Vedder and Gallaway, who are both professors of economics at major universities wrote in the Madison Messenger about new instances of government efforts leading to the destruction of jobs:

During the impressive economic expansion from 1983 to 1989, hourly wage costs (including fringe benefits) rose slightly more than four percent per year. After adjusting for inflation and some increase in productivity of workers, labor costs actually fell as a percentage of sales, making hiring more attractive. Beginning in 1989, however, hourly wage costs started to rise at a faster rate and then soared to an annual rate of eight percent in the second quarter of 1990. Why? One major factor was the 13.4 percent increase in the federal minimum wage that took effect the first day of that quarter.

The result was that soaring labor costs reduced employment which, in time, led to smaller wage increases, setting the stage for a market-based recovery. Then, on April 1, 1991, another large increase in the federal minimum wage forced up labor costs at an annual rate of five percent, thwarting potential recovery.

Other recent legislation has also aggravated joblessness. On three occasions, for example, Congress extended the unemployment insurance benefits, causing the unemployed to be more choosy about what work they would accept and also increasing what economists call the reservation (the lowest acceptable wage) of the unemployed, further retarding job growth.

To have both new job opportunities and a rising standard of living, labor productivity—the output per hour worked—must go up. In recent years, several pieces of new legislation have retarded productivity growth, such as the 1990 amendments to the Clean Air Act, the Americans with Disabilities Act, and the 1991 Civil Rights Act. By restricting the ability of employers to use labor and capital inputs to maximize productivity, new regulations arising from these laws continue to hold back the economic recovery.

The Moral Case

The two economist authors do not really look at the moral aspect of what they are describing. And I believe that is at the moral level that their recommendations will be made or broken.

One argument that might be presented is: As the Holy Father stated in Laborem Exercens, the economy is for man and not man for the economy. Therefore the value of a strong economy with high employment is questionable if this employment is actually underemployment (workers are forced to accept poor paying jobs) and no social protection for workers in their place of work, their unemployment benefits, compensation, etc.

This might sound like a fair reproach to the let the market set labor wages and take care of unemployment of our two economists. Gallaway confided to this author that his Protestant church found him quasi satanical for his politically incorrect views.

The moral argument as stated above, while widely shared, is pathetically flawed on several accounts.

The Theology Of Work

Man finds his dignity in work. Man is made for work; it is his right and obligation to work. Work is for man and not man for work relates to this priority.

Government leaders, as they ponder over economic issues, must certainly be concerned with the matter of employment. Therefore, they should be ready to abandon any attempt to legislate social or entitlement programs which look like they are going to interfere with jobs.

The first flaw in the moral argument above is that there is no real symmetry between being underemployed (or employed at a lower wage) and being on welfare drawing unemployment insurance. In the first instance, the worker has full dignity, in the second he seriously lacks in dignity, especially in his own eyes.

The Omnipotence Of Government

The second flaw in the moral argument is the myth of government omnipotence.

We have been brainwashed to believe in the myth of the ever more powerful government, as source of all knowledge and of all resources. We poor peons only have the opportunity to kneel humbly and gratefully accept what the government is willing to bestow upon us and to teach to us. The myth of government omni-science is a direct attack against the teaching authority of the Church.

It is a manner to bring down Truth from its transcendent and objective levels to the level of the statistical product of majority opinion. At this level, truth can be as plebeian and as subjective as the media will allow public opinion to be.

The matter of the government as the source of all resources is also another myth. Governments do not produce anything, they can only consume resources; governments also find interest groups to which they will confer consumption privileges over the national product; governments ally themselves with co-consumers.

By regulating its own consumption, government can influence national productivity; in this sense it can indirectly affect the total output of production. But government does not directly produce anything. Government does not "create" jobs.

Therefore governments need to nurture the sources of job production. And these are mostly small and mid-size businesses. Think of your local laundry shop manager. If he hires another assistant, that may boost his employment force by 10%, 30%, even 100%. No Fortune 500 firm could do as well. Now, if the cost of these assistants jumps way up, the manager will postpone hiring. If the cost of doing business, by satisfying government regulations, goes up too much the manager will postpone hiring.

The effect of government actions are not symmetrical: there are no two similar buttons available to a chief of state: Button A to spur on economic growth, Button B to increase social programs. Button A does not work. The only way government can help economic growth is by not pushing too hard on button B.

This Valle Of Tears

Another corollary of the myth of government omni-potence is that there is no domain of human misery in which the government cannot bring soothing relief. The Nanny State is going to make everything all right.

This myth is in direct opposition to the Mysteries of the Fall and of the Incarnation. Nature and human nature have been injured by the Fall. We do live in a valle of tears. If the American Dream is to dream that we are no longer in a valley of tears here on earth, this American Dream is a pipe dream.

Certainly some government regulations may alleviate social problems. However, Christians should be strongly opposed to the notion that more government intervention in the economy and more government regulations are going to wipe out all the tears of the unemployed, the underemployed and the handicapped.

The Rahn Curve

Cesar Conda of the Alexis de Tocqueville Institution wrote in a newspaper column:

In 1986, then-Chamber of Commerce chief economist Richard Rahn charted an inverse relationship between government spending and economic growth for the seven major industrialized countries in the form of a curve, not unlike the famous Laffer Curve that focused on the incentive effects of taxation.

The theory behind the Rahn Curve is that, at first, low levels of government spending on basic public services—like law and order and a judicial system to enforce contracts—stimulate growth in the economy. But as spending rises as a share of the economy, its contribution to economic growth diminishes. Government spending eventually reaches the point where it actually retards economic growth.

Vedder and Gallaway have quantified that limit of government: government action aimed at eliminating unemployment of more than seven percent defeats itself.

The Sensible Government

It is therefore an error to state that the best government is the least government. But it is an even greater error to state that the best government is the most government. The first error is an error against social theory, the second error is an error against the faith.

Furthermore, we need to situate ourselves on the map of where governments are these days. It is undeniable that in most countries governments are way beyond the Rahn Curve. They are meddling in the economy in general and in peoples lives in particular all for negative results.

The only one who benefit from this situation are the modern elite talking classes (copyright due to Cong. Dick Armey). Without the agreement of all elements of this class (educators, politicians, reporters, lawyers, economists and entertainers) no idea is allowed to be accepted as public opinion. Businessmen, a.k.a. jobs providers, need not apply.

The Church's Social Teachings

God has permitted diversity in economic conditions (as in other conditions) among men so that each one of us has the opportunity to express and grow in charity.

To farm out matters of social care to government does not satisfy this divine objective; it just displaces the problem. Therefore if we perceive new needs for charitable action, we should contribute to alleviate them from within a religious and charitable activity.

If we believe there is a need for ramps for wheelchair-bound handicapped, individual businesses may contribute to provide these ramps, and some individuals can also help pay for these ramps (no government intermediary and therefore no waste) for their local businesses.

The Church has social programs but it does not seem that some of her leadership really believes in them. Catholic Charities in this country is the second source of charity after "government charities". Our Church leaders, do not enthusiastically ask us to contribute in person, and by our alms, to help specific needs.

Although, they do not hesitate financing a Capitol Hill lobbyist to push more welfare programs through the legislative process, American Catholic Bishops should take their cue from the Pope's recent encyclical "Centesimus Annus" which, among others, makes the same point as this article. They should lobby the government but not to pass more laws which destroy jobs. Instead, they should lobby to obtain more room for the activities of the Church, including more tax deferment for donations to Church programs.

The Catholic Church should be the number one Charitable organization. Bishops should appeal to all Catholics and people of good faith to be more charitable, help parish/diocesan programs for the unemployed, for the underemployed, the handicapped, and help develop parish/diocesan programs to improve clean air and water or buy land to be set aside for wildlife preservation. etc.

The Saint Antoninus Institute would become a Catholic "Consumer Union", publicize information on soundness and value of product, the quality of work life in corporations, concern of businesses for true social needs etc.

It would be also a great plus to be able to see bishops, being totally committed to these charities. Some bishops can now be seen making sandwiches for the poor. But what about a bishop building a ramp for the handicapped, declaring publicly that government should get out of the ramp business and that parishioners should get in on it? Such a bishop would have a great predecessor in St. Antoninus who was prominent in performing great material works of mercy (in addition to his spiritual works of mercy for which he is even more famous) in his city of Florence which had been plagued by many natural disasters.

Applied Economics File 6/2a
St. Antoninus Institute