Inflation and the Economy

DR. CRANFIELD:

I hope it seems funny to you, but I'll wager it isn't a joke in good taste at the International Union of the Automobile Aerospace Agriculture Implement Workers of America Head Office at Solidarity House. For a few weeks now their office staff and others who did not belong to the United Auto Workers Union were on strike. I am sure Mr. Woodcock says to himself, or said to himself at least, "Solidarity House, baloney!" So to get to work our speaker probably had to cross a few picket lines but he tells me that's not the first time he's done that and I picture that his desk is now getting less of a pile of mail on it than before, and I was unable to get through to him when I was trying to finalize my arrangements because the telephone switchboard was on strike. Fortunately, I was able to persuade the girl in the United Auto Workers 707 Branch in Oakville that I was a fit person to have this private line number. But I had to commit the number to memory and swear a "cross my heart and hope to die" oath that I would not divulge it to anyone else. So, we did manage to make our final arrangements and our speaker is here.

Though I had just started kindergarten when our speaker was born, we were both in the group that were affected by World War I for the same reason. In each case, in August of 1914, my father and his were employees of German firms. So each was suddenly out of work the day war was declared. It is almost true but not quite. His father managed to hang on till January. But the family at that time, in the speaker's case, had moved from Providence, in the state of Rhode Island, to Germany, where his father installed machinery made in Providence in a German plant. Mr. Woodcock Senior was a British citizen so he was automatically interned in Germany and didn't get to rejoin his family until after the war was over. That fall, my father helped to bring in a harvest of wheat in Saskatchewan. We always have to do something. Now Leonard and his mother, having managed to leave Germany, went to Britain and there they stayed until 1926. His early education in Britain was at Northampton. The family moved to Detroit which permitted our speaker's entrance to the Detroit City College, now known to you as the famous Wayne State University with an enrollment of 38,000 people, students. I trust they are all students. He completed his education by some studies later at the Walsh Institute of Accountancy. In the dirty thirties, economics altered all sorts of life plans, and after a year in the ranks of the unemployed, our speaker got a job as a machine assembler with the Detroit Gear and Machine Division of BorgWarner Corporation, and immediately joined the A.F.L. Federal Labor Union which, as you all know, is now part of U.A.W. His union activities and special abilities brought him to the attention of the late Walter P. Reuther who, on becoming President of U.A.W. in 1946, appointed our speaker as his first administrative assistant. He stayed with him for a year and leaving here in 1947, went back to his job at Continental Motors. He has tremendous capability as an organizer and as an administrator and consequently went on up through a variety of directorships in the union and which he eventually became head of the union's General Motors Department, which is the largest section of the union. History is full of circumstances in which a variety of rights for workmen were established. And this is true in his case. Local agreements, for instance, in addition to national master contracts, are now negotiable with strike rights to back them up. This is due to his energy and persistence. In 1961, he negotiated the first contract clause barring discriminatory employment practices. So we have a humanitarian in our midst. His triumphs go on. Not all were with the U.A.W. He has gone beyond this to battle for the outlawing of discriminatory practices in jobs everywhere; one example being discrimination in housing. These are things we don't think about in terms of a man who is with the United Auto Workers.

Many other aspects of American life have become his concern. At the same time the inroads could be made by legislative assault on both sides of our common national boundary are subject to his scrutiny. His political energy and planning are alert to safeguard the hard-fought privileges that unions now possess. It is only natural that his wisdom, strength and imaginatory skills would be recognized by his own university and he served for two terms, a number of terms actually, I think eleven years in all, on Wayne State University's Board of Governors. Regrettably, his responsibilities to the United Auto Workers have been so excessive that he's been unable to carry on in that. He has been repeatedly Chairman on that Board.

Sixteen years ago, the Empire Club was privileged to listen to Dr. Walter P. Reuther and I have just re-read that address as it appears in the bound volume of Empire Club speeches for 1955 and '56. And I believe we are about to hear another inspiring presentation, this time from his successor. I now present to you, Leonard Woodcock, President of one and one-half million members of the United Auto Workers Union, who has selected as his title, "Inflation and the Economy." Mr. Woodcock.

MR. WOODCOCK:

Thank you very much Mr. Chairman, distinguished guests, and gentlemen. I guess all I can say about the late unpleasantness that we went through at Solidarity House, it's now behind us. We live by our principles, no matter whether we're on the giving end or the receiving end.

I would like to discuss, today, the outcome of the General Motors negotiations of 1970 which drew such wide attention, both in the United States and in Canada. It was the first time in the Big Three that the contracts from both sides of the border ran out at the same time and the negotiations therefore were carried on in the same time frame. There was of course a strike in General Motors. It began both in Canada and in the United States, midnight on the 14th of September, lasted in the United States for 10 weeks and then was settled, but only for the U.S., with the Canadian strike continuing. At that time, there was considerable uproar in the Canadian press to the effect that we had abandoned the Canadian section, that we had walked out on them, and this really wasn't in effect an international union. Shortly thereafter when I joined Mr. McDermott in the G.M. negotiations right here in this hotel, we got the other side of the record. Mr. Woodcock was coming here to import American inflation into Canada and to pull the rug out from under the Canadian economy. And particularly when we proposed that we use the same consumer price index to measure the movement of wages, the uproar became loud indeed because, in proposing the same index, obviously if we were to have the same index on both sides of the border, already having signed and settled agreement in the U.S., that index had to be the American index. Well, in the event, of course, that didn't happen. But I think that it is important that we understand the background of the American negotiations which were considerably different than Canadian because of the sharp inflationary problem that we had in the United States. That inflationary problem plagued the automobile negotiations of 1970 and it was an inability to find another solution to that problem which was the main cause of the General Motors strike. When we opened the negotiations, U.A.W. tried to underscore what we believed to be the nature of the American inflation. And we spent a lot of time quoting a former great president of the General Motors Corporation, Mr. C. E. Wilson, who back in 1952 said, "I contend that we should not say the wage price spiral, we should say the price wage spiral. For it is not primarily wages that push up prices, it is primarily prices that pull up wages." Now we quoted Mr. Wilson, not simply because he was a former president of the Corporation, but also because in our opinion he was right and that his opinion is supported by the actual fact. The Wall Street Journal, in an issue of August 5th, 1968, in a very comprehensive survey of the inflationary problem, pointed out that, with regard of course, still, to the United States, that in each of the three major inflationary periods of the last 20 years, prices began to climb while labour costs per unit of output were declining. And in each of the three cases, labour costs continued to decline for some time after the price rise was under way. In the current inflation, from which we are still suffering in the United States, was no exception. At the end of 1964, wholesale prices had been relatively stable for some years. We had during those early years of the 1960's an expanding economy, a declining unemployment although declining from a very high level at the beginning of the decade, and at this same time, that is the late months of 1964, unit labour costs began a sharp decline which lasted throughout 1965 and into the early months of 1966. Wholesale prices, on the other hand, began a slow rise in the early months of 1965, which were sharply accelerated in the summer and fall of 1965. It is not difficult to understand why that sharp escalation took place, because the summer of 1965 we also had another escalation, escalation of the war in Viet Nam. And wholesale prices then continued their rise into 1967 and, of course, beyond. Unit labour costs began to move up sharply beginning with the early months of 1967. But the important thing to understand is that this was 18 months after the beginning of the price rise in the economy. And this was because workers began to strive to catch up, to repair their damaged cost of living position, and also to fight to anticipate future price rises. And at this point, of course, the labour costs push aggravated the other problems. But the other problems, of course, remained. They were the failure of the government in 1966 to increase taxes to meet the increased war expenditures; the further failures of the government to let the surtax which had been put in place, lapse. And, of course, our tremendously escalating military budget.

Now the U.A.W. problem, then, as we came to the General Motors negotiations was that we had just before us long term agreements that had been negotiated, which had big wage increases in the second and third years of those agreements, which underscored the expectancy of our people, and we said to our people that we should have in the second and third year of a three year agreement, which the industry wants, of course, for stability, which our people want for a different kind of stability--their own family stability--that we should be content with moderate and restrained increases in the second and third year of such an agreement, provided those increases in their purchasing power value were completely protected against the possibility of rises in the price index. And so we said to General Motors that the solution had to be a first year increase, which had to be sizeable because we bad to catch up with the lost position as against the cost of living and we had to make some progress. When we finally settled on the 12th of November, in Detroit, we got an average increase for the first year of 51 ¢, which sounds high, but of that 51 ¢, 33¢ was catch up cost of living, 26¢ which had already become due at the ending of the old contract under what would have been the normal operation of the escalator, 7¢ which was the additional cost of living money which became due through the time frame of the negotiations, a 3 % annual increase factor which equals 12¢, and the only additional new money on top of what was 6¢. In the years two and three we accepted the same 3 % which is less than the long-term national productivity of the American economy and certainly substantially less than the long-term productivity of the General Motors Corporation and we were able to do this because we did restore to the contract the quarter annual adjustments and cost of living as measured by the consumer price index to the United States Bureau of Statistics.

I might say that when the settlement was made the Nixon administration issued what they called a second inflation alert in which the General Motors settlement was branded as being inflationary and bad for the country. We didn't think it was--we thought it was counter-inflationary, but low and behold in the first of February, 1971 when the President of the United States in his annual economic message to the Congress, attaching to it the annual report of the Council of Economic Advisors, there is embodied in that report this paragraph -

"To embody in wage agreements covering two or three future years provisions for wage increases based on the assumption that prices will continue to rise at recent peak rates is not a reasonable response to our present situation. If this were done generally it would be a recipe not only for permanent rapid inflation, but also for persistent unemployment because the Government would be bound to try to check the inflation by generally restrictive policies. On the other hand, in some escalated clauses, which relate future wage changes to actual variations in the cost of living rather than to the expectation of continued inflation at its peak rate may have a role to play during the adjustment to a more stable price level.

Well, I think possibly had the administration said that in August of 1970 instead of February of 1971 it is very possible there would not have been a General Motors strike, but even for a delayed reaction, I am grateful.

Now, obviously, this approach to wage stability by itself will not ease inflation, but it does allow breathing room, while other factors can be brought into line, the chief of which has got to be in, and our Union is insistent and demanding on this, the ending to the ghastly tragedy of the Indo-China war, and also to sharply reduce, when necessary, military spending. Now, with the U.S. strike ended, we face the continuing Canadian problem. I am sure everyone here understands that there is between our two countries a treaty made in U.S. auto-pack, which was brought about by the fact that in the pre-1965 period, Canada had an adverse balance of trade with the United States in automobiles and parts to the tune of $600 million annually. And certainly an outflow of that size in an economy of the size of the Canadian was such that it was intolerable and could not continue. Canada had, obviously two choices, to go to the Australian route to demand an all-Canadian car which by the economy scale would not have been the kind of car to which Canadians have become accustomed, and would have been a sharply reduced industry, or to do what was done--to work out a common market, which in this case, say a manufacturers' common market as between the two countries. When we came then to the 1967 negotiations we had the problem of one market between two countries fully under the control of the American companies that owned the facilities on both sides of the border. We made a demand for the the same wage rates to be paid in the Canadian plants as in the U.S. plants. We made the demand on the basis of equity and, very frankly, we made the demand in terms of protection of American jobs because with the same market, with the unrestricted right to place facilities anywhere if there had continued the 43 ¢ an hour differential that then was prevailing as between the Canadian plants and the American plants, given a recession in the industry and in the economy, there would be an almost automatic movement of jobs to the lower wage level.

Now, wages in the automobile industry are made up of two components, what we call base rates and the cost of living factor which is fed in by the operation of the escalator. When the settlement was made to pay the same wage rates in 1967, it provided for base rate parity, but not cost of living parity. Now the expectancy at that time was, and it had been the fact for the 20 years before, that inflation would move more quickly in Canada than it would in the United States, and what we would come to 1970 with, in fact, higher rates in Canada by virtue of more money being paid on the escalator, but with the base rates still the same. Of course, the Vietnam war is what made the difference when we came to the end of the contract it was 26¢ owing in the U.S. and only 11¢ in Canada. That is why we proposed to have the same base rates and to use the same U.S. index, which the reaction was that we were importing American inflation into Canada. The way this problem was solved and its only an interim, temporary solution for the assembler, the production machine operator, that's the most populated classification on either side of the border as we continued the endeavour to end the Canadian strike, the U.S. rate was $4.25 base rate plus 5¢ left in the cost of living float. We solved that by having the Canadian base rate immediately reflect $4.12 and to move up to the $4.25 plus 5¢ in two stages through September and December of this year. But, 13¢ of that is discounted against future cost of living increases in living in Canada which, of course, guarantees that we are going to have the same wage gap, in 1973, in the same unsettled state of affairs.

In this connection, I would like to point out--the common market came about because of the tremendously adverse balance of trade as between Canada and the U.S. Pre-1965 more than $600 million annually. By 1969, taking the first 11 months because similar comparison in 1970, that adverse balance had dropped from $600 million to $129 million. Last year, in 1970, the adverse balance had reversed itself and the U.S. now has an adverse balance of trade to the extent of $166 million. I emphasize that simply to point out that if there is to be a substantial disparity of wages to the disadvantage of the American sector in a situation where the balance of trade has so substantially reversed itself, and where the United States itself has a balance of trade and an outflow problem with regard to the world in general that this is a difficulty that we have to solve if we are going to keep the manufacturers common market in the automotive industry.

Now, people will say, how can you have the same cost of living application on the two sides of the border? Well, first of all the Dominion Bureau of Statistics made a survey in the spring of 1970, which showed that on balance the difference in the cost of living between Canadian cities and American cities was 5 % to the advantage, of course, to the Canadian cities. But, we have within the United States wide differences of cost of living in cities and at one time we used to have different wage rates that were paid in Atlanta, as against New York, as against Detroit, but we insisted that when a car was built, no matter where it was built, for the same market, it had to carry the same wages. That principle has long since been established. In Atlanta, for example, where there are two General Motors plants, they have a cost of living 21.7 % below New York, which has a General Motors plant in Terrytown. Detroit has a cost of living which is 11.3 % below New York. So these differences in cost of living cannot allow for differences in wage rates when that compels the movement of jobs. In one market there has to be one rate, and I submit this common market cannot survive politically with unequal rates, particularly when we get such sharp changes in the balance of payments. If we did not have a cost of living component of the wage setting, we would have had the same rates. When you have the reasonable and sensible approach that we made in the 1970 bargaining, in a most difficult situation, which I think has reversed the trend that was well under way to this constantly mounting escalation to huge increases to anticipated inflation and thereby almost guaranteeing that inflation, we reverse that and, therefore, we believe the annual improvement factor concept, plus cost of living protection where the wages don't increase until the prices have first increased, is counter-inflationary and is good for our two countries. But, to keep that we need one index. I would suggest that since it may be improper to use in one country the index of another, that it would be a very fair compromise to have a weighted composite of the Canada and U.S. indexes with that weighted composite index to be used both in the United States and in Canada, and I conclude by saying that I am absolutely convinced that this is the only way to avoid continued strife and turmoil in the Canadian automobile industry and to preserve the automotive common market which I think is good for the economy of our two countries.

The gratitude of the Club was expressed by Brigadier General Bruce Jarvis Legge, Q.C.