Inflation and Strikes

A lawyer who has taken a leading responsibility in business management, a citizen who is public-spirited and courageous in the contributions he has made to his home community, LELAND HAZARD has been vice president and general counsel of the Pittsburgh Plate Glass Company since 1947.

The future of capitalism may very well depend upon improvement in the quality of the labormanagement relationship. This becomes more and more apparent as we observe the disturbing progress of inflation.

Of course the memories of the deflationary early 1930s linger. For psychological reasons we can have a chilly wind in our economy almost any time, in fact in the very month in which the reader attends this article. But the underlying factors — population growth, a people conditioned to ever-rising standards of living, and strong unions — these factors tend toward inflation. The grave question is: Who is the villain responsible for spreading the inflationary disease?

Is it management; labor? Is it wages, profits, the income tax, the interest rate, Wall Street, Main Street? The truth is that nobody knows beyond all doubt, and therefore the field is wide open for accusations.

But when people feel threatened, they do not wait for proof. They decide. A recent poll of the Gallup type found 89 per cent of the American people saying that prices have been going up and 85 per cent saying that we do have inflation now. The poll found inflation the first of twenty domestic problems which people thought Congress should consider, and showed that in the people’s view government, big business, and labor unions shared the blame nearly equally — within a mere four percentage points.

The underdog has disappeared from our midst. Phrases such as “exploitation of labor” are gone from our vocabulary. Practices in capitalism which made a Robert Owen and other Utopians of the nineteenth century possible, even a Norman Thomas of the twentieth century, are gone. Minimum wages, retirement pensions, health and accident insurance, unemployment compensation — through these we have all but created the riskless society, except for the risk of inflation. Labor can no longer sound the howl of the underdog.

And even though the man on the street may not care about, or be much influenced by, the statistics which prove that for some years wages have been increasing more rapidly than profits, in any case he finds the erstwhile underprivileged tugging less insistently on his heartstrings. The forests of television aerials all over America hearten the average man. And the difficulty of finding a parking place leaves him with the conviction that not all of those cars can belong to the wicked rich.

But nowadays Americans worry about whether our system can last. People who care about haircuts have — more often than not — the required $1.75. But they are rightly concerned about any price which has moved upward so much, so fast, in such a short time. Where will it end, people want to know?

Prices rise 1) when goods which people need or wish are in short supply, so that people are bidding against one another for the less than sufficient quantity, or 2) when the supply of money (mostly bank credit) is ample or excessive so that money is pressing to rent itself, and therefore capital is abundant for all kinds of new and risky ventures. These classic causes of inflation do not seem prominent enough today to explain what is happening to prices. By and large, goods are plentiful. A person can get an automobile or refrigerator without waiting, as everybody knows. Less widely understood, but equally significant, is the fact that the board of governors of the Federal Reserve System has been consistently and effectively restricting the supply of money, that is, the supply of bank credit. Therefore two of the classic causes of inflation are absent from the scene. There is no shortage of goods and there is no excessive supply of money. And yet we have inflation.

FROM all of this a new term has emerged — wage inflation. Higher wages, higher prices. The circle is vicious. Management says to labor, keep the wage down and we can keep the price down; put the wage up and we have to put the price up, so that your wage increase does you no good and does harm to schoolteachers, some farmers, government workers, pensioners, and others (including savers) who have little power to force their incomes upward to match the higher prices. Labor retorts that the cost of living keeps going up, that labor must run faster to stay where it is, and that management does not indeed need to increase its prices. At this point in the argument labor points to high profits, usually quoting absolute figures in impressive millions, seldom relative figures. The fact is that the margin of profit for all business, particularly big business, is presently declining.

In management circles it is widely held that unions should restrain themselves and refrain from higher wage demands. According to the polls, a surprising percentage of the people are also coming to that conclusion. But I do not expect relief from labor. Union leaders, even the more responsible ones, are necessarily political. Workers’ demands are varied and disparate; interunion rivalries still exist, despite the merger of the AFL and the CIO. Employment is relatively full. Labor is actually short in some areas. These are not the conditions under which a realist expects unions to withhold wage demands.

And so I make the first of two proposals: I think that we in management must begin now to refuse wage increases even though we know certainly that our refusals will produce strikes. We have been too timid about strikes. During World War II we were highly conditioned against them. Production of munitions was so much needed; almost every significant manufacturer had converted to some form of war production; and any interruption of production could have threatened our national survival.

Furthermore, the conditioning continued into the post-war period. Flush with the money of wartime payrolls, our country needed goods to supply the enormous demand accumulated during wartime restraints. After the war we could have had an inflation to curl your hair, except for the amazing speed of industrial reconversion and a relatively high degree of industrial peace.

But now we are in a new day. Nevertheless labor has got the habit of asking wage increases and management has got the habit of granting them and passing on the cost by increasing prices. The case is not unlike that of the victim who originally suffers real pain, takes a drug of sufficient potency to alleviate the pain, then ultimately imagines the pain so that he may have the drug.

Of course management can exhort labor not to ask for the next wage increase, warning against inflation, and of course labor can exhort management to grant the next wage increase and pay it out of profits rather than by higher prices, pointing to the high cost of living — both sounding unctuously pious. But the fact is that management does have the power to say no.

Powerful influences work to coerce management to say yes: not only the conditioning mentioned above but also the general stigma which attends a strike. The manufacturer may be a supplier to another manufacturer, so that interruption of supply closes the customer’s plant — an event which may well cause that customer to change his source of supply; or a manufacturer may hesitate to risk a strike which will take his brand name off the shelves while a competitor’s brand name is in ample supply. Management has many good reasons for yielding to wage demands when a strike is the alternative. But management has the power to say no. Does it in present circumstances have a duty to say no? I think it does.

In the United States, wage setting is left by law (the Wagner Act of 1935) to collective bargaining between management and labor. In some other countries government fixes wages. In America management values very highly this freedom from governmental intervention in the wage-setting process. So does labor. But are we using our freedom?

Management has more independence than does union leadership. It is relatively free of political considerations and should begin now to exercise its greater power to say no, lest government under political pressure resulting from the people’s fear of inflation should blunder into the process of setting wages and prices.

The price of “no” to further wage increases will be some strikes. It is said that no one wins a strike, but this cliché is only partly true. A strike which lasts long enough (I consider six weeks a minimum) has a considerable and favorable effect for a long time. It hurts enough to be remembered. It has a sobering influence. The fact that a strike has occurred is one of the best reasons why it will not be necessary again — not soon.

Strikes of themselves will not necessarily curb inflation. But if management has the wit to make the issue clear — that the hurt of the strike is inflicted in the sober conviction that the American system is in jeopardy — a great advance can be made in our economic understanding. People learn what they need to learn. And crisis and drama are great aids to learning.

We are now confronted by a dilemma with three horns rather than the conventional two. Labor is unlikely to refrain from wage demands while prices (cost of living) continue to rise. Management is unlikely to deny wage demands so long as the higher wages can be passed along in higher prices. Here are two horns of the dilemma.

The third is politics. Government has the power to enlarge or contract the money supply — the amount of bank credit. If the dollar is to be really sound, the Federal Reserve Board must contract the money supply severely. It must up the terms for credit and confidence sharply. Then goods at the higher prices necessary to recover the last wage increase will not move. Inventories will increase. Manufacturers will begin closing plants, and marginal enterprises will fail. The result will be people out of work.

So there we have it — a three-horned dilemma. If management says no — and management should say no — there will be strikes and, worse, perhaps the loss of customers not willing to suffer for the good of the economy as a whole. If labor leaders refrain from more wage demands, who will guarantee them that the cost of living will stand still or that other labor leaders will not raid their unhappy unions? And if government yanks the credit rug from underneath higher prices, they will fall all right, but too many voters will walk hard pavements, unemployed and quite uninterested in the hardened dollar. Everybody fears inflation but no one will do anything about it. We know how. Indeed we understand the remedies and their consequences all too well.

Productivity is the one technically possible escape from the three horns of the dilemma. But I mention productivity only to admit that our techniques for greater productivity in industry are not working very well. We have endless schemes of job evaluation, incentive, bonuses — plans designed to appeal to the self-interests of individual workers. But more often than not the worker tries to beat the system by a minimum of effort rather than enhance his individual earnings by a maximum of effort.

The basis of an incentive system is simple enough. If a worker runs a machine so as to make one piece in fifteen minutes for pay of one dollar, but can be induced by a bonus of 50 per cent to run the machine in the same fifteen minutes a little faster or a little better so as to make a second piece, then the worker has increased his earnings by 50 per cent. And management has reduced its cost by 25 per cent — two pieces for a dollar and a half, seventy-five cents each, instead of a dollar each. It is as simple as that. The system would be marvelous if it worked.

James F. Lincoln, one of the most successful exponents of incentive, admits that 60 per cent of the plans fail. They fail for lack of workers’ belief in the honesty of the system. Let us be frank, workers do not trust management. They are not convinced that prices would go down with declining unit costs. They would rather remain skeptical of management than enjoy a higher take-home pay which would result in a reduction of management’s costs. This is a harsh conclusion, but nothing else could explain such waste of human talents and of machine capacity.

And yet workers do believe in the system as a whole. They are putting more and more of their efforts into a kind of deferred compensation: pensions, annual wages, vacations, health and accident insurance, various kinds of benefits which do not involve “Get your pay every Friday,” but rather are deferments of the sort which bespeaks faith in the system. The figures show that of workers’ total compensation about 20 per cent is now invested by them in benefits which do not show up in the payroll and benefits which, by and large, workers trust the company to deliver at some future date.

But this confidence will be misplaced unless there is a wider recognition of the inescapable connection between costs and prices. Management will have to convince labor that the lower costs will result in lower prices, in a lower cost of living, and in better economic health for America.

Now I can state my second proposal. I believe that top-level labor and top-level management and top-level government must come together in an open, public, widely publicized conference — one in which all masks come off, all pretenses are abandoned in a collaborative search for the key to greater capitalistic success. The more quickly decent management and decent labor define areas of agreement and explore the true nature of their honest disagreements, the harder it will be for the shysters and the crooks to operate.

The hour is late and the need is great. American capitalism by high costs can be priced out of the market, but, more than that, unless capitalism conquers inflation America can lose the global struggle for men’s minds and hearts.

This is the first of a series of papers on tabor and management. In March we shall hear from George W. Brooks of the International Brotherhood of Pulp, Sulphite and Paper Mill Workers.