Business Tides
Common Market and Us
January 1, 1962
Last week I discussed seven basic issues and principles involved in foreign-trade policy, but never got to the complicated problem of the European Common Market and what our relations with it ought to be.
At the heart of that problem is the difficulty of knowing whether the Common Market will prove in the long run to be a step toward free trade or a step toward increased protection. It is a step toward freer trade among its six members—France, West Germany, Italy, Belgium, Luxembourg, and the Netherlands—but it remains a protectionist area against the rest of the world Even internally it is not yet certain whether its net effect will be to encourage a free economy or collectivist controls. So far as agricultural products are concerned, subsidies, tariffs, and quotas on the part of member nations are as entrenched as ever. Industrial products, such as coal and steel, are on a cartel and quota basis. And unless the Six either adopt a common currency, or return individually to a gold basis, free trade among them will not in the long run be feasible.
DISCRIMINATION
In seeking free trade within the area, but continued discrimination against non-members, the Common Market suffers from an internal contradiction. It says to the Italian automobile manufacturer: We will continue to protect you against the competition of the Ford, but you must now accept the competition of the Volkswagen, because the Germans are now One of Us. We will let you buy raw materials from Germany if you can get them cheaper there, but we will not let you buy them from the U.S. because Americans are Foreigners. And the Common Market likewise says to the Italian consumer: To give you a wider range of choice and price, we will let you buy a Volkswagen from Germany; but we will not let you buy a Falcon or a Cadillac, unless you pay a stiff penalty tariff.
In brief, the Common Market discriminates against American products. This is what it was intended to do. Yet our own officials have from the beginning actively encouraged the Common Market. They have even gratuitously interfered to encourage the Common Market as against the European Free Trade Association, or Outer Seven, though the latter worked on the much sounder principle of lowering their trade barriers vis- à-vis each other without requiring any member to raise its tariffs against non-member nations.
BARGAINING FALLACY
As of now, the Common Market has triumphed over the Free Trade Area, not because it is nearer to free trade, but because it is farther from it. It is precisely its discrimination as a unit against non-members that gives it the bargaining power to force others to negotiate to “get in under the tent.” If Britain joins, and others of the Outer Seven follow suit, the chief country against which it will discriminate will be the United States. And if we joined, against whom would the common tariff wall be built? Katanga?
The President has not suggested that we join the Common Market. He has correctly insisted that we adhere to “our traditional most-favored-nation policy.” This means that we would not discriminate against any nation, but grant to every one as free an entrance or as low a duty for specific products as we grant to the “most favored.” Surely this is the policy that we ought to follow, not only vis-à-vis the Atlantic Community, but the whole non-Communist world.
But with such a policy, nation-to-nation or region- to-region bargaining would be not only unnecessary but inconsistent. Each nation could act by itself, realizing that it helps its own consumers and even the great bulk of its own producers by reducing trade barriers even if other countries refuse to do likewise.
Today this may sound like a counsel of perfection. The Common Market is a fact; and perhaps the most effective way of dealing with it, as of now, is through reciprocal bargaining. But let us not forget that such reciprocal bargaining rests on the protectionist fallacy that reduction of barriers to imports is a “sacrifice” or “concession” justified only by the reciprocal “concession” another country makes in favor of our exports to it. 
January 8, 1962
Those of us who, for the past fifteen years or more, have been warning against inflationary policies, have found ourselves doing it with little help on net balance from the academic community, particularly that part of it clustered around Cambridge, Mass. Such Harvard faculty names as Seymour Harris, Alvin Hansen, J.K. Galbraith, and the late Sumner Slichter have been associated, if not with direct advocacy of inflation, at least with advocacy of such inflationary policies as continuous credit expansion, cheap money, increased government spending, and unbalanced budgets.
Now, out of Harvard itself, comes a powerful voice that not only warns against inflation, but correctly analyzes its causes and courageously recommends its cures. Gottfried Haberler is not only a Harvard professor; he is a former president of the International Economic Association and will be president of the American Economic Association. Because of his prestige and the power of his argument, his 85-page pamphlet, Inflation: Its Causes and Cures (Revised and enlarged edition, American Enterprise Association, Washington, $1) may well mark a turn of at least the academic tide of thought on the subject.
PAYMENTS CRISIS
Because of the deterioration in the U.S. trade and payments position the tone of the revised edition is urgent:
“In view of the changed competitive position the U.S. can no longer afford even a ‘little’ inflation without losing gold. Moreover, disinflation or at least holding the pace of inflation below that of our principal competitors is the main prerequisite for a correction of the imbalance.
“Here is not the place to discuss other measures that could be taken to improve the balance—elimination of discrimination against dollar exports, larger contributions by Europe for mutual defense and for economic aid to underdeveloped countries, tied loans, and so on. The effect on the balance of payments of all these measures combined will probably be insufficient to eliminate the deficit and, at any rate, it could be easily wiped out by loose financial policies. The position of the U.S. as the world’s foremost banker and of the dollar as the world’s principal reserve currency greatly increases our responsibilities. At the same time, it excludes easy solutions which would be open to others. . . .
“The U.S. cannot tamper with the gold value of the dollar without committing a crass breach of the confidence of all those who have entrusted us with keeping their international reserves and without provoking an international financial crisis which would greatly weaken American leadership in the free world. . . .
“The conclusion is that, from now on not only considerations of international stability and sustained growth, but also the international position of the U.S. imperatively require that inflation be stopped.”
TO CURB WAGE DEMANDS
It is possible to cavil at a few aspects of Haberler’s study. But any shortcomings are far overbalanced by enormous merits. Several aspects of the American inflation in recent years get a more thorough analysis than they have received anywhere else. And Haberler is emphatic on the essentials: “Let us start from the basic fact that there is no record in the economic history of the whole world, anywhere or at any time, of a serious and prolonged inflation which has not been accompanied and made possible, if not directly caused by a large increase in the quantity of money.”
Finally, he recognizes the necessity of curbing excessive union wage demands if inflation is ever to be halted. And he points out that this can be done by legal reforms that in no way infringe liberties, but merely restore a more balanced power equilibrium between the parties in wage bargains, and eliminate violence and intimidation. More basic than legal reform would be a change in public opinion. “Aroused public opinion could force the government in its executive as well as in its legislative branch to pick up some courage, instead of maintaining a studious neutrality in wage bargaining, and issuing platitudinous appeals to everybody to behave, or outrightly capitulating to striking unions and bringing pressure on employers to capitulate.”
January 15, 1962
Two weeks ago my colleague Raymond Moley pointed to the strange fact that our government was supporting the action of the U.N. in systematically destroying, among other things, the properties of the Union Minière, which would have been the major source of supply for the entire Congo. “Since that company represents capitalism,” he continued, “it is easy to see why the Soviet so eagerly supported the U.N. resolution which precipitated the war.” But how explain our own government’s action? “Could not the President and his many advisers understand the consequences and also the inconsistency of ruthlessly destroying the Congo’s economic viability and then spending billions to restore it through foreign aid?”
This strange attitude was revealed afresh in the attack by Carl T. Rowan, Deputy Assistant Secretary of State for Public Affairs, on Dec. 27:
“Out of Katanga’s rich veins, Union Minière was producing 8 percent of the world’s copper, 60 percent of its cobalt, and many other minerals. Union Minière was a classic example of the profitable side of colonialism. Despite all the Congo’s troubles, this Belgian-controlled firm had net profits of $47 million in 1960. . . . Union Minière pays about 80 percent of the tax revenues of Katanga. . . . Now isn’t it natural that those with financial interests in Union Minière would rather see Katanga as an easily controlled ‘separate nation’ than as part of a larger Congo nation whose government might not be as friendly as Mr. Tshombe and his associates?. . . . Much of Mr. Tshombe’s most vocal support arises not so much from the fact that he is ‘anti-Communist’ as the fact that he is pro-Union Minière.”
WHAT PROFITS DO
This remarkable statement admits that the Union Minière, formed in 1906, has become the economic backbone of Katanga, and is vital even in the world economy. Yet Rowan is sarcastic because the company has until recently earned a profit. If it had not been that profitable, however, it could not have supplied 80 percent of the tax revenues of Katanga, and it could not have employed 21,000 people (equivalent to the whole adult male population of Katanga’s 95,000 inhabitants).
Rowan’s statement seems to imply that if a foreign- owned company is profitable, all the benefits go to the foreign owners. This is a fallacy we are accustomed to find among socialists, Communists, and xenophobes. But it is strange to see it getting implied support from a member of the State Department of the world’s greatest creditor nation, with huge investments all over the globe. For this fallacy is always the excuse offered for the expropriation and nationalization of foreign-owned companies. (Rowan did admit at one point that “the Congo needs much that Union Minière can give.”)
HOW TO RETARD GROWTH
Rowan implies that it is a point against Tshombe that he is not only anti-Communist but pro-capitalist. Rowan seems to expect the same thing that the Union Minière expects that the government of “a larger Congo nation . . . might not be as friendly as Mr. Tshombe”—i.e., that it might levy still heavier taxes (already some $50 million a year), and perhaps expropriate and nationalize the properties. But Rowan talks as if this would be a very desirable thing from the American point of view.
The Rowan statement seems to be just one more indication of a strange anti-capitalist bias that now seems to run through our whole foreign economic policy. This is reflected in the Administration’s proposals for punitive taxation of American investment in Europe; its efforts to force American investments to go, not to the countries where the owners of the funds want to put them, but to the countries where our bureaucrats think they should go; its deliberate encouragement, in Latin America, of more government planning, more drastic corporate and income taxation, more “land reform” (i.e., expropriation and division of big private land holdings).
It need hardly be pointed out that all these policies must retard, not encourage, sound economic growth in underdeveloped countries, and must increase the burden on the American taxpayer for foreign aid.
January 22, 1962
So all those who say that there’s nothing left to be done, that we should rest on our laurels, that the function of the national . . . government is to sit and lie at anchor are wholly wrong and we do not propose to follow their advice.”
President Kennedy at Columbus, Ohio, Jan. 6
Who are these people who say that there’s nothing left to be done? I have never met one. Are there people who actually believe that the 12,437,668 civilian employees on the Federal payroll should sit back and do nothing because there is nothing to do? Rightly or wrongly, the overwhelming majority of Americans have acquiesced with only minor reservations in the enormous proliferation of Federal programs and powers that has developed since the first and second world wars. A majority have in fact accepted the 2,133 different functioning agencies, bureaus, departments, and divisions found by the Hoover commission even in the Federal government of 1954.
Some Americans, confronting Federal expenditures of $89 billion in the current fiscal year and some $94 billion in the 1963 fiscal year, may look back wistfully to 1955, when such expenditures were “only” $64.5 billion. But no one dares to dream of a return to the $4.6 billion level of 1932, when candidate F.D. Roosevelt was demanding drastic economies.
WHO SHOULD DO IT?
Mr. Kennedy is, in fact, attributing an extreme laissez-faire and do-nothing philosophy not only to everybody who wants to cut back a little on some of the thousands of existing Federal programs, but to everybody who thinks maybe the Federal government is sufficiently overgrown and over expanded and ought to try to straighten out the messes in, say, foreign aid and farm subsidies, before taking on still more programs.
The assumption implicit in the President’s statements seems to be that if any “unfilled need” can be shown to exist anywhere, it is the duty of the Federal government to fill it; and if there is anything that ought to be done in any field, it is the Federal government that should do it. And so he wants it to pay the medical bills of the aged, or the tuition of needy college students, or to cure mental retardation, or to solve any other problem. It is because such assumptions have now become perennial that practically every new Congress enacts more than a thousand new laws.
Yet the truth is that the proliferation of new Federal programs, with their corresponding expenditures, does not on net balance meet new needs. Whatever the government gives to B it must take from A. It taxes Peter to subsidize Paul. It transfers part of the earnings of some people to other people. Instead of allowing those who have earned money to spend it on their own wants or needs, the bureaucrats seize the money to be spent more “wisely,” or on other people’s real or supposed wants or needs. The politicians may spend the tax money on real collective needs, or in the directions designed to influence the most votes.
THAT ‘PUBLIC’ SECTOR
The process has semantically come to be known as squeezing the “private” sector (by implication selfish) to expand the “public” sector (by implication benevolent). It would be more accurate to say that the government forces a relatively shrinking free-enterprise sector to subsidize an expanding socialized sector.
This constant expansion of the Federal government does much more than merely transfer income from one set of pockets to another. It abridges the liberties of the individual. It feeds the growth of bureaucracy. It reduces the incentives to production of those who earn money and reduces the incentives to self-help of those who get the increasing Federal aid.
The heavy personal income and corporate taxes soak up precisely the funds that would otherwise have been devoted to savings, to capital accumulation, to the creation of new equipment. The final effect, therefore, of increasing Federal programs and Federal spending must be the opposite of what Mr. Kennedy hopes for. Even if they do not bring on further inflation and imperil the dollar, they must tend to slow down the rate of economic growth, and the rate of increase in real wages and in standards of living.
January 29, 1962
In his State of the Union Message the President asked Congress for two major delegations of power. One concerned its constitutional power “to levy and collect taxes,” the other its power to lay “duties.”
“We need, first,” he declared, “Presidential standby authority subject to congressional veto to adjust personal income-tax rates downward within a specified range and time.” There are weighty reasons, both constitutional and economic, why Congress should refuse to delegate this power. Congress has already, through delegation or default, lost too many powers to the Presidency. The peacetime power of that office is already swollen beyond parallel.
The chief economic assumption behind the President’s request for stand-by powers over income- tax rates—that they must be quickly lowered “to slow down an economic decline before it has dragged us all down”—is fashionable but false. This assumes that the sure cure for recession or unemployment is a budget deficit. A budget deficit is sure to bring on inflation, but whether it slows down a decline or reduces unemployment will depend upon what happens to wage rates and a score of other factors. If inflation through bigger deficits were a remedy for recession, there would always be time for the President to send an urgent message to Congress or to call a special session. If Congress is to be asked to delegate powers on the assumption that it is incapable of acting in time, it could more logically be asked to delegate to the President its constitutional power to declare war.
FOR A NEW SAFEGUARD
Constitutional objections to the transfer of taxing power apply just as much in principle to transfer of power over tariffs. Economically, however, the President is here on firmer ground. Even constitutionally there are important mitigating considerations. Congress has already been delegating such powers, under successive reciprocal-trade acts, for 28 years. There are practical reasons for this. The setting of tariff rates, item by item, involves infinite detail. Before the era of reciprocal-trade acts the final set of schedules was the result of unconscionable logrolling among congressmen, each haggling for the industries in his district. Congress is of course utterly unequipped to bargain separately with each foreign country or trading unit.
There are strong precedents and practical reasons, therefore, why Congress should continue to grant the President discretionary reciprocal trading powers. But because the President’s request goes much beyond the powers granted in the past, Congress would be justified in surrounding such a delegation of power with additional safeguards. The most important of these was suggested by the President himself in his request for discretionary power over income tax rates. Delegation of tariff bargaining powers should be “subject to Congressional veto.”
‘RECIPROCITY’
How would this be practically possible? Congress could provide that every trade agreement the Executive power negotiated should be submitted to it before going into effect. It could agree in the new law to accept or reject such an agreement in toto, without trying to amend it in detail. (Though if it returned an agreement unratified it might indicate what changes would make it acceptable.) And it could provide further that, if it failed to take any action either way within 30 or 60 days, the agreement would automatically go into effect. Thus Congress, without obstructive delays, could force the American bargainers to keep constantly in mind the overall acceptability to Congress of each agreement.
It remains to be said that the method of reciprocal- tariff bargaining, though we have followed it for the last 28 years, is dubious in principle. It rests at bottom on the protectionist assumption by each party to the bargaining that though exports are good for a country, imports are bad for it. Barriers to imports are therefore lowered only as a “concession” in return for a reciprocal “concession.” Hence there is an incentive to each country to boost its tariffs high in the first place so that it may have more to concede.
February 5, 1962
Is It Balanced? The President estimates that the Federal government will spend $92.5 billion in the fiscal year 1963, and will take in revenues of $93 billion, leaving a surplus of $463 million. This would be the first surplus in three years and the second in six. But the forecast is based on a series of the most optimistic assumptions. Revenue forecasts, for example, are based on the expectation of unparalleled prosperity. With no important net change in tax rates, revenues are counted upon to jump from $82.1 billion in fiscal 1962 to $93 billion in fiscal 1963. If revenues did not increase, the predicted surplus of half a billion would become a deficit of $10.4 billion.
How Reliable? In the light of the past record, how much confidence can we place in the new estimates? It is ironic to recall that for the fiscal year 1959, which ended with a deficit of $12.4 billion, Eisenhower originally estimated a surplus of nearly half a billion, almost exactly what Mr. Kennedy now estimates for 1963. But in 1959 expenditures turned out to be $6.8 billion more than the estimate, and receipts $6.1 billion less. Eisenhower originally estimated a surplus for the current fiscal year of $1.5 billion. Last March Mr. Kennedy estimated instead a deficit of $2.8 billion. In July this was raised to $5.3 billion. It is now estimated at $7 billion—with the year only a little more than half over. If an estimated deficit is raised a billion dollars or so every two or three months, what confidence can we have in a paper-thin surplus forecast seventeen months ahead?
Why So Big? The spending estimates for fiscal 1963 are the highest on record in peacetime—$11 billion higher than in 1961 and $28 billion higher than in 1955. The taxes to support such spending must undermine productive incentives and siphon off the funds for investment. Sentences in the President’s message give the impression that the rise in Federal spending is almost entirely caused by increased costs of defense. But even with the heavy increase in proposed defense spending to $52.7 billion, more than half of our total spending of $114.8 billion (when we count social security and similar payments) is still on nondefense and welfare items. Even when we confine ourselves to the regular budget, we find that compared with the last completed year, 1961, though projected national defense expenditures have increased $5.2 billion, nondefense and other expenditures have increased $5.8 billion. Nondefense expenditures of $39.8 billion projected for fiscal 1963 are almost double the $20.9 billion nondefense expenditures in 1954.
More ‘Needs’ Met? It is a fallacy to suppose that the enormous new budget enables the American people to “meet more needs” on net balance than before. All it does is to transfer expenditures from the free enterprise sector of the economy to the socialized sector, from the voluntary sector to the compulsory sector. The government can give nothing to Paul that it does not take from Peter. Everybody is forced to pay for somebody else’s education or illness. As Bastiat put it more than a century ago: “Government is the great fiction through which everybody tries to live at the expense of everybody else.”
Inflation Threat: A few months ago Mr. Kennedy gave his support to the theory that an annually balanced budget was unnecessary; all that was needed was a “balance over the years of the business cycle.” But even this theory involved the implicit assumption that if, say, we ran deficits of $7 billion to $12 billion in our bad years, we would have to run equally huge surpluses in our good years. Now Mr. Kennedy’s Budget Message rests explicitly on the theory that though we need heavy deficits to turn the business cycle “from recession to recovery,” even a budget balance at any time, let alone an actual surplus, may endanger prosperity, and that the President needs discretionary stand-by powers to cut taxes or increase spending to cure unemployment.
This theory is very fashionable but quite fallacious. Not merely the new budget itself, but even more the new explicit budget philosophy behind it, must increase the threat and fear of inflation and undermine confidence in the American dollar.
February 12, 1962
Throughout the Economic Report of the President and his advisers run a multitude of supremely confident assumptions. They know just where the GNP is going to go. They know just how much economic growth we ought to have every year and just how to get it. They know the “guideposts” and formulas for fixing wages and prices. They know just what to do if things start to turn for the worse. All that is necessary is for Congress to surrender some of its constitutional powers and responsibilities now and turn them over to the President to use in an “emergency.”
“As 1961 ended, actual output was still $25 billion to $30 billion short of potential.” If we attained our “maximum,” GNP in 1963 would reach “approximately $600 billion.” “We should not settle for less” than a growth rate of 4½ percent a year. In fact, in November, together with our nineteen fellow members, “we pledged ourselves to adopt national and international policies aimed at increasing the combined output of the Atlantic Community by 50 percent between 1960 and 1970.” Well, as Shakespeare put it: “If to do were easy as to know what were good to do, chapels had been churches, and poor men’s cottages princes’ palaces.”
NEED FOR INVESTMENT
Economic growth depends on one thing: The volume of new investment—the amount of capital put into new machinery, plant, and equipment to increase productivity. In all the Administration proposals outlined in the Economic Report only one—a modest investment tax credit and revised depreciation allowance—is directly calculated to encourage increased private investment. Nearly all the other proposals would discourage it. They would increase government spending, increase deficits, and increase the tremendous burden of corporate and personal income taxes that already discourage and reduce our rate of economic growth. For they reduce incentives at the same time as they siphon off for nonproductive government spending the funds that would otherwise have gone into new investment.
The main assumption behind the Economic Report, in brief, is that the cure for unemployment is inflation, if you can only get enough of it. On this assumption the President asks for emergency stand-by power (1) to cut income taxes by as much as $10 billion a year and (2) to increase spending on public works by $2 billion a year. He also asks for longer and bigger unemployment benefit payments.
DEFICITS VS. JOBS
The assumption is that huge deficits are always a sure cure for unemployment. Nowhere in the report is there any reference to our experience in the ten years from 1931 to 1940 inclusive, when uninterrupted deficits averaging 3.6 percent of the gross national product (equivalent to $18.7 billion a year at present GNP levels) were accompanied by average annual unemployment of 18.6 percent of the total working force (equal then to 10 million and now to more than 13 million unemployed). Nor is there the slightest hint that unemployment may be the result of excessive wage rates or that anything effective should be done to mitigate union demands. Nor is there the slightest suspicion that higher and longer unemployment benefits might directly and indirectly increase unemployment.
Even if there were reason to think that the President’s proposed spending and taxing policies might reduce unemployment without increasing inflation, there would be no reason for Congress’s granting him stand-by powers. The President could always send an urgent message or call a special session and allow Congress to use its own judgment in the light of conditions at the time.
In brief, the President’s proposed policies seem likely to bring about precisely the opposite of the goals he wishes to achieve. They would slow down economic growth by reducing incentives to work and save and invest. They might increase rather than reduce unemployment. They would almost certainly increase inflation and thereby (together with his light-hearted suggestion that our 25 percent gold-reserve requirement might be repealed) undermine that confidence in the dollar which he is so eager to preserve.
February 19, 1962
President Kennedy’s call for a Congressional investigation of the government’s war-emergency stockpile program is gratifying. Such an investigation, in fact, is long overdue. Let us hope that it will not deteriorate into mere personal and partisan charges, but will confine itself mainly to essentials and basic principles.
If the investigation is partisan, neither party is likely to derive much credit from it. The program was started in 1939, under Roosevelt, resumed by Truman in 1946, and expanded by Eisenhower. In fact, it is astonishing that Mr. Kennedy was “astonished” to find that the nation’s strategic stockpile now contains $7.7 billion worth of materials. This does not differ much from the situation a year ago, when he came into office. And the figures have been published monthly for more than two years by the Byrd Joint Committee on Reduction of Nonessential Federal Expenditures.
Mr. Kennedy declared that the materials the government is holding exceed the nation’s “emergency requirements as presently determined by nearly $3.4 billion” even though these requirements are based on the highly improbable assumption that a (presumably nuclear) war today would last as long as three years. But this overbuying has also long been common knowledge.
HANDOUT TO INDUSTRY
Five years ago official estimates indicated that the U.S. had enough tungsten aboveground to last for six years at the peak wartime rate of consumption. Even a tungsten producer, Philip M. McKenna, pointed this out, and opposed Federal subsidies to domestic tungsten producers as neither necessary nor desirable. The government purchases of lead and zinc were also widely recognized five years ago as nothing more than a handout to industry.
The stockpiling program demonstrates once more that when the government embarks on a commodity buying, subsidizing, or “stabilizing” program even for “essential” purposes, political pressures and momentums develop that carry it far beyond its original or any rational purpose. It now includes some 76 commodities. The government dare not reverse its program, and fears even to halt it, lest it demoralize the very markets and producers it was trying to help.
In the press conference in which Mr. Kennedy called for an investigation of stockpiling, he only incidentally mentioned the most costly stockpiling program of them all, that of agricultural commodities. The Byrd committee figures show that on Nov. 30 the total cost value of stockpiles under the General Services Administration was $8.7 billion, but the agricultural price support program added $5.4 billion more, bringing the total above $14 billion. For the fiscal year 1961, annual storage costs of agricultural stockpiles were $460 million, out of a total $475 million.
‘AID’ MEANS CONTROLS
Ironically, on the same day as the President publicly worried about the strategic stockpiles, he submitted to Congress a new agricultural support program. True, he argued that this would reduce surpluses. But his argument rested on the assumption that in return for their subsidies the farmers will accept the most complicated and drastic controls, not only over acreage but over marketing quotas, to which they have ever been subjected. The alternative with which they are faced is that if they refuse to accept such controls not only will all price supports be dropped but also the government will dump its holdings of crops on the open market.
The present predicament of these programs emphasizes once more the danger to producers from accepting government “aid” and subsidies. Always, eventually, these lead to governmental control and dictation. Let us hope that the colleges and the score of other present applicants for Federal funds can learn this elementary lesson.
Meanwhile, it is worth pointing out that government “stabilizing” programs are always, in the long run, unstabilizing programs. The President’s own farm message concedes that the government’s past farm programs have led to “the drift toward a chaotic, inefficient, surplus-ridden farm economy.”
February 26, 1962
In January electrical workers in New York City, who had been working a 30-hour week at $4.40 an hour ($6.60 for overtime), struck and demanded a twenty- hour week at higher pay. They finally settled for a basic five-hour day and 25-hour week at $4.96 an hour, with a guaranteed sixth hour at $7.44, or $161.20 for a 30-hour week. The shorter week was demanded in spite of the fact that a serious shortage of skilled electricians already existed in the New York area.
There is hardly need to point out that the new contract (particularly if it becomes a “pattern”) must reduce national production, raise the cost of factories and homes, reduce our ability to compete abroad, create unemployment, and lead to further inflation. The Kennedy Administration and even the AFL-CIO have disapproved the settlement. Yet the unreasonable demands were made and granted.
And now, to prevent a repetition of anything like the 116-day steel strike of 1959, or even abnormal stockpiling, the Administration has already intervened in the steel wage negotiations to plead with both sides for “industrial statesmanship” and “an early and nonin- flationary settlement in the public interest.” Wages in the steel industry are already $3.24 an hour compared with an average in all manufacturing of $2.36.
FIXING RIGHT WAGES
Behind this intervention is the implication that the government knows what a proper or statesmanlike wage ought to be. This implication, in spite of many reservations, is found in the latest annual report of the Council of Economic Advisers. “The general guide for noninflationary wage behavior,” it tells us, “is that the rate of increase in wage rates (including fringe benefits) in each industry be equal to the trend rate of overall productivity increase.” After describing “important modifications” of this guide, it concludes that “productivity is the central guidepost for wage settlements. Ultimately, it is rising output per man-hour which must yield the ingredients of a rising standard of living. Growth in productivity makes it possible for real wages and real profits to rise side by side.”
It is gratifying to find explicit government recognition that real-wage rates are limited by productivity. But the truth is that neither “overall productivity” nor “output per man-hour” can be accepted as a wage-rate guide. “Overall productivity” is not productivity of labor, but of land, labor, management, and capital combined. “Output per man-hour” is a misleading ellipsis for output per man-machine-hour. The council report itself admits this at one point: “Output per man-hour rises mainly in response to improvements in the quantity and quality of capital goods with which employees are equipped.” Now if the rise in productivity is mainly owing to the creation and use of more and better machines, and if all the money earned by these machines (and needed to amortize them) is to be sucked into high wages for the workers who use them, what incentive is left for new investment?
EMPLOYERS COERCED
Why is the government drifting toward the idea of compulsory wage arbitration? The reason is that our one-sided labor laws grant so much power, privileges, and immunities to the labor unions that they can make unreasonable demands which the employers are impotent to resist. The latter find their own freedom to bargain abridged. The employers are legally forced to “recognize” and “bargain with” specific unions that are legally granted exclusive bargaining power. In addition, unions are allowed to use mass picketing and intimidation to prevent anybody else from taking the jobs that the union members have voluntarily vacated by a strike.
If these one-sided laws were repealed, if freedom, not merely of “collective bargaining” but of all bargaining, were restored, competition of workers and employers would set workable and “noninflationary” wages, prices, and profits, without need of coercive government slide rules. If two-sided freedom of bargaining is not restored, we will continue to drift toward compulsory arbitration, government wage and price and profit fixing, and totalitarian controls.
March 5, 1962
Ever since technological progress began, men have feared efficiency and machinery as a threat to their jobs. In the Industrial Revolution new stocking frames as they were introduced were destroyed by the handicraft workmen (more than 1,000 in a single riot), houses were burned, the inventors were threatened and obliged to flee for their lives. Yet before the end of the nineteenth century the stocking industry was employing at least a hundred men for every man it employed at the beginning of the century. And so with scores of other industries.
Yet the belief that machines on net balance destroy jobs, no matter how often disproved, never dies. Whenever there is prolonged unemployment, machines get the blame anew. In the depression of 1932, a group called the Technocrats emerged to blame the mass unemployment in that era once more on the machine.
Well, here we go again. A reporter at the press conference on Feb. 14 cited an estimate by the U.S. Labor Department that 1.8 million jobholders are replaced every year by machines. “How urgent,” he asked, “do you view this problem—automation?” And the President replied: “It is a fact that we have to find over a ten-year period 25,000 new jobs every week to take care of those who are displaced by machines and those who are coming into the labor market. So that this places a major burden upon our economy. . . . I regard it as the major domestic challenge, really, of the ’60s—to maintain full employment at a time when automation, of course, is replacing men.”
RECORD EMPLOYMENT
Now “automation,” in its broader sense, is simply the latest name for increased technological progress. To regard this as “a major burden” or “the major challenge” is to misunderstand it completely. It is true that machinery or automation can displace specific men from specific jobs, and this creates a problem. But it is not true that mechanization destroys jobs on net balance. Historically, it has always created jobs. In spite of our unemployment, U.S. employment in January exceeded 65 million, the highest for any January in our history.
It is important to understand not only that mechanization, automation or scientific progress has never reduced the total number of jobs, but just why it does not. First, a huge number of new jobs are created just to make the new automated machines. Secondly, scientific progress turns out innumerable products—telephones, motor cars, planes, air conditioning, radios, television, plastics, synthetics, miracle drugs—that never even existed before. A huge new demand is created. Thirdly, automation is most often adopted because it reduces costs of production. This means that it brings down prices. Then people either buy more of a product or have more money left over to buy other products. More jobs are created.
IT RAISES WAGES
Mass production, in brief, has made possible mass consumption. Mechanization increases production, real wages, and living standards.
When this is not understood, the policies adopted are precisely the opposite of what they should be. Unions no longer smash machines; but they still insist on slowdowns, make-work practices, featherbedding, retention of wholly unneeded workers, and other penalties to discourage mechanization. These policies injure all of us, and workers most of all.
It is not true, as the Administration thinks, that the government must “do something” to “find” jobs lost by automation. It is above all not true that it must resort to inflation or to massive new spending to “create jobs.” What it must undo are the ill-considered laws that have destroyed jobs.
To blame automation for current unemployment is to divert attention from the real cause. That cause is excessive wage rates in certain lines. It is no accident that some of our most serious unemployment is in the coal and steel industries, in which hourly wages have been $3.10 and $3.26 an hour respectively, compared with an average of $2.34 an hour in all manufacturing. And these job-destroying wage rates are the result, in turn, of the special legal powers and immunities that government has conferred on the unions.
March 12, 1962
The President has sent to Congress, accompanied by a letter urging its passage now, a pre-drafted “Stand-by Capital Improvements Act of 1962.” The proposed law would give the President authority to spend $2 billion on expanded public-works programs whenever government unemployment figures signaled a slump. Projects would be designed to create jobs, inject Federal money quickly into the economy, draw state and local matching funds after it, and expand consumer purchasing power.
Congress is being asked, in effect, to transfer in advance part of its power of the purse to the President. The President’s argument for having these stand-by spending powers is that, if a recession gave statistical signs of beginning, Congress would be incapable of acting soon enough. It is hard to see any force in this argument. In the event that statistics took the turn the President now contemplates, he could send an immediate emergency message to Congress on the day the discovery was made. If Congress were not in session, he could call a special session within a week. Congress could then act.
CONGRESS CAN BE QUICK
The President, therefore, must either think that Congress is incapable of acting promptly, or that it might not wish to do so. The historic record shows that the first assumption is not true. Congress has repeatedly declared war within a few hours after being asked to do so by a President. In the early weeks of the Roosevelt Administration, in 1933, laws were often enacted within a day or two after they were proposed. On May 25, 1946, when President Truman asked Congress for authority to draft striking railroad workers into the Army, the House voted the same day to grant him the powers he had asked (an action fortunately later rescinded by the Senate).
If, however, the argument is that Congress may not wish to authorize the increased spending at the time when the trigger conditions envisaged by the proposed stand-by law occur, that is the best of all reasons why Congress should not enact a self-paralyzing law now. This is asking it to vote now not to trust its own future judgment, but to agree to be bound in advance to authorize an automatic response to a statistical barometer without knowing the full circumstances of a future situation.
If we turn from the political imprudence of the proposed law to its economic consequences, we find that it rests on all the old pump-priming fallacies—on the assumption that a net increase in jobs is always created by bigger deficits, achieved either by more spending or by cutting taxes—on the assumption, in other words, that more jobs can always be created by injecting more money into the economy—in plainer words, that the total number of jobs can always be increased by more inflation.
KEYNESIAN FALLACY
This is the fallacy on which governments all over the world have been operating for the last generation, and especially since Lord Keynes built up an elaborate rationale for it in 1936. Those who believe in it forget that heavy unemployment has frequently occurred in the very midst of a major inflation. That increased deficit spending will bring on more inflation is practically certain; but whether it creates more jobs will depend on whether or not prices rise faster than wage rates and increase profit margins. The Administration remains persistently blind to the effect of excessive wage rates in causing the unemployment of which it complains. Such wage rates, instead of being allowed to correct themselves, would under the proposed law be subsidized with Federal funds.
The only direct employment provided by the President’s automatic pump-priming plan would be in the construction industry. But construction workers might be those in least need of subsidy. Today they earn an average of $3.24 an hour, compared with an average of $2.36 in all manufacturing and $1.71 in retail trade.
Finally, the projects on which the $2 billion would be spent would be projects dreamed up just to spend the money. For the inference is that if the unemployment thermostat did not hit the trigger levels, we could get along without the projects.
March 19, 1962
The proposal that we associate ourselves with the European Common Market has diverted attention from the real problems of American foreign trade. Administration spokesmen talk as if such an association would be necessarily a step toward lower trade barriers in general, and as if any other course would be necessarily toward more protection. But the problem is less simple than that.
1—It may be wise for us to bargain with the Common Market. But this would not necessarily be a step toward freer trade. It is still uncertain whether the Common Market will prove to be a step toward freer world trade or toward bigger inward-looking, discriminatory, protectionist blocs. The Common Market does not seem to be welcoming Britain with great fervor or the associate membership of such neutrals as Austria, Switzerland, and Sweden. It has still not decided whether it is primarily economic or primarily political. It is still to be seen whether it can hold together in spite of nationalistic suspicions, jealousies, and interests. It is doubtful it can hold together in the long run unless the six nations adopt a common currency or complete currency convertibility based on a common gold standard.
2—Our most important need is not to start bargaining reciprocal concessions with the Common Market, but to make and keep ourselves competitive in foreign trade. This means that we must slash, and not increase, Federal spending; that we must stop the deficits; that we must halt inflation, and every policy that undermines confidence in the dollar. We must keep down our prices and costs. We must revise or repeal all Federal labor laws that encourage excessive union demands and lead to faster rises in wage rates than in marginal labor productivity. We must revise our tax laws to give more incentives to industry, particularly for investment in cost-cutting or quality-raising equipment. Only such thoroughgoing reforms can keep us competitive in world markets.
3—The first step we must take in reducing foreign trade barriers is to abolish the import quota system we have been building up in recent years—on sugar, on petroleum, on cotton textiles. There is no legitimate aim of a quota system that cannot be accomplished as well or better by a tariff. Quotas are a totalitarian device that require detailed farm-by-farm or firm-by-firm output or import quotas, that reduce or eliminate competition even by domestic producers or importers with each other. A tariff at least permits domestic competition, and so tends to hold down domestic costs. It also brings in revenue.
4—When we have abolished quotas, we can start reducing tariffs. But it is extremely important that this be done gradually, to bring a minimum of disruption to industry, and to allow time for adjustment. Tariffs might even be reduced, by pre-set schedule, by very small changes month by month over a number of years. It is violent and unforeseen changes in tariffs, either way, that cause most uncertainty and disruption.
5—The worst course would be to reduce tariffs suddenly or sweepingly and then, as the Administration bill proposes, offer government cash payments or other forms of “adjustment assistance” to the workers or firms injured. It would be impossible, in fact, to know precisely how much or which unemployment or injury could be attributed to a tariff reduction. The decision would have to be arbitrary. “Adjustment assistance,” in brief, will lend itself to discrimination, favoritism, and corruption, and will expand the area of government paternalism and controls.
SELF-DEFEATING CURE
There is no good reason, moreover, why workers presumptively unemployed because of tariff changes should be more generously treated in length or amount of benefit payments than workers unemployed through other reasons that may be no direct fault of their own. Or why firms presumptively hurt by tariff changes should get better tax treatment or bigger government loans than firms hurt by other causes outside their control. To keep our high-cost inefficient producers going artificially, at public expense, would defeat the very purpose of tariff reduction.
And high tariffs, bad as they are, are infinitely less dangerous to a free economy than paternalistic government subsidies, direct or indirect.
March 26, 1962
My colleague Raymond Moley has just written the biography of a remarkable man—The American Century of John C. Lincoln (Duell, Sloan and Pearce, $4.95). John Lincoln was a genius peculiarly American—a sort of amalgam of Thomas Edison and Henry Ford. Like Edison, he was a prolific inventor. He took out 54 patents over a period of 65 years. Like Edison, again, his inventions showed amazing versatility—electric motors, brakes, drills, arc lamps, apparatus for curing meat, new types of steel springs. His chief contributions were in the field of electric welding of metals. As with Edison, some of his schemes and inventions were commercial failures, but his successes enormously outnumbered them. Like Edison, finally, his interest was primarily in invention or problem-solving for its own sake, rather than in the profits that it brought.
There were also, in his career and temperament, striking similarities to Henry Ford. His genius was dominantly practical. He was constantly devising methods of reducing costs, of making things cheaper, faster, better. Like Ford, he lived far below the level that his income would have permitted, and kept plowing back his profits into the expansion of his business.
PHENOMENAL WAGES
He started the Lincoln Electric Co. in 1895 with a capital of $200. By 1906 it was duly incorporated with a capital of $10,000. Its twenty employees grew to 70 by 1910, to 100 by 1911, to 150 by 1914. In 1907 Lincoln’s brother, James F., his junior by seventeen years, entered his employ at the age of 24. In 1913, at 47, John decided that he preferred a life of engineering and invention to a career as a business executive. As he found in James all the characteristics that make a successful head of a growing company, they entered into an arrangement in 1914 by which James took over the business management.
Under James’s management, the business of the company grew prodigiously. In 1961 it had 1,345 employees and did a gross annual business of nearly $60 million. Its prosperity has been based on the inventive genius of John C., on an initial lead in building certain types of motors, concentration on finding lower- cost methods, the wise use of engineering talent, and the “incentive management” system of James F., including profit-sharing, piecework, bonuses, employee stock ownership, and merit rating. Lincoln Electric’s wage policy has been extraordinary. The earnings of its factory workers range from $5,500 to $14,000 a year.
LINCOLNS AND FORDS
John C. Lincoln died in 1959, at the ripe age of 93. What is amazing is the range of his activities and inventions after he had passed the conventional retirement age of 65. He was making major inventions after 70. At 78 he took over and rehabilitated the Bagdad copper properties. In his late 70s, he wrote and published an analysis of the New Testament, and was actively preaching and propagating the tax theories of Henry George.
Will there be another career like that of John C. Lincoln? asks Moley at the end of his book. That, I am inclined to answer, depends on our future national policy. Certainly there will be other men born with the temperament of John Lincoln—men to whom life is a constant adventure and an unending quest, men with tireless drive and unquenchable curiosity, men more interested in invention and problem-solving than in any money profit that may come from them. But an atmosphere of hostility toward business, a tax on corporate profits of 52 percent, and of up to 91 percent on the personal income that may remain, must drastically restrict what even such men can achieve.
The profits that men like Henry Ford and John C. Lincoln plowed back into their businesses, increasing employment, production, wages and the amenities, welfare and living standards of the consuming community, were as surely “devoted to a public purpose” as any government activity. It is this capital investment that is the true and only source of that “national economic growth” that our political leaders profess to be so eager to increase. It will not be increased, but retarded, by punitive taxation, reckless government spending, and printing more paper money.
April 2, 1962
If you believe the books of Vance Packard and J.K. Galbraith and the speeches of Senators Kefauver and Douglas, the consumer is an ignoramus and a fool, unable to compare one product with another, swallowing every advertising claim, incompetent to spend his own money. The President’s 5,000-word message to Congress on March 15 (his fourteenth this year) implies that these assumptions are correct. So he calls for scores of new Federal controls, and an army of new bureaucrats to enforce them.
If these assumptions are true, the country would be in a bad way. For if the American people are too stupid to buy intelligently, how can they be expected to vote intelligently, or to know how to discriminate among the rival claims of politicians?
Yet the consumers may not be as helpless as Mr. Kennedy assumes. He says: “They are the only important group in the economy who are not effectively organized, whose views are often not heard.” They do not need to organize. Their views are heard every day in their purchases and failures to purchase. With every penny that he spends, the individual consumer is casting his vote for this product or against that. He does not need to sign petitions or march on picket lines. If he patronizes a product, the firm that makes it prospers and grows; if he stops buying a product, the firm that makes it goes out of business. The consumer is the boss. The producers must please him or die.
THE REAL PROTECTION
The great protection of the consumer is competition. It is true, as the President says, that advertisers (like politicians) utilize “highly developed arts of persuasion.” But their advertising is competitive. When each of a score of firms in each line claims that its coffee, or its cigarette, or its car is the best, the consumer must compare. If a coffee, say, is not to a housewife’s liking, she buys only one can, and then tries another. She does not have to stick with one brand (as she does with one senator) for six years. If she feels cheated in quantity or quality, she does not repeat her purchase.
Even the President’s message admits that: “The typical supermarket before World War II stocked about 1,500 separate food items—an impressive figure by any standard. But today it carries over 6,000.” This enormous range of choice was produced by freedom and competition, not by government restraints and bureaucrats.
Yet Mr. Kennedy’s solution for every problem seems to be more and more laws, more and more agencies, thousands of more bureaucrats, more and more government power, controls, and restraints.
SOME PROPOSALS
Space permits no adequate examination of his many specific proposals. The First National City Bank of New York, in its March letter, has already explained what is wrong with schemes to force disclosure of the “truth” about interest rates. Mr. Kennedy wants manufacturers to be compelled to make a specified type of TV set. He wants Federal bureaucrats to have power to forbid the sale, not merely of unsafe drugs, but of drugs that they decide are “ineffective” or “worthless.” This would not only ruin firms, but prevent the very clinical experience by which the relative merits of new drugs must be tested. Is this “protecting” the consumer? And would the principle be extended to allow bureaucrats to forbid the sale of “ineffective” or “worthless” paintings, newspapers, magazines, or books?
In spite of its length, there are a lot of things missing from the President’s message. Nothing is said about what the Federal farm program does to raise prices against the food consumer; or how import quotas on oil, sugar, and textiles boost the prices he pays; or how excessive wage demands and featherbedding affect consumer prices and choice. Mr. Kennedy wants “more adequate protection for savings.” But the gravest threat to savings has come from inflationary government spending.
The best way of protecting the consumer is not mentioned by the President. It is not to harass, threaten, hamstring, or intimidate the producer. It is to encourage the producer, by lower taxes and fewer restraints, to invest in new equipment, to expand, and so to reduce costs and prices and increase production.
April 9, 1962
Thirty years ago, the idea took hold in Washington that strikes and most other labor troubles were caused by the weakness of unions and of labor’s bargaining power. So the Wagner Act was passed in 1935 to encourage the formation of unions, to grant them exclusive bargaining powers, and to compel employers to “bargain with” them.
The act had two main purposes. One was embodied in its very title: “An Act to Diminish the Causes of Labor Disputes Burdening or Obstructing Interstate and Foreign Commerce.” The other was to enable unions to raise wages. The first aim was not realized. There was an enormous increase in labor disputes. There were three times as many strikes a year in the decade following the Wagner Act as in the decade preceding it. Whether and to what extent the second aim was realized is a matter of dispute. Money wages were probably forced up higher than otherwise, but it is doubtful that real wages were. And excessive wage rate increases in certain lines brought unemployment and a decrease in total real wage payments.
The Taft-Hartley Act of 1947 amended the Wagner Act but retained its provisions granting exclusive bargaining power to government-certified unions and forcing employers to “bargain with” these unions no matter how unreasonable or adamant their demands. And under the Norris-LaGuardia Act of 1932, the employer has been in effect left without recourse against coercion, violence, and mass picket lines to prevent other workers from taking the jobs voluntarily abandoned by strikers.
WHAT THEY FEAR
Yet events have taken an ironic turn. In recent years the chief fear of government officials has not been that unions would be too weak to demand sufficiently high wage rates, but that they would be so strong that they could demand and get excessively high wage rates—wage rates that would force more inflation, price us out of foreign markets, imperil the dollar, bring unemployment.
This is precisely the fear of the Kennedy Administration today, the most “pro-labor” government that the country has ever had. It is the fear of the chairman of the President’s Council of Economic Advisers, Dr. Walter W. Heller, and of the Secretary of Labor, Arthur J. Goldberg. Both hoped for a “favorable” outcome of the Big Steel wage negotiations. And by a “favorable” outcome they meant a wage increase that was not too high. And so they are delighted by the “noninflationary” tentative settlement of the steel wage dispute.
VAGUE ‘GUIDELINES’
To prevent excessive wage-rate increases Secretary Goldberg proposed a government voice in the terms of settlement. Though he denied that he wanted compulsory arbitration of labor disputes, his speech on Feb. 23 came very close to demanding this. In a “definitive” statement of Administration policy, he declared that Federal mediators must “increasingly provide guidelines” at the bargaining table to insure settlements “in the public interest.”
These “guidelines” had to do with “productivity.” The last annual Economic Report of the President assumed that such “productivity” can be statistically measured and that such “guidelines” can be set. But this “productivity” turns out to be a very nebulous concept. It has nothing directly to do with physical output per man-hour. The productivity that determines wages is marginal labor productivity. But there is no statistical way of determining this, except hypothetically and retroactively.
George Meany, the president of AFL-CIO, was right, therefore, when he called Secretary Goldberg’s statement “a step in the direction of saying the Federal government should tell either or both sides what to do.” And the NAM is right when it fears that Goldberg’s proposal would “lead to government regulation and control of the economy.” The government seems driven in this direction because it fears the consequences of excessive union bargaining power. Yet no one dares to ask whether our laws took a wrong turning in the 1930s and whether we should not simply revise or repeal the legislation that created the present union dictatorship.
April 16, 1962
In the Constitution, Congress alone is granted power “to lay and collect . . . duties” and “to regulate commerce with foreign nations.” In the government’s tariff bill Congress is asked to make a sweeping delegation of these powers to the President.
Few people realize how sweeping that delegation is. Discussion has centered around the proposal that the President be given power to reduce this country’s existing tariffs by as much as 50 percent in return for comparable reductions by other countries—and even to cut tariffs to zero on items on which the U.S. and Common Market together account for 80 percent or more of aggregate world export value. But the bill would also give the President power: (1) To increase any tariff by 50 percent over “the rate existing on July 1, 1934” (i.e., before any of the reductions made in 28 years of reciprocal agreements); (2) to levy new tariffs on duty-free goods up to half of their value; and (3) to impose any “other import restriction . . . as he may determine to be in the national interest.”
AN ACT TO ABDICATE
So the Trade Expansion Act of 1962 might more appropriately be called “An Act to Abdicate the Constitutional Power and Responsibility of Congress over Tariffs and Trade and to Turn Everything over to the President.”
There is, of course, a practical argument for a limited delegation of power in this field. Though reciprocal-trade agreements rest on dubious assumptions, Congress has already been delegating its tariff-making powers for 28 years. Individual agreements often involve more than a thousand items. Congress as such is hardly equipped to bargain separately with each foreign country or trading bloc.
But that is no reason why it need surrender its constitutional powers and responsibilities, tie its own hands in advance, and reduce itself to impotence in this field. It can and should provide that the President submit every trade agreement to Congress, but that an agreement go into effect in 60 days unless either house votes against it.
There are ample precedents for such a provision. It is precisely the provision in the Reorganization Act (which enabled Congress to halt the proposed Department of Urban Affairs). The President himself, in asking a few weeks ago for discretionary powers to cut income taxes, suggested that such powers be “subject to Congressional veto.”
CONGRESSIONAL VETO
Yet Under Secretary of State Ball declares: “It would greatly weaken the negotiating position of the United States if it could go through the great agony of making a very complicated trade agreement and then not be able to assure the country with which it was making it that it would be a binding treaty.”
If this argument is sound, the Senate should be deprived of its constitutional power to ratify treaties by a two-thirds vote or to reject them by a vote of one-third plus one. This constitutional provision is a far more formidable hurdle than the safeguard here proposed. It requires a positive two-thirds majority endorsement by the Senate, which can let a negotiated treaty die by mere inaction. Under the proposed Trade Expansion bill amendment, a trade agreement would automatically go into effect unless at least one house acted adversely on it within 60 days. Surely Congress should not allow any agreement to go into effect to which even one house is actively opposed.
Nor is there any substance in Ball’s “agony” argument. Both sets of government negotiators would be paid for their work and time. Those of the foreign country would lose nothing by their own tariff concession if the agreement were rejected; the concessions would simply not go into effect. Our own negotiators would be put in a stronger rather than a weaker bargaining position; they could argue that, if they conceded too much, Congress might kill the whole agreement.
Finally, turning power over to the President is no guarantee against political logrolling—as illustrated by Mr. Kennedy’s order for a sharp increase in the tariffs on woolen carpets and glass, the bulk of which comes from Belgium, in order to win sectional support for his program.
April 23, 1962
To provide more incentive for capital investment, the Administration has proposed that businesses investing in productive equipment be granted a flat-rate tax credit of 8 percent of the amount of their investment in any year. In addition, the Treasury has begun to reduce its estimates of “useful lives” of property to permit business to take somewhat quicker depreciation allowances than before.
These are certainly steps in the right direction. A modification of the first proposal (a 7-percent tax credit) is embodied in the tax bill as it passed the House and is now before the Senate. But is this proposal excessively generous, as some senators think? Or is it insufficient? And is it better or worse than other proposals designed to attain the same result?
Careful estimates indicate that, as a result of inflation combined with a shortsighted past depreciation policy, about $100 billion of plant and equipment in this country is obsolete and in need of replacement. Other careful estimates hold that our underdepreciation of plant and equipment amounts to $5 billion to $8 billion a year. On this basis business is paying $2.5 billion to $4 billion more in annual taxes than it would with adequate depreciation.
OBSOLETE PLANTS
If these calculations are reasonable, then even if the Treasury was correct in its first estimate that its proposed 8-percent credit would mean a tax cut of $1.2 billion a year at the outset, the tax credit would still not enable industry to write off adequate depreciation.
But how does the proposed tax credit compare, in fairness or as an incentive to modernization and new investment, with the method generally used in Europe in recent years, of allowing faster depreciation write-offs or a bigger initial write-off?
The tax credit would no doubt provide some incentive to new investment. But compared, say, with allowing a bigger initial write-off, it would have disadvantages both for industry and for the government. It would favor the already prosperous and growing industries over the older or more depressed. It would favor investment in short-lived rather than in long-lived assets. It would be more expensive for the government, because it is a direct offset against a corporation’s tax and would not reduce subsequent depreciation allowances. George Terborgh of the Machinery and Allied Products Institute has calculated that it would require at least a 40 percent initial write-off to match an 8 percent tax credit in overall terms.
FOR FASTER WRITE-OFFS
If it is a choice of one or the other, therefore, allowing faster depreciation on write-offs or a big initial write-off seems fairer as between companies, more promising in the long run as investment incentive, and ultimately better for government revenues, than the proposed tax credit.
The advantage of allowing faster write-offs or a big initial write-off is that the government gets the money back. A corporation can never write off an asset for more than its total cost. If it is allowed to write off 40 percent of that cost the first year, it has only 60 percent left to write off in later years. Depreciation adjustments involve merely transfer of income from one year to another. Past insistence by the Treasury on slow depreciation over the so-called “useful life” of an asset has been not merely arbitrary but shortsighted.
The Treasury itself stands to gain from liberalized depreciation allowances. Maurice E. Peloubet, a certified public accountant, has persuasively argued for adoption of the Canadian method of capital allowances and for “reinvestment depreciation.” A Senate subcommittee recently concluded:
“Liberalized depreciation allowances would generate enough new taxable earnings among producers of capital goods to offset the tax loss from lower profits resulting from increased depreciation allowances. . . . It is doubtful that there would be any revenue loss in the second year after such liberalization, and perhaps none in the first. . . . The economic growth and resulting greater tax base under new depreciation policies should assure the Federal government of a long-term gain in revenue.”
April 30, 1962
“But what good came of it at last?” . . .
“Why, that I cannot tell,” said he;
“But ’twas a famous victory.”
Let us see where the President’s great victory over the steel companies is likely to lead us.
The principle has been established that the price of steel, or of any other commodity, ought to be what Mr. Kennedy says it is. How does he know this “right” price? Presumably from his Council of Economic Advisers. They not only know what each price ought to be but what each wage ought to be. In their last annual report they laid down confident “guidelines.” Secretary Goldberg announced that the government would not stand idly by and let wages be decided by free bargaining. It would insure settlements “in the public interest.” When the steel unions settled for an added labor cost of only 10 cents an hour in the first year, he and the President hailed the settlement as “responsible” and “noninflationary.”
There was no Presidential blast at the steel unions for forcing this settlement. Nobody in the White House pointed out that since the steel industry had last adjusted its prices in 1958 there had been four increases in steel wages and benefits amounting to some 40 cents an hour; that the new increase would add another 10 cents; that as compared with average wages of $2.38 an hour in manufacturing in general, wages in the steel industry were already $3.01 an hour—and, plus fringe costs, $4.10 an hour.
STEEL AS SCAPEGOAT
No, the union was congratulated for its moderation and “statesmanship,” and for getting still another “noninflationary” rise. But when U.S. Steel, in a belated effort to catch up on an increase in employment costs of 12 percent since 1958, and a net increase of 6 percent in all costs, announced a price increase of 3½ percent, the White House turned loose all its fury. It denounced the increase as “a wholly unjustifiable and irresponsible defiance of the public interest.”
The steel companies have long been Washington’s No. 1 political whipping boy. When a 40-cent hourly package pay increase and a 30-month contract were forced on them in 1960, they were warned not to raise prices and didn’t. Last September Mr. Kennedy again warned them that they mustn’t raise their prices to meet the coming wage increase on Oct. 1. Yet many now say that the recent announcement of price increases was “badly timed.” Apparently it is never the right time to raise steel prices, no matter what happens to costs.
According to the new mythology, the cause of inflation is not the enormous increase in the money supply, not irresponsible Federal spending, not chronic deficits, not one-sided laws which give labor unions power to demand ever greater wage increases and to boost production costs. The cause of inflation, we are told, is refusal of the steel industry to “absorb” all these costs.
VICTORY FOR WHOM?
The result of the Administration’s policy must be to stunt the steel industry—the foundation of our national defense. Our government wants a big, strong, modernized, growing steel industry—but it mustn’t make profits. In 1961 steel stood only 33rd out of 41 manufacturing industries in return on net assets. Only once in the past twenty years have profits in the industry equaled the 8 cents per dollar of sales that they reached in 1940. In 1961 they were about 5 cents. Yet funds for modernization and expansion can come only out of past profits or out of borrowing in anticipation of adequate future profits. U.S. Steel’s profits available for reinvestment dropped from $115 million in 1958 to less than $3 million last year.
As Professor Livernash of Harvard put it in a report prepared for the Department of Labor in 1960: “Obviously while price policy can be debated in the short run, in the long run all cost increases must be met.” But suppose a President, through lawless price fixing by fury and threat, can prevent cost increases from being met? Then economic growth, modernization and expansion of plant, employment, wages, and output, must all be less than they would have been.
The President has struck a heavy blow at all business confidence. Who can gain from a climate of fear?
May 7, 1962
Unless prompt and convincing steps are taken to offset the consequences of the President’s “cold fury” press conference of April 11 and the punitive measures that followed, unmeasurable harm may be done to American industry.
In that press conference Mr. Kennedy denounced the steel price increase as “a wholly unjustifiable and irresponsible defiance of the public interest.” His private expressions appear to have been even more sweeping. The New York Times reports him as having said: “My father always told me that all businessmen were sons-of-bitches but I never believed it till now.”
In a belated statement on April 19, the Joint Senate- House Republican leadership listed nine actions that followed this conference, ending with that of the FBI in “routing newspapermen out of bed at 3 a.m.” for questioning. The Republican group declared that collectively these actions “imperiled basic American rights, went far beyond the law, and were more characteristic of a police state than a free government.” The Democratic leadership denied none of the Republican allegations of fact. It simply “commended” the President “for taking every appropriate step he could to . . . preserve the public interest.”
SHOCK TO CONFIDENCE
Where does this leave us? It leaves us with an illegal form of price control enforced by denunciation, threat, and intimidation. And nobody knows the new rules. Which businessman can raise the price of his product? By how much? When? In the steel industry we now have a price freeze of unpredictable duration. Under what circumstances, and at what level of labor costs, will a rise in steel prices—or in any other price—cease to be a crime? What is the standard? The personal opinion of the President? Must every price or wage rise be submitted to him in advance?
The President’s action has given a severe shock to business confidence. There is already a profit squeeze. In the last sixteen years corporate profits have been dropping both as a percentage of national income and as a percentage of sales. As a McGraw-Hill compilation has shown, profits dropped from 5 percent of sales during the years 1946–50 to 3.6 percent during 1951–55, to 3.2 percent during 1956–60, and down to 3.1 percent last year. Last year, also, the steel industry stood only 33rd out of 41 manufacturing industries in return on net assets.
A leading Soviet ideologist has just repeated that Russia is “further expanding heavy industry, the cornerstone . . . of the defense of the country.” The President wants faster economic growth and especially a growing steel industry. Yet our expansion can only be financed out of profits. How many steel men—or any other businessmen—will go ahead with heavy capital spending programs when they do not know whether they will be allowed to set prices, subject only to keeping competitive, or where they will be allowed to set them?
UNKNOWN RULES
Sensing the disquiet and fears to which his actions have given rise, and their threat to economic growth, the President on April 18 announced that his Administration “harbors no ill will against any individual, any industry, corporation, or segment of the American economy.” He admitted “the steel industry’s need for profit, modernization, and investment capital.” He declared that “this is a free economy.” He insisted that his action had not set a precedent. “I have not suggested that . . . we have powers to set or that those powers would be desirable to set—prices or to set wages.” But he repeated that he had a “responsibility” to intervene in steel prices because “the public interest” was “mandatory.” Thus one thing contradicts another and everything is left ambiguous.
And the central question remains unanswered. Which is really in “the public interest”? That prices be fixed in accordance with the President’s personal opinion? That profit margins in steel be squeezed tighter, investors frightened, and investment in new steel plant discouraged? Or that industry management be free to try to set prices to yield profit margins that encourage the industry to grow, with a rise in employment and real wages?
May 14, 1962
The speech of the President before the U.S. Chamber of Commerce was gratifying not only for its conciliatory tone but for its recognition of the crucial role of profit in the American economy:
“We want prosperity and in a free enterprise system there can be no prosperity without profit. We want a growing economy, and there can be no growth without the investment that is inspired and financed by profit. . . . Our primary challenge is not how to divide the economic pie, but how to enlarge it.”
Yet, as the response of the stock market has shown, it will take more than verbal reassurance, no matter how well phrased, to restore the confidence so badly shaken by the President’s outburst of April 11 and by some of his subsequent actions. Here are seven measures that might help:
1—The President should abandon all hints that price and wage controls may be desirable or necessary unless labor and management act, in his judgment, “responsibly.” It is not enough for him to say that “We [in Washington] do not want the added burden of determining individual prices for individual products.” He must recognize that the task is impossible, and that it would do immeasurable damage to the economy for the government to attempt it. There are millions of separate prices and billions of interrelationships of prices, wages, and costs. These ever-changing interrelationships determine how much of thousands of different commodities are produced, and when, and how many workers are employed, and where. Arbitrarily to hold down the price of one commodity must reduce its production and disrupt the production of scores of others.
The President must also abandon the belief, sold to him by his Council of Economic Advisers, that any “scientific” formula has been found for fixing prices and wages. He must above all abandon the delusion that wage hikes of 3 percent a year, combined with a price freeze, is such a formula. Any attempt to apply this crude formula would be disastrous.
2—The President should stop asking for increased discretionary powers for himself. Congress should stop abdicating its legislative responsibilities and stop granting him such powers.
3—There should be no more anti-business taxation. This applies particularly against the new tax proposals that would penalize the competitive position of American firms operating abroad. The proposed withholding tax on dividends and interest should be postponed for additional study.
4—The Administration and Congress should halt reckless “welfare” spending. They could begin by slashing a few billions out of farm price supports and foreign aid. If this gross inflationary spending were cut, the Administration would not have to impose still more growth-choking taxation to “balance the budget.”
5—In addition to refraining from measures that shake confidence, the Administration should take positive measures to instill it. Far better than the proposed 8-percent investment tax credit, for simplicity, justice, and incentive, would be to permit an initial depreciation write-off of 30 or 40 percent in the first year, and 10 percent in subsequent years. In the long run, precisely because it gave a strong incentive to new investment and growth, the government would gain not lose revenues.
6—The jungle of our antitrust laws should be re-explored. It has become impossible for the heads of big corporations to know when they are violating one of these “ten thousand commandments,” most of which are ambiguous and many of which conflict with each other. Their enforcement has been haphazard, selective, and discriminatory. Government officials have been able to use them for harassment and intimidation. We might begin by eliminating criminal penalties and by repealing the Celler-Kefauver and Robinson-Patman acts.
7—The double legal standards in dealing with big business and big unionism have led to disorder. But the way to curb unreasonable union demands is not to make the unions subject to the antitrust acts, as so widely proposed, nor to give the President more power to intervene in strikes or set wages, as recommended by a Presidential panel, but to stop tolerating union violence and intimidation and imposing one-sided bargaining compulsions on the employer that force capitulation to strike demands.
May 21, 1962
The market economy is a marvelous but infinitely complicated mechanism. It was once moderately estimated that there are some 9 million different prices of all goods in the United States. This would imply more than 40 trillion interrelationships of these prices.
Under the play of supply and demand these prices change from day to day and from hour to hour. So do their interrelationships. These changes in relative prices, wages, costs, profits, and losses are daily changing the pattern of consumption and production, driving firms and workers out of some lines and drawing them into others. It is through this wondrous mechanism that the relative output of thousands of different commodities and services, in accordance with the relative demand of consumers, is determined.
If, now, a government official, substituting his personal judgment for that of the market place, steps in to hold down one set of prices (say of steel), what will happen? Because of the smaller relative profit margin, the output of that product will decline. Suppose the government keeps inflating, by undermining confidence in the dollar and increasing the money supply, thus putting upward pressure on all prices and wages, but then insists that everybody must “hold the line” and freeze prices? Then it will impair or nullify the function of the whole price-cost mechanism, disrupt and disorganize production, and bring shortages and unemployment.
THE 3 PERCENT FALLACY
Yet there are people who are not only presumptuous enough to suppose that they can fix prices better than the market can fix them, but that they can do this by some simple pat formula. The Council of Economic Advisers, in its last annual report, put forward its own “guidelines” for prices and wages. It modestly disavowed omniscience. It conceded that “productivity is a guide rather than a rule”; that “this is a large and complex subject and there is still much to be learned”; that it had no “mechanical formula for determining whether a particular price or wage decision is inflationary.”
But suddenly the “guidelines” became clear rules and the government knew all. Any price rise whatever (especially in steel) was “inflationary,” but a wage-rate rise or labor-cost rise of 3 percent or less was “non-inflationary.” The President denounced the steel-price rise as a “wholly unjustifiable and irresponsible defiance of the public interest”; but he congratulated the steel union leaders for their “statesmanship” in forcing another 2½ percent labor-cost rise. And when a Presidential emergency board recommends an increase of 10.2 cents an hour, or more than 4 percent, for non-operating railroad employees, the President declares himself “gratified” that the recommendation falls within the council’s guidelines.
THREAT TO EMPLOYMENT
These “guidelines” are economic quackery. The council’s own figures show an average annual growth of output per man-hour from 1947 to 1960 of 2.8 percent. But this varied every year. Average man-hour output in 1956, outside of agriculture, was lower than in 1955. The rate of change was different in every industry in every year, and in every firm within every industry. To impose a Procrustean annual hourly labor-cost increase of 3 percent on every industry and firm would disrupt profits, employment, and production. The formula ignores, moreover, all differences in past increases in wage rates. The average wage increase in the apparel and textile industry in the period 1947–1960 was 38 percent; in steel 113 percent.
Suppose, however, there really was everywhere an increase in man-hour productivity of 3 percent a year? Such increases as occur are brought about, not because everybody works harder every year, but because there has been an increase in investment in new plant and equipment. If the whole of the increased productivity goes to labor, where will the funds come from and where will the incentive come from for future investment?
Any formula whatever of government price and wage control overlooks and destroys the whole function of free prices and free wages, which is to guide and stimulate production, investment, and employment.
May 28, 1962
Successive statements have only increased the ambiguity of the President’s attitude on price and wage control. “This Administration,” he told the convention of the United Auto Workers, “has not undertaken and will not undertake to fix prices and wages in the economy.” That sounds clear enough, but he continued: “We can suggest guidelines for the economy, but we cannot fix a single pattern for every plant and every industry. We can and must under the responsibilities given to us by the Constitution and by statute and by necessity point out the national interest.”
Mr. Kennedy denies that he either has or seeks power to fix prices or wages. But he did in fact force the steel industry to rescind its price increase in April. By his action the price of steel is now frozen for an unpredictable period. He denies that he either has or wants any legal powers over prices and wages—but he insists that he has “responsibilities” concerning them. How can one have “responsibilities” where one has no power? He declares that his responsibility is to point out “the national interest.” Is he alone competent to say what the national interest is? Are price-fixing by anger and threat, and profit margins too thin to permit or encourage industrial growth, in the national interest?
PHANTOM ‘GUIDELINES’
There is a great deal of confusion on this central point. Even “conservatives” ask whether the President will be just as “tough” in holding down wages as in holding down prices. They forget that it would be enormously dangerous and disruptive for him to dictate either. Only free markets can coordinate the millions of prices and wages, and decide the ever-changing price-wage-cost-profit-loss pattern of relationships that will maximize production and employment and provide goods and services in the proportions that best meet the demands of consumers. This incalculably complicated problem cannot be solved either by pat formulas or by vague generalities about “productivity” and “guidelines.”
Last week I discussed here some of the fallacies in the Administration’s notion that wage rises of 3 percent a year are “non-inflationary” because of a supposed annual rise of that amount in “man-hour productivity.” The phrase itself is dangerously misleading. It is an ellipsis for man-machine-hour productivity. A power mower may enable your gardener to cut your lawn in half the time a hand mower would take. But if he demanded an increase in wages from $2.50 to $5 an hour, on the ground that his “man-hour productivity” had increased 100 percent, there would be no point or incentive in your buying the power mower.
DISRUPTIVE CONTROLS
This problem is commonly discussed as if it could be solved by some moral calculus. If new machines increase productivity, how “ought” the gains to be shared as among labor, capital, management, consumers, etc? The problem cannot be solved in such pseudomoral terms. Only free markets can solve it. Free competition tends to give to workers, managers, and investors what each contributes to production. Productivity and competition decide not what everybody “should” get but what he can get. A movie star’s salary is not fixed by what is “fair” but by what she brings in at the box office.
Why is Mr. Kennedy talking about price and wage control at all? First, because his Administration is following dangerously inflationary spending and monetary policies. But to inflate, and then to try to prevent the consequences of inflation by freezing prices and wages, is the most disruptive of all policies. Secondly, the pressure for both price and wage control exists because some unions are making and winning unreasonable demands which threaten both industry and employment. They are making and winning these demands, however, because under existing laws an employer is legally forced to bargain with a specified union, while unions are allowed to use violence, intimidation, and mass picketing to prevent struck employers from trying to carry on their business.
The cure for all this is not still more government intervention. It is to restore the conditions everywhere for competition and free markets.
June 4, 1962
The president has been eloquently and rightly pleading that we should not move toward economic isolationism but toward greater freedom of international trade. But the Administration’s Trade Expansion bill bears little relation to this plea. It is not primarily a bill to reduce trade barriers. It is a bill under which Congress would abdicate its constitutional tariff powers and turn them over to the President—including the power to raise as well as lower tariffs, to impose import quotas, and to decide which firms and workers should receive special and discriminatory doles and which should not. Every such determination by the President and the “administering agencies” would be final and conclusive, and not reviewable by any court.
A bill primarily designed to reduce international trade barriers would not have to be an enormously complicated 61-page document. It need have only two main provisions: (1) It would abolish all import quotas and similar non-tariff impediments to trade. (2) It would provide unilateral tariff reductions. These reductions would be smooth and gradual, extending over a considerable period, say ten years, to allow time for adjustment and to minimize disruption. They would contain the most-favored-nation clause.
AMENDMENTS
I made essentially these suggestions in previous Newsweek articles in the issues of Dec. 25 and Jan. 1 last. Similar recommendations have been made in a remarkable article by Prof. Milton Friedman in National Review of May 22. But they may sound academic in view of present sentiment in Congress and 28 years of reciprocal tariff negotiations. The more immediate question is what are the minimum changes in the Trade Expansion bill that would lead toward real freedom of trade and retain constitutional processes and protections.
1—The bill should abolish all import quotas or provide for their abolition over a reasonable period. These are today a far more serious barrier to trade than tariffs. We have had for years a creeping quota system. We now have import quotas on some agricultural products, notably sugar, on petroleum, and on lead and zinc, as well as “voluntary” export quotas on textiles imposed on Japan and Hong Kong. As between quotas and tariffs, tariffs are in every way to be preferred. Quotas are discriminatory, require individual allocations, lead to growth of bureaucracy, become weapons of punitive action or of favoritism, and breed corruption.
2—Of the 61 pages of the original Administration trade bill, 38 are devoted to “adjustment assistance.” These provide for discriminatory doles to workers laid off or business firms injured because of tariff reductions. All these provisions should be stricken out. This discrimination cannot be justified. As chairman Mills of the House Ways and Means Committee asked: “Why should a worker who is out of a job due to import competition be placed in a more favorable light . . . than a worker who is unemployed due to cancellation of defense contracts . . . or technological advances?” It would be impossible to know, moreover, which plants shut down just because of import competition. As the First National City Bank of New York has pointed out: “Curtailments of operations in industry have multiple causes; import competition could almost always be figured as playing some part even though other causes might be paramount—shifting desires of consumers, bad management, exorbitant labor demands, or excessive taxes.”
3—Congress should provide that every trade agreement be subject to Congressional veto, but would automatically go into effect unless within 60 days after submission either House of Congress voted against it. This would be the same provision as that now in the Reorganization Act.
Finally, the Administration itself should adopt a consistent policy of freer trade. It should not try to impose punitive taxation on firms doing business abroad. As for our so-called “balance of payments” problem, it is caused solely by our own inflationary policies (combined with an inflexible exchange rate), and the first step to any cure is to halt these policies. Any other course (such as government speculation in foreign currencies) is a dubious gimmick that can only postpone the day of reckoning.
June 11, 1962
The demand of David Dubinsky, head of the International Ladies Garment Workers, and of George Meany, head of the AFL-CIO, for a cut in the standard workweek from 40 to 35 hours is senseless from the workers’ point of view.
Without overtime, it would reduce national production by one-eighth, or 12½ percent. Therefore it would reduce real income and “purchasing power” by 12½ percent. If wage rates were not changed to compensate, it would reduce the money-wages of all presently employed workers by 12½ percent. It would not force the employment of 14.3 percent more workers, if only because there are not that many unemployed. Moreover, the percentage of unemployment is different in every industry and locality. Even if the cut in the workweek did force the employment of presently idle workers, presently employed workers would in effect be paying their wages.
That is why the union leaders insist that there must be a compensating hourly wage increase to bring present workers the same take-home pay. This wage increase would have to be more than 14 percent per hour. Putting aside the question of how the union leaders propose to achieve this uniform hourly increase—by law, by Presidential directive, or by individual strikes and “collective bargaining,” the result of achieving it would be to bring on massive unemployment. If, to remedy this unemployment, union leaders demanded enough monetary inflation to raise prices also by some 14 percent, the present workers would in effect take a cut in real weekly wages of 12½ percent.
CRUDE FALLACIES
The union leaders’ demand, in brief, rests on the crudest fallacies. It assumes that there is only a fixed amount of work to be done, and that hours per person must be cut to spread this fixed amount of work around. The union leaders refuse to recognize that even our present unemployment is caused by excessive hourly wage rates in certain lines. The reductio ad absurdum has been put forward by Walter Reuther, who suggests that the greater the percentage of unemployment, the more the workweek must be cut and overtime rates doubled to compensate This would make the unemployment greater and greater.
Administration officials have called attention to some of the absurdities in the proposal. Walter Heller, chairman of the President’s Council of Economic Advisers, points out it would “undercut the sources of economic growth quite apart from the cost-push effect that this would have on prices.” Secretary Goldberg declares: “The result would be that our goods would be necessarily higher priced, would be less competitive both at home and abroad, and the result would be more unemployment instead of less.”
REVISE LABOR LAW
Other Administration officials make additional points: (1) A reduction of working hours of skilled labor would not spread work to unemployed that are not skilled. (2) When the workweek is shortened below 40 hours, many workers “moonlight”—i.e., go out and get a second job. (3) There is no evidence that a workweek of less than 40 hours increases efficiency. (4) In three-shift industries it is easier to schedule workers on an eight-hour day than on a seven-hour day, which is what the 35-hour week comes to.
But it is not enough to point out that a further forced 12½ percent cut in the standard workweek would be senseless from the workers’ point of view. Unions have the government-granted powers and immunities to force such cuts. The Ladies Garment Workers already have a 35-hour week. Electrical workers of New York City have forced a basic 25-hour week at $4.96 an hour and $7.44 for overtime. The situation will grow steadily worse (hurting workers most of all) unless we reconsider our labor legislation of the last 30 years.
Two revisions are basic. (1) We must stop compelling employers to “bargain” with specified unions no matter how exorbitant their demands. (2) We must stop allowing unions to enforce a strike by violence or the intimidation of mass picketing. This means revision of the Wagner-Taft-Hartley Act and of the Norris-LaGuardia Act.
June 18, 1962
When tens of thousands of investors buy and sell millions of shares, each for his own reasons, no one can say with certainty what specific considerations caused the rise or fall. If more than one factor is involved, which invariably happens, no one can know the precise effect of each factor. But whenever the market has a violent rise or fall it is usually possible to make a few reasonable presumptions. Two main factors seem responsible for the recent crash.
The first was the overvaluation of most shares based on the assumption of rapid and inevitable “growth,” plus the assumption of further inflation. And even though both the inflation and the growth were probable, stocks selling at an average of 23 times earnings (as compared with 11.2 to 14 times earnings in 1954–1957) got too far beyond reasonable expectations. At some time a readjustment was inevitable.
But what triggered that readjustment, and made it far more violent than otherwise, was the President’s “cold-fury” press conference of April 11, denouncing the steel price increase as “unjustifiable and irresponsible,” and ordering punitive measures against it. That action was part of a whole package of policies injurious to business. It was a culminating episode that shook confidence profoundly because it left all businessmen wondering whether they would be allowed to announce price changes or whether everything was to be decided by the President’s personal opinion.
FIVE MEASURES
What can be done now to rebuild confidence? In this column of May 14, under the title, “To Restore Confidence,” I suggested seven measures. Let us consider a few such measures again with a different emphasis:
1—The President should abandon all hints that price and wage controls may be desirable or necessary unless labor and management act (in his judgment) “responsibly.”
2—He must also abandon the notion, sold to him by his Council of Economic Advisers, that they have discovered some “scientific” formula for fixing prices and wages. The idea that such a formula is a 3-percent boost in wage rates every year, with a tight ceiling on prices, is dangerous nonsense. Free markets and free competition can decide this enormously complicated problem, not bureaucrats too cocky to understand the superficiality and pitfalls of their formula. Pushing up wage costs while holding down prices is hardly the best way to create business confidence.
Many other measures that shake confidence ought to be withdrawn or repealed. I discussed some of these in the column of May 14, but several positive measures are possible to instill confidence:
3—Faster depreciation write-off should be permitted. The proposed 8-percent tax credit is a subsidy and a needless gimmick. But a 30 or 40 percent initial write-off of new investments in the first year and short write-off terms thereafter could prove a simple and dramatic incentive.
4—Faster write-offs are not a subsidy, but though in the long run they would increase government revenue, they are equivalent to a slight tax rate cut. This and other tax cuts are desirable. One would be to keep the 52 percent corporate income tax only on retained earnings, and to tax at only 50 percent (i.e., a reduction of 2 percentage points) all dividends paid out. This would reduce the inexcusably heavy double taxation on corporate dividends. In addition, all personal income-tax rates above 65 percent should be dropped to that level, now. The result of these measures would be a probable long-run gain in government revenue, and a certain long-run gain in investment and production.
5—It is incredible that in a violently falling market the Federal Reserve should have kept margin requirements at 70 percent. As G. Keith Funston, president of the New York Stock Exchange, said in 1957: “I sometimes wonder at our sense of proportion. A man can borrow up to 75 percent to buy a car, 100 percent to buy a washing machine, and 94 percent to buy a home. But he can borrow only 30 percent to buy an interest in the company that makes the car, the washing machine or the house. We have made it much easier to borrow in order to spend, than to borrow in order to save.”
June 25, 1962
The Administration is to be congratulated for recognizing that tax reform and a reduction of the total burden of taxes are imperative if we wish to reduce the deterrents to production. But the Administration refuses to consider the reversals in its policies and attitudes that would be necessary to put these reforms into effect. At the moment, it is suffering from schizophrenia. It has begun to talk about a new tax-reform and tax-reduction bill for 1963. But it still insists that Congress must go through with the tax bill now before it. This is as if Mr. Kennedy were to say: “Before you consider a tax bill to restore business confidence you must first of all pass the existing bill that tends to undermine it.”
TO RESTORE CONFIDENCE
Business confidence needs to be restored now, as quickly as possible. A big step in this direction could be taken if the Administration abandoned several features of the existing tax bill and agreed to some changes it is talking about for next year:
1—Congress should abandon, or postpone for further study, the proposal for tax withholding on interest and dividends. This has been correctly described as “impractical, unnecessary, and unwise.” It would create an administrative nightmare both for business and the government.
2—The Administration should abandon its proposals for punitive taxation of income from sources abroad. These proposals would force American companies operating abroad to bear simultaneously the full weight of foreign taxes plus the extra weight of higher U.S. income taxes. Prof. Dan Throop Smith of Harvard has characterized this section of the bill as bad in principle and raising administrative problems “which are little short of appalling.” The June monthly letter of the First National City Bank of New York presents an excellent analysis of the harmful features both of the tax-withholding and foreign-income provisions of the present tax bill.
3—The consensus outside of Administration circles is that the proposed 8 percent investment tax credit is too complicated, inequitable as between various types of business, and a doubtful long-run incentive to investment, especially because of the “compensating” tax revenues the government asks for. It would be far simpler, fairer, and more stimulating to investment to allow a depreciation write-off of, say 30 or 40 percent in the first year, or to write faster depreciation schedules into law, as in Canada.
4—The tax burden on corporations is excessive, and a deterrent to investment and production. At least one reform would be possible immediately. This would be to keep the 52 percent corporate income tax only on retained earnings, and to tax at only 50 percent all dividends paid out. As dividends when received are also taxed as personal income, they are subject to a double taxation that is a drastic discouragement to investment and economic growth. The differential should eventually be much greater than the 2 percentage points here suggested. But at least the principle of differential tax rates on retained and distributed corporate earnings should be established now. If this were substituted for the present $50 dividend exclusion in the personal income tax and the 4 percent tax credit against dividends received it would mean no net loss in government revenues.
5—All personal income-tax rates in excess of 65 percent should be dropped to that level now. This would mean practically no loss in government revenues. In fact, even if the top rates stopped at 50 percent there would almost certainly be a net long-run gain in government revenues. But this would be far less important than the stimulus this change would give to production and investment.
These changes in the tax laws would reduce immediate tax revenues very little, and long-run tax revenues not at all. But their moral effect would be immediate. They would reassure business and stimulate investment. This stimulating effect will not be achieved by tax cuts merely designed to create budget deficits and more inflation, nor will it be achieved by the deplorable kind of speech Mr. Kennedy made at Yale, contemptuously dismissing all criticism of his policies as “worn-out slogans” based on “myths.”
July 2, 1962
Do we need a tax cut now? Yes. Why? Because the burden of taxation on investment is excessive and undermines incentives. Also, because of the stock-market collapse, a tax cut now is psychologically important.
What taxes should be cut? How much? Those taxes should be cut that most discourage production and investment. We should begin with corporation taxes. First, we should abandon the ill-advised proposals to discriminate against American business investments abroad. For an immediate positive stimulus, a depreciation write-off of, say, 35 percent should be allowed on all investments in the first year, with short total write-off periods. The corporate income tax of 52 percent should be kept only on earnings retained in the business. What a corporation pays out in dividends should be taxed at a lower rate—to begin with, not more than 50 percent. This lower tax on earnings paid out as dividends could be a substitute for the present complex personal $50 allowance and 4 percent credit on dividends.
How much would these reductions reduce government revenues? In the first year or two, perhaps a little. In subsequent years, not at all. They would increase government revenues by their incentives to new income- producing investment, employment, and production.
CUT SPENDING TOO
Would such tax cuts be enough to give the stimulus needed? No; but they are the best possible until real slashes are made in the huge proposed government spending of $92.5 billion in fiscal 1963 ($115 billion counting social security). For the following fiscal year, given a few moderate spending cuts, corporate tax rates might be dropped to 50 percent for retained earnings and to 45 percent for earnings paid out in dividends.
What about personal taxes? Income taxes ought to stop right now at a top rate of 65 percent, instead of soaring to a confiscatory 91 percent.
Wouldn’t that lose revenue? It would probably increase revenue, even in the first year; and certainly in later years. Even if the top rates stopped at 50 percent, the government would lose, at most, a hypothetical amount of less than $1 billion, which is what it now spends in three or four days. In fact, however, even if top rates on personal incomes (keeping other brackets unchanged) stopped at 50 percent, there would be a long-run increase in government revenues—and a dramatic increase in investment and production.
But what about personal income taxes on the lower brackets? It is desirable to reduce tax rates all down the line; but lower rates on lower and middle incomes would mean a very heavy loss in revenues. Such tax cuts are possible only by heavy cuts in government spending.
REAL INFLATION THREAT
With our huge defense needs, are such spending cuts possible? Easily. More than half of our planned $115 billion spending for fiscal 1963 is for non-defense items. To slash foreign aid, farm price supports, etc., would strengthen our economy.
Isn’t the real need now to cut taxes on lower and middle incomes to give a big fillip to “purchasing power”? No; that would only lead to bigger deficits and inflation.
But isn’t the whole inflation danger over, as so many people are now writing and saying? No. With a $7 billion deficit in the fiscal year just ending, and with an increase of $16 billion in money and deposits in the last twelve months, plus the prospect of a further big deficit in 1963, the danger of more inflation is very real.
What of the drop in the stock market, and steady commodity prices? In the midst of every inflation (even the tremendous German inflation of 1923–24) there are occasional violent breaks in the stock market, because speculative guesses of the exact extent and pace of an inflation are constantly changing. The wholesale price index is held down for technical reasons that would take long to explain. But consumer prices have mounted to new high levels this year.
What is the most serious threat of renewed inflation today? Precisely the false assumption that “the danger of inflation is over” and that the country needs another shot in the arm.
July 9, 1962
What is most disheartening about Mr. Kennedy’s reaction to the deepening crisis of confidence is his complete inability to admit past error or the possibility that he could be wrong. His Yale speech, implying that all criticism of his policies has been made up of “stale phrases,” “myths,” “illusion and platitude,” “traditional labels and worn-out slogans,” and that he alone is interested in “the real problems of our time,” was not calculated to restore confidence but to undermine it further. He did not help matters when he said both before and after the House vote rejecting the farm bill that those who voted against it (including 48 Democrats) did so because they “chose to make a party issue of this matter instead of voting in the national interest.”
The truth is that the farm bill demanded by Mr. Kennedy and Secretary Freeman was incredibly bad. It was disgraceful that it passed the Senate. It should have been defeated in both houses by an overwhelming vote. It would have imposed the worst regimentation in our history on the growing of wheat, corn, and other grains, with Draconian economic punishment against any farmers who dared to violate its provisions.
FARM FIASCO
Eisenhower’s broadside against the whole Kennedy economic program contained many a truth. Its central truth was that the present Administration’s difficulty stems “primarily from an inadequate understanding of our American system—of how it really works.” But Eisenhower’s own remarks were marred by partisanship. For the misconceptions and bad policies he attacked were only exaggerations of unsound policies accepted in his own Administration.
The policy of farm price supports, overstimulating production and creating unsalable surpluses, plus the attempt to offset these consequences by acreage and marketing controls, began in the Roosevelt New Deal. But it was continued by the Truman and Eisenhower administrations, with ever-mounting problems, because neither they nor successive Congresses had the courage to stop it. The economic problem is not at all baffling. The situation can be cured by abandoning and reversing the policies that created it. It is merely necessary to halt all further price supports; and to sell the surpluses back to the farmers themselves, on a pro rata basis, below the free-world price, leaving it to the individual farmer to decide whether to hold or resell, and how much to plant under the new conditions. But neither party has had the courage to suggest anything like this. So the problem mounts.
CANADIAN CRISIS
This applies also to the stockpiling program. Democratic investigators seem chiefly eager to expose Republican errors. But the policy was and is bipartisan. On Jan. 31, Mr. Kennedy advised that the Federal stockpile of strategic materials be reduced, but as Senator Byrd has pointed out, the $8.7 billion figure of Feb. 1 actually increased by the end of March.
The 26 budget deficits and the inflation of the last 32 years have also been bipartisan. All that Mr. Kennedy and his advisers have added is the doctrine that deficits are often necessary and “appropriate.” As a result of similar policies Canada has just had an exchange crisis. Part of its countermeasures—to cut government spending and to raise the discount rate—are correct. But the added duties on imports, and the borrowing of more U.S. dollars from us and from the International Monetary Fund, are at our expense, and will only intensify our own balance-of-payments problem. Yet the whole IMF monetary system, now stumbling to a crisis, has bipartisan support.
And so with a whole series of other policies—excessive taxation on corporations, double taxation of dividends, niggardly depreciation allowances, confiscatory rates on higher personal incomes, business prosecution under unpredictable interpretations of vague antitrust laws, and Federal labor laws that encourage union demands and strikes to get out of hand.
These bipartisan errors, many of them of more than 30 years’ standing, are having cumulative evil consequences. Will either party have the courage, before it is too late, to reexamine or repudiate them?
July 16, 1962
For the fiscal year just closed the Federal government reported a deficit of more than $7 billion. Nobody but Senator Byrd seemed to be particularly concerned. Only an insignificant minority in Congress or out was demanding a cut in expenditures. Almost everybody, including congressmen, governors, labor unions, chambers of commerce, was calling for a cut in taxes.
We are losing the very concept of a responsible budget. Consider the strange record of estimates for the fiscal year just closed. In January 1961, the Eisenhower Administration estimated that it would end with a surplus of $1.5 billion. On March 24, 1961, the Kennedy Administration declared that this was unrealistic, and forecast a deficit of $2.1 billion. On May 25, 1961, it raised this deficit estimate to $3.5 billion. On July 25, 1961, it raised its deficit estimate again to more than $5.3 billion; on Oct. 29 again to $6.9 billion; on Jan. 18 of this year to $7 billion.
26 IN 32 YEARS
Also last January, the President estimated that there would be a surplus in the fiscal year that has just begun of $463 million. No one today takes this estimate seriously. Responsible Congressional committees think there will be a deficit of $3 billion to $5 billion. The Administration blames the changed outlook on an unexpected change in business conditions. But the estimate never was realistic. Its revenue forecasts were based on the expectation of unparalleled prosperity. With no important net change in tax rates, revenues were counted on to jump from $82.1 billion in fiscal 1962 to $93 billion in fiscal 1963. If revenues do not increase, and expenditures are as estimated, the predicted surplus of half a billion will become a deficit of $10.4 billion.
But what of the expenditure side? In May, Senator Byrd pointed out that “some 200 actions and proposals involving increased obligation of public money and credit can be documented in Presidential communications to Congress during the current Administration.” Since then the President has hardly let a week go by without presenting some new major spending proposal. Nothing is said about the effect on total proposed expenditures for the year. These proposals are not accompanied by a revised budget, let alone by any compensating tax increase.
In sum, the outlook is already for a deficit for fiscal 1963 approaching the dimensions of that for the year just closed. We have now had 26 deficits in the past 32 years. We face a 27th.
RATIONALIZATIONS
Instead of showing any concern about this, the Administration has been developing rationalizations that would logically call for perpetual deficits. It began to talk of balancing the budget over “the business cycle” rather than annually. Now Budget Director Bell tells us that even this is “clearly inadequate to deal with a situation such as we have been experiencing for the last five years—a situation in which we have had years of recession clearly enough, but no years of full prosperity.” Whereas “deficits, not balances, are appropriate in years of recession,” and even bring “positive benefits,” there is always, even in a good year, “real danger that the attempt to achieve a budget balance too soon may itself contribute to bringing the recovery to a halt below full employment levels.” The natural conclusion to be drawn is that the only safe policy is one of perpetual deficits.
What must be the effect on foreign confidence in the dollar when, on top of all this, demands are coming from all sides for an immediate cut in taxes, many of them for tax cuts on lower and middle personal incomes in order to “pump more purchasing power” into the economy and insure a thumping inflationary deficit?
The situation raises a grave problem for believers in fiscal responsibility. Tax cuts on productive enterprise are needed, for the sound reason that present taxes are discouraging production and new investment. But those who ask for such cuts must insist on the condition that even greater cuts be made in our fantastically swollen expenditures. Must we wait, like Canada, until a currency crisis is upon us before we start to put our house in order?
July 23, 1962
Since 1934 this country has subjected all sugar imports to a complicated quota system under which each country is allowed to export to us no more than a fixed maximum each year. For such imports the U.S. has been paying a special premium of 2.8 cents a pound above the world price. When this program was altered drastically in 1960 by President Eisenhower’s decision to cut off purchases of Cuban sugar, which had totaled more than two-thirds of the whole U.S. import quota, increased shares were temporarily allotted to other Latin American countries.
The Sugar Act expired June 30. Early this year, President Kennedy wisely requested that the quota system be abandoned on the ground that competition among nations for quota shares often produced ill feeling toward the U.S. He could have recommended that sugar imports be treated like any other imports by converting the 2.8 cents a pound premium payment into a flat tariff for the time being, and otherwise leaving the total of sugar imports and the amount from each country to be settled by the free play of supply and demand and competition. Instead, he suggested a complicated substitute plan still entangled with foreign subsidies.
U.S. AS SUGAR DADDY
The bill that Congress actually passed retained the quota and premium systems. It provided for an increase of the sugar market for domestic producers from 55 to 60 percent, an import quota of 1,205,000 tons divided among 27 countries, plus a special treaty allocation for the Philippines, and a reduction of 10 percent annually in the premium payments. Immediately there was an outcry from the Dominican Republic that the cut in its sugar quota would lead to economic collapse and political upheaval. So the Senate tacked an amendment on to another bill giving the President discretionary power to increase the quotas of the Dominican Republic, Argentina, and Peru over the next three years.
Then a sudden protest came from senators against the practice of foreign governments in lobbying for bigger import quotas for their own countries. It was brought out that 23 countries seeking sugar quotas were represented by Washington lobbyists. All this was denounced as very wicked. But as these individual quotas are necessarily arbitrary, and set openly on a basis of political favoritism, what did Congress expect? Arbitrary quotas must breed lobbies.
PRIVILEGED ACRES
That government “planning” leads to lobbying, to favor-seeking, and finally to corruption, is even more strikingly illustrated with regard to our wholly homegrown crops. On July 2 the General Accounting Office reported to Congress that cotton brokers acting as agents for the government had made illegal profits by selling to themselves more than $400 million worth of government cotton at prices far below the prevailing market. On July 4 it was revealed that two county office managers for the Department of Agriculture had been suspended as a result of a Federal investigation into the alleged sale of Federal rice planting allotments in Texas. On July 6 two Federal farm officials from Oklahoma admitted to a Senate subcommittee that they had each accepted $820 in cash from Billie Sol Estes.
This is probably a prelude to more revelations. Bribery and corruption are an almost inevitable outcome of arbitrary government controls.
The steps are simple. The government, say, guarantees farmers higher prices for certain crops than they could get in a free competitive market. As a result it finds that it has encouraged huge surpluses. To prevent these it limits the number of acres on which each farmer is permitted to grow the subsidized crops. But these privileged acres then sell for enormously higher prices than those on which the subsidized crops are forbidden. So what happens when someone stands to win or lose millions of dollars, depending on the discretionary decision of some petty bureaucrat getting $5,070 or $7,275 a year? The result is the most inevitable consequence of substituting discretionary favoritism for the rule of law. One of the worst consequences of “government economic planning” all over the world has been the corruption of the civil service.
July 30, 1962
The chief economic problem of this country in the last generation has been inflation. This is reflected in 26 deficits in the last 32 years; in a growth of the national debt from $16 billion in 1930 to $298 billion today; in a fourfold expansion of the money supply—from total bank deposits and currency of $68 billion at the end of 1939 to $282 billion today; and in a fall in the purchasing power of the dollar to less than half of its 1939 level.
We cannot throw all this into the past tense. In the fiscal year just closed there was a deficit of $6.3 billion. When the Treasury announced the new depreciation schedules for business, it estimated that the changes would mean a tax cut of $1.5 billion in the first year. But Senator Byrd had already estimated a probable deficit in the current fiscal year of $6 billion. One more item: This year consumer prices have risen nearly every month to a new high level.
BALANCE OF PAYMENTS
The problem that has been worrying government authorities for more than four years has been the deficit in the country’s balance of payments. This amounted to $3.5 billion in 1958, to $3.7 billion in 1959, to $3.9 billion in 1960, and to $2.4 billion in 1961. So far this year, according to a recent statement of Treasury officials, the deficit has been running at a rate of “only” $1 billion to $1.5 billion a year. But this is no ground for complacency. For the deficit is cumulative. The latest figures mean that it has totaled $14 billion in the last four and a half years. This is reflected in a rise in short-term liabilities to foreigners to more than $23 billion, and in a constant fall in our gold reserves, now down to $16.3 billion, the lowest level in 33 years.
This deficit in the balance of payments is being treated by our officials as if it were the cause of our difficulties. It is in fact the consequence of our policies. The real evil is our inflation. This is the cause of the deficit in the balance of payments. For it raises our costs and prices to a point where we can compete less successfully with foreign producers. It makes this country less attractive to buy from and easier to sell to. In addition, our artificially low interest rates make it less profitable for foreigners to invest funds here and more profitable for Americans to invest funds abroad. Finally, gold at $35 an ounce (almost the only thing that hasn’t risen in price in 28 years) seems to many foreigners the biggest bargain we have to offer.
A SLASH IN SPENDING
The problem, to repeat, is inflation. Yet almost everybody has suddenly begun to talk as if the problem were not enough inflation. Almost everybody has begun to demand a tax cut. And most of those who demand the tax cut want it in order to make sure that we will have a thumping deficit in the current year. The deficit of $7 billion in the year just closed is being ignored; so is the prospect of a $6 billion deficit this year, even without a tax cut. Because of the political hazards of asking for a tax cut, the Administration is reported to be looking into the possibilities of speeding up Federal spending as an alternative.
The great fear is that the next deficit may not be big enough. The theory is that we need to pump more “purchasing power,” i.e., more money, into the economy. The theory, in brief, is that we need another dose of inflation.
The country, in other words, is still bewitched by the Keynesian fallacies, still enchanted with inflation. Do we (even though employment is at record levels) have more unemployment than we like? Then let nobody ask whether excessive wage rates in certain lines might be causing it. Let’s soak up all the unemployment by printing more money, by raising everybody’s cost of living. And let’s ignore the desperate need of maintaining confidence in the dollar.
The irony is that we do need a substantial tax cut to relieve the excessive burdens on and discouragements to production and investment. But accompanying that cut we need an even greater slash in government spending if we are to keep our economy sound and vigorous and free. But a major slash in our hysterical spending is something of which no one in politics now dares to speak.
August 6, 1962
When the Senate rejected President Kennedy’s Medical Care for the Aged bill by the narrow vote of 52 to 48, he denounced the vote as “a most serious defeat for every American family. . . . We have to decide,” he continued, “the United States, in 1962, in November, in the Congressional elections, whether we want to stand still or whether we want to support this kind of legislation for the benefit of the people.”
Was the defeat of the medicare bill a defeat, or was it really a victory, for most American families? May it not at least be better to “stand still” for a while than to keep going in the wrong direction—further and further away from individual initiative and self-help, and deeper and deeper into the paternalistic welfare state?
How deep we have already got into the welfare state is documented in the July monthly letter of the First National Bank of New York. In a tabular comparison of public social-welfare expenditures in the fiscal years 1950 and 1961, the bank’s letter shows that old-age, survivors, and disability insurance payments rose from $784 million in 1950 to $12,160 million in 1961, an increase of 1,451 percent. Unemployment benefits rose to nearly $4 billion, an increase of 67 percent. Old-age assistance payments rose to nearly $2 billion, an increase of 33 percent. Aid to dependent children increased 115 percent, hospital and medical care costs 106 percent, government spending on medical research 827 percent, veterans compensation and pensions (at nearly $4 billion) 34 percent. Altogether, total public- welfare expenditures grew from $13.8 billion in 1950 to $37.3 billion in 1961, an increase of 170 percent.
LIMIT TO TAXES
This tremendous total does not include such welfare- related activities as farm-price supports, urban renewal, aid to depressed areas, etc.
The money to pay these gigantic welfare benefits did not come out of some magical fourth dimension. It came out of taxes—nearly half out of a flat tax on payrolls. If the employer’s contribution is considered to be in lieu of higher pay for the worker (as in the long run it must be) the tax on the workers is now at 6¼ percent. The combined tax is now scheduled to rise to 7¼ percent next year, to 8¼ percent in 1966, and to 9¼ percent in 1968. The President’s medicare program, if enacted, would add another ½ of 1 percent. Yet even Secretary Ribicoff declared last February: “I think we have reached a stage of almost maximum taxation under social security. In my mind, I place that at 10 percent of payroll.”
MOUNTING ABUSES
Rates have to be raised to keep the program solvent. But it is a real question whether presently scheduled rates are high enough to do this. No serious thought is given to the enormous “unfunded liabilities” already assumed by the social-security program. Official actuaries have placed these at $350 billion. One former actuary places them at $650 billion.
Yet hardly a week goes by in which a further piling up of liabilities is not recommended. Several Administration proposals would “liberalize” unemployment insurance further.
In the last year or so, reports of abuses and scandals in the welfare programs have been mounting. The bank letter cites a few. From Hollywood, it was reported that a child actor, who turned down a job paying up to $28 a day because he was accustomed to $100–$150 a day, was awarded unemployment benefits. In New York, a ring of six persons was uncovered which allegedly had bilked the public of $41,900 in unemployment compensation by faking employment records. A committee of the New Jersey legislature discovered a family with 23 children that was receiving $969 a month in welfare payments (including social security).
It is obvious that handing out generous welfare benefits to idle people while imposing heavy tax burdens on those who work and produce can only discourage ambition and responsibility, work, production, and economic growth. The President’s medicare program would give heavy (unearned) benefits to the present aged and load the cost onto the present young.
The whole social-security system is in urgent need of reexamination.
August 13, 1962
In his press conference of July 23 the President announced that “those who speculate against the dollar are going to lose. The United States will not devalue its dollar.” The effect was dramatic. Gold-mining shares fell. The dollar was stronger on the foreign exchanges.
It was gratifying to have this assurance reiterated. But Mr. Kennedy gave this same assurance in his first month in office and it is necessary to point out once more that the dollar cannot be defended merely by uttering the right phrases. These must be followed by actions and policies which will convince the world that such pledges can and will be kept.
The right policies have not followed the right words. The Administration has been pursuing a policy of deficits and cheap money. The outward flow of gold has continued. Three days after the President’s pledge of July 23 the Treasury announced a further weekly loss of $90 million, bringing the nation’s supply of monetary gold down to $16.2 billion, the lowest in 23 years. Against this our short-term liabilities to foreigners and international institutions total $23 billion.
Yet in the same week in which Mr. Kennedy made his renewed assurance he let it be known that he favored a tax cut of “at least $7 billion a year.” As a deficit of some $3 billion to $6 billion is already in prospect, this could mean a total deficit of $10 billion to $13 billion.
INFLATION THE CAUSE
Now the blunt truth, as I pointed out in this column of Dec. 4, 1961, and on other occasions, is that our balance-of-payments deficit is simply the consequence of our internal inflation. No matter what solution we adopt for our dollar problem, the first and indispensable step is to halt this inflation. Yet not only the Administration, but the greater part of the business and banking community, has been treating this problem either with astonishing lack of understanding or with disturbing levity. One of the country’s outstanding business organizations has been advocating a big slash in taxes without a corresponding slash in expenditures.
Two exceptions to this irresponsible attitude deserve honorable mention. Last November Hans A. Widenmann, a partner in Carl M. Loeb, Rhoades & Co., pointed out that the only solution to the dollar problem was to “balance our budget and put an end to inflationary trends.” Anything else was a mere “gimmick.” He listed eleven such gimmicks that the Administration had already tried or suggested—from reducing tourist duty-free imports to $100 and the proposal to eliminate the 25 percent gold-reserve requirement to attempts to “improve liquidity” through the International Monetary Fund. And he showed that each of these gimmicks was at best a stopgap, and that some would mean dangerous steps in the direction of more world inflation.
UNDERMINING THE DOLLAR
In May of this year, John Exter, senior vice president of the First National City Bank of New York, made a brilliant analysis of the cause of the dollar crisis. He stated his conclusions bluntly: “A balance-of-payments deficit is caused by monetary policy alone. It is a question of creating too much money . . . of running the printing presses. If one country runs its printing presses faster than other countries run theirs—remember Gresham’s Law—then that country is going to have a balance-of-payments deficit.” He went on, like Widenmann, to list the gimmicks to which the Administration had resorted to solve the problem, and pointed out that they enabled us at best to postpone it. “Why do we continue easy money when it becomes clearer day by day that it is relentlessly undermining the dollar?”
If I may presume to answer his question, I should say: Because we are still under the delusions of Keynesianism and inflationism. Because we still think that economic salvation lies in government spending, in deficits, and in cheap money. Because many of us hold the insane belief that balanced budgets and sound money cause depression and unemployment. Because we have not stopped to ask ourselves how irreparable the damage would be if confidence were once undermined in the world’s anchor currency—the dollar.
August 20, 1962
When some visiting Brazilian students interviewed the President one of them asked what the reaction of the U.S. Government would be “in the event we were to socialize the means of production in our country as a way to more effectively wage the battle against underdevelopment.”
Mr. Kennedy replied: “The decision of your country as to the means of providing progress is your decision, and if by socialization you mean ownership of the means of production or of the basic industries, that is a judgment which you must make. What we are opposed to is a denial of civil liberties, a denial of opportunities for people to assemble, to have their press, to make a free choice of what kind of government they want. . . . We prefer the competitive market economy here. We believe that by free competition we can satisfy the needs of our people best. Every country must make its own choice.”
This reply, though ambiguous in some respects, reveals the ideology behind the Alliance for Progress and our foreign-aid program. A less diplomatic but more instructive reply might have run like this:
WHICH SYSTEM WORKS?
Whatever you do in your country is of course your own business, whether it is voting yourself into socialism or voting yourself into a dictatorship, as the Germans did when they chose Hitler or the Argentinians when they accepted Perón. In either case we do not consider it our business to interfere, with either government economic aid or a “warning.” It is only fair to tell you, however, if you are asking our advice, that you will not accelerate your economic development or growth by socializing the means of production. You will, on the contrary, retard it—as your recent governments have in fact retarded it by all sorts of measures hostile not only to foreign investment but to domestic business.
We ourselves got to be the richest and most prosperous country in the world by following the way of free enterprise, of private ownership of the means of production—in a word, of capitalism. Our rate of economic growth was increased by private investment of foreign—chiefly British—capital here. It was attracted here not only because it could get a higher rate of return than at home, but because it ran no risk of discrimination, oppressive taxation, nationalization, or expropriation. It was welcomed, not feared. In the same way, today, the economic growth of Canada has been greatly accelerated by the investment of private United States capital.
FREEDOM INDIVISIBLE
It is the anti-capitalistic mentality of the so-called underdeveloped countries that has kept them underdeveloped. It has scared away foreign private capital. It has also discouraged domestic investment. What you seem to be asking is whether, if Brazil socialized the means of production, we would be willing to pour in the American taxpayers’ money to help you do it. We would be even more foolish if we did that than you would be to socialize. For socialization would retard and distort your economic development. Our taxpayers would not only lose their money, but would be encouraging you to follow unsound and hurtful economic policies.
The question is not whether we North Americans “like” or “dislike” socialism; the question is whether socialism tends to increase or retard production of the goods consumers really want. Economic aid to a socialistic country is worse than wasted.
And now we come to the question of liberty. Capitalism is merely the name for a system of economic liberty. Under it civil and political liberties flourish and are secure. Under a complete or nearly complete socialism neither economic nor political liberty can exist. Freedom is indivisible. How can there be freedom of press, speech, or assembly when the government owns all the newspapers, presses, and assembly halls? As Leon Trotsky (who knew) wrote in 1937: “In a country where the sole employer is the State, opposition means death by slow starvation: The old principle: Who does not work shall not eat, has been replaced by a new one: Who does not obey shall not eat.”
So if you want to go in for socialism, it’s your funeral. But don’t expect us to subsidize it.
August 27, 1962
The dollar is the world’s anchor currency. Nearly every other monetary unit is tied to it. It is difficult to estimate what the domestic and world repercussions would be if the dollar went off gold or were devalued.
Yet what is the outcome likely to be if our government continues the policies it has pursued, not only since Mr. Kennedy took office, but practically since the end of World War II?
In 1958, to go no further back, we had a deficit in our balance of payments of $3.5 billion. In 1959 this deficit was $3.7 billion; in 1960, $3.9 billion; in 1961, $2.5 billion. In the first half of the present year the deficit ran at an annual rate of $1.5 billion.
This decline in the annual rate has been hailed by some commentators as very reassuring. But they forgot that the deficit is cumulative. Since the beginning of 1958 it has totaled $15 billion, and is still increasing.
So we continue to lose gold while foreign claims against our remaining supply of it continue to grow. At the end of 1957 our stock of gold amounted to $22.8 billion, and our total short-term liabilities to foreigners (including international institutions) to $15.2 billion. Today the relation is reversed. Our short-term liabilities to foreigners now total $23.5 billion while our gold stock is down to $16.1 billion. In brief, our gold stock is already less than the total direct and indirect short-term foreign claims against it. True, our government is pledged to pay gold only against “official” foreign or international claims. But even these now reach $15.1 billion.
IF WE LOSE MORE GOLD
What is likely to happen if a deficit in the balance of payments, even at the present reduced rate, continues? Against present note and deposit liabilities of $47.4 billion, the Federal Reserve System is required to hold a gold reserve of 25 percent, i.e., of $11.8 billion. This means that we now hold “free” gold reserves of only $4.3 billion. What will happen if foreigners continue to ask for gold and even this narrow margin shrinks?
It is possible that foreign central banks, worried by the diminution of our “free” gold supply, may become nervous and precipitate a run. Fearful of this, the Kennedy Administration may renew its support of the proposal to abolish the 25 percent gold reserve requirement so as to “free” our entire gold stock for withdrawal. It is doubtful, however, that such a step (which would obviously shake domestic confidence in the dollar) would in fact reassure foreign holders; it might itself precipitate a run.
If the export of gold were suspended, nothing could prevent a violent drop of the dollar on the foreign-exchange markets. If an overnight devaluation of the dollar were announced—say by raising the price of gold from $35 to $70 an ounce—the step would be almost automatically followed by an equal devaluation of other currencies. This would probably be the signal for a new world inflation. But it would not cure our balance-of-payments problem—unless we stopped inflating faster than other countries.
STOP THE INFLATION
Our balance-of-payments deficit, and the dwindling confidence in the dollar, are both consequences of the same cause—inflation. Because it raises our costs and prices, inflation makes this a better market to sell to and a poorer one to buy from. Our cheap-money policy makes it less attractive for foreigners to lend or invest here and more attractive for Americans to lend or invest abroad.
The indispensable step in any cure is to halt our inflation. This means that we must allow our interest rates to go up, stop expanding credit and printing money, slash government spending, and balance our budget.
The proposals in Mr. Kennedy’s television address of Aug. 13 were nearly all in the opposite direction. Of the six bills that he wants enacted immediately, one is a tax credit for new investment (which would be good considered in isolation), but four of the other five—for increased public works, “youth employment,” longer unemployment benefits, and education subsidies—involve still more Federal spending. They would increase the prospective deficit. Their enactment would further undermine confidence in the dollar.
September 3, 1962
The basic disagreement in all the recent dispute about a tax cut reduces itself to this: Should a tax cut be accompanied by at least a corresponding cut in expenditures, or not? For all parties to the debate agree on one thing: Present taxes are too high.
This was admirably put by President Kennedy in his television address of Aug. 13: “Our present tax system is a drag on economic recovery and economic growth, biting heavily into the purchasing power of every taxpayer and every consumer. . . . Our tax rates, in short, are so high as to weaken the very essence of the progress of a free society—the incentive for additional return for additional effort.”
In this statement lies the key to the kind of tax cut most likely to provide incentives and stimulate economic growth. It is a reduction of the exorbitant tax rates on productive enterprise and on the higher incomes.
The rates on personal income now range from 20 to 91 percent. A cut in the 20 percent rate to 15 percent, now widely advocated, would result in a serious loss of government revenues. Such a 25 percent cut in the basic rate would probably reduce the yield from personal income taxes by nearly the same percentage. But the case would be obviously different in the rates ranging from 50 percent up to 91 percent.
MONEY FOR THREE DAYS
All the income-tax rates above 50 percent, in fact, today yield a revenue of less than $1 billion—or no more than the Federal government now spends every three or four days. To halt the progression of the personal income-tax rates at 50 percent would restore, to the most productive element in the country, “the incentive for additional return for additional effort.” Not only would there be no significant loss of government revenues but probably a very substantial increase. Much more important, such a reform would mean an increase in national output and income, and in the rate of economic growth.
In Sweden, some years ago, a prominent industrialist said to me: “We in Sweden consider any tax rate over 50 percent to be confiscatory.” It seemed a good rule of thumb. If we want to make it more precise, there would be a clear practical and psychological advantage in setting the top personal income-tax rate at 49 percent. For then every taxpayer would feel, in considering a new venture, a new investment, or added personal effort, that he could count on keeping “most” of what he earned.
Many readers, long accustomed to our present confiscatory rates on higher incomes, may be shocked by any proposal to cut these down to a top rate of 49 percent without at the same time making a corresponding cut in the rates on lower incomes. Certainly there is a strong case for reducing these rates too—when and if expenditures are also cut enough to make this possible without unbalancing the budget.
FOUR REASONS WHY
But the case for an immediate cut in the tax rates above 49 percent, even without other tax reductions, is fourfold: (1) The rates between 50 and 91 percent do not in fact produce revenue, but reduce it. (2) The rates above 50 percent discourage effort and investment and reduce employment and economic growth. (3) These rates encourage many voters to tolerate government extravagance under the illusion (and the figures show that it is an illusion) that only “the rich” are paying for it. (4) The rates are grossly discriminatory and inequitable. They serve no purpose except to gratify envy and malice.
Some economists, in fact, are now coming back to the view that it is hard to justify, either on grounds of justice, revenue production, or economic growth, anything but a simple proportional or flat rate of income tax. Do 90 percent of the voters have a right to impose discriminatory and punitive taxes on the other 10 percent? Prof. Milton Friedman of the University of Chicago has calculated that a flat tax of 23½ percent on taxable income, as presently defined, would yield as much revenue as the present highly graduated rate.
To halt the present tax progression at a top rate of 49 percent would increase government revenues, restore business confidence, and increase economic growth at one simple stroke.
September 10, 1962
Everything possible must be done to prevent a recurrence of the kind of tragedy brought about by thalidomide, a sleeping pill that, when taken by pregnant women, was found to have the frightful side effect of causing deformity in infants.
Stricter legal controls are no doubt part of the answer. And yet they may also bring with them the danger of an overregulation that may itself have the side effect of retarding medical progress without being more than partially effective in curing the evil against which it is aimed.
Take the drug-control bill in the form in which it was unanimously passed by the Senate. If such a bill had already been law, could it have averted the thalidomide tragedy? Would such a law give assurance that no similar tragedy could occur again?
One answer to these questions is that even under existing law Dr. Frances Kelsey did have authority to keep thalidomide off the market and exercised it. What is ironic, as one scientist has put it, is that the real tragedy occurred in Germany (where the drug originated), “a country that has no drug laws that would have prevented it,” and yet it is the U.S. that “takes immediate action to drastically change the strong drug laws it has which actually had prevented that tragedy from occurring here.”
MUST TEST ON MAN
One of the provisions of the Senate bill gives the Secretary of Health, Education, and Welfare discretionary authority to require that new drugs be tested first on animals. Most pharmaceutical firms already make such tests. But an irony of the thalidomide case is that no tests on animals showed the dreadful side effect that developed in pregnant women. Soon or late, a new drug must be tested on human beings. And no one can know in advance what side effects will develop, or in what number of cases, or how long after the drug is taken.
Some of the provisions in the Senate bill could do more harm than good. Among the most serious are those giving the Food and Drug Administration the right to pass on the “efficacy” of new drugs and not merely, as heretofore, on their safety. More than this, the bill puts the burden of proof on the industry rather than on the government. It requires “substantial evidence” that a drug is effective before permitting it on the market. It is a dangerous legal precedent to allow any bureaucrat to keep off the market something that, even though harmless, is in his opinion “ineffective.” This is trying to protect the patient against the judgment of his doctor, trying to protect the consumer against his own judgment. Efficacy can be determined only by freedom of trial, and in no other way.
PROFITS AND PROGRESS
Present legal provisions give the government power to prevent the marketing only of unsafe drugs. They permit a new drug to be marketed if the government takes no action within 60 days after an application is filed. This seems much sounder in principle than provisions that allow a government official to hold up a drug indefinitely until the manufacturer can prove to the official’s satisfaction that it is not only safe but “effective.” This could give a bureaucrat power of life or death over a company.
It is fortunate that the Senate threw out proposed amendments to abridge drug patent rights. Those who sincerely want the American consumer to benefit from more miracle drugs will not begrudge the drug industry its profits. They will want the industry to have maximum incentive to develop new drugs. Sterling Drug, Inc., estimates that already each new drug that reaches the market costs the company an average of $5 million in development costs. Such great sums must come from somewhere. They can only come out of past or prospective profits. Initial high profit margins are the greatest stimulus to expansion of the industry and the entry of new firms. This expansion increases output, stimulates further research, and brings down prices.
It would be tragic if we hastily passed laws whose chief effect was not to safeguard the health of the American public but to slow down the very medical progress that in the last generation has extended the span of life and almost eradicated some of the most dreaded diseases of mankind.
September 17, 1962
The new book by Prof. Ludwig von Mises, The Ultimate Foundation of Economic Science (148 pages, Van Nostrand, $4.50), is what its title implies—a basic investigation not only of the methods appropriate to economics but of how we can discover and prove its fundamental truths and propositions.
His theme might be stated negatively. He tries to show that the present fashionable idea that all sciences, including economics, must imitate the methods of physics, that they must be empirical, experimental, statistical, and quantitative, is not itself a scientific idea, but an arbitrary assumption. He rejects materialism, panphysicalism, and logical positivism, in fact, as “metaphysical” ideas that have perverted and set back rather than advanced economics and have led toward a philosophy of collectivism and totalitarianism. Economics, he contends, rests on an utterly different basis. Its subject is human action. In acting, men strive constantly to substitute a more satisfactory state of affairs for a less satisfactory state. In short, all men pursue ends, and resort to means in order to attain these ends.
I shall not attempt here to follow in detail Mises’s “epistemological” argument, but rather point to some of the practical conclusions to which it leads. One of these is his rejection of the tremendous emphasis placed in recent years on economic statistics and on “mathematical economics.”
MATHEMATICAL MIRAGE
Hosts of authors, deluded by the idea that the sciences of human action must ape the technique of the natural sciences, are intent upon a “quantification” of economics. They assume that economics ought to imitate chemistry, which has progressed from a qualitative to a quantitative state. Their motto is the positivistic maxim: Science is measurement. But in the sphere of economics, i.e., of human action, Mises answers, there are no constant relations between any factors. Consequently, no measurement, no quantification is possible. The only measurable magnitudes that the sciences of human action encounter are quantities of the environment in which man lives and acts—acres of land, bushels of wheat, tons of coal. But these quantities tell us nothing about values, which depend upon human preferences, choices, means, and ends.
Statisticians get into insoluble dilemmas when they indulge, for example, in the modern sport of measuring “the national income.” “Income” itself is a somewhat arbitrary accountant’s concept, as the concept of “the national income” is an arbitrary political concept. Mises shows how this illusive concept depends on changes in the purchasing power of the monetary unit. The more inflation progresses, the higher the national income. Within an economic system in which there is no increase in the supply of money, progressive accumulation of capital and the improvement in technological methods of production to which it led would result in a progressive drop in prices. The amount of goods available for consumption would increase. The average standard of living would improve. But none of these changes would be made visible in the national income statistics.
HOW CONSUMERS RULE
Some of the most interesting passages in Mises’ book deal with issues not directly connected with his central theme. In one of these he explains why private ownership of the means of production so effectively serves the public interest:
“The owner of producers’ goods is forced to employ them for the best possible satisfaction of the wants of the consumers. He forfeits his property if other people eclipse him by better serving the consumers. . . . Private property in the factors of production is a public mandate, as it were, which is withdrawn as soon as the consumers think that other people would employ it more efficiently. By the instrumentality of the profit-and-loss system, the owners are forced to deal with ‘their’ property as if it were other people’s property entrusted to them under the obligation to utilize it for the best possible satisfaction of the virtual beneficiaries, the consumers. . . . It is precisely the necessity to make profits and to avoid losses that forces the ‘exploiters’ to satisfy the consumers to the best of their abilities.”
September 24, 1962
The immense appeal to so many intellectuals and politicians today of the idea of government economic Planning rests on a simple but glaring oversight. The apostles of Planning forget that each of us, in his private capacity, is constantly planning ahead, regarding his job, his business, his leisure, his spending, his saving for a home or a car or the education of his children. And these millions of individual plans are coordinated through the marvelous mechanism of competition and the free market.
The question then is never whether there should be planning or not, but who should plan for whom? To put it another way, the question is whether each of us should be free to make his own plans, or whether all of us should be forced to work or consume according to some Master Plan drawn up for us by some supposed group of supermen. Most Plans being proposed today are plans for accelerating economic growth. But almost equally popular, under the influence of J.K. Galbraith, are Plans to control our spending and socialize consumption.
According to the Galbraith thesis, most consumers do not know how to spend the incomes they have earned. They buy whatever advertisers tell them to buy. They have atrocious taste, and crave cerise automobiles with ridiculous tailfins. They are, in brief, boobs and suckers, wasting their money on trivialities and junk.
THE TWO ‘SECTORS’
The natural conclusion from all this is that consumers ought to be deprived of freedom of choice, and that government bureaucrats, full of wisdom—of course, of a very unconventional wisdom—should make their consumptive choices for them. The consumers should be supplied not with what they themselves want, but with what bureaucrats of exquisite taste and culture think is good for them. And the way to do this is to tax away from people all the income they have been foolish enough to earn over that required to meet their bare necessities, and turn it over to the bureaucrats to be spent in ways in which the latter think would really do people the most good.
The goods and services for which people voluntarily spend their own money make up, in the Galbraithian vocabulary, the “private sector” of the economy, while the goods and services supplied to them by the government, out of the income seized from them in taxes, make up the “public sector.” This is a neat semantic triumph. For the word “private” is meant to suggest the selfish and exclusive, and the word “public” to suggest the democratic, the shared, and the public-spirited.
VOLUNTARY VS. COERCED
But a truly descriptive vocabulary would throw a different light on the matter. For what Galbraith calls the “private sector” of the economy is, in fact, the voluntary sector; and what he calls the “public sector” is, in fact, the coercive sector. And as this sector grows at the expense of the voluntary sector we come to the essence of the welfare state. In this state nobody pays for the education of his own children, but everybody pays for the education of everybody else’s children. Nobody pays his own medical bills, but everybody pays everybody else’s medical bills. Nobody helps his own old parents, but everybody helps everybody else’s old parents. Nobody provides for the contingency of his own unemployment, his own sickness, his own old age, but everybody provides for the contingency of the unemployment, sickness, or old age of everybody else. The welfare state, as Bastiat put it with uncanny clairvoyance more than a century ago, is the great fiction by which everybody tries to live at the expense of everybody else.
This is not only a fiction; it is bound to be a failure. This is sure to be the outcome whenever effort is separated from reward. When people who earn more than the average have the “surplus,” or the greater part of it, seized from them in taxes, and when people who earn less than the average have the deficiency, or the greater part of it, turned over to them in handouts, the production of everybody must decline; for the energetic and able lose their incentive to produce more than the average, and the slothful and unskilled lose their incentive to improve their condition.
October 1, 1962
In a free economic system, production tends to be maximized. This is because, in such a system of private property and free markets, everybody’s reward tends to equal the value of his production. What he gets for his effort or his product, and is allowed to keep, is what it is worth in the market. In a free market, therefore, everyone has the incentive to maximize his satisfactions, whether these consist in more goods or in more leisure.
But along comes the Growth Planner. He finds by statistics (whose reliability he never questions) that the economy has been growing, say, “only” 2.8 percent a year. Whatever the rate is, he decides that it ought to be greater. How does he propose to increase it?
There is among the Growth Planners a profound mystical belief in the power of words. They declare that they “are not satisfied” with a growth rate of a mere 2.8 percent a year. They demand, say, an annual growth rate of 5 percent. And once they have spoken, they act as if half the job had already been done. If they did not assume this, it would be hard to explain the deep earnestness with which they argue among themselves whether the growth rate “ought” to be 4 or 5 or 6 percent.
MAGIC TARGET RATE
But why do they assume that setting their magic target rate will increase the rate of production over the existing one? And how is their growth rate supposed to apply as far as the individual is concerned? Is the man who is already making $50,000 a year to be coerced into making $52,500 next year? Is the man making $5,000 a year to be forbidden to make more than $5,250 next year? If not, what is gained by making a specific “annual growth rate” a governmental “target”? Why not simply encourage everyone to do his best, or permit him to make his own decision, and let the average growth be whatever it turns out to be?
The way to get a maximum rate of “economic growth”—assuming this to be our aim—is to give maximum encouragement to production, employment, saving, and investment. And the way to do this is to maintain a free market and a sound currency. It is to encourage profits, which must in turn encourage both investment and employment. It is to refrain from oppressive taxation that siphons away the funds that would otherwise be available for investment. It is to allow free wage rates that encourage full employment.
HOW TO SLOW DOWN
The way to slow down the rate of economic growth is of course precisely the opposite of all this. It is to discourage production, employment, saving, and investment by incessant interventions, controls, threats, and harassment. It is to frown upon profits, to declare them to be excessive, to file constant antitrust suits, to control prices by law or by threat, to levy confiscatory taxes that discourage new investment and siphon away the funds that make investment possible, to hold down interest rates artificially to the point where real saving and real investment are discouraged, to deprive employers of real freedom of bargaining, to grant excessive immunities and privileges to labor unions so that their demands are chronically excessive and chronically threaten unemployment—and then to try to offset all this by increased government spending, deficits, and monetary inflation. But we have just described precisely the policies that most of the fanatical Growthmen advocate.
Their [recipe] for inducing growth always turns out to be—inflation. This does lead to the illusion of growth, which is measured in their statistics in monetary terms. What the Growthmen fail to realize is that the magic of inflation is always a short-run magic, and quickly played out. It can work temporarily and under special conditions—when it causes prices to rise faster than wages and so restores or expands profit margins. But this can happen only in the early stages of an inflation that is not expected to continue. The consequences of this short-lived paradise are malinvestment, waste, gambling, social discontent, disillusion, bankruptcy, increased governmental controls, and eventual collapse. This year’s euphoria becomes next year’s hangover. Sound long-run growth is always retarded.
October 8, 1962
For the fiscal year 1963 the Space Director is asking for nearly $4 billion for his agency alone. Before the race to the moon is finished, the program is expected to cost $20 billion or more.
This is a huge sum. How will it be raised? By higher taxes? But taxes already take away from the corporations more than half of what they earn, and from individuals up to 91 percent of what they earn. As President Kennedy has already told us: “Our present tax system is a drag on economic recovery and economic growth. . . . Our tax rates, in short, are so high as to weaken the very essence of the progress of a free society—the incentive for additional return for additional effort.” Will the money be raised by deficit financing—i.e., by piling up our national debt still further, by printing more money? That way lies more inflation, further undermining confidence in the dollar.
Of course we must spend whatever is needed on national defense. And it is difficult to view the civilian space program entirely apart from missile and other military programs. Just as what was discovered in developing intercontinental missiles made the civilian space program possible, so the civilian program may in turn lead to discoveries of military application. Yet military advances are more likely to be achieved, and sooner and more cheaply, if they are aimed at directly.
DIVERSION OF EFFORT
The space program may also lead to other incidental scientific discoveries and technical advances. It has already led to Telstar, with its immediately dramatic results and immense future possibilities. Scientists point to other potential benefits: Weather observation and prediction, more accurate navigation, improved mapping and miniaturization, new processes and materials.
Yet when all this has been said, the question remains whether these incidental or possible by-products will be enough to justify the huge spending, the huge diversion of national effort, that the space program involves.
Some basic questions are involved. Is it an appropriate function of government to engage in or finance scientific research? To what extent will government research programs supplement private research? To what extent are they likely, in the long run, merely to displace private research? And if the government is to take over the business of scientific research, how will it decide on the relative usefulness or urgency of a thousand different projects?
MORE URGENT PROJECTS
It might be interesting and even exciting to land a man on the moon, but it would not be difficult to think of more necessary, urgent, or useful projects: Research to increase food production (notwithstanding our own insane farm program) to provide more and cheaper nourishment for the world’s 3 billion population. Developing new and cheaper sources of power. Attacking a hundred human diseases, from cancer to the common cold, and prolonging human life. Finding cheaper and better ways to decontaminate air and water, or to turn salt water into fresh. Research on weather control, to mitigate floods and droughts, or to dissipate smog over cities. And scores of other projects that from the standpoint of increasing human happiness or reducing human misery seem to deserve priority over the Buck Rogers stunt of landing a man on the moon.
It is, indeed, not easy to find a satisfactory answer to the questions raised by former President Eisenhower: “Why the great hurry to get to the moon and the planets?” Are we merely engaged in “a mad effort to win a stunt race?” If we are in a race with Soviet Russia for world “prestige,” should we let the Communists set the terms and the items?
Suppose, one day, after we have spent many billions in trying to land men on the moon, the Russians get there first?—a not improbable outcome, judging by experience to date. Then our billions of expenditures will acquire a negative value. Our prestige will be lower than if we had never entered the race. And meanwhile we will have diverted world attention (and our own) from our immeasurable superiorities in the things that matter most—human freedom and dignity and standards of living.
October 15, 1962
LONDON—There is no such thing as an ideal tax system, especially when the total burden is heavy. Every tax is a deterrent to production or consumption.
When we compare the British and American tax systems from this point of view, we find that the British system is better than ours in some respects, but even worse in others. It is much better, for example, in its treatment of corporations. We tax the net income of our own corporations 52 percent. (This comparison throughout is in broad outlines and ignores many qualifications on both sides.) The British tax the net profits of their corporations only 15 percent. In addition they levy an “income” tax on corporate profits of 7 shillings and 9 pence in the pound (38¾ percent), bringing the total to 53¾ percent. This seems equivalent to ours. But this full rate applies in effect only to undistributed profits. For when the corporation pays out dividends, the individual shareholders are credited with having already paid their “standard rate” (38¾ percent) of personal income tax on these dividends.
DEPRECIATION
British companies also have an advantage over their American counterparts in depreciation allowances. The system is complex, but a typical example might work out like this: First, the corporation is allowed an “investment credit” equal to 20 percent of the cost of the investment. This is not deducted from its depreciation allowance. Then it is allowed an “initial” depreciation deduction of 10 percent. It may also take, say, a 10 percent depreciation at the end of the first year. In this way, it may write off 40 or 45 percent of a new investment in the first year.
All this is much more favorable than the depreciation treatment given to our own corporations, even under the new tax proposals. But British industrialists still complain that they are at a disadvantage with their competitors in the Common Market because of the much shorter period over which many of the latter may write off their investments entirely.
When we come to taxation on personal income, there seems to be only one major respect in which the British taxpayer enjoys an advantage over our own. This is in the treatment of capital gains. Until this year, Britons paid no tax on these at all, unless capital gains were a regular part of business income. Now short-term capital gains (within six months for most property, three years for land) will be taxed as ordinary income. But long-term gains are still completely exempt from tax. And owner-occupied dwellings and other property are still exempt even from short-term capital-gains tax.
HIGH RATE, LOW YIELD
In practically every other respect the British taxpayer seems much worse off than his American opposite number. Compared with our “normal” tax of 20 percent, the British “standard rate” (beginning at about $1,000 of taxable income) is 38¾ percent. Our surtaxes, it is true, go as high as 91 percent, but stiff British surtaxes begin at much lower income levels and they reach a top rate of 88¾ percent for incomes above $42,000. And the British death duties rise to 80 percent for those estates in excess of $2.8 million.
The harm that such tax rates do to economic growth can hardly be calculated. Neither in the U.S. nor in Britain do they raise any revenue to speak of. In the U.S. the personal income tax rates over 50 percent raise less than $1 billion—about 1 percent of the total Federal budget and enough to run the government for only three or four days. In Britain all the surtax rates together bring in only £188 million out of total revenues of £6,807,000, or less than 3 percent. All the death duties together bring in £265 million, or less than 4 percent. Yet in both countries such taxes gravely undermine incentives to production and saving. They siphon off the very funds most likely to go into investment. Both hurt wage-earners by retarding the rise in their productivity and real wages. Yet such destructive taxes are kept in the name of “social justice,” and both British and American government officials publicly wonder why the rate of economic growth in their respective countries is so disappointingly low.
October 22, 1962
LONDON—The more closely we examine the world’s monetary chaos, the more obvious it becomes that the only solution is a return to a full gold standard. This means that currencies must be made unconditionally redeemable in a fixed quantity of gold, on demand, at home or abroad, by anybody, even a citizen of the country that issues the currency.
Some of the reasons why this is in the long run the only satisfactory monetary system were admirably explained in a recent article in Fortune by Michael A. Heilperin. Other reasons have become clear in recent years. They were inadvertently emphasized by the proposals at the meeting of the International Monetary Fund in September. The history of the world’s currencies since the operation of the IMF began (i.e., since about 1947) has been a history of chronic inflation, followed by exchange controls, price controls, depreciation, devaluation, and repudiation. The most sweeping devaluations came in the fall of 1949, when the overnight slash of the British pound from $4.03 to $2.80 was followed in a few weeks by corresponding devaluations of 30 or more other currencies.
This process is not safely in the past. On the contrary, within the last twelve months or so, a dozen currencies have been partially or wholly devalued. These include not only those of such chronic offenders as Argentina, Brazil (five devaluations in the past twelve months), Chile, the Congo, Egypt, Israel, Indonesia, and South Korea, but Venezuela and Canada. There is no reason for supposing that this process has ended.
THE IMF DEPLORES
It is true that the culprits have violated some of the paper rules of the fund. It is true that the IMF always piously deplores inflation, exchange control, and devaluation, and exhorts its member governments to monetary virtue. But the IMF system itself encourages domestic inflation and devaluation by removing or postponing the natural penalties. It is internal inflation that chiefly brings about a deficit in a country’s balance of payments. When that country does not have to meet its external liabilities in gold, when its foreign creditors can be told that it is an ungentlemanly thing to ask for gold and its citizens that it is a criminal thing to own gold, when it can demand credit or support from the IMF as a matter of right to tide it over the difficulties it has brought on itself, it can continue its inflationary policies longer and without sense of guilt.
And it is significant that whenever the IMF meets, the chief proposals by its national members are always for more domestic or world inflation. The British propose that the IMF print its own paper currency for individual central banks to use as “reserves.” The Americans want everybody to conspire to support the dollar, by swapping paper currencies and letting every nation count the others’ paper money as part of its reserves. This is officially called “increasing world liquidity.” A plainer term for it is increasing world inflation.
HOW TO RETURN
Only a return to a full gold standard can bring this chronic inflation to a halt. Each inflating nation must be made to pay the penalty for its inflation immediately. It must no longer be able to demand the automatic support of other nations through the IMF in helping it to continue its inflating.
The problems of how to return to a full gold standard, and at what gold value for the dollar and other currencies, are awkward ones. They are political and legal as well as economic. Heilperin suggests that a new gold price be fixed at $70 an ounce and that the problem be solved internationally through a committee of the Organization for Economic Cooperation and Development. There is much to be said, however, in favor of the U.S. acting alone. If it does act internationally, then the IMF seems the appropriate instrument through which to do it. But once the world, or even the U.S. alone, recognizes the necessity of returning to gold, problems of method should not be insuperable.
One central relationship must be kept in mind. The world is unlikely to halt inflation until it returns to gold; and no nation can stay on gold unless it refrains from serious inflation.
October 29, 1962
STOCKHOLM—Some of our more knowledgeable businessmen and accountants, concerned by our government’s niggardly rate of depreciation allowances in the past, have from time to time pointed out how much more liberal these allowances are in Sweden. They are. From 1939 until about four years ago a Swedish company could deduct the entire cost of a new machine in one year. Under present law it is still permitted to write off new machinery and equipment within five years.
In addition to this, a company may set up a deductible “investment reserve” of up to 40 percent of an entire year’s profits. It must, however, deposit 46 percent of this reserve in cash in the Riksbank (the national bank) and, broadly speaking, can invest it only at times approved by the government.
Another substantial tax advantage enjoyed by the Swedish taxpayer is his relative exemption from long- term-capital-gain taxation. He pays straight income tax on 100 percent of capital gains on securities and other assets held for less than two years, but on only 75 percent of the gain on assets held between two and three years, on only 50 percent of the gain if the assets are held one year longer, on only 25 percent if held one year longer still, and no capital-gains tax at all if the asset is held more than five years. And he pays no capital-gains tax on real estate if he has held it more than ten years.
HEAVY IMPACT
But this pretty much exhausts the relative tax advantages of the Swedish taxpayer. The corporate tax rate is roughly equivalent to our own. Corporate income taxes average about 49 percent, and shareholders must pay full income taxes, without deductions, on dividends received. Personal income taxes are extremely heavy. After exemption of only about $400 for single persons and $800 for a family, individuals first pay a local proportional income tax averaging about 15 percent. Then they pay, on the rest of their income, national taxes ranging from 10 to 65 percent. Thus the effective top rate not only can exceed 70 percent, but a family with a national taxable income of only $1,200 could pay 23½ percent, while an individual with a taxable income of only $4,000 would pay about 40 percent. The top rates above 70 percent apply to incomes above $30,000.
And the tax impact is greater than these figures indicate. There is a general retail sales tax of 6 percent in addition to special excise and luxury taxes; a formidable annual capital levy on an individual’s capital assets (regardless of whether he gets any income from them), and a severe inheritance tax.
CAPITAL RESTRAINT
As in the U.S. and Britain, the higher rates give negligible yields. Ignoring the proportional local income tax rate averaging about 15 percent, and concerning ourselves exclusively with the national income tax, we find that the highest national rates—i.e., from 45 to 65 percent—yield about $7 million, or only 1 percent of the total yield of national income tax. In fact, the Swedish Taxpayers’ Association has figured, in a study shortly to be published, that 90 percent of the national income-tax revenues would be realized if the progressive rates stopped at the 25 percent bracket, and that just as much would be collected, without any progressivity of tax rates at all, by a flat national rate of 14 percent.
But though the yield from the high bracket rates is negligible (as is also the yield of the capital tax and inheritance tax) it is impossible to measure the restraining effect of such rates on the creation of income, on savings, and on the supply of venture capital.
Many Swedes tell you they are getting their extensive social-welfare services “free”—education, unemployment insurance, old-age pensions, medical care. But the Taxpayers’ Association study makes it doubtful that there is even much redistribution of income or welfare from the “rich” to the “poor.” Half of the population now pay 30 to 40 percent of their income in taxes. Two-thirds of the tax money levied for redistribution purposes in effect returns as “social services” to the identical income groups that paid it, after an enormous merry-go-round.
November 5, 1962
BERN—Because of our own unique position, few Americans realize the impact of the Common Market on its Western European neighbors. Our own merchandise exports amount annually to only 4 percent of our gross national product, and those to the Common Market countries to only about 1 percent.
Contrast this with the position of some neighboring European countries. Switzerland is already so integrated economically with the rest of Europe that its very survival depends on continuance of this relationship. Its exports amount to 25 percent of its gross national product. In some industries—watches, chemicals, dyestuffs—its exports constitute 90 to 95 percent of total output. The proportion of Swiss trade with Europe reaches about 80 percent for its imports and more than 60 percent for its exports. Last year 62 percent of its imports came from the six Common Market countries and 42 percent of its exports went to them. Switzerland, in short, is already more integrated with the Common Market countries than those countries are with each other.
The relation of Sweden to the rest of Europe is almost as striking. More than 25 percent of Sweden’s national product is exported. Imports are equally high. Both in exports and imports some two-thirds of Swedish foreign trade takes place with the other EEC and EFTA members. Present members of the EEC account for a third of Swedish trade.
DANGERS OF EXCLUSION
Both Switzerland and Sweden are following the negotiations between Britain and the Common Market with intense interest. The outcome will affect the terms of their own association, if any. Exclusion from the Common Market could profoundly disrupt their economic life. They have applied for “associate membership.” By this they mean that they are willing to accept in full all the economic obligations implied by membership without the purely political obligations. Switzerland, for example, neutral by long tradition, would like to retain the right to negotiate trade agreements with third countries, or to withdraw in case of war. But our own government, which has taken so active a part in promoting the Common Market, and in urging British membership, is actively discouraging even associate membership by Switzerland, Sweden, or Austria.
I have talked about this problem with a score of the leading bankers, industrialists, labor leaders, and government officials of Sweden and Switzerland, including Switzerland’s Foreign Minister and former President, F.T. Wahlen, Sweden’s Minister of Trade, Gunnar Lange, and its Prime Minister, Tage Erlander. While government officials are careful to refrain from any criticism of the American attitude, it is obvious that they as well as more outspoken private citizens are deeply disturbed by it.
BUGBEAR OF ‘DILUTION’
Our government’s objection even to associate membership for Austria, Switzerland, or Sweden is based on a vague fear that this would “dilute” the Common Market. On the economic side, the three countries find this baffling because our government wants to dilute the Common Market by urging the adherence of the British and accepting that of the Norwegians, Danes, and Greeks. As the Swiss, Swedes, and Austrians do not even wish to participate in the political decisions or institutions of the Six, they cannot understand how their purely economic association could in any way reduce the will of the Six to achieve closer political ties with each other.
As the European neutrals see it, the United States can only hurt its own political and economic interests by weakening the ties that already bind these neutrals into the European economy. To keep them out of the Common Market would not only do them immeasurable economic harm, but would tend to drive them for self-preservation toward greater ties with Iron Curtain countries. Many Europeans point to the tremendous Russian pressure now being put on Finland, and the possibility that our government’s indifference may force Finland into the Russian orbit. Our policy, as they see it, may tend not to unite Western Europe, but to split it into two rival camps, weakening or destroying the ties that already exist.
November 12, 1962
People who write on the future of American business ordinarily do so on the tacit assumption that the forces determining the future of business lie within the realm of business itself. Along comes a Cuban crisis, and suddenly everyone realizes that the future of American business is simply a part of the future of America. What happens to business depends as much on our “foreign” policy as on our “economic” policy.
I trust I shall not be thought to roam too far out of the purview of this department, therefore, if I express the hope that the outcome of the Cuban crisis may lead us to abandon some of the unrealistic assumptions on which that foreign policy has rested for the last eighteen years.
It is clear in retrospect that, prior to the present agreement on Cuba, the Kennedy Administration made some very costly errors. These were not merely the errors in the few weeks preceding the Oct. 22 announcement of the blockade—the denials, for example, of Republican charges that offensive missile bases were being constructed in Cuba. The errors go back at least to April 12, 1961, when (after his own State Department, nine days before, had correctly described developments in Cuba as “the seizure by international Communism of a base and bridgehead in the Americas”) President Kennedy declared that “there will not under any conditions be an intervention in Cuba by United States armed forces.” This was followed five days later by the disastrous failure, through the Administration’s vacillation and timidity, of the invasion of the Bay of Pigs. This blow to American prestige was followed by eighteen months of tragic inaction while the Soviet buildup went on.
RECORD OF APPEASEMENT
But we can now hope that the apparent victory resulting from our finally firm stand on Cuba may signal a reversal of the yielding and appeasement that have plagued our foreign policy under both Democratic and Republican leadership for the last eighteen years. President Truman must accept responsibility for acceding to an untenable position for the West at Berlin, and for his prior ambiguity about our willingness to defend South Korea. And President Eisenhower must accept responsibility for not only failing to provide any real aid, physical or moral, to the Hungarian Freedom Fighters in 1956, but for actually diverting world attention from that Communist crime by taking that moment to halt France, Britain, and Israel in an action that, without his intervention, would have deposed Nasser and prevented the immense harm he has since done. It was the Eisenhower Administration, also, that rushed to recognize Castro and failed to break off relations with him until its last weeks in office.
FRUITS OF FIRMNESS
The truce resulting from President Kennedy’s bold action once more confirms the ancient truth that honorable or tolerable peace is not to be bought by a timorous appeasement but by firmness. As the Swiss economist Wilhelm Röpke put it eight years ago: “Pacifism, merely as an attitude of mind that rejects war, is not only sterile but indeed dangerous to a tragic degree, since at the very moment when the danger of war is greatest it further increases that danger immeasurably by encouraging the attacker. Such pacifism not only fails but actually becomes one of the fatal links in the chain of causes which trigger off the war and possibly effect the triumph of the aggressor. The chief task of war prevention is to make plain to every potential aggressor, beforehand and in a completely indubitable way, that the risk is overwhelming.”
The outcome in Cuba does not mean, of course, that the dangers of the cold war are past. No one knows what Khrushchev’s next moves will be in Berlin, or what the consequences will be if Cuba is allowed to remain as a Communist “base and bridgehead in the Americas.” But we have now learned that, in the moment of crisis, time does not allow us to consult a score of other nations, and that we must decide and act swiftly and alone, trusting in our own strength and the readiness of other countries to follow a firm, clear lead.
And what’s best for America is best for American business.
November 19, 1962
Last summer Mr. Kennedy let it be known that he favored a tax cut of “at least $7 billion a year.” “Our present tax system,” he declared on Aug. 13, “is a drag on economic recovery and economic growth. . . . Our tax rates . . . are so high as to weaken the very essence of the progress of a free society—the incentive for additional return for additional effort.”
Everybody agrees that present taxes are too high. But a cut of the dimensions indicated, without a corresponding cut in spending, would touch off a new spiral of inflation and endanger the dollar. We have already had 26 deficits in the past 32 years. The Council of State Chambers of Commerce, before the Cuban crisis, estimated that the deficit in the current fiscal year would reach $7.7 billion. A tax cut of $7 billion could mean an annual deficit of $15 billion. Yet in despair of the political prospect for any cut in spending, groups and institutions ordinarily deeply concerned about inflation now advocate a tax cut even without a spending cut.
The latest example is the First National City Bank of New York. After an instructive comparison of the American tax system with that of other nations, its November letter concludes: “Our present tax system is bankrupt. It deters effort and progress. It has not succeeded in balancing the budget. We desperately need an imaginative new fiscal combination, even at the initial cost of some continuance of deficits. Easier taxes on enterprise could invigorate the economy [and] build a bigger base of taxable income.”
1 PERCENT OF REVENUES
May it not be possible, however, to reform our tax system without plunging into still bigger deficits in the hope that lower taxes will themselves restore a balanced budget in some sweet by-and-by? We need merely recognize that the greatest harm is being done by the excessive tax rates on the higher personal incomes. All U.S. personal income-tax rates above 50 percent yield less than $1 billion, i.e., less than 1 percent of total Federal revenues. The experience of other countries also shows that such punitive rates produce negligible yields. Yet such confiscatory rates immensely discourage effort, siphon off most of the very funds otherwise available for risk capital, and undermine the incentive to invest what is left.
If we stopped our income-tax progression at the 50 percent rate there can hardly be any doubt that this would result in an actual increase in governmental revenues. It would certainly result in an increase of economic growth from increased effort, increased capital accumulation, increased investment, increased job opportunities, and higher real wages.
DO HIGH RATES PAY?
The City Bank comparisons show that our top rate at 91 percent is the highest of any important country in the world. As the bank points out:
“It is sometimes thought that high rates and heavy reliance on income taxation necessarily go together. Such is not the case. The bulk of the revenue from the tremendously productive Federal individual income tax is derived from the initial 20 percent rate. In 1960, 86 percent of receipts came from this first bracket rate, to which all taxpayers are subject, while the entire progressive portion up to 91 percent produced only 14 percent of the yield. Collections were 23.3 percent of the total taxable income reported in 1960, which implies that a flat tax of 23.3 percent would produce the same revenue as the present steeply graduated schedule.”
To raise the individual exemption by even $100 would cost some $3 billion in revenues. But to lower the 20 percent rate to 19 percent on the first $1,000 of taxable income, or alternatively, to continue the 20 percent rate (which now applies only to taxable incomes of $2,000 or less for single persons) through the $2,000 to $4,000 bracket (which now pays 22 percent) would mean a revenue loss of only about $750 million.
With such changes at the top and bottom of the rate scale, the complexity of the income-tax schedule would be enormously reduced—from 24 tax rate brackets to eight or nine. This could be a cautious start toward further tax reduction spread over the following years.
November 26, 1962
This year, at the initiative of the Kennedy Administration, two important steps were taken to increase the incentives for new investment. One was the tax credit of 7 percent of the cost of new equipment. The other was the Treasury’s new rulings permitting business to depreciate equipment over shorter periods.
The Treasury estimates that in a full year the tax credit will cost it $1 billion in revenues, and that the new depreciation rulings will cost it another annual loss of about $1.5 billion. If this were so, business could keep $2.5 billion more a year (about 5 percent) of present profits and the added amount would be available for new investment.
But such estimates are likely to apply only in the early years of the new reforms. As business cannot in the long run write off more than 100 percent of the cost of equipment, the government must stand to make up any early revenue loss in later years. Broadly speaking, in fact, all that changes in depreciation allowances do (unless, as in France, they allow also for depreciation of the currency) is to shift the amount of reported earnings, and hence the amount of taxes, as between one year and another. Accelerated depreciation allowances reduce reported profits, and hence taxes, in earlier years at the cost of increasing profits and taxes in later years.
TO STIMULATE GROWTH
Yet because the long-term return on investment in new equipment is always problematical, particularly over more remote years (the rate of obsolescence, or shifts in demand, can never be known in advance), because the principal of the investment is more surely and quickly recouped, and because the net outlay in the early years is less, shorter depreciation periods increase the incentive for new investment. This means two things. As a result of accelerated depreciation the government in the long run increases revenue rather than loses it. More importantly, corporations invest more, scrap obsolescent equipment sooner, expand and modernize, meet foreign competition better, provide higher-paid jobs. In brief, the economy expands faster and so does the tax base.
The Machinery and Allied Products Institute has just published a study of the probable stimulating effects of the new investment credit and the changes in depreciation rules. It estimates that the tax credit is equivalent to an initial depreciation write-off of about 25 percent, and that the credit and shortened depreciation life are together equivalent to an initial write-off of 33 percent.
INITIAL WRITE-OFF
The stimulating effect of the changes on new investment may be substantial. This is the kind of “tax reduction” most likely to appeal to conservative members of Congress. It promises to reduce the depressing effect of taxes without in the long run reducing revenues. It might be even better if, instead of the complications of the new investment credit and “guideline class” depreciation rules, we simply followed the example of Sweden and allowed corporations to write off new machinery and equipment within five years, or (as in Britain) to write off 40 percent of a new investment in the first year, or to choose one of several such options. We might be astonished at the effect on our economic growth.
It is reassuring to learn that the Administration’s tax planners are considering the possibility of spreading its proposed tax reduction over five years, to prevent a massive budget deficit in a single year that could set off inflation fears. In such a program an initial moderate change in the corporation income tax will probably be considered. One such change might be to keep the present rate of 52 percent on undistributed profits, but to reduce the rate to 48 percent on all profits paid out in dividends As corporations in recent years have been paying in dividends about 30 percent of their profits before taxes, this would be equivalent to an average overall corporate rate of 50.8 percent. Even if this were made a substitute for the present 4 percent tax credit allowed to individuals on dividends received, it would mitigate the double’ tax on dividends in a way less open to misunderstanding.
December 3, 1962
The Administration seems to be divided on whether it should recommend simply a tax “cut” in 1963 or whether it should also demand tax “reform.” Unfortunately it seems to have precisely the wrong idea of what constitutes true tax reform. True tax reform would make our tax system simpler, less vexatious, less inequitable, less discouraging to business growth. The “reforms” insisted on by the Administration at the last session of Congress were mainly in the opposite direction. It tried unsuccessfully to get interest and dividend withholding that would have created an accounting nightmare. It succeeded in getting punitive taxes on foreign investment, and stringent rulings on business expenses.
Here is The Wall Street Journal’s summary of the proposed application by the Internal Revenue Service of the new expense-account law:
“Anyone claiming deductions of $10 or more for travel would have to provide documentation of the cost of transportation, meals, lodgings, telephone expense; date and hour of departure and return; number of days away from home; number of days spent on business at each stop; location of each stop, and the business purpose of the trip, ‘including the nature of the business benefit expected to be derived by the taxpayer as a result of the travel to each place’.”
KILLING INCENTIVE
The requirements for entertainment deductions are even more inquisitorial. They would constitute what the Journal calls “a bookkeeping nightmare,” and a “blow to travel and entertainment and indeed all business.” In order to catch a few cheaters, must every taxpayer or businessman be treated as a potential crook?
In its November Survey, the Morgan Guaranty Trust Co. of New York describes the multitudinous ways in which the high corporate and individual income tax rates have distorted business practice, and twisted incentive into strange shapes where they haven’t killed it altogether. Many savings in corporate costs hardly seem worth the effort when it is pointed out that they really amount only to 48 cents on the dollar. “Beyond the dollars and cents,” concludes the bank, “enormous harm has been done to business by the colorful mythology that has grown up around practices designed to help the individual avoid losing the greater part of his pay to taxes. Externally, the exaggerated impression of rampant abuse has damaged public respect for, and confidence in, business. Internally, it has chipped away here and there at business morale and business ethics.”
CONFISCATORY RATES
The favorite demand of most tax “reformers” is that we must “close the loopholes.” But what is a loophole? Those who invoke the catchword never refer to the exemptions and deductions that apply to the low-bracket incomes. They use it only to stigmatize the deductions that those who earn high incomes are permitted to take, implicitly or explicitly, by the law. They do not stop to ask whether a deduction is fair or unfair. Do a few abuse it? Then it should be denied to everybody. Even President Kennedy, in his tax message to Congress on April 20, 1961, said: “The slogan—‘it’s deductible’—should pass from the scene.” He was talking of expense-account abuses; but if his statement were taken without qualification, no expense deduction, no matter how legitimate, would ever be allowed. Even a company that lost money would pay taxes on its gross. It is only because of expense deductions and “loopholes” that most businessmen are able to stay in business at all.
The kind of tax reform we most sorely need is not that proposed by the “loophole” closers. The most important tax reform is to stop confiscation. Any tax rate above 50 percent, on corporate or individual income, is prima facie confiscatory. We need to reduce the multitude of income brackets, to stop penalizing irregular incomes, to deal in a more balanced way with capital gains and losses. If we undertook this kind of reform we could at the same time reduce tax rates and increase revenues. More importantly, we would enormously stimulate income, production, employment, and national economic growth.
December 10, 1962
In a world drifting toward economic chaos, the weekly problem of choosing a topic, to the neglect of all other topics, sometimes becomes insoluble. Take this week, for instance.
With the Administration talking of a tax cut of $5 billion to $10 billion in 1963, though the outlook for the current fiscal year is already for a deficit of $8 billion without a tax cut, I get to ruminating about the gross and glaring inequities in our income tax. When Treasury officials have been questioned about these in the past, their excuse for retaining them has been, “We need the money.” Now they say they don’t want at least $5 billion of it. But nobody suggests that this might be a good time to end some of these inequities.
Take, for example, the gross unfairness to people with irregular incomes. An official of a small bank with a steady net taxable income of $10,000 a year pays over ten years, on his $100,000, a total income tax of $26,400. But a writer, inventor, or actor, who had no taxable income for nine years but $100,000 such income in the last year, may be forced to pay an income tax on it of $67,320. Yet nearly everyone would prefer a steady and predictable income to an irregular one of the same amount. Then there is the cynical heads-I-win-tails-you-lose policy in taxing capital gains and losses.
But I’ve been writing too much about taxes lately, so I’ll skip that.
INFLATION IN BRAZIL
Then I think of the rampant inflation in Brazil. Prices there have risen more than 50 percent in the last twelve months. Even last August the cost of living had already increased to ten times that of 1953. It now takes more than 700 cruzeiros to buy a dollar. People are rushing to change their money for anything. Brazil got into this inflation by the most approved New Frontier method—budget deficits. The budget deficits were also brought about by the methods most approved by our own progressive thinkers—losses on socialized enterprises. The government has also ordered a year-end bonus equivalent to one month’s pay for all Brazil’s salaried workers, and a new and higher legal minimum wage to go into effect in January.
One wonders whether the Brazilian example will cause our tax-cut-happy, big-spending, deficits-for-”growth” theorists to have any second thoughts. One wonders whether the inflation, socialization, and confiscation throughout most of Latin America are causing any second thoughts to the daydreamers about the Alliance for Progress. One wonders whether the Brazilian inflation will even cause anybody to ask whether the International Monetary Fund, under which inflations and devaluations have been occurring with unparalleled frequency, serves any useful purpose at all.
CAPITALISM IN RUSSIA
But then I think of the Russian situation. The U.S.S.R. idolators here have been telling us for years that Russia is growing faster than the U.S. and will soon leave us far behind in the race for production unless we too adopt socialist planning. The only people who begin to have doubts are the Russians themselves. Things are going so badly in Russia, particularly in agriculture, that Khrushchev has decided in desperation to imitate capitalism. Why shouldn’t we “use anything rational and economically advantageous that the capitalists have to offer,” he asks defiantly. So he announces one of the most sweeping reorganizations of the Soviet economy on record. He wants plants and industries to try to maximize profits. He proposes to tie managerial compensation closely to these. Communist radicals even recommend the introduction of a rate of interest on invested capital in Russia, in flat disregard of the Marxist dogma that interest, like profit, is simply exploitation of the workers. I might write a piece on the theme that while the Western radicals want to rush us toward Communism, the Russian radicals are moving toward capitalism, and in a few years East and West may pass each other going in opposite directions.
But as I can’t make up my mind which of these subjects to take up this week, I won’t do a column on any. There’s too much to write about.
December 17, 1962
The belief that inflation can solve all the economic problems of mankind has the immortality of the phoenix. Discredited a hundred times by its ultimately tragic consequences, it always rises again in a new form. Its present form is the conviction that whenever the economy needs a lift, the sure way to get it is by a big enough budget deficit.
In a report on Nov. 19, a majority of the President’s Advisory Committee on Labor-Management Policy called for a tax cut in 1963 of $10 billion. A few thought maybe a tax cut of $5 billion would be big enough. Some members urged that, in addition to cutting taxes, the government ought to increase spending. Nobody on the committee suggested that the government should actually reduce spending. The report never troubled to mention the $7.8 billion deficit already officially estimated.
The committee had no doubt that a thumping deficit was the way to “achieve and maintain fuller utilization of manpower, higher industrial operating rates, and a more rapid rate of economic growth.”
Just how deeply embedded the faith in deficits has become was illustrated by an article in The New York Times of Nov. 18: “Economically, there is no longer any essential disagreement among theorists over the fact [!] that deficit spending is a stimulus. . . . If the economy is not generating enough demand to keep it going at close to full tilt then the government must generate the demand, by deficit spending if necessary. . . . This view . . . is central to economic thought and theory in today’s world.”
PRINTING MORE MONEY
It is precisely because this has become the new orthodoxy—which one can challenge only at the cost of being dismissed as hopelessly out-of-date—that the government seems likely to launch on a policy that can only end in monetary collapse.
Let us analyze this theory a little. It assumes that all unemployment or business slack must be the result of “insufficient demand.” But by insufficient “demand” it always means insufficient money. The supporters of the theory want deficits because they want the government to shovel more money into the economy than it takes back in taxes in order that everybody will have more money to buy more things. In brief, they want more inflation.
The theory assumes that bigger deficits, more money, more inflation, will inevitably “lift the economy.” But they can do so only for brief periods and under special conditions. If union pressure forces some wage rates too high in relation to prices, then an added injection of money into the economy may increase either sales or prices, thus restoring sales or profit margins and enabling industry to pay the higher wage rates.
WAGE RATES IGNORED
But this result will follow only if: (1) It does not lead to still further wage demands, or (2) if the price rises are at least greater than the wage rate rises, and (3) if the added dose of money is expected to be the last one, and not merely the beginning of an indefinite number of doses. In the latter case the inflation will get out of control.
The deficit-idolaters always ignore wage rates, and their effect on employment. Under no conditions, apparently, do they think any wage rate should be adjusted downward to coordinate wages, prices, and profits and restore employment. Always the whole level of prices must be raised instead.
But unless distortions are removed from the economy, unless there is freedom, flexibility, and coordination of wages and prices, even the greatest dose of deficit financing cannot restore full employment. All it can do is to intensify our problems. Our costs are getting too high for competition in the world market. More deficits can only make them higher. The deficit in our balance of payments, the outflow of gold, the dwindling confidence in the dollar, are all the result of the inflation we have already had (from 27 deficits in the last 33 years). The prospect of still more inflation can only lead to a renewed outflow of gold, or a devaluation of the dollar and a profound shock to world confidence.
December 24, 1962
The strike of the printers’ union against New York newspapers raises once more the vexed question of what the attitude of government and the law should be in regard to unions and strikes in general.
A word ought first to be said about the merits of this particular strike. In October the average weekly wage paid in all U.S. manufacturing establishments was $97. (This compares with an average of $68 in 1952, of $37 in 1942, and of $17 in 1932.) The New York newspaper printers were getting $141 a week. They initially asked for $160, and for a basic 30-hour week. The publishers offered an increase of $8 a week over two years, to correspond with the settlement of the Newspaper Guild strike. The Typographical Union replied that the publishers had not even begun to “negotiate.”
The plight of the New York printers hardly seemed desperate enough to justify their action in calling a strike at the height of the Christmas season, throwing 20,000 people directly out of work, injuring thousands of small newspaper stands and stationery stores, and depriving more than 5 million people of their daily papers. If the strike goes on long enough, or is settled on burdensome terms, it may put some newspapers permanently out of business and their employees out of work.
CAN UNIONS RAISE WAGES?
Why does the public tolerate such strikes against it, year in, year out? Probably because most people still believe that the unions, using the “weapon” of the strike, can in fact raise wages above the level they would otherwise reach. Economic analysis has shown again and again that this belief is a delusion.
The unions can raise money wages. But the gain is canceled out (with the help of inflation) by an equivalent rise in prices. Or an individual union can force an increase in wages for its members at the expense of all other workers, who must pay that wage increase in higher prices. In recent years the most highly paid workers have been achieving further victories against the more poorly paid. But union pressure cannot raise real wages for all workers. The attempt only creates unemployment. Our persistent 5.8 percent unemployment, in spite of record GNP figures, is mainly the result of excessive wage rates in key industries.
But the delusion that strikes and union pressure can raise real wages for all workers above the level that free competition would have brought is the reason why the law encourages unions and strikes.
LAW NOT IMPARTIAL
Under the Taft-Hartley Act the government has become, in effect, a union-organizing agency. It legally compels an employer to “bargain” with a specified union. It confers on a union representing a mere majority, exclusive power to bargain for all the workers in a given unit. It in effect grants unions the intimidating and coercive powers of mass picketing. It in effect deprives the employer of the right to treat a striker as a man who has quit his job, and to replace him peaceably and permanently. This is why a steel plant or newspaper no longer even attempts to carry on its business during a strike. In New York even strikers, after nine weeks, are entitled to unemployment insurance.
Yet the strange myth continues that the government and the law are “neutral” during a strike. When a strike occurs, instead of there being any demand for revision of the laws that encourage the strike (and reduce its risks) there are demands for still more government intervention—direct intervention of the President or Secretary of Labor, resort to the compulsory return-to-work period of the Taft-Hartley Act, compulsory arbitration, even direct wage and price fixing.
But no one calls for the obvious solution—to revise or repeal all the Federal labor legislation since 1931 and return to the principles of the common law. Under these principles unions would no longer be privileged to resort to intimidation or coercion. Individual workers would be free to join or not to join unions, to strike or to stay on the job.
Wages, employment, production, peace, would all gain by the change.
December 31, 1962
President Kennedy’s speech before the Economic Club of New York was a mixture of the sound and the unsound. He said many good things and sometimes said them admirably. He warned that our balance-of-payments problem places limits on monetary inflation. He warned against the demoralizing effects of “increasing Federal expenditures more rapidly than necessary.” He recognized the need to reduce “the burden on private income and the deterrents to private initiative.” He pointed out how our present tax system constitutes “a drag on growth” because it “siphons out of the private economy too large a share of personal and business purchasing power” and reduces the “incentives for personal effort, investment, and risk-taking.”
The Federal government’s most useful role, Mr. Kennedy recognized, “is not to rush into a program of excessive increases in public expenditures, but to expand the incentives and opportunities for private expenditures.” He insisted that “corporate tax rates must also be cut to increase incentives and the availability of investment capital.”
The President also stated admirably the need for tax reform and some of the objectives of such reform. He pointed out how our present tax system distorts economic judgments and inhibits economic growth. He courageously urged reduction of “the oppressively high rates in the upper brackets.” He emphasized the need of improving profit margins and increasing “the incentive to invest and the supply of internal funds for investment”; of arousing a “new interest in taking risks, in increasing productivity, in creating new jobs and . . . long-term economic growth.”
CUT SPENDING FIRST
But in spite of these correct perceptions, the President did not draw the correct conclusions for practical action, because he looked at only one side of the problem. We do need tax reform. We do need tax reduction. But we cannot afford to reduce taxes unless we are also willing to reduce the Federal spending that makes the taxes necessary. Yet the President holds out no prospect whatever that Federal spending will be reduced. On the contrary, “defense and space expenditures will necessarily rise.” The most the President promises is that “the total of all other expenditures combined will be held approximately at its current level.”
What does this mean? In the current fiscal year we are heading into a deficit already officially estimated at nearly $8 billion. This will be the 27th deficit in the last 33 years. The President’s advisers have been publicly recommending a tax cut in the neighborhood of $10 billion. This could mean a deficit in the next fiscal year of $18 billion. Add a couple of billion to expenditures, and you get a deficit around $20 billion.
A TEN-YEAR TRIAL
The President and his advisers seem to believe that deficits themselves, by increasing “purchasing power,” will increase prosperity, eliminate unused capacity, bring full employment, and thereby increase revenues and so restore a balanced budget. This beguiling fantasy has been floating around for 30 years. It is part of the reason why we have already had 27 deficits in 33 years. It is a complete delusion.
Deficit spending as an economic panacea has had a thorough trial. It got an uninterrupted test in the ten fiscal years from 1931 to 1940, inclusive, in which there was a deficit every year. The average annual deficit was $2.8 billion, or 3.6 percent of the gross national product of the period. The same percentage of the gross national product today would mean an average annual deficit of $19.7 billion. The average unemployment in that ten- year period was 9.9 million. This was 18.6 percent of the total labor force. The same percentage of unemployment today would mean 13.9 million jobless.
But though deficits brought about by cutting taxes would probably be futile in restoring full employment, they would not be harmless. On the contrary, they would undermine domestic and foreign confidence in the dollar. They would lead foreigners to drain us of our gold supply. And they would eventually let loose an uncontrollable inflation.
