Restating the Obvious

Labor ode

Two labor questions have faced the United States since the English waded ashore at Jamestown: Who will do the  work? How can a country be free if its workers are paid the same as workers in the unfree world?

With the exception of the years of the Great Depression, America has always been short of labor. This drove up wages to levels that astonished the world and attracted millions of people who were willing to work hard and  who were attracted by liberty. There are plenty of people in this world who are one or the other, but  Americans are both.

There's a story from the 19th century that sums it up nicely. A recent immigrant was writing back to his family in Ireland, and he showed the letter to his American employer. It said, "I am well and have work. We get meat three times a week."

The boss admonished him: "Pat, you know very well you get meat three times a day."

"Faith," says Pat, "they'd never believe it."

As long as America was busy exploiting its own soil and minerals, the imbalance of wages with the rest of the world  could be maintained. As the global economy ramified in the late 19th century, it became more difficult. And
there were always capitalists who believed in Ricardo's Iron Law: In a free market, wages will be driven down to a level where the workers live at just above subsistence. They were always happy to enforce that law.

However, since America was a free country whose workers voted, government continually intervened to try to prevent  the Iron Law from working. Intervention was hesitant and not very effective at first, but after the end of World War I it was apparent that a desperately poor and ruined Europe (which had, to boot, a ruined financial system) would compete with American producers and American labor, driving down American wage rates to European or even Asian levels.

Thus it was not merely racism that inspired Congress to pass the restrictive immigration laws of 1924. It will come as a surprise to Reagan Republicans, but 1920s Republicans were in favor of high wages. They were also against
 regulation, unless it subsidized capital, so their policies were contradictory and confused. It proved difficult either to insulate American business from foreign competition or to prop up American wages at five to 10 times levels in other industrialized nations.

The outcome was the Great Depression, the only time in our history that labor was in surplus.

(I'm leaving a lot out here, of course. While politicians wanted high general wage rates, many of the same politicians wanted low farm labor rates, so they discouraged migration from the country to the city. At the same time, their free market indifferentism led them to ignore the collapse of American agriculture -- for farmers, the Great Depression began in 1922 and was complete even before Black Friday -- which drove people off the farms and into the city.)

The two world wars helped muddy the situation, both tending to drive up American wages because the rest of the world stopped competing for markets and spent its energies killing each other. After World War II, politicians were as aware of the problem of maintaining high American wages as they had been in 1920. It wasn't only altruism  or only fear of the Red Army that persuaded Congress to part with billions of dollars for the Marshall Plan.

This approach worked rather well, much better than the suicidal Republican policies of the '20s, and it had  considerable support in both parties. However, there was a faction in the Republican party that had fallen under the influence of free market ideologues who equated government protection of labor with
totalitarianism. Employers liked this -- whether they bought the totalitarianism bit or not -- because operation of the Iron Law would beat down wages. They forgot (or never knew) what  Henry Ford had realized: A consumer economy depends on well-paid workers to consume things.

As their front man, these ideologues recruited a simple-minded, ignorant but attractive washed-up actor with serious mental problems (he had what pyschologists call a fantasy-prone personality and was unable to distinguish what had really happened around him from what he had imagined), and they got him into the White House. By this time,  and unexpectedly, European wage levels were close to (in some cases higher than) American levels, but luckily
for the new Ricardians, Asians (notably, the Japanse) had raised their technical and educational levels close to European-American levels without reaching western wage scales.

The policy of the Reagan administration was to break unions and ship American jobs overseas. These men believed  that once American wage levels were driven down to Asian levels, they would be able to bring back capital goods and restore full employment, although at cheap rates.

People who were not morons understood at the time that this would not work. A Taiwanese businessman who had learned that the lathe that had been introduced to and financed for him by American industrialists could earn him a million dollars a month did not care whether his benefactors planned to move production back to Indiana just as soon as American workers had been "disciplined." He would get his own lathe and keep competing, and that is what he did.

Many of the morons who directed the Reagan Revolution ended up with stock in uncompetitive, worthless American businesses, although some of the smart cookies, as always, saw what was going on and escaped.

Well, surprise! Along came a digital revolution that rewrote the rules, again. Arno Penzias, who was made head of Bell Labs as a reward for discovering the cosmic background radiation, made a tour of American businesses after taking the job. He was amazed, writing that computerized process controls had made possible manufacturing to precisions he would never have thought possible or -- here is the key phrase -- even desirable.

A great deflation, comparable almost to the one that occurred in the late 19th century, began in the cost of producing consumer goods.

But instead of an industrial economy with low-paid operatives, the United States ended up with a hybrid -- a hollowed-out industrial sector with jobless operatives and a rapidly expanding digital sector with a mix of high-paid specialists and low-paid operatives. Nobody expects the Digital Revolution! (The so-called shift to a service economy was more or less mythical. There had always been a big low-wage service sector.)

The Democrats, still thinking of themselves as the party that supported labor, never knew what hit 'em. They made no efforts to restore unionism among private business workers, instead finding easier pickings among unionized government workers. Ideologically, the Democrats signed on to Reagan nostrums, and in 1994 they threw out the key legislation of the New Deal -- the law that had forestalled a financial crash for almost 60 years -- by repealing the Glass-Steagall Act.

The Republicans also reversed their failed strategy of the '20s and turned into a loose money party. During the '80s and  again since 2000, they sponsored orgies of deficit spending -- which they described as "savings" -- that distorted the economy and concealed the developing crisis among the banks.

This year, the government adopted Mugabean economics and cranked up the printing presses, injecting an imaginary $160 billion into the economy in a period of about eight weeks. This goosed the GDP quarterly numbers sufficiently to avert having to acknowledge an official recession.

Which brings us to Labor Day 2008. Vast swathes of American cities no longer offer jobs that provide meat three times a day, or any jobs at all, to immigrants or native-born. People in sectors that did provide jobs, who thought they were doing well because they had just bought a $600,000, 3,500-square-foot house (four times bigger than the house in Leavittown  that their grandfather had bought on the GI Bill in 1949), found themselves insolvent, or close to it.

The words of Anatole France echoed hollowly through their fevered minds -- or would have, if they had ever heard of Anatole France: The law in its majesty forbids the millionaire as well as the bum to sleep under bridges.

David Ricardo, an English stock manipulator who made a fortune during the Napoleonic wars but who was regarded as a quaint, important but seriously mistaken theorist when I studied economics 45 years ago, turned out to have
been right all along.