The Great Depression Revisited
By Tom Brewton (06/20/07)
Big Three auto makers are offering labor unions an opportunity to step back into the real world, out of the Alice-in-Wonderland world of New Deal socialism.
Labor unions are icons of the liberal-Progressives, who apotheosized them in the New Deal during the Great Depression. In addition to the primary status of unions in the Marxian labor theory of value, labor unions have been unfailing vote-getting allies of the Democratic Party.
The 1935 Wagner Labor Act, together with subsequent administrative rules and judicial decisions, made unions immune to anti-trust prosecution and enabled them to engage in criminal intimidation of employers and non-union employees with little fear of retaliation. As a consequence, union labor costs remained at levels too high for profitable production at full-employment levels.
Today, as the reality of market competition intrudes into this labor-liberal symbiotic affair, we have yet another opportunity to repair a union-made wreck.
General Motors, Ford, and Chrysler recently announced their intention to bargain with unions for significant reductions in their labor costs, in order to bring them closer into line with those of Japanese and Korean manufacturers. With union labor costs about double those of non-union Japanese and other foreign auto manufacturing plants in the United States, Big Three American automakers are financially bleeding to death.
Labor leaders face an increasingly clearly defined choice. They can insist upon maintaining artificially high wages and benefits and watch union employment shrink still more, or they can step back through the Alice-in-Wonderland looking glass and re-enter the real world in which demand and supply intersect at market-determined prices.
Liberals fail to recognize this situation for what it is: a sledge-hammer refutation of their cherished socialist economic theory that Federal spending programs can repealed the laws of economics.
Artificially-high wage costs in unionized industry were one of the main factors that kept unemployment at double-digit levels throughout the Depression. Wage rates in dollars per hour declined somewhat, but other prices declined even more. Unionized labor's real wages, in purchasing power, thus increased as manufacturers' sale prices and revenues declined.
President Hoover started the process in 1930 by jaw-boning businessmen and threatening to retaliate with government regulations if businessmen allowed normal market forces to reduce wages to levels at which they could profitably resume production. The New Deal played that game in spades.
Recessions are the effect of what should be temporary misallocations of economic resources. Over-supply of goods at prices that are too high stops sales. Wage costs that are too high for profitable production curtail the demand for labor.
In a free marketplace, businesses misjudge consumer demand and over-produce certain products. If they insist upon maintaining high prices, the goods remain in their warehouses. If they cut prices, the goods eventually will be sold and production can be resumed at levels of cost and sale price that conform to actual market demand.
For example, in the dot.com boom and bust, the Federal Reserve's over-expanded money supply financed too many unneeded dot.com entities. Fiber optic cable production was roughly ten times the ultimate market demand. Because the market was permitted relatively free movement, supply and demand were brought back into line within 24 months via liquidations of companies and inventories, along with reductions in salaries and wages.
In contrast, the Depression was dragged out over ten years, because the Federal government did everything possible to stymie normal market forces. President Roosevelt's 1933 National Recovery Administration and subsequent Congressional legislative enactments endeavored to fix labor rates and sale prices at high levels that bore no resemblance to real market demand.
A businessman considering whether to ramp up production has to make judgments about how much product can be sold, at what prices. He then must calculate his costs of production to determine whether the prospective profit justifies the risk of financial loss if he ramps up production.
In manufacturing industries like the automobile business, labor constitutes a high percentage of costs. If labor costs are too high to permit profitable production at sale prices determined by competition, businessmen have three choices. They can go out of business, they can curtail production, or they can reduce the number of workers employed.
This is the reality that the liberal-dominated Democratic Party and its labor union allies wish to ignore, preferring to believe that new Federal mandates and spending programs can fix every problem.
Thomas E. Brewton - http://www.thomasbrewton.com/
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