Unemployment in America — The People Pay for Inflation

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Unemployment in America — The People Pay for Inflation

by John Walsh

‘Science for the People’ Vol. 2, No. 4, December 1970, p. 10 – 14

That rampant inflation can be eliminated only by increasing the level of unemployment, with all the trauma so implied, has now become a commonplace, accepted but often not understood. The present accelerated inflation in the USA derives from two sources which appear to reinforce and strenghten one another. The first is a heavy military outlay, necessary to protect American interests against socialist and nationalist liberation movements. Military spending means that the government pays out dollars for goods and services which are not sold in the marketplace but instead are dumped in Vietnam, buried in desert silos or sunk in the ocean. Dollars so spent do not find their equivalent in marketable goods. Thus military spending increases total demand (as measured in available dollars) while failing to increase supply (as measured by the totality of marketed goods and services). The result is that there are more dollars for fewer goods and prices are bid up. In a word, inflation. Any sudden and drastic increase in military expenditure as for example in Vietnam, only exacerbates and accelerates this sort of built-in or structural inflation. 1

Secondly the major industrial sectors of the U.S. economy are dominated by a handful of firms (oligopolies, or what amounts to the same thing, monopolies) who long ago recognized that price competition is of no benefit to them (eg. steel, autos, electrical appliances, etc.). Essentially these firms command almost the entirety of their respective markets, are subject to no competitive pressures and are therefore never compelled to lower their prices. (Establishment economists like Gardiner Means acknowledge this phenomenon and employ euphemisms like price administration’ or ‘imperfect competition’ to describe it). So whenever a general level of increased demand affects the prices of goods and services in either non-monopolized or monopolized areas, the monopolies react by increasing their own prices and later do not move them back when demand slackens. Hence the war in Vietnam by increasing total demand has spurred the monopolies to up their prices — what one might consider a price-price spiral. The unions and laborers in general are thus placed in a position of reacting to inescapable price increases. Not only can they do no more than react but, with the exception of a few building-trade unions, their reactions never catch up to the monopoly increases. Any small gains are wiped out by further monopoly price moves. Thus in the period 1963-1970, according to Fortune magazine, price per manufactured item increased twice-as-much as wages per item in percentage of the original 1963 levels. The term ‘wage-price’ spiral is at the very least misleading and should cause us to question the motives of ‘experts’ who so faithfully and unrelentingly employ it.

Given that monopoly pricing and a war-economy are the basic causes of the present inflation, the first question to be asked is whether inflation is actually undesirable. Of course from the viewpoint of those living on fixed incomes the elderly and the retired, it is intolerable. (Let us note that if the ‘powers that be’ were really interested in helping out these people, they could legislate a compulsory cost-of-living escalator for all retirement benefits. Not surprisingly no such legislation is forthcoming). But a high level of inflation is also unacceptable to the powerful men who control corporate America. Inflation means that American goods are priced out of the world market. Inflation means that in terms of real dollars banks now collect less than they originally loaned. Inflation means that other nations are less willing to accept dollars because these dollars are growing less valuable. Their lack of dollars in turn means they cannot buy U.S. exports as before, most of which are.produced by the large corporations. To the wealthy in the USA, inflation is unacceptable.

How then does the government — be it Republican or Democrat — go about stemming the inflationary tide? In theory, monopoly pricing practices could be controlled. However, the very executives who preside over the monopolies have easy access to high governmental places. If they are not residing there transiently themselves, their cronies and friends are certain to be found there. (Eg. Who heads the President’s Productivity Commission which makes determinations about questions of inflation and price and wage controls? Who else but James M. Roche, Chairman of GM. Who is chief of the Justice Department which oversees the monopolies? A former Wall Street lawyer of course.) Realistically monopoly prices will not be regulated effectively, given the structure of power which ultimately is based on wealth.

Another strategy is to decrease the war expenditures in Vietnam and elsewhere in a drastic way. However such action demands total and immediate withdrawl of American troops from Vietnam with the accompanying admission that the U.S. has suffered defeat at the hands of a popular war of liberation. In the minds of architects of foreign policy like Dean Rusk or Henry Kissinger, such an admission would topple all the dominoes in the American sphere of influence. Already the cry in Latin America is; “We are all Vietnamese. We can toss the Yankees out.” Clearly a precipitous withdrawl from Vietnam is unacceptable to those with far-flung international investments.

The only way to end inflation, then, is to decrease the level of total demand by causing more unemployment. With fewer dollars on the market (since fewer people are drawing wages), prices in the non-monopoly sectors will be bid down. This means that the monopolies pay less for the goods which they purchase from the competitive sector. And with so much extra manpower available, the corporations in all sectors can bid down the wages of labor. When the cost of labor and goods is thus decreased, the monopolies can maintain or increase their profits without further raising their prices and so they can protect their international competitive position. In this way unemployment and the resultant labor surplus benefit the large monopolistic corporations — at the expense of the people.

How is this unemployment to be effected? One way is by tightening credit thus decreasing total investment and consequently the number of jobs available. Of course such policy does not affect most large corporations since they are not dependent on borrowing for their investments but instead have substantial capital resources. And even when these resources are not sufficient, the large corporations are given preference by the banks. (A dramatic example of this was the massive credit extended to the Chrysler Corporation which developed a cash shortage when the Penn Central collapsed and panicked investors rushed to sell their Chrysler stock.) Moreover the tight credit policy pursued for some time by the Federal Reserve aggravates already high unemployment levels in many segments of the populace. For example unemployment among young blacks just out of high school has approached the 40% level. As Clyde Farnsworth reported in the NYT (Nov. 18, 1969) from a meeting of international bankers in Switzerland:

The most effective way to eliminate the payments deficit (a necessary concomitant of war-caused inflation) is by prescribing a recession, but the Americans argue that the first to be laid off, according to traditional employ-patterns, would be unskilled black workers. This, they say, would provoke an intolerable aggravation of racial disquiet… The argument is not a new one, but it is unusual for it to be raised in international monetary discussions.

In sum monetary strictures by themselves do not seem to be sufficient to brake the inflation, and the unemployment patterns which they generate are increasing social tensions which now threaten to tear the society apart. For both these reasons (although undoubtedly primarily for the first since riots and militants can be suppressed) the government must decrease employment by directly cutting its own expenditures. Of course the first costs to be trimmed are the negligibly small social welfare programs (eg. the veto of the education appropriations, the veto of the hospital appropriations, etc.). However, these miserly sums are not enough to produce the desired anti-inflationary effects. And so albeit reluctantly Nixon has been forced to turn to the aerospace and military industries. (Note that this has been a last resort and there is no reason to believe any President would behave in a drastically different fashion. As we have shown above the system applies constraints to other courses of action).

The only spigot of the economy which produces substantial flow and which the government is allowed to turn on and off at will is the defense industry wince all the rest has been left to the wisdom of private enterprise. By cutting back on domestic defense research and development and the space program, the government can effect the mass layoffs necessary to eliminate a large chunk of demand. (Meanwhile Vietnam defense expenditures are maintained at the necessary level to protect American interests in Southeast Asia and the world.) Thus, in the past year cutbacks by the Department of Defense have resulted in the loss of 900,000 jobs; and 750,000 more are expected in the coming year (Business Week: Sept. 5, 1970). As the Pentagon Comptroller, Robert Moot, reluctantly admitted: “I would hesitate to say that all the people leaving the Defense Department have gone on unemployment rolls. But there is a reasonable assumption that there is a direct correlation between the two.” (Business Week: Sept. 12, 1970). The Defense establishment is the means by which the American economy is regulated; with the resources it commands booms and recessions are created or regulated. When the international interests of the large corporations “prescribe” a recession, working prople everywhere suffer. Of course blacks and poor whites feel the sting of unemployment first and most sharply. But when it is necessary, engineers and scientists are also promptly consigned to the unemployment heap and their crumbs of professional privilege mean nothing.

The above should make it clear that the layoffs in the aerospace and defense industries are not a prelude to conversion of resources and manpower for peaceful and socially necessary purposes. Even Business Week, a leading business magazine, acknowledged this fact in a recent article entitled “The Peace Bonanza That Went Bust” (Sept. 5, 1970). Conversion is impossible because conversion means employment which aggravates the inflation problem. The pattern of the past is clear. The only time the system gets close to full employment is when heavy defense expenditures are needed for the protection of American interests abroad or, even more often, when the defense industry can frighten the public into useless expenditures on “super-weapons” which generate super-profits (eg. the ABM). Socially useful expenditure is left to the realm of rhetoric. The monopolies are the principle beneficiaries of all these defense expenditures, for it is their foreign interests which are protected and their sub-divisions which get some of the juiciest defense contracts (eg. GE, GM, etc.). So the full-employment policies like those of the Kennedy administration redound to big business and not the people. And when inflation generated by such policies begins to threaten the world position of the U.S. corporations, it is the people who suffer the terrible burden of unemployment.

So much for the past and present. Does the future look better? If the substantial unemployment eventually slows inflation down somewhat and if therefore a portion of the unemployed can be allowed to return to work, what are the chances of using this manpower in a socially rational way? Let us examine the means routinely recommended for getting people back to work in non-defense industries. The accepted Keynesian way of doing this is through tax reductions (used by Kennedy in the early 1960’s). Such tax reductions give people more to spend and this eventually creates more jobs. But note well that such reductions mean more spending in the private sector. There is no reason to believe that under our “free-enterprise” system this spending will be done in a socially beneficial way. Rather, money will flow into areas where profits are highest, and profits nowhere necessarily coincide with socially desirable expenditure. As John Maynard Keynes himself admitted:

The world is not so governed from above that private and social interest coincide. It is not a correct deduction from the Principles of Economics that enlightened self-interest always operates in the public interest. (Essays in Persuasion)

In short a society motivated by private gain will only accidentally act in a way that is to the general benefit of all its members. So it is with any realistic estimates of future non-defense expenditures. The administration, anticipating the future, is already concocting models that estimate how such expenditures will be divided up. Business Week, reporting on these projections, states that the following sectors of the economy will make gains: hotels, amusements, apparel, construction, service industry machines, beverages, automobiles, household appliances. (Sept. 5, 1970) In other words more of the same and presumably with the same “equality” of distribution. Not mentioned in the projections are education, medicine, parks, city planning, public transportation, pollution control, better communications, recreation, the arts, etc.

So necessary social expenditures are not likely to be made by the private sector because they are not inherently the most profitable (especially in the short-run) given the existing stock of plant and equipment. The other alternative, government-owned industry, represents an intolerable encroachment on the universally acknowledged terrain of “free-enterprise.” (For example, GM and Ford cannot accept a rapid, efficient safe network of public transport because it would render unprofitable an enormous portion of the productive apparatus they own. Moreover, in the long run producing a few railroad cars is not nearly as profitable as foisting off thousands of automobiles on the public.) In addition, since the example of an adequately founded and efficiently run state-owned enterprise represents by its very existence a threat to the corporate elite, it must be resisted by any means necessary. (For example, TVA and its success are a constant thorn in the side of the utilities.) In sum there are no realistic prospects of substantial and meaningful conversion of resources in a sensible way.

At the same time there are powerful obstacles to any real shift away from continued expenditure on the defense industries. First and most important, there is the necessity of protecting American investment and markets throughout the world. But there are also other reasons. The U.S. Arms Control and Disarmament Agency conducted a study on new expenditure patterns and concluded that there was little problem in utilizing the talents of most workers, including scientists and engineers, presently employed by the aerospace industry for peaceful pusposes. However, such is not the case for defense-oriented corporations. As Business Week sums up the findings of the study in this regard: “Some major defense companies will have serious problems shifting to civilian markets. Two major problems appear to be a lack of management motivation (they prefer the lower risks of military production) and a lack of capability. The major defense concerns often have low capitalization, little marketing capacity, and limited experience in producing high-volume output at low unit cost.” (Sept. 5, 1970)

The lessons for those in the scientific and technical community are clear. It is not they who are incapable of functioning in a socially useful and productive way but our economic system which is unable to so employ them. The system may accord scientists and technicians the status of “professionals”, but when the chips are down, it treats them like any other group of workers. The need for solidarity with other workers to eliminate a system of this sort is imperative. The economic system under which we live at present is designed for short-term profit and nothing else. It serves to increase the wealth and power of a few at the expense of the American people and of people throughout the world. For this reason the right of private investment of social wealth for the sake of profit must be abolished. Only a system which places the prerogative of investment in the hands of the people and their democratically chosen representatives is compatible with a humane use of resources and with a decent and secure life for people everywhere. Democratic socialism has become a necessity.

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  1. To the degree that deficit defense spending generates increased government income in the form of taxes, the tendency to inflation is reduced. However in a full-employment situation, this is not the case, for any shift from non-defense to defense spending only increases inflationary trends. In a situation where there is not full-employment (eg., the U.S. at the present time) taxes generated by defense expenditures must meet those expenditures to eliminate the tendency to inflation. We take the position here that such conditions have not been met in the U.S.A. in the 1960’s (or anywhere ever, for that matter).
    If, however, we grant that the “multiplier” effects eliminate the tendency to inflation inherent in deficit spending on goods of destruction, inflationary tendencies still exist if the major defense firms are monopolized or oligopolized (as they are). In this case any increase in military demand causes the military producers to further increase their monopoly prices, and their suppliers (also monopolies for the most part) react by increasing prices to get a share of the new and larger profits so generated. A price-price spiral is thus set in motion resulting in accelerated inflation.