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A letter to the chair of the Federal Reserve Board
by William McGaughey, Jr.
February 8, 2014
Ms. Janet Yellen, chair
Board of Governors
Federal Reserve System
20th Street and Constitution Ave. N.W.
Washington, DC 20551
Dear Ms. Yellen:
I have read the recent cover story about you in Time magazine and wish to make some comments. The article, describing you as a Keynesian, mentions your desire to bring down stubbornly high unemployment so that economic policy serves ordinary Americans as well as the economic elite. Please indulge my expression of views.
I think there are some aspects of the unemployment problem that cannot effectively be addressed by managing the money supply. They can only be addressed by managing the labor supply. That means that that the Federal Reserve System cannot take the critical step or steps to solve the problem; only Congress and the President can do that. Even so, the Federal Reserve System has an overarching responsibility for the nation’s economic well being. It also has the technical expertise and moral authority to devise and recommend economic policies outside its immediate sphere of operation.
Cyclical unemployment such as that experienced during the Great Depression can be alleviated by timed adjustments in the money supply. However, the big problem now is technological unemployment. The problem is that machines handle an increasing amount of the “work” done in the productive economy so that less human labor is needed. Labor productivity has increased many times since the Great Depression but we are still using Depression-era remedies.
In the 19th century and early 20th centuries, there was a progressive reduction in the hours of work to offset the progressive increase in labor productivity. There was a consensus that reduced work hours were needed to maintain employment stability. In 1933, the U.S. Senate passed a 30-hour workweek bill. Even John Maynard Keynes, principal architect of countercyclical spending, stated in a 1945 letter to the poet T.S. Eliot that shorter work time was “the ultimate solution” to employment deficiencies.
The progress toward shorter work hours in the United States has been halted in recent years. That is because labor unions are no longer supplying the political muscle to put this on the agenda of public policy. The unions now represent a substantially smaller percentage of workers in the United States than in previous years; and they are concentrated in the public sector where there is more job security and wage increases are easier to obtain. They have let lapse the very issue that created the 19th century labor movement. That means that some other institution must pick up the ball - government. In my opinion, the federal government needs to act soon to reduce unemployment by legislating shorter hours. See http://www.shorterworkweek.com.
The Fair Labor Standards Act provides a mechanism for encouraging employers to schedule fewer hours of work in a week. Assuming that a four-day, 32-hour week is the goal, a law could be passed to amend the Fair Labor Standards Act by substituting 32 hours for 40 hours as the standard workweek. Other changes may also be needed. If a stronger disincentive for employers to schedule longer hours is needed, the overtime penalty rate might be increased. If a weaker incentive for employees to accept overtime work is needed, the premium wage might be taxed away instead of being given to the overtime worker. Finally, the eligibility for exemption to FLSA coverage needs to be significantly tightened. There is a proposal to increase the earnings threshold to $970 per week from $455 per week in line with wage inflation.
I am, of course, ignoring the political realities. While organized labor has collapsed as a supporter of shorter hours, business interests remain firmly opposed. Too many of today’s CEOs seem not to care about the long-term health of the economy because their compensation is tied to short-term results. The benefits of reduced hours, on the other hand, would take some time to be realized and perceived.
Another bulwark of opposition to hours reductions has been academic economists. Students of economics in your generation and mine all used the “Economics” textbook by Paul Samuelson which states (on page 576 of the ninth edition): “This attitude, that there is only a fixed amount of work to be done, is sometimes called by economists ‘the lump-of-labor fallacy’ ... the lump-of-labor argument implies that there is only so much useful remunerative work to be done in any economic system, and that indeed is a fallacy.”
I know of no person who has argued that there is only so much useful remunerative work to be done or that economic systems are static. I also know of no economic study that substantiates the “lump-of-labor fallacy”. A Canadian scholar, Tom Walker, has traced this back to a phase used by a New York Times reporter who covered a strike in England in the early 19th century - and economists blindly parrot this phrase as if it expressed an economic law. I understand that the latest edition of Samuelson’s “Economics” textbook has quietly dropped references to the untenable “lump-of-labor fallacy.” However, the damage has been done.
Economists in earlier times, who had acquaintance with actual reductions in working hours, were more favorably disposed to this approach. For instance, University of Chicago economist Paul H. Douglas, later U.S. Senator, wrote a book, Real Wages in the United States: 1890 to 1926, which analyzed the relationship between hours and wages. Senator Eugene J. McCarthy, who chaired the 1959 Senate Special Committee on Unemployment, was also a strong supporter of reducing work time to reduce unemployment and bolster the employment market. I had the privilege of becoming acquainted with him and co-authoring a book, Nonfinancial Economics: The Case for Shorter Hours of Work, late in his career.
I would urge you to support further studies in this area. The Federal Reserve System has the resources and expertise to do this effectively. Areas of particular attention might be the effect of shorter work hours on employment, wages, inflation, and financial markets. A beneficial byproduct of a four-day, 32-hour week might be the possibility of staggering the extra day off evenly among the work force in order to reduce traffic congestion in metropolitan areas such as mine.
Considering the entrenched hostility toward shorter workweeks among large employers, it might also be advisable to consider the effect of reducing work time in the United States upon our nation’s trade competitiveness. One solution is to encourage work-time reductions in several nations simultaneously, perhaps coordinated with trade policy. A new think tank is being created at Lomonosov Moscow State University, prospectively called “Club of Moscow”, to study global issues. I have spoken personally with the director of this organization about studying the problem of youth unemployment and received a favorable response. Years ago, I coauthored an opinion article with the director of Japan’s “Leisure Development Center”, an agency within MITI, about the Japanese government’s efforts to reduce work time. China went to a “shorter” (40-hour) workweek in 1995. So I think an American initiative in this area might be welcomed in other industrial countries.
In summary, an appropriate response to the continuing mechanization of production is to reduce working hours for human workers. This is better than continuing to push employment into wasteful activities such as crime and punishment, war, gambling, excessive medication, excessive licensing, and education driven by the fear of becoming employed. A more humane economy would be one which gives working parents enough time to raise children and which promotes other interests besides chasing the dollar. It is time that economists reexamine this question and produce recent studies. I am hoping that you will be interested in an old but fresh approach to our nation’s unemployment problem as you assume your important position.
March 5, 2014
Dear Mr. McGaughey:
Thank you for your recent correspondence to Federal Researve Board Chair Janet Yellen, in which you expressed our concerns about unemployment and monetary policy.
The chair receives a great number of letters daily. As a public figure with many daily responsibilities, she is unable to reply to all of those letters personally or to adknowledge receipt of each piece of correspondence. However, it isn't often that we receive a letter such as yours. I want to acknowledge it and offer thanks for your kind words and support.
We appreciate your willingness to share your views and please be assured that the Federal Reserve will continue to work diligently to restore prosperity and opportunity to our economy.
Public Affairs Office
Although this is in many respects a form letter, I was actually encouraged. If the Federal Reserve is going to study the impact of shorter work hours, it certainly would not announce this immediately to me in a letter. I do believe that Ms. Yellen and her associates recognize the limitations of the monetary approach to relieving unemployment. Incidentally, I studied math with the chairwoman's husband, GeorgeAkerlof, in college but it did not seem wise to drop any more names in this letter than I already had.
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