Employer of Last Resort

By Hans Sennholz

Dr. Hans Sennholz heads the Department of Economics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and monetary affairs.

During the 1984-85 school year American high school debaters have been weighing an important resolution:

Resolved: That the federal government should provide employment for all employable United States citizens living in poverty.

On the affirmative side students are expected to argue that the federal government shall strive to abolish poverty and, if necessary, act as employer of last resort; on the negative side they are likely to oppose the use of government for such ends.

High school students at last are catching up with the political debate that has animated their elders since the first New Deal. In 1935, President Franklin D. Roosevelt proposed to make the federal government the employer of last resort, proclaiming that “one third” of the American people were “underfed, under-clothed, and underhoused.” Thirty years later, President Lyndon B. Johnson declared his “war on poverty,” which was to liberate some twenty percent of the population. President Jimmy Carter, during his term of office, waged his special war on poverty. All three made the poverty of some 40 million Americans the central issue of their public pol icies. Indeed, all presidents have echoed a deep concern for the poor.

And yet, the poor are still with us. Their faces have changed, but their numbers hardly ever vary. Armed with poverty statistics, their spokesmen suggest that past government efforts were half-hearted and indecisive. The war, they argue, must be carried on with unrelenting vigor and dedication until victory is won. They would make government the employer of last resort.

Poverty in America

Other observers may draw entirely different conclusions. They may object that the poverty data itself may be erroneous and misleading. When compared with living conditions throughout the world there may be no poverty at all in the U.S. Most Americans have never seen the true face of poverty, which is visible in many other countries. It reveals hunger, disease and early death. In the U.S. even the least productive members of society live in relative abundance and comfort when compared with their counterparts abroad. Among his foreign peers the American pauper is an object of envy and the U.S. the target of pauper immigration.

American poverty statistics are built on levels of income. Families earning less than a stated dollar amount are defined as poor or poverty-stricken; families earning more are believed to be above the poverty line. A brief observation of the living conditions of the American poor, however, may suggest a different conclusion. It may reveal that forty percent of poor families own their own homes; eighty-six percent of these “very poor” homeowners have no mortgage debt. Some fifty percent have liquid savings of $500 or more. In Harlan County, Kentucky, the heartland of depressed areas, it was found that eighty-eight percent of the poor families have washing machines, sixty-seven percent have TV sets, forty-two percent have telephones, and fifty-nine percent own cars. (Newsweek,February 17, 1964, p. 20)

Most Americans now designated as poor and indigent would resent the label if they actually knew that the poverty warriors are talking about them. As a graduate student at New York University and a part-time accounting clerk, I never earned more than $1,500 a year, which sufficed to pay $35 tuition per credit and put me through school. Even as a young college instructor, the poverty definition included me. With all my heart I resent this supercilious and derogatory description of those important years of my life. It is obvious that the poverty politicians who are accustomed to spending billions of other people’s money have lost touch with economic reality and the meaning of life.

In every society some people are more prosperous than others, some are poorer than others. In the eyes of a critical observer, anyone who earns less than he does, may be poor. To a millionaire anyone with less than a million may be a pauper. To a poverty warrior anyone who belongs to the last 10 percent, 20 percent or 30 percent of income earners may be poverty-stricken. In fact, the concept of inequality of income and wealth always comprises the poor.

Government, Cause or Cure

Lengthy unemployment may impoverish a person and put him in a poverty bracket. More than seven million Americans are mostly unemployed, suffering declining incomes and living conditions. Alarmed at such statistics, the poverty warriors managed to pass the Humphrey- Hawkins Full Employment and Balanced Growth Plan Act of 1978. And yet, unemployment continued to rise. Defining “full” employment as no more than 3 percent adult (4 percent overall) unemployment, the warriors are now proposing to reach that level by using government as employer of last resort.

Most government programs seeking to alleviate poverty are treating the effects of unemployment; they never touch the causes. In fact, they completely reverse the cause and effect relationship by depicting the federal government as a source of employment rather than a primary cause of unemployment. They blame commerce and industry for the unemployment and call on government to correct the evil. They propose to grant more power to politicians, officials and bureaucrats and call for extensive government intervention. And yet, by confusing cause and effect they fail to accomplish their stated objectives and even make matters worse. During years of radical government intervention unemployment actually rises and levels of living usually fall.

The champions of government power and intervention are sadly unaware that government is the primary cause of unemployment. They do not understand that employment is a price and cost phenomenon, and that mass unemployment is the inevitable effect of any government measure that directly or indirectly raises labor costs. A law or regulation that boosts Social Security taxes, unemployment compensation taxes, workman’s compensation taxes, or in any way raises the cost of labor, reduces the demand for labor and creates unemployment. Boom and bust policies conducted by the Federal Reserve System may generate cyclical unemployment. Minimum wage legislation may deny employment to the least productive workers. Labor legislation that grants restrictive powers to labor unions may bring stagnation and unemployment to unionized industries.

Minimum wage legislation bars millions of young people from the labor market. Although they have limited training and experience, the federal government may issue an order that they be paid a minimum rate of $3.35 per hour. Moreover, it forces employers to pay a number of fringe benefits, from Social Security to national holidays, which may boost the worker’s employment costs to $5 or $6 per hour. If a person does not add this amount to production, if he fails to cover his employment costs, he is a candidate for unemployment.

Before the days of minimum wage legislation high school and college students were always welcomed by commerce and industry. From the first day of vacation to the last, young people used to work in offices and stores, workshops and factories, working their way through school or supplementing family income. Unfortunately, these ways of the past have given way to minimum wage legislation, which condemns young people either to remain in school, to join the armed forces, or be unemployed. At $5 or $6 an hour there may be no economic demand for their services.

Minimum wage legislation is the evil product of a political system that bestows favors and benefits on some classes of people at the expense of others. It favors the employment of skilled workers who are earning more than the minimum by denying employment to unskilled workers earning less. This is why labor unions representing skilled workers are fervent champions of minimum wage legislation.

Business Provides Employment

Poverty warriors like to depict business as the culprit behind poverty and unemployment. In reality, business is the only genuine source of production, employment, and income. It is bidding for labor in order to serve its customers. It eagerly employs labor as long as it is “productive,” that is, its net addition to output is positive. In other words, as long as it does not cost more than it is producing, labor is in great demand. When it costs more than it is adding to the production process, when it takes income from investors and entrepreneurs, when it becomes “destructive” to employers, it is discharged. In this case production is more productive without it.

Governments and unions are forever raising labor costs and thereby causing unemployment. Business is adjusting continually in order to prevent the unemployment. When the federal government raises its Social Security exactions and state governments boost unemployment compensation taxes, which may significantly raise the cost of labor and thus the rate of unemployment, business is straining to prevent the unemployment through cost adjustments. It may seek to offset the mandated costs with other cost reductions. In particular, it may reduce fringe benefits, delay inflation adjustments, elicit greater effort and draw out more efficient production. Whenever and wherever business is successful in offsetting the boost in labor cost it succeeds in preventing threatening unemployment. If laws, regulations and work rules prohibit the cost adjustment, business has no choice but to lay off loss-inflicting workers. Production is more productive with out them.

It is no coincidence that the strongholds of unions are also the centers of unemployment. In the steel and auto industries the union rates are more than double the market rates of industrial wages paid for similar labor throughout the American labor market. Union rules generally deny efficient use of labor and prevent cost adjustment. Ugly strikes by angry workers further increase labor cost. It cannot be surprising, therefore, that unionized industries are barely managing to stay afloat in an ocean of unemployment.

Job Programs Destroy Jobs

The unemployment generated by governments and unions is as severe and persistent as the force that is causing it. It is holding millions of Americans in its sinister grip and reducing them to poverty. To make government their employer of last resort is to put the culprit in charge and urge him to continue his transgressions. He will create more unemployment than he will provide jobs through a variety of make-work schemes. Facing mass unemployment, government may launch leaf-raking and snow-shoveling programs, build highways and public buildings, embark upon slum removal and urban renewal, or engage in any other economic activity. It may ostentatiously hire thousands of idle workers and become their employer of last resort. Unfortunately, the politicians who launch the programs and the poverty warriors who advocate them, are blissfully unaware of the consequences of their policies. They completely overlook two inevitable effects that tend to destroy more jobs than government can create:

1. When government appears on the labor market and engages idle labor it tends to support or even raise the labor costs that are causing the unemployment. It is removing the pressures for readjustment. By placing purchase orders for steel, automobiles, trucks and tanks it gives employment to idle steel and auto workers. But it also sustains their wage demands that exceed market rates, and thereby reinforces the cause of unemployment. Government tends to prolong and intensify the suffering of idle workers by encouraging them to cling to unproductive labor costs.

2. Government has no source of income and wealth of its own. Every penny spent is taken from someone. It may be exacted from taxpayers, borrowed from lenders, or snatched from inflation victims. If it takes $50,000 to give employment to one idle worker, taxpayers, lenders or inflation victims must be reduced by that amount. Their reduction consumes business capital, which in turn lowers labor productivity. Falling productivity, together with rigid labor cost, render more labor “unproductive” and cause it to be unemployed. And even if it were to consume no business capital, and labor productivity were to remain unchanged, the losses suffered by taxpayers and inflation victims would force them to curtail their consumption and the employment they would otherwise provide. While government may create one $50,000 job, which under bureaucratic conditions and circumstances would be a low-cost job, it probably destroys the jobs of two or three workers serving taxpayers and inflation victims.

Federal Assistance Reduces Levels of Living

Government reports are quick to point out that government assistance is sustaining those truly in need. According to one study, without any kind of assistance forty-one million people, or 18.8 percent of the population, would live below the poverty level. Cash assistance alone allegedly cut this number in hall If in-kind transfers are included, 13.5 million Americans are left in poverty. If medical care is included in the calculation, the poverty level includes only nine million people, or 4.1 percent of the population. (Press Release, Executive Office of the President, Office of Management and Budget, March 12, 1982)

In 1983 Federal cash programs supported 24.5 million elderly people living in retirement, 4.3 million disabled workers and their dependents, and 8.9 million survivors. They provided Medicaid and Medicare assistance to 47 million aged, disabled and needy Americans, ap proximately 20 percent of the total population and 99 percent of those over 65. They granted housing assistance to 3.4 million American households, and subsidized approximately 95 million meals per day, or 14 percent of all meals served in the country. They made available 6.9 million post-secondary awards and loans to students and their parents, and provided training for almost one million low-income disadvantaged people. They paid supplemental allowances to more than 7 million people, unemployment compensation to more than eight million, and granted food stamp assistance to 18.6 million individuals. Government sustained 3.5 million men and women on active military duty and their dependents, and some 27 million civilian employees and their dependents. Altogether, some 80 to 90 million Americans are dependent on tax dollars.

The Burden of Dependents

Whatever their numbers, the dependents weigh heavily on the economic well-being of their supporters, the taxpayers, lenders and inflation victims. Their inactivity and absence from economic production keeps society poorer than it otherwise would be. It visibly reduces the levels of living of the providers, discourages their productive efforts, and deprives them of the funds needed for productive investments. Surely, there cannot be any doubt that 80 to 90 million dependent Americans constitute a heavy burden on productive Americans.

Poverty warriors are encouraged by these transfer statistics. If 80 to 90 million Americans already are enjoying full support, another 7 to 10 million may not upset the transfer system. The warriors may be right. But they, too, must admit that there are limits to the burden the remaining producers can carry. All transfer systems have limits beyond which economic production is bound to decline and poverty is certain to multiply.

This article has been published with FEE‘s permission and has been originally published at The Freeman January 1985 • Volume: 35 • Issue: 1.

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CIEL wrote 62 articles on this blog.