Greenspan Undermines the AFL-CIO!! Jude Wanniski June 21, 2001

Memo To: John B. Judis, The New Republic
From: Jude Wanniski
Re: The Problems of the John Sweeney and the AFL-CIO

You really have to rethink the problems confronting the economy when you ponder why it is the AFL-CIO is having such a hard time organizing workers. Unless you understand that we are in the midst of a pure monetary deflation, you will not be able to explain to your contacts in organized labor why their organization is shrinking. I read your piece in the June 25 issue, “John Sweeney in Trouble: Labor’s Love Lost,” and see you have a gaping hole in your analysis. We do agree, as we discussed on the telephone Monday, that Labor has its best success in signing up workers when there are expanding increases in labor productivity. Management always tends to resist fully sharing those gains and the individual worker does not have enough clout to get a full share unless he or she is part of an organized effort. In a deflation, productivity increases may well be occurring, as they have these past four years. When there is a secondary economic action taking place that requires a downward adjustment of wages and benefits, though, the AFL-CIO will often find it is beating a dead horse -- when the industry it is trying to organize sees profits that are declining in nominal terms, although the dollars are gaining in purchasing power.

At the moment, it is clear to everyone that the manufacturing sector is getting beaten up, and the National Association of Manufacturers has common cause with the AFL-CIO in blaming “the strong dollar.” What neither organization realizes is that the problem is not the strength of the dollar relative to the Japanese yen or the European euro, but to gold. Remember we are in a floating currency system, John, which means the dollar changes its value from day to day relative to many things traded around the world. It is my belief that gold is the first commodity that responds to an error by the Federal Reserve when it supplies too many dollars or not enough. When it supplies too many, each dollar in the system loses value, and we call that inflation. When it supplies too few, the dollar becomes scarce and gains value. That’s deflation. If you don’t like my use of gold, take a commodity of your choice, and you will see that since the deflation began, in late 1996, all commodities have declined relative to the scarce dollar, with gold falling to its present $270 range from $385 in November 1996. The price of oil fell to as low as $10 a barrel and stayed low for almost two years, before the absence of investment in new oil supplies made it more scarce in physical terms. But the deflationary process is continuing, a little at a time, forcing profits and prices and wages to fall in nominal terms.

What neither Sweeney nor Jerry Jasinowski of the NAM sees is that the Fed is forcing an expanding economy to live within a smaller monetary suit. If we were on a gold standard during this past decade, and the Fed had to supply exactly the amount of liquidity the market was demanding at a fixed dollar/gold price, there would not have been a rise in the gold price to $385 from $350 in 1993 following President Bill Clinton’s tax increase. Nor would we have seen the downward adjustment during the last four years. Productivity would have expanded and so would profits, but without an increase or decrease in the GENERAL price level. The AFL-CIO would have found it much easier to add membership instead of losing workers, who now have to find work as best they can at lower wages than the unions insist upon maintaining. The same deflationary situation took place in 1981-82, when organized labor was forced to “give back” wages and benefits previously won. A carpenter could make $4.25 an hour when gold was $35 and could make $42.50 an hour (including fringes) when gold went to $350. With gold coming down to $275 because of the Fed’s monetary errors, the carpenter has to be willing gradually to accept lower nominal wages because his employers will be being forced to charge nominally lower prices. In April, I explained this to Treasury Secretary Paul O’Neill, saying the tax cuts enacted in 1997 were pushing the economy to expand, the way a skinny kid could would grow with more and better food and exercise, but that the monetary authority was refusing to allow the kid a bigger suit of clothes.

In our conversation Monday, I mentioned the monetary deflation that took place after the Civil War, when it was purposely engineered by the Grant Administration and the New York bankers. The adjustment process was terrible for workers and for farmers, as the U.S. government made the dollar scarce by selling bonds for dollars and then destroying the dollars tendered, until gold fell to its pre-war parity of $20.67 per ounce, from the $40 level to which it had floated. Workers who had been earning $2 a day were cut back to $1, which bought twice as much gold, but did not allow them to extinguish their nominal debts, incurred when the dollar was cheap. This is important to bear in mind when you next talk to Sweeney, who will remember that the AFL was founded in 1886, AFTER the adjustment to $20.67 gold was completed in 1879. By 1886, the national economy was booming and so was worker productivity!! There was a demand for unions to negotiate a full share. So if Sweeney wants to reverse the fortunes of the AFL, now is the time for him to call Jasinowski at the NAM, and they can both pay a visit to Treasury Secretary O’Neill and ask for a correction to the Fed’s errors. The President would be happy to oblige, I think, if he knew the floating dollar had become the problem, not the solution. By now, even Greenspan might agree.