Business Tides
How to Read a Forecast
January 3, 1955
This week and next, newspapers and business magazines will overflow with forecasts of business conditions in the coming year. In previous Newsweek columns (e.g., Nov. 22, 1948, and Sept. 21, 1953), I have tried to explain why, though I recognize the necessity for business forecasts, I so seldom indulge in them. Business forecasting can sometimes be a help, but it can never be a science. There are two main reasons for this. One is that the facts and contingencies that must be taken into account to predict the future are too multitudinous for any human mind to encompass. The other reason is that, in human affairs, predictions themselves affect the future they predict.
There are much greater similarities, in fact, than most business forecasters would care to admit, between their own occupation and that of race-track tipsters. (I will get to the differences later.) Business forecasters boast of the occasions in the past when their forecasts turned out to be right; so do race-track tipsters. A racetrack tipster may be right for the wrong reasons; so may a business forecaster. A tipster may falsely inform a client that a race has been fixed for a certain horse to win. That horse may win nevertheless. A business forecaster may base his prediction of a recovery or recession on fallacious economic reasoning. But as business can only go up or down, there is a 50-50 chance that his falsely based prediction may turn out to be right.
A business forecaster may contend that all his forecasts are based on careful study and analysis of available statistics and existing conditions. But this may also be true of the forecasts of an intelligent racing analyst. The latter may know everything there is to know about the past records of all the horses involved, supplemented by honest fresh information from owners or trainers. On this basis he can of course make more intelligent and informed guesses than persons who lack his information. Nevertheless he cannot predict the outcome of any race with certainty. All we can say is that the informed racing analyst will on the average stand to do much better than the uninformed. Though he will never know certainties, he will know much more about probabilities. And that is the best we can say for the most intelligent and best-informed business forecaster.
Moreover, the individual race-track gambler, or the stock-market speculator or the businessman, seldom stands to gain much merely by knowing such facts and probabilities as are already known by the majority of his fellows or competitors. For unusual profit or success, he must know more than his competitors know; he must guess right sooner than the rest. It is common to say in the stock market that an expected future event has already been “discounted.” This means that it has already been taken account of in the present price of the stock. This sort of thing also happens at the race track. Known probabilities (i.e., the composite general guess regarding the probabilities) are already embodied in the betting odds. A man who always bet on the favorite would stand to win more often than a man who bet on the long shots; but it does not necessarily follow that he would lose less money in the long run. For when he won he would win comparatively little, because too many people were right with him.
But though there are similarities between the position of the racetrack gambler and that of the speculator or the businessman, there is one vital difference. The risks in betting on horses are invented and unnecessary; the risks in speculation or in business enterprise are inherent and inescapable. Somebody must assume them. And he who assumes them intelligently confers a public benefit, whether or not that was his intention. He prevents wasteful use of resources.
So the honest and intelligent business forecaster performs a needed function. A forecaster is a nuisance only when he is cocky and self-assured, clothes his opinions in a pompous abracadabra, parades pretentious charts and mathematical formulas, and tries to give you to understand that his guesses are the verdict of science. 
January 10, 1955
It is increasingly sad to follow the record of the Eisenhower Administration on the budget.
Just before the Republican convention of 1952, General Eisenhower expressed the opinion that the Federal budget could be cut as much as $40 billion in the next few years. In his first State of the Union message, on Feb. 2, 1953, he said: “The first order of business is the elimination of the annual deficit.” He has since successively explained why, because of this or that unforeseen condition, he could not balance the budget for the 1953 fiscal year, or for the 1954 fiscal year, or for the present 1955 fiscal year which ends on June 30. The same dismal note was sounded once again on Dec. 6 by Treasury Secretary Humphrey, when he declared that “we cannot balance the budget” for the fiscal year 1956. This statement was followed a week later by an announcement that the President would ask Congress to cancel the $3 billion in corporate and excise tax reductions that had been scheduled for April 1.
There is, alas, nothing novel in this record. It merely continues the record of the last quarter of a century.
In Newsweek of Nov. 2, 1953, in a column called “In the Sweet By and By,” I presented in as full detail as space would permit the budget record of Franklin D. Roosevelt and Harry Truman. It was a record of constantly promising a balanced budget—but always for some day in the future, never now. “The plan is to reduce the cost of current Federal government operations by 25 percent,” said candidate Roosevelt in 1932. “We should plan to have a definitely balanced budget for the third year of recovery,” he was saying on Jan. 4, 1934, “and from that time on seek a continuing reduction of the national debt.” “We approach a balance of the national budget,” he was announcing on Jan. 3, 1936. And so it went.
Harry S. Truman, in his budget message of Jan. 12, 1948, promised not only a balanced budget but a surplus of $4.8 billion for the fiscal year 1949. There was, alas, actually a deficit of $1.8 billion. In his budget message of Jan. 10, 1949, he once more deplored deficits, and once more promised a balance. Nevertheless the deficit for the fiscal year 1950 was $3.1 billion.
To sum the whole matter up, we have had deficits in 22 out of the last 25 years. And now we are told we must have still another.
It is not true. The budget can be balanced. And it can be balanced in the next fiscal year. What stands in the way is not, as apologists declare, either military or economic necessities. It is false economic theories and lack of political courage.
There is neither space nor need to go into the subject in great detail here. In April of 1954 the Committee on Federal Tax Policy, a private group under the leadership of former Under Secretary of the Treasury Roswell Magill, made a careful study and concluded that a total of at least $8 billion could be cut from Federal budget obligations for the fiscal year 1955 without even touching defense items.
The budget is not to be cut by a horizontal slash of expenditures by 10 or 20 percent all along the line. Such proposals are hopelessly naïve when they are not plainly insincere. The chief way to cut the budget is to abandon whole categories of expenditures that are being made either because of naïve delusions (this applies to almost the whole of the $5 billion a year we are throwing away on foreign aid) or because of sheer political expediency (i.e., the farm price-support program which raises the price of food for city workers and has created appalling surpluses).
There is unfortunately still another leading factor responsible for the continuance of deficits. This is the belief, concealed or candid, that deficits are necessary to prosperity, full employment, and re-election. It is the doctrine of salvation through inflation.
So this is how the matter really stands. Anybody who sincerely believes that the budget cannot be balanced in the next fiscal year, or that the present fantastic level of expenditures cannot be cut without danger, is a victim of delusions.
January 17, 1955
President Eisenhower’s decision to support an increase in the Federal minimum wage from 75 to 90 cents an hour marks another step toward the New Deal philosophy.
If wages can be raised to any desired amount by law, without harmful consequences, why stop at a minimum of 90 cents an hour? The CIO, in fact, has been demanding a minimum of $1.25 an hour. But why not $1.50, $2—or even more? The blunt truth is that insofar as a law is effective in forcing wages above the levels at which competitive market forces would fix them, it creates unemployment. Marginal firms which cannot afford the higher costs are forced to drop their marginal workers or go out of business entirely.
It is often argued that “business” (treated in such an argument as if it were a single big firm) can simply “pass on” forced wage increases by raising “its” prices. But even where competition is mild enough to permit this, the higher prices result in lower sales. These mean lower production and hence smaller employment in the firms and industries affected.
The Fair Labor Standards Act went into effect at the end of October 1938. Unemployment jumped from 8.1 million in October that year to 9.6 million in December and to 12 million in January 1939. In 1949, President Truman demanded that the legal minimum wage be boosted from 40 cents to 75 cents an hour. This went into effect Jan. 1, 1950. Unemployment rose from 3.5 million in December 1949 to 4.5 million in January 1950.
Of course the government can always resort to still further monetary inflation to enable industry to pay the higher wage rates it enforces. But in that case the higher money wages are offset by price increases and become illusory.
It is a mistake to suppose that the effects of an increase in the Federal minimum wage would be confined to the part of the labor force now getting less than the proposed new minimum. For other workers will demand the maintenance of their existing differentials. The result must be upward pressure on all wage rates.
This upward pressure will be still more widespread because of a joker in the existing wage-hour law. This joker is a provision that the employer must pay a 50 percent penalty increase for all hours above 40 a week, no matter what his regular rate of pay. Under this provision, a law ostensibly passed to apply only to marginal workers and their employers has controlled in practice the wages of most of the workers of the country. The provision penalizes most, the employers who are already paying most; it rewards most, the workers who are already best off. Under it, the employer who pays his workers 75 cents an hour need pay only 37½ cents additional for overtime. But the employer who pays his workers $2.30 an hour must pay $1.15 an hour additional for overtime.
Of course this absurdity could be cured if those who now insist on boosting the regular minimum-wage rate to 90 cents an hour would at least consent to fix the minimum overtime-wage rate above 40 hours simply at $1.35 an hour, leaving workers and employers free to negotiate higher regular or overtime wages.
What really needs to be done at this time, in fact, is not to increase further the Federal government’s meddling with wage rates, but to reduce the absurdities and contradictions in existing legislation. One of these absurdities is the Walsh-Healey Act. This law, passed in 1936, two years before there was any general wage-hour act, authorizes the Secretary of Labor to fix minimum wages in companies that are awarded Federal contracts. Under this law, a series of mischievous rulings have been made by successive Secretaries of Labor. Secretary Mitchell is now trying to force a minimum rate of $1.20 an hour on textile companies working on government contracts. It is senseless, and violates the whole principle of nondiscrimination, to have two minimum wage laws which enforce entirely different wage standards. Is it too much to hope that enough sense and courage exist in Washington to remove at least this absurdity?
January 24, 1955
About a year ago (Newsweek, Feb. 15, 1954) my article in this place carried the title “Ike’s Semi New Deal.” The present headline conforms to the new state of affairs as revealed in the President’s messages to the new Congress.
This is no mere personal judgment. It is a state of affairs acknowledged by the Democratic New Dealers themselves. The Democratic House leader, Congressman John W. McCormack, said of the State of the Union message: “On domestic matters most of it might be termed New Dealish.” And the Democratic whip of the Senate, Earle C. Clements, declared: “I am glad to see him embracing so many things that the Democrats have so long stood for and on which he has been unable to get the support of his own party.”
The New Deal policies now adopted by Mr. Eisenhower are so numerous, in fact, that it is easier to point to exceptions. I can think of two: Private instead of socialized electric power and flexible instead of fixed farm supports. Toward both, the President seems to take a mainly defensive attitude. His retreat from the previous farm-parity formula is so mild that we are still piling up enormous surpluses at the expense of the taxpayer and consumer. As for nearly all the other policies advocated, Harry Truman might have delivered the latest State of the Union speech, and did deliver a score of speeches like it.
Yet when Mr. Eisenhower dealt in broader generalities in that speech he paid at least lip service to a program of another kind: “The aspirations of most of our people can best be fulfilled through their own enterprise and initiative, without governmental interference. . . . Our government must not impair the self-respect, freedom, and incentive of the individual.” But he followed this with an array of programs for increased governmental interference, and less freedom and incentive for the individual (particularly if he happens to be a taxpayer); for more government spending, more taxation, more deficits—in brief, for a huge paternalistic “welfare” state.
Mr. Eisenhower called for a continuance, and in some directions for an expansion, of the Truman foreign-aid and the Truman Point Four programs. He asked for a billion-dollar upper Colorado River basic development project. He outlined a $101-billion ten-year highway-modernization program. He asked for more public-works programs; special aid to low-income farm families; more loans of the taxpayers’ money to “small business”; still more government-subsidized housing; a Federal health-reinsurance program; Federal aid to build more schools. He asked Congress to raise the Federal minimum wage from 75 to 90 cents an hour and to expand its coverage. He asked amendment of the Taft-Hartley Act—in directions demanded by union-leader propaganda. He asked for a general pay increase for all Federal workers, adoption of a “substantial” pay increase for Congress and the judiciary, adoption of a Constitutional amendment to lower the voting age to 18, and many other “progressive” or big spending programs.
Does not the President see that his program, considered collectively or by most of its individual items, is in direct contradiction to the principles he has previously preached and is still preaching? Of course, there are loopholes in his “simple rules.” To announce that “the Federal government should perform an essential task only when it cannot otherwise be adequately performed” is to allow wide room for interpretation of what constitutes adequacy. It is the contention of the Democratic New Dealers, for example, that private industry cannot adequately supply electric power. The British socialists even contend that private industry cannot adequately supply railroad transportation, coal, or steel. Yet how can the President reconcile his new program with his previously expressed concern for lower taxes and a balanced budget?
The new Eisenhower program raises one final question: What longer reason or need is there for a Republican Party? Do we need two major parties, both demanding the same huge bureaucratic paternalism?
January 31, 1955
President Eisenhower has renewed his request to Congress to extend the trade-agreements act for three years, and to authorize him, in trade-agreement negotiations, to make gradual and moderate tariff reductions over that period. Congress should grant the President these powers. But it must be added in all candor that even if it does so, its action under present conditions will prove largely academic and all but futile in bringing about the results that the President intends.
The truth is that the President’s “foreign economic policy” message is confused, and that the policies we have actually been following are self-contradictory. Mr. Eisenhower, in pleading for lower tariff barriers, bases his case largely on the wrong reasons. The main reason for reducing the American tariff is to benefit the American consumer—to enable him to buy foreign goods cheaper. But the President bases his case, as the Truman Administration did, mainly on the argument that it is our duty to lower trade barriers in order to gain the good will and increase the prosperity of foreign countries. Lower American tariffs would, incidentally, have these effects. But to stress this philanthropic argument is far less effective politically than to stress the argument that we ought to reduce tariffs directly for the advantage of our own people.
Moreover, Mr. Eisenhower once more accompanied this request for lower tariffs with a request for continuance of our huge foreign giveaway program. This creates needless confusion and helps to give Congress the impression that more trade, like more handouts, is primarily a favor to foreigners.
On the other hand, Mr. Eisenhower wrongly separated his argument for lower American tariffs from other necessary changes without which such lower tariffs would be meaningless. He did not point out, for example, that trade is necessarily two-sided, and that European economic isolationism has been and still is a far greater barrier to its expansion than our own policy. He did not point out that European countries still directly discriminate against American goods and put them under import quotas. He did admit, rather indirectly, that most European currencies are still inconvertible; but he spoke of this as if it were an affliction imposed on them from without, rather than a policy deliberately adopted by European governments to conceal the extent of their inflation and to bolster their economic nationalism.
And finally, the President’s message did not point out, except by a vague and slight hint, that the tariff policy he recommends is directly contradicted by our farm policy. In order to protect our farm-price supports we have put quotas on agricultural imports that have created resentment in half a dozen foreign countries (to many of which we are giving aid). And in trying to get rid of the appalling farm surpluses that our government has piled up through its price-support policy, we are proposing to “dump” part of the surplus abroad, undercutting world prices and disorganizing export markets, and thereby alarming and antagonizing scores of nations.
The Randall commission, a year ago, courageously and clearly faced up to this contradiction. The President glosses over it. His flexible farm-support policy, it is true, is not as bad as the ultrahigh supports on which the farm bloc is still insisting; but even the present flexible policy will continue to do great harm. Since the middle of last year our government has succeeded in getting rid of more than $800 million of farm surpluses, by selling them below cost, giving them away at home, or giving them away to foreign countries. But in spite of this huge loss to the taxpayer, the government on Nov. 30, through new acquisitions, still held about $7 billion worth of farm surpluses, compared with about $6 billion in July. If we had the courage to abolish this program, we would make a far greater contribution to freedom of trade and to regaining the good will of foreign countries than we could do merely by acting directly on tariffs, and leaving our farm-price support policy unchanged.
February 7, 1955
Mr. Eisenhower is planning the 23rd deficit in the last 26 years. We are supposed to be pleased about this because the expected deficit is only $2.4 billion in the fiscal year 1956 compared with an expected deficit of $4.5 billion in the current year. Yet Mr. Eisenhower a year ago predicted a deficit of only $2.9 billion for the current year. If events force him to write up his present estimate even as much as he has been forced to write up last year’s, we are headed for a new deficit of $4 billion. But Mr. Eisenhower’s present estimates are far more optimistic all along the line even than his estimates a year ago. Raymond Moley discusses this phase of the budget in his own column in this issue. But the devices that have been resorted to are so extraordinary that I cannot forbear calling further attention to them: (1) In order to get his estimate of budget receipts up to $60 billion, the President must assume that employment and production will be increased. (2) In order to keep his apparent total of expenditures down to $62.4 billion, he proposes to set up special budgets (e.g., for roads and schools) outside the Federal budget. (3) The budget gives one set of figures covering the Army, Navy, and Air Force in detail. These add up to $35,750,000,000. But for the three military services as a whole he gives a total of only $34 billion. He deducts this $1,750,000,000 because the Secretary of Defense believes there are possible (but unspecifiable) savings and “slippages.” In other words, allowance is made for unforeseen economies but none for unforeseen spending increases!
There is, of course, always a possible margin of error in estimates of future expenditures and receipts. But that is precisely why conservative Treasury Secretaries of the past aimed at a safe surplus rather than an exact balance.
When Mr. Eisenhower presents a table of annual expenditures in the first part of his budget message, he carries it back only to 1952. This happens to be the last year with which spending comparisons are still in his favor. Had he carried back his comparison only one year more (as the appended table shows), he would have brought out the fact that his proposed spending for 1956 is $18.4 billion more than Mr. Truman spent in 1951. And in both fiscal 1951 and 1952 the Korean war was going full tilt. What is most disheartening about the new budget is the whole spending philosophy implied. Mr. Eisenhower’s message continues to give lip service to conservative spending principles; but his words are not supported by his program. There is, for example, the familiar device of showing as many expenditures as possible under the sacrosanct classification “national security programs.” Mr. Eisenhower thereby gets a total for such programs of $40.5 billion, or 65 percent of the entire budget. Yet this includes $3.7 billion for foreign military aid, the excuse for most of which has vanished. Yet not even plausible perfunctory reasons are presented to explain why a now-prosperous Europe still cannot pay for its own defense. In fact, total expenditures for foreign aid are estimated at $4.7 billion for the fiscal year 1956, which is actually $400 million more than we are spending in the current year.
Then $2.2 billion is to be spent for a farm-price-support program which raises food costs for city workers and makes a liberal trade program impossible; $4.6 billion is allotted for veterans’ benefits—$219 million more than in the current year; and in the offing is a grandiose $101 million ten-year road program.
Mr. Eisenhower has drifted far from the day two years ago when he declared to Congress: “The first order of business is the elimination of the annual deficit.”
| Fiscal Year | Expenditures (in millions) | Deficit or Surplus |
| 1947 | $39,033 | + $ 754 |
| 1948 | 33,069 | + 8,419 |
| 1949 | 39,507 | - 1,811 |
| 1950 | 39,606 | - 3,111 |
| 1951 | 44,058 | + 3,510 |
| 1952 | 65,410 | - 4,017 |
| 1953 | 74,274 | - 9,449 |
| 1954 | 67,772 | - 3,117 |
| 1955 (est.) | 63,504 | - 4,504 |
| 1956 (est.) | 62,408 | - 2,408
|
February 14, 1955
The present Council of Economic Advisers is a much more distinguished body than that in the later years of the Truman Administration. This fact is reflected in an annual Economic Report that is better reasoned, more carefully documented, more informative, lucid, balanced, and less flagrantly political than those to which we had become accustomed.
But after I have said all this, I am sorry to arrive at the same conclusion announced several times in this place over the last eight years—to wit, that a Council of Economic Advisers that makes public reports cannot be an independent, disinterested, and scientifically objective body but is forced to become an apologist for what the administration in power has done or has decided to do.
The reasons for this are inherent in the setup of the council. Appointed and removable by the President, and making public reports to the President, it can hardly criticize the economic policies that the administration has followed or recommend the opposite of what it knows the administration intends to do. Therefore the CEA’s latest report, as I remarked of those under the Truman Administration, still “consists mainly of giving ‘scientific’ and ‘economic’ reasons for what the President has done or wants to do for political reasons” (Newsweek, Jan. 28, 1952).
The new Economic Report, in fact, goes down the line for every economic recommendation of President Eisenhower, however dubious, in all his other messages. I could repeat about it verbatim, with complete truth, many of the things I wrote about President Truman’s older economic reports. For example: “The report was full of expressions of faith in a free economy. Yet one recommendation after another was based on the assumption that the economy would not in fact be stable without government intervention and control at a score of crucial points” (Newsweek, Jan. 27, 1947).
Now a government can continue for a long time to maintain the appearance of prosperity through monetary inflation. This is in fact the policy that the Federal government followed in 1954; and it is in fact the reason why it was able to turn the recession of late 1953 and early 1954 into a resumption of the boom.
This fact is not disputed; it is candidly acknowledged (but not of course under the nasty name of inflation) by the Eisenhower Administration itself. In his letter transmitting the Economic Report to Congress, the President declared: “Fiscal and monetary measures fostered an expectation of improving economic conditions and encouraged people to maintain a high rate of expenditure.” The council’s lengthy report is more explicit. It describes how the government increased the money supply by about $10 billion in 1954 by cheap money policies. The “Federal Reserve Banks lowered their rediscount rates. The reserves that member banks are required to hold in support of their deposits were reduced once again.” Then, “As a result, the loans and investments of commercial banks increased by about $10 billion during 1954 and the money supply increased further—especially in the second half of the year. Had it not been for the increased availability of credit and the easing of terms, the fast pace of . . . construction . . . would not have been attained,” etc.
And later (page 100), the CEA admits that: “More than half of the overall expansion in bank loans and investments was in holdings of U.S. Government securities. These increased by about $6 billion. . . . The increase of $2.6 billion in total loans clearly was not due to commercial and industrial loans. . . . These loans were still lower at the year end than they had been at the end of 1953. The increases in the total were in large part the result of increases in real-estate loans, in loans to brokers and dealers, and to others for purchasing and carrying securities, and to a minor degree in agricultural loans.” But after this admission of the way in which government policies stimulated a booming stock market, the CEA and the President deplore the “overemphasis of speculative activity!”
February 21, 1955
If developments in Russia, France, or Formosa force an “agonizing reappraisal” of our foreign policy, they call no less for reappraisal of our foreign economic policy. Yet this reappraisal need be agonizing only in the sense that it may force some of us to abandon a few of our pet ideas.
The necessity for diverting more of our military resources to the protection of Formosa must increase our expenditure in that direction. But this need not mean that our total budget expenditures must be increased by the same amount or even that this total must necessarily be increased at all. The need for more expenditures in one direction underlines, rather, the need for more economy in other directions.
Yet this need is getting almost no attention. Army partisans are using the Formosa crisis for a dubious insistence on more foot soldiers. And our armchair strategists are somehow certain that even a defense expenditure of $40.5 billion a year is not enough. One of their most persistent fallacies is the assumption that the amount of defense we get is directly measured by the amount of money we spend. This assumption has survived repeated exposures of shocking misdirection and waste in military spending before Congressional committees.
Foreign economic policy cannot be treated in a separate compartment from foreign political, diplomatic, and military policy. What is needed especially at this time is a clarification of our whole relationship to our so-called “allies.” Since the end of the second world war this relationship has been strangely one-sided. We have showered other countries with money, goods, armament, and agreements to defend them. We have asked and got in return only the vaguest assurances regarding what they will do in a crisis to help defend us. One of the chief purposes of having military allies has always been to economize the use of one’s own resources—to have others share the burden of defense or war. But our own so-called alliances have been one-way contributions and assurances that have increased, not reduced, our defense expenditures.
This applies to the nearly $50 billion that we have thrown into foreign aid since the end of the second world war. It applies to the $4.7 billion that we are planning to spend in the same way in the next fiscal year. Almost the whole of this new sum, at least, could be saved. We must of course continue to give aid in certain special situations, as in Korea and Formosa. But there is no earthly reason why we should continue to bribe a now-prosperous Europe to defend itself, or continue the Truman giveaway program known as Point Four. We need not go again into all the fallacies and follies that lie behind our foreign-aid program. I have already done this in scores of Newsweek articles over the last eight years, as well as in a book, Will Dollars Save the World? (1947), and in a pamphlet, The Illusions of Point Four (1950). (Both published by the Foundation for Economic Education,Irvington, N.Y.) Fortunately there is now a growing recognition of the futility of our foreign-aid program. One evidence is the appearance of such new books as The Dollar Dilemma: Perpetual Aid to Europe? by Melchior Palyi (Regnery; $2.75) and Billions, Blunders, and Baloney, by Eugene W. Castle (Devin-Adair, $3.50).
The fantastically one-sided nature of the “alliances” we have made was glaringly exposed in the Korean war. It was a “United Nations” war. But the United States supplied not only more than 90 percent of the money, but (apart from South Korea itself) 90 percent of the men and casualties. Yet when it came to deciding how we were to conduct this war, and what the truce terms were to be, our token allies had apparently as much to say as if they had shared equally in the blood, sweat, and tears. We suffered, in brief, all the disadvantages of an alliance with none of its advantages. Such a situation should never be allowed to occur again. If we are now forced to carry alone the burden of defending Formosa, we can at least stop wasting subsidies on European countries that seem apathetic even about defending themselves.
February 28, 1955
In his attitude toward the Dixon-Yates contract, Mr. Eisenhower has been merely defensive. He has made no counterattack against the fanatic devotees of socialized electric power. In the world of party politics this is losing strategy.
Occasional and reluctant defensiveness is even less likely to succeed with relentless enemies like Communist Russia and its satellites. Hardly a day has passed in the last ten years in which the leaders of these countries and its official press have not vilified the United States and the whole “capitalist” world. Yet our official answers have been sporadic, often timid, and nearly always merely defensive.
True, we have the Voice of America. The United States Information Agency is spending $77 million this year and wants to spend $86 million next year. But it is impossible to believe, in the face of results, that this spending has been very effective. On its face it is not reasonable to expect too much, for example, even if we do reach a few isolated and helpless men and women behind the Iron Curtain through their short-wave sets.
What really needs to be done would not cost the taxpayers an extra cent. Yet, ironically, we are not doing it. We should make a full, daily, public reply to every Chinese or Russian Communist attack upon us. Our government would not need to put this on radio or television; it would broadcast itself. Its primary purpose should be, not to “penetrate the Iron Curtain,” or to convince a Khrushchev or a Chou Enlai of the error of his ways, but to convince and solidify the opinion that we can and do reach—that of the non-Communist world.
What the American Government needs to provide today is systematic propaganda on behalf of the true opposite of Communism, which is free enterprise—or (to use the smear word invented by Marx) capitalism. Our spokesmen occasionally do defend something that they vaguely call “democracy.” This makes little impression, because the Communists call our democracy “capitalism” and reserve for their own political system the name of “people’s democracy.” What we must defend in our system, if we ever hope to win the ideological war, is the element of freedom in it—particularly freedom of private competitive enterprise, because it is precisely this that is the contrary of Communism. When we do defend capitalism against the Communists or some of our socialist “allies” we usually apologize for it. Almost invariably we defend it on the ground that it is enormously more productive than socialism or Communism. This is true; but it is merely a derivative benefit. And it is precisely this kind of defense that tends still further to convince both socialists and Communists that capitalism is materialistic and soulless.
We forget, in making this materialistic defense, that the Communists are imbued with a quasi-religious zeal for their monstrous system. What makes so many of our own fellow travelers apparently incurable is their fixed belief that somehow, whatever its errors, Communism represents a higher moral ideal. So we must base our defense of capitalism not on its immensely superior production, but primarily on moral grounds—on its respect for the self-dependence, freedom, and dignity of the individual.
The next few years will be extremely difficult years for the Western world. If it is confused and internally divided in its ideology it stands in gravest danger of defeat. Its central economic doctrines must be clarified. Its social faith must be unified. A cold war with Communism, or even a shooting war with Communism, will still be half an ideological war, half a propaganda war. Unless our own philosophy is coherent we cannot sow doubt among our Communist enemies. The Communist world threatens to destroy civilization today, not because the majority of its active inhabitants are innately any more wicked than the rest of us, but because they believe in absurdities. It is this belief in economic absurdities that causes them to commit political crimes. Our chief hope is that we can shake their insane logic before it has plunged the world into an insane war.
March 7, 1955
It was a disturbing symptom when the House and Senate, by big majorities, rushed through fat increases in their own pay, effective immediately, raising Congressional compensation from $15,000 a year to $23,750.
There may be good arguments for an increase in Congressional salaries. But that is beside the present point, which is whether congressmen ought to raise their own salaries during their own unexpired terms.
The history of Congressional pay is instructive. In 1789 the compensation of senators and representatives was fixed at $6 for each day’s attendance; in 1815 at $1,500 a year; in 1817 at $8 a day; in 1855 at $3,000 a year; in 1865 at $5,000; in 1873 at $7,500 (reduced to $5,000 again in 1874); in 1907 at $7,500; in 1925 at $10,000; and in 1946 at $12,500 plus $2,500 for expenses. The increase of March 3, 1873 (also retroactive, as in this year’s House bill, to the beginning of the Congressional term), was denounced by the country as a “salary grab”; and on Jan. 20, 1874, it was repealed.
For congressmen to raise their own salaries during their own terms is not contrary to the letter of the Constitution, but clearly contrary to its spirit. Two explicit provisions are relevant. One is Article I, Section 6: “No senator or representative shall, during the time for which he was elected, be appointed to any [Federal] office . . . which shall have been created, or the emoluments whereof shall have been increased, during such time.” The purpose of this is plain. The Constitution provides, again (Article II, Section 1): “The President shall, at stated times, receive for his services a compensation which shall neither be increased nor diminished during the period for which he shall have been elected.” The purpose of this should also be plain on its face. Any doubt is removed by the contemporary explanation of Alexander Hamilton in “The Federalist” (No. 73) that it was inserted precisely that Congress should not be able to “tempt” the President “to surrender his judgment to their inclinations. . . . They can neither weaken his fortitude by operating on his necessities, nor corrupt his integrity by appealing to his avarice.” But the Founding Fathers could not foresee everything; and so they neglected to limit the power of congressmen to change their own compensation. But surely the same considerations that led to the constitutional provisions just cited would indicate that the President ought not to curry Congressional favor by asking Congress to raise its own salaries. They would also suggest that Congress, when it does see fit to raise Congressional salaries, should make the increase apply, not to congressmen already in office, but only to those to be elected in future. Is this too much restraint to ask? Are congressmen’s necessities too great for them to get along on their recent salaries for the next two years? How many of those who voted to increase their own pay explicitly notified the voters during the election of their intention to do so?
This brings us to an even more serious aspect of the self-salary-raise. Congress for the last quarter-century (and the present Congress has not yet shown itself to be any exception) has tolerated, encouraged, and helped to create constant deficit financing and continuous inflation. It has acted on the assumption that almost any problem, domestic or international, can be solved at the expense of the American taxpayer.
When it is suggested that the exorbitant personal or corporate income-tax rates might be slightly reduced, Congress, with a shrug of the shoulder, has expressed perfunctory sorrow that it cannot be done now. But now it pleads that the inflation it has itself encouraged and helped to create has raised its own cost of living to a point where it must raise its own salaries for relief. If congressmen can continue to inflict inflation on the rest of us, and escape the consequences for themselves by raising their own pay, what hope can the country have for a cut in spending, a cut in taxing, or a halt to inflation? If more congressmen had seen the subject in this light, fewer might have voted to raise their own pay.
March 14, 1955
President Eisenhower was thoroughly justified when he called the Democratic proposal to cut everybody’s income tax by $20 (plus $20 more for each dependent) “the height of fiscal irresponsibility.”
This is in effect the same proposal Democratic leaders made a year ago to raise everybody’s personal-income exemption by $100. It has all the disadvantages of that former proposal. The deficit for the current fiscal year is estimated at $4.5 billion; for 1956 the deficit is already estimated (optimistically) at $2.4 billion. This $20 cut proposal would raise the annual revenue loss by $2.1 to $2.3 billion more. Hardly less serious, it would relieve some 5 million more voters of the necessity of paying any income tax at all, and so relieve them of any concern about governmental extravagance by fostering in them the illusion that “the other fellow” was paying the bill.
What makes this proposal even more irresponsible is that it was tacked on as a rider to a bill designed to maintain excise and corporation tax rates, so that revenues from them would not fall by $2.8 billion a year. The Democrats said in effect to the President: “If you want to keep this $2.8 billion of revenue we will charge you $2.3 billion for the privilege.”
This was demagogy outsmarting itself. Even should the rider be passed by Congress in some form, it is politically easy for the President to veto it. He would stand, at worst, to lose only about $500 million net in revenues. And economically this would be in every way a better tax cut than the one the Democrats proposed. A cut in the excise taxes would stimulate sales. A cut in the onerous corporation taxes would stimulate investments that create jobs. And Mr. Eisenhower could accompany his veto with a reiterated demand that Congress pass his tax-maintenance proposal in its original form. If the Democrats refused to do so, they would find themselves bearing the onus of “favoring the big corporations.”
But how did Mr. Eisenhower get into this difficulty in the first place? By abandoning the goal of his State of the Union message two years ago: “The first order of business is the elimination of the annual deficit.” When he abandoned that, he lost his anchor and was himself adrift. At his press conference of Feb. 23 he gave an excellent description of the kind of proposal the Democrats had made. It would mean inflation. “Whenever you have inflation, the immediate effect is to hurt first the people of fixed incomes, white collar workers . . . the person who lays aside savings in the forms of pensions, insurance plans, and savings bonds. . . . Now we are going back to deficit spending, the most insidious thing that can happen to a free economy.”
True words; well spoken. But, alas, Mr. Eisenhower has himself never got out of deficit spending. He has allowed himself to be led astray by the Keynesian and New Deal doctrines of a “compensated economy,” which treat an annually balanced budget as a minor and even a dubious objective. He has himself proposed huge new spending programs. This leaves him no firm ground on which to stand against the fiscal demagogy of the Democrats. He can hope to combat it only by submitting a completely balanced budget—and for 1956.
My comment in Newsweek of March 8,1954, on the Democratic proposal for an increase of $100 in all income-tax exemptions would cover the present situation with hardly a change even in the figures: “President Eisenhower can successfully combat this demagogy, irresponsibility, and inflation only if he takes a solid stand on principle. He cannot hold the line if he merely tries to stick by his January budget. He cannot convincingly argue that a deficit of $2.9 billion is all right but a deficit of $5.2 billion is all wrong. He can succeed only if he stands on the firm economic and political principle that the budget must be fully balanced, and now. And then he can demand of any group in Congress that wants the fun of cutting taxes that it first of all cut expenditures by the same amount. The only alternative to this course is economic and political demoralization.”
March 21, 1955
The Democratic proposal for a $20 cut in everybody’s income tax is the most disturbing example so far of the almost complete fiscal irresponsibility in Washington.
The Federal budget has become a political football. Fiscal responsibility has been forgotten in a sordid scramble for partisan advantage. For this situation neither party can escape blame, nor can the Congress or the President. Mr. Eisenhower in January submitted a budget which carried the 23rd deficit in the last 26 years. We were supposed to be gratified because this deficit was “only” $2.4 billion. Yet a year ago the President estimated a deficit of $2.9 billion for the current fiscal year, which is now estimated at $4.5 billion. The deficit for the new fiscal year seems even more underestimated than the last one. In addition, Mr. Eisenhower has proposed huge new spending programs on schools and roads outside the Federal budget. Even without the proposed Democratic cut, the budget deficit threatens to reach $4 billion.
This is what made it so difficult for Mr. Eisenhower to present a convincing case against a Democratic proposal that would have raised the deficit by at least $2 billion more. In the present situation, in fact, only a handful of men in either party dare to talk of a budget balance or of real economy.
This is fiscal demoralization. It has become all but futile to argue against specific spending schemes or the perpetual deficit. Real hope lies only in a complete reform of budgetary procedure itself. We must establish a responsible budget system.
For 22 years one man in Congress, Senator Byrd of Virginia, has stood above all the rest in the courage and persistence he has shown on behalf of economy and fiscal responsibility. He has now introduced a proposed constitutional amendment which recognizes the urgency of a reform in fiscal procedure itself. This amendment would permit Congress by law to authorize the President to veto any item in an appropriation bill, without being forced to veto the entire measure.
A similar proposal has long been advocated by outstanding leaders in both parties, conservatives and liberals alike. It was urged in 1937, for example, by Republican Senator Vandenberg, and supported then by President Roosevelt. The power of “item veto” over revenue bills is already possessed by the governors of thirty-seven states. Some of them also have the power of reducing any item.
A constitutional change of this sort would surely bring us nearer to fiscal responsibility. But it may be doubted whether in today’s conditions it would go far enough. Perhaps Senator Byrd drafted his amendment in the form he did—merely giving the President the power of item veto, and making even that subject to authorization by Congressional law—because he feared that anything stronger would have difficulty getting through Congress. Yet the most wholesome system for controlling the budget, if it could be achieved here, is that which has long prevailed in Great Britain, under which the legislative branch may reduce, but cannot increase, the total expenditures proposed by the executive branch.
A budget procedure very close to this, in fact, is prescribed by the constitution of New York State. The governor’s annual budget must not only give estimated expenditures and revenues for the next fiscal year, but must be accompanied by a bill or bills containing all the proposed appropriations and any proposed new taxes. The legislature (I quote the state constitution) “may not alter an appropriation bill submitted by the governor except to strike out or reduce items therein.” If the legislature wishes to increase or add any appropriation, it must be by separate items or bills “each for a single object or purpose” which “shall be subject to the governor’s approval.” In addition to this control, the governor is given explicit power to veto individual items in appropriation bills.
Nothing short of these combined restraints, I fear, can now give us a responsible Federal budget.
March 28, 1955
The present Senate investigation of the stock market reminds me of one of those whodunits in which it is discovered at the end that the crime was after all committed not by the suspects who were grilled but by the detective in charge of the investigation.
The recent extraordinary rise in the stock market is of course in large part due to the present earnings of corporations, and to confidence in the outlook for business. This confidence is in part the result of the less hostile attitude toward business taken by the present Administration as compared with its immediate predecessors. But a good deal of the stock-market rise of the last eighteen months has been due to the existence of money-and-credit inflation, as well as to the belief that this inflation will continue.
The government increased the money-and-credit supply in 1954 by about $10 billion through cheap money policies. The long-run overall figures speak for themselves. At the end of 1939, the country’s total money supply (as measured by total bank deposits and currency outside of banks) was $64.7 billion. At the end of 1953 it was $205.7 billion; at the end of 1954, $214.5 billion.
Spokesmen for the Eisenhower Administration have argued that there was no inflation in 1954 because wholesale commodity prices stood at an index number in January 1955 of only 110.2, compared with 110.9 in January 1954, while the cost of living in December 1954 stood at only 114.3 compared with 114.9 in December 1953. There are even those who contend, in the face of an increase of more than $24 billion in the money-and-credit supply between the end of 1951 and the end of last year, that there was a “deflation” in that three-year period, because wholesale commodity prices dropped from an average index of 114.8 in 1951 to 110.3 this February.
This illustrates the confusion we get into when we define inflation, not as an increase in the money-and-credit supply, but simply as the rise in commodity prices that is usually a consequence of such an increase. (But a consequence that may sometimes not take place.) The same confusion existed in 1929 and helped to increase the dimensions of that debacle. A standard index of security prices rose from an average of 100 in 1926 to 216 in September 1929. It was argued at the time that this certainly could not be the result of any inflation because the official index of wholesale prices had meanwhile fallen from an average of 100 in 1926 to 96 in September 1929. Yet monetary inflation was in fact going on. Deposits of Federal Reserve member banks rose from $29 billion at the beginning of 1926 to $32.5 billion at the beginning of 1929. By present standards, this overall credit increase may seem moderate. But the inflation was pouring into the stock market. In this respect it is only the developments of recent months that bear any realistic comparison with 1929. In 1929, brokers’ loans were more than $8 billion; today they are less than $2 billion. This illustrates not only the inexcusable discrimination but the absurdity involved in the suggestion of some witnesses before the Senate committee that margin requirements on stocks should be raised by the Federal Reserve Board from the present 60 percent to 100 percent.
It may be, as one witness in favor of the 100 percent margin requirement insisted, that there has been a 54 percent advance in stock prices in the last sixteen months, compared with a 78 percent rise in the sixteen months before the 1929 crash. But when we take longer and broader comparisons this one hardly seems ominous. In fact, whereas compared with 1929, Standard & Poor’s stock-market index shows an increase of 13 percent, the cost of living shows an increase of 56 percent, wholesale commodity prices an increase of 78 percent, and hourly manufacturing wages an increase of 225 percent.
Yet in spite of the fact that security prices have lagged far behind the general price rise, there are outcries from a Harvard “economist” and a former Federal Reserve official for still further discrimination against stocks, so that stocks would become the one thing that nobody was allowed to borrow on at all. Winthrop H. Smith, the managing partner of the country’s largest brokerage house, was one of the few who raised a pertinent question. If we are to eliminate borrowing on securities listed on the national exchanges, why not eliminate borrowing on homes, on all real estate, on motor cars, on furniture, television sets, air conditioners, or whatnot?
The comparison points up the demagogic discrimination to which the government has already resorted. It is now encouraging people to buy houses or almost any consumption goods or luxury on a shoestring margin. But some “economists” and senators want to prohibit people from borrowing at all if they prefer to save their money and invest it in industrial corporations—that is, in the plant and equipment that is necessary to raise the productivity of the country, to increase wages, and create jobs.
Such discrimination has reached a degree that would be comic if it were not disturbing. Installment credit now outstanding exceeds $22 billion. This is being encouraged. Mortgage debt on one-to-four family houses has nearly quadrupled in ten years to an estimated $75 billion. This, too, is being encouraged. But brokers’ loans against stocks are less than $2 billion. And this is so alarming that it calls for investigation and repression!
This so-called “qualitative” credit control is not only dangerous, because it permits the government to dictate just who shall have credit and who shall not, but it is also futile. Even if a man is prevented from borrowing on stocks, what is to prevent him from borrowing on his home or government bonds or his merely personal credit and using the proceeds to buy stock? We cannot flood the country with credit and throw a dike around the stock market.
And so we are back to our starting point. If the present stock-market boom is something that somebody should be blamed for, then the blame rests squarely on the Federal government itself. It is a result of its general policy of credit inflation. So the Senate investigators, if they really want to find the culprit, need not search for him somewhere in Wall Street. They need not go outside of Washington.
April 4, 1955
One good outcome of the Senate stock-market inquiry may be the public education it has provided on the effects of the capital-gains tax.
This is supposed to be a tax on capital gains. But as it is only collected when an asset is sold, it is, in effect, a tax on selling. An investor must pay, say, a tax of 25 percent on his capital gains on his shares in company X—if he sells them. As long as he holds on, he need pay nothing. If he could be sure that his X shares were going to fall, or even that shares in company Y were going to do relatively much better than X shares, he might make the switch in spite of the heavy tax penalty. But as he can almost never have such absolute assurance, he is likely to stay put. This is what is meant when it is said that many investors are “locked” into their investments.
The tax on long-term capital gains therefore raises comparatively little revenue. But by so heavily penalizing sales or exchanges of property, it makes holdings less liquid and the economy less flexible. It discourages people from acting in accordance with fresh knowledge or new conditions. It thereby not only distorts the relative prices of securities and other goods but prevents much capital from flowing into new enterprises or into the lines where it would be most productive. It is locked up where it already happens to be.
A great injustice of the capital-gains tax is that in an era of inflation it is a tax on gains that do not even exist. If a man bought property in 1939 for $10,000 and sells it for $15,000 today, he is taxed on a supposed profit of $5,000. But this “profit” exists only in paper dollars. In terms of what he can buy with the proceeds he actually has a loss. For the cost of living has gone up 92 percent in the meantime, and wholesale prices have risen 120 percent.
Another injustice in the capital-gains tax is that it is levied by the government on the cynical principle of “heads I win, tails you lose.” For the government taxes capital gains without allowing corresponding deductions for losses. True, it allows deduction of capital losses from capital gains. But though it taxes short-term capital gains, for instance, up to any amount just as if they were income, it allows no more than $1,000 deduction of capital loss against income. This negligible pretense of balance does not change the cynical unfairness toward investors with heavier net losses.
Senator Fulbright asks, even today, why even long-term capital gains shouldn’t be taxed as straight income. The question reveals his ignorance of the history of this measure. The government once did treat both capital gains and capital losses for tax purposes exactly like income. And it was appalled at the results. When the stock market fell from 1929 to 1932 Federal revenues collapsed—because taxpayers deducted their capital losses even from their already reduced incomes.
The crucial revelation came on May 23, 1933, when the famous banker J.P. Morgan disclosed before a Senate committee that he had paid no income tax for the two preceding years. The reason was simply that his capital losses had exceeded his income in those years. But the very idea that J.P. Morgan could skip income tax for any reason at all so shocked headline writers and congressmen that it was decided to change the law. An honest change might have been to treat capital gains and losses as the British Government does. By and large it neither taxes gains nor allows losses to be deducted against income. But our own government insisted on eating your cake and having it too. It in effect decided,(with trivial qualifications) to tax its citizens’ net capital gains and ignore their net losses.
It is easier to point to the inequities in the present tax treatment of capital gains, and to the harm it does, than to suggest an acceptable alternative. The truth is that when a country has progressive income-tax rates running up to 91 percent, it is impossible to work out any fully satisfactory solution of the problem of capital gains and losses. But probably the best solution is that adopted in Britain.
April 11, 1955
As he gropes and calculates and curses his way through his income tax, the taxpayer is apt to curse the wrong man. When he is asked for his Social Security number or some other information in a space obviously too small to hold it, his wrath turns on the bureaucrats who framed the forms. But sober second thought should convince him that the main culprits have been his elected representatives who framed the laws the bureaucrats must apply.
It is the complications in the law that cause the complications in the income-tax blanks. Nearly all these complications arise from the fact that our lawmakers refuse to grant to persons with high incomes the deductions which, as a matter of simple fairness, they grant to persons with moderate incomes. If capital gains are to be taxed as if they were income, then capital losses should be fully deductible from income. But Congress arbitrarily limits the deduction to $1,000. If medical expenses above a certain amount are fair and proper deductions from taxable income, then they should be fully deductible above that amount. But Congress and New York State put an arbitrary limit on the deduction. If, finally, it is wrong in principle and harmful in consequences to tax the same income twice, then it is wrong to remove double taxation on a few moderate incomes but retain it on higher incomes.
The calculations that the taxpayer must go through in order to figure the amount of tax relief he is allowed on income from dividends are so fantastically complicated that a new Mark Twain or Bob Benchley could not think of anything more absurd. Yet after the taxpayer is all through, he can only exclude $50 of income from his dividends and get a tax credit of 4 percent on part of them.
These complicated calculations are necessary simply because the last Congress, in granting this merely token relief from double taxation of dividends, was in deadly fear of the accusation that rich stockholders would benefit from it. Yet from a political standpoint the Republican Congress responsible for the token relief gained nothing from all its super-caution. The CIO bosses and the Democratic dervishes are still shouting that the Republicans allowed rich men tax deductions on unearned income from dividends but refused to allow poor workers to make any corresponding deductions in income from wages.
If the Democrats should now try to throw out this dividend tax relief, in the form in which it now exists, the Republicans would be well advised either to let them do it or to offer an amendment of their own.
The double tax on corporate dividends is still flagrant. If a man invests his money in a corporation he pays a tax of $52 out of every $100 that his investment earns even before he gets it. Then, on the $48 that is left (or whatever part of it is paid out to him in dividends), he must pay a tax of up to 91 percent (now minus a 4 percent credit). On any dividend on which he pays the maximum tax rate he has only $6 left for himself out of every $100 the corporation earns. The government grabs the other $94.
Instead of giving the individual taxpayer this extremely complicated but negligible relief on his own tax, it would be much simpler all around to tax corporations themselves in a slightly different manner. Instead of requiring them to pay a 52 percent tax on their total net income for the year, for example, they could be asked to pay 52 percent on the amount of net income they retain, and, say, 48 percent on the amount they pay out in dividends. (In 1954, corporations had profits before taxes of about $35 billion, from which they paid out $10 billion in dividends.)
This would be an approach toward the British system of corporate taxation. Such a change in system would save the individual taxpayer an enormous headache, would be easier to explain to the inexpert, and would take phony issue away from the Democratic left-wingers. The individual taxpayer would once more pay precisely the same rate in his own tax bill on income received in the form of dividends as on any other income.
April 18, 1955
The proposed constitutional amendment of Senator Byrd would make it possible for the President to veto any item in an appropriation bill without being forced to veto the entire measure. This would surely bring Washington much nearer to fiscal responsibility. But it would still fall short of that goal. We will not achieve a fully responsible budget until we are ready to accept the system that has long prevailed in Great Britain, under which the legislative branch can reduce, but cannot increase, the expenditures proposed by the executive branch.
The proposal that Congress should actually deprive itself of the power of voting appropriations not proposed by the President is so contrary to what we are accustomed to that it may strike some readers as shocking or chimerical. Yet it is our own Federal procedure that would seem shocking in most foreign countries. They simply could not afford the fiscal irresponsibility of the American system. Nor can we ourselves afford it much longer.
The rule that the legislature should not be allowed to increase expenditures beyond those proposed by the executive is not novel. It is accepted, in fact, in the overwhelming majority of governments in the world today. It prevails in many of our own states.
The rule rests on a fundamental principle of government. The only proper fiscal function of Congress is to be the watchdog of the people’s Treasury. Its members will not properly perform their function as watchmen if they can put their own hands in the Treasury. The Congressional “power of the purse” properly consists solely of the power to guard or to refuse the purse.
If this principle could once be established it would end forever the present shocking competition among the President, the House, and the Senate, and among individual representatives and individual senators, to outspend each other—to prove that each can be more generous than the others in appropriating the taxpayers’ money. If members were unable to introduce measures proposing handouts the change would leave unborn most of the bills now introduced. It would forever end logrolling. Congress would exercise far more than now its power of reducing proposed Presidential expenditures. As H.J. Ford put it in his Representative Government 30 years ago: “There is no propensity of human nature more marked than jealousy of opportunities that one does not share.”
We may put the political principle involved in another way. It is to encourage competition between the President and Congress in economy; it is to discourage, preferably to the point of making it impossible, competition between them in extravagance.
But why, some congressmen will ask, should this power be taken away from Congress, and not from the President? The answer is that Congress already can exercise an absolute veto over any appropriation proposed by the President (simply by refusing to vote it), whereas the President cannot exercise such an absolute veto over Congressional appropriations. He does not even have the power of item veto, which Senator Byrd wants to give him. And even if he had it, he would still have, as now, only a partial “veto” which can still be overridden by a two-thirds majority in both houses. This power to override has often been exercised by Congress in granting veterans’ bonuses or lavish Federal payroll increases. It tempts the President in advance to increase his own spending proposals.
If Congress could be persuaded to pass a self-denying constitutional amendment depriving itself of the power of increasing the President’s proposed expenditures, it should at the same time give itself the explicit power to return an unbalanced budget submitted by the President with directions either to balance it or to reduce its proposed total expenditures to some specified maximum.
To repeat, the basic principle to be followed to attain a responsible budget is clear. It is to eliminate the power of either Congress or the President to spend without restraint and to increase the power of each to restrain the spending of the other.
April 25, 1955
American workers are now getting by far the highest wages paid anywhere in the world. They are the highest wages ever paid even in American history. The aristocrats even among American workers are the automobile workers, who today get an average of $2.24 an hour and more than $96 per week.
Walter P. Reuther, head of the United Auto Workers CIO, who has never understood, and never tried to understand, what has made possible the miracle of American wages, has decided to plump for a guaranteed annual wage. The worst thing that could happen to American labor would be to win such a demand.
The first thing to be understood about the employer is that he is merely a middleman, a go-between. He can never pass on to workers more than he gets from consumers. The employer cannot guarantee an annual wage to his workers unless consumers will guarantee him the required volume of sales. The late Philip Murray, Reuther’s predecessor as head of the CIO, understood this. “Experience to date,” he wrote in 1940, “raises doubt as to whether annual-wage plans can be extended over a wide area of business activity, for back of their success is the stabilization of operations.”
The paradox of the guaranteed annual wage is this. When a company’s volume of business is really stable all year round, there is no need to insist on a guaranteed annual wage. Steady employment and the annual wage will exist anyway. But where the volume of sales fluctuates widely, it is impossible to guarantee an annual wage. In the automobile industry the best selling season is usually spring, and manufacturers must gauge production closely to current demand.
Reuther’s childish theory is that if he can force the employer to pay an annual wage he can “force” him to stabilize his sales. He forgets that it is already strongly to the employer’s interest to stabilize his sales to the best of his ability. This enables him to keep his skilled working force intact, to maintain its morale, and to hold down his hourly wage rate. (Durable goods industries, less stable than nondurable goods industries, today pay wages averaging 28 cents an hour more.)
It is important to notice that Reuther is demanding guaranteed pay rather than guaranteed employment. What he proposes is not steady work, but that men be paid for not working. One of his slogans reads: “40 Hours Pay Any Week You Work—52 [Weekly] Paychecks If You’re Laid Off.”
The Reuther plan might more accurately be entitled: A Plan to Undermine the American Enterprise System and to Cripple the Companies on Which You Depend for Employment. For the first effect of his plan would be to penalize and discourage the expansion that has been the life of American business. If the employer had to pay for an entire year’s idleness to every man who had worked for him two or more years, he would be extremely reluctant to take on workers who might become such liabilities. He would rather miss sales than take such a risk. This is not only common sense; it is proved by experience. After the second world war, Italy passed a law that virtually prohibited the layoff of workers. Dismissal of workers there is still subject to very heavy separation pay. The result is that Italy has had heavy chronic unemployment for years. Its labor leaders blame the result on everything but this glaringly obvious cause.
The guaranteed annual wage, in brief, would hurt most of all the very workers it is designed to protect. It would make even the American economy stagnant. It would bring permanent unemployment. It would eat up the reserves that now provide the new equipment which by increasing American productivity in the past has enabled us to pay the highest wages in history.
And the demand for a guaranteed annual wage hasn’t even a plausible excuse. We already have nationwide unemployment insurance. Reuther’s guarantee is to be thrown on top of this. It is designed, in fact, to allow a man to “maintain the same living standards as when fully employed,” thus removing his last incentive to get another job.
May 2, 1955
Our direct official government debt is $277 billion. This in itself should be colossal enough to disturb any citizen who studies its implications. But the Hoover commission, in its report of March 13 on Federal lending agencies, found, in addition, that government loans, guarantees, insurance, and contingent liabilities, created through more than a hundred different Federal agencies, totaled $244 billion.
The commission’s report made various suggestions for reducing the government’s proliferating lending agencies and putting others more nearly on a business basis. Yet moderate as its suggestions were, five of the twelve commission members thought they went too far.
The majority recommendations were based in part on a report of 257 pages prepared by a group headed by Paul Grady, a partner of Price, Waterhouse & Co. This task-force report was not made public until later. It is hard to see how any member of the commission could have read it and still remained blind to the mischief and danger of government lending to private business.
Whoever was principally responsible for drafting the task-force report not only knew the principles of accounting, but had a firm grasp of both economic and political principles and a gift for pithy, aphoristic statement. The first 25 pages are a model of what such a report should be. It would be a tragedy if it should gather dust while more billions of the taxpayers’ money are recklessly “loaned” away.
The temptation to quote from this report is limited only by space. A few excerpts may indicate its quality:
“It sometimes happens that a program accomplishes its original objectives, and then continues to function ostensibly for the same but actually for other purposes.” (This might be said of much more than lending programs; it is a sort of universal bureaucratic law.) “REA is an example. . . . Although more than 90 percent of the nation’s farms are electrified, the sponsors of the REA program foresee no end to the need for ever increasing amounts of government loans for rural electrification.” The report goes on to cite the RFC and other examples:
“Ever since the depression of the early 1930s, we have made virtually a fetish of financial security for the individual, and by our successive governmental efforts to enhance it, we have loaded more and more of the inherent financial risks of our economic life on the Federal Treasury. . . . No economic system is free from risks of loss. . . . The savings of our people must stand the losses of our enterprises if there are losses. There is no way around this, no matter how remote we are able to make the settlement appear. . . .
“We may not like to acknowledge it, but it is an essential truth that many in our society, though they may honestly wish to try, are not capable of being successful businessmen, successful farmers, or even successful home owners. The failures of such people may be personal misfortunes but there seems little justification for assessing the taxpayers to cover their losses. . . .
“It is not possible for the government to assist one competitor without placing handicaps in the path of another. . . .
“Human nature and politics being what they are, occasional windfall profits are virtually an inevitable accompaniment of government lending. Subsidies in one form or another are an essential characteristic of government lending and a windfall profit is only a subsidy grown up. . . .
“Government lending programs and government guarantee programs have a fatal attraction politically. They can be used handily to bestow favor on particular groups and persons. . . . Because it is attractive politically, government lending grows and grows. Each successive national administration offers more than the last lest there appear to be retrogression.”
Finally, the task force quotes from the prophetic statement of the first Hoover commission in 1949: “Direct lending by the government to persons or enterprises opens up dangerous possibilities of waste and favoritism. . . . It invites political and private pressure, or even corruption.”
May 9, 1955
Once a government bureaucracy has been set up to do any job whatever, it will find endless excuses for expanding, prolonging, or perpetuating that job. This is the sad history of our postwar foreign aid.
Originally urged by Secretary Marshall in 1947, to meet what was then regarded as a temporary emergency situation, foreign aid has gone on and on, from year to year, constantly changing its stated purposes, constantly changing its name, but showing not the slightest tendency to terminate or even taper off. It may come as a jolt to some readers to discover that the President is actually recommending an increase in the amount to be spent in the next fiscal year even over the amount being spent in the current fiscal year. He wants foreign aid to rise from $4.3 billion in 1955 to $4.7 billion in 1956. Worse than this, far from even suggesting a tapering off, the President in his letter to Secretary Dulles of April 16 made it clear that he thought foreign giveaway should be a “continuing” program under “a permanent government establishment.”
The President’s April 20 message to Congress on foreign aid gives the perfunctory and mainly rhetorical arguments for it that we have been hearing for the last nine years. The message raises a hundred doubts about details. I can mention only one or two.
It is a program for scattering the taxpayers’ money over nearly the whole world—practically to every country outside of the Iron Curtain. To a few countries, in the world as it is today, continuance of military aid is unavoidable. This now applies most notably to Formosa and Korea. The President’s message makes out a less obvious but still persuasive case for aid to Iran, Greece, and Turkey. But having mentioned these specific countries, he suddenly plunges into the wholesale and unsupported generality that it is the duty of the American taxpayer “to promote welfare and growth for the peoples of Africa.” Next we find that it has become somehow our duty to shower money all over Latin America. Where a “critical situation” exists, as in Guatemala or Bolivia, we must toss in still more. Then we must continue to give to Yugoslavia and India, though there is not the slightest assurance that these countries will be on our side when the chips are down.
This is dangerous business. To scatter aid all around the globe is not only inexcusably wasteful, but its effect must be to reduce the aid we can give, for example, to Formosa, where it is urgently needed. The argument for such indiscriminate largess seems to be that having given aid to countries A, B, and C, we must give it to D, E, and F to prevent resentment.
The President’s foreign-aid program still allots substantial funds for “economic” aid, Truman’s Point Four, and all the rest. We are told that “three out of every four dollars” in our foreign giveaway program “will be immediately spent within the United States.” This is like trying to appeal to the self-interest of an automobile dealer by telling him that if he makes you a gift of $4,000, you will use $3,000 of it to buy one of his cars. Yet an “economic” argument that would be rejected as ridiculous if made to a private business firm can be solemnly made to a nation.
Again, the President tells us that we cannot be secure in our freedom unless, elsewhere in the world, we destroy “the conditions under which totalitarianism grows—poverty, illiteracy, hunger, and disease.” Are these really the reasons for Communism—or any other form of totalitarianism? Germany went Nazi with less poverty, illiteracy, hunger, or disease than any country outside the United States.
It is ironic, in the light of our foreign-aid program, to compare the budgets of the United States and Great Britain. In its last fiscal year Britain had a surplus of $1.2 billion; the U.S. will have a deficit of more than $4 billion. In the fiscal year ahead Britain plans a surplus of $414 million; we plan a deficit of $2.4 billion. Yet the country that had the surplus got $120 million of aid last year from the country that had the deficit. And we think it was Alice who lived in Wonderland!
May 16, 1955
A thoughtful, authoritative, carefully documented, and long overdue study has just been made by Gerard D. Reilly of States Rights and the Law of Labor Relations (Washington, D.C.: American Enterprise Association, $1).
Reilly is a Washington lawyer who has been Labor Department Solicitor and was a member of the National Labor Relations Board from 1941 to 1946. He begins by pointing out that “No aspect of labor law is in a state of greater confusion today than the power of the states to regulate labor-management relations.” This has gone to the point where “parties to labor disputes are frequently unable to learn until after months of costly litigation whether their rights to relief lie in state or Federal tribunals.”
There is one provision (Sec. 14 b) in the Taft-Hartley Act in which Congress did make a clear delegation of power to the states. This allows the states to forbid any kind of compulsory union membership contracts. Eighteen states have done so. The provision has recently become the subject of bitter debate. Yet it is not the only issue dividing states’ rights advocates from union leaders. Others include the authority of state courts to grant relief against secondary boycotts, jurisdictional strikes, and coercive union picketing.
The history of Federal and state relations in this field is ironic. Prior to 1937, when the Supreme Court sustained the constitutionality of the Wagner Act, it had been assumed in previous Supreme Court decisions that only the states had authority to regulate labor relations in manufacturing and mining industries, even though the products of these industries might enter the channels of interstate commerce. But once the Supreme Court decided that Congress did have the right to legislate in this field at all, it went on from decision to decision extending its interpretation of Federal power and correspondingly restricting its interpretation of state power until it arrived at the doctrine (in 1953) that when Congress passes a law on a matter within its jurisdiction it “pre-empts the field,” and deprives the states of jurisdiction over such matters regardless of whether their laws are “in coincidence with, as complementary to, or as in opposition to, Federal law.”
This and subsequent decisions have left the subject in legal confusion. Crucial provisions of state labor laws have been struck down whether or not they were in conflict with the Taft-Hartley Act. A sort of legal “no man’s land” has been created. The Federal government has no means of policing local strikes, or of preventing coercive mass picketing or outright violence; and the Taft-Hartley Act is practically blind to the existence of such matters. In fact, in past rulings of the National Labor Relations Board or of Federal courts, assaults by pickets or the throwing of rocks have been condoned or dismissed as “animal exuberance” or mere picket-line “scuffles.” Yet Federal-court decisions have thrown a fog of doubt around the power of the states and localities to control violence and coercive picketing.
Reilly’s statement of the case is moderate in tone, and his own legislative recommendations are also moderate. He believes that Section 14 (b) of the Taft-Hartley Act, which permits the states to enact right-to-work laws, should be preserved. And as the Federal government is not equipped to handle all labor-management problems (especially those concerned with mass picketing, sabotage, violence, etc.), he feels that the right to legislate in some of these matters should be reserved to the states and that Congress should clearly define “those areas which it intends to leave unregulated and those which it intends to leave to separate or concurrent regulation by the states.”
But the history and facts that Reilly so admirably presents raise questions that go much beyond his own recommendations. Does the Federal government, in fact, constitutionally actually have the sweeping powers of intrastate labor regulation that Supreme Court decisions of the last twenty years have awarded to it by their far-fetched reasoning?
May 23, 1955
Senator Byrd, as the event proved, showed good sense in putting aside the President’s proposal for an international “Organization for Trade Cooperation” and getting quick action to extend the Reciprocal Trade Act on its own merits.
The OTC proposal places a serious question before Congress. Indeed, it places a serious question before all those who, like the present writer, earnestly wish a lowering or removal of international trade barriers, but doubt whether the creation of one more permanent international organization is the way to get it.
Does the world need, does any single nation need, an elaborate multilateral trade agreement, requiring the consent of 34 nations, and an elaborate bureaucratic machinery, in order to lower trade barriers? Obviously not. The world has already had the old General Agreement on Tariffs and Trade (GATT) since 1947, and international trade barriers where never more fantastic. Yet prior to the first world war, and for that matter prior to the second, the barriers to international trade were far less serious than they are today. If each individual national understands that free trade or at worst only moderate trade barriers are primarily in its own interest, then each national will follow such a policy in its own interest and no international agreement will be necessary. And unless such an understanding exists within individual nations any international agreement or organization will be worthless.
The President’s message to Congress of April 14, advocating U.S. membership in the proposed OTC, was not convincing. Its reference to our membership in the International Monetary Fund, for example, mainly recalls the futility, and worse, of that organization. Mr. Eisenhower’s argument that OTC could “help establish conditions favorable to convertibility of currencies” is depressingly familiar. The IMF was established precisely to stabilize currencies and make them convertible; its actual effect has been to prolong for ten years completely inexcusable policies of internal inflation, external exchange control, trade discrimination, and state control of industry.
All this is not to deny that the revised GATT is in some respects an improvement over the old GATT (and of the proposed ITO), and that in it 34 nations have embodied many sound principles likely to appeal to proponents of freer trade. But the new GATT also embodies and gives official sanction to some thoroughly unsound principles.
Even the new GATT expressly denies the right to require the removal of any country’s quantitative import restrictions which are the result of balance-of-payment difficulties caused by “full employment policies” or by a country’s “underdevelopment.” This is economic claptrap. Can we, or any nation, afford to give it official sanction? So-called “balance-of-payment difficulties” are almost invariably the result of internal inflation combined with exchange control; the country brings them on itself by its own bad policies. It is no consolation to learn that the United States succeeded in obtaining a special concession allowing it to impose quantitative import restrictions itself to protect its farm price-support program. This again gives official sanction to thoroughly unsound policies. These provisions alone, not to mention many others, are enough to invalidate GATT. Why embody this dangerous nonsense in a permanent agreement with an enforcing organization?
The OTC in fact, seems to represent just one more example, not of any real tendency toward international freedom, but a tendency to create ever new supranational bureaucratic organizations for world centralization of power. And the OTC would also deprive Congress of still more of its proper powers under the Constitution. There seems to be no good reason why Congress should vote to establish the OTC. On the contrary, it is rather time that we should start withdrawing from the thoroughly unsound international organizations, typified by the IMF, that stand in the way of freedom, stability, and sound economic progress.
May 30, 1955
There has lately been increased rebellion against the trend toward compulsory unionism. Opponents rest their case on the principle that no man should be compelled to join a union in order to get or keep a job. But most of the rebels are modest in their aims. What they seek (like Gerard D. Reilly, whose pamphlet, States Rights and the Law of Labor Relations, was discussed here a couple of weeks ago) is little more than the retention in the Taft-Hartley Act of the provision which permits the states to forbid compulsory unionism.
But if any permanent success is to be achieved in this cause its aims must go much farther. Let us begin, for example, with the Taft-Hartley law itself. It must never be forgotten that this is merely an amendment of the Wagner Act. Like the Wagner Act, it forbids “discrimination in regard to hire or tenure of employment or any form or condition of employment to encourage or discourage membership in any labor organization.” Yet, in clear contradiction to this, it permits the imposition of the compulsory union shop. If the Taft-Hartley Act is to conform with its own declaration of purpose, it must forbid the employer to discriminate in favor of union workers as it forbids him to discriminate in favor of nonunion workers. It cannot permit the compulsory union shop, and it cannot permit so-called maintenance-of-membership contracts.
But any attempt to protect the right of the individual worker either to join or not to join a union would have to go much farther than this. For the Taft-Hartley Act gives a union that has gained the adherence of more than 50 percent of an “appropriate bargaining unit” in a plant or company the right to act as the exclusive bargaining agent for all the workers in that company. This right to bargain for other than its own members is a right not given by law to any other kind of private organization. As the eminent labor lawyer, T.R. Iserman, has pointed out: “The right to act as the exclusive bargaining agent of employees is far more important to unions than any right to force employees to join unions under closed-shop or union-shop contracts.”
But a still further amendment would have to be made in the Taft-Hartley Act before it could become a truly impartial and workable document. Congress would have to adopt the amendment suggested by Gerard Reilly (once a member of the National Labor Relations Board), under which Congress would clearly define “those areas which it intends to leave unregulated and those which it intends to leave to separate or concurrent regulation by the states.” Preferably Congress should go even farther and leave to the states and localities all those matters, such as coercive picketing, sabotage, and violence, that the Federal government is not in a position to police. It is absurd for any governmental authority to try to lay down rules in spheres beyond which its own power of enforcement extends.
If we look at the question realistically, however, it is extremely unlikely, in view of the one-sided Washington attitude of the last twenty years, that Congress would now pass a balanced labor law which would consider first of all protection of the liberty of the individual worker to join or not to join a union, as he saw fit.
It may be asked, in fact, whether those who are now insisting that the law abolish any form of the compulsory union shop have fully studied the problems that this raises. It implies continued detailed intervention by government in the field of labor relations. Would it not be better to take the unions at their word and simply repeal the Taft-Hartley Act and return to the situation that existed in this country prior to 1935? Would it not be better for the Federal government to intervene only in undeniable interstate labor relations and leave the regulation of other labor relations either to the states or to the common law, which should protect the individual, whether worker or employer, from violence, but otherwise leave him free? These are large questions, which deserve deeper study than we have yet given them.
July 18, 1955
The other day Rep. Clarence Cannon, chairman of the House Appropriations Committee, made a promising analysis of some of the things wrong with our present Federal budget system and then came up with some very unpromising remedies.
At present, he said, Congress can wreck completely the best prepared budget. “Any senator can walk into the Senate Appropriations Committee and put anything in a bill he wants. Then when it gets to conference the senators say: ‘You can’t do anything about that—that’s Senator So-and-So’s item.’ You’d be astounded at what some senators get away with. . . . You can go down the roll and find many members who never vote for a tax [increase] bill but for every appropriation bill. The people must be protected against that sort of statesmanship.”
What then are Congressman Cannon’s proposed remedies? To take away the power of Congress to wreck even the best prepared budget? Not at all. His proposed remedies are two. One is a bill to require the President to submit to Congress a balanced budget each year. This would appear to be quite inflexible and not allow for emergencies or crises. The other remedy is a bill that would abolish the present Budget Bureau under the Executive Department and assign its duties to a new agency operating under Congress.
This second bill is even more puzzling than the first. Chairman Cannon would apparently still require the President to submit a budget, but would deprive him of his chief agency of preparation and control. It would turn the preparation of budgets over to a Congress which, on Cannon’s own testimony, has been so busily engaged in mutual logrolling that it wrecks even the best prepared budget.
Much more promising proposals have been made by the Treasury Department and by the Hoover commission. Secretary Humphrey has proposed that Congress pass individual appropriation bills as at present, but not send them to the White House for signature until the overall total has been tabulated and cuts made to bring it down to the level of expected receipts. The Hoover commission has recommended that Congress stop appropriating enormous sums which may not be spent for several years, and appropriate money only for actual spending in a given fiscal year.
Unfortunately, while both of these proposals have merit, neither goes to the heart of the problem. The heart of the problem is that our Federal government has an irresponsible budget system. It is irresponsible because no single official or agency can now be held accountable or responsible for the final result. The President can recommend one set of expenditures; the House can raise them; the Senate can raise the House. This triangular competition in spending favors the localities and the pressure groups and leaves the taxpayer defenseless.
Nearly every other country has a more responsible system. In Great Britain for more than two centuries the wholesome rule has been established that Parliament may reduce but not increase any spending recommendation made by the executive government. This is the ideal. The very minimum requirement to bring us even near a responsible budget would be a constitutional amendment to give the President power to veto individual items in appropriation bills (a power now held by the governors in 37 states). Even better would be provisions such as those in the New York State constitution. These require the legislature to act on the governor’s whole budget before making any appropriations on its own initiative. Such extra appropriations must be in separate bills subject to veto.
If such a reform were adopted, it would still leave room even for the adoption of Congressman Cannon’s suggestions in a modified form. Congress could set up its own budget agency to maintain liaison with the Federal Budget Bureau throughout the year. And Congress could be given explicit power to return to the President any unbalanced budget and recommend that he cut spending to a specified overall sum.
July 25, 1955
Since the new Conservative victory at the polls, there is once more serious discussion of Britain’s abandonment of exchange control. If the government is to act, it should act now, when its victory is fresh and its prestige high, and when Labor cannot threaten to restore controls.
Recent discussion of British abandonment of exchange control has been much more realistic than the previous perfunctory discussion. It now envisages return of the pound first of all to a free or “floating” rate. Unless Britain contemplates returning immediately to a gold standard (which seems outside the realm of realistic discussion), a transitional free market for the paper pound is the only feasible method of ending exchange control. If it is ended in Britain, it will collapse in most of the rest of the world. An enormous step will have been taken back toward that interconvertibility of currencies and freedom of international trade that the world’s politicians have so long professed to want—and done almost everything to prevent.
For the last ten years many of us have been hoping for some clarity, courage, and common sense on this subject in Great Britain, only to be repeatedly disheartened by the confusion or acquiescence of most British discussion on the subject. But at last the tide seems to have turned. I recently received from England a booklet of 62 pages, The Free Convertibility of Sterling, by George Winder (Batchworth Press; London), which is the most lucid, thorough, and uncompromising protest against continuation of British exchange control that I have yet read.
Winder has published something more effective than a mere polemic. He has written a sort of elementary textbook. It begins by explaining exactly what foreign exchange is, how exchange rates are arrived at, and how foreign payments are made. It leads by that means into an explanation of how great the injustice and folly of exchange control really is. He emphasizes especially two aspects: (1) It involves price-fixing in currencies; (2) it involves arbitrary confiscation of the overseas earnings of a country’s own citizens.
It is only by rare accident, as Winder points out, that the arbitrary price put on controlled paper currencies can correspond with the relative real values of currencies as they would be reflected in free markets. Therefore, “where currencies are sold at controlled rates, one of the parties to every transaction will inevitably receive less than he is entitled to. Someone, in fact, is robbed.” The so-called “dollar shortage” was brought about simply by the underpricing of dollars. This underpricing of dollars (or overpricing of sterling) also had the effect of encouraging British imports and discouraging British exports. “Sir Stafford [Cripps], over a long period, was paying our exporters 5 shillings for their dollars when in fact they were worth 7 shillings. All the time he was robbing our exporters he was pleading . . . that Great Britain must ‘Export or Die’.”
Perhaps worse than this economic damage is the immorality of exchange control—its complete disregard of the individual’s right to dispose freely of his own overseas earnings. “To be effective, currency laws must not only provide that people leaving a country be carefully searched, but that all overseas mail be censored. . . . All foreign currencies . . . owned by Englishmen must be surrendered to the government. There is here far more than control; there is quite literally confiscation. . . . Of course, compensation is paid but invariably it is insufficient. If this were not so there would be no need for punishment to enforce the surrender of currencies.”
A crowning irony, I may add, is that under our own foreign-aid program we have not only been subsidizing exchange control in Europe, but we have actually insisted that as a condition of receiving our aid the recipients must discriminate against American (i.e., dollar) imports! But it does not follow that because we have been injured by England’s exchange control, England has benefited. It has retarded the expansion of its essential export markets.
August 1, 1955
One wonders whether the hue and cry that Democrats have raised over an alleged Dixon-Yates “scandal” is intended to divert public attention away from the failure of TVA and from the deceptions practiced to put over and extend that and many other socialized power projects.
In the 218-page report of the Hoover commission, and in the 1,783-page report of the task force under Admiral Moreell on which the final commission report was in large part based, we now have a mine of material exposing some of the misleading estimates and unkept promises by which Congress and the taxpayers were induced to undertake many public-power projects. There is not space enough here to cite more than a few random examples from the Hoover-commission report.
Among these are the persistent underestimates of government engineers concerning the real cost of these projects. “In the field of reclamation the original estimated cost of the 90 projects (outside the Missouri Basin) was $1,580 million, and in 1952, the estimated cost at completion was $3,317 million. The cost of the reclamation portion of the Missouri River Basin Project was estimated in 1944 at $850 million. In 1953, the same work was estimated at $3,717 million, an increase of about 343 percent.” Only a small percentage of these increases was owing to soaring prices.
“A report to the House Committee on Public Works, rendered by its subcommittee to study civil works, in December 1952, states that the TVA reports its costs had exceeded its estimates by only 3.1 percent. But an examination of a 1936 report of the Authority showed that later estimates for Kentucky Dam exceeded the original by 93.6 percent; for Fort Loudoun Dam, by 74.7 percent; and for Fontana Dam, by 137.7 percent.”
In a group of Bureau of Reclamation proposed projects the construction costs of irrigated land averaged $509 per acre for land that had an average market value of less than $150 per acre even with the full water supply.
Under the Constitution, Congress has authority to control navigable streams and floods, but no discoverable right to build hydroelectric power plants. This has led to the development of the shrewd doctrine that hydroelectric power may be developed and sold by the Federal government to the extent that it is “incidental” to flood control and navigation. It has also led, as the Hoover-commission report points out, to a bookkeeping allocation of all the costs possible to flood control and irrigation rather than power.
The Hoover task group laid down certain criteria for determining the real success or failure of Federal power projects: They ought to earn 3 percent interest annually to insure return of Federal borrowing costs. The investment should be properly amortized. The projects should pay local taxes equal to those of private utilities. Earnings of Federal projects should include an amount equal to the Federal tax exemptions, based on the tax payments of private utilities. With such an honest “yardstick,” the TVA would show a deficit of $30 million in the fiscal year 1953 and an accumulated deficit up to that time of $100 million. The principal groups of Federal projects would show a cumulative deficit of $332 million.
The Hoover commission points out that the Federal taxpayer is subsidizing these projects. Less than 10 percent of the total population will be directly benefited even when the programs are completed. This means that 90 percent of citizens are forced to subsidize an arbitrarily favored 10 percent. The task group estimates that the Federal projects are selling power on the average at about 50 percent below its real cost.
Finally, while hydroelectric power plants were built under the pretense that they were “merely incidental” to navigation and flood control, the TVA “has now embarked upon an expansion of its power-generating capacity beyond hydroelectric plants by the building of steam plants.”
The moral indignation of the zealots for socialized power at the Dixon-Yates contract seems misplaced.
August 8, 1955
Among the measures passed by Congress was one to raise the legal minimum wage from 75 cents to $1 an hour. The changes brought about by this measure will do more harm than good to marginal workers.
So far as basic principles are concerned, there is nothing I need add to my Newsweek article of Jan. 17, discussing President Eisenhower’s proposal at that time for an increase in the minimum wage from 75 cents to 90 cents an hour. If wages can be raised in any desired amount by law, without harmful consequences, why stop at Mr. Eisenhower’s 90 cents an hour? Or Congress’s $1 an hour? Or the CIO’s demand for $1.25 an hour? Why not $1.50, $2—or even more? The truth is that insofar as a law is effective in forcing wages above the level at which competitive-market forces would fix them, it creates unemployment. It does most harm precisely to the marginal workers it is most designed to help. For marginal firms which cannot afford the higher costs are forced to drop their marginal workers or go out of business entirely.
It is an error to suppose that the effect of a 33⅓-percent increase in the Federal minimum wage will be confined to the part of the labor force now getting less than the proposed new minimum. For other workers will demand the maintenance of their existing differentials. The result must be upward pressure on all wage rates.
Congress, in voting for this measure, did not even take advantage of the opportunity to reduce the absurdities and contradictions in existing legislation. One of these is the joker in the existing wage-hour law, which provides that the employer must pay a 50 percent penalty increase for all hours above 40 a week no matter what his regular rate of pay. This provision penalizes most of the employers who are already paying most; it rewards most the workers who are already best off. This absurdity could have been easily cured if Congress, even when it insisted on boosting the regular minimum wage to $1 an hour, had simply fixed the minimum overtime rate at $1.50 an hour.
The other absurdity which Congress and the President could have taken this opportunity to get rid of is the Walsh-Healey Act. This law authorizes the Secretary of Labor to fix minimum wages in companies that are awarded Federal contracts. Successive Secretaries of Labor have used this act to force minimum-wage rates in particular firms or industries far above the general minimum-wage rate fixed under the so-called Fair Labor Standards Act. This is discriminatory legislation. It gives the country two minimum-wage laws, enforcing entirely different wage standards.
So much for the basic principles involved in the minimum-wage increase. But if ever a measure was unnecessary and ill-timed, this one is. The increase in minimum wages is being enacted at a time when wages in manufacturing industries average $1.87 an hour—the highest level in American or world history. And this figure does not yet reflect the formidable new increases that have just been achieved in wage rates in the automobile and steel industries and elsewhere. These increases have already led to an average increase of $7 a ton in the price of steel and are expected to lead to increases in automobile prices for 1956. Other things being equal, the effect of these wage increases, and of the consequent increases, should be to restrict the market for American products both at home and abroad, to bear heavily on marginal firms, and to cause unemployment.
The economic factors at work at any one time are so numerous and difficult to measure that the consequences of any one policy cannot be precisely predicted. Wage boosts of the present sort have in the recent past forced a further monetary inflation in order to make the wage boosts payable. That result may follow once more. But certainly the higher minimum-wage rate, on top of recent wage increases forced by strong unions, introduce an element of weakness, not of strength, in the present economic situation.
August 15, 1955
The British Government has announced a retrograde step in economic policy. This is worth study both on its own account and for the light it throws on American errors.
Richard A. Butler, Chancellor of the Exchequer, moved in the right direction when on last Feb. 24 he raised the interest rate that the Bank of England charges ordinary banks a full point, to 4½ percent. This was part of a courageous effort to curb inflation. But now he is taking measures that move away from economic freedom and yet do not promise to be very effective in halting inflation. He has raised the required down payment on installment purchases on such items as motorcars and household appliances from 15 percent to 33½ percent. The purpose of this is to halt a so-called buying spree of the British public, and to correct Britain’s international balance of payments by forcing British manufacturers to find an export market rather than a home market for some of these goods.
As for correcting the balance of trade, the restriction on installment credit is irrelevant to real causes. Foreign trade, left to itself, will balance itself. It will balance itself for the simple reason that sellers insist on being paid for the goods they sell. What is unbalancing British trade now is exchange control. If the pound were set free it would seek the level that would balance imports and exports. A decline in the pound, for example, would raise the cost of imports, so discouraging and contracting them. It would increase the profit margin on British exports or reduce their foreign-money cost, so encouraging and expanding them. Ironically, Chancellor Butler now gives as his reason for postponing free exchange rates the very unbalance of trade that is caused by the existing ban on free exchange rates.
Britain’s new curb on installment credit (like our own Federal Reserve requirement for a 70 percent margin in the buying of stocks) is at once discriminatory, unnecessary, and futile. Installment credit, like stock-market credit, is derivative credit. If interest rates are raised generally, the whole volume of credit will be contracted or held from expanding. If, on the other hand, money is kept generally too cheap, credit must continue to expand. Governments cannot flood their countries with credit and build effective dikes around special kinds of buying.
It is argued that the recently announced British steps are necessary because the February rise in the Bank of England discount rate to 4½ percent has proved ineffective. Bank loans, instead of dropping, rose by $448 million more in the first six months of this year compared with the first half of 1954. But this means merely that the British bank rate is still not high enough in relation to the demand for credit. (Our own recent Federal Reserve rate of 1¾ percent was even more inflationary in relation to our own money market.) If Chancellor Butler tried a Bank of England rate of 5 or 5½ percent he might find it effective enough.
Instead of taking this well-tested traditional step, Butler has preferred an unsound alternative. He has announced that the government will frown on capital expenditures for construction of new plants or equipment, and will postpone all such expansion plans in the nationalized industries (except for coal mines and atomic power plants). This action, like the even more drastic action of Sweden in curtailing investment in plants and equipment in private industry, rests on confused Keynesian theory. Direct government discouragement of new capital investment is the worst possible way to “combat inflation.”
Such discouragement must lead in the long run to higher rather than lower production costs, to less rather than more consumer goods, and to lower real wages than would otherwise prevail. The nation that follows such a policy will soon find itself handicapped in export competition with more progressive countries.
The dead hand of Keynesianism, and the fetish of “full employment,” still vitiate the policies of the leading nations of the West.
August 22, 1955
Adjournment of Congress provides an opportunity for taking stock of present Federal economic policies. One central conclusion emerges. Mr. Eisenhower, with minor reservations, is now another New-Deal president.
He has been pressing for the heart of what the New Deal stood for—big spending, big government, an ever-expanding paternalism. And the political situation is such that there is no real opposition to this pressure. We have now two New-Deal parties. Those millions of Americans who believe in economy, in balanced budgets, in some curb on centralization and expanded governmental power and paternalism, now have no national party to represent them.
Let us illustrate this by specific items. We have come a long way from the time when Mr. Eisenhower during his campaign suggested huge slashes in Federal spending, and even from the day of his first State of the Union message when he declared: “The first order of business is the elimination of the annual deficit.” He still pays lip-service to the need for a balanced budget, but this goal keeps receding into the future. As “the first order of business” it can no longer be reconciled with his actual policies.
The worst of them, from this standpoint, is his grandiose ten-year $31 billion Federal-state road-building program to be financed by special bond issues not to be counted as part of the national debt. This failed in the last Congress through the mere accidents of partisan jockeying for position. Mr. Eisenhower also advocated Federal aid to local school construction, and Federal reinsurance of private health plans. Both deservedly failed. The Federal government has no business in either field.
Mr. Eisenhower was successful, however, in his plan to continue foreign aid on a scale even higher than last year. He wants to scatter subsidies totaling $4.7 billion to dozens of foreign nations in a year in which we ourselves have an officially estimated deficit of $2.4 billion! For this same year, Mr. Eisenhower also insisted on appropriations for 35,000 public housing units (and got 45,000). From any standpoint such public housing is not merely unnecessary but dangerously ill-advised. It promotes subsidies and socialization at the expense of private initiative. It increases a wholly needless deficit. And it artificially stimulates still more housing at the very peak of prosperity and a housing boom.
The President insisted on other New Deal measures. At a time when hourly wages are the highest in American or world history he asked for a boost in the minimum wage from 75 to 90 cents an hour (and got $1). This measure will increase production costs and imperil the employment of the very marginal workers it is designed to aid. The Administration has also encouraged a whipping-up of the present boom by credit expansion, against which it is only now taking belated steps.
It is of course fair to point out that the President has taken some actions in the other direction. With the Dixon-Yates contract he tried to stop the growth of the Federal public-power colossus. But that whole contract was so ineptly handled and defended that the zealots of socialized power think it provides them with a crucial 1956 issue. Again, the President made an effort to put some limit on the present appallingly costly, inequitable, and dangerous farm-price-support program. But here again his action has been so timid and inadequate that the situation is becoming constantly more critical.
It is also fair to point out that the majority of House Democrats supported some shamelessly demagogic measures and that Mr. Eisenhower courageously and successfully fought them (the $20 income-tax reduction for everybody, and the slapdash social-security revisions).
Yet on balance the central conclusion remains. We are drifting, under pressure from a Republican President and Democratic Congress leaders, toward ever-expanding Federal power and paternalism. The opponents of this drift are scattered and isolated, and there is now no national party even to state their case.
August 29, 1955
We are enjoying at the moment the greatest prosperity in our history. But this boom has been in part created, and certainly raised to its present level, by a flood of credit. The measures so far taken to moderate it are timid and belated. Only time can reveal their effectiveness.
That the present boom is at record levels is shown by almost every major index—whether of employment, production, or money income. But the government policies responsible for this boom have been ill-considered and dangerous. When a government-created boom shows signs of getting out of hand, government officials begin to shake their fingers at the stock market, at private banks, and at private business practices, as if these were responsible. Of course they must assume part of the responsibility. But in most cases, and certainly in the present case, it is government policy that has mainly determined the result.
Suppose we begin with a segment of the economy where the direct hand of government is least visible—that of automobile credit, and of installment and consumer credit generally. In the latest figures, consumer credit has reached $32 billion, with installment credit at $25 billion, and with more than $12 billion in automobile credit alone. All these are the highest sums on record. But those close to the situation are even more troubled by the quality than by the quantity of this credit. The National Automobile Dealers Association is warning its members that “crazy credit terms” are a threat to the industry: “To sign a contract which results in a buyer owing more than his car is worth—at any time during the terms of the contract—is business suicide.”
All this may seem at first glance to be solely the fault of dealers, banks, and finance companies. But if the general supply of credit had not been kept artificially cheap and plentiful by government policy, these excesses of installment credit could not have developed. It was Federal Reserve policy that reduced the rediscount rate from 2 to 1½ percent in 1954; the rate was not restored to 2 percent until this month (Aug. 4). As a result of this low discount rate, and of other government policies, the country’s money supply (as measured by total bank deposits and currency outside of banks) increased $9 billion between May of last year and May of this year. This increased money and credit financed the boom.
But this is not the only way in which the government has brought about an inflationary credit boom. It now has $7 billion of the taxpayers’ money invested in the propping up of farm prices by its holdings of “surplus” crops. But most fantastic of all has been the policy in regard to housing.
Until a few weeks ago a veteran, under the government’s guaranteed mortgage plan, could “buy” a $10,000 home without putting up a nickel. He had 30 years in which to pay the mortgage off. The Veterans Administration and the Federal Housing Administration have now cut the payoff period down to 25 years. The VA will now require a down payment of 2 percent instead of none; the FHA, a down payment of 7 percent instead of 5. Even this mild change has led to cries of anguish from builders who had been profiting under the old rules. But what sort of government policy is it that encourages families to assume debts beyond their resources; that has piled up an $80 billion debt by home buyers; that in a construction boom already at an annual record, when current rates of home building are nearly twice as high as the estimated rate of household formations, whips it up still further by unsound credit? And even on top of this, demands 35,000 subsidized government-housing units a year?
If careful students of the business cycle have at last discovered any one thing it is that the best way to prevent a slump is to prevent the preceding unsound boom. Arthur F. Burns, chairman of the Council of Economic Advisers, has himself expressed such a view (see my Newsweek article of June 29, 1953). This wisdom has not been reflected in recent governmental credit policies.
September 5, 1955
In Newsweek of Oct. 25, 1954, I reviewed a book on America written by the Swiss economist, Prof. William E. Rappard, published in Paris, and expressed the hope that it would be translated into English and published here. I am glad to announce that this has now been done. The translated work appears under the title The Secret of American Prosperity (Greenberg, $3.50). Its publication date is Sept. 8. The occasion provides an opportunity to review another book published in French, but with somewhat different implications. On June 26 last I was startled to read a Paris dispatch to The New York Times which began: “Capitalism in the United States is a thing of the past, according to an official document circulated in France by the United States Information Service.” I sent for the document, which runs to 80 pages.
A good deal of what the book has to say is shrewd and sensible. In fact, most of the best things it has to say were already said in Professor Rappard’s book. Rappard, for example, selects four main elements as explaining the economic superiority of the United States: (1) Mass production; (2) the application of science to production; (3) a passion for productivity; (4) the spirit of competition. The document published by the U.S. Information Service also explains American productivity under these four heads, sometimes in strikingly similar words, though if any credit is given to Professor Rappard my eye completely missed it.
Yet the USIS document remains especially disturbing because of its repudiation of “capitalism.” It reveals no understanding or recognition of the capitalistic basis of American productivity. The book bears the title The American Economy (L’Economie Américaine), and the subtitle Beyond ‘Capitalism’ (Au-delà du ‘capitalisme’). The theme implied by this subtitle is carried out in the text: “America [my translation] has been a capitalistic state. . . . It has had its miserable proletariat and its injustices.” Again: “American life is no longer the life of a society essentially capitalistic. It is now approaching standards of justice and equality,” etc. What this book does, in brief, is to use the word “capitalism” pretty much in the same smear sense as the Marxian socialists who invented the word. It follows that, when general prosperity and productivity are to be explained, they cannot be explained on the assumption that America still has “capitalism.” It must have been superseded by something else. What this something else is, the USIS book never quite makes clear.
Nowhere, in fact, does this book give explicit credit for American progress in the capitalistic system. It explains how much the American economy owes to the beneficent interventionism of government: The TVA, farm-price support, FHA mortgage guarantees, minimum-wage laws, social security. Much is said of mass production, technical research, the spirit of competition, the raising of wages, the lowering of prices, the increase of purchasing power. But nothing is said about the basic capitalistic principles of which all these are consequences rather than causes. There is no emphasis on private property. Much is said about the willingness of American corporations to build new plants and to install ever new and more efficient machines. But it is not pointed out that for them to do this they must have acquired past profits to invest; they must be allowed profits, and they must have confidence that they will be free to make future profits.
What America has today is capitalism, at its highest development to date. If it is more productive than the capitalism of yesterday, it is primarily because the capitalism of yesterday made this possible.
This book of the USIS, in brief, is merely another illustration of the fact that while socialist and Communist governments have no hesitation in denouncing capitalism, the governments of capitalistic countries are afraid to defend capitalism. We fatuously deny that we have it, and spend millions of our taxpayers’ dollars in order to give the case away.
September 12, 1955
The unparalleled boom we are now enjoying is not confined to this country, but largely shared by Europe. Recent dispatches from there have reported that virtually every major industrial region is operating under conditions of “full employment.”
This is no mere coincidence. When major countries operated under an international gold standard, and when trade among them was comparatively free, it was only natural that prosperity (or depression) in one area should spread to others. And though the world today is much less of an economic unit than it used to be, though each country tends to pursue its own paper-money policy and to erect all sorts of barriers to imports, this mutual influence still holds to some extent.
But what has mainly caused the widespread full employment of today is the political popularity of “full-employment policies” within every nation. These are also supported by the intellectual prestige of Keynesian doctrines. And in any case, who can argue against “full employment”?
Yet there is a fly in the ointment. Hurricane warnings trouble this paradise. What threatens to cause hurricanes is not the end-result sought. Full employment (when the phrase is appropriately defined) is both a desirable end in itself and a necessary means for the achievement of such wider ends as maximum production and maximum consumer welfare. The real trouble lies in the means being used to bring full employment about.
The most desirable way to bring about enduring “full employment” is to provide a stable currency, and to keep prices, wages, and interest rates free, competitive, and flexible, so that a workable dynamic relationship can be constantly maintained between one price and another, one wage and another, between prices and costs, prices and wages, payrolls and profits.
But this is not what the leading nations of the Western world are doing today. They have achieved their present full employment by monetary inflation—that is, by steadily increasing their supply of money and credit. The United States money supply (bank deposits plus currency outside of banks) increased from $204 billion in May a year ago to $213 billion in May of this year. In a roughly corresponding period, in leading European countries, we find a money increase in England from 5.32 to 5.43 billion pounds sterling; in Germany from 23.4 to 26.1 billion marks; in Italy from 3,523 to 3,956 billion lire; in Belgium from 180 to 190 billion francs, and in France from 4,664 to 5,312 billion francs.
A defense which will doubtless be offered in at least several cases is that this increased supply of money was not created by deficit financing but by an effort of the banks to “meet the legitimate demands of business.” This sort of defense overlooks the fact that both in America and in most European countries money rates have been kept artificially low through government policy. It is these low interest rates that have encouraged dubious borrowing and thereby increased the money and credit supply.
Inflation produces its alleged miracles by temporarily increasing volume of sales and profit margins. But the full employment that follows from this always produces union demands for increased wage rates. Once these increased wage rates are granted, they threaten foreign or domestic sales through increased prices, or threaten to wipe out profit margins. This is the fear that haunts European governments today. The Keynesian “cure” is to inflate the currency a little more, in order to restore profit margins and consumer purchasing power. This is the inflationary spiral, which may so easily get out of hand.
In brief, the blessings of full employment obtained through inflation are unstable and dangerous. The government that embarks upon such a policy is like a juggler forced to keep more and more china plates in the air and dreading a single miss. That is why interest rates are being raised everywhere, why there are fears of a new round of inflation, and why the world is now likely to see increasingly serious discussion of a return to more orthodox measures.
September 19, 1955
At the adjournment of the last session of Congress, the President at his press conference made some remarks that require more serious examination than they have yet received. It may seem a late date to hark back to something that Mr. Eisenhower said on Aug. 4, but his words on that occasion threw a great deal of light on his philosophy of government, and on the policies we may expect him to follow while he remains in office. He remarked at that time that he had a “little list” of “needed” legislation, of which at least four items were still “absolutely vital to our future. . . . They are school construction for our children, the health program, the highway program, and the water resources.”
Now of course schools and health and highways and water are vital to our future. But this is not exactly what Mr. Eisenhower meant. He meant that it was “absolutely vital” for the Federal government to subsidize local school construction; for the Federal government to reinsure private health insurance; for the Federal government to provide enormous grants for highway construction; etc. It is not only not vital for the Federal government to do these things; it is dangerous politically and economically. The notion that the Federal government must take over such functions goes directly counter to the principles of our Constitution and to our ideals of local self-government.
Other remarks of the President at this conference implied a broader philosophy no less disturbing. Mr. Eisenhower pointed to the “almost unprecedented prosperity” in America today, and implied that this boom must be kept whirling at its present peak, or beyond, with no slackening whatever. “If we are going to keep that kind of thing moving,” he said, “it means that there must forever be action, not only in the economic and industrial field on the part of the individuals in our system of free enterprise, but government as well.” (My italics.) There are two implications in these statements.
The first is that it is the function and duty of the Federal government to keep a boom constantly whipped up to a peak by unceasing government policies of spending, subsidies, and credit inflation. A widely held economic theory today is that it is not the duty and function of the government to balance its budget annually, but rather to “compensate” for the oscillations in the private economy—building a budget surplus, taxing heavily, and contracting credit in boom times, but running a deficit, reducing taxes, and expanding credit in times of depression or unemployment. Even if we grant (I don’t) that this theory is sound from an economic point of view, it should now be obvious to everyone that it is politically unworkable. For the government in power always acts as if it were “fighting a depression.” It never admits that it is in an inflationary boom which it is its duty to dampen down. This is now being proved afresh by the present Administration. It has been proved over and over again here and in Europe, since the end the last world war.
The second implication of the President’s statements is even wider. It is that no matter what level of prosperity or welfare we reach, the government must go on and on—“there must forever be action”—and always in the same direction—i.e., the direction of the New Deal, of the paternalistic welfare state, the direction of more and more government spending for alleged “vital” purposes.
“We must make progress,” summed up Mr. Eisenhower. But what is progress? Is it for the government to spend more this year than last year? To subsidize more and more pressure groups? To have a bigger deficit this year than last? The glaring truth which all these theories overlook is that the government cannot give a dollar to one man unless it takes it from another. It cannot give a nickel to Peter without taking it from Paul—the man who has earned it. And this process must reduce the productive incentives both of Peter and of Paul. It does not meet more needs but fewer. It leaves us not richer, but poorer, than we would otherwise have been.
September 26, 1955
The budget has become a political football. The leaders of both parties, with a few honorable exceptions, are competing with each other in demagogy rather than responsibility.
On Aug. 25 George M. Humphrey, Secretary of the Treasury, announced that the deficit for the current fiscal year (ending next June 30), which was estimated in January at $2.4 billion, is now estimated at only $1.7 billion. He went farther. “Barring some unforeseen development we think that we should, and that we can, balance the budget this year.”
This made cheerful headlines. But a closer look was less reassuring. The reason for the reduction in the estimated deficit lay wholly in an increased estimate of Federal receipts since January, owing to the present boom. Treasury receipts are estimated at $2.1 billion more than in January. But expenditures also are now estimated at $1.4 billion more than in January.
It is disturbing to notice the items on which spending estimates are now increased. The largest increase is $1.1 billion for farm-price support. Another increase is $272 million for foreign economic aid. Here are two items on which drastic spending cuts, rather than increases, would be more justified. Even more disturbing are comparisons of proposed expenditures for nondefense items as a whole. In the current fiscal year the Treasury will pay out $25.1 billion for nondefense items, compared with $22 billion forecast seven months ago, and with only $21.3 billion actually spent in the year ended June 30, 1954. This year’s budget would already be indicating a substantial surplus instead of a deficit, in brief, had nondefense spending been held to the fiscal 1954 level.
The Democratic majority has not come forward with any specific suggestion as to where the President might cut nondefense spending. Adlai Stevenson, in fact, indicates that he doesn’t think enough of the taxpayers’ money is being thrown away in piling up farm surpluses. But when it was given out on Sept. 6 that the Defense Department was aiming at an expenditure of only $33 billion for the current fiscal year instead of the $34 billion in its estimate two weeks earlier, one Democratic senator immediately shouted that this was “putting dollars ahead of defense,” and another was sure it would mean “a sacrifice of national security.” Obviously neither had any means of knowing whether his charge was true. To say that a budget made up of hundreds of thousands of heterogeneous items is “safe” at $34 billion and “dangerous” at $33 billion is to talk obvious claptrap.
Harry S. Truman (the man who advocated a $9.9 billion deficit for the fiscal year 1954) rose to new heights of comic inconsistency. He declared that this is no time to reduce taxes because Mr. Eisenhower must balance the budget! A few days later he called the proposed military expenditure cut a “politically inspired plan to balance the budget!”
Secretary Humphrey rightly declared: “If there ever is a time when our budget should be balanced, it is now.” But he added that once a balanced budget was achieved, “still further progress would justify lower tax rates.” Immediately, Democratic Senator George and Republican Senator Millikin said they would favor tax reductions next year even if government spending and income were not completely balanced.
Amid this bipartisan competition in demagogy one or two voices have been courageously raised on both the Republican and Democratic sides in favor of economic sense. Congressman Daniel A. Reed, chief Republican spokesman on taxes in the House, has branded talk of substantial tax relief next year as “premature.” Clear, firm, and emphatic, as usual, has been Sen. Harry F. Byrd: “It would be foolhardy to balance the budget and then unbalance it by a premature reduction in taxes. I strongly favor tax reduction made possible by retrenchment in spending.”
But if we judge by the level of political humbug to which both parties have now descended, these isolated voices of sense and courage do not seem likely to prevail.
October 3, 1955
In his column in The New York Times of Sept. 8, Arthur Krock presented one “obviously important reason why the Secretary of the Treasury and other Presidential advisers believe that the budget can soon be balanced . . . without depressing the buoyant national economy.”
This reason is that private spending in this country, in Krock’s words, “has been steadily replacing . . . and topping, the billions cut from the budget by the Eisenhower Administration.” This conclusion is supported by a table (at the bottom of this column) of comparative official statistics for the second quarters of 1953, 1954, and 1955. The figures are expressed in billions of dollars at seasonally adjusted annual rates. They show that while government spending was running at an annual rate of $3.4 billion less in the 1955 quarter than in 1954, and $15.8 billion less than in the corresponding 1953 quarter, nongovernment activity was running in the second quarter of 1955 at a rate $30.6 billion higher than in the same period of 1954 and $31.3 billion higher than in 1953.
Krock calls this “one of the most remarkable aspects of economic development in the United States for years. For,” he correctly says, “the view has been, and still is, strongly held that shrinkages in the Federal budget must in time, and at a certain point, start the economy downward.”
Yet there is really nothing astonishing about this development except to those who have so tenaciously held this completely false view. I hope I may be forgiven if I cite the new comparisons with special satisfaction. In my Newsweek column of Jan. 12, 1953, I remarked: “What troubles me about the current crop of forecasts for 1953 [including one by the Department of Commerce] is that most of them rest on [the] fallacious . . . assumption that the future of business activity at this time depends primarily on the government’s defense-spending program. If that rises, we are told, business activity and prices will rise . . . but if it declines, there’s no telling how much business will deteriorate.”
This assumption, I pointed out, would lead to the absurd conclusion “that the more resources we are forced to devote to making guns and tanks and shells, instead of consumer goods, the richer we become. . . . The fallacy consists in looking only at the government’s defense payments and forgetting that the money for these comes ultimately from taxes. If defense payments suddenly dropped from the present $50 billion a year to only $10 billion, taxes could also be cut by $40 billion. Then the taxpayers . . . would have $40 billion more to spend than they had before, to make up for the $40 billion drop in government spending. . . . There is no reason to suppose that the overall volume of output or activity would decline.”
I went on to show that the whole theory that defense spending is necessary for prosperity “got a crushing refutation at the end of the second world war. Immediately after Japan surrendered in August 1945 there was a sweeping cancellation of war contracts. Government economists predicted that unemployment would reach 8 million by the following spring. Nothing of the sort happened.”
Yet this fallacy was still raging so strongly a year and a half later that in Newsweek of July 19, 1954, I pointed out again: “In the fiscal year 1944 the Federal government spent $95 billion; in the fiscal year 1947 it spent $39 billion. Here was a drop in the annual Federal spending rate in this three-year period of $56 billion. Yet, far from there being a recession in this three-year period, there was a substantial increase in employment, wages, and prices.”
| 1953 | 1954 | 1955 | |
| Gross National Product | 369.3 | 357.6 | 384.8 |
| Federal purchases of goods and services | 61.0 | 48.6 | 45.2 |
| All other expenditures | 308.3 | 309.0 | 339.6 |
A particularly hardy myth has once more got a crushing factual exposure.
October 10, 1955
Reports have been leaking out of Washington that the Republicans plan to vote for a cut in taxes whether or not the budget is balanced. One report is that they are even seriously considering an increase of $100 in the personal income tax exemption.
Such reports, if true, would be profoundly discouraging. There should be no tax cut at all unless and until the budget is not only balanced but shows a prospective surplus from which the tax cut could be taken. We are now facing the 23rd deficit in the last 26 years. If we cannot balance the budget at the very peak of prosperity, how can we ever hope to balance it at all? A planned deficit is a planned inflation. Inflation is the most unjust of all taxes.
If a tax cut is now possible, it certainly should not be made by increasing personal income tax exemptions by $100. It is impossible to believe that the President himself ever seriously considered this. It is precisely the proposal the Democrats brought forward in the spring of 1954. At that time Mr. Eisenhower made a courageous and statesmanlike TV talk exposing the transparent demagogic character of the proposal. It would remove about 5 million people from the necessity of paying any income tax at all. It would thereby foster in them the dangerous illusion that “the other fellow” was paying the bill. And it would cost the government some $2.5 billion in annual revenue. This is not much different from the proposal made by the Democrats this spring for a $20 cut in everybody’s income tax. Mr. Eisenhower correctly called that scheme “the height of fiscal irresponsibility.”
If any tax cuts are possible now, they should be made first of all at two points where any “practical” politician would consider it suicidal to suggest them. There should be a cut in the corporation income tax rate and a cut in the confiscatory rates on the highest personal income brackets.
Congress actually voted several years ago to reduce the corporate income tax rate from 52 percent to 47 percent. But it has been voting to postpone this cut from year to year; and the reduction is now being treated as out of the question. Yet a cut in the corporate income tax from 52 percent to 50 percent would mean a cut in revenues of only about $85 million.
If the top rate on the personal income tax were reduced from its present level of 91 percent to 80 percent next year, and then successively to 70, 60, and 50 percent, the cut would probably not reduce revenues at all. It would in fact, probably increase them. I have pointed out in preceding articles (March 29, 1954) that “of the $31 billion that the personal income tax yields, only about $1 billion comes from the rates above 50 percent.” All we have done by these confiscatory rates on the higher incomes has been to erode the incentives to produce higher incomes.
The reason why neither of these two tax reductions is now discussed is purely political. The Democrats started up the propagandistic howl that the Eisenhower Administration is a government “for big business” and “for the rich.” Administration officials seem to be in deadly fear of this charge. But they are likely to do best politically as well as economically if they act now with statesmanship, courage, and sense.
It was recently calculated that American industry has invested about $12,500 for every job it has created. This tremendous investment putting incomparably more and better machines and equipment in the hands of the American worker than in the hands of any other worker, is the main if not the sole reason why the American worker’s productivity is greater than that of any other worker in the world, and why his wages are correspondingly greater. If industry is drained of these investment funds American supremacy will be lost. If the incentives to earning, saving, an investing wealth are removed, the very source of productivity and high wages will be removed. By all odds the best way to “help the little fellow” is to encourage the profits, savings and investments that make his job and his income possible.
October 17, 1955
“In case of the removal of the President from office, or of his death, resignation, or inability to discharge the powers and duties of the said office, the same shall devolve on the Vice President, and the Congress may by law provide for the case of removal, death, resignation or inability, both of the President and Vice President, declaring what officer shall then act as President, and such officer shall act accordingly until the disability be removed or a President shall be elected.” Thus reads the Constitution. Death and resignation are matters beyond dispute; but “inability” is more often than not a question of opinion. Does it refer to physical inability? Or (as some suggest), merely to mental inability?
And who is to decide that the inability exists? The Constitution does not say explicitly who is to make that decision, but by implication it puts it in the hands of Congress. Congress, in any case, is explicitly authorized to pass laws governing the subject. And Congress may also, by explicit direction, provide for purely temporary replacement of the President “until the disability be removed.”
Yet from the beginning of our history Congress has neglected its clear duty in this matter, in spite of the sharpest reminders. President Garfield was shot on July 2, 1881, and lived on for 80 days. During his illness he performed only one official act—the signing of an extradition paper. At the first opportunity one would have thought that Congress would have made legal provision to prevent a repetition of such paralysis in government. It did nothing. President Wilson collapsed on Sept. 25, 1919, and was not able to attend a Cabinet meeting until the following April. Once more government had been paralyzed. Once more Congress ignored a warning.
This is not the moment to attempt to make any Constitutional change concerning this problem; but it is clearly the time to make legal provision for the present emergency. A person who has suffered a coronary thrombosis needs, above all, two things—complete physical and mental rest (and this is usually to be counted in months rather than weeks), and complete relief from anxiety. The great danger of the present situation is that Mr. Eisenhower will be pushed into attempting too much too soon, and risking a setback. Many Republicans are trying to minimize his illness. Some even foolishly talked of his resuming the reins of government in a few weeks. And a few extreme Democrats call it presumptuous for Vice President Nixon or Sherman Adams to carry on routine functions. Yet it is of the utmost importance not only that Mr. Eisenhower should not be prevailed upon to do too much too soon, but that he should not be made to suffer anxiety because of his enforced inactivity.
The simplest and safest way to insure the President his needed rest, and at the same time to avoid the many dangers of a temporarily headless government, is to get Mr. Eisenhower’s consent to call a special session of Congress and to submit to it, a simple bill allowing the President to delegate as much of his powers and duties as he saw fit to the Vice President, and also to withdraw this delegation at any time he thought proper. This would give Mr. Eisenhower the choice of acting in whatever way he thought wisest. It would give him the assurance that the Vice President could make whatever decisions or take whatever actions were necessary until the President’s full recovery. And it would insure that these actions would be legal.
The fact that there is no government emergency at the moment of writing is not a reason for doing nothing. On the contrary, it provides the very opportunity necessary for Congress to provide the discretionary powers of delegation which could enable our government to make whatever quick decision or set of decisions might be necessary in the event of an unexpected emergency in foreign relations or in domestic economic policy without strain on the President or further risk to his health. This is the course indicated by forethought and common prudence.
October 24, 1955
The myth of a farm “crisis” has been built up in recent months by the farm bloc in Congress. Farm income is of course below the Korean-war boom level. But nothing justifies the label of a “crisis.” And apart from this, the “remedies” proposed are utterly devoid of economic sense.
The whole notion of a price “parity” that ought to be perpetually maintained between farm and nonfarm prices is absurd. So is the whole idea that any group of producers is perpetually entitled to some fixed “fair share” of the national income. If there were any merit in such a notion, it ought to be universally applied. If farm prices are to bear the same relationship to nonfarm prices that they bore in the extremely favorable period from 1910 to 1914 (now more than 40 years past), then the price of everything ought to bear that 1910–14 relationship to the price of everything else, and the public Treasury ought to be used to maintain this relationship. Nobody has so far been brazen enough to propose anything so preposterous. Everyone knows that the supply and demand and conditions of cost of production for every commodity change every year. The market, as well as “fairness,” must reflect such changes.
The parity nonsense is not applied consistently even to farm prices. It is applied to half a dozen so-called “basic” commodities—wheat, cotton, corn, tobacco, rice, and peanuts—and about twenty “nonbasic” commodities. Taken all together the value of price-supported items is less than half of total farm cash income. The farmers who raise the other commodities must depend on themselves. But the price supports distort farm-price interrelationships and often increase the pressure on farmers raising unsupported commodities. Cattle raisers, for example, are hurt by the artificially high prices they must pay for feed.
The methods of providing price supports are also inconsistent, one-sided, and about as mischievous as could be imagined. The government makes “loans” to farmers for some crops at the high price level that Congress prescribes. If the price rises even above that level the farmer can sell his crop and make the extra profit. If it falls below that level he can let the taxpayer take the loss.
One result of this system has been the piling up of huge artificially created farm surpluses in warehouses. The government now holds $7 billion worth of farm products in storage. More and more storage space, expensive and but for this foolish plan entirely needless, is being built to hold these mounting surpluses. Even a large number of second-world-war freight ships are now being used to hold millions of bushels of grain.
These surpluses hang over the market, and exercise a depressing effect on market prices. To maintain our artificial farm-price levels we impose import quotas on foreign farm commodities. Worse, we try to dump our government-created surpluses on foreign markets. We thereby create an immense amount of ill will abroad and make a mockery of all our pious advice that the world should lower international trade barriers. The American city worker pays these artificial farm prices both as a taxpayer and as a consumer who is charged more for his foodstuffs in the market.
It would be easy to suggest a less preposterous “farm policy” than the present one. The real gain from the Benson program is not that it provides “flexible” price supports but that it makes possible lower price supports. But the main problem is to get the government altogether out of this fantastic fiasco. It is the program itself that is today creating most of the farmer’s problems. Without it he would not have been encouraged to raise unsalable crops, but could have adjusted himself to actual demand as every other producer must do.
On the economic side it would not be too difficult for the government to get out from under the present program. It could announce a halt in further price support within a year. But what is primarily needed—and what seems to be altogether lacking—is the political courage in Washington within either party to talk sense to the American people on this issue.
October 31, 1955
The so-called farm “crisis,” as I pointed out here last week, is not primarily economic but political. It exists chiefly in Washington. And politicians, instead of considering how to extricate the government from its price-support fiasco, talk of even bigger and more harmful subsidies.
It is true that certain farm groups, such as hog raisers, today face special difficulties. But realized gross farm income was running in the first half of this year at the annual rate of $33.7 billion, compared with an average annual income of $33.8 billion in the preceding nine, years (which include the Korean-war boom years). This hardly indicates a crisis.
Regardless of such comparisons, the whole farm subsidy program is wrong in principle. In the long run it must work more harm than good to the farmers themselves. The chief problem today is to extricate the government from the present fiasco. Let us look at some ways in which this might be done.
1—The whole notion of a price “parity” that ought to be perpetually maintained between farm and non-farm prices is ridiculous. But the parity formula is at least being made a little less preposterous than it has been. Instead of taking the 40-year-old period from 1910 to 1914 as the basis, we are now transferring to a rolling average of the relationships between prices paid and prices received by farmers for the ten years preceding each crop year.
2—A more important step (if we assume that it is politically impossible to get rid of the price-support program altogether) would be to lower the price-support level, not to a point where it would assure the farmer a so-called “fair” income, but to the point where it would protect him against out-of-pocket loss. The reason for this should be obvious. Wherever a surplus already exists it is fantastic for the government to offer a support price to encourage the farmer to grow a still greater surplus. Rather the effort must be to prevent the farmers from repeating the collective error that led to the problem. Government estimates indicate that farm production expenses are usually about two thirds of realized gross farm income. On this basis the government support level should not be 90 percent of “parity,” or even 75, but only about 67 percent.
3—Even assuming that some price-support program is to continue, there is no justification for offering the farmer or any other producer a one-way speculation against the taxpayer in which the taxpayer takes all the losses and the producer only the profits. Instead of its present “nonrecourse loans,” the government should buy outright, and be free to dispose as it wishes of what it holds.
4—There is a possible way in which the government could get out from under its present enormous holdings of crop surpluses, and in the process perhaps solve several problems at once. This would be to offer to sell its holdings, at a price slightly below estimated cost of production, back to the farmers themselves. Each farmer might be allowed to buy an amount proportionate to that of his own production of that commodity in the preceding year. The government would doubtless take a big loss on this—but not as big as it ultimately would by continuing its present program. The farmers who bought the commodities would be free to sell them in the market at the best price they could get.
Under such an arrangement a farmer could have a good part of one year’s crop, say, without the usual work and risks of raising it. He would almost certainly be able to sell it at a profit. Few farmers, knowing in advance that this carry-over would be thrown on the market, would plant the same crop for the new year. (Any such government plan should of course be announced a month or so before the normal planting season.) In this way most of the surpluses now held by the government could be worked off in a short period.
The farm price-support program has been growing like a cancer. Only a drastic surgical operation seems likely to curb it now.
November 7, 1955
The current prosperity has been mounting to ever higher peaks. In the third quarter of this year the total amount of goods and services produced in the U.S. (the “gross national product,” affectionately known as GNP) rose to an annual rate of $392 billion, the highest on record.
Official estimates also intimate that the increase in the gross national product in the third quarter was founded on consumer buying, itself at the annual rate of more than $256 billion, highest in history. But how stable is this economic paradise? For how many quarterly periods can we continue to build up new records? In Newsweek of Aug. 29, in a column entitled “A Flood of Credit,” I pointed out the large extent to which the current boom rested on credit expansion. An article on the same theme appears by Jules Backman in the October issue of a little magazine called Challenge, published by New York University. Though many of the statistical comparisons that Professor Backman makes cover the same ground as those in my Aug. 29 column, his own article adds some additional and very striking comparisons.
The boom in housing, in automobiles, and other durable goods has been financed to a large extent by personal debt. By the end of June 1955, the volume of automobile credit outstanding, at $12.5 billions, was 23 percent higher than twelve months earlier. Total consumer credit, at $32.5 billion, increased 13 percent during the same period. The August total of $33.6 billion compared with only $5.7 billion at the end of 1945.
Again, under the imprudent mortgage guarantees of the Federal Housing Administration and the Veterans Administration, mortgage debt on one- to four-family houses climbed from $66.3 billion at the end of 1953 to an estimated $82 billion in June 1955. Together, consumer credit and mortgage debt have increased from about $24 billion at the end of 1945 to about $110 billion, while total private debt has risen from $140 billion to $360 billion.
Are we too deep in debt? Professor Backman makes some judicious answers. He points out, quite rightly, that any exact quantitative measurement of the safe limit to personal debt is impossible. But he also points out that the current ratio of consumer debt to total personal income after taxes is the highest on record. To put it another way, the rate of increase in consumer credit has been greater than the rate of increase in consumer income.
And he makes a sensible observation that emphasizes the dangers in this situation. The safeness of consumer credit is not measured solely by the ability of the borrowers to carry the interest burden, or even to repay the principal. It is measured also by the impact of expanding debt on the future level of general business activity. When consumers spend beyond their incomes, they obviously stimulate the economy to the extent of their borrowing. A family earning $100 a week, for example may spend much more as it refurnishes a home, buys a car, a television set, or a refrigerator. But at some future date, the family will have to spend less than its current income if it is to repay the loan. If the total volume of consumer credit merely stops growing, part of the stimulus to the economy is lost. When repayments exceed new debt, recessionary tendencies may develop. Yet periods of borrowing must be followed by periods of repayment.
Considerations like these perhaps explain why our Federal monetary authorities are fearful of a further rise in credit, but fearful also of bringing the rise to a halt. Some officials discourage the idea of a further advance in the Federal Reserve discount rate even above 2½ percent because “it might rock the boat.” But may it not eventually rock the boat still more to allow credit expansion to continue? The country’s money supply (measured by bank deposits and currency) increased $10 billion at the end of July compared with the same date a year ago, largely as a result of a $9.4 billion increase in commercial bank loans in the same period. How long can we keep up this rate of money and credit inflation?
November 14, 1955
Developments of the last few weeks reveal once more that no matter how high or harmful a subsidy may be, it creates vested economic and political interests that demand not merely its continuance but its increase.
Even Secretary Benson, who has been urging moderation and sense, was forced by political clamor to announce that $85 million of the taxpayers’ money would be thrown into buying pork and lard in an effort to halt the decline in hog prices. True, hog prices are comparatively low. But it never occurs to those who are bawling for government subsidies to ask why hog prices are low, and what the consequences may be if the government boosts them. The truth is simply that hog prices have been falling because the demand for pork has been declining while the supply of pork has been increasing. Profitable hog prices will not be restored until the supply of hogs is brought into workable relationship with reduced demand. But any government support which falsifies prices will encourage hog raisers to continue in the same course that led to their existing troubles. It will prolong and eventually increase these troubles.
In the same way, it is the 90-per-cent-of-parity support for “basic commodities” that led to the huge crop surpluses which have exhausted storage capacity, misdirected farm production, forced our farm products out of world markets, led to our import quotas and export dumping schemes, and thrown a heavy burden on the city buyer of foodstuffs and on the taxpayers.
The appalling consequences of this policy should at last be clear even to a schoolboy. Yet that great statesman and intellectual, Adlai Stevenson, has joined the clamor for an immediate return to rigid farm prices at 90 percent of parity. His argument for this is incredibly naïve. “Our objective for agriculture,” he declared, “is equality with the other parts of our economy.” What does he mean by “equality”? Does he mean that everybody, whether farmer, factory worker, or film star, should have the same income as everybody else? He cannot mean anything like this—which shows how loosely he uses words.
He tries to explain what he does mean: “Our yardstick for measuring this equality is parity—a formula for fairness based on relating what a farmer gets for what he sells to what he must pay for what he buys. And 90 percent of what is fair is certainly not unfair or too high.” Here is a priceless specimen of begging the question. If parity is “fair,” then it certainly cannot be unfair. In fact, if parity is “fair,” only 90 percent of it must be unfair. Why is Stevenson so niggardly? Why not 100 percent parity for 100 percent fairness?
Of course what “parity” really means is that a certain past relationship between prices that existed from 1910 to 1914, or in the ten past years, is to be perpetually preserved, at the expense of the taxpayer and consumer, no matter how drastic the changes have been in supply and demand or in the conditions and costs of production. If Stevenson knows anything about this matter at all, he must know that as a result of trying to maintain 90 percent parity the government is now holding $7 billion in unsalable farm surpluses. It would take nearly a year to use up the American cotton already in storage. It would take at least two years to consume the record volume of American wheat already in storage. When such surpluses already exist, it is preposterous to support prices that encourage the farmer to grow still greater and more unmanageable surpluses.
What Stevenson is really saying is that he desperately wants the Democratic nomination; and that he thinks the farmers’ vote can be bought by this further bribe at the expense of the taxpayers and of city workers who must pay it through higher food bills. If Stevenson does not realize the economic consequences of what he is proposing, he is surely not fit for the high office to which he aspires. If he does realize these consequences, then we can only conclude that, like Harry Hopkins, he cynically thinks the American people are “too damn dumb to understand.”
November 21, 1955
Immediately before last year’s Congressional elections, I pointed out in this column (Nov. 1) that the “middle-of-the-road” and semi-New Deal policies being pursued by the present Administration would probably be the main cause of a Republican Congressional defeat if it occurred. Following those elections (Nov. 22), I remarked that the real danger of the Republican defeat that had just occurred was that “Administration Republicans . . . may interpret the result as a repudiation of President Eisenhower’s more conservative policies and a public demand for return to New Dealism—to big government, big spending, inflation, and subserviency to labor-union bosses.” Unfortunately, this interpretation did in the main prevail. In this year’s local elections we have had further Democratic gains. And once more it is widely argued that this is because the Eisenhower Administration did not go sufficiently left.
A more plausible interpretation is the very opposite—that the Democratic voters, as usual, voted for Democrats, but that a substantial percentage of conservative Republicans, disheartened by the abandonment of traditional conservative Republican policies on the part of the Administration, simply stayed home—as they did in the Truman-Dewey election of 1948 and as they did last year.
It might be difficult to prove this interpretation statistically if we did not happen to have direct evidence that whatever caused the election of more Democrats and fewer Republicans, it was not a drift of the electorate toward the left. This direct evidence shows, on the contrary, a return toward conservatism. It shows a revolt, above all, against the constant increase of government spending.
The most dramatic example of this was in Ohio, where, in the face of tremendous CIO propaganda, the voters overwhelmingly rejected a proposal to increase the state’s unemployment-compensation benefits from a maximum of $33 to $50 a week, to extend the length of time a person can receive benefits from 26 to 39 weeks, and to permit the payment of state unemployment benefits to people drawing out-of-work pay from private industry. The votes of many factory workers, including rank-and-file CIO members themselves, must have been against this proposal to bring about such a defeat.
Only slightly less dramatic were the results in New York State. Here the voters heavily rejected a proposed constitutional amendment to authorize a $750 million bond issue for highway construction. They defeated a proposed amendment authorizing local governments to borrow in excess of their debt limits for sewage systems. They rejected a proposition to authorize the lending of $50 million in state housing funds for “middle income” housing. They very nearly defeated the proposal to increase annual subsidies for low-rent housing from $25 million to $34 million. In New York, such housing subsidies have hitherto been approved by overwhelming majorities.
Over the country as a whole, the balloting resulted in the defeat of 75 percent of the bond issues proposed to finance road building and other projects. This reversed the pattern of recent years in which the voters have ratified an average of 85 percent of the bond issues submitted to them.
Let us hope that the lesson will not be lost in Washington. If people in our richest states have finally decided that they cannot afford to keep on piling up debt for more roads and other improvements in their own localities, what, do you suppose, would happen if they were permitted to vote directly on the Administration’s grandiose national road-building program, or on its policy of scattering subsidies totaling $4.7 billion to dozens of foreign governments?
Next week I expect to write about the spread of the political delusion that the government can draw on a sort of Fourth Dimension to supply everybody’s needs or wants without taking the corresponding dollars or goods away from anybody else. This year’s elections show that the voters are less subject to this delusion than most of our politicians.
November 28, 1955
We are heading into our 23rd deficit in the last 26 years. In the richest and most productive year in our history, with the most onerous taxation we have known until this decade, our Federal revenue still does not equal our Federal spending. That spending now runs to about $64 billion a year-twenty times the rate at which we were spending, say, in 1928. Yet the Administration professes helplessly that it cannot cut this down. It is not merely defense but nondefense spending that is at record levels. From a hundred directions come demands for more funds—for grandiose highway programs, Federal aid to schools, flood control, more social security, more aid to the farmers, more foreign aid. And so on and on.
It now seems futile to criticize any specific spending program. For a general delusion has taken hold of the overwhelming majority of our Washington rulers. This delusion has been given what seems to me its most appropriate name by the European economist, Wilhelm Röpke. “When demanding assistance from the state,” he wrote, “people forget that it is a demand upon the other citizens merely passed on through the government, but believe they are making a demand upon a sort of Fourth Dimension which is supposed to be able to supply the wants of all and sundry to their hearts’ content without any individual person having to bear the burden.”
This name for the delusion is comparatively new. But the delusion itself, and correct descriptions of it, are very old. “The state,” wrote the French economist Frédéric Bastiat a century ago, “is the great fiction through which everyone attempts to live at the expense of everyone else.” And in 1842 Macaulay declared: “It is supposed by many that our rulers possess, somewhere or other, an inexhaustible storehouse of all the necessaries and conveniences of life, and, from mere hardheartedness, refuse to distribute the contents of this magazine among the poor.»”
This delusion thrives today as never before. Every morning our newspapers report statements that the government has not yet begun to meet our highway needs, our education needs, our farm-support needs, our hospitalization and health needs, and a thousand other “needs.” The tacit assumption is always that an increase in government spending will meet more of our total needs than were met before. But this comes from overlooking the fact that the government has not a dollar to spend on anybody that it does not take from somebody else. When a pressure group says: “We demand that the government should pay for us,” it is really saying, “we demand that other people should pay for us.”
The net result of this process is that instead of meeting more of the people’s needs than otherwise, we actually meet fewer. This is true for several reasons. In 1829, the poet Robert Southey (who was a New Dealer a century before Franklin D. Roosevelt and a Keynesian a century before Keynes) wrote that “a liberal expenditure in national [public] works” was “one of the surest means of promoting national prosperity.” Macaulay pointed out in a blistering retort some reasons why public spending is usually less needful and more wasteful than private spending.
We may add other reasons. For every additional dollar that the government spends, the taxpayers have one dollar less to spend. The situation is worse than this. Taxation erodes the incentives to produce and earn. It penalizes success, and the production of marketable products, often in order to subsidize continued production of unmarketable products. It sets up an army of taxgatherers. In the end it meets fewer real needs than before. People spend the money they themselves earn on what they themselves really want. The government spends money, not on what the rest of us want, but on what the bureaucrats think is good for us.
The delusion of an economic Fourth Dimension flourishes not merely through stupidity, but because there is now an enormous vested interest in keeping it alive.
December 5, 1955
We have all been long indebted to Judge Harold R. Medina, now of the U.S. Circuit Court of Appeals, for the patience, balance, and firmness with which he presided at the trial of eleven top Communists in 1949. A few weeks ago he put us further in his debt by exposing the inverted semantics into which most of us have recently fallen in our political discussion—particularly in the strange use of the word “liberal.” He regards himself as a liberal, Judge Medina declares, and he does not intend “to be frightened away because the Communists and their coadjutors have tried to appropriate the word ‘liberal’ just as they have the names of our great Presidents, Abraham Lincoln and Thomas Jefferson, by the use of Aesopian language, twisting names and personalities to suit their purpose.”
Today Socialists, fellow travelers, and Communists all call themselves liberals. As a result, as Judge Medina points out, the word has taken on “a sinister and evil connotation.” I should like to supplement his own remarks on this strange usage and its results.
Originally (as its Latin root liber implies) the liberal was a man who believed in freedom. The foundations of the liberal tradition were laid in England by such great figures as Milton, Locke, Hume, Burke, Adam Smith, and Mill. Politically, the liberal tradition stood for freedom for the individual, the Rule of Law, strict limitation of the powers of government, and decentralization and diffusion even of these limited powers. Economically, the liberal tradition stood for protection of private property, and for freedom of trade, of prices, of markets, and of enterprise.
But through historical accident and intellectual confusion, the word “liberal,” particularly in this country, altered and finally reversed its meaning. Today, in popular speech, a “liberal” has come to mean a person who wants constantly to expand the powers of government, and to centralize them in Washington at the expense of the states and localities. It has come to mean a person who disparages Congressional restraint on the executive power and who prefers bureaucratic discretion to the Rule of Law. Economically, it has come to mean a person who distrusts freedom of markets and freedom of enterprise; who distrusts private ownership and management and extols government ownership and management; who presses for more government “planning,” and who wants to tax and penalize success in order to subsidize failure.
Most of those in America who are called “liberals” today are, in brief, either Socialists, statists, or state paternalists. Some leading newspapers now use the word “liberal” in their news columns, without quotation marks, to designate precisely such groups. The real liberals—those who believe in personal liberty and limited government—are usually referred to in these same news columns as “ultraconservatives” or “reactionaries.” It is not strange that state paternalists have appropriated the word “liberal” to themselves. It has had a noble meaning. When anything acquires value, it becomes worth stealing. But what is much harder to understand is why many who are libertarian in their own basic philosophy not only fail to challenge the Socialists’ and statists’ title to the word “liberal,” but have themselves begun to use it as a stigma.
This particular perversion of the word’s meaning has not occurred in most of Western Europe. In France, for example, the economists who are opposed to Socialism and state “planning,” and advocate private enterprise and free markets, now call themselves the “neo-liberals.” Their Socialist opponents admit their title to the word, and openly disparage liberalism. In Continental Europe, and even in England, the Socialists know and admit they are Socialists. But those who support Socialist principles here—the zealots for TVA, for example—furiously resent application of the term to themselves.
We need to return to first principles in our political and economic thinking. But we will never do so until after we have reexamined our political and economic vocabulary.
December 12, 1955
The Federal Reserve Board is to be congratulated on its courage in approving an increase in the discount rate from 2¼ to 2½ percent. Only a firm rein on interest rates can prevent a new spiral of inflation.
This mild action was promptly denounced, not only by Democrats in Congress but even by some bankers and businessmen. “Money was tight enough already,” complained one banker; “they’re going to make it unavailable.” If one takes comparisons for the last twenty years alone, a 2½ percent discount rate (the rate at which member banks can borrow from the Federal Reserve Banks) may indeed seem high. It is the fourth increase this year, and the highest discount rate since 1934.
But our generation has become so accustomed to cheap money that we have lost our perspective. In 1929 the discount rate of the Federal Reserve Bank of New York was raised to 6 percent. It had averaged around 4 percent for the preceding decade. It had been as high as 7 percent in 1920. Nor is the present discount rate high compared with official discount rates in the rest of the world. Money has been getting tighter everywhere. A recent compilation by the London magazine The Banker showed that in early August the discount rate in Britain was 4½ percent; in Germany, 33½ percent; in Sweden, 3¾ percent; in Denmark, 5½ percent.
In fact, if the Federal Reserve System were operating on pre-Keynesian policy it would today be charging a much higher discount rate. The late Benjamin M. Anderson, who was for many years economist of the Chase National Bank, declared in discussing the belated increase of the rediscount rate in 1920: “The Federal Reserve System should have held to the orthodox rule of keeping the rediscount rate above the rate to prime borrowing customers at the great city banks.” Today this rate is 3½ percent. The purpose of this “orthodox” rule was, of course, to penalize and discourage borrowing from the Federal Reserve Banks rather than to encourage the commercial banks to overlend to their own customers and then to reborrow at the Federal Reserve at an actual profit to themselves.
I do not mean to suggest that the Federal Reserve System could return overnight to this traditional rule, so long neglected. But it is time for us to recognize more clearly the direct causal connection between artificially low interest rates and inflation. Many bankers and economists talk and write today as if the sole cause of present-day inflation were a budget deficit financed by unloading government securities onto the banking system. But the inflation will be brought about, even without a budgetary deficit, whenever interest rates are kept too low in relation to the supply of and demand for real savings. This leads to overborrowing, and an increase in the money supply which pushes upwards on prices.
Some reasons why the Federal Reserve Board has now increased the discount rate are clear. The board is concerned about the upward pressures on the price level of steel, other primary metals, and building materials. Most of our economy is already operating practically at full capacity—at “full employment” of available men and resources. Any further increase in loans would tend merely to push up prices rather than lead to any further expansion in output.
Consumer spending has been rising more rapidly than consumer income. Installment credit and mortgage debt are at record levels. In September total consumer credit outstanding was at $34.3 billion, compared with $28.9 billion a year previous, and with $8.4 billion at the end of 1946. The stock market has been buoyant. Industrial companies have been announcing the most ambitious expansion programs on record. The country’s money supply (total bank deposits and currency outside of banks) stood at the end of September at $215 billion—an increase of $7 billion over the year before. Total bank loans stood at $78.4 billion—an increase of $11 billion over those of September 1954.
It was time for the government to take its foot off the accelerator.
December 19, 1955
A few weeks ago Secretary of Agriculture Benson invited “everyone” in the country to send in his ideas about solutions to the farm problem. “I guarantee to you,” he said, “that those ideas will receive the most careful attention possible.”
Thus encouraged, I should like to propose a very simple farm program. I have already suggested, in Newsweek of Oct. 31, some ways in which the government might extricate itself from the present farm fiasco, but those proposals tried to take into account what political pressure groups might accept. If we consider merely what plan would work best economically, such a plan could be reduced to two points.
The first point may strike some readers as extremely novel, because it is almost nowhere being suggested. This is that Congress stop all price guarantees and all promises of support-buying of any kind on any crop that has not yet been planted.
Let us look at the remarkable advantages that such a plan would have. (1) It would mean immediately an enormous saving to the nation’s taxpayers. (2) It would soon mean a great saving to the nation’s food buyers and food consumers. (3) It would end any further accumulation of farm surpluses. Marginal farmers would stop raising crops on marginal acres. Farmers and the government would cease to hold crops off the market. We keep forgetting that the present farm surpluses are purely the creation of the price-support program itself. Farmers raise crop surpluses because they are encouraged to do so by an excessive price. The surpluses pile up because they are unsalable at the price set.
(4) With the removal of price guarantees and supports, there would no longer be any need for government acreage control or marketing quotas. Farmers do not plant crops on which they do not expect a profit. Marginal producers are no longer induced to grow crops on marginal acreage. (5) Removal of price guarantees and supports would restore a better balance of farm production. Unfavored farm commodities would no longer be caught in an artificial price-cost squeeze. (6) Our foreign economic relations would immediately improve. We would no longer need to impose farm import quotas or try to dump surpluses abroad.
But while termination of further price guarantees or supports would prevent the present situation from getting still worse, as it otherwise threatens to do, it would not solve the problem of the huge $7 billion worth of surpluses that the government already holds. This brings me to the second step of my proposed program. The government would sell its existing surpluses back to the farmers themselves. Each farmer might be allowed to buy an amount proportionate to that of his own production of a surplus commodity in preceding years. The government could assure the sale simply by offering the surpluses to the farmers at, say, two thirds of the world market price of each commodity at the moment of sale. Each farmer would be free to dispose of what he bought as he saw fit. He could store it at his own expense, or sell it through the speculative markets.
There would then be no need to subsidize the farmer to put his acreage in soil-conserving crops. Once again guided by free market prices, most farmers would realize the folly of raising more of a crop until the existing surplus was worked off. They would meanwhile have sufficient incentive to conserve their own soil.
It is true that the government would take a big loss in selling these surpluses back to the farmers. But most of this loss is inevitable anyway. It will be immensely greater, in fact, if the government continues with its present program. It is true that individual farmers would for a year or two be paid, in effect, for not raising crops in which surpluses existed. But the twin objectives of a “soil bank” and of getting rid of surpluses would be achieved.
The only alternative to halting present farm price supports is further losses to taxpayers, further piling up of surpluses, and ultimately much further harm to farmers themselves.
December 26, 1955
The present ballyhoo for Federal aid to local schools is one more example of the delusion that Federal money comes out of a sort of Fourth Dimension, and doesn’t really cost anybody anything.
The chief argument for Federal aid is that the states and localities cannot afford to pay for their own education. The moment we examine it, this argument vanishes into thin air. For the residents of the states and localities who “cannot afford” to pay for adequate education are the same people who would be called upon to pay increased Federal taxes to supply Federal aid. In Newsweek of Nov. 28, Raymond Moley discussed some of the fallacies of Federal aid to education, based on the excellent study by Roger A. Freeman, published by the American Enterprise Association in Washington, D.C. But here I should like to call attention especially to the economic and fiscal fallacies.
Freeman argues that, if anything, the states and localities are now in a better position to pay for education than the Federal government. State and local government debt is small compared to the huge Federal debt. Twenty-five years ago the Federal government collected one fourth of all taxes in the U.S.; today it takes three fourths. It is high time to reverse this trend.
When such facts are pointed out, some proponents of Federal aid are content to argue that the Federal government should aid the poorer states alone. Freeman points out what is wrong with this argument. The discrepancies in fiscal capacity among states have greatly narrowed in recent years. Between 1940 and 1953 the per capita income in the twelve highest-income states rose 37 percent in dollars of constant value, whereas in the twelve lowest-income states it rose 96 percent.
And Federal aid to the poorer states alone is politically so improbable as to constitute a daydream. Congressmen from New York may gain politically by getting Federal aid for New York; but they will get few votes in their own districts for taxing New Yorkers to help build schools in Mississippi. Experience has shown, in fact, that the only kind of bill for Federal aid to education that has a political chance in Congress is one which makes a flat per pupil grant to all states. This was the kind of bill that actually emerged from the House Education and Labor Committee last summer. Under it, about half the Federal appropriations would go to the fourteen wealthiest states, and only a fourth to the fourteen poorest. As Freeman points out, the fourteen wealthiest states control 53 percent of the votes in the House of Representatives, and the fourteen poorest states only 23 percent.
The arithmetic of Federal aid, in brief, is entirely unsound. From where, then, does the constant political pressure come for Federal aid? From the very persons who ought to be the greatest defenders of states’ rights, but who turn out to be among its greatest enemies. From many governors, state legislators, and local educators. The reason is not obscure. If state officials get Federal aid, they can argue to their local voters that they have brought benefits to the state without raising taxes. The argument is, of course, fallacious. The voters of the states and localities simply pay for schools in increased Federal taxes instead of increased local taxes. To be sure, the exact increase of the Federal tax burden on himself is much harder for the individual taxpayer to trace. The Federal government can even create the illusion that Federal aid doesn’t cost anybody anything, because it can run a deficit and print more paper money.
The pressure for Federal aid to education, in sum, perfectly illustrates the delusion that funds appropriated by the Federal government are not really supplied by the voters of the states and localities, but come out of a sort of Fourth Dimension. The sad truth is that there is no magic in Federal aid; that everything has to be paid for; that if the Federal government helps to pay for local education it must end by controlling local education, and that states’ rights will become a hollow shell.
