Letter to the Editor


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To the Editor:

We are in a recession. Two methods have been recommended to get us out of it. One is for the Federal Reserve System to reduce its discount rates sufficiently to bring about corresponding reductions in the interest rates which banks charge their customers. It is hoped that such reductions will result in more borrowing and more spending of the borrowed money by individuals and businesses. The other alternative is to restore the incentive to invest by such things as repeal of the capital gains tax.

Ordinarily a reduction in interest rates would indeed give rise to more borrowing and more spending, but if firms cannot invest money profitably (or if their managers don't believe they can), then even extremely low interest rates may not lead to any significant increase in the demand for goods and services. However, it is really a very simple matter to restore high employment and production temporarily, by increasing the money supply. This could be done by reducing taxes and issuing some new money to pay a portion of the government's expenditures.

There is no reason why this need result in inflation if the amount of such new money were properly controlled. The usual mechanism for increasing the money supply is for the Federal Reserve System to buy U.S. Government securities. The last I knew, all or nearly all of the earnings of the Federal Reserve System (including the interest Federal Reserve banks earn on the Government securities which they own) in excess of the "Fed's" operating expenses has been returned to the U.S. Treasury. So, such an addition to the government's debt is not a matter which the public needs to be concerned about.

The increase in consumer spending resulting from this kind of combined fiscal and monetary action causes receipts per unit of output of firms to rise. Since wage increases are almost invariably delayed, it will then pay firms to employ more workers and to increase output. Unfortunately, unemployment probably cannot be reduced much below 6 percent of the labor force for any long period by measures like this which are designed to increase the demand for labor. This is because, if unemployment drops below the level economists often refer to as the "natural level," wage rates will be forced up. The result of such increases is that it will not pay firms to employ as many workers and it is the reason why the irreducible minimum of unemployment may still be a lot of unemployment.

Why do wage rates react this way? With business profits higher, and with less unemployment, unions are in a stronger bargaining position. Firms will not resist union wage demands for so long a period before giving in. Workers are less afraid of losing their jobs because of being replaced during a strike or because with the higher wage rates it might pay the employer to reduce his labor force. And workers who risk losing their jobs now have a better chance of finding others.

It troubles me that, aside from the minimum wage laws, there is another problem in using wage reductions to solve the employment problem. This is that workers with no very special skills often, even if employed, find it very difficult (and in some areas probably impossible) to earn enough to support themselves or families. I have become convinced that the chief reason for this is overpopulation.

When I was younger, and I think more naive than I am now, I believed that if capital investment took place at a sufficiently high rate (and by this I mean additions to buildings and equipment primarily), this could very largely offset or compensate for a scarcity of land and natural resources. I now suspect that this is true only up to a point, and that once nearly all of the good deposits of minerals, etc., are being tapped and nearly all of the good fertile and well-watered farm land has been put into use, more capital will not solve this problem. Tools and equipment are often as much a substitute for labor as they are complementary to labor. Unfortunately, almost every proposal to deal effectively with the problem of overpopulation is offensive to very large numbers of people. But unless, we soon "get a handle" on this problem, I suspect that poverty and its consequences hunger, homelessness, lack of adequate medical care etc. will become increasingly more serious. Also damage to the environment will become more severe.

Phillips H. Brown

Cape Girardeau