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International Socialist Review, January-February 1967


Dick Roberts

A “Wage-Price Spiral” Inflation?


From International Socialist Review, Vol.28 No.1, January-February 1967, pp.29-37.
Transcribed & Marked up by Einde O’Callaghan for ETOL.


Consumer prices are rising at the fastest rate in a decade. Between September 1963 and September 1966, the consumer price index climbed from 110.2 to 114.1; the food price index, from 109.7 to 115.1. The retail price of bread climbed 10 per cent. Between November 1964 and August 1966, milk prices increased 7.0 per cent; butter, 14.3 per cent; coffee, 19.6 per cent; pork chops, 22.5 per cent; bacon, 47.8 per cent; onions, 50 per cent; cabbage, 54.1 per cent; and apples, 79.2 per cent. These statistics were dramatically reflected in housewives’ picket lines across the country. Food consumes the lion’s share of wages and salaries, and it is right in the supermarkets that inflation hits first and hardest.

What is causing the present inflation? According to President Johnson’s 1966 State of the Union message, things had never been better: “Workers are making more money than ever,” Johnson said, “– with after-tax income in the past five years up 33 per cent – in the past year alone up 8 per cent. More people are working than ever before in our history-an increase last year of 2½ million jobs. Corporations have greater after-tax earnings than ever in history. For the past five years those earnings have been up over 65 per cent, and last year they had a rise of 20 per cent.”

The month after Johnson gave this report, food prices jumped a whopping 1.7 per cent. Interest rates began their dizzying upward spiral towards the 40-year highs they reached in August. And the New York transit workers conducted a militant struggle against heavy odds to win a wage increase in excess of the administration’s wage-price guideline.

The administration’s explanation of this contradictory state of affairs is that workers are seeking “inflationary” wage increases. Washington directly intervened in the airline mechanics strike later in the summer, first in the form of an “emergency” mediating board under the direction of liberal Democratic Senator Wayne Morse, and then when the president himself took over negotiations. The U. S. Senate passed a bill ordering the workers back to their jobs for 30 days and gave Johnson the privilege of extending this period another 150 days if he so desired. When the airline mechanics won a settlement that exceeded both the mediating board and Johnson’s terms, Morse denounced them on the Senate floor:

“The administration,” he declared, “has become party to an inflationary settlement of the airline strike. There has been placed on the House and the Senate a clear legislative responsibility, while this war lasts, to pass legislation that will protect all of our people from the exercise of naked economic power on the part of labor, and naked economic power on the part of American industry in letting loose on the American people an inflationary tornado ...”

Nor is the Senate letting this matter slide. It has appointed a committee led by New York Senator Javits to “study emergency strike laws and report to the Congress by Jan. 15 with recommendations for improving such laws.” Rigorous anti-labor legislation is one of the top priorities of the incoming 90th Congress.

The appeal to the “logic” of the wage-price spiral as a means of holding down wages in time of war is not a new line in the propaganda of the American ruling class. It was the essence of Roosevelt’s wage policy in World War II-the so-called “equality of sacrifice” – which actually amounted to federally enforced wage freezes and voluntary price controls. While real wages declined during the war, corporations raked in gigantic profits:

”In the third quarter of 1943,” Art Preis writes in Labor’s Giant Step [1], “corporation profits were ‘the highest for any quarter in American history and 16 per cent above the same quarter in 1942.” The figure was taken from a Dec. 18 report of the Dept. of Commerce.

“In the very week Roosevelt demanded that Congress adopt a labor conscription law,” Preis continues, “a Senate group issued a report revealing that net profits of 200 leading and representative corporations in 1942 were five to ten times greater than in the best peace-time years. These cases, the senators reported, ‘are not exceptional instances.’ As Roosevelt issued his new ‘plea’ to congress, the steelworkers union, presenting a 17-cent wage demand to the War Labor Board, submitted figures revealing that US Steel Corporation had almost tripled its net profits during the two war years.” (pp.203-204.)

The wage-price spiral explanation of inflation proved to be completely fraudulent during the profit-spiral years of World War II, and it hasn’t improved as an explanation of fundamental economic relationships in the intervening period. It was used after Roosevelt by Democratic Party president Truman, to “explain” the inflation caused by Korea. It is being used a third time by the Democrats to justify the inflation caused by the Vietnam war – but mere repetition of the argument does not constitute proof. What is really behind Johnson’s revival of the wage-price spiral hoax at this time is the attempt to disguise the inflationary effect of the war on one hand, and to preserve the inflation as a means of financing the war on the other.

The first and most obvious weakness in the administration argument is the simple fact that the inflation going on right now is in prices and interest rates-not in wages at all. Workers did not share in the super-profits of the 1961-65 expansion that Johnson boasted about in his State of the Union message; and they are not getting a greater share of the “national product” today. Johnson affirmed that there had been higher total incomes of workers during the expansion, and then added that there were more workers. That means the total had to be divided among more people. Johnson skipped the real question, namely the purchasing power of the individual workers, and for good reason.

Between 1960 and November 1965, wages had increased from an average of $2.24 an hour in manufacturing industries to $2.65-an increase of a little more than 18 per cent. But the consumer price index had increased in the same period from 103.1 to 110.6-an increase of more than 7 per cent. This means that real wages, taking into consideration the declining value of the dollar, had only increased about 11 per cent in the five year period. That comes to a yearly increase of a shade under 2.2 per cent, a figure a good deal below Johnson’s cherished 3.2 per cent guideline.

Have real wages fared better in the last year? On the contrary, the cost of living is rising faster and wages are getting hit even harder. Between November 1965 and September 1966, average hourly earnings rose from the $2.65 level to $2.74, an increase of 3.4 per cent. But in the same period, the consumer price index had risen 3.1 per cent, cutting down real wage increases to a mere 0.3 per cent. Reporting these effects in their September 15 Journal, the United Mine Workers held that beginning in July, miners were faced with an actual loss of buying power. In actual fact, the relatively low increase in real wages has been one of the main underpinnings of the gigantic corporation profits in the 1961-66 expansion.

The consumer-price figures tell us something else. They show that significant price rises were already taking place, relative to the take-home pay of workers, before the Vietnam war had become a major factor in the U. S. economy. Inflationary price rises are not limited to periods of war spending. This is something the workers in England are learning today all too clearly. And “peace time” inflations occur in this country as well as in Europe. There was a sharp upturn in prices in the US in 1956-57, at the peak of the 1954-57 expansion. What the war accomplishes, so far as the capitalists are concerned, is to give them the highly prized opportunity of continuing their inflationary price increases while justifying wage-control on patriotic grounds.

At the same time, it opens up a vast new arena of investment where highly profitable returns are guaranteed by the government. The Nov. 23 Wall Street Journal calculates the present cost of the Vietnam war alone at $24 billion annually. That comes to $2 billion a month, $460 million a week, over $65 million a day.

The war is not funded by taking the profits from one section of capitalist industry and giving them to another. That argument comes from some members of the Republican Party, but it is less-than-half true. By far the larger protion of war finances comes straight out of consumer income, either in the direct form of personal taxation, or in the indirect form of price inflation. This pattern was clearly established during World War II.

The Roosevelt administration financed the war through heavy deficit spending and major increases in personal income taxes: Between 1941 and 1945, the level of personal income tax increased over eight times, from 1.5 to 12.7 per cent of personal income. In the same five years, the consumer price index increased over 22 per cent. These two factors caused a sharp drop in real wages beginning in 1944. In fact, real wages did not come back up to the 1943 level until 1955, twelve years later. The deficit spending during the war, was paid for by the workers through price inflation after the war. Truman’s fiscal and monetary policies simply complemented those of Roosevelt, and these are the same policies which the Democratic Party is undertaking in this period to finance the war in Vietnam.

On Oct. 6, 1966, Senator Robert F. Kennedy revealed that “49.9 per cent of all personal taxes in the United States come from the lowest income tax bracket – the 20 per cent bracket. Forty-nine and nine-tenths per cent of all personal income taxes,” he reiterated, “are paid by those who have taxable incomes of less than $2,500 a year.” (Congressional Record, 1966, p.24458.)

As to corporate income taxes, Kennedy further disclosed that the sum total collected from “all our great corporations, the Du Pont and the General Motors, and down to the very smallest” is less than the sum total collected from the lowest income bracket. Individual income taxes as a whole and excise taxes, the great bulk of which are paid by consumers, account for 48 per cent of all federal income. Thus the capitalists stand to gain much and lose little from the federally underwritten war-goods market: Profits are high and the risk is small. The only chance they are taking is that the killing might come to an unexpected end.

The scramble for war profits accelerates inflation. In order to raise capital for war investment, the corporate rulers are quite willing to sacrifice investment in less profitable areas of consumer-goods production. This results in a scarcity of certain consumer items often accompanied by poorer quality. The scarcity itself drives prices up at the same time the capitalists are already maintaining inflationary price levels in order to generate additional funds for war investments.

But all the money which corporations invest in the war industry cannot be raised from internal sources. Much of it comes from banks and other sources of credit, and this is what causes a rise in interest rates. It was particularly sharp in 1966 because the borrowing for war production coincided with heavy capital-investment plans in basic industries launched under the stimulus of the federal tax incentive policies adopted in 1962 and 1964. Higher interest rates, in turn, effect prices throughout the economy. At each stage of production and distribution, money is borrowed, and higher interest rates pyramid the cost of the final product. A pertinent example is in food prices. Farmers must borrow heavily to buy their land and machinery, and a rise in interest rates will force them to raise farm-product prices. “Total farm production will probably reach a new record [in 1967]” the Agriculture Department predicts, because of “substantial increases ... for such overhead costs as interest, taxes and depreciation charges.” (Wall Street Journal, Nov. 11).

The shift of large capital investments from the consumer-goods sector to the war industry thus permeates the whole economy. Certain consumer items are priced out of the market: Housing construction is a dramatic example. Because housing depends on high-interest mortgage rates, it is usually hard hit by an interest-rate inflation. Since April, housing starts in this country have seen an historic decline. From a seasonally adjusted annual rate in April of 1,502,000, they have fallen to the 20-year October low of 848,000 and are expected to fall still further. This will lead to a serious housing shortage and will drive rents up. Recent declines in auto production in part reflect high interest rates, because cars are purchased through exhorbitantly high-interest auto loans; and in part the decline in auto production reflects the shrinking ability of consumers to buy high-priced products:

Does the present inflation reflect a wage-price spiral? According to the capitalists, it is wage increases that spark inflationary price rises. The truth is, it is just the other way around. Wage increases are just beginning to take place in response to rising prices which began their upward trend over a year ago. And further price rises can be anticipated which will offset these catch-up wage increases.

The capitalists are fully aware of the fact that their inflationary policies of war financing will meet stubborn resistance on the part of the working class. This is eloquently attested to by the song and dance in the capitalist press about wage-price spirals long before anything like a major wage increase has taken place for the working class as a whole. More significant is the fact that the ruling class has already taken steps to weaken the leverage of an important sector of the working class: skilled labor.

The capitalists need skilled workers everywhere, and at the lowest possible wages, in order to make the inflation pay: Sophisticated instruments of death require skilled labor, the factories to produce these weapons need skilled construction workers, and all of this at a time of peak production when skilled-labor employment is already at an all time high. This short supply of skilled workers gives these workers an excellent lever in bargaining for catch-up wage increases.

The ruling class’ anxiety on this score is well depicted in a Sept. 12 article in the US News and World Report. Based on the assumption that US forces in Vietnam will climb to 400,000 by the end of the year, 500,000 by mid-1957 and 600,000 by the end of 1967, US News and World Report makes the following predictions:

“The armed forces will reach 3.7 million by the end of next year, matching the peak level of the Korean War ... Defense spending will skyrocket. By the fourth quarter of 1967 it will run at an annual rate of 75 billion dollars compared with the present rate of 60 billion ... Labor shortages – skilled and even unskilled – will grow more severe. Unemployment, now at 3.9 per cent of the work force, will slip to 3.5 per cent by next spring, and fall to a mere [sic] 3.1 per cent by year-end. Total civilian employment will rise more than 2 million by the final quarter of 1967-but more than a fourth of the rise will be diverted into defense and defense-related production ...

“A manpower squeeze is the biggest single economic worry for the months ahead ... Says one planner: ‘The major impact of a troop build-up will be to aggravate shortages of labor. That will mean even bigger wage demands – and settlements – than would otherwise be the case. So we can expect more wage-price push, more inflation.’”

In order to meet the skilled-labor shortage, the Democratic administration has undertaken steps to induce a selective unemployment in skilled labor. This partly flows from the inflation itself. The fact that workers are “released” from over-priced consumer-goods industries makes it possible to absorb labor into war industry without encountering wage increases. This is why high interest rates, tight money and a slow-down in bank reserves are not viewed with great alarm by the capitalist ruling class:

“The experts,” states an article in the Oct. 8 Business Week, “see the declining indicators only as a sign that the monetary policy is being used in a wholly new way; to make the civilian economy give up its command over-scarce resources, thereby freeing them for use in Vietnam.” (Emphasis added.)

But high interest rates alone will not accomplish the “easing” of the skilled labor shortage which the capitalists desire. Johnson has made it clear he will take any additional steps to provide labor for the war machine. The so-called “anti-inflationary” dropping of tax incentives on investment in new plant and equipment is one such step. It is hard to see how this will contribute one iota to price declines but what it will do is cause layoffs. Johnson didn’t explain at the time whether the Democratic administration intended to compensate workers who lost their jobs as a result of this “anti-inflationary” action; the president apparently assumes that the workers will find their way into a war factory if they’re lucky ... or into the army. The coup de grace of Johnson’s strategy would be to increase unemployment in skilled sectors sufficiently by 1967 to offset the bargaining position of the unions when major contracts are scheduled for negotiation. Unemployment figures have been closely followed in the capitalist press and even slight changes in their favor make the front page.

Thus the Oct. 11 New York Times heralds the fact that the government had announced on the previous day that “the shortage of skilled workers appeared to have eased in recent months.” This occurred, the New York Times explained, even though unemployment as a whole had declined. The explanation lies in the increasing employment of women. While selectively weakening the job position of skilled workers, the capitalists force more women into jobs simply to maintain the family income.

The idea, in essence, is to change the composition of the reserve army of unemployed. But while the capitalists are playing it tight with the skilled workers, they are playing it fast and loose with the Negro and teenage workers. McNamara, for his own purposes, has taken steps to reduce the “mental” and age requirements for the draft. He sets aside the fact that the same measures that could induce a change of a few percentage points in the skilled labor force could mean a change of ten or twenty points in the ranks of Negro unemployed. Even in boom conditions, Negro unemployment remained at least double that of white workers. At one point this summer, over 25 per cent of Negro teenagers were unemployed on a nationwide basis. In the 100 largest cities, the figures ran to 31 per cent for Negro teenage boys and 46 per cent for Negro teenage girls.

Lyndon Johnson’s demagogic promise of “guns and butter” will have to be jettisoned. The capitalist system does not have the leeway to conduct an escalated war simultaneously with a program of domestic reform. As Johnson further and further embraces the wartime economic policies of the Truman and Roosevelt administrations, not only will no new reforms be undertaken, but the government will attempt to take back concessions already won by the workers in bitter struggle.

In a recent policy statement, Gardner Ackley, the chairman of the president’s committee of economic advisers, stated that a “substantial” increase in inflationary pressures would come from further attempts to reduce unemployment by stimulating the economy. This is nothing else but an open admission of the ruling class policy to undercut labor by reducing employment. It marks a major retreat from the pretensions of the Kennedy Democrats that the problems of unemployment could be solved if only you listened to the “new” economists. Ackley went even further. He insisted that “an increasing number of increasingly serious violations of both the wage and price guideposts has been occurring.” But the guideposts are not dead, he proclaimed, “arithmetic doesn’t go away just because we don’t like it or can’t learn it.” (Wall Street Journal, Oct. 27)

The 89th Congress set the stage for an intensification of reaction in this country. It rejected all major labor-sponsored and civil-rights legislation. It projected for prime consideration at the next session additional repressive anti-labor legislation. The almost unanimous hysteria in congress about “riots” and “Black Power” leading to an overwhelming endorsement in the House of severe “anti-riot” legislation, indicates what the Negro people can expect. Inflation is not only an economic matter; it has to be enforced, and this requires a political as well as an economic offensive on the part of the ruling class.

But will it work? The American working class has gone through this before-and when the “war effort” was much more popular. It is not going to be so easy for Johnson to pretend the survival of the “free world” depends upon war and domestic sacrifice. Few Americans see any connection at all between the survival of “democracy” at home and the support of Hitler-loving dictator Ky in Vietnam, The defiant militancy of the New York transit workers last January, the airline mechanics in August, and even more recently, the electrical workers, has shown that organized workers are not going to accept the appeal-to-war as a rationale for some latter day “equality of sacrifice” fraud under which corporations enrich themselves at the expense of the workers. American housewives are demonstrating the same mood across the country in a different way. The boycotting and picketing of the supermarket food chains is another significant indication that Johnson’s program of inflation and war is bound to stir increased resistance. Ultimately, the escalation of the war must link the demands of the antiwar movement with those of the working class. The workers will learn precisely why it is in their interest to demand an end to Johnson’s “police action 10,000 miles away.”

November 24, 1966


1. Labor’s Giant Step: Twenty Years of the CIO, 1965. Merit Publishers, 5 East St., New York, N.Y. 538 pp. $7.50.

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