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Politics / Social Issues Mar 08, 2010 - 04:13 AM GMT

By: Howard_Katz


Best Financial Markets Analysis ArticleWell, the train is pulling out of the station.  Gold has said goodbye to the $1,000 level and is off for northern climes.  It is not your last chance to get on board, but it is your last chance to get on board at these low, low prices.  The hard analysis of the past few months has been identifying the intermediate bottom, but now that that is in it is time to step back and once again focus on the big picture.  Friday’s Wall Street Journal has an excellent article on unemployment and the “minimum wage” law, and this is a very good time to discuss this most important subject.

The subject of unemployment is the centerpiece of our modern economy.  Let us imagine an economic discussion between a “liberal” and a conservative:

“Liberal:”  I am a sensitive, caring person.  I feel the pain of the lower members of society, and I am on their side.  I am in favor of all measures intended to reduce unemployment.

Conservative:  That is very commendable.  So you go down to your local soup kitchen and devote hours each day to helping the poor?

“Liberal:”  No, of course not.  But I favor social measures to raise these people up to a higher level.

Conservative:  Ah, I see.  You favor giving my money to the poor.

“Liberal:”  You selfish monster, rugged individualist.  How can you look yourself in the mirror in the morning?

Conservative:  Oh, I’m sorry.  I’m sorry.  I’m so ashamed.

The reason that unemployment is so important is that, while it seems to be a political or moral issue, it is also an economic issue.  And in fact it is the crucial economic issue of our age.  As I have noted in the past, Franklin Delano Roosevelt was a Wall Streeter.  In the 1920s, he was the manager of a vulture fund (so called because it swoops down on troubled companies and gobbles them up).  On his first day in office, he rammed through legislation to give the power to create money to the commercial banks (working hand in glove with the Federal Reserve).  It was passed without hearings in one day (illegally), and members of the House of Representatives did not even have copies of the bill to read when they voted on it.

FDR’s objective was to help his Wall Street buddies.  He knew (from the experience of WWI) that the issuing of new money by the banks also helps their corporate loan customers, and this is done at the expense of the working people, who suffer a decline in their real wages.  In short, FDR wanted to rob from the poor and give to the rich.

If this is what you are trying to do, then you naturally can’t tell anybody.  And the well-known positions of the New Deal – that it was robbing from the rich to give to the poor and that it was the party of the working man – were blatant lies.  The conservative opponents of FDR were unable to counter his policies in the public mind because they were afraid to penetrate the mask of altruism which he employed.

During WWI, prices in the U.S. had doubled.  This had caused a significant decline in the real wages of the average working man.  At that time, almost every American was saving for retirement, and the depreciation of the currency sharply reduced the retirement savings of the average American.  The Republicans of the day arose as the champions of the working man.  They adopted the policy of the “good 5 cent cigar,” which meant a reduction in the money supply and prices back to the levels of 1914.  This policy was successful, and prices (Wholesale Price Index, or what we today call the Producer Price Index) by 1933 were back down to their level of 1914 (and 1793).  America had experienced 140 years of stable prices, and the savings of the average Americans were restored to their pre-World War I value.

The Republicans were aware that their policy would cause high unemployment.  The exact same thing had happened in the 1870s.  At that time, the real wages of the working class were also being restored (after being forced down by the paper money of the Civil War).  Higher real wages, of course, lead to unemployment.  Employers cannot afford to pay the high wages.  Also, wages were not being increased in nominal terms.  They were only increased in real terms, in terms of what they could buy.  But many working people do not understand real wages.  They only think of the nominal figure they are receiving (not what it can buy).  In the 1870s, these nominal wages were declining, and many wage earners felt insulted that they were being asked to accept a wage beneath their social status.  Rather than accept what they felt was an insult, they lived off their increasing real savings while they sought for a job with pay that was much too high for the prices of the time.  An incident from the 1930s illustrates the psychology.  A businessman was trying to start up an operation and could afford to pay $40/wk. (about $680 per week in today’s money).  No takers.  So he offered $50/wk.  But to get the job in these “bad” times, you had to kick back $10.  The workers felt, “I’m a $50 man.  I just have to kick back because my employer is unethical, but my status in society is recognized.  In the 1870s, America had a free market, and so the unemployment was speedily reduced.  The Republicans of the 1920s assumed that the same thing would happen again.

However, the New Deal had a good thing going.  They were robbing from the poor to give to the rich.  But they had to pretend to rob from the rich.  The paper money and easy credit policies of FDR directly benefited Wall Street and the banks.  Low real interest rates cause a rise in both stock prices and corporate profits.  (Most corporations carry a significant amount of debt.)  And of course, it is very much to the benefit of these large corporations to pay lower real wages.  Stock prices about doubled from just prior to FDR’s inauguration to the end of his first year in office and almost quadrupled by the end of his first term.  (These profits far outweighed FDR’s progressive income tax, which was done for show and was filled with loopholes)

The Republicans had pursued sound money policies from the end of the Civil War to 1933.  These policies had been good for the country and good for the Republicans at the polls.  American enterprise produced an explosion in wealth never before seen in any country in the history of the world.  Real wages grew by an average of 60% per generation (taken as 30 years).  Foreigners flooded into America (to get these higher wages) from all over the world.  My ancestors immigrated to America at this time, and it is natural to assume that this large inflow (of immigrants willing to work for very low wages) would have caused unemployment among American workers.  Natural but wrong.  Historical Statistics of the United States, Colonial Times to 1954 (published by the U.S. Commerce Dept.) lists the unemployment rate for the U.S. in 1906 as 0.8%.  That is, it was less than 1%.  Those foreigners were being snapped up as they walked off the boat.

This illustrates the unemployment problem of the time.  (Today, of course, it is almost 10%.)  Indeed, there was no word for unemployment in America prior to the 1870s because there was just no problem.

Further, America is a very good model for the study of unemployment because it went through all of the stages which theoretical economics predicts.  When the Pilgrims landed at Plymouth Colony, they were organized under communism.  So the question of unemployment did not arise.  They abolished communism in March 1623 (according to the diary of Gov. William Bradford).  The conversion to private property “had very good success,” and the holiday of Thanksgiving was instituted to celebrate the new system of private property.  This first Thanksgiving, by the way, was celebrated at the end of July 1623 (about Aug. 8-9 taking account of the calendar change of the 18th century).  Thus Plymouth Colony converted to a self sufficient economy.

Then people began to specialize (division of labor), and each person produced the goods at which he was best (leading to another large increase in wealth).  They exchanged their goods using the medium of money.  Then, some of the older members of the community realized that they could increase production even more by hiring younger workers and training them.  Thus was the relationship of employment born, and the producers of society became divided into employer and employee.  This benefited both the young employee and the older employer.  Everyone was better off.

The type of phonies and frauds who pander to the paper money faction usually argue that a “capitalist” economy cannot provide full employment.  (What the blazes is a capitalist economy?  The term was coined by Karl Marx, and I have never heard a definition of capitalist.  It changes its meaning from day to day and does nothing more than confuse people who think in terms of it.  I advocate a free economy, not a capitalist one.)

Is this true?  Is a free economy unable to provide full employment?  I would suggest that these people look at the facts.  As the employer-employee relationship proved profitable, employers developed a hunger for more and more employees.  They kept hiring more and more people.  First they hired fellow Americans off the farms, and the late 19th century is a time when Americans flooded from the farms to the cities to get the higher wages of a job.  When they ran out of Americans to hire, they started to hire foreigners.  The desire of American employers for more workers is insatiable, and there is only one force which can trump it.

This is as follows.  Once the New Deal had established (in people’s minds) that it was the party of the working man and that FDR was a traitor to his social class, it found that it needed to increase unemployment.  If unemployment was temporarily high, ignorant working people would vote Democrat.  High unemployment equaled a Democratic victory.

One of the ways this was accomplished was by backing the Union movement of the day.  Union workers (competing with ordinary Americans for jobs) were given the right (by the National Labor Relations Act) to beat up non union workers competing for the same job.  These non-union workers were intimidated and forced into unemployment.

Another of the ways was by enacting what are fraudulently called minimum wage laws.  If you actually read these laws, they do not guarantee anyone a minimum wage.  If the worker’s wage is to be raised, somebody has to pay the extra money, and these laws do not provide any extra money.  The employer simply evades this intent by not hiring the worker, and workers whose labor value is not worth the legal minimum find themselves unemployed.  The Friday WSJ article (“The Lost Wages of Youth”) demonstrated that the recent increase in the “minimum wage” (2007-09) from $5.15/hr-$7.25/hr caused massive unemployment, hitting the lowest level of workers hardest.  Total teenage unemployment rose from 15% of the labor force to 27%.  Black teenage unemployment rose from 38% to almost 50%.  These unemployed teenagers, being idle, drift into crime, and the black-on-black murder rate in this country is horrific.  (It should be noted that the first unemployment statistics to separate black from white unemployment showed that the two were almost the same.  This was in 1940, when American society was openly racist and blacks were the victim of heavy discrimination.  Since that time, due to the “minimum wage” laws, black unemployment has risen to double white despite numerous laws prohibiting discrimination by race.

A third technique was to put burdens on employers, such as making them pay health care costs.  Today this makes it almost impossible for older workers to get jobs because health insurance for these people is prohibitively expensive.  In sum, the cause of unemployment in America is the (New Deal version of the) Democratic Party.  If a magic wand could be waved which transported all Democrats to the planet Klingon, then unemployment would pretty much disappear in America, and our economy would dramatically revive.  Meanwhile the Klingon economy would collapse, and their unemployment rate would go through the roof.

But the most common way of increasing unemployment is via the Federal Reserve.  The Fed has had a repeated policy since it was created of first easing and then tightening credit.  The easing brings profits to credit sensitive industries (such as housing) and draws workers into jobs created in those fields.  But then the money created by the Fed causes higher prices and a public demand for the Fed to tighten.  Then we have a period of higher interest rates (e.g., 1979-81) and the jobs created originally are now abolished.  (Today’s unemployment rate is mostly caused by the Fed tightening of 2004-06).  I have charts on the economy going back to WWII, and one can clearly see the Fed easings, followed by a drop in unemployment, and the Fed tightenings, followed by a rise in unemployment.  This is the part of the unemployment cycle which gets all the attention from our (short-term oriented) media.

In these articles, I try to present an economic overview so that you can get an appreciation for the massive irrationality and ignorance of facts which pervades our society on the subject of economics.  For people who already understand this and are looking for specific advice on how to protect yourself (and profit) from the dishonest policies of our government, I publish a fortnightly (every two weeks) newsletter which gives specific buy and sell signals and discusses tactics (such as whether you should be in gold or gold stocks, and what kinds of stocks). 

This newsletter is The One-handed Economist, and the cost is $300 per year.  (It has proven a very good investment for subscribers over the past 10 years).  You may subscribe either by going to my web site, and hitting the Paypal button or via the old fashion way by using the U.S. mail.  Simply send a check to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  I am increasing the cash discount for using the mail to $10.  So include a check for $290.  (However, OHE has been at the same price for a decade, and a cost of living adjustment is due to keep the real price the same.  This is a few months away.)  We do not accept credit cards.  OHE is sent primarily via e-mail, so be sure to include your e-mail address.  But any subscriber is free to request regular mail delivery as well as e-mail.

Thank you for your interest.

© 2010 Copyright Howard S. Katz - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


29 Feb 12, 10:38
A flaw in this argument

"When they ran out of Americans to hire, they started to hire foreigners."

I do not recall ever hearing about a time when this was true. Can you provide me with some evidence?

Because I am thinking about how Americans used hire the Chinese instead of Americans to work on the railroads in the 1800's because it was cheap labor.

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