In a vigorous and dynamic economy in which consumers are eager to live better, and in which producers are good at bringing out new and improved articles and have efficient sales organizations, the situation that I have described is likely to exist for much of the time. But these periods of vigorous demand, in which the price level usually rises slowly, are interrupted from time to time by business recessions. When sales start to fall off, should the community stand aside and let the recession develop without restraint? Or should the community take vigorous steps to combat the depression and to keep it as mild as possible? Everyone knows today that the country will not tolerate a policy of doing nothing about recessions. And in the divided world of today, in which every recession in business gives opportunities for Communist activity, it is imperative that the United States avoid severe or even moderate recessions. Since this country is such a large part of the world's economy, producing about 40 per cent of the world's goods and consuming nearly as much, even a moderate drop in business here would dangerously disrupt the economies of other free countries.
But the policy of keeping recessions as mild as possible is incompatible with the ideal of long-run stability of the price level. In order for the price level to remain stable in the long run, the fall in prices that accompanies each recession must be great enough to cancel out the rise in prices during the preceding boom. If the country halts each recession fairly promptly, prices will not fall sufficiently to wipe out the rise of the former boom. Hence each revival of business will start from a higher price level than the previous revival, and the long-term movement of prices will be slowly upward. Although a slow climb of prices would create injustice by diminishing the purchasing power of pensions, insurance, and some savings, let us not overlook the fact that recessions also create injustice. A drop in prices sufficiently severe to cancel the rise of prices in the preceding boom would be accompanied by severe unemployment. People who were eager and able to work would have to remain idle while the demand for goods was being allowed to drop until some earlier price level had been restored. Hence the cost of long-run stability of prices would be the unnecessary unemployment and loss of output that accompany recessions sufficiently severe to cancel the price rise of the previous booms.
The problem of a wise price policy is complicated by the rise of powerful trade unions in recent years. The bargaining power of unions naturally varies with the demand for goods and labor. At some point short of full employment the bargaining power of most unions becomes so great that they are able to push up money wages faster than the engineers and managers can increase output per man-hour. The ability of unions to raise money wages is enhanced by stiff taxes upon corporate profits. Since a large part of any wage advance would diminish the tax liability of the employer, and to that extent cost him nothing, his incentive to resist the wage demands of unions is weakened.
The ability of unions to raise wages faster than the engineers and managers raise output per man-hour confronts the community with two more or less unpleasant possibilities. One possibility is that the rise in labor costs might come out of profits instead of being passed on in the form of higher prices. But the number of men that employers are willing to hire depends upon their success in making money. Hence a drop in profits would mean fewer jobs and more unemployment. The increase in unemployment would weaken the bargaining power of unions. After unemployment had reached a certain level, probably around 4 or 5 per cent of the labor force, the unions would not be able to raise wages faster than the average advance in output per man-hour. Hence rising wages would no longer produce an increase in labor costs and unemployment. The community, however, would get stable labor costs only by sacrificing the output of several million men—that is, by accepting a lower standard of living.
Another possibility is that the community might attempt to protect itself against rising labor costs by placing legal restrictions on collective bargaining. Such restrictions would be most difficult to enforce, and they would, of course, involve much sacrifice of freedom on the part of both employees and employers. Most people would probably regard this remedy as worse than the disease.
Confronted with the unpleasant choice of chronic unemployment or government regulation of collective bargaining, the community is likely to decide that prices should be encouraged to rise sufficiently to offset the rise in labor costs. This policy would mean a slowly rising price level and all of the injustices that go with it. It would, however, enable the community to avoid the disadvantages of chronic unemployment or of government regulation of collective bargaining.
Cannot ways be developed of limiting the bargaining power of unions so that free collective bargaining would be preserved but so that unions would be unable to impose a cost inflation on the community? I have seen no promising proposals. The prohibition of industry-wide bargaining, which has been suggested, would probably hurt employers more than unions. The Swedish trade unions are now wrestling with the tendency for collective bargaining to inflate labor costs and thus indirectly to inflate prices. The Swedish unions are proposing tax changes which, they hope, will stiffen the resistance of employers to the unions' wage demands. Their proposals do not seem to me to be very promising, but the fact that the unions have made them is significant. It may seem startling for unions to attempt to build up the bargaining power of employers—but the union leaders are faced with a novel problem. They find that agreements among unions to practice restraint in pressing for higher wages break down after several years, and neither the leaders nor the members like the tendency for rising wages to push up prices.