Pharaoh Dreams Again

AND, behold, there came up out of the river seven well favored kine and fatfleshed [Coolidge prosperity]. . . . And, behold, seven other kine came up after them out of the river, ill favored and leanfleshed [Hoover adversity]. . . . And the ill favored and leanfleshed kine did eat up the seven well favored and fat kine.

I

THE depression of 1930 has been described by Sir Charles Addis, Vice Governor of the Bank for International Settlements, as the worst in one hundred years. Perhaps this is an exaggeration as far as the United States is concerned, but the depression will at least go down as among the most severe in our history. Nevertheless, the dividend disbursements of American corporations during 1930 set a new high record. According to the Monthly Survey of Business, they were $355,000,000 above 1929, which in turn was $1,150,000,000 above 1928. This represents an increase of 05 per cent in two years. How did the wage earners fare? The wage payments of manufacturing corporations in 1930, according to the estimates of the Federal Reserve Board, were $2,146,000,000 below 1929 — a drop of about 19 per cent. This brought them below any year since 1922, although the dividend payments of the manufacturing companies in 1930 were more than double those of 1923. The wage bill of the railroads in 1930 was 17 per cent below 1929, and in the building trades the drop was even greater. Only in the public-utility industry did wage payments hold about even with 1929. Is it anything short of a national scandal for business enterprises, in a year when they throw several millions of men on the streets and reduce pay rolls by several billions, to advance dividend disbursements to a record-breaking high?

The story of previous depressions is essentially the same. In the severe depression of 1921, for example, dividend payments, according to the estimates of the National Bureau of Economic Research, were only 5 per cent below the boom year of 1920, but wage disbursements were more than 20 per cent below. The dividend payments of American industry have shown almost unbroken growth; wage payments have fluctuated violently. Inevitably the question arises: ‘Is it not possible to give the wage-disbursement curve the same stability that is now possessed by the dividend-disbursement curve? Cannot the deep troughs in the wage curve be eliminated just as they have been largely eliminated from the dividend curve?’

II

Why were business enterprises able to pay record-breaking dividends in a year of pronounced depression? Profits in 1930 were approximately 40 per cent below 1929, and yet dividend disbursements increased. In 1921, the total profits of business corporations, according to the estimates of the National Bureau of Economic Research, were about $458,000,000, but dividend disbursements were $2,958,000,000— nearly seven times profits. In the case of corporations engaged in manufacturing, there was a net loss in 1921of about $101,000,000, and yet dividends of $1,549,000,000 were disbursed — only 8 per cent below the boom year of 1920. Obviously business enterprises are able to maintain dividends during periods of depression only because they build up reserves for the purpose during periods of prosperity. This is now accepted as merely conservative business practice. The best estimates indicate that, during the period 1909 to 1926, corporations in the United States saved, on the average, 40 per cent of their profits.

If industry can stabilize the dividend curve by building up reserves, why can it not stabilize the wage-disbursement curve by the same method? Cannot the principle of building up reserves in prosperity to maintain incomes during depression be applied to labor as well as to capital?

It must be confessed that it is more difficult to reduce the fluctuations in wage disbursements than to reduce the fluctuations in dividend disbursements, for the simple reason that the wage bill of industry is several times as large as dividend payments. In manufacturing, for example, the wage bill is about five times dividend disbursements. Nevertheless a beginning in applying the reserve principle to the stabilization of labor incomes has already been made by about two dozen concerns, among them the Dennison Manufacturing Company, the Leeds and Northrup Company, the General Electric Company, and, most recently, fourteen firms in Rochester, headed by the Eastman Kodak Company. The General Electric plan, for example, applies only to employees who have been in continuous service for one year or more. The reserves are created by payments equal to 2 per cent of the employee’s weekly or monthly earnings. Half of the payment is contributed by the company and half by the employee. In addition, the plan provides for a doubling of the contributions whenever the disbursements from the reserves exceed the contributions. Employees who are temporarily unemployed receive, after a waiting period of two weeks, a benefit of 50per cent of their full-time earnings, except that the benefit shall not exceed twenty dollars a week. The benefits are limited to ten weeks within a twelve-month period. Provision is also made for the payment of benefits to workers who, because of part-time work, are receiving less than half of their regular earnings.

III

If business enterprises were jointly controlled by wage earners and stockholders and if managers were directly responsible to both, the creation of reserves could be left to the discretion of each individual concern. Under the existing organization of industry, however, the managements, being selected solely by the stockholders and being responsible solely to them, do not have the interest in stabilizing the incomes of wage earners that they have in stabilizing dividends. Consequently the establishment of unemployment reserves is not likely to go beyond a few hundred of the more progressive and more prosperous enterprises unless it is made compulsory by law. The hope of stabilizing labor income by the creation of reserves seems to depend, therefore, upon making the establishment of such reserves a legal obligation.

But the unemployed want work, not relief. Instead of giving them an unemployment wage, why not give them jobs? No doubt this is desirable as far as it can be done. But how far can it be done? It would be folly for most business enterprises, in the face of a weak market, to provide more work by building up large inventories of unsold goods. That would unsettle prices and make the depression go from bad to worse. The counties, cities, states, and Federal Government can give some employment by properly timing their public works. But it is impossible for the government on short notice to start construction projects that would absorb three million, four million, or five million men. Even the indirect repercussions of government projects would not absorb such large numbers. Furthermore, the proposal to provide for displaced wage earners solely by government work ignores the nature of our industrial system. Our unparalleled productivity is based upon minute specialization and subdivision of labor. It is not feasible suddenly to convert unemployed musicians, boot and shoe workers, photo-engravers, printers, garment workers, clerks, stenographers, and a vast variety of factory workers (many of them women) into construction workers. Employment on public works is excellent so far as it goes, but it does not go far enough.

But why impose upon employers the obligation of stabilizing labor incomes? Why should not each workman provide for himself by saving? The answer is that the loss caused by unemployment falls so heavily upon those who are dismissed that savings are not an adequate protection. It is just as foolish to rely upon savings to protect against unemployment as it would be to rely upon savings, instead of fire insurance, to meet the losses caused by fire. But if unemployment is the kind of risk that should be met by insurance, why should not individual workmen buy their own unemployment insurance, just as they now buy their own fire insurance? For the simple reason that a workman could not purchase unemployment insurance if he tried. It is not on sale. Indeed, it is difficult to see how unemployment insurance could be sold except on a group basis, because otherwise the insurance companies would, in the main, obtain the poor risks, and the cost of the policies would be prohibitive.

If enterprises were obliged to pay an unemployment wage when they laid off men, would they not refuse to hire temporary workers and would this not handicap some men in obtaining employment? The answer depends largely upon how long a man must work for an enterprise in order to qualify for an unemployment wage. If the period were six months or a year, the hiring of temporary workers would be little affected. Nevertheless (as will be explained presently) the establishment of an unemployment wage would give business managers an incentive to flatten the waves in the employment curve. To this extent a few men in the twilight zone between employable and unemployable, who are now able to obtain work only during peak periods, would have difficulty in finding even intermittent employment. In other words, the arrangement would sharpen the distinction between the ‘ employables’ and the ’unemployables ’ which is now blurred by the very violence of the fluctuations in the demand for labor. The same result would, follow, be it noted, from all progress in controlling the business cycle. On the other hand, flattening the employment curve would protect many men, particularly older men, who are now thrown into the streets when employment shrinks and who, for various reasons, have great trouble in again obtaining steady work.

But would it not demoralize the unemployed to pay them an unemployment wage, would it not undermine their self-respect and self-reliance and make them prefer idleness to work? This objection is so frequently made that it should be examined with care. Let us admit without delay that a certain amount of demoralization must inevitably go with unemployment. There is no use in blinking that fact. Everyone who has the slightest appreciation of what unemployed men must undergo knows that in a high proportion of cases unemployment produces demoralization in the extreme. But the unemployed must be supported. The problem is, how can this be done with the least demoralization? When the several alternatives are examined, the conclusion becomes plain, I believe, that an unemployment wage would decrease rather than increase the demoralization inevitable with unemployment.

How are the unemployed supported now? First, they exhaust their savings. This in itself is demoralizing. For what better way is there to destroy the will to save than to compel men to use up in the space of a few months the money they have been putting away over a period of years for the purchase of a house, for provision against old age, or for the education of their children? And why should a man be compelled to sacrifice the hope of owning a home or of educating his children because of the accident that he, rather than some other member of the force, was selected for dismissal? An unemployment wage would reduce demoralization because it would protect savings and would prevent unemployment from shattering cherished hopes and ambitions that depend upon savings.

After his savings are gone, the unemployed man may borrow on his insurance, if he has any. This does not help for long. Next he may pawn a few valuables. But eventually, if he fails to find work, he must resort to begging in various forms — he entreats his relatives for a loan, he pleads with the grocer for more credit, he implores the landlord to wait a little longer for the rent. As a last step, when the children are crying for food, when the gas and electricity are about to be cut off, when the landlord is threatening eviction, the idle man nerves himself to apply for public or private relief. Again we are confronted with the question of alternatives. Which is more demoralizing, to compel the unemployed to engage in these various forms of begging or to give them, as a matter of right and without their asking, an unemployment wage sufficient to cover bare necessities?

One reason why unemployment weakens morale is because the idle man feels that he is an industrial outcast. He feels that he is no longer a part of industry, that industry does not need him and has no place for him. An unemployment wage would help preserve his morale because it would help him to feel that he still is connected with industry and has a claim upon it which industry itself recognizes. Nor would the effect of an unemployment wage be confined to the unemployed. On the contrary, the wage would reduce demoralization throughout the community. No one will deny that during the last year America has been a fear-ridden community. The employed have not dared spend what they have lest they be walking the streets next month. Business men have not dared make commitments for fear the market would not be there. The basis for this paralyzing fear has been the insecurity which characterizes the incomes of the great masses of the population. In the degree that we introduce security into those incomes, we raise the morale of the entire community and dissipate the fear which is itself a potent cause of unemployment.

IV

But the principal reason for insisting that industry establish unemployment reserves and pay an unemployment wage is not that such a wage would be less demoralizing than the present methods of relief or that it would avoid the cruel delay and the unfair penalization of thrift which are inherent in these methods. The principal reason for insisting that industry establish unemployment reserves is that the expense of maintaining idle laborers is one of the costs of production — just as is the cost of maintaining idle machines. Industry requires a reserve of labor because it needs more men at some times than at others. If any agency, public or private, undertakes to bear the cost of maintaining this labor reserve for industry, it invites industry to pursue policies which produce unemployment. It is in effect subsidizing the creation of unemployment. This is precisely what we are doing. We say to industry, ‘Here is a cost that we will pay for you. Don’t worry how much it is. Lay off men whenever you desire. The cost of maintaining them will not fall upon you. We will assume it for you.'

Is this not inordinate folly? When we thus invito and encourage industry to lay off men, is it surprising that we have an unemployment problem? Suppose that the community were to offer to bear some other cost for industry — the cost of fuel, for example. Suppose we said to business men, ‘Don’t worry about your fuel bill. It will not fall upon you. The community, through public and private charitable agencies, will pay for your coal.’ If the proposal were put into effect, would not the fuel bill of industry soar? Surely no sensible man would suggest that the community assume the cost of industry’s fuel bill. And yet we do relieve industry of the cost of maintaining its labor reserve. Naturally we shall continue to have an unemployment problem as long as we subsidize unemployment. Under present circumstances, why should any manager concern himself, in substantial degree, with how much unemployment his policies produce? The costs are not assessed against his enterprise. How can he justify to his board of directors the inclusion in his budget of a substantial expenditure for stabilizing work, as long as the community bears the cost of instability?

The first and most important step in solving the problem of unemployment is to withdraw our subsidy and say to industry, ‘Pursue any policies that you see fit to follow; produce as much unemployment as you desire. But henceforth the community will not relieve you of the cost of maintaining your labor reserve. From now on, a legal obligation to pay an unemployment wage will fall upon you.’ Only then will the best minds of industry apply themselves to the problems of stabilizing employment with the same intensity and insistence that they now display in striving to produce more automobiles and more yards of cloth. Modern business is marvelously efficient in supplying us with every good which can be sold for a profit. It is far less efficient in supplying us with certain other goods, such as security of employment, because there has been little profit in providing them. When we require industry to bear the costs of insecurity instead of letting them fall upon the unemployed themselves, upon their relatives, and upon innumerable grocers, butchers, landlords, and public and private charitable agencies, then industry will become as efficient in finding how to keep men at work as it now is in discovering how to displace them.