Business Tides
The GNP Fetish
January 5, 1959
The “national income approach,” once part of the abracadabra of a few statisticians, has now become so widely popularized, not only in economic textbooks but in newspaper discussions, that almost anyone is likely to ask you, or tell you, what “GNP” (gross national product, for the still benighted) is going to be for 1959. Yet a close examination does not justify the exaggerated reliance now placed on these figures. At least five major cautions ought to be kept in mind. Here are two of them:
1—The national income or gross national product figures are arbitrary, and from a strictly scientific standpoint, indeterminate. This was recognized in the pioneer studies. Simon Kuznets, in his two-volumed book National Income and Its Composition, published in 1941, pointed out: “The statistician who supposes that he can make a purely objective estimate of national income, not influenced by preconceptions concerning the ‘facts,’ is deluding himself; for whenever he includes one item or excludes another he is implicitly accepting some standard of judgment, his own or that of the compiler of his data. There is no escaping this subjective element.”
WHAT DO WE INCLUDE?
Kuznets went on to show that estimates of the national income necessarily involve legal and moral considerations. Should we include “the compensation of robbers, murderers, drug peddlers, and smugglers”? And how shall we “draw a line between economic activity and economic goods on the one hand and active life in general and its stream of satisfactions on the other”? Should “washing, shaving, and playing for amusement on the piano” be treated as economic activity? “When judged by the attributes of satisfaction-yielding, scarcity, and disposability, they do not differ from the same activities carried on for money as services to other people (nursing, barbering and giving concerts).”
And yet Kuznets decided (as do practically all national-income statisticians) to include only items that “are dealt in on the market.” This of course excludes all do-it-yourself activities, which in total are now probably enormous. More, it excludes all the products of the family economy, including the activities of housewives. So we get such paradoxes as these: When a man marries his cook, the value of her work disappears from the national-income accounts. When an opera singer sings professionally, she is considered as adding the equivalent of her salary to the national income. When she sings for charity or for friends, it doesn’t count.
GROSS VS. NET
2—So what we include in or exclude from national income involves arbitrary decision. But a second serious problem is how and where to set the difference between gross and net. How are we to prevent double counting at a thousand points? A married man earns an income of $10,000. That is the joint income of himself and his wife. He becomes a widower and hires a housekeeper for $4,000 a year. His income, and their joint income, is still $10,000; but the national-income accounts would now call it $14,000. The same problem occurs daily and everywhere. If we count the income of doctors and dentists should we, or should we not, deduct it from the income of patients?
Sliding by this awkward point, how do we separate gross national product (the famous GNP) from national income? Our official statisticians do it by deducting from their GNP figure a “capital consumption” allowance, mainly a “depreciation” charge, and also “indirect business tax and non-tax liability.” But depreciation charges are the results of estimates. The “right” amount of depreciation is never precisely known. Contrary even to the belief of many businessmen, a depreciation deduction is not so much an estimate of past loss as a forecast of future probabilities. It is never known, for example, when an old machine is going to be made obsolete by a new discovery or a new invention. And particularly in a period of monetary inflation, orthodox depreciation charges fail to allow for ever- mounting replacement costs.
There are even more serious defects in national- income estimates, but they will be reserved for a subsequent article. 
January 12, 1958
Last week we discussed two of five major defects in the national income or GNP estimates. One was the arbitrary inclusions and exclusions. The other was the difficulty of avoiding duplicate counting or of separating gross from net. Here we will consider the three remaining major defects.
3—National income, to be estimated at all, must be reduced to a common measure—in our case, the dollar. But the value of the dollar is itself constantly changing. In a period of inflation all values are falsified. For 1939 our GNP was estimated at $91.1 billion; for 1957 it was estimated at $440.3 billion. Here is an apparent quadrupling, or better, of “gross national product.” But when the government statisticians restate the figures in “constant dollars” (specifically in “1954 dollars”) they find that the GNP in 1939 has to be raised to $189.3 billion and that the 1957 GNP has to be lowered to $407 billion. In other words, “real” GNP did not quadruple but only about doubled in the eighteen- year period.
The government statisticians get this result by dividing actual dollar totals by an index number of prices each year. They print, in fact, a separate table of “implicit price deflators” for the gross national product figures for each year based on an index number of 100 for 1954. The price deflator for 1939, on this basis, is 48.1, and for 1957 is 108.2. If we take the GNP in 1939 at the prices that prevailed in that year it comes, as we have seen, to $91.1 billion. But if we translate 1957 GNP into 1939 prices, we get, instead of $440.3 billion, only $195.7 billion for 1957. This is not nearly as impressive.
WHAT DO WE MEASURE?
Moreover, it is possible to correct the comparison only approximately, never accurately, by applying “implicit price deflators.” Goods never remain the same for two years in succession, either in relative quantities or qualities. No index number can be completely “scientific.”
4—In Newsweek of Aug. 25, I called incidental attention to a defect in the national-income estimates that throws into doubt the whole question whether these estimates measure comparative “real” income or economic welfare. Larger crops often have a smaller total dollar value than smaller crops. (Hence crop-restriction schemes.) But this merely illustrates a wider principle. Economists have pointed out since the time of Adam Smith that it is not “value-in-use,” but scarcity, that determines “value-in-exchange,” or money price. Water is an indispensable commodity that ordinarily commands no price at all. If more and more things become plentiful (except dollars), the national income, as measured in dollars, might actually begin to fall. If we could imagine a situation in which everything we could wish for was in as adequate supply as air and water, we might have no (monetary) national income at all. Our dollar “national income” figure does not measure total economic welfare, but merely an internal relationship of marginal values (multiplied by quantities).
5—The fetish made of national-income figures leads to false ideas concerning cause and effect. The national income is treated as the “purchasing power” that causes and buys the production. Yet the national income is merely the total assumed dollar value of the production itself.
SHRINKING YARDSTICK
The fetish made of GNP also leads to false policies. Part of the official GNP total of $440.3 billion for 1957 was arrived at by including $87.1 billion for “government purchases of goods and services.” Planners easily jump to the conclusion that if it had not been for these $87 billion of government purchases the GNP would have been just that much less. Yet whatever government spends it takes away from somebody in taxes.
If the national income falls short of some “goal” by x billion dollars, economic planners are tempted to assume that the x billion dollars could easily be supplied by that much deficit financing, or even by printing that much money. We can raise national income to any figure we want, in fact, not by increasing output and consumer satisfactions, but simply by shrinking the measuring rod—by inflation, by depreciating the dollar enough to raise prices to reach that income.
January 19, 1958
Since I last wrote here (Nov. 17 and Dec. 8, 1958) about the common market and the free-trade area, major decisions have been taken which mark great steps forward.
The first effects of the rivalry between the six common-market countries—France, Germany, Italy, Belgium, the Netherlands, and Luxembourg—and the proposed free-trade area that would include eleven other European countries have been unexpectedly good. For the common-market countries, in order to blunt British charges of “discrimination,” agreed at the last moment to extend their 10 percent tariff cut, which went into effect Jan. 1, not only to each other but to all nations subscribing to GATT, including the United States. They also offered extension of the first 20 percent increase in quotas to the eleven other European nations.
And when Britain, partly to counter the common market, announced that the pound sterling would be made completely convertible for nonresidents, all the principal European nations felt encouraged or obliged to make a similar announcement. France felt that in order to do so it had to make a still further devaluation of the franc, this time of about 15 percent—from an official rate of 420 to 493.7 to the dollar. In order to offset the shock to confidence, France at the same time announced an anti-inflation program and a “revaluation” of the franc. It dropped two zeros from each unit of 100 francs to create a “heavy franc” with 100 times the purchasing power of the old franc, making it once more about five to the dollar. It remains to be seen whether the steps France takes will in fact be adequate to convince the world that this is its “last devaluation.”
FREER TRADE ABROAD
Nevertheless, the overall effects of the European announcements during Christmas week are of the first importance. The establishment of the common market—together with the initial extension of its benefits to the rest of the Western world—is the most dramatic step taken since the end of World War II toward a lowering of international trade barriers. The establishment of convertibility for the pound and other currencies is the most important single step taken since the war toward a restoration of international monetary order, stability, and discipline.
There have been two other significant developments. The new “heavy” franc is not tied to a round number of American dollars, but made equal to 18/100 gram of fine gold. The European Payments Union, with its automatic credits right, will go out of existence; it will be supplanted by the European Monetary Agreement, under which debt balances must be settled entirely in gold. Perhaps the restoration of the international gold standard is not the vain dream that so many have supposed.
INFLATION AT HOME
But while Europe has been taking giant forward steps, what of the United States? We have been preaching all these fine reforms to Europe, but show no desire to take our own medicine. As Europe is moving toward freer trade, we are moving toward more protection, and particularly toward more import quotas—on farm products, metals, petroleum.
We believe in getting out of recessions, not by internal adjustments, but by more inflation. In the twelve months ending November 1958, notwithstanding unemployment averaging between 6 million and 7 million, average hourly wage rates were pushed up from $2.11 to $2.17. We look forward to a budget deficit this fiscal year of $12 billion. In the twelve months ended October 1958, the country’s money supply, as represented by total deposits and currency, increased $13.6 billion. This was chiefly brought about by the monetizing of government securities. The violent rise of the stock market to new high records, in the face of mediocre corporate earnings, is flashing a signal of lack of confidence in the future value of the dollar. And so is the loss of gold. “Our gold outflow,” says the First National City Bank of New York in its January letter, “is saying that the government is spending too much.”
The dollar, like Caesar’s wife, must be above suspicion. When are we going to heed these signals?
January 26, 1959
There were many excellent recommendations in the President’s State of the Union Message, but his proposals for labor legislation failed to go to the heart of the matter. If we want a glaring example of what our present labor laws and enforcement agencies permit or encourage, we have merely to look at the recent nineteen-day New York newspaper-deliverers’ strike.
Let us recall what happened. The deliverers were getting a basic wage of $103.82 for a 40-hour week for day drivers. The publishers offered them the same package increase previously granted to the Newspaper Guild—$7 a week spread over two years, $4 the first year and $3 the second. This would have made, as of now, about $108 a week. (Average nationwide manufacturing earnings are $87 a week.)
The union leaders, after a one-day strike, accepted this offer; but the striking members themselves turned it down by a vote of 877 to 772. Thus 105 men, in effect, precipitated a strike that threw about 17,000 of the 20,000 employees of the nine New York papers out of work. In other words, each man in the plurality that voted to strike forced more than 160 others out of work. The newspapers estimated their loss in revenue at $25 million. Nearly 6 million readers were deprived of papers.
The indirect losses (even passing over those of big merchants or theaters) were incalculable. Ten thousand of the city’s 16,000 newsstands were forced to close during the strike. Candy-store sales dropped violently. People who had rooms to rent couldn’t advertise. Job hunters didn’t know where to look for work.
WHO GAINED?
Who gained by the strike? Certainly not the strikers. They lost nineteen days’ work and pay—at the Christmas season. (The strike ran from Dec. 9 to Dec. 28.) It is difficult for an outsider to see any net advantage in the contract they finally accepted over the contract they struck to reject. According to the publishers’ spokesman, they merely accepted the old offer in revised form: Instead of $4, only a $3.55 wage increase for the first year, plus Columbus Day as an additional holiday; and instead of $3, only a $1.75 increase for the second year, plus three days of paid leave for illness or other personal reasons.
Suppose the strikers, instead of buying a “paid” Columbus holiday for $23.40 (45 cents a week less, times 52 weeks) had actually gained a paid holiday net by the strike? It would still take nineteen years of such Columbus Days to make up the strike loss. Even if we accept the claim of union members that they “gained” 30 cents a week net, it will take them seven years of work to make up their average strike loss of more than $400 each. And by inflicting heavy strike losses on the newspapers, they reduced the funds available for future increases in jobs or wages.
WHAT MADE IT POSSIBLE
What made it possible for 105 men to silence the press of the greatest city in the world? This is the question the President and Congress should be asking themselves. Part of the answer is the physical intimidation or coercion the strikers were able to impose. As in 1945, they put a limit on the number of copies (five or six) that an individual was allowed to pick up at the publishing plants. The local police in effect enforced such rules. Plenty of truckers were willing, if they had been peacefully allowed to do so, to perform the functions the strikers had abandoned. Some truckers did, in fact, deliver papers all the way from Philadelphia.
What the law and law-enforcement agencies ought to have done, and should do hereafter, is clear. (1) They should forbid mass picketing, or all picketing, however ostensibly “peaceable,” that has in fact an intimidatory effect. (2) They should cease compelling an employer to negotiate with strikers. He should be free to announce that all strikers not back at work at a given time would be considered to have resigned their jobs and that others would be permanently hired in their place.
Or do we believe that a tiny but muscular minority should have the right, at will, to close down the press of a great city unless its demands are met?
February 2, 1959
Because the Democratic majority in Congress seems bent on reckless inflationary spending, and is criticizing only the economies and not the extravagances in the President’s budget, there is a temptation to defend that budget as it stands and to praise it as at least an effort toward a balance. But the budget cannot be defended as it stands and it is hard to believe in the “balance” it depicts.
This balance is precarious on its face. To get his estimated budget receipts up to $77.1 billion, the President had to assume an increase in tax revenues of $9 billion for the fiscal year 1960 over 1959, with practically no increase in tax rates or levies. To get his estimated expenditures down to $77 billion, he had to assume a drop of $3.9 billion compared with 1959 in spite of proposed increases in many spending programs and his own failure in the last calendar year to veto huge Congressional appropriations that he had not asked for. Most of the “decline” in 1960 expenditures, moreover, is achieved by charging the $1.4 billion proposed increased subscription to the International Monetary Fund against expenditures for the current year instead of against 1960.
PAST MISCALCULATIONS
Nor does the record of the past two years increase confidence in the accuracy of Mr. Eisenhower’s present estimates. For the fiscal year 1958 he projected a budget surplus of $1.8 billion; we emerged with a deficit of $2.8 billion. For 1959 he predicted a surplus of half a billion; we now face a deficit of $12.9 billion. Receipts of the present fiscal year will be $6.4 billion less than his estimate a year ago; expenditures will be $7 billion more.
Even if we take the new budget at face value, we must remember that it is the biggest budget Mr. Eisenhower has ever proposed. Nor can this be blamed on defense necessities. For it contains the highest nondefense expenditures ever recommended. These total $31.2 billion, compared with $28.1 billion recommended for 1959 (though increased in actuality), and with nondefense expenditures of $27.8 billion in 1958, $25 billion in 1957, and $21.2 billion in 1954. In brief, nondefense expenditures alone are $10 billion greater than in 1954.
Nor does even this tell the full truth about the overall budget. In recent years, the cost of government activities such as social security and highways has been hidden in special segregated budgets. When we put them in a “consolidated” budget, we find that Mr. Eisenhower is really planning to spend in 1960 a total of $92.9 billion.
THE ITEM VETO
And Mr. Eisenhower’s latest budget suffers from the very “schizophrenia” toward economy and spending of which he accuses its critics. On the one hand, he insists that we must “keep our financial house in order” and “examine new programs and proposals with a critical eye. Desirability alone is not a sound criterion for adding to Federal responsibilities.” We must “restrain the forces that would drive prices higher, and thereby cheapen our money and erode our personal savings. The first step is to avoid a deficit by having the government live within its means, especially during prosperous, peacetime periods.” But then he recommends continuation of and increases in so many welfare programs that there is not space to list them here. He even declares proudly that we must “carry forward current public-works programs—now larger than ever before.”
But there is one recommendation in the President’s message that can be endorsed with the sole reservation that it does not go far enough. This is that the President should be given the constitutional power not only to veto individual items in appropriations bills, but to reduce the amount of any appropriation. This power would not in itself, of course, insure a responsible budget. But we can never have a responsible budget, or anything approaching a responsible budget, until this power exists. At present the so-called executive budget is merely a speech which Congress is free to ignore. The President cannot fairly be held responsible for the budget until he has the power to carry out that responsibility. Congress is in no position to blame him for a result that he lacks the power to control.
February 9, 1959
The Economic Report of the President reflects the same schizophrenic attitude toward spending vs. economy, inflation vs. dollar-integrity, as his Budget Message. At one point he declares: “An indispensable condition for achieving vigorous and continuing economic growth is firm confidence that the value of the dollar will be reasonably stable in the years ahead.” But most of the report endorses policies that would clearly undermine this confidence.
Describing governmental actions that helped “to bring about a prompt and sound recovery” he says: “Monetary and credit policies were employed vigorously to assure ample supplies of credit. Legislation was enacted to lengthen temporarily the period of entitlement to unemployment benefits. Numerous actions were taken to spur building activity. Steps were taken to accelerate Federal construction projects already under way and to speed up projects supported by Federal financial assistance. Activities under a number of Federal credit programs, in addition to those in the housing field, helped counter the recession. And the acceleration of defense procurement exerted an expansive effect.”
WHO PRINTS MONEY?
Every one of these policies was inflationary. All of them meant pouring new money and credit into the system, increasing the supply of dollars, reducing their individual purchasing power. In a later part of the report it is admitted that the Federal Reserve policies enabled the commercial banks “to add nearly $10 billion in loans and investments to their assets,” largely by “additions to their holdings of U.S. Government securities.” This in turn added $13.6 billion to the total money supply (including inflated time deposits), and helped to boost living costs.
Yet the President’s report blurs responsibility for inflation and tries to shift it onto consumers, business, and labor. The “individual consumer” is advised to “shop carefully for price and quality”—as if he couldn’t be depended upon to do that without urging. The government in effect is saying to consumers: “Here are $10 billion or more additional paper dollars; but don’t be reckless enough to spend them, because it will make you responsible for raising prices.” “Businessmen” are told they “must wage a ceaseless war against costs”—as if self-interest and self-preservation did not insure that. But nothing is said about Federal labor laws (including compulsory exclusive “bargaining”) which render the employer all but impotent in resisting excessive demands. And “leaders of labor unions” (after having been granted monopolistic bargaining powers by law) are urged not to ask as much as they can get under these conditions. This means that they would not last very long as labor leaders.
THE REAL CULPRIT
The President goes on to declare: “If the desired results cannot be achieved under our arrangements for determining wages and prices, the alternatives are either inflation, which would damage our economy and work hardships on millions of Americans, or controls, which are alien to our traditional way of life and which would be an obstacle to the nation’s economic growth and improvement.” What the President seems to be saying is that it is consumers, businessmen, and labor leaders who threaten to bring inflation by lack of “self-discipline and restraint,” and that they may “force” government controls. But the real culprit is government. Government must stop deficit spending, stop flooding the country with more paper dollars, and stop encouraging monopoly in the labor field while blaming “our free competitive economy” for rising wages and prices.
Perhaps the most important recommendation in the Economic Report is that Congress “amend the Employment Act of 1946 to make reasonable price stability an explicit goal of Federal economic policy, coordinate with the goals of maximum production, employment, and purchasing power now specified in that act.” Well, if the mischievous Employment Act of 1946 is to be retained, this amendment on net balance would probably make it less mischievous, because the act has been constantly interpreted as a directive to inflate. But an immensely better solution would be to repeal the act altogether.
February 16, 1959
In past articles I have called attention to some of the fictions and fallacies in recent hysterical comparisons between Soviet Russia’s alleged “rate of economic growth” and our own. But supposedly responsible American publicists, in and out of government, continue not only to swallow the Soviet boasts without adding even a grain of salt, but to draw conclusions that would be flagrantly fallacious even if the boasts were reliable.
One of the latest developments to arouse these viewers-with-alarm has been “the Soviet challenge in foreign trade.” In their front-page anxiety about this they are merely acting as megaphones for official Communist propaganda, as illustrated, for example, in Mikoyan’s statement in Moscow on Jan. 31 in favor of “peaceful competition in cooperation with other countries in developing the economies of the underdeveloped nations,” etc. Before we ask how “peaceful” this “competition” has been or is likely to be, we may begin by putting the subject in factual perspective. Just how important, relatively, has Russian buying and selling been? How does Russia rank in international trade?
It should not be too difficult to answer that question, at least in approximate terms. The official figures are available. It is merely necessary to have sufficient enterprise and industry (like Alice Widener, for instance, in U.S.A. magazine for Feb. 13) to dig them up and interpret them. They are to be found among the 777 pages of the United Nations Yearbook of International Trade Statistics.
SOVIET ‘STATISTICS’
According to the U.S.S.R.’s own official figures, it had total exports of 17.5 billion rubles in 1957 and 15.8 billion of imports. If we accept these figures at face value, the next question is how to convert them into dollars for purposes of comparison. The official rate of the ruble is 4 to the dollar. The U.N. tables solemnly convert it at that rate. Even at that rate, we find that the Soviet Union did only 2 percent of world trade in 1957. And we find that total U.S.S.R. exports to the free world in 1957 (after deducting “trade” with the Russian satellites and Red China) amounted at that rate to only $966 million. This is less than 5 percent of the total exports of $20.6 billion from the United States in that year.
But the official 4-to-1 rate for the Russian ruble is a flagrant fiction. Foreign-currency dealers in New York will sell you rubles at 25 or more to the dollar and will buy rubles at 50 to the dollar. If we are unkind enough (as Mrs. Widener is) to convert rubles into dollars at a rate of 24 to 1, we bring Russian exports to the free world in 1957 down to a value of only $161 million. This is less than the gross exports in that year of a single American company, like General Electric. If, generously, however, we convert rubles at the official tourist rate of 10 to the dollar, we get total 1957 exports to the free world of $386 million. This is less than the U.S. Government spends every two days.
A NEGLIGIBLE FACTOR
About 73 percent of Soviet exports go to other Communist countries. But even if we convert the U.S.S.R.’s total exports in 1957 of 17.5 billion rubles at the tourist rate of 10 to the dollar, we get only $1.8 billion. This is not only less than one-tenth of U.S. exports of $20.6 billion; it is only one-fifth of the 1957 exports of West Germany ($9 billion), and it is about equal to the exports of little Switzerland ($1.6 billion) with a population 1/40th as large as the Soviet Union. And it is by no means certain that a conversion rate of 20 or 25 to 1 for rubles into dollars would not be more realistic than the tourist rate of 10 to 1.
Nor can these ridiculously small exports be attributed to American “discrimination” against Russia since 1947. Soviet Russia has always been a negligible factor in world trade. In 1938, the last full year before World War II, American exports to the Soviet Union were valued at about $70 million, and our imports from the U.S.S.R. in the same year were valued at about $24 million.
Finally, as the Russian satellites and such reluctant victims as Finland have discovered, “trade” is something that Soviet Russia forces on weaker neighbors as a form of tribute or extortion. But that’s another story.
February 23, 1959
No one concerned for the protection of the public interest against the almost unlimited power of labor bosses can become enthusiastic about either the Kennedy- Ervin or Administration bills now before Congress.
Both bills, it is true, purport to protect union members against corrupt or unscrupulous union bosses. But both mistake the means. Congress, having by the enactment of special privileges and immunities created the Frankenstein monster of lawless union power, now seeks by still more government intervention to curb a few of the abuses of this power. Both bills carry elaborate provisions requiring financial statements from unions, and opposing bribery and corruption. There are already enough laws against robbery, embezzlement, and misappropriation of funds. It is merely necessary to enforce them. The real evils are compulsory membership in unions and exclusive bargaining powers. These neither bill dares to touch.
Both bills, on the contrary, contain provisions which would merely increase the power of unions and of union bosses. The Kennedy-Ervin bill would extend union dominion over many supervisors. Both bills would allow replaced strikers to vote in representation elections. This would permit former employees to choose “representatives” for present employees. It would tend to keep former union bosses in power and put pressure on the employer to fire replacements. The real reason some unions acquiesce in the Kennedy-Ervin “reforms” is that they want such provisions and accept the “reforms” as innocuous or meaningless. Both bills place still more discretionary power in the hands of the National Labor Relations Board, which has flagrantly misused the discretionary powers it already has.
COERCIVE PICKETING
The Administration bill amends the provisions of the Taft-Hartley Act against secondary boycotts; but instead of making those provisions clearer and stronger, it virtually authorizes some of the worst forms of secondary boycotts.
The Administration bill contains at least one good provision, the only trouble being that it does not go nearly far enough. This is the provision to outlaw “stranger” or “black-mail” picketing—i.e., picketing by people who are neither employees of the employer picketed nor representatives of those employees. This kind of picketing can ruin a small-businessman. It has become a weapon of extortion and shakedowns.
But a recital of the few virtues of the Administration bill, and the even fewer virtues of the Kennedy-Ervin bill, only serves to emphasize the extent to which both fall short of the reforms that are desperately needed. Why should reform be confined, for example, only to “stranger” or “extortion” picketing? Should mass picketing be tolerated, even for so-called “legitimate” purposes?
FOR REAL REFORMS
Even Senator Kennedy said during the Kohler hearings: “It does not seem [that] there is any defense of mass picketing.” And he refused to concede that there is “any justification for a minority or even a majority to place themselves in such a position that others cannot do what they desire to do.” But this recognition of reality did not get into the Senator’s bill. Surely all mass picketing, as well as all picketing that has an intimidatory effect, should be prohibited.
The two labor bills now before Congress merely serve to deflect public attention away from the real evils of uncurbed union power. They seem to be drafted mainly on the assumption that labor bosses can do no wrong except to union members. The plight of nonunion workers, employers, and the consuming public is largely ignored. The central evils of legalized violence and monopolistic compulsion are left untouched.
Real steps to reform would be amendment of the Taft-Hartley Act to remove the exclusive bargaining powers granted to unions, and to prohibit all devices that tie employment to union membership. Still another would be complete repeal of the Norris-LaGuardia Act. As Prof. Sylvester Petro puts it: “There is no excuse for a law which denies injunctive relief to persons suffering irreparable injury from clearly and plainly unlawful conduct.”
March 2, 1959
A few weeks ago Nikita Khrushchev, in the course of a seven-hour speech, called for an 8.6 percent annual increase in Soviet production. He said that the United States’s annual increase was only 2 percent. This set off a fresh alarm among the 5-percent-or-bust addicts over here.
Edwin L. Dale, Jr., in The New York Times, went Khrushchev one better. In allowing us a growth of 2 percent a year, he wrote, Khrushchev “was being unnecessarily kind because “after correcting for higher prices” our own growth rate since the end of the Korean war “has averaged less than 1.5 percent.” Barbara Ward, also in The New York Times, demanded an “Atlantic world” growth of 5 percent a year, to be achieved by an “increase in government activity.” Walter P. Reuther, head of the United Automobile Workers, told Congress that the nation could solve most of its problems by achieving a 5 percent annual growth in the economy—by (as one might guess) more spending and “higher wages.”
WHY 5 PERCENT?
It is difficult to know where to begin in analyzing all the confusions and false assumptions involved in these rates-of-growth comparisons. I discussed five of them in an article last summer (Newsweek, Aug. 25, 1958). There is space here only to mention two: (1) There is no reason for assuming any Russian statistic to be honest. (2) It is more than doubtful whether overall “economic growth” is accurately measureable even by “objective” statisticians. All such measurements rest on arbitrary assumptions.
But suppose we ignore these fundamental difficulties. Why the mania for a growth rate of 5 percent? Of course once the magic figure of 5 percent is suggested as a “goal,” no one dares to say that he would be smugly content with a growth rate of a miserable 3 or 4 percent. But why don’t our starry-eyed “liberals” really set their sights high? Why don’t they at least try to better the Khrushchev goal of 8.6 percent per year? What’s wrong with a growth rate of 10, or 20, or 50 percent a year?
If we are trying to talk about realities rather than dreams, it becomes pertinent to ask just how realistic the 5 percent growth figure is. One of the few hardheaded comments I have seen on this is that of Jules Backman of New York University, who points out that an annual rate of growth of 5 percent in gross national product, compounded, would result in a gross national product sixteen times that of the present figure within slightly more than half a century.
PERCENTAGE TRICKS
In my article last August, I pointed out that our “unfavorable” growth rate compared with Soviet Russia depends in part on a trick of percentage figures. The smaller the base from which you start, the easier it is to attain a high percentage growth rate; the bigger the base, the harder.
Take the history of a specific economic product—television. Output in 1946 was 7,000 sets. In 1947 it was 200,000—growth rate, 2,757 percent. In 1948, it was 975,000 sets—growth rate, only 387 percent. In 1949 output rose to 3,029,000 sets—but growth rate was only 211 percent. In 1950 production jumped to 7,464,000 sets; but growth rate was only 146 percent. Though output was accelerating enormously in absolute amounts, percentage rate of growth was constantly falling. And since 1950 the rate of growth has stopped entirely. Yet we have continued to turn out from 5 million to 7 million sets a year.
This brings us to steel. Grave concern has been expressed because United States steel output fell to 78 million metric tons in 1958 from 102.5 million in 1957, whereas Russian steel production increased to 54.9 million tons from 51 million in 1957. But the U.S. increased steel capacity 6 million tons last year, compared with an apparent Russian increase of 4 million. Our percentage rate of increase was less than Russia’s. But our real increase was more. This means that, in real terms, we are even farther ahead of Russia in steel capacity than we were a year ago! As long as we can maintain such an absolute annual lead, Russia can never catch up.
Our rates-of-growth alarmists are scared stiff by their own false assumptions and statistical fallacies.
March 9, 1959
The recent agitation for a high “rate of economic growth” tends to divert attention from the real menace that confronts us. That menace is the immediate striking power of the Soviet Union. While public attention is focused on the danger of intercontinental ballistic missiles, some Navy specialists think that a much more immediate danger is Russia’s 450-odd submarines. Rear Adm. John S. Thach, on Feb. 17, estimated that if the Russians had submarines firing effective ballistic missiles, as they have contended, and if as many as a dozen could get through our defenses undetected, they could wipe out 70 percent of the nation’s industry in one surprise blow.
Now such a menace cannot be countered by producing more automobiles and stereophonic sets, or by competing with Russia for a mere overall rate of economic growth. In the type of war most probable tomorrow, or even today, general economic potential is unfortunately likely to count for little compared with immediate 24-hour striking power or retaliatory power.
PRODUCTION VS. RATES
This of course is not the only way in which the rate-of-growth fetishists misconceive our real goals. They are victims of an elementary statistical fallacy. This fallacy, as I pointed out here last week, is dramatically illustrated by output of television sets since 1946. Though rate of growth has dropped below zero, absolute growth has been enormous. Between 1946 and 1947, output of television sets increased by an absolute amount of 193,000. This was at a rate of 2,757 percent. Between 1949 and 1950, output increased by an absolute amount of 4,435,000 sets. But this was at a rate of only 146 percent. Since 1950 there has been no net increase in the rate of television output, but a decrease. Yet present output is about 5 million sets a year, compared with 7,000 in 1946. And the total number of television sets in use is greater than ever.
The same pattern of growth (though, of course, at different rates and over different periods) can be traced for housing, railroads, automobiles, airplanes, radio or hi-fi sets, or any product whatever. The pattern can be found even in the growth rate of human beings. From the day of birth a boy grows in weight an average of 195 percent in his first year—a record which he never even approaches thereafter.
The trick is to start from a small enough base. Insofar as even a provisional credence can be given to Soviet statistics, this is the chief explanation of Russia’s higher rate of industrial growth compared with our own.
WRONG POLICIES
Economically, for special products, in sum, the rate or curve of growth is steepest at the beginning and then tends to level out. This falling rate of growth is both inevitable and sane. When practically every family has an automobile, a refrigerator, or a television set, there is no reason for further production except for replacement. And this eventually tends to become true even of total levels of consumer goods output and consumption. As even Barbara Ward admits: “If a family has an income of $20,000 a year it should in all sanity be content with a smaller increase than a family with only $2,000.” Unfortunately, her subsequent discussion forgets this momentary flash of insight.
Finally, practically all the rate-of-growth agitators propose exactly wrong means to achieve their declared aims. Most of them want to do it by mere inflation—i.e., by deficit spending and money printing so that the same physical product is priced higher every year in terms of rotting dollars. Barbara Ward wants an “increase in government activity”—i.e. more deficit spending and more hampering interventions which can only reduce production and divert it products that consumers desire less. Walter Reuther has the worst suggestions still-more punitive taxation and a still further increase in automobile wage-rates which would further discourage both production and employment.
None of the growth raters mention the one thing that would do most to increase real wages and national productivity—policies to encourage more saving and capital investment.
March 16, 1959
Some of us thought that George Orwell, in 1984, had portrayed the horrible daily life and terror of a totalitarian socialist regime with classic power and finality. But today actualities surpass what even first-rate scientists were able to imagine.
A vivid report from Red China, for instance, was recently made in three articles for the Associated Press by an Indian social scientist, Dr. Sripati Chandrasekhar. Except for their final paragraphs, these articles are written in a detached tone. They even make some favorable generalizations, though these violate probability. Admitting that there was famine three years ago, the articles say, for example: “No one starves in China now.” No one? That would be a risky statement to make even about the United States, the best-fed country in the world. It becomes particularly implausible about Red China when we recall the chronic famine among its estimated 650 million population, the starvation in Soviet Russia and elsewhere whenever swift collectivization was imposed, and the 2 million farm landlords that the Red Chinese are estimated to have executed. The official claims of a 100 percent increase in food production in 1958 over 1957 are preposterous on their face.
NIGHTMARISH PICTURE
Not that the Chinese Communists are not making great efforts. A Hong Kong dispatch to The New York Times of Feb. 23 tells how “factory and office workers, students, housewives, and army units from towns and cities have joined the rural population in a massive shock campaign of manure collection.” As the People’s Daily of Peking points out: “Manure can be found everywhere.”
But to return to Dr. Chandrasekhar. When he is not merely retailing Chinese official propaganda, but reporting what he actually saw, he paints a nightmarish picture. It is a picture of men and women of all ages working day and night. He personally counted eighteen structures being built around the clock, with the aid of artificial light at night.
“Everyone, men and women of all ages, is dressed in blue trousers and buttoned-up coats,” looking like “an endless army of blue ants.” No one can escape the ubiquitous wired radio loud-speaker. “The radio blares away at you in the bus, in the train, in the trolley, in sleepers and dining cars, on street corners, in villages, towns and cities.” What it blares out is how to make a smelter, how to defeat the American “imperialists,” how to be a good Communist, how to denounce the rightists. The relaying loudspeaker “cannot be controlled and cannot even be turned off.”
Chinese women have achieved “equality.” That is, they do the work of men, and “can and do denounce their husbands at party meetings if they suspect them of rightist and bourgeois tendencies.”
A CHINESE COMMUNE
Chinese Communist officials are proudest of their latest development, the communes, where they have gone beyond the Soviet Union. Dr. Chandrasekhar describes the “best” one, a “showpiece.” It was made up of 68 villages. “The houses, the land, the implements, the cottage industries, and the kitchen utensils were all owned by the commune.” It managed 228 public canteens where all adults ate in hostel-type dining halls. The adult population was distributed over 146 productive “teams.”
Men and women wake up in the morning to the blare of loudspeakers in the streets. After half an hour of exercise in the open air they go off to the canteens for a communal breakfast. After the day’s toil in the fields and factories, all attend regular classes. There they listen to propaganda on the radio. Last is the party meeting, which every worker attends. People rise up, confess their failings, and criticize their colleagues.
At the end of his factual report, Dr. Chandrasekhar sums up: “This is the commune where human beings are reduced to the level of inmates in a zoo. But there is a difference. The animals in a zoo do not have to work hard, and, what is more, they do not have to listen to the quasi-compulsory radio. The lack of peace and quiet in the countryside, where no one can retire and reflect, and the lack of privacy and solitude are to me more terrifying than all the hells put together.”
March 23, 1959
The spenders and the inflationists are in the saddle, both in Congress and in an influential part-of the press. Actual advocacy of inflation (as typified by Sumner H. Slichter) becomes constantly more open, as does advocacy of still more reckless spending. And now a new type emerges—the defender of increased spending in all directions who professes at the same time to be against inflation, and who therefore proposes even more burdensome taxation.
Take, for example, a column by Walter Lippmann in The New York Herald Tribune of March 5. “Neither the Administration nor the Congress,” he writes, “shows any sign of being willing to vote the taxes which are absolutely essential if the budget is to be balanced. As of now, both parties regard as untouchable the income-tax rates which were fixed in 1954, the date of the Eisenhower reduction”; these are accepted as “sacrosanct.”
What Lippmann is saying, in effect, is that every dollar of the $77 billion (really $93 billion) that the President is proposing to spend in the fiscal year 1960 is a sacrosanct and untouchable expenditure. Not once does he suggest in his article that any saving is possible anywhere. Every dollar, he implies, that either the Administration or the Democrats want to spend is essential to meet our “needs.” Among these he specifies not only national defense, but foreign aid and “education and public facilities.”
COST OF NONDEFENSE
Let us look at this budget; and let us, for the sake of argument, grant the spenders’ tacit assumption that there is no waste whatever in any category of our military expenditures and that all of these are indeed untouchable—except in an upward direction. We still find that nondefense expenditures proposed for 1960 come to a record $31.2 billion, compared with $21.2 billion in 1954. This is an increase of $10 billion. But the spenders apparently cannot think of a single place to cut it.
Lippmann thinks we are “too soft and too timid to tax ourselves enough.” I suggest that we are, on the contrary, too soft and too timid to call a halt to the preposterous handouts to special pressure groups. We are spending more than $6 billion a year for farm subsidies alone. These raise food prices for city workers at the same time as they bring into existence huge unsalable farm surpluses that we try to dump abroad. If we swept out the whole farm-subsidy program it would save $6 billion, bring us a far healthier economy, and vastly improve our foreign relations. Veterans’ aid at $5 billion a year is shamelessly swollen. We have little to show except suspicion and resentment (e.g., Bolivia) for the $62 billion we have lavishly distributed since World War II in foreign aid. All this is not to mention Federal aid to education, Federal housing, aid to “distressed areas,” and the rest.
CONFISCATORY RATES
Now let us look at the soft and timid income-tax rates that Lippmann is so eager to raise. Personal income-tax rates now rise to the confiscatory level of 91 percent. How much higher would he raise them? And how much additional revenue would the increase in rates bring in? The Tax Foundation has pointed out that in 1956 (the latest year for which data are available) all the rates above the lowest-bracket level of 20 percent brought in only 14 percent of the total income-tax yield; the other 86 percent came from the 20 percent rate. We also know that all rates over 50 percent brought in less than $800 million, or only 2½ percent of the total income- tax yield.
It does not follow that halting the top income-tax rate at 50 percent would mean the loss of this small revenue. On the contrary, there is every reason to suppose that with such lower rates actual revenues would increase. The government’s revenues in 1954 were $64.7 billion. Three years after the tax cuts were made which Lippmann now deplores, revenues rose to $71 billion.
Those who want to raise tax rates even further now, instead of cutting government extravagance and waste, forget how much our existing personal and corporate tax rates already retard potential economic growth, and how dangerous to our productivity a still further rate increase would be.
March 30, 1959
Notwithstanding all the reassurances from Washington, the American public believes that inflation is here to stay. It has been saying this by its actions—most dramatically in the stock and bond markets. On March 13 the Dow-Jones industrial average reached 615, up 175 points from April 7 of last year. As one shrewd observer put it: “The stock market is in orbit. It has been thrust free of the gravitational pull of a declining bond market.” The Dow-Jones stocks have been selling at 21 times their $29 1958 earnings and at seventeen times even of a projected $36 for 1959 earnings. As of March 11, the average yield of 500 common stocks, as compiled by Standard Statistics, was only 3.23 percent, compared with an average yield of 4.20 percent for A-l bonds.
The rise of stocks and the decline of bonds have been twin results of an inflationary psychology. Momentary breaks do not necessarily herald a reversal of this longtime trend. Regardless of what stocks are at present yielding, holders believe that inflation will cause them to sell still higher in the future (if only in terms of a further depreciated dollar), and that they will receive, if not a good yield, at least a “capital gain.” For the same reason “safe” bonds even at a 4 percent yield do not interest investors when they expect the dollar face value of these bonds to decline in real purchasing power.
REASONS FOR FEAR
This spreading belief that inflation is here to stay, this resignation and adjustment to it, is premonitory. It helps to create or intensify the very consequences it fears. And it is not set at rest, but increased, by complacent assurances from congressmen that there is really nothing to it—just a baseless bugaboo. For the business and financial community merely draws the conclusion that Washington even now refuses to recognize the danger, or to take the steps necessary to avert it.
The business community judges the outlook not merely by what is said but by what is done. Here are reasons that lend substance to its fears:
1—After twenty years of inflation most congressmen still do not understand that the basic cause of inflation is the increase in money and credit. The active money supply has been expanded from $36 billion at the end of 1939 to $138 billion at the end of 1958—an increase of 283 percent.
2—With one rationalization after another, there have been 25 budget deficits in the last 29 years, during which the national debt has risen from $16 billion to $285 billion. The public believes that deficits are here to stay. Few persons believe that even the President’s proposed budget for 1960 would really balance at $77 billion. We are certain to have a dangerous deficit if the Congressional spenders have their way.
3—The Federal Reserve authorities showed reassuring courage when they raised the discount rate of four reserve banks from 2½ to 3 percent on March 6. But this also called attention to the lack of courage and wisdom they showed in dropping the discount rate from 3 percent to the inflationary level of 1¾ percent last year. In the last quarter-century the Federal Reserve Board has been under practically continuous pressure to keep inflating. Over the long run it has yielded to this pressure. When it acts with restraint and courage, as now, it is subjected to a political barrage. Typical is the statement of Senator Douglas (who knows better) that: “This action certainly seems extraordinary in view of the 4.7 million people who are fully unemployed and the equivalent of another 1 million who suffer from involuntary part-time employment.”
4—The chief reason for present unemployment, with inflation, is the excessive wage rates imposed on employers, particularly by industrywide unions such as those in automobiles and steel. These unions have been pricing their members out of the market. Yet as long as they keep automatic escalator clauses in their contracts, even more inflation is unlikely to float them into full employment.
5—The only way in which this process can be stopped is by modification or repeal of Federal labor laws passed since 1932 which make employers impotent to combat unreasonable demands. But Congress shows not the slightest interest in or stomach for such reform.
April 6, 1959
In his classic little history of fiat money inflation in the French Revolution, Andrew D. White points out that the more evident the evil consequences of inflation became, the more rabid became the demands for still more inflation to cure them. Today, as inflation increases, apologists emerge to suggest that, after all, inflation may be a very good thing—or, if an evil, at least a necessary evil. The chief spokesman of this group is Prof. Sumner H. Slichter of Harvard.
Slichter’s testimony and writings overflow with fallacies. I confine myself here to three: (1) That a “creeping” inflation of 2 percent a year would do more good than harm. (2) That it is possible for the government to plan a “creeping” inflation of 2 percent a year (or of any other fixed rate). (3) That inflation is necessary to attain “full employment” and “economic growth.”
I long ago pointed out (Newsweek, Sept. 23, 1957), as did others, that even if the government could control an inflation to a rate of “only” 2 percent a year, it would mean an erosion of the purchasing power of the dollar by about one-half in each generation. This cannot fail to discourage thrift, to produce injustice, and to misdirect production. Actually inflation in the United States has been much faster. The cost of living has more than doubled in the last twenty years. This is at a compounded rate of about 4 percent a year.
IT CAN’T BE PLANNED
The moment a planned “creeping” inflation is announced or generally expected in advance, it must accelerate into a gallop. Even Slichter now recognizes that, if lenders expect a 2 or 4 percent rise of prices a year, they will insist that this be added to the interest rate otherwise paid to them to maintain the purchasing power of their investment. But he still fails to see that all businesses will be forced to offer a correspondingly increased gross rate of return to attract new investment, even new equity capital. He still fails to see that if there is a planned price rise, union leaders will simply add the expected amount of that rise on top of whatever wage demands they would have made anyway. He still fails to see that speculators and ordinary buyers will try to anticipate any planned price rise—and thereby inevitably accelerate it beyond the planned percentage. He still fails to see that inflation forces everybody to be a gambler.
The burden of Slichter’s argument now is that “a slow rise in the price level is an inescapable cost of the maximum rate of growth”—in other words, that inflation is a necessary cost of “full employment.” This is simply not true. What is necessary for maximum “growth” (i.e., optimum employment and maximum production) is a proper relationship or coordination of prices and wages. If some wage rates get too high for this coordination, the result is unemployment. The cure is to correct the culpable wage rates. To attempt to lift the whole level of prices by monetary inflation will simply create new maladjustments everywhere.
COORDINATION NEEDED
In brief, if a real coordination of wages and prices exists, inflation is unnecessary; and if coordination of wages and prices does not exist—if wages outrace prices and production—inflation is worse than futile.
Slichter assumes that there is no way to restrain excessive union demands except by “breaking up” unions. It never occurs to him that we need merely repeal the special immunities and privileges conferred on union leaders since 1932, especially in the Norris-LaGuardia and Wagner-Taft-Hartley acts. If employers were not legally compelled to “bargain” with (in practice, to make concessions to) a specified union, no matter how unreasonable its demands; if employers were free to discharge strikers and peaceably to hire replacements; and if mass picketing and violence were really prohibited, the natural competitive checks on excessive wage demands would come into play.
Slichter argues that labor unions are much the most important cause of present-day inflation, yet contends at the same time that a general wage increase is just the right medicine for the economy right now! His delusion is that we can inflate ourselves out of the inflation.
April 13, 1959
The Roots of Capitalism, by John Chamberlain (Van Nostrand, $5.50), is a book unapologetically in praise of the American system of free enterprise. It is a history of the ideas, the men, and the deeds that produced the capitalism of the present day. The ideas include liberty, freedom of choice, private property, limited government, and contract. The men include the economic theorists from Adam Smith to Ludwig von Mises, the political theorists from John Locke to James Madison, and inventors and enterprisers like James Watt, Eli Whitney, and Henry Ford.
Chamberlain interweaves fascinating thumbnail biographies and portraits with a discussion of abstract principles. As he writes in his preface, for years the system we call capitalism was on the defensive, because it existed in the here-and-now, and its imperfections, whether inherent or not, were plainly apparent to everybody. When contrasted with a dream of perfection, such as socialism, capitalism was manifestly at a disadvantage. But since the advent of socialist economies, as in Communist Russia and China, and of the semi-socialist or “mixed” systems of Scandinavia, Britain, and New Deal America, capitalism “no longer requires apologists. Under any comparative audit of systems it comes out very well indeed.”
‘ADMINISTERED PRICES’
Chamberlain defends capitalism against some of the more persistent current criticisms of it. One of these is that real competition has disappeared in America, and has been supplanted by “administered prices,” by monopoly or “oligopoly,” or by “imperfect” or “monopolistic” competition.
The term “administered prices” was invented by Gardiner Means in the early New Deal era and is being exhumed today by Senator Kefauver. It turns out to be merely a sinister name for a price established or quoted by the seller. Quoted prices are immemorial. As Roger Blough of the U.S. Steel Corp. has pointed out, they can be found anywhere, from the corner newsstand to Macy’s. It is only when a firm has the “market power” to make the “established” or the “quoted” price stick through periods of declining sales and unused manufacturing capacity that competition ceases to be the governor of market transactions.
And as Chamberlain conclusively shows, this power very seldom exists in present-day America. The presence or absence of competition seems to have very little to do with the size of the units involved. “It can be absent in a small town . . . where the barber or the hardware-store proprietor has a local monopoly. It can be present among automotive giants when they are engaged in a dingdong battle for sales leadership.”
ROLE OF INNOVATION
This is being illustrated afresh by the present plight of the Buick. In 1955 it was the most popular medium-priced car. But it has now dropped from third place to sixth in its share of the American market. Its sales are down so far in 1959 (according to The Wall Street Journal of March 24), 61.2 percent from their best pace. Chamberlain brilliantly shows the terrific price as well as quality competition that the American automobile companies are under. For example, there are upwards of some 50 million cars on the roads of the U.S., and “each one of the 50 million is in the hands not only of a buyer but also of a potential seller.”
Recent economists have gone sadly wrong in their postulate of something they call “perfect” competition. Compared with this, all actual competition seems to them “imperfect” or “monopolistic.” As F.A. Hayek pointed out a dozen years ago, their “perfect” competition, on analysis, seems to mean “the absence of all competitive activities.”
Chamberlain follows up the Hayek lead with a beautifully lucid exposition of what real competition means today. The characteristics of the so-called “perfect” market—an undifferentiated product, many buyers and sellers, no trade secrets—are built on the analogy of the wheat market. They have never applied to industrial competition. Industrial competition is not merely competition in prices; it is competition in product, in improvement, in innovation—in short, in the very “differentiation” that the theorists deplore as an “imperfection.”
April 20, 1959
On April 7 the government triumphantly announced that employment rose 1,106,000 and unemployment dropped 387,000 between mid-February and mid-March to 4,362,000. The drop for the two months was the largest in any year since 1950. But though there is cause for some gratification in this, it is not the basic answer to the barrage of propaganda from the labor-union bosses and the left-wing Democrats seeking to pin the blame for unemployment on the Administration. The basic answer is that existing unemployment is mainly the result of the very policies that the labor-union bosses have followed and that the left-wing Democrats want to carry still further.
Unemployment is caused mainly by wage rates that have become excessive in relation to productivity or demand. The price of labor services is like the price of anything else. If it is too high in relation to demand, part of the supply will go unsold. The cure for a commodity is to reduce the price to the point where the entire supply can be sold. The cure in the case of labor is to reduce wage rates, in the lines where they are unworkable, to the levels where full employment can be resumed.
ESCALATING WAGES
The policy of the union leaders has been the exact opposite of this. They are constantly pushing wage demands beyond the point of productivity. It is significant that precisely where the unions have been most powerful and most successful—in the automobile and steel industries, for example—recent unemployment has tended to be highest. This is partly because these unions have succeeded in getting automatic escalator clauses in their contracts under which their wage rates rise automatically with increases in the cost of living and also at set periods, regardless of what happens to productivity. Hence even their favorite cure for unemployment—more inflation, a further rise in prices—is now largely ineffective, because automatically escalating wage rates rise even faster than prices and prevent return to workable relationships. Hence we have what the baffled left-wingers call the “paradox” of unemployment with inflation.
The unions keep blaming unemployment on the wrong things, such as “automation.” This is not a cause of net unemployment, but itself partly a consequence of excessive labor costs.
If we look at the remedies for unemployment that the union leaders and left-wingers propose we find that they all consist in various inflationary devices, most of which would intensify the very evil they are supposed to cure. Increased and prolonged unemployment compensation tends to increase and prolong unemployment. It relieves the pressure on the less conscientious workers to look for or take a new job as soon as possible. It relieves the pressure on the union to readjust wage rates to a level that would permit full employment. It takes the burden of providing for a union’s unemployed off the particular unions whose policies have caused it, and throws it on the general taxpayer.
AN ‘EXTRA BILLION’
This subsidizes the aristocrats of the automobile industry earning an average of $2.65 an hour, or of the steel industry averaging $3.03 an hour, compared with the average in all manufacturing industry of $2.19 an hour or of $1.74 in retail trade.
The belief that the cure for unemployment is a still further increase in wage rates rests on a nebulous “purchasing power” theory. Thus the United Steelworkers of America are running ads implying that a still further wage increase for the steelworkers would somehow bring an “extra billion dollars” into existence. It is not explained where this extra billion dollars would come from—unless an equivalent extra amount of steel were produced. Otherwise whatever added amount the workers got would have to come from the steel companies, and reduce their purchasing power for inventories or reinvestment in plant. The most probable result of a further increase in steel wage rates would be to increase steel prices and reduce markets, employment, and “purchasing power.”
The Reuthers and McDonalds who most loudly complain about present unemployment are the very people who have done most to bring it about.
April 27, 1959
In the last decade the political appeal of an orthodox socialism—i.e., of government ownership and operation of the means of production—has been fading to the point of disappearance, at least in the U.S. and in Western Europe. Even the parties of the left no longer openly propose further nationalization, but busy themselves chiefly with more “welfare” programs. Yet the nationalization that has already taken place has remained practically undisturbed. It is even carried on, in Britain and elsewhere, by conservative successors of its original socialist sponsors. The prevailing assumption has been that socialization is an irreversible process.
It has remained for Western Germany to find a politically acceptable route to the restoration of private enterprise. A few weeks ago it offered “people’s shares” of the capital stock of Preussag A.G., a government-owned mining and machine-building concern, for private subscription. Sales were limited to persons with a taxable income of not more than the equivalent of $3,800 a year, and each buyer was limited to five shares at the equivalent of $33 each. The issue was oversubscribed three times. And now the West German Government has begun preparations for the sale, through a similar plan, of the extremely successful government-owned Volkswagen company.
Here is an example that the British, French, Norwegians, Italians, and Spanish, among others, would do well to study and to emulate. The “others” include the citizens of our own country. Let us take two outstanding examples: The New York subways and the Tennessee Valley Authority.
NEW YORK SUBWAYS
New York City has operated its own “independent” system since 1932. It bought the rights and properties of the IRT and BMT from the private companies in June 1940. Prior to that time the great issue had been the sanctity of the 5-cent fare. Politicians had made a living by denouncing the “profiteering” and “gouging” of the private companies. But under municipal ownership and operation, the fare jumped from 5 to 15 cents by 1953, an increase of 200 percent. This cannot be blamed solely on “inflation.” In the same period the general consumer price index increased by only 91 percent. Even a 15-cent fare now fails to meet municipal-operation expenses. The deficit in the fiscal year ended June 20, 1958, was $11 million. It is expected to be around $17 million in the current fiscal year.
These subway deficits have helped to bring about New York City’s present fiscal headaches. The issue of private operation has now been revived by the dramatic offer of a group of investors to negotiate for the purchase of the city’s entire transit system. The particular terms suggested may not be acceptable, but the re-privatization of the subways is greatly to be desired. The city might well offer “people’s shares,” with a maximum amount purchasable by any individual, and perhaps a preference to present employees. If any shares remained unsold, the city could open up the rest to free competitive bidding. In any case it would have to give guarantees against imposing fare-controls that would threaten solvency.
AND THE TVA
When we turn to the TVA, we find its political champions still pushing for ever more expansion and special privileges. For the fifth consecutive year, Congress is being asked to authorize the TVA to finance its new requirements for outside capital by issuing revenue bonds to the public. The April survey of the Guaranty Trust Co. of New York points out the dangers of this “blank check” precedent for government agencies. TVA, the bank shows, has always operated under conditions that make a mockery of the “yardstick” idea that was part of the excuse for its origin. “TVA pays no Federal income tax and nothing in lieu thereof. . . . It receives its capital funds from Congress and yet has never paid any interest to the Federal government on any Congressional appropriation. These are not operating economies but special privileges bestowed on the people of one area at the expense of the taxpayers at large.”
It would not be difficult to devise a plan to sell TVA to small investors, perhaps giving prior choice to residents of the territory TVA serves.
May 4, 1959
Congress is now debating a labor bill which is irrelevant to the real crisis in labor today. If enacted in the form in which it came out of the Senate committee, it could only intensify that crisis. For this bill proposes an unpromising method of curbing misuse or embezzlement of union funds by union leaders, and does nothing whatever to curb the privileged monopoly of unions, their resort to intimidation and violence, and their power to paralyze production until their demands are met.
Yet while the great majority in Congress still seem blind to these problems, there has been increasing recognition of them in the academic world. This was evidenced by the appearance two years ago of The Labor Policy of the Free Society, by Prof. Sylvester Petro of New York University, and by the appearance a year ago of a symposium, Labor Unions and Public Policy, containing contributions by Dean Roscoe Pound, Profs. Edward H. Chamberlin and Philip D. Bradley, and by Gerard D. Reilly.
It is evidenced now by the appearance of two more books. Again one of them is a symposium, The Public Stake in Union Power, edited by Philip D. Bradley (University of Virginia Press), and containing lectures delivered at the University of Virginia by sixteen different writers, including such eminent economists as Profs. E.H. Chamberlin, Frank H. Knight, F.A. Hayek, Gottfried Haberler, and David McCord Wright. And again one is a book by Professor Petro, Power Unlimited—The Corruption of Union Leadership (Ronald Press, $5).
NAÏVE ASSUMPTION
It would be unfair and impossible to attempt to summarize in this limited space the diverse views of sixteen independent economists. Yet there has obviously been a profound change since the days, 25 years ago, when it was naïvely assumed both in academic and in political circles that labor unions could do no wrong, and that the main if not the sufficient solution of the whole problem was to encourage bigger and stronger unions. As a result the government itself was in effect put into the union-organizing business, and employers were forced to “bargain” with unions set up by government-controlled processes.
Now we find an outstanding economist like Frank H. Knight writing: “‘Bargaining’ is a misleading, essentially dishonest use of a word. . . . What ‘collective bargaining’ obviously means in our case is simply monopolistic action on the part of a labor union. And the union, like any other seller, can secure a price above the free-competitive level only by arbitrarily restricting the quantity offered for sale, obstructing access to work in the union’s jurisdiction.” And F.A. Hayek writes that unions “have become what they are largely in consequence of the grant, by legislation and jurisdiction, of unique privileges which no other association or individuals enjoy. They are the one institution where government has signally failed in its first task, that of preventing coercion of men by other men—and by coercion I do not mean primarily the coercion of employers but the coercion of workers by their fellow workers.”
MCCLELLAN RECORD
These abstract statements receive overwhelming documentation in the Petro book. Petro has performed the herculean task of working his way through the 40 volumes which make up the record of the McClellan Senate committee, and has arranged, summarized, and interpreted the results. It is an appalling record of corruption and violence, ranging from the embezzlements of the Becks to the mass violence (in the Kohler strike, for example) engineered, authorized, and financed, but piously deplored, by the Reuthers.
Few men are better qualified to summarize this record than Petro, who, though now a professor of law, worked in the steel mills as a youth and took an active part in the CIO’s organization drive in the mid-1930s. In addition to presenting the facts, he has presented his own recommendations for corrective legislation and law enforcement.
If every congressman could be persuaded to read this absorbing and powerful book, Congress would certainly adopt a vastly different law revision from that proposed in the original Kennedy-Ervin bill.
May 11, 1959
The Kennedy bill, in the form in which it passed the Senate, would do nothing to mitigate the central labor problem in the United States today. One way to judge how irrelevant it is to that problem is to ask how it affects, if at all, the overhanging threat of a nationwide steel strike.
If ever a strike threat was completely without justification, this one is. Both absolutely and relatively, the steelworkers have made gains far beyond the average. In a January bulletin, the U.S. Department of Labor declared: “According to 1957 gross average hourly earnings data for 318 separate manufacturing industries and groups . . . production workers in the primary iron and steel industry ranked fifth from the top. . . . A study of changes in hourly earnings between 1950 and 1957 reveals that the earnings position of the production worker in primary iron and steel manufacturing improved steadily in relation to that of the average factory worker.”
The position of the steelworker has been further improved since 1957. In January 1959 only one industry—flat glass—paid higher earnings than steel. In 1940 the steelworker was already getting 18.3 cents an hour above average earnings in all manufacturing. In January 1959 he was getting $3.03 an hour—84 cents above. He was also getting 38 cents more than the auto-worker, whom he once trailed. Steel wages have far outpaced the rise in living costs. Since 1940 living costs have increased 106.7 percent; steel wages have increased 259 percent.
PRICES AND PROFITS
The result has been to force up steel prices. The claim of the steel union that the companies have used the situation to make exorbitant profits is not borne out by the long-term record. In 1958, out of 41 manufacturing industries, steel ranked 27th from the top in its return earned on net assets. Where its rate of profit on sales had been 8.1 percent in both 1940 and 1950, it was only 7.3 percent in 1957 and 6.3 percent in 1958. Without profits in our economic system, there would soon be neither tools, nor production, nor jobs.
Yet the steel unions are threatening to strike when their contract expires on June 30. When, on April 10, the steel companies made a proposal for a one-year wage freeze, David J. McDonald, the union’s president, replied: “I reject it out of hand.” One can imagine the political and legal reaction if the companies had made any such retort to a proposal by the union. “Collective bargaining” is still a one-sided requirement.
LOSSES OF STRIKERS
If a steel strike now does occur, it will probably hurt the steelworkers most of all, whether they “win” or lose. This was the result of the 1956 steel strike. Comparing what they won with what they had been offered without a strike, I pointed out in Newsweek of Aug. 13, 1956, that each worker had lost about $600 as a result of six weeks’ idleness; that even at the end of the three-year contract he could make up (assuming a 40-hour week) only $190 of this, leaving him still $410 worse off than if he had not struck. I added: “In the long run higher costs of production will . . . mean less employment of steelworkers.” This is what happened. In May of 1956, 646,000 men were employed in the steel industry; the number fell to 500,000 in May of 1958.
Yet our Federal laws encourage strikes. Roger M. Blough, chairman of the board of the United States Steel Corp., testified in 1957: “The union has struck our plant five times in the past eleven years. . . . Hardly has one of these strikes begun before there is a nationwide demand that we settle it. . . . And ultimately—if we do not settle—we may face the threat of government intervention, as happened five years ago when the then President of the United States seized our plants illegally and sought to grant the union demands in full.”
One factor must be added to this. Because of the attitude of the law and the law-enforcement authorities, no struck steel company today dares to try to carry on its business by hiring workers to replace the strikers. If it did, it is the company, and not the strikers, that would be accused of “provocation” and “violence.”
The political cards are stacked in favor of unjustified strikes and inflationary wage increases.
May 18, 1959
The Kennedy bill, as it passed the Senate, is much worse than no labor bill at all. It would on net balance increase the appalling power of union bosses. And it would do nothing to reform real abuses.
The quickest way to recognize the faults of the bill is to ask ourselves what a sound and balanced labor law would seek to do. It would either not interfere in industrial labor relations at all (as in the days before the Wagner Act), or it would make it illegal for an employer to require either membership or nonmembership in a union as a condition of employment. The Taft-Hartley Act, like the Wagner Act, piously professes to do this in Section 8a. It declares it an “unfair labor practice for an employer . . . by discrimination in regard to hire or tenure of employment or any term or condition of employment to encourage or discourage membership in any labor organization.” And then, in flagrant contradiction of this balanced principle, it explicitly authorizes a union shop under which an employer can and must fire a man who does not become a member of a union.
The basic requirement of any sound and balanced labor law would be to illegalize beyond the shadow of doubt every practice, including mass picketing, which involves violence, intimidation, or coercion. A guiding principle of labor law should be to protect free employee choice.
UNION ABUSES
The union abuses that any labor law will have to correct are outlined in all their grisly detail by Prof. Sylvester Petro of the New York University School of Law in his recent book Power Unlimited—The Corruption of Union Leadership. The appropriate legal remedies are outlined both in that book and in the same author’s The Labor Policy of the Free Society.
Let us apply to the Kennedy bill the test of the basic principles just stated. We find that, under the guise of correcting union abuses, it would actually increase the stranglehold of the union bosses. It makes a mockery of the principle of free employee choice. By allowing the building trades unions to fasten a completely closed shop on unwilling workers, it takes an enormous step backward. By prohibiting certain narrowly specified types of organizational picketing, it in effect permits other types of organizational picketing that are probably illegal under present law.
One of the worst features of the new bill is that repealing the present explicit provision of the Taft- Hartley Act which forbids voting by replaced strikers in representation elections. The Kennedy bill would now permit the former employees, who had been replaced by a fair employer as a result of a strike, to vote in an NLRB election. This is like permitting people who have moved out of New York to continue to vote in New York local elections. As some critics have pointed out, this could result in certification of a union not wanted by a single employee on the job. Under this provision the government would in effect throw its support behind every strike, and encourage arrogant abuse of the strike power. This provision alone throws doubt on the integrity of the whole Kennedy bill.
WHERE THE BILL FAILS
And the Kennedy bill completely fails to deal with the true causes of union abuses. It gives no protection to employers who are being subjected to shakedowns by racketeers. Its union disclosure requirements add nothing substantial to existing law. Union members already have the right to go to court whenever their officers mistreat them or steal from them. They do not go to court now simply because they are afraid of the physical reprisals which are a favorite technique of unions run by gangsters. The Kennedy bill in no way eliminates the threat of a beating which now intimidates so many union members.
What is chiefly needed today is the repeal of bad labor law—e.g., the Norris-LaGuardia Act. What the Kennedy bill seeks to do is to correct the evils caused by present bad labor law by piling on still more bad labor law, and by interfering still more in the internal affairs of supposedly voluntary associations.
The Kennedy labor bill, if enacted, would be simply one more huge step in the wrong direction.
May 25, 1959
Last year the United States lost the record amount of $2.3 billion of gold. The outflow slowed down in the first three months of this year to only $92 million. But in April and the first two weeks of May it rose to $197 million for the six weeks.
It is sometimes said that any concern about the present outflow of gold is premature. The reasons given are that, even though the United States gold stock has declined from its peak of $24.6 billion in 1949 to its present level of $20.2 billion, this is still a tremendous sum and more than half of all the monetary gold in the world. It is also contended that this loss of gold is actually healthy because it makes for a sounder distribution of gold reserves and strengthens the currencies of other countries.
Any complacency about the situation, however, is unwarranted. Though some $20 billion is still held in the United States, it is not, strictly speaking, owned by the United States. The “free” gold supply is comparatively small. The notes and deposits of the Federal Reserve Banks are required by law to be backed by 25 percent of gold. As of May 6, this called for a gold cover of $11.7 billion, leaving the Treasury with only $8.5 billion of “free” monetary gold.
(It is also instructive to recall that if Congress had not reduced the reserve requirements to only 25 percent as a “war” measure in 1945, and had kept the previous requirements of 35 percent gold reserve against deposits and 40 percent against notes, the amount of “free” gold today would be only $2.5 billion.)
WHAT THE THREAT IS
As against the Treasury gold holdings, banks in the United States already have short-term liabilities to foreigners totaling $16.6 billion. So if foreigners really elected to withdraw their deposits and short-term assets in gold, and could do so through their central banks, the situation would become very serious.
One of the explanations most frequently offered for the loss of United States gold in the last sixteen months is a “deficit in the balance of payments with the rest of the world.” This explanation confuses cause and effect, and suggests the wrong remedies. The chief reason for the outflow of gold is distrust of the future of the American dollar, brought about by our inflationary policies. These policies also cause the deficit in the balance of payments. Unless we have the sense and courage to halt these inflationary policies in time, the withdrawal of gold could become accelerative.
FOUR POSSIBLE STEPS
Discussing this subject in Newsweek of Dec. 22, 1958, I listed a few specific steps we should consider to restore confidence in the dollar. I repeat the substance of them here, with some change in emphasis and detail:
1—The Federal Reserve Board should definitely abandon the effort to make money artificially cheap by open-market purchases, further reduction in reserve requirements, and similar measures. Firm interest rates will not only discourage the withdrawal of foreign balances but stop encouragement to credit expansion.
2—The Administration and Congress should take dramatic steps toward slashing the deficit and balancing or even overbalancing the budget. They should do this not by increasing taxes still further (which would only act as a deterrent to production) but by slashing unjustified expenditures. Swollen veterans’ aid and the whole farm subsidy and price-support program are obvious candidates for the ax.
3—It makes no sense to continue and even to expand an enormous foreign-aid program when our problem is already inflation, excessive government spending, the loss of gold to foreigners, and a deficit in the balance of payments. Our military-aid program should be much more selective. Our economic-aid program, which rests on dubious socialistic assumptions, should be discontinued. Particularly ill-timed is the pending subscription of some $1.3 billion by our government to the International Monetary Fund, which operates on questionable monetary assumptions.
4—Revise the Federal legislation and NLRB decisions that enable labor leaders to force excessive wage rates on employers and tend to price our products out of world markets.
June 1, 1959
We got into the Foreign Ministers’ meeting at Geneva, and into all the plans for a “summit conference,” by yielding to Soviet propaganda and pressure. There never has been any sincere desire in Moscow for “peaceful coexistence” or for a just “settlement.” “Negotiation,” to them, is merely a technique of warfare. They want the West to negotiate its own surrender—or, failing that, to make concessions that will further weaken its military or moral position. At the very least they want a conference to give them a world loudspeaker for their propaganda against the West.
We have been lured into these conferences by not knowing how to get out of them. How can we refuse to “negotiate” for peace? But the question confuses means with ends. The goal is peace with justice. A summit conference, or even a Foreign Ministers’ conference, is at best a means. Both means are unpromising for the West. Neither is necessary. The West could have said long ago, and there is time to say still; that if Khrushchev has any proposals for a Berlin, a German, or any other settlement to make to us, our Ambassadors in Moscow are always there to hear them, to transmit them, to negotiate concerning them. This in fact is the precise reason why our Ambassadors and their staffs are there.
AMBASSADORIAL LEVEL
If the Foreign Ministers’ conference fails, therefore, we could keep the door open, instead of passing the problem on to a futile summit conference, by suggesting that the negotiations be continued quietly at the ambassadorial level. This is the chief raison d’être for the whole traditional ambassadorial system. If it is to be bypassed every time matters of importance arise, it becomes an expensive farce.
At a press conference on May 5, President Eisenhower seemed to minimize what the forthcoming Foreign Ministers’ meeting could achieve by saying: “All of us do know that within the Soviet regime there is only one man who can talk authoritatively.” But the fact that the consent of a head of state is necessary for final ratification of an agreement need not mean that all negotiations must be with him directly, and by other heads of state. The very day before the President said this, our Ambassador at Moscow had presented to Khrushchev a demand for information on eleven American fliers, missing since the crash of a C-130 transport in Soviet Armenia last September. This is the proper procedure. If it is not effective, it is because the head of state does not really want a settlement.
FEAST–OR FAMINE?
These thoughts are suggested by an important book that has just appeared under the auspices of the Foreign Policy Research Institute at the University of Pennsylvania—Protracted Conflict, by Robert Strausz- Hupe, W.R. Kintner, J.E. Dougherty, and A.J. Cottrell (Harper, $3.95). The book is the most acute study of Communist international strategy that I have yet seen. It describes in detail the political, economic, psychological, and military techniques that the Communists have been using against the West since 1945, as well as the sporadic, halfhearted, and purely defensive responses of the Western democracies. There are separate chapters on the Soviet’s “Monopoly of the Initiative” and on their strategy of “Deception and Distraction.” And one of the devices of deception treated is the “deliberate falsification of economic data.”
This continues to be successful because gullible Westerners continue to play into the Communists’ hands. Even within the last two weeks Lord Boyd Orr, for example, speaking from Moscow, endorsed the extravagant claims of the Chinese Communists by saying that they appeared to have raised food production by “50 to 100 percent” in three years. Yet three days after that estimate, a dispatch from Hong Kong in The New York Times reported that “residents of Shanghai have been unable to get bread of any kind for two and a half months,” while “the rice lines in all large cities were increasing steadily in size and rations were decreasing.”
Those who are so ready to give credence to Communist lies about production betray a weak faith in our free economic system.
June 8, 1959
The hospital strike in New York City threw a brilliant light on what is basically wrong with our labor law and law enforcement. Hospitals, it is true, are exempt from the labor-law provisions that apply to profit-making business. They are not forced to bargain with a particular union. They are free to apply for an injunction against mass picketing. The besieged New York hospitals did apply for injunctive relief and were granted injunctions by courts in Manhattan and Brooklyn. But mass picketing nonetheless continued. The mayor and police of New York were slow to enforce the injunctions.
The situation exposed the absurdity of the slogan, dear to muddleheaded “liberals,” that one must never pass a picket line. Let us hope that for the peace of their souls none of these people had seriously ill friends or relatives who were patients at any of the hospitals affected.
But the incident also serves to expose the hollowness and irrelevance of the Kennedy bill passed by the Senate. That bill is now opposed by labor-union leaders on the ground that it interferes in detail in the internal affairs of ostensibly voluntary organizations. This is a proper ground for opposition. But a far more serious reason is that the Kennedy bill and its sponsors remain completely blind to what is fundamentally wrong in our labor law. This is that it permits violence, intimidation, and lawlessness.
NEED FOR REPEAL
What is needed is not more Federal labor legislation but less. What is needed is repeal-above all repeal of the Norris-LaGuardia Act.
Few people realize what this law really does. It is commonly believed that it merely prevents the Federal courts from enjoining “strikes.” But the right of workers peaceably to quit work, and even to do so collusively, was not denied by the Federal courts prior to the enactment of the Norris-LaGuardia Act. What the courts had been enjoining, in the words of Prof. Sylvester Petro, was “the violent, intimidatory, coercive activity of trade unions, not strikes for higher wages and better working conditions.”
The Federal courts had enjoined only unlawful conduct which threatened irreparable harm. But in the Norris-LaGuardia Act of 1932, Congress, instead of defining boundaries for union conduct, chose to make practically all union conduct unenjoinable. To prohibit Federal judges from issuing labor injunctions, on the assumption that they cannot be trusted to act impartially, is an insult to the integrity of our courts. It implies distrust of the judicial system itself.
PICKETING AS COERCION
The evil begun by Congress has been compounded by the “new” Supreme Court. During the past twenty years it has provided a succession of additional privileges for aggressive union action. Until recently, it even identified the coercive economic weapon of picketing with “freedom of speech.” Under such reasoning, the United Automobile Workers were simply exercising “freedom of speech.” when they set up a line of 2,000 pickets around the Kohler plant, forming a human barricade, making entrance to the plant impossible, and harassing, assaulting, and humiliating nonstrikers.
Where the Norris-LaGuardia Act bars employers and nonunion employees from going to the Federal courts for immediate relief from irreparable injury, the Supreme Court’s more recent pre-emption doctrine even bars them from going to the state courts. Chief Counsel Kennedy and some members of the McClellan committee heaped scorn as well as direct accusations of impropriety upon employers who had yielded to shake-downs. Yet it is Congress itself that has made it impossible for the victims of trade-union wrongdoing to secure any help from the law.
The primary need is to restore the principle that every man who feels himself aggrieved by unlawful conduct has a right to a day in court. And local officials, instead of courting the so-called “labor vote,” must have the courage to enforce the laws and judicial decisions against violence or intimidation.
It is because it is completely oblivious of such primary needs that the Kennedy bill would be a mockery of labor-law reform.
June 15, 1959
Thirty years ago—in 1928, to be precise—H.G. Wells published a minor propagandistic novel called The Open Conspiracy. Though I reviewed it at the time, I’ve forgotten now exactly what that open conspiracy was. But the description seems to fit with peculiar aptness something that is happening in the United States today. Our politicians, and most of our commentators, seem to be engaged in an open conspiracy not to pay the national debt—certainly not in dollars of the same purchasing power that were borrowed, and apparently not even in dollars of the present purchasing power.
There is of course no explicit avowal of this intention. The conspiracy is, rather, a conspiracy of silence. Very few of us even mention the problem of substantially reducing the national debt. The most that even the conservatives dare to ask for is that we stop piling up deficits so that we do not have to increase the debt and raise the debt ceiling still further. But anyone with a serious intention of eventually paying off the national debt would have to advocate overbalancing the budget, year in, year out, by a sizable annual sum.
Today one never sees this problem seriously discussed. We see hundreds of articles and hear hundreds of speeches in which we are told how we can or should increase Federal expenditures or Federal tax revenues in proportion to the increase in our “gross national product.” But I have never seen an article that discusses how we could begin and increase an annual repayment of the debt in proportion to the increase in our gross national product.
285 YEARS TO PAY
When we look at the dimensions the problem has now assumed, it is not difficult to understand the somber silence about it. If someone were to propose that the debt be paid off at an annual rate of $1 billion a year, he would have to face the fact that at that rate it would take 285 years, or nearly three centuries, to get rid of it. Yet $1 billion a year is even now no trivial sum. Republican Administrations, after World War I, did succeed in maintaining something close to such a steady annual rate of reduction between 1919 and 1930; but they were under continual fire for such a “deflationary” policy. Because of such deflationary fears, one would hardly dare mention a higher rate today.
One suspects that there is at the back of the minds of many of the politicians and commentators who sense the dimensions of the problem an unavowed belief or wish. This is that a continuance of inflation will scale down the real burden of the debt in relation to the national income by a constant shrinkage in the value of the dollar, so reducing the problem to “manageable proportions.” Such a policy would be indignantly disavowed. But this is precisely what our reckless spending is leading to. On the debt we contracted twenty years ago we are paying interest and principal in 48-cent dollars. Are our politicians hoping to swindle government creditors by paying them off in dollars twenty years from now at less than half the purchasing power of the dollar today?
A ‘JUGGLING TRIC’
This trick, alas, has a long and inglorious history. “When national debts have once been accumulated to a certain degree,” wrote Adam Smith in The Wealth of Nations in 1776, “there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment [i.e., payment in an inflated or depreciated monetary unit]. . . . The honor of a state is surely very poorly provided for, when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious.”
Our government is not forced to resort, once more, to such a “juggling trick.” It is not too late for it to face its responsibilities now, and to adopt a long-term program that would eventually pay off its creditors with at least the present 48-cent dollar, without plunging us further into inflation or deflation.
June 22, 1959
A crisis has developed among the poultry farmers, the result of a huge overproduction of eggs. Eggs have been selling in recent months below their cost of production for most small farmers. The result, as usual, has been pressure on the government to “solve” the problem, and the Department of Agriculture has been forced to promise to step up its egg-buying program. It has already bought some 500 million eggs, dried or frozen, and perhaps the race has just begun.
Of course the effect of this program, to the extent that it is “adequate,” can only be to encourage continuance of overproduction. Without this government buying, adjustments would soon set in to bring the overproduction to a halt. But, at least as far as farmers are concerned, most politicians consider the adjustments brought about by supply and demand as too callous and cruel; every farmer must at all costs be protected from them. The congressmen who take this view do not see that what they are refusing to accept is the whole principle of the free market, which is the central principle of free enterprise.
WHAT FREE MARKETS DO
It is the principle of the free market that regulates the relative price and production of thousands of different commodities to meet the relative wants and consumption of millions of consumers. When there is too little of a desired commodity, the demands of consumers will lift its price relative to other commodities; and more of that commodity will be produced because of the higher profit margin, until the price falls again. When there is too much of a commodity, its price will fall below the previous marginal cost of production, and the highest-cost or least-efficient producers will have to turn to something else.
This sometimes means great hardship for the individuals affected. But this finely graduated system of rewards and penalties, of incentives and deterrents, leads in the long run to the greatest production, growth, and general welfare provided by any economic system. And this same system, which politicians think “intolerable” as applied to farmers, is in fact accepted in nearly all other fields. The annual figures of industrial failures are a constant reminder. Government studies have shown, to cite only one statistic, that only three-fifths of firms in retail trade survive their first year, and only a sixth reach the age of ten years.
The practice of price support must involve favoritism. It simply cannot be universalized. We cannot subsidize everybody at the expense of everybody else. One of the very things that the egg farmers are chiefly suffering from, in fact, is the price supports and subsidies to the grain producers. These have raised the price that poultry raisers are forced to pay for feed. Nothing could help the egg farmers more than the termination of price supports on grain.
FIASCO IN WHEAT
The price-support program in wheat grows more and more fantastic. In a statement on June 1, President Eisenhower pointed out that the existing program had piled up $3 billion worth of wheat, a supply equal to two and a half times our annual domestic needs; that storage, handling, and interest charges alone for this wheat will cost the American taxpayers close to half a billion dollars during the next fiscal year, and that “continuation of this legislation for another year leads the wheat program one step closer to disaster.”
These programs, which increase the price of feed for cattle and poultry raisers, and the price of food for city workers, are costing the taxpayers some $6 billion a year. Grain farmers are growing crops for government storage rather than for markets. The Wall Street Journal reports that some farmers are even deliberately growing inferior-quality wheat in order to take advantage of the government’s generosity.
Secretary Benson’s proposed solution is to reduce the price support to 90 percent of the average market price for the three years preceding the crop year. This would certainly reduce the dimensions of the problem. But any price support at all, to the extent that it is effective, must encourage excess production and storage. Today’s “farm problem” is government-created.
June 29, 1959
The President, the Secretary of the Treasury, and the chairman of the Federal Reserve Board are all urging Congress to remove the present legislative ceiling of 4¼ percent on the interest rate that the government can pay on its new issues of bonds with a maturity of five years or more. The reform is urgent. Some long-term Treasury bonds have already been selling in the open market at prices that yield about 4½ percent. The government cannot sell new long-term bonds at yields below going market rates. The only effect of the present limit is to force the government to finance its needs through short-term borrowing. But this merely drives up rates (on which Congress has been wise enough not to put any ceiling) on short-term borrowing, and forces the government to keep coming back to an uncertain market every few months.
Some of the Democrats in Congress have been cool to the suggestion that the rate ceiling on long-term bonds be removed. They are full of counter-proposals, typical of which is that the Federal Reserve System support or buy in long-term government bonds at prices that would keep their yields 4¼ percent or below. Such proposals would not only destroy once more the hard won independence of the Federal Reserve Board, but they would be violently inflationary.
HOW INFLATION COMES
The Federal Reserve System was forced to peg the government bond market through the second world war and until early in 1951. One result was a huge inflation. As Secretary Anderson explained the process anew in his recent testimony: The Reserve banks would buy Treasury securities, paying for them by creating deposits in the Treasury’s name. As the Treasury paid out this money to individuals, the Treasury checks would be deposited in individual banks, thus adding to those banks’ reserves because such checks are the equivalent of cash. This increase in the banks’ reserves would provide for a multiple addition to the banks’ lending and investing power. Direct sale of Treasury issues to the Federal Reserve, in short, would “provide the basis for a highly inflationary expansion of the money supply.”
The purchase of government securities by the Federal Reserve System is inflationary even when it buys short-term securities. But the situation would be much worse if it supported long-term securities also. Federal Reserve economists have pointed out that when the system buys, say, three-month bills, longer maturities are also affected in at least some degree by substitution or arbitrage transactions. In any case, increased bank reserves, which increase by a multiple factor the supply of funds available for loans and investments, are provided just as effectively by operations in bills as by operations in bonds. And there is a further consideration. The purchase of long-term bonds might have to be endless and astronomical to hold down the long-term interest rate. Such bond purchase, therefore, would ultimately be enormously more inflationary than bill purchase.
A FALSE ‘SAVING’
Some congressmen honestly think they are saving the taxpayers’ money by forbidding higher interest payments on government bonds. But the inflation they would force through Federal Reserve buying to keep down the bond yields means, as the President has put it, that “the additional cost to the government alone for increased prices of the goods and services it must buy might far exceed any interest saving.”
The irony is that the very congressmen who are now complaining about higher interest costs for the government are among those who have done most to bring them about. By insisting on artificially cheap money in the past, they increased the present extent of inflation. Part of the interest rate that the government must now pay for long-term borrowing is in effect an insurance premium that lenders are asking as a hedge against further depreciation of the dollar.
The chief contribution that Congress can now make is to balance the budget, remove fears of further inflation, stop agitating for cheap money, and let the Treasury meet whatever competitive rate is necessary to sell its bonds.
July 6, 1959
The consequences of the Senate’s rejection of the nomination of Lewis L. Strauss as Secretary of Commerce will be felt for a long time—and few of them seem likely to be good.
Strauss was eminently qualified for the position. Few of his predecessors in the office, indeed, have had equal qualifications. These were revealed in the eight months he had served as Secretary and in his previous long record of public service. As Arthur Krock summed up the case in The New York Times, the rejection of his nomination “marks a Senate repudiation of the type of highly talented, self-sacrificing citizen that it has become increasingly difficult for Presidents to recruit for government service except in time of war. [Strauss] had served and been commended by four Presidents, awarded five of the highest national decorations, was an officer in the Naval Reserve who rose to rear admiral, and who, as he vastly understated it in his comment on his rejection, had ‘done the best I knew how to do to protect and defend the national security when that was not the recognized, nor easy, nor popular course of action at the time’ (the decision to produce the H bomb).”
Yet Strauss was the first Cabinet appointee to be rejected by the Senate in 34 years, and only the eighth such rejection in our history.
THE REASONS FOR IT
When one seeks the reasons for this, the last place one finds them is in the explanations most frequently offered. We are told that he had grave personality faults. For example, when he was violently attacked, he defended himself! When he was accused of all sorts of wrongdoing, he refused to admit it! This proved his “arrogance.” Also, the Administration was accused of “lobbying.” That is to say, when Strauss’s enemies in the Senate resorted to personal vituperation, almost daily calling him a “liar,” Administration supporters had the impudence to put in a quiet word in his behalf! We were told at the same time that the senators who voted against him did so because his answers were “evasive and unresponsive,” and because he insisted on replying to every charge. He further infuriated his questioners by bringing in documents that disproved their charges.
Suppose we look at the real reasons for Strauss’s rejection, most of which were not hidden.
The first is that he really stood for private enterprise, and had the courage to try to slow down the steady expansion of the socialized and subsidized public-power empire represented by the Tennessee Valley Authority. He had continued to stress private rather than public development of nuclear power.
SOME CONSEQUENCES
The second is that Strauss was too aggressively and persistently anti-Communist. The Senate committee that passed on the nomination listened to a delegation from the Federation of American Scientists. These gentlemen complained that Strauss had been responsible for the dismissal of J. Robert Oppenheimer; had urged construction of the H bomb; had favored restrictions on the dissemination of scientific secrets, and had opposed suspension of bomb testing.
The third reason for Strauss’s rejection is that Democrats in Congress, playing the most petty type of partisan politics, wanted to “rebuke” the President and show that “the veto can work both ways.”
The action of the Senate majority was vindictive and irresponsible. By repudiating the President’s nominee, they violated the long-standing tradition that a President should be free to choose the members of his official family. They have weakened the President’s prestige in foreign negotiations at a time when it is imperative to strengthen it. They have discouraged men of dignity and stature from accepting nominations to Cabinet posts that may subject them to the insult and vituperation that was poured upon Mrs. Luce and Admiral Strauss. They have shown that they will punish nominees who are in favor of private enterprise rather than socialized enterprise; who are hesitant about releasing defense secrets; who have the courage to remove security risks; or who take a leading part in developing weapons, like the hydrogen bomb, that constitute our greatest source of national security.
July 13, 1959
For 25 years the Western world, and particularly Washington, has been dominated by the economic philosophy of The General Theory of Employment, Interest, and Money by John Maynard Keynes. That philosophy, as commonly interpreted, supports a program of deficit financing and inflation, of ever-rising money wages (never to be adjusted downward) and of low interest rates under all conditions. Above all the Keynesian philosophy deplores saving, which it calls hoarding or “liquidity preference,” and blames as the primary cause of slumps.
In my book The Failure of the ‘New Economics’ (Van Nostrand, $7.50), I examine the General Theory chapter by chapter and theorem by theorem, calling attention to its many fallacies, contradictions, and errors of fact. But Keynes’s own book might never have been written if he had devoted some of his days and nights to a careful study of the Austrian economist Eugen von Böhm-Bawerk (1851–1914).
Böhm-Bawerk’s two volumes on Capital and Interest had been published respectively in 1884 and 1889. English translations by William Smart appeared respectively in 1890 and 1891. But Böhm-Bawerk subsequently made extensive revisions and additions, and published second and third editions, also adding a third volume, over the following 25 years. These were never translated. English-reading economists based their interpretation of Böhm-Bawerk, at best, on the Smart translation. Now, however, a new translation has appeared, by George D. Huncke and Hans F. Sennholz, of the whole three volumes of the fourth (posthumous) Austrian edition of 1921 (Libertarian Press, South Holland, Ill., $25).
CAPITAL AND INTEREST
Böhm-Bawerk made greater contributions to the theory of capital and interest than any other economist. Knut Wicksell called The Positive Theory of Capital (the second volume) “one of the finest achievements of economic theory.” It would be impossible, of course, to review or summarize here these three volumes of more than 1,200 closely packed pages. But Böhm-Bawerk’s name is most closely associated with one doctrine that “a wisely chosen selection or extension of a roundabout way of production generally results in greater productivity.”
Keynes’s knowledge and criticism of Böhm-Bawerk seem to have been taken at second hand from Alfred Marshall: “It is true,” wrote Keynes in the General Theory, “that some lengthy or roundabout processes are physically efficient. But so are some short processes. Lengthy processes are not physically efficient because they are long.” But this was explicitly and emphatically conceded by Böhm-Bawerk himself: “Above all, my thesis does not state that every lengthening of every production process must literally and without exception lead to higher productivity or that a process must be more productive just because it is more time-consuming, even if it has been blindly or impractically chosen.” In short, more time-consuming roundabout ways of production are chosen, in spite of the fact that they are more time-consuming and round about, because they are also more productive, and hence in the long run more economical.
CAPITAL FORMATION
Keynes might have gained even more from a study of Böhm-Bawerk. He might have been brought to recognize the fallacies in his own fear of saving. “Economic growth,” higher real wages and living standards, are possible only through new capital formation. The rate of economic growth depends on the rate of capital formation. “Production and saving,” as Böhm-Bawerk pointed out, “constitute equally indispensable conditions of the formation of capital.”
This is what Keynes tended constantly to overlook. He persistently regarded saving as something merely negative, a mere non-spending. And here Böhm-Bawerk could have reminded him: “To complete the act of forming capital it is of course necessary to complement the negative factor of saving with the positive factor of devoting the thing saved to a productive purpose. . . . [But] saving is an indispensable condition precedent to the formation of capital.”
July 20, 1959
A visit to the Soviet exhibition at the New York Coliseum raises more questions than it answers. A visitor sees, for example, a Russian-made automobile. But what does this tell him about the comparative state of the Russian and American motor industries? What does the Russian car cost to produce? How does it run? Is it actually in mass production? How many are turned out? How many Russians could afford one?
American automobile engineers tell us that the Chaika, for example (a car made only for officials), is not mass-produced, that there is no original engineering in it, that the Russian designers are imitating even our mistakes. But most of the questions above are questions that even an American engineer cannot answer. A better expert is someone who has lived in Russia. Max Frankel, who spent two years in the Soviet Union as correspondent for The New York Times, tells us that a visitor to the Russian show can see far more there in two hours than he was able to see in his two years in Russia—“far more especially of the stuff of Soviet wishful dreams.”
IMAGE OF ABUNDANCE
“The products and models at the exposition are a distinct surprise to someone who works and travels in the Soviet Union. . . . The Soviet exhibition strives for an image of abundance with an apartment that few Russians enjoy, with clothes and furs that are rarely seen on Moscow streets, and with endless variations of television, radio, and recording equipment, cameras and binoculars that are not easily obtained in such quality or range in Soviet stores. . . . The men and women employed as guides have been hastily dressed in American suits and dresses and shoes. . . .
“The restraint in showing toys and drugs and household goods reflects the low priorities assigned to such goods in the Soviet Union. . . . The large, sleek Packard-like limousine Zil is produced exclusively for chauffeured government duty. The small Moskvich advertized as an ‘economy’ car would cost a Russian worker at least a year’s wages and many years of patient waiting. . . .
“The majority of Russian city folk must still live in communal apartments, four and more to a room, sharing bathroom and kitchen with two and more families. . . . Few Russians enjoy built-in kitchen cabinets like those in the model apartment. A few similar sets caused a sensation in Moscow last year when imported from Finland. . . . Shower curtains are hard to find. . . .
“A visit to the Soviet Union exposes glaring paradoxes of ugly slums and palatial subways, muddy roads and huge jet planes. These contrasts are glossed over at the Coliseum.”
REAL FACTS ON OUTPUT
To those who have followed factual studies of the Russian economy there should be nothing surprising in this report. In Newsweek of May 27, 1957, I discussed the careful study of Prof. G. Warren Nutter covering 37 leading industries, from which he concluded that “Soviet industry still seems to be roughly three and a half decades behind us in levels of output and about five and a half decades in levels of per capita output.” More recent studies have shown that in Russia there is one agricultural worker for every 10 sown acres as against one for every 60 sown acres in the U.S. Yet Russia produces only a third as much meat and half as much grain per capita as the U.S. The Russian occupies less than a fifth as much dwelling space as an American. Most families have only a single room in which all members sleep.
These facts reveal how ludicrous are the Russian claims that they are about to equal or surpass us in “peaceful production” or living standards for their people. In this respect they are still enormously behind not only the U.S. but nearly every country in Western Europe. But we should carefully distinguish between production for peace and production for war. In the latter Russia has made giant technological strides—precisely because she has put that goal first.
And in propaganda she is enormously our superior. She can put on an exhibition that gives false impressions of merit, whereas our own exhibition at Brussels exhibited and apologized for our slums, and the new one at Moscow will have a painting lampooning our generals.
July 27, 1959
Whom does a steel strike hurt? It hurts, of course, the companies against which it is ostensibly directed. When forced to suspend operations, they must face losses instead of profits. And if they are forced to settle at higher labor costs, these must either squeeze or wipe out profit margins, or force the companies to charge higher prices for their steel. This, in turn (except as it may be offset by a new round of monetary inflation), must shrink markets and volume of sales.
A steel strike hurts the whole country. For the nation produces less steel, not only during but perhaps after the strike. It loses export markets, and even part of its domestic market, to foreign producers of steel. This slows down the long-term growth of a key defense industry.
A steel strike hurts workers in other industries. During the strike many of these workers are laid off, because of shortage of raw or semi-finished steel. If the strike is settled by an uneconomic wage rise, these other domestic industries suffer through an increase in their costs.
THE 1956 RESULTS
What, finally, of the steelworkers themselves? During the strike, they are hurt worst of all. Their wage income is totally cut off, and they do not know when it will resume again.
The results of the 1956 steel strike are instructive. Comparing what the steelworkers had won with what they had been offered without a strike, I pointed out in Newsweek of Aug. 13, 1956, that each worker had lost about $600 in wages as a result of an average of six weeks’ idleness; that even at the end of the three-year contract he won he could make up (assuming a 40-hour week) only $190 of this, leaving him still $410 worse off than if he had not struck. I added: “In the long run higher costs of production will . . . mean less employment of steel workers.” This is what happened. In May of 1956, 646,000 men were employed in the steel industry; the number fell to 500,000 in May of 1958. Though it increased in the first half of this year (mainly to fill orders in anticipation of a strike) the net loss to the whole body of steelworkers is clear.
Why, then, another steel strike?
Who wanted it, and why? One answer might be framed in terms of the psychology of a single man—David J. McDonald, the president of the steel union. He had made such sweeping demands that he could not back down without losing face.
UNION IDEOLOGY
But this view is too narrow. The psychology of McDonald must be viewed in a wider setting. Each union leader seeks to show that he can get more for his union, relatively or absolutely, than other leaders get for theirs. It has come to be the established expectation of each of the major unions that every year, and above all at every new contract, there must be a substantial increase in wage rates, beyond any rise in living costs no matter what level wage rates have already reached.
Hence the mere fact that steel wages in the last twenty years have increased both relatively and absolutely more than almost all other wages, and that they stood just before the strike at $3.10 an hour compared with an average of $2.23 an hour in all manufacturing industries, was considered no argument against a still further increase now. Nor was the fact that the American steel industry, on important items, was already being priced out of foreign markets.
For it is part of current union ideology that wages are not determined by marginal labor productivity but by tough “bargaining”; that increases are not the result of competitive demands of employers for workers but of strike threats. Another item in this ideology is that an increase of wages for one group of workers helps all other groups. This is the doctrine of labor “solidarity.” The truth is that any increase of wages for the workers in any line that goes beyond the point justified by marginal labor productivity is at the expense of the workers who must be laid off as well as of the living costs of all other workers.
And union ideology is reflected in our labor law, which confers exclusive bargaining powers, sanctions compulsory unionism, and tolerates mass picketing. So a word from the head of a single union can bring a national industry to a halt overnight.
August 3, 1959
President Eisenhower has said that he will not interfere in the steel strike at this stage. And certainly he has not interfered in the sense, for example, that Mr. Truman interfered when he seized the companies in 1952 and tried to impose big wage increases on them. Mr. Eisenhower is ostensibly following a “hands-off” policy, to permit “free voluntary collective bargaining.” Yet the Federal government has been in fact interfering, and interfering every day, on the side of the union leaders and of greatly increasing the effectiveness and coercive power of a strike. It is interfering through the Federal labor laws already on the books (with the help of lack of local law enforcement against union coercion and violence).
The Norris-LaGuardia Act, for example, in effect prevents employers or nonunion employees from going to the Federal courts for immediate relief from irreparable injury. Mass picketing is tolerated, and has proved in fact so intimidatory that the steel companies have not even attempted to carry on production in any of the six national steel strikes that have been called since the end of World War II. As one news item matter-of-factly put it a few days ago: “Any ‘back-to-work’ drive under company sponsorship would touch off picket-line violence of a type that has been unknown in the steel industry since the strikes of twenty years ago.” Even in the present strike, picket lines stranded an estimated 500 supervisors in three Jones & Laughlin plants. The stranded personnel was made up of a stand-by corps to prevent deterioration of equipment, maintain essential utilities, and keep a fire watch.
COMPULSORY BARGAINING
Government interference, in fact, began long before the strike. The phrase “free voluntary collective bargaining” has become a mockery. The employer’s “bargaining” is neither free nor voluntary. He is compelled by law to “recognize” and “bargain with” one specific union. No matter how unreasonable the demands of that union may be, he is forbidden to deal with anybody else with whom he might make a more acceptable voluntary agreement. This is a discrimination that the law does not make in favor of any other private group. It supplies corrupt or ruthless labor leaders with a weapon of extortion and shakedowns. Moreover, an officially “recognized” union, though it may originally have represented only 51 percent of a given group of employees, is legally granted exclusive bargaining rights for that group. This means that dissenting individuals or minority unions are denied the right of freely bargaining for themselves.
ONE MAN’S POWER
And so it comes about that one man, one private individual, has the power to bring practically the entire steel industry to a halt overnight. And other single individuals can bring the automobile industry, or the coal industry, or the aluminum industry, or the railroads, or the airlines to a halt. And then the country is helpless. There seems no way of ending the paralysis except by forcing the employers to give in, to grant the union demands, so that union leaders will permit us to start producing steel or aluminum or coal again. No way is even contemplated of resuming production without their consent.
The government’s impotence, of course, is of its own making. But what, meanwhile, does Congress do? It acts as if the whole situation did not exist. It is now tinkering with a labor bill that deals with none of the primary or central problems, but only with secondary and peripheral problems; and even for most of these it proposes the wrong remedies. Congress acts as if there were only one problem—the corruption of some labor-union bosses, or their excessive power over rank-and-file members. Any injustice or harm to nonunion employees, or to employers, or to the public is treated either as if it did not exist or as if it did not matter—as if nobody but union members had any rights that anyone was bound to respect.
This is the ideology behind present Federal law and its discussion. It forgets, finally, that industrywide unions cannot raise wages by coercive strikes except at the cost of bringing on either unemployment or additional inflation. The steel union did both by its strike in 1956.
August 10, 1959
The Democratic majority in Congress has been playing transparent politics with the nation’s fiscal and monetary system. The effect of the policies it advocates would be to let loose a more dangerous inflation than any the country has yet experienced.
On June 8 the President requested Congress to eliminate the 4¼ percent legal limit on rates the Treasury may pay on new issues of bonds with a maturity of more than five years. As a result of the rise in interest rates, the Treasury can no longer count on selling long-term bonds below this rate.
After pondering a full month, the House Ways and Means Committee, on July 8, instead of simply removing a legislative ceiling that should never have been there at all, gave the President, as a sort of favor, the right, for not more than two years, to disregard the interest-rate ceiling when he found higher rates necessary “in the national interest.” The obvious political intent of this was to try to make the President seem personally responsible for paying any higher rate that market conditions might make necessary. The Democrats went even farther. An amendment to the proposed authorization read:
DOUBLE-SPEAK
“It is the sense of Congress that the Federal Reserve, while pursuing its primary mission of administering a sound monetary policy, should to the maximum extent consistent therewith utilize such means as will assist in the economical and efficient management of the public debt, and that the system, where practicable, should bring about needed future monetary expansion by purchases of U.S. securities of varying maturities.”
Here was a beautiful specimen of double-speak. The Federal Reserve System was to bring about more inflation by monetizing the public debt, short-term or long-term, but to do this only to the “extent consistent” with “sound monetary policy.” It was to give us inflation and sound money at the same time.
When the Federal Reserve and the Treasury objected to the inflationary implications of this, Sam Rayburn, Speaker of the House, angrily declared that the Federal Reserve authorities considered themselves “immune to any direction or suggestion by the Congress, let alone a simple expression of the sense of Congress.”
There are several issues involved here. The first is whether the provisions of the measure approved by the House Ways and Means Committee are inflationary. To this there is only one answer: They certainly are. They would put pressure on the Treasury to continue with short-term rather than long-term financing. They would put pressure on the Federal Reserve to expand the currency by monetizing the debt. Both proposals, it is obvious, would be inflationary.
BAD REFUNDING
True, our debt management record since the end of World War II is not one of which successive Secretaries of the Treasury can feel very proud. At practically any time up to 1956 the Treasury could have funded the debt in long-term bonds at 3 percent or less. It kept failing to do so because short-term rates (largely as a result of inflationary Federal Reserve policies) were lower still, sometimes falling to 5/8 percent. The Treasury acted as if this situation would last forever. It kept missing opportunities because it assumed that short-term rates would stay low or that long-term rates would go lower. Now it must pay more than 4¼ percent for long-term money. A few weeks ago it paid 4.7 percent for one-year money. But it must be said that the Treasury and Federal Reserve authorities acted through the postwar years with the inflationists in Congress constantly breathing down their necks.
A final question has to do with the independence of the Federal Reserve System. Certainly it should be free from direct political interference, dictation, or pressure. But a further question is whether any governmental administrative body, no matter how set up, can be granted wide discretionary power without excessive political pressure being put upon it to inflate. What is necessary is to reduce the range of administrative discretion, to move in the direction of fixed, almost “automatic,” rules. The most important step in that direction would be a return to the gold standard.
August 17, 1959
The losses suffered through a strike—by the companies, by consumers, by the country, by the strikers themselves-are obvious to nearly everyone. Why, then, are there strikes? Surely there must be a gain somewhere—at least to the strikers, assuming they “win”—that more than makes up for all the anxiety and hardships and losses suffered.
This at least is the assumption on which strikes are called. But it is amazing how seldom this assumption is subjected to statistical test; how seldom, either before, during, or after a strike, anybody bothers to draw up a profit-and-loss sheet. Yet in most cases this calculation would not be difficult. It is already clear, for example, that even if the present steel strikers won their full demands, they would still be worse off than if they had not struck.
David J. McDonald’s final demand was for an increase of about 15 cents an hour. But the steelworkers in May, according to official statistics, were already being paid $3.10 an hour and $127.10 a week. The addition of 15 cents an hour would add about $6 a week. This means that it would require more than twenty weeks of work at the increased wage to make up the loss from each week of strike idleness. When the present strike had run two and a half weeks, therefore, the workers had already lost as much as they could make up by a full year’s work, even after a “complete victory.” And as the companies had merely suggested a one-year wage freeze, this means that the strikers are already worse off than if their leaders had accepted the companies’ offer.
LOSSES NEVER MADE UP
Such a calculation is, of course, necessarily to some extent hypothetical, comparing actualities with might-have-beens. It would change with different assumptions regarding the future. But a survey of the actual gains and losses of previous steel strikes since the end of World War II shows that the steel strikers themselves have lost heavily on net balance from every prolonged strike, even when they “won.”
In the steel strike of 1956 each worker lost about $600 in wages as a result of six weeks’ idleness. Even at the end of the three-year contract that he won he made up only $190 of this, leaving him about $400 worse off than if he had not struck.
The 1952 strike was over the issue of a union shop, and not over wages. The strike continued for seven weeks after the companies had offered the wage increase which was finally accepted. During these seven weeks the total wage loss was $595 per worker. Even after deducting one-month additional retroactive pay granted by the companies, and an average of two weeks’ vacation pay collected by some employees for the strike period, there remained a $395 loss which they never recovered.
KEEPING A SCORECARD
In the 1949 strike, the loss of previous average weekly earnings of $64.49 over a seven-week period meant a loss of $454.93 per employee. But as there were no wage increases granted even after the strike, this loss was never made up.
In the 1946 strike, the loss of $53.06 of previous weekly wages for more than four weeks meant a loss of $219.67 per employee. Prior to the strike the companies had offered a 15-cent-an-hour increase if they were allowed to raise steel prices. The intervention of President Truman forced the companies to pay an 18½- cent increase, or 3½ cents an hour more, for a one-year contract. This meant that at the end of a full year’s work at a 40-hour week the steelworkers had earned back only $72.80 additional, and were still about $146 worse off than if they had not struck.
In the four major postwar steel strikes (excluding the twelve-hour strike of 1955) the total direct loss in wages to all the strikers, it can be calculated, came to more than $830 million, most of which was never recovered by the strike “gains.”
Nobody wins a prolonged strike. The strikers lose most of all, even when “victorious.” The union leader, of course, gets in the headlines. He strikes Napoleonic poses and displays his immense power. But if the union members kept a score card, it would considerably change their attitude toward melodramatic strike calls.
August 24, 1959
None of the legislative proposals now being debated in Congress deal with the central labor problem today. That problem is symbolized by the present steel strike. Regardless of what comes out of the House and Senate, it will clarify our thinking to ask ourselves what real labor-reform legislation would seek to do.
In his broadcast to the nation of Aug. 6, the President made the remarkable statement that “The legislation we need has nothing to do with wages, or strikes.” But wages and strikes—the power of a single man to bring a nationwide industry to a halt unless his inflationary wage demands are granted—are precisely the main problems we need to deal with. The corruption of a few labor leaders is also a problem; but it is not the central one, and it would probably disappear if the main problem were courageously dealt with.
There is no doubt that the reforms the President asks for are needed. The question is whether they go far enough. For example, it is clear that a union official ought not to be allowed to put “a picket line outside the plant, to drive away customers, to cut off deliveries” in order to “force the employees into a union they do not want.” But should a union be allowed to use intimidatory mass picketing to enforce any other demand, even a “legitimate” one? Does the end justify the means? Is not all coercive picketing “blackmail” picketing?
MASS PICKET LINES
Yet all major steel strikes have been enforced by mass picket lines. Because of this the companies have not dared to try to continue production in any of the major steel strikes since the end of World War II. Workers who would have found the terms offered by the companies acceptable have not dared to apply, or to continue work.
The overwhelming majority in Congress not only calmly accepts all this, but a group under the leadership of Senator Symington is pressing a resolution calling on the President to appoint a special fact-finding board to recommend settlement terms. This is, in effect, an attempt to do for David McDonald what he cannot do for himself, even with the one-sided advantage that existing labor law already gives him. These senators must know very well that their “fact-finding” board would not dare to bring in a recommendation for a settlement that would award no more than the companies have already offered. They know that McDonald would not accept such a settlement. What they are proposing, in effect, is compulsory arbitration that would force the companies to yield enough of the steel union’s demands so that McDonald would consent to let the country make steel again.
‘THE RIGHT TO WIN’
Yet, in a way, these senators are only taking the next step to which existing legislation and union ideology logically lead. If employers are to be legally compelled to “bargain with” a specified union, no matter how unreasonable its demands; if this union is legally assigned exclusive bargaining power for all employees in a unit, and not merely its own members; if this union is allowed to set up mass picket lines to prevent an employer from offering the jobs abandoned by the strikers to other workers, and to prevent other workers from applying for them; and if, even with the cards thus stacked against them, the employers do not yield to the strikers’ demands, then the only way to get the industry going again is for the government to interfere still further and order the employers to grant enough to satisfy the strikers.
Thus the right to strike has come to be interpreted as the right to win a strike. A built-in inflationary process is set up by which unions are to win new rounds of wage increases without end, while the monetary authorities are directed to insure full employment, at no matter what wage level, by offsetting excessive money wages with more inflation.
What is needed is not new legislation, which the union leaders can assail as a “legalistic strait jacket,” but primarily the repeal of special union immunities and privileges, above all of the privilege, not granted to any other group, of private coercion. Once that privilege were removed, the problem of labor racketeering would easily sink to manageable dimensions.
August 31, 1959
For years we have been talking about the inflationary wage-price spiral. But Washington (by which is meant both the majority in Congress and officials in the Administration) talks about it for the most part as if it were some dreadful visitation from without, some uncontrollable act of nature, rather than something brought about by its own policies.
Let us see just how those policies, over the last 25 years, have produced the wage-price spiral. First of all, under a series of laws beginning most notably with the Norris-LaGuardia Act of 1932, followed by the Wagner Act and by its later modification, the Taft- Hartley Act, we decided that labor troubles developed chiefly because there was not enough unionization and because unions were not strong enough.
Therefore, we in effect put the Federal government into the union-organizing business. We compelled employers to deal exclusively with the unions thus quasi-officially set up, regardless of how unreasonable the demands of these unions might turn out to be. Though illegalizing all efforts to deny employment to workers who joined unions, we explicitly legalized arrangements to deny employment to workers who did not join unions.
THE RIGHT TO COERCE
But worst of all, we gave to the unions and union members a privilege not granted to any other associations or individuals—the power of private coercion and intimidation. By the Norris-LaGuardia Act we in effect prevented either employers or nonunion employees from going to the Federal courts for immediate relief from irreparable injury. We refuse, contrary to legal practice in every other field, to hold a union liable for the acts of its agents. We tolerate mass picketing, which is intimidating and coercive, preventing employers from offering to other workers the jobs abandoned by strikers, and preventing other workers from applying for such jobs. And then we are astonished and indignant when these special privileges, against which we provide no effective legal protection, are “abused.”
The inevitable result of these laws is that we have built up huge unions with the power to bring basic national industries to a halt overnight. And when they have done this, we can think of no way of getting an industry started again except by giving in to the demands of the union leaders who have called the strike.
This accounts for the upward push on money wage-rates. But it does not account for the inflationary spiral. The effect of pushing wage-rates above the level of marginal labor productivity, taken by itself, would simply be to create unemployment. But as F.A. Hayek has put it: “Since it has become the generally accepted doctrine that it is the duty of the monetary authorities to provide enough credit to secure full employment, whatever the wage level, and this duty has in fact been imposed upon the monetary authorities by statute, the power of the unions to push up money wages cannot but lead to continuous, progressive inflation.”
NOT FACING THE ISSUE
Soon or late our Federal lawmakers and administrators must face up to the labor-union-boss dictatorship and the wage-price spiral that their own laws and actions have created. But they refuse to do this when each new crisis arises. When a nationwide steel strike is prolonged they become panicky. They seek to settle it by the only means that seem possible to them—by giving in once more to union demands, by granting still another wage increase and setting off a new upward wage-price spiral.
Senators demand that the President appoint a “fact-finding” board to “recommend,” i.e., to impose, in effect, compulsory arbitration that would compel the employers to grant another increase to employees who (at $3.10 an hour, compared with average factory earnings of $2.23 an hour) are already among the highest paid workers in the country.
Thus one government intervention begets a further government intervention. Because government has failed in its primary task—that of preventing private coercion—senators ask, in effect, for price and wage-fixing; and we are driven toward totalitarian controls.
September 7, 1959
The labor laws and administrative and court decisions of the last 27 years have finally produced a situation where there seems no way of settling a strike except by forcing employers to give in to each succeeding union demand for higher wages or fringe benefits.
One reason Presidents have been slow to resort to the injunction provisions of the Taft-Hartley Act is that they have recognized that such a step does not assure any solution. People do not cool off during the 80-day “cooling off” period. If negotiations got nowhere in all the weeks before the strike, there is little more reason to expect them to succeed during the 80 days. And union leaders, like David J. McDonald, have a plausible excuse for calling the forced return to work a “slave labor” device.
Recognition of the weaknesses of the “cooling off” period brings pressure for compulsory arbitration, under whatever thin disguise. One such disguise is government “fact-finding.” But the fact-finding report recently made public by Secretary Mitchell, though as full and impartial as could reasonably be desired, merely served to emphasize the truth of the President’s earlier remark that the “facts” in the steel strike were already pretty well known. Each party emphasizes the particular facts or interpretations that serve its case.
FACTS THAT STAND OUT
The facts most likely to impress the public are that hourly earnings of the steelworkers have increased 85 percent since January 1950, and were $3.10 an hour just before the strike compared with $2.23 in manufacturing as a whole. Any further increase in steel wages, even apart from its effect on steel prices, would be certain to provoke a new round of demands for wage increases by other workers determined to catch up.
Contrary to a widely held opinion, “fact-finding” does not unerringly indicate what the “right” settlement of a wage dispute should be. There is no scientific formula by which we can determine a “correct” price or a “just” wage. In a free economy, prices and wages are determined by supply and demand. Competition and comparative incentives determine particular wages, prices, and cost-price relationships. It is failure to recognize this that brings political pressures for compulsory arbitration. This would lead directly into government wage-and price-fixing, throw every wage and price into politics, and finally produce the suffocating controls of a totalitarian economy.
The injunction provisions of the Taft-Hartley Act were an attempt find a substitute for the rights taken away from employers and non-strikers by the Norris- LaGuardia Act of 1932. That act denies injunctive relief to persons suffering irreparable injury from unlawful conduct. By it the government has abandoned its first duty—that of preventing private coercion.
TOLERATING COERCION
That the performance of this duty would be the first step toward halting the wage spiral and solving the labor problem is beginning to be recognized. As Edward H. Chamberlin, the Harvard economist, wrote in the June Atlantic Monthly:
“The threat of potential violence and intimidation through the device of the picket line are powerful factors—so powerful, in fact, that nowadays a firm rarely attempts any operations at all if a strike has been called, although it would be within its legal rights to do so. For all practical purposes the alternative of making a bargain with anyone other than the union has been removed. . . . Should a union be allowed to strangle a business economically by arranging with the teamsters to cut off its transportation? It seems to me we might as well ask if a physically strong customer in a retail shop should be allowed to twist the arm of a shopkeeper in order to drive a better bargain with him.”
The right to strike is too often interpreted as the right to win a strike. But if it is unthinkable that any strike should be broken, if no strike is to be lost, then every strike must be won. The tolerance of mass picketing gives enormous incentive to irresponsible strike-calling and to the wage-price spiral. Until our lawmakers face the implications of this, the labor problem will grow.
September 14, 1959
If the Democrats in Congress object to being called the Party of Inflation, it is hard to understand why they do so many things to earn the title. Nothing so greatly increased the probability of more inflation as the action of the Democratic leadership in the House Ways and Means Committee in shelving the President’s request to remove the statutory 4¼ percent interest ceiling on government bonds running five years or longer.
The law that set this ceiling was passed more than 40 years ago, in 1918. It did no harm as long as it remained completely academic—that is, as long as the market rate for government bonds was well below the ceiling. But when the market rate the government must pay is higher than the ceiling, as now, any statutory limit becomes pernicious.
The President first requested Congress to remove the statutory 4¼ percent interest-rate limit on June 8. After a month, the House Ways and Means Committee replied with a transparently political solution giving the President the right, as a sort of personal favor, to disregard the interest-rate ceiling for a period of not more than two years if he found higher rates necessary “in the national interest.” Then, suddenly, the committee decided not to recommend even this.
HAND TO MOUTH
The practical effect is to prevent the government from offering any long-term bonds whatever, and to force it to do all its borrowing on a hand-to-mouth basis a few months at a time. If the result of such a restriction would be grave for any business concern or corporation, the evil is multiplied enormously when applied to the Federal government, compelled to manage a national debt of almost $290 billion, and forced to borrow $85 billion in the next twelve months simply to cover maturities, redemptions, and seasonal cash needs. The President’s second message of Aug. 25 clearly described the probable consequences of this:
“The vital interest of all Americans is at stake because excessive reliance on short-term financing can have grave consequences for the purchasing power of the dollar. The issuance of a large amount of short-term Treasury debt would have an effect not greatly different from the issuance of new money. Because these securities are soon to be paid off, their holders can treat them like ready cash. Moreover, short-term securities are more likely to become lodged in commercial banks. When a commercial bank acquires a million dollars of governmental securities, bank deposits rise by a million dollars. This is the same as a million-dollar increase in the money supply. When the money supply builds up too rapidly relative to production, inflation is the result. The piling up of an excessive amount of short-term debt poses a serious threat that may generate both the fear and the fact of future inflation at an unforeseeable time.”
FALSE ECONOMY
There are many congressmen who sincerely believe that they are “saving the government money” by forbidding the Secretary of the Treasury to offer long-term bonds at a rate to yield more than 4¼ percent. The irony is that their prohibition will have exactly the opposite of its intended effect. When the long-term market rate is higher than 4¼ percent, the Treasury is forced to do all its borrowing at short term. This concentrates the demand for funds on the short-term market, and forces up short-term rates.
Already, in recent weeks, the Treasury has had to pay 3.9 percent interest for 91-day borrowing, the highest since the dark days of March 1953. It has had to pay 4.5 percent interest for 182-day borrowing, the highest ever paid for this term. And it has had to pay 4.7 percent for one-year borrowing. The belief that short-term borrowing is always necessarily cheaper than long-term borrowing is a myth.
And the crowning irony is that it is precisely the cheap-money zealots who have brought on the inflation that has forced the government to pay double price for everything. They have finally created a situation that is forcing both more inflation and higher borrowing rates. For lenders seek to protect themselves against erosion of their dollar principal.
September 21, 1959
The action of the Eisenhower Administration, first in calling for voluntary” restrictions on oil imports, and finally, last March, in imposing mandatory import quotas, has been in need of a thorough, balanced analysis. This analysis is now supplied in a 70-age pamphlet by William H. Peterson, associate professor of economics at New York University, published by the American Enterprise association of Washington.
Dr. Peterson’s study fails to find any adequate cause to justify restriction of oil imports. On the contrary, he believes that the program must hurt our foreign relations, weaken national defense, deplete domestic oil reserves and undermine the vitality of the American oil industry. In addition, it is costly to U.S. consumers and establishes precedents for still further government interventions incompatible with a free economy. He recommends that the entire quota program be disestablished as promptly as possible.
SOME CONCLUSIONS
Here are some of his conclusions:
1—Our national defense does not depend solely on oil wells within our continental borders. Previous administrations encouraged American oil investments overseas precisely to strengthen national security. In both world wars imported oil, American- or foreign- owned, was essential to us. Our air, land, and sea bases, around the globe, depend on foreign oil.
2—American oil investments have raised living standards in many foreign countries. By importing their oil we gave convincing demonstration of the benefits of “trade—not aid.”
3—Our oil import quotas violate the policy of greater international trade and invite retaliation against American exports.
4—Long-range studies show that U.S. reserves of economical oil are wholly inadequate to meet national consumption, The U.S. consumes 54 percent of the free world’s current consumption, but has only 13 percent of the free world’s reserves.
5—From 1954 to 1958, U.S. demand for petroleum products rose by 15.5 percent. Domestic crude-oil reserves, despite unprecedented drilling and exploration, increased only 2.8 percent. “It would therefore hardly be in the national security interest to consume domestic crude reserves at the fastest possible rate and at the highest possible price.”
6—Competition from natural gas in recent years has had far greater adverse impact on the domestic crude-oil industry than have oil imports. Yet since natural-gas production is essentially a part of the domestic petroleum industry, governmental restrictions can hardly be applied.
7—Oil import restrictions force up the prices of fuel oil and gasoline, penalizing every American consumer. An unnecessary bureaucracy must be maintained.
8—Oil import quotas, whether on a historical basis or on a basis of refinery capacity, stifle competition and inevitably create inequities. It is impossible for bureaucrats to determine the “proper” level of imports or a non-”excessive” price for petroleum products. Such decisions will be influenced by political pressures from domestic oil and coal producers.
9—If restrictionism is still believed necessary to achieve national security aims (which Dr. Peterson does not concede) the fairest and least injurious way to restrict would be through tariffs, not through quotas.
NEW POWER SOURCES
I subscribe to all these conclusions, and would add only one. The way to provide for our long-term economic productivity and national defense needs is not to restrict imports of foreign oil, but to develop, through research, new sources of heat and power—solar energy, nuclear power plants, “fuel cells” producing electricity from chemical reaction, etc. Oil companies, in self-protection, might take the lead in such research.
Meanwhile, what seems called for is encouragement of oil imports rather than restriction. A barrel of crude imported means practically a barrel of crude left in the ground, whether proved or as yet undiscovered. After World War II, the Navy bought substantial amounts of Middle Eastern oil explicitly, in the words of Navy Under Secretary W. John Kenney, to “reduce the drain on our essential reserves at home.”
September 28, 1959
LONDON—The coming election may be crucial for the British economy. If the Conservatives win, as they are widely expected to, the issue of nationalization will be dead; if the Laborites win, attempts at denationalization will be doomed—and it is by no means certain that further nationalization will be attempted.
But though England seems fed up with traditional socialism, both major parties accept the controls and other implications of the welfare state. Looking at the situation from the perspective of New York, it had seemed that with the imposition of a 7 percent Bank Rate in September 1957, followed last year by the convertibility of sterling and the active efforts toward a free-trade area, England was making rapid strides in the direction of a free economy. But action, it is now clear, was moving faster than ideology.
To see how much England is still ruled by a controllist philosophy, it is merely necessary to look at the Conservative Party’s manifesto. The party promises to “double the British standard of living in this generation”; to “rehouse at least another million people from the slums” by 1965; to “take no further action to decontrol rents” in the next Parliament; to provide a road program over the next five years “twice as big as over the last five years”; and to “remodel and strengthen our powers for coping with local unemployment.” This last policy could involve the most detailed government intervention, for example, by “offering capital grants to encourage the building of new factories where they are most needed, as an addition to subsidizing the rent of government-built factories.” One can imagine the political pressures and economic distortions arising from such a program.
MONEY AND CREDIT
Not less significant of the trend of British thinking is the recent Radcliffe Committee report. In May of 1957, the then Chancellor of the Exchequer, Peter Thorneycroft, appointed a committee, headed by Lord Radcliffe, “to inquire into the working of the monetary and credit system, and to make recommendations.” The report, consisting of 375 closely printed pages, was published on Aug. 19. It is based throughout on the assumption not only that managed money is here to stay, but that management of money is not enough. According to the committee, it is only part of a general economic policy which must have complex aims.
Further, not only does the committee fail to insist on the independence of the Bank of England in monetary policy, as we do on the independence of the Federal Reserve, but it declares, in effect, that monetary and credit policy decisions are and ought to be political. “In our view the true responsibility for decision [on the Bank Rate] lies today with the Chancellor of the Exchequer, not with the Bank; and it would be better that this should be made explicit.” Long experience not only in England, but in nearly every country in the modern world, shows that political control of money and credit policy leads either to continuous inflation, or at best to a bumpy economy of inflation followed by jolts of deflation or stabilization crises.
NAÏVETÉ OF GOLD
The committee’s report takes permanent monetary management for granted. It treats the old international gold standard as naïve and hopelessly outmoded. “Before 1914,” it says with a patronizing smile, “the maintenance of convertibility at a fixed gold value of the pound was sufficient definition of the duty of the Bank of England.” It now assumes that the economy has become too complicated for producers and consumers, but can be easily managed by bureaucrats who will know just what strings to pull and which buttons to press. It regards the national debt as “an integral part, even an indispensable part of the web of claims and counterclaims that gives strength to the structure of financial institutions”—a statement that moved George Schwartz of The London Sunday Times to give ironic thanks to Hitler. Finally, the report assumes that economic salvation is to be achieved through government manipulation of interest rates, without explicitly recognizing what this will do to inflate the money supply, what political pressures it will generate, and why it must eventually break down.
October 5, 1959
Is “scientific” forecasting possible? Can we, by studying enough statistics, and inventing more ingenious statistical methods, tell just when business conditions are going to get better or worse, and by just how much? Is there, perhaps, some single indicator, if we could only find what it is, that would point the future course of the whole economy?
There are many professional forecasters who would like to give that impression—by the solemnity and confidence of their tone, if not by explicit assurance or the size of their fees. But a recent eighteen-page pamphlet by Henry M. Platt, Economic Indicators: Their Use in Business Forecasting, published by the Amos Tuck School of Business Administration at Dartmouth College, makes as lucid and intelligent an effort as one is likely to find to answer that question, and does not end with assurance.
Dr. Platt takes off from the work of the National Bureau of Economic Research, particularly in the revised form adopted by Geoffrey H. Moore in 1950. Dr. Moore selected 21 business indicators, and divided them into eight indicators that ordinarily lead, eight that tend more or less to coincide with, and five that generally lag behind cyclical turning points.
THE 21 INDICATORS
The eight “leaders” are: Number of new incorporations, new orders for durable goods, industrial stock prices, wholesale prices of basic commodities, commercial and industrial construction contracts, residential construction contracts, the average work week in manufacturing, and business failures.
The “coinciding” indicators are: The Federal Reserve Board index of production, nonagricultural employment, unemployment, bank debits outside of New York City, freight-car loadings, wholesale prices (except of farm and food products), corporate profits, and the gross national product.
The “lagging” indicators are: Personal income, retail sales, consumer installment debt, bank rates on business loans, and inventories.
Now though these indicators were chosen empirically, Dr. Platt tries to show that there are good reasons for each of them to act or turn as it generally does in relation to general business activity. He begins by briefly describing what he calls the “self-generating cycle,” according to which a revival, once begun, tends to be cumulative, to reach a peak, then to break, and to turn into a cumulative downswing or recession, which in turn reaches a bottom and generates forces that bring about revival again.
Dr. Platt tries to show why, for example, the eight “leading” indicators tend to lead. The first six all represent or reflect investment commitments. Investment commitments are present actions based largely on plans or expectations for the future—that is to say, on “economic forecasts.” Similarly, he tries to show why the coinciding indicators coincide and why the lagging indicators lag.
THEY CAN’T PREDICT
But when he is all through, he is obliged to conclude that “Economic indicators cannot predict when a business turning point will occur.” Further they “can give no idea of how intense a revival or recession will be, or how long it will last, until it is well under way”—i.e., until it is too late.
Dr. Platt also gives some of the reasons for this disappointing conclusion. “Genuine reversals in some series usually cannot be confidently distinguished from random fluctuations until some time has elapsed.” “It takes time to gather and transmit the data that show an indicator’s curve has turned.” Though the “leading” indicators reflect business expectations, those expectations may themselves turn out to be wrong.
One can think of additional reasons. It is not merely that all statistics reflect merely past events; or that they can never adequately cover the infinite number of economic developments. But business is often tremendously affected by developments from outside the purely “business” world, from government interferences to revolutions and wars.
This does not mean that it is useless to study, refine, or follow business statistics. It does mean that business forecasting is not a science but an art, depending heavily on personal judgment, hunches—and luck.
October 12, 1959
Adam Smith’s Wealth of Nations, published in 1776, had tremendous influence on practical policy; but that influence did not reach its peak until 50 or 60 years later. Karl Marx’s Das Kapital, published in 1867, has also, alas, had tremendous influence—yet even that influence did not reach major importance until a half century after publication.
These examples illustrate the truth of Lord Keynes’s observation, in his General Theory, that “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the whole world is ruled by little else. . . . Not, indeed, immediately, but after a certain interval. . . .”
Today conservatives and true liberals are entitled to take some comfort from this reflection. For though in practical politics, especially in America, the assumptions of statism, socialism, paternalism, and inflationism were never more prevalent, there are increasing signs in the academic and intellectual world of a turn in thought. If we confine our attention merely to what has happened so far in 1959, I do not think one could name a year in the last 30 in which so many consciously conservative books of high quality have appeared.
THE 1959 RECORD
Some of these have already been mentioned in this column. They include The Roots of Capitalism by John Chamberlain; Power Unlimited—The Corruption of Union Leadership by Sylvester Petro; The Public Stake in Union Power, a collection of sixteen lectures by leading economists, edited by Philip D. Bradley, and Protracted Conflict, an analysis of Communist strategy, by Robert Strausz-Hupe and associates.
But there are many other important books that I have not had the opportunity to review or discuss. In the purely economic field there is Managed Money at the Crossroads, an analysis of the European experience by Melchior Palyi, one of the most devastating attacks on monetary planning and built-in inflation that has appeared in a generation. More largely in the political field there are The Rise and Fall of Society by Frank Chodorov; James Burnham’s Congress and the American Tradition, and Allen Drury’s powerful Washington novel, Advise and Consent. In the international field of the cold war there is Willi Schlamm’s Germany and the East-West Crisis, a best seller in Germany itself.
Then there are books in the more general fields of the arts, culture, morals, and education. Outstanding among these are The Freudian Ethic, an Analysis of the Subversion of American Character by Richard LaPiere, professor of sociology at Stanford, and The House of Intellect by Jacques Barzun, provost of Columbia University.
SEMANTIC PROBLEM
Though most of the books mentioned above are by university professors, they all repudiate one or another aspect of the statist-socialist-Jacobin-newdealist-unbuttoned-“liberal” ideology that has dominated American economic, political, cultural, and academic life since the days of the New Deal. But one problem is that there is no entirely satisfactory name either for the philosophy which is being rejected or for the new philosophy which in contrast, is now being expressed.
This is illustrated by two of the books that must stand high on the list. One is The Evolution of a Conservative by William Henry Chamberlin; the other is Up From Liberalism by William F. Buckley, Jr. Both authors call themselves conservatives. Chamberlin writes: “Conservatives should stand strongly for a government of limited and divided powers, kept in equilibrium by a system of checks and balances.” Yet this was a central tenet of the liberalism of the eighteenth and nineteenth centuries. Buckley brilliantly excoriates a philosophy he calls Liberalism, yet nearly all the doctrines he decries are the opposite of those of traditional liberalism. Notwithstanding the present confusing state of the vocabulary with which we are compelled to deal, a turn of thought away from paternalism, statism, and socialism, and toward conservatism and self-discipline is increasingly perceptible.
October 19, 1959
When the present writer went to Europe in 1947, his chief impressions were those of bombed buildings, disrepair, half-empty shop windows, scarce, outmoded products, “austerity” programs, price controls, a chaos of inconvertible currencies, and dark, deserted streets at night. A month now in Europe, particularly if the stop-offs are few and somewhat haphazard—Oxford, London, Paris, Vienna, Athens, Delphi, and the Greek Islands—may not provide the most satisfactory basis for a representative economic comparison. But it does impress one anew with the enormous progress that Europe has made in the last dozen years.
Last year I wrote about the incredible amount of new building in Germany and Italy. This year I found the amount of new building around Vienna and in Greece hardly less incredible. In Greece new houses, apartments, hotels, roads are being constructed everywhere; half of Greece looks as if it had been built in the last six years. Vienna and Athens, no less than London, Paris, Frankfurt, and Rome, now have their neon lights and traffic jams.
EFFECT OF PEACE
What has led to this result has not been wise public policies but principally peace. It is only four years since the Russians got out of Austria and nine since Greece has been free of war and civil war. The result is a seeming miracle. Once more we have an illustration of Macaulay’s thesis that: “No ordinary misfortune, no ordinary misgovernment, will do so much to make a nation wretched as the constant progress of physical knowledge and the constant effort of every man to better himself will do to make a nation prosperous.”
Where governments have followed free market policies, as in West Germany, progress has been far more striking. But there has been progress even in highly socialized economies. This was brought out in some of the papers presented at a conference which I attended at Oxford of the Mount Pèlerin Society, made up of economists from a score of different countries. Prof. Bruno Leoni, for example, of the University of Pavia described in detail the extent of government ownership or operation of Italian industry: Eighty percent of the production of cast iron, 45 percent of the production of steel, 80 percent of shipbuilding, 60 percent of natural gas, 99 percent of coal production, 30 percent of electrical energy—and practically 100 percent of the railroad system, the telephone service, and radio and television.
ITALY AND INDIA
As a result, one person in every three in Italy now depends directly or indirectly on the government for his living. But Leoni sees no justification for this immense socialization (much of it inherited from the day of Mussolini) and cites some of the enormous wastes under it. The government-owned Ansaldo Fossati tractor factory at Genoa has accumulated a deficit of 18 billion lire since 1950 which is 4 billion lire more than would have been sufficient to keep all the factory’s workers at home and pay them a full wage. The main product of this factory was a practically useless heavy tractor. Yet there are very good private tractor manufacturers in Italy like Fiat, who sell their products profitably.
But sometimes government control and socialization become greater than an economy can endure. Prof. B.R. Shenoy of Gujarat University fears that this is the case in India. His paper drew a dramatic contrast between what has happened since 1948 in the free market economy of Germany and in his own socialized and “planned” country. Even in the eight years since 1950, “German national income (at current prices) more than doubled, the annual average increases in it being 15.9 percent (probably a world record for a sustained rise at this high rate) [and] real wages went up by 60 percent” whereas India’s economic product in recent years has barely kept pace with its population growth. “He who can rescue the country from its present economic policy and bring about a change-over to a free market economy will have done more in speeding up Indian economic development than all the foreign aid that is being planned, or that the country has received.”
October 26, 1959
Twenty-seven years of experience have demonstrated not that our federal labor law is “inadequate” to deal with strikes, but that it encourages and strengthens them. Eventual settlement of nationwide strikes has come not because of the Taft-Hartley Act, but usually in spite of it.
When the President, after holding off thirteen weeks, finally resorted to the emergency provisions of the Taft-Hartley Act, his action was widely criticized. David J. McDonald denounced “injection of Taft-Hartley into this situation” and forcing “free American steelworkers back into the mills.” He professed to favor leaving the decision to “free collective bargaining.” Senator Kennedy accused the Administration of trying to “break the strike.” He urged the “necessity of Congress’s rewriting the national emergency section of the Taft-Hartley law in order to prevent a repetition.”
Those who favor a free economy should sympathize with these objections. It is not desirable that men should be ordered back to work. But it is either uninformed or disingenuous to talk as if this were the first interference by the government in the steel strike. Existing Federal law heavily loads the dice in favor of union bosses and strikers. The Norris-La Guardia Act of 1932 enormously strengthens the power of strikes. It in effect deprives those who want to work of their right peaceably to continue in their jobs and the employer of his right to try to continue his business unmolested. For it denies injunctive relief to persons suffering irreparable injury from unlawful conduct.
COMMON-LAW RIGHTS
The emergency provisions of Taft-Hartley, giving the Federal government the right to seek injunctions, are a fumbling attempt to find a substitute for the common-law rights denied to private persons. But the Taft- Hartley attempt goes too far in the wrong direction and not far enough in the right one. It orders workers back to their jobs against their will—whereas the court injunctions formerly granted to private parties merely ordered strikers to desist from violence, mass-picketing, or vandalism—in short, merely to desist from clearly unlawful interferences with the rights of others. On the other hand, the Taft-Hartley provisions not only allow a strike to be resumed in 80 days, if no agreement is reached; but they also allow the strikers to resume mass-picketing and other forms of intimidation.
In directing his attention at last to the Taft-Hartley Act, Senator Kennedy now concedes by implication that neither the bill he sponsored nor the law he got deals with the central labor problem today. This is the power the law puts in the hands of a single union or a single labor leader to shut down a nationwide industry until his demands, no matter how unreasonable, are met.
NEED FOR REPEAL
The chief cure is not still further government interference in labor relations, as represented by the Landrum-Griffin law, but modification or repeal of existing legislation. What is most urgent is repeal of the pernicious Norris-LaGuardia Act. This alone might have permitted steel companies to continue operations. It would also be desirable either to repeal the Taft-Hartley-Wagner Act completely (a step which union spokesmen sometimes profess to favor) or to amend it drastically—by abolishing, e.g., the government grant of exclusive bargaining power to unions which represent a mere majority of employees.
McDonald still professes to favor “free collective bargaining.” But this phrase is a mockery when one party, the employer, is not at all legally free to choose the person or persons with whom he can bargain—to turn to B, say, when he cannot make an acceptable bargain with A. Moreover, what McDonald and others who use this cant phrase have been asking is that the President appoint a “fact-finding” board with power “to make recommendations.” If this is not asking for compulsory arbitration, it is at least trying to get a government board to force more concessions out of the companies than “free collective bargaining” has succeeded in doing.
Why not try restoring genuine freedom of bargaining, collective and individual, to employers and workers?
November 2, 1959
Will even the disaster of the 1959 steel strike cause us to ask ourselves whether practically the whole Federal labor legislation of the last 30 years has not been misconceived? Whether it has not gone in the wrong direction, toward one-sided and ever increasing government control? Whether it is not necessary to make an agonizing reappraisal of the whole New Deal approach, and retrace our steps toward freedom? Neither the history of the last dozen years, nor the tenor of current discussion, encourages affirmative answers.
Consider what has happened. The steelworkers, as a result of a smashing series of union victories, were, before the strike broke out, the highest paid major group of workers in the country. This means that they were the highest paid major group of workers in the history of the world. They were averaging $3.10 an hour compared with $2.23 for manufacturing industry as a whole.
David J. McDonald assumed that these smashing victories could go on forever. He ignored the height to which steel wages had already been boosted. He ignored the reduction of employment in the steel industry that had followed his 1956 victory. He ignored the competitive inroads that foreign steel was already making on the American industry’s market. He ignored the further inflationary pressure to which another substantial increase in steel wages was bound to lead. He made extravagant demands and recklessly called a strike.
LOST WAGES
But the longer the strike went on the more difficult it became for McDonald to agree to a compromise of any kind. Even if his full demands were now met it would take years for the steelworkers to earn back their losses from strike idleness—to bring them to where they would have been had they not struck at all. That is why McDonald had to reject every offer by the companies with increasing vehemence as “a mess of nothing,” “infamous demands,” “a black-snake whip on the backs of the workers.”
It is bad Federal laws, government intervention, increasing government controls, that have given this man and his union the power to bring a vital national industry to a halt. But as the paralysis was prolonged there was a rising demand from many politicians and press commentators not for a modification or repeal of these laws, but for still more government intervention and control. What they ask is compulsory arbitration, perhaps thinly disguised as “government machinery for fact-finding and recommendations.” Of course no government body can know what a “correct” wage is any more than it can know what a “correct” price is. Compulsory arbitration would carry us step by step into complete government wage and price control and toward an authoritarian economic system. And all decisions would be necessarily political.
COMPULSORY BARGAINING
As Mr. Eisenhower himself declared on May 5: “I deplore the possibility of putting the government into this field, either as party in negotiations, and certainly in establishing laws to fix the levels of profits and of wages and prices. Once we do that, I believe we have gone to a route that is going to hurt the American system as we know it, especially when we are going to do it in peace time.”
In finally seeking an injunction under the Taft- Hartley Act the President declared that “free collective bargaining has not worked in this dispute.” But free collective bargaining is precisely what was never tried. The essence of free collective bargaining is that neither party is under compulsion. Yet the steel companies are legally compelled to bargain solely with a specified industrywide union. The law gives exclusive bargaining power to that union. The law allows that union to set up mass picket lines which physically prevent the companies from trying to continue their business and individual workers from applying for employment and working peaceably at their jobs.
Why not try a courageous revision of existing law to restore free employee choice, to restore genuinely free, voluntary bargaining, collective or individual, on both sides? The President would be justified in calling a special session of Congress to do that in the 80-day injunction period.
November 9, 1959
For more than a generation Federal law has assumed that the primary solution of the labor problem was to increase the workers’ bargaining power. This took on the form, on the one hand, of putting special compulsions on the employer to “bargain collectively,” and, on the other, of granting special privileges and immunities to the labor unions to organize, monopolize, strike, picket, boycott, and intimidate. This legislation notoriously failed of its declared purpose “to diminish the causes of labor disputes.” After passage of the Wagner Act the number of strikes tripled.
The mild amendments in the Taft-Hartley Act did little to improve matters. Federal laws still encouraged strikes by making it virtually impossible for an employer to try peaceably to carry on his business with non-striking workers once a strike was called. But the urgent legal reforms have never been made. In quiet times, when there is no major strike, there seems to be no urgency and Congress does nothing. When there is a prolonged nationwide strike, it is “too late” for Congress to act. And most of those who do want to “do something” call for still further government intervention.
TWO PROPOSALS
Two proposals are now being widely put forward. The first is for compulsory arbitration, perhaps thinly disguised as government “fact-finding” and “recommendations.” What the optimistic advocates of this fail to recognize is that it would lead us rapidly toward a controlled, authoritarian, economy. The first question is whether it could be enforced. Would an employer accept a wage decision that the thought was going to put him out of business? Would a union accept a decision that its members thought was going to make them worse off than other workers? Would unions and labor leaders generally accept a situation which would cause them to lose their very raison d’être?
Assuming that the government was sufficiently determined and ruthless in enforcing its decisions, its problems would mount. It would doubtless begin by assuming that it could decide each case “on its merits.” How would it determine these “merits”? In 1952 automobile wages were higher than steel wages; today the situation is reversed. Which is “correct”? Suppose a government board awarded one union a 5 percent wage increase? Would not every major union immediately demand, or threaten to strike for, a similar increase? On what principle could it be denied? Would the government, in desperation, try to freeze all wages and prices where they were? Wouldn’t this freeze all existing inequities? Would it not remove all the flexibility which allocates workers and production among thousands of different products to conform with daily changes in supply and demand, and reduce, distort, and disrupt production?
LIMITING UNION SIZE
The second major proposal is that industrywide unions be prohibited; that the size of the bargaining unit be limited by law—to, say, the workers in each individual firm. Here again the question arises whether this could be enforced, or even whether it would be desirable to try to enforce it. Should we limit the right of freedom of association? It would make sense, of course, to stop putting a legal compulsion on the employer to bargain with an industrywide union, or any unit larger than that consisting of his own employees. But this exemption would probably be meaningless as long as other coercive union privileges—including the exclusive-bargaining-power clause—remained in the law.
Why not simply remove any legal compulsion on the employer to bargain with a specific union? Why not make collective or individual bargaining genuinely free and voluntary on both sides?
Perhaps the best solution, if we were bold enough to consider it, would be to wipe most of the Federal labor legislation of recent years off the books, including the Norris-LaGuardia and Taft-Hartley-Wagner acts, get rid of labor boards, and substitute a simple provision, enforceable in the courts, that an employer substantially engaged in interstate commerce could not discriminate in hiring or firing either against union members or against non-union members.
November 16, 1959
On Oct. 19, the U.S. Development Loan Fund announced that in future its loans must normally be used to buy goods in the United States.
I must begin by admitting that I share some of the misgivings expressed by Senator Fulbright concerning the wisdom of this policy. On its face, it doesn’t look like a step toward freer multilateral world trade. It tends to defeat part of the ostensible purpose of the loans by obliging the borrowing nation to pay more for the goods it wants than it otherwise would. Under normal conditions the proceeds of dollar loans would have to be spent, anyhow, directly or indirectly, in this country.
FRUITS OF GIVEAWAY
But Senator Fulbright seems to live in an ivory tower that shuts off part of his view of actual conditions today. Among these are (1) a deficit of about $4 billion this year in our balance of payments; (2) a heavy gold outflow over the last two years which has brought our gold stocks to a nineteen year low; (3) a discount on the dollar in European exchanges; and (4) continuing foreign discriminations against American goods. As the President said at a press conference on Oct. 28, our aid policy has been “merely . . . increasing the gold reserves of somebody else while we have to make good the resulting balance of deficit in our own receipts from abroad. . . .”
The remedy, however, is not to tie our loans to a “Buy American” policy, but to halt our giveaway and most of our government-agency loans.
The Wall Street Journal succinctly recapitulated some of the facts in an editorial of Aug. 19:
“Once upon a time there was established the International Bank for Reconstruction and Development and the International Monetary Fund.
“This was during World War II and the idea, in case you have forgotten, was to provide a capital fund for economic development loans and for currency loans to the war-torn countries and the underdeveloped countries of the world.
“But this did not prove sufficient, and so we had the U.S. loan to Britain, and U.S. loans and grants under the Marshall Plan, and the U.S. loans and grants under the many names of what is now the International Cooperation Administration.
“But this was not sufficient, and so we increased the resources of the U.S. Export-Import Bank.
“But this was not sufficient, and so we set up the U.S. Development Loan Fund to make ‘easy’ loans repayable in local currencies.
“But this was not sufficient, and so the World Bank was broadened to include an International Finance Corp. to invest in special enterprises in underdeveloped countries.
“But this was not sufficient, and so we are now organizing a Latin American Bank and we have proposed a similar Middle Eastern Fund.
“But this was not sufficient, and so this week the U.S. launched a campaign to establish a $1 billion world agency to be called the International Development Association. It will be used to spur economic development in underdeveloped countries on easier terms than those poor countries can get from the World Bank, the Monetary Fund, the Export-Import Bank, the U.S. Development Loan Fund, the Latin American Bank or the Middle Eastern Fund or the International Finance Corp. or from the International Cooperation Administration. . . .”
$69 BILLION
If, now, we tabulate, we find (see A. Wilfred May in The Commercial and Financial Chronicle of Oct. 29) that our postwar overall foreign aid to date totals approximately $57 billion in net grants and $12 billion in net credits. This brings the grand total to $69 billion.
The present $4 billion deficit in our balance of payments can be wholly accounted for by our foreign-aid outflow at an annual rate of $4.4 billion. Therefore the first remedy, as I have already said, is to start drastically tapering off our foreign-aid program, which rests chiefly on dubious socialistic assumptions.
Our global spenders have yet to learn that the most important contribution we can make to international economic stability and growth is to keep our own economy strong and solvent, and to put the integrity of the dollar beyond question.
November 23, 1959
There are the strongest reasons why the President should immediately call a special session of Congress to deal with the labor crisis.
“If the [steel] strike is resumed at the end of 80 days,” Secretary Mitchell has declared, “the Administration will have recommendations to Congress as to what to do to settle the strike.” But this is to imply that the President will take no action until more damage has been done, until still more unemployment has been suffered, until there is once again paralysis in industry.
Even if the steel strike is miraculously settled before these words appear, the nation still faces the prospect of resumption of the East Coast longshoremen’s strike, the possibility of a nationwide railroad strike, and the probability of an outbreak of a new nationwide wave of strikes if the steel wage settlement is after all inflationary. If, however, the President utilizes the period of grace allowed by the 80-day injunction, he may not only forestall future paralysis but encourage a quicker settlement of the steel strike itself.
COERCIVE PICKETING
To find the right solution we must first of all recognize the coercion that made the 116-day strike possible. Most press and Washington comments, as well as court decisions, have been curiously oblivious of this coercion. When the strike was called, not a single plant against which it was called tried to continue producing steel. Not a single plant dared to try. If it had tried, any former striker or other worker who had applied for work (on the calculation that $127 a week, say, was at least acceptable until something better turned up) would have been lucky to escape intact. For the union threw picket lines around the plants, and their purpose was to intimidate and coerce. As one reporter put it at the beginning of the strike: “Any ‘back-to-work’ drive under company sponsorship would touch off picket-line violence of a type unknown in the steel industry since the strikes of twenty years ago.”
One looks in vain, either in the Supreme Court decision, or in the lengthy dissent of Justice Douglas, for any acknowledgment that this coercion exists. The Justice declaims against injunctions that, “force men back to work” and “bludgeon all workers.” He praises the enactment of the Norris-La Guardia Act as ending the “easy” and “abusive” use of the injunction in labor disputes. He implies (resurrecting a hoary myth) that such injunctions were typically used to force men to work against their will, when they were in fact used to order strikers to desist from intimidatory picketing, violence, or irreparable injury.
LICENSE TO INTIMIDATE
The fact is that today unions are in effect licensed to intimidate and coerce anyone who tries to oppose a strike. What they claim is not merely the right to quit their jobs but to prevent others from taking the jobs they have vacated. They have become in effect agencies entitled to use intimidation or violence to enforce their ends. That is why and how they can choke off at will the nation’s supply of steel or of almost anything else.
The first and most important labor reform is to restore the rule of law. Employers who wish peaceably to continue their business, workers (including former strikers) who wish peaceably to apply for the jobs that have been vacated, are entitled to adequate local police protection of life, person, or property. And in order that they may get it, the first thing that must be done is to repeal the Federal legislation that stands in the way—including the Norris-La Guardia Act and either the whole of the Taft-Hartley Act or any provision in it that abridges or clouds the employer’s or the individual worker’s right to freedom of bargaining.
Such a proposal is not “anti-labor” but pro-labor. It is the self-declared champions of labor who advocate or defend laws that bring about industrial paralysis, and then hysterically seek to cure the paralysis by proposals for compulsory arbitration, by Federal seizure (Harry Truman and Senators Morse and Kennedy), or by drafting the strikers into the Army (President Truman). Not until private coercion is prevented can personal liberty be secure.
November 30, 1959
In Newsweek of Dec. 19, 1955, encouraged by an open invitation from Secretary Benson, this department proposed a simple two-point farm program. In a book just published, The Great Farm Problem (Regnery. $5), Prof. William H. Peterson of New York University refers to this proposal sympathetically. But as it was not adopted, and as, in consequence, the farm surplus crisis has grown much worse, I venture to repeat my proposal with some additional details.
The first point may sound less startlingly novel than it did four years ago. This is that Congress stop all price guarantees and all promises of support-buying of any kind on any crop not yet planted.
At one stroke this would stop any further accumulation of farm surpluses. These “surpluses” are created by price supports, and by nothing else. When any product whatever is priced above the real market, there is bound to be an unsold surplus. The test of a free market price is precisely that it “clears the market.”
A score of other problems would also be solved by ending price supports. Farmers would cease to be encouraged to overplant, overfertilize, overproduce. Marginal farmers would be forced to turn to occupations where they would be more productive. All need for government acreage controls or marketing quotas, with their huge attendant bureaucracy, would end. We would cease to impair our foreign economic relations.
SELL AT A BARGAIN
The one problem that this would not solve is the huge farm surpluses in which the government has already invested $9 billion. This brings us to the second point of my program. The government should sell its existing surpluses back to the farmers themselves.
Each farmer would be allowed to buy, say, an amount proportionate to that of his own relative production of a surplus commodity in preceding years. To assure sale, the government would set a price both below the existing free world price and below the average farm-cost of production. Each farmer would be free to dispose of what he bought as he saw fit. He could immediately sell through the speculative markets, or store at his own expense. The difference between what he paid and what he could sell for would assure him a profit-roughly equal, say, to what he would have made by planting a new crop. His ability to buy the commodity at less than his cost of production would discourage him from planting a new crop and adding to the surplus again.
NO DOWN PAYMENT
The plan could be set up so that the purchasing farmer would not even need cash. The government could give him a negotiable certificate, say, entitling either him or the bearer to buy his allotted quota at the specified price. Suppose the world price of wheat was $1.50, and Farmer Jones was allotted a certificate entitling him to buy from the government 10,000 bushels at $1 a bushel. Jones could simply sell this “right” on the market for, say, $5,000.
It is true that this solution would not instantly bring economic paradise. Individual farmers would for a year or two be paid, in effect, for not raising crops in which surpluses existed. Fertilizer and farm-machinery interests might be temporarily hurt. Some farm labor would have to spend a year or two doing something else. The government would take a big loss (on paper) in selling the surpluses back to the farmers. But most of this loss is inevitable anyway. At least the government would get back, instead of paying out, billions in real cash. If such a proposal had been adopted four or five years ago, some $20 billion might have been saved.
The farm surplus crisis has reached a point where no timid compromise program can avert collapse. Secretary Benson’s new proposal for support payments based on average market prices in the preceding three years is of course not as preposterous as the present “parity” formula based on the years 1910–14. But any support price whatever above the market must simply pile up new surpluses. The government already has $9 billion tied up in surpluses, including a two and a half year supply of wheat. It is costing $1.5 million a day just to store the stuff. How insane can our policy get?
December 7, 1959
In New York, already overcrowded, already jammed with traffic that crawls along fitfully or grinds to a halt, 20-, 30-, 40-, and 50-story apartment or office buildings continue to go up at record rates. One of them alone could house the population of an entire town. The problem of getting in and out of them, of moving from one to the other, by foot or car, threatens to become insoluble.
Even if we were to take drastic steps right now to solve the problem, we could not prevent it from growing. Suppose we immediately imposed a height limitation on all future buildings of twelve stories, or some equivalent limitation on cubic footage. The mere building of new structures up to that height or volume, on sites that now have less, could enormously increase crowding. Yet even this much restriction is nowhere seriously suggested. And if it were, it would probably meet the strongest opposition on the double ground (1) that it would be discriminatory against sites on which present buildings were lower, rather than already higher, than the new height limitation, and (2) that it is an abridgment of private property rights to prescribe any maximum building height or limitation whatever.
‘EKISTICS’
This column would be the last, as its readers know, to accept lightly any discriminatory treatment or infringement of property rights. But here is a clear case where each must accept some restraint for the good of all. It may hurt a specific property value in New York to impose a stricter building limitation on it; but it will soon hurt all property values in New York unless stricter building limitations are imposed.
No new principle is involved here. Everyone accepts the necessity of condemnation proceedings to put through a necessary street or road, or to widen an existing one. Everyone accepts sensible building laws against sanitary hazards or hazards of collapse or fire. Nearly all cities, including New York, have some limitations on height or building-area to insure a minimum of light and air and movement. The real question is whether present limitations are adequate or look forward far enough into the future. This problem faces every large city in the world.
In Greece, a month or two ago, I met an extraordinary man, Dr. Constantinos Doxiadis, and talked with him, in an office with a magnificent view of Athens and the Acropolis, in his new building and school. Doxiadis is an architect, engineer, city planner, and more. He is trying to found a new science—Ekistics, “the science of human settlements”—which would draw upon all these disciplines. He has been called in as consultant or planner by Washington and Philadelphia, by Pakistan and Iraq.
‘SECTORS’
Perhaps some of Doxiadis’s premises go too far in the direction of central planning. But he seems to have recognized, better than anyone else with whose work I am acquainted, the nature and dimensions, economic, technical, and esthetic, of the modern-city problem. These new dimensions have been brought about by the unprecedented increase in world population, the propensity of people to crowd into cities, and the multiplication of automobiles.
Where once our cities were inhabited by men, they are now inhabited by men and machines. Man, Doxiadis points out, has now been displaced as the dominant element by the motor car. Our city plans, once three-dimensional, must now take account of a fourth dimension—time. This is the time wasted or saved in commuting to work or getting from one part of town to another.
The basic element of the city of the future, according to Doxiadis, will be the community neighborhood or “sector.” The size of the sector will be determined by reasonable walking distances. Outside and around the sector cars will be able to move at high speeds. They may enter it at controlled speeds to come to parking lots, dead-end streets, or areas where children play, wives shop, and pedestrians can walk with pleasure and safety. Such sectors can be planned with a fair distribution among property owners of costs and advantages. Cities, after all, are made for man, not man for cities.
December 14, 1959
All of us must constantly act on some assumptions regarding the future. But if we are wise enough to recognize that we are merely guessing, we will always be ready to revise our assumptions. Economic forecasting can never be a science. Every forecast depends upon a thousand ifs. The Secretary of Labor, for example, ought to be in a specially favored position to guess how much unemployment there is going to be six months ahead; but because he was too cocksure in April he found himself eating his hat (or a specially baked simulacrum thereof) on the steps of the Labor Department, in November.
Today we make a fetish of “economic growth.” We have already had all sorts of predictions concerning our economic growth in the next ten years. Such predictions can obviously be no better than the assumptions on which they rest. If we project the average percentage “rate of growth” over the Fifties into the Sixties, or if we extrapolate the growth curve, we will get one result. (Or several. One trouble is that our pundits cannot even agree concerning the growth rate of the past—partly because of disputes concerning statistical reliability or method, partly because of disputes concerning what year to start from as a base for calculation.)
GROWTH NOT AUTOMATIC
If we are optimistic we will project a much higher growth rate for the Sixties than in the Fifties. If we are “research foundations” we will point out, with an air of discovery, that an annual growth rate of 4 percent leads to a higher national income at the end of ten years than one of only 3 percent, and one of 5 percent to even more than one of 4 percent. And if we are politicians, we will demand a higher “growth rate”—5 percent, 6 percent, or even more.
But one thing is clear. No rate of growth will take place in the Sixties automatically, regardless of what anyone does. Our economic growth (or shrinkage) will depend on the policies we follow. And the policies best calculated to increase production and living standards are those that encourage the greatest saving and investment, the maximum capital accumulation, the largest addition to and improvement of the tools and equipment that bring the highest increase in the productivity of labor. These are not, unfortunately, the policies favored by those who harp most on “rates of economic growth.” What they propose, rather, are increased government spending, continued deficits, continued inflation, and still more government “planning” and controls.
TO HALT INFLATION
We should look forward to the Sixties, then, not as an era of automatic growth, but as a challenge, as a set of problems to be solved. And the chief domestic problem we have to solve is how to halt the inflation we have experienced over the last 26 years.
The measures necessary to halt that inflation would also solve other major problems. We would have to balance the budget—by reducing both expenditures and burdensome taxes, but reducing expenditures more. We would have to stop subsidizing unsalable farm surpluses at home and socialism abroad. We would have to stop government cheap-money policies, and the continuous expansion of our money supply, and return to the full gold standard. This would also solve the problem of our “deficit in balance of payments.”
Not least important, we would have to solve the problem created by the present power of labor unions to shut down whole industries and force money-wage increases that in turn bring political pressure for more inflation. In solving this labor problem, we may have to make a candid reappraisal of the assumptions on which our labor policy has rested for a quarter century.
Finally, we will solve neither our domestic nor our foreign economic problems unless, against floods of socialist and Communist propaganda, we refuse to lose sight of the incomparable superiority of capitalism—of our system of free markets and private enterprise—as a stimulus to maximum production and as a safeguard of personal liberty.
December 21, 1959
Roy L. Reierson, vice president and chief economist of the Bankers Trust Co. of New York, has proposed that we reduce or even eliminate the present 25 percent gold reserve requirement against Federal Reserve note and deposit liabilities. His proposal illustrated what happens once a full gold standard has been abandoned for a partial or make-believe gold standard.
Reierson argues that, though our gold reserve is still about $19.5 billion, more than half of this must be held as reserve against domestic liabilities. “Almost $12 billion of gold is required to be held as a 25 percent reserve against approximately $47.5 billion of Federal Reserve note and deposit liabilities, even though these are no longer redeemable in gold. This gold is thereby barred from functioning as a means for settling international accounts—the remaining essential function of gold in our monetary system.” This leaves available only $7.5 billion of “free” gold against some $16 billion of short-term dollar balances held by foreigners, plus $3 billion held by the IMF and other international institutions.
PURPOSE OF A RESERVE
The situation, Reierson thinks, has led to fears abroad that “if further heavy inroads are made upon the free gold, the United States will be compelled to stop making gold available for international settlement and thus devalue, even though most of our gold reserve might still be intact.” On the other hand, “if the United States were to eliminate altogether a formal reserve requirement for the central bank the monetary gold stock would cover these foreign liabilities by about 100 percent.”
The astonishing thing about this proposal is that it is not made by an irresponsible inflationist but by a highly reputable banker and economist who deplores inflation. Its ostensible purpose is to strengthen our present for-foreigners-only gold standard. That it would achieve this declared purpose is improbable. Such an announcement would more likely be interpreted as dropping the last vestige of a domestic gold standard.
What, after all, was the purpose of a legal gold reserve? It was to ensure convertibility at all times of bank notes and deposits into gold. The chief purpose of this, in turn, was to prevent an undue or unsound expansion of credit and currency. The reserve ratio was a sort of thermometer; it was constantly watched, both at home and abroad. When credit expansion or a gold drain brought the reserve ratio dangerously low, the monetary authorities had to raise interest rates and halt further credit expansion to prevent a further gold drain. Reierson’s proposal would destroy the thermometer, smash the pressure gauge, remove the warning signs and traffic signals.
TO RESTORE CONFIDENCE
Consider the history. In 1933 and 1934 we abandoned a real gold standard, devalued the dollar to 1/35 of an ounce, put even this on a “24-hour basis,” and allowed only foreign central banks, not American citizens, to demand gold. In 1945, Congress, at the request of the Federal Reserve, reduced the legal requirement of a 40 percent gold certificate reserve against Federal Reserve notes and 35 percent against deposits to a uniform requirement of only 25 percent. At the end of 1944 total deposits and currency amounted to $151 billion; today they exceed $248 billion. The increase of 64 percent in the total money supply is enough to account for the increase of 64 percent in consumer prices in the same period.
Reierson thinks that: “In the future, as in the past, we shall have to depend upon the integrity and good judgment of the Federal Reserve officials to establish a credit policy appropriate to conditions in the United States economy.” I submit that we need something much more solid to depend on than the arbitrary discretion or caprice of present or future monetary managers.
The immediate need is to halt the inflation, and to restore confidence in the dollar at home as well as abroad. To prevent resumption of inflation, we must ultimately restore the discipline of a full gold standard. Meanwhile our measures should move toward that goal and not remove the last hopes for its attainment.
December 28, 1959
On Dec. 11, the governor of Minnesota threw a brilliant light on the one-sidedness of labor law and law enforcement in this country.
The old labor contract between Wilson & Co. and the United Packinghouse Workers of America expired on Aug. 31. Work continued on a day-to-day basis. On Oct. 29, the company broke off negotiations until “binding assurances be given us that the lawless acts started last May and continuing through the sitdown strikes of the week of Oct. 26 will not be repeated.” On Nov. 3, the union’s workers struck. After a few weeks the company warned them to return to their jobs or be replaced. On Nov. 30, the company tried to continue operating with nonunion labor. Hundreds of pickets surrounded the plant and resorted to violence, overturning and stoning cars of nonunion workers.
Then Governor Freeman called out the National Guard, who used fixed bayonets to restore order. But not order that permitted the company peaceably to operate its plant or the nonunion workers peaceably to process meat. The National Guard shut down the plant. Production workers hired to replace strikers were turned back at the gate. All court orders pertaining to the dispute, including one to limit pickets, were suspended.
SOLDIERS AS PICKETS
Under the guise of maintaining peace and order, in other words, Governor Freeman called out the military not to permit peaceable production but to stop it; not to maintain the right to work but to deny it. He subverted the rule of law and turned the National Guard into an instrument for enforcing the aims and policies of the union.
The governor’s highhanded action merely carried one step farther the legal premises on which our national labor legislation and our local enforcement (or non-enforcement) have rested for the last quarter-century. Unions today are tacitly granted the right not only to strike, but to prevent others from taking the jobs they have vacated. Thanks to mass picketing, with its latent threat of violence, no struck steel plant has attempted to continue production with nonstrikers.
And our statesmen have remained willfully blind to this situation.
But now even “liberal” politicians have suddenly come to see that the labor legislation they did so much to fasten on the country leads to industrial paralysis. In panic, they seek to cure this paralysis by still more government intervention. Governor Rockefeller has come out in favor of compulsory arbitration of labor disputes, and Adlai Stevenson in favor of compulsory arbitration and even seizure of plants.
‘THE END OF AN ERA’
True, Rockefeller opposes “any legislation setting up compulsory arbitration as an automatic and generally accepted remedy for industrial disputes, for it negates the concept of collective bargaining . . . and our economy would tend to be regulated by fiat. But the present situation points up the need for an exception.” What this overlooks is that once a union were led to think it could get more by forcing compulsory arbitration through a sufficiently prolonged nationwide strike, the “exceptions” would become the rule.
McDonald is angling for government arbitration today precisely to get himself off the hook. He knows that no politically appointed board would dare to award him less than the company offer he has rejected. He also knows the history of the Railway Labor Act—how the rail unions have not hesitated to reject the awards of Presidential “fact-finding” boards that they did not wholly like (e.g., 1941), and forced boards to bring in new awards more acceptable to them. Rockefeller and Stevenson talk like men ignorant of this history.
Stevenson now declares that “we cannot tolerate shutdowns which threaten our national safety.” He thinks “the steel strike has dramatized the fact that we are at the end of an era.” But the era which has ended, let us hope, is that in which government has not only tolerated but built up the irresponsible private power of nationwide unions to use mass picketing and the threat of violence to prevent employers who refuse to meet their terms from continuing production peaceably with other workers.
