Let’s Go For Full Employment
by David Morris
November 5, 1996
There are societal tragedies and there are personal tragedies. For many the death of William Vickrey three days after he won the Nobel Prize for economics would be counted as a personal tragedy. He was, after all, 82 years old. Yet the timing of his death was singularly ill-fated for the nation. For what excited Vickrey, as the New York Times noted “was not the personal fame or fortune that came with the prize but the platform it provided to sell his ideas about how economics can improve society.”
Professor Vickrey’s ideas were creative. And he cared not a whit that his creativity often put him at odds with his economic brethren. As C. Lowell Harriss, an emeritus professor of economics at Columbia noted, “he proposed a system of graduated rates for transit fares that was ridiculed at the time”. Yet Vickrey’s system is now in operation in several cities.
William Vickrey’s passion was the benefits of full employment. For him, 5 or 6 percent unemployment is a crime against society. He railed against the wastefulness of public policies that keep ten million people out of jobs. Unlike virtually all of his fellow and sister economists, for Vickrey full employment really meant full employment, that is, unemployment rates close to 1 percent.
The Nobel Prize would have given Vickrey the ability to be heard on this issue. And never were we in such dire need of his counsel. In the last year unemployment rates have inched downward sufficiently that real wages have begun to increase for the first time in many years. And this has galvanized the Federal Reserve Board and many of the nation’s leading economists to declare a national state of emergency.
The Fed has autocratic power. It unilaterally raises and lowers interest rates. And it does so on the basis of an economic theory that Vickrey thought detestable. In May Gary Stern, the President of the Minneapolis Fed declared the nation “close to full employment”. In September 8 of 12 heads of the regional Fed banks favored boosting interest rates to slow the economy, boost unemployment and reduce wages. To the Fed an unemployment rate of 5.1 percent is too low while an inflation rate of 2.9 percent is too high.
Certainly at some level of unemployment wages rise and at some level of wage increases inflation goes up and at some level of inflation the economy is damaged. Yet that theoretical proposition is a far cry from declaring full employment a threat to the nation’s health. Indeed, the evidence seems to indicate otherwise.
Recent empirical studies by Robert Eisner, past president of the American Economic Association and a professor at Northwestern University, have found little connection between unemployment rates of 4 percent and accelerating inflation. Professor Eisner doesn’t offer his studies as the last word. But he adds, “they raise a very serious question. Do we know what we are doing?”
The question is relevant because the Fed is required by law to promote “maximum employment”. Thus it must offer compelling evidence to justify policies that choose to lower inflation to zero rather than to lower unemployment below 5 percent.
In the late 1960s unemployment dropped to 3.8 percent. In February 1968 Business Week ran a story headlined “A Tight Market That DoesnÕt Really Hurt”. Three years of unemployment at or below 4 percent had led businesses to increasingly recruit women, blacks and other minorities and expand job training programs.
Twenty eight years later, Business Week economic columnist Robert Kuttner noted that today more than a dozen metropolitan areas boast unemployment rates below 2.5 percent: Madison, Wisconsin, Sioux Falls, South Dakota, Lexington Kentucky, Omaha and Lincoln, Nebraska. For the most part they donÕt have soaring wages or price inflation. A tight labor market doesn’t raise everyone’s wages. It raises the wages and improves the working conditions of those on the bottom end. The minimum wage in those areas is above $6 an hour.
In Knox County, Tennessee, Fi-Shock Inc. a manufacturer of electrical fencing is not only raising wages but is offering flexible hours and is cross training workers to ease the boredom of the assembly line. A nearby company Delta Apparel needs to hire 150 sewing machine operators. To attract employees it has turned an empty warehouse into a child care center.
William Vickrey would have challenged his colleagues to explain why these things are bad for the economy. And he would have done so with a Nobel Prize fresh in hand. A Nobel Prize winning economist speaking on behalf of the working stiff. Now that would have been refreshing. For millions of unemployed Americans and for our understanding of economic forces, Vickrey’s death qualifies as a tragedy of national proportions.
David Morris is vice-president of the Institute for Local Self-Reliance