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Economics of wartime bureaucrats kept on payrolls by bilking taxpayers

By Gary North | Specific Answers

And he shall judge among many people, and rebuke strong nations afar off; and they shall beat their swords into plowshares, and their spears into pruninghooks: nation shall not lift up a sword against nation, neither shall they learn war any more. But they shall sit every man under his vine and under his fig tree; and none shall make them afraid: for the mouth of the Lord of hosts hath spoken it (Micah 4:3-4).

This is a prophecy regarding “the last days” (v. 1). The description of peace — swords into ploughshares — is one of the most familiar in Western culture. It is a day that men say they dream of.

Let us assume that the day comes to pass. Can you imagine a group of economists calling for the continuation of the sword industry? They would invoke this argument: “If we get out of sword production prematurely, there will be unemployment. This would bring the post-war economy to a screeching halt. What we need is a program of sequential reduction of weapons production that does not disrupt the job market.”

As for letting the troops return home, the suggestion would bring this response: “The rise in unemployment would be devastating to the post-war economy. The bulk of our troops must be kept on active duty until such time as the economy makes the transformation back to peacetime production.”

How long would it take to turn swords into ploughshares under these post-war conditions? How long would the troops wait to be demobilized in order to return home? The answer would be open-ended. No one would know. Politics would decide.

If the definition of “peace” is “keeping the troops in uniform until it is clear that they can get good jobs in the private sector,” then peace sounds suspiciously like preparation for the next war.

This was what the United States economy was facing in late 1945. Japan surrendered in August. Germany had surrendered the previous May. By the time that President Truman delivered his State of the Union address in January 1946, he had disbanded half of the 12 million troops who had been on active duty when Japan surrendered. In his address, he promised that most of the remainder would be demobilized by June. Hazlitt was writing this chapter about the time when Truman delivered his speech.

America’s families wanted the troops disbanded. They wanted their sons and husbands out of uniform and back in the country. Truman understood this. Concerns over unemployment were not sufficient to keep him from bringing them home and demobilizing them. They came home. They hung their uniforms in a closet. Soon, they folded them, and packed them in trunks. The uniforms were mothballed. So were their owners’ wartime jobs.

The troops were rapidly integrated back into the private sector. Unemployment in 1946 was low: 3.9%. It remained in this range for the remainder of the decade. Hazlitt’s prediction in early 1946 was accurate:

The soldiers previously supported by civilians will not become merely civilians supported by other civilians. They will become self-supporting civilians. If we assume that the men who would otherwise have been retained in the armed forces are no longer needed for defense, then their retention would have been sheer waste. They would have been unproductive. The taxpayers, in return for supporting them, would have got nothing. But now the taxpayers turn over this part of their funds to them as fellow civilians in return for equivalent goods or services. Total national production, the wealth of everybody, is higher.

But what about wartime bureaucrats? Here was the question: “Can the private sector absorb them?” Hazlitt said it would. Here was a second question: “Is it a good idea to dismiss them?” Hazlitt argued that it was a good idea.

But the vast majority of these employees remained on the payroll. In fact, more were hired, year by year. The argument that almost everyone applied to the troops was not applied to the wartime bureaucrats: “Bring the boys home. Let them get on with their lives.” The politicians, the bureaucrats, and the voters concluded that the logic that applied to men in uniform did not apply to non-combatant bureaucrats who had not gone off to war.

With this as background, let us consider the economics of keeping wartime bureaucrats on the federal government’s payroll.

  1. Owners

War is a matter of coercion. It is a non-market phenomenon. Ludwig von Mises wrote this in 1944: “History has witnessed the failure of many endeavors to impose peace by war, coöperation by coercion, unanimity by slaughtering dissidents.”

Before a war begins, citizens are owners. Their primary asset is their lives. They are stewards of their lives under God.

Except for a handful of government employees, citizens earn their livings through voluntary exchange. They have jobs. They do not own their jobs. Jobs are temporary products of competitive bidding. But the bidders own the skills they possess. In a free market social order, they own the right to make bids to others. They buy and sell. Among the things that they buy and sell are employment skills.

They also own that portion of their income that is not extracted by taxes, including the losses imposed by monetary inflation and government regulations of the economy.

  1. Window

Unlike the other chapters in Hazlitt’s book, the window here is pre-war. The window is peace. It is the right of people to make voluntary arrangements with each other in order to attain their goals as owners of their lives, talents, and money.

In peacetime, individuals decide where to work and at what compensation. Employers compete against employers. Employees compete against employees. Out of this competition comes an array of wages. At some price, a labor market clears: no unemployed people willing to work at that wage, and no employers unable to hire workers at this wage.

This is not the case in wartime.

  1. Stone

The stone is the war. Civil governments seek to impose coercion on foreign citizens and also on domestic citizens. This disrupts citizens’ pre-war priorities. It therefore disrupts pre-war labor markets.

During the war, voters consent to higher levels of taxation, government borrowing, and central bank monetary inflation. They also consent to price and wage controls.

The labor markets adjust to the new conditions of the supply and demand for labor. This adjustment is invariably administered by bureaucrats, who impose price and wage ceilings. The phrase “price and wage controls” really means this: people controls. The state’s bureaucrats threaten violence against people who buy or sell at prices above the legal maximums. This intervention always produces shortages. The government then introduces non-price rationing. This system of the mobilization of labor may also be accompanied by military conscription: the draft. The labor markets during wartime are not free markets. State coercion is basic to clearing the labor markets in wartime. This domestic coercion is justified by invoking the war. This is said to be the price of victory. This was the universal phrase in the United States in response to shortages: “Don’t you know there’s a war on?”

Here is the economic question raised in this chapter: “Should the national civil government stop throwing stones into the labor markets after the war is over?” In the market for military service, the state is likely to reduce the number and size of these stones. But this is not true of the labor market for wartime bureaucrats. The politicians offer new justifications for keeping wartime bureaucrats on the payroll.

Men who were forced by the threat of violence to join the armed forces — conscription — did not own their jobs. They probably did not want these jobs. They had refused to volunteer, so they were drafted. Most men in World War II were drafted into the armed services. But some volunteered. The threat of conscription always backed up the system of volunteering.

In contrast, wartime bureaucrats were all volunteers. They remained safely stateside. Most bureaucrats remain stateside in every war. There is no organization known as the BFW: Bureaucrats of Foreign Wars.

The legal justification for the massive shift away from pre-war employment patterns is based on the moral foundation of the war. When the war ends, the moral justification for the continuation of these jobs also ends. The surviving owners of their lives are allowed by the state to reclaim possession. The national government demobilizes the troops.

In contrast, stateside bureaucrats are reassigned to new positions, or at least newly defined positions. The moral and legal justifications for their original employment disappear. An economic justification is substituted: “If we fire them, they will stop spending. This will depress the economy.” This is a Keynesian argument.

Taxpayers must therefore continue to be taxed in order to keep these bureaucrats on the payroll. Their ownership of their income is reduced by taxes.

  1. Costs

Some of the costs of the war decline when the war ends. Conscription ends for most men. Taxes may go down. Central bank inflation may end. Price and wage controls may end.

In the case of wartime bureaucrats, their salaries continue to be paid. Because their wartime assignments ended with the war, new assignments are discovered or invented. The federal government continues to tax, borrow, and spend. Money that would otherwise have remained in the possession of peacetime taxpayers and investors continues to be transferred to the federal government. This money is used to keep bureaucrats on the payroll.

We are back once again to Bastiat’s contrast between the things seen and the things not seen — the heart of Hazlitt’s analysis. The bureaucrats are seen. The goods and services that they buy are seen. What is not seen are the goods and services that would have been bought by taxpayers, had the bureaucrats been fired and their salaries eliminated. The taxpayers now do not buy these things. Producers who would have supplied these things now do not hire workers to produce these goods and services. Investors who would otherwise have provided the capital for such ventures decide instead to buy government bonds. Hazlitt described this outcome:

Once again the fallacy comes from looking at the effects of this action only on the dismissed officeholders themselves and on the particular tradesmen who depend upon them. Once again it is forgotten that, if these bureaucrats are not retained in office, the taxpayers will be permitted to keep the money that was formerly taken from them for the support of the bureaucrats. Once again it is forgotten that the taxpayers’ income and purchasing power go up by at least as much as the income and purchasing power of the former officeholders go down.

Had they returned to the private sector, the bureaucrats would have become productive citizens — as determined by customers. The work that the bureaucrats had performed during the war was justified politically in the name of military victory. But after the war, taxpayers are no longer willing to suffer taxes in the name of national wartime sacrifice. They want to pursue their own affairs. How, under these circumstances, can they be persuaded to hand over money to the government to pay salaries to post-war bureaucrats?

If wartime bureaucrats stay on the government’s payroll, taxpayers must forego some of their post-war goals. This is the cost of keeping bureaucrats on the payroll. To hide this cost, Keynesian economists came up with this argument: “If the federal government keeps them on the payroll, they will spend money. This will stimulate the economy. Taxpayers will be better off than if the bureaucrats are fired and their jobs get mothballed.” Hazlitt wrote this in response: “When we can find no better argument for the retention of any group of officeholders than that of retaining their purchasing power, it is a sign that the time has come to get rid of them.”

No one in authority in government believed Hazlitt. Most voters did not care.

  1. Consequences

The growth of the federal bureaucracy continued after 1945. Those wartime bureaucrats who wanted to remain on the payroll were assigned new tasks, and these tasks became permanent, unlike World War II’s military tasks.

Post-war West Germany and Japan experienced unprecedented economic booms after 1949. Their wartime controls ended. Free markets were substituted for the pre-war and wartime economic regulations. These two nations were not allowed to re-arm. So, their populations were spared the fiscal burden of the military. This was especially true of Japan. These booms constituted the “peace dividend” of a foreign military-imposed anti-militarism. This exemption from militarism enabled both economies to become economic powerhouses after 1949. Their export-oriented businesses became formidable economic competitors to the military victors of World War II.

Conclusions

Government spending and government employment are twin ratchets. They do not reverse, short of the bankruptcy of the government.

Wartime economic controls in the United States ended in late 1946. They did not end in Great Britain. The British had to suffer price and wage controls and rationing until the Labor government was defeated in late 1951.

The justification of conscription and wartime economic controls is the war itself. When the war ends, the justification should end. But bureaucracy in the twentieth century became a way of life. It expanded as it had not done ever since the days of the Pharaohs.

Once the state spends money to hire bureaucrats, politicians can frighten voters into maintaining the existing staffs. Politicians use this argument: “Government employment reduces national unemployment.” The politicians do not believe that the free market will adjust wages, so that everyone who wants employment at a market wage will receive a job offer. Keynesian economists echo this view. The voters shrug, and then pay the taxes to keep bureaucrats on the payrolls. The things unseen remain unseen. This includes the reduced wealth of most taxpayers . . . but not the bureaucrats.

 

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