Full Employment and the Environment

Mason Gaffney

[ GroundSwell, May-June 2008]

This article is abridged from a chapter in George Rohrlich (ed.), 1976, Environmental Management. This recap is offered now in hopes that the times are more receptive, that 32 intervening years have confirmed the analysis, and give it more credibility.

In order to protect the environment, we are going to have to face up to the chronic (and now acute) problem of mass unemployment. To save jobs and make jobs we now tolerate polluting mills and vehicles; we chew up more earth each year for energy and materials; we secure and protect mineral rights abroad at great material, environmental and human cost; and we put fat in government budgets, for peace as well as war.

Along with short work we face a swelling array of derivative evils. Each could be a study in itself, as many are, but they only distract us from the ultimate challenge that Henry George posed in 1879:

"Though custom has dulled us to it, it is a strange and unnatural thing that men who wish to labor, in order to satisfy their wants, cannot find the opportunity."

There can be no real scarcity of work ... until all human wants are satisfied" Why cannot idle persons find work to meet their own pressing needs?

Chronic inflation bespeaks enough dollars of demand -- in point of fact, too many. Businessmen and home buyers are aware of a capital shortage. Raw materials are high, even though they receive massive subsidies and tax favors. It is only labor that appears to be in long supply. There is plenty of demand for land and capital, goods and services.

The force behind these dilemmas is that the coefficients of land, materials and capital used per worker and consumer have risen sharply for many years. We are bumping into the implacable logic that if we require a vast complement of resources per worker we will chew up lots of resources and push on the limits of Earth and the tolerance of other nations. If we require high coefficients of capital and land per worker, then capital and land set the limits to growth of jobs and consumption.

With labor surplus, and land and capital short, the needed adjustment would be evident to any reasonably bright 12-year old: lower the land and capital used per person.

The "growth" issue is a red herring. There is no need to divide into factions for and against growth. We can grow by combining more labor with the same land and capital. It is simply a matter of modifying processes and products and consumption. Growth of capital is not needed for progress; turnover is. And since the way to substitute labor for capital is to turn over capital faster, this also accelerates embodiment of new knowledge in real capital.

No matter how much capital we have and create, we will still have people out of work if we match each 5% increment of capital stock with, say, a 10% increment in the capital coefficient per job. Capital formation is not enough. It is not even necessary.

The problem is too much displacement of labor. It is "too much" because it results from biased institutions, a large set of them, operating over many years, which artificially induce substituting land and capital for labor. The way to solve the problem is to identify and remove the biases. This will increase demand for labor without requiring any more natural resources or capital.

The possibilities for reducing resource coefficients of work and consumption are far greater than most people have any idea. Just for example, here are some data on farm land use on the east side of the San Joaquin Valley, California. Land here is versatile among many competing uses. These range from dryland grazing up to citrus, fresh tomatoes, and berries. Berries gross 100 times as much per acre per year as dryland grazing from weight-gain on the animal units.

Labor's share of gross rises with intensity, defined here simply as nonland inputs/output. For grazing, this is on the order of 40%. Grazing is land-intensive. For berries it is more like 93%. Berries are labor-intensive. Wouldn't you know, Federal income-tax law treats the growth of herds of breeding cattle, mostly derived from the land input, as capital gains, subject to lower tax rates and a host of related favors, while income from berries, mostly from the labor input, is ordinary income subject to the full fury of the tax rates. On top of that there are social security (when enforced) and workmens comp, and this and that penalty for hiring labor, exemplifying the strong tax biases against labor.

The return to land from truck crops like berries or tomatoes, averaging out the good years and the bad, is very sensitive to wage rates and other costs of hiring like payroll taxes. A slight rise of 7 percent nearly wipes out the rent; a drop of 7 percent nearly doubles it. But the same wage changes would little change the returns to land from grazing. Thus a slight drop of labor costs applies great pressure to shift land to berries and tomatoes and other high-yield, labor-intensive crops, making a very elastic demand for labor.

The scope for this kind of change is manifest in the fact that most of California's prodigious farm output comes from a fraction of her good farm land, that which is used intensively. Of several million acres of irrigable land in California, there were in 1976 only about 21,000 acres in plums, 36,000 in freestones, and 65,000 in navels. Most California farm land is used at lower intensities, using little labor to yield barley, alfalfa, forage pasture, hay, sorghum, safflower, rice or cotton.

The high-grossing crops such as tomatoes, citrus, peaches and berries are also modest users of water. Pasture, alfalfa, and rice are the heavy drinkers. They yield only one-tenth as much value per acre as the high yielders, and therefore much less than one-tenth as much value per unit of scarce water.

The high-grossing crops use more labor per acre not just in the fields, but in the packing houses, the railroads, the stores and the kitchens. A $1500 berry crop will use more labor at every step to the consumer than a $15 weight gain on a calf, do it sooner, and much more often.

Turning to industrial corporations, the regressive use of labor on property is clear from data in Fortune magazine's yearly report on the largest 500. Profits per employee rise sharply with size of firm; assets per employee rise even faster. It's the smaller firms that make more jobs per unit of land and capital.

Government is the largest firm of all and the least labor-intensive. It pays the market or above for labor, while it borrows below the market. As to land, it still holds much more than anyone, tax free and unmortgaged, with little internal pressure or shadow price to reflect the foregone gains. Military bases make good examples. The annual value of this kind of lavish land input does not appear in the budget. The National Forests use much more capital (as timber) per man employed than do private ones, especially small private ones, a fact of which Forest Service doctrine makes a virtue. Richard Muth has concluded that the outstanding distinguishing trait of public housing is its higher capital intensity. Civil engineers, generally working for governments, have become notorious for producing white elephants by treating capital -- not labor -- as a free good, and for overstating future benefits next to present costs by using low interest rates. One can justify any project using a low enough interest rate, and ignoring land costs, and many agencies have, because at zero interest the present value of future rents in perpetuity equals infinity.

Private utilities are capital-using, of course. But governments supply the most capital-using utilities, like water and sewer which are increasingly costly because of urban sprawl. Governments are always called upon to put up social front money, to push back and invade frontiers, territorial and otherwise, where the payoff is too slow for private capital.

Some public buildings like the New York State Capitol are marbled and monumental, with excessive grounds. Ironically, much government spending is done in the name of making jobs. On balance, it destroys jobs by inactivating capital.

How about productivity and efficiency?

Many economists mislead themselves and others by using productivity to mean output per worker, even though their own elementary theory textbooks teach better; or used to, before the dark days of modern obscurantism set in. Defining efficiency this way is perverse, with a built-in bias against employment.

More recent studies of energy-efficiency are better, but still fail to put it all together, so they can be isolated from and ignored by mainstream economists the ones who advise presidents, snow journalists, edit major journals, and garner endowed chairs and Nobel Laureates from Swedish bankers.

Over-substituting capital and land for labor raises efficiency only by wasting capital and land (and underemployed labor, too), and only seems efficient in unrealistic models where land and capital are underpriced and unemployment is ignored. High labor-efficiency then means low land-efficiency and low capital-efficiency, either directly or at one remove in the form of low energy-efficiency, low water-efficiency, low feed-grain efficiency, etc.

Misled by the standard of labor productivity we have exulted in high output per man employed as a symbol and measure of national and company success, and accepted an extreme substitution of capital and resources for labor. The well-known displacement of farm labor is not an exception, but more like the rule. Even the better studies omit the public sector, the infrastructure into which we pour so much public treasure at low interest rates. They omit housing, which soaks up so much capital and land per job created. They omit recreation which requires so much more land and equipment per consumer hour, and per measure of personal joy, than the quiet pleasures of yesteryear. And they omit the swing of consumers toward goods and services like electric power and natural gas, whose production is capital-intensive, and whose prices fall relative to labor-intensive products when the capital and resource inputs are subsidized. Producers as well as consumers use much more of these as inputs. A primary metal like aluminum will consume 135 kwh per unit of value-added, compared to 10-20 in a normal manufacturing operation. It is energy inefficient and thrives only on underpriced energy, thanks to which it is cheap relative to competing materials. For years we have been substituting capital and energy for labor and calling it progress and efficiency, only to find that capital and energy are scarce, and labor surplus.

Discard the idea that spending or recycling money is a bottleneck limiting national income. It does not at all square with the facts today, if it ever did. Instead of running down, the turnover of demand deposits has risen rapidly for many years now, even as the money supply does, and banks press on their reserve requirements to meet the demand for loans. Instead of a fatal deflationary imperative, there have been years of violent inflation which failed to solve the fatal unemployment problem. New Economists have mastered all too well the arts of creating and spending money. Delivering the goods is where they fail, and it is real goods ready to consume that turn play money into real money.

Instead of a glut of loanable funds and a shortage of investment outlets there is a capital shortage. Instead of a glut of goods there are shortages, an energy crisis, materials scarcities, limited selections in inventory, delivery delays, islands of famine and fears of hunger. Money, like labor, is in long supply. It is land, materials, commodities and investment funds that are short.

Unfortunately, the concerns that prevailed when the twig of the New Economics was bent are built into its axioms, laws, models, circuitry and conditioned reflexes. In addition they drew upon deep springs in the cultural subconscious. New Economics was always a misleading name; it was more of a regression.

"There is not an opinion more general among mankind than this, that the unproductive expenditure of the rich is necessary to the employment of the poor. Before Adam Smith the doctrine had hardly been questioned; ... if consumers were to save ... the extra accumulation would be merely so much waste, since there would be no market for the commodities…" (John Stuart Mill, Principles 1, Ch. V., Para. 3).

Now everything is different but this mode of thinking on which prevails at the top of the economics profession and leads us ever deeper into error and trouble.

Keynesian pessimism sees supply overwhelming demand. Inflationary pessimism sees demand overwhelming supply. A confirmed pessimist profession sees both calamities at once, and there are always some of those. Yet each calamity is the counterpart to and solution of the other.

Calamity results from neither, but from restrictive and braking policies of other kinds adopted or tolerated by pessimists who believe, or proclaim that they must forestall these imagined problems. These are the real macro-economic bottlenecks.

What are they? They include all institutional biases that interfere with the intensive application of labor to land, biases we have accepted and endorsed because we were in doubt about the aggregate benefits of taking the brakes off production and payrolls. There are too many to list here, but a good example is the tendency to base most taxation on the use of land, the activity on land, the payroll on land, the sales, the output, the income generated from land. The alternative is to base more taxation on the value of land, prompting owners to use it harder to serve customers, and make jobs.

They also comprise biases that interfere with the rapid turnover, recovery and reinvestment of capital.

A third set of biases are in payroll taxation. The U.S. social security payroll tax rose sixfold, 1960-75, up to about 25 percent of all federal receipts. The personal income tax, largely another payroll tax, raised another 44 percent. The tendency of payroll taxes is to make labor costlier to employers than beneficial to workers, who always have and increasingly exercise the options of welfare, crime, prison time, and military employment. Prison time may not be voluntary with the prisoner, but risky behavior is, and the U.S. now houses some 25% of all the prisoners in the world.

Once the basic idea is clear a host of policy changes write themselves. I leave this Imagineering to the reader. Environmentalists are distressed at the perpetual invasion of wild land by men seeking jobs, led by others seeking rents. They should be glad to learn that is not where to make jobs after all, anyway.

The traditional last great sink of capital is war, and the policies of mercantilism and imperialism that attend it. War combines the frontier fallacy and the public works syndrome and the waste-makes-jobs doctrine into a claim on the national treasure that is greatly inflated above the simple cost of police protection. Imperialism has generally been an economic and environmental catastrophe for most of the players, invaders as well as invaded. Our current hemorrhaging of blood, treasure, and national morality in Iraq merely replicates what has happened to previous world imperialists over centuries. Perhaps they will learn when they run out of useful idiots, but that takes too long. They may learn sooner when they run out of resources, and are made aware of it. We can help by making people aware.

The policy of lowering the land and capital coefficients of labor will help us find full employment on our present land base, permanently, freed from the compulsion to grow and expand and pollute. We can continue to create capital, and we can apply new ideas more quickly than now as faster replacement lets us embody new techniques in capital in a shorter time. Thus we can grow in every good sense by substituting real progress for the random lateral expansion and environmental destruction of the past. We can find full employment in peaceful labor on our share of this small planet, and doing so, drop the burden of imperialism that may otherwise destroy us in the ultimate environmental calamity.