Business Tides
Who Gains by Strikes?
January 7, 1963
It is easy to point to those who do not gain by a strike. Let us look at the present newspaper strike in New York City.
1—Not the employers. Their losses are direct and heavy; some papers may not be able to sustain them. If they are forced to settle on the strikers’ terms, or even on terms higher than they offered to avoid the strike, they will be saddled with higher labor costs. If they try to compensate by raising the price of their papers or of their advertising, they will sell less of both. When, like the steel companies, employers are in foreign competition, they will lose business to their foreign competitors.
2—Not the public. The New York public loses by being deprived of the full daily information that only newspapers can supply. Department stores lose. Specialty stores lose. The owners of small newsstands and stationery stores lose. From every strike the public suffers at least inconvenience and sometimes serious hardship. It is deprived, while the strike lasts, of the particular product or service that the strikers helped to supply. And if the strike is settled by an excessive increase in wages, the public must pay a higher price for that product or service.
3—Not the whole body of workers. They constitute the overwhelming majority of consumers. They suffer the same inconvenience or hardship as the rest of the public during a strike. They also must pay higher prices afterward for the product or service supplied by the former strikers. This reduces the purchasing power of their wages. Workers in other industries often lose their jobs as a result of a strike. If some of them receive less pay at their jobs than the strikers did at theirs, they are not allowed to apply for the jobs that the strikers have voluntarily vacated. The “solidarity” in the interests of “all labor” is a myth. The wage gains of one group of workers as a result of a strike are nearly always at the expense of other workers through the higher prices that the others must pay.
4—Do even the strikers themselves gain from a strike? The truth is that they can do so only under very special and unusual conditions. Even when they “win” a strike they may lose—especially if the strike is prolonged, or if they win excessive gains. What labor is mainly suffering from today is too many victories.
In the New York newspaper strike, the printers were receiving a basic wage of $141 a week. The publishers offered an increase to $149 a week over a two- year period. The printers asked an increase to $160.
WHAT STRIKERS LOSE
For the first year the publishers offered an increase of $4.25 a week. The printers asked an increase of $10, or $5.75 more. By striking they lose $145.25 a week. Even if they win their full $10 demand, therefore, it will take them 25 weeks, or almost half a year of work, to make up for every week lost on strike. Even if they were to win their whole fantastic “package” demands, now estimated at an increase of $38 a week, they could win them only by throwing several newspapers out of business and thousands of employees out of work.
Anyone who thinks this prediction overdrawn should look at the record of the 1959 steel strike. This ran for 116 days, with an average wage loss of $2,100 per worker. If we compare the workers’ wage increase with what they would have got if they had accepted the steel companies’ last offer before the strike, we find that in the three years since the settlement they have made up less than half the losses they suffered. That is, those who have remained employed have done so. But as a result of the increased labor costs imposed on the steel companies, fewer have remained employed. Total nonagricultural employment in September 1962 was 63.1 million in 1958, an increase of 8.6 percent. But employment in steel mills dropped from 601,100 in 1958 to 565,900 in September 1962, a fall of 5.8 percent.
We may yet have to revise our labor laws, ceasing to force employers to bargain only with a specified union, and ceasing to permit intimidatory picket lines, if only to prevent shortsighted unions from committing economic suicide. 
January 14, 1963
Any tax cut that led to still another budget deficit—which means any tax cut not accompanied by an equal or more than equal cut in expenditures—would be a cruel deception of the American people. It could precipitate an inflation that would do immense harm. But this objection does not apply to proper tax reform. Our present system embodies rates and types of taxation that are not only inequitable, but actually reduce possible revenues at the same time as they retard economic growth.
An outstanding example is the capital-gains tax. This tax is cynically one-sided. It is a heads-I-win-tails-you-lose proposition of the government against the taxpayer. Short-term capital gains are taxed in full, to any amount, just as if they were added income. But capital losses can be deducted only against gains, if any, and not against income, except to a maximum of $1,000 in any one year. Long-term capital gains (i.e., gains from assets held longer than six months) are treated similarly as compared with losses, though such capital gains are taxed at a maximum rate of 25 percent.
GAINS VS. LOSSES
Prior to the market collapse and depression of 1929–33, capital gains were taxed as income, and at the same rates. And capital losses were fully deductible against income. But when J.P. Morgan revealed that he had paid no income tax for the preceding year, because his capital losses exceeded his ordinary income, his statement made front-page headlines. Then Congress one-sidedly “rectified” matters by refusing to allow deduction of more than $1,000 a year of capital losses against income, though it continued to tax short-term capital gains in full as income.
Another gross injustice of the present capital- gains tax is that the “gains” it taxes are often nonexistent. Suppose a man bought stock or real estate for $10,000 in 1939 and sold it for $21,800 in 1962. He would be taxed on a long-term capital gain of $11,800. Actually, as the cost of living also rose 118 percent in that period, he would have achieved no capital gain at all. His $21,800 in 1962 could buy no more than $10,000 bought in 1939. If he had sold his real estate or stock for $19,000, he would be taxed on a capital gain of $9,000, but he would have suffered an actual loss in real terms. Under past and prospective inflation, the long-term capital gains tax amounts to a large extent to nothing else but capital confiscation and expropriation.
Its evils do not end there. By taxing gains in full, and short-term gains at sometimes confiscatory rates, with loss deductions only against gains (except for a token deduction against income), it discourages all investment, and particularly of risk capital. It “locks in” capital. It penalizes investors heavily for transferring investments into new ventures. It stunts economic growth.
It is hard to imagine any reform of the capital-gains tax that would not be an improvement. Here are some possible alternatives:
1—Segregate capital gains and losses from ordinary income. Tax these segregated capital gains at the same rates as ordinary income, or at a flat rate calculated to maximize revenue. Allow deduction of losses against gains, and an indefinite carry-forward of losses until absorbed.
2—Cut the rate on long-term capital gains from a maximum of 25 percent to a maximum of 10 percent.
3—Follow the example of Britain. Don’t tax long-term capital gains at all. Or adopt the Swedish policy of tapering the tax off. (The Swedish taxpayer pays straight income tax on 100 percent of capital gains on assets held for less than two years, on only 75 percent of the gain on assets held between two and three years, on only 50 percent of the gain if the assets are held one year longer on only 25 percent if held one year longer still, and no capital-gains tax at all if the asset is held more than five years.)
4—At least allow the taxpayer to deflate his alleged capital gain to allow for the rise in the consumer price index over the period involved.
5—Allow the taxpayer a tax-free transfer of capital from any investment to another (a right that now applies only to his residence).
6—Enact some variation or combination of these reforms.
January 21, 1963
Congress is being urged to do many things that are not urgent and some things that ought not to be done at all. But aside from a few forlorn proposals by individual congressmen, it has no plans for dealing with the most urgent domestic problem now facing the country—that of paralyzing strikes.
This problem is being treated for the most part either as if there were no real solution to it, or as if that solution were merely to move into still further government control—“fact-finding,” compulsory arbitration, or outright wage- and price-fixing. Most politicians and publicists simply refuse to re-examine the Federal laws passed in the ’30s and ’40s (particularly the Norris- LaGuardia Act and the Wagner-Taft-Hartley Act), or to ask whether these were not, perhaps, steps in the wrong direction. Suppose we had today the Federal and state labor legislative situation that existed prior to 1932 (together with local law enforcement) and either the East and Gulf Coast dock strike or the New York printers’ strike had been called?
Each of the New York newspapers would probably have tried to continue publication. It would have offered permanent employment, say to any competent printer, at a basic wage of $145 a week. If the employers and the applicants were guaranteed adequate police protection, is there any doubt that the papers would get enough eligible applicants even from members of the union itself? And if mass picketing were again treated in law as what it is in fact—intimidation and coercion—would members of non-striking unions abet the strike by “honoring” the picket lines?
TOWARD WAGE-FIXING
Of course if the members of the striking union were really underpaid, as they contend, it would be impossible for the employers to replace them permanently with suitable substitutes. It is precisely because they know that other and less privileged workers would be eager to take over their “underpaid” jobs that they set up picket lines. What is constantly forgotten is that the coercion unions exercise is primarily coercion of their fellow workers.
The crippling strike of the Atlantic and Gulf Coast dock workers would not have been possible without the intimidation unions are permitted to exercise through picket lines and violence In the dock strike that favorite remedy of so many employers and conservatives—the forced return to work under the “emergency” provisions of the Taft-Hartley Act for a “cooling-off” period of 80 days—has been exhausted. So leaders of the maritime industry, in despair, are calling for compulsory arbitration. No demand could be more shortsighted. If compulsory arbitration were imposed in the shipping industry, it would soon be imposed everywhere. Then demands for “equality of treatment” and “guidelines” would lead to outright wage- and price-fixing and a regimented and petrified economy.
OUR DOUBLE STANDARD
What is urgently needed is not more laws but revision or repeal of bad laws now on the books. Unless we want to be forced step by step into more and more government control and coercion, we must restore free competition in the labor market. This means first of all enforcement of the common law against coercion and violence. It means prohibiting all picketing in numbers. It means ceasing to give unions power to bargain for anyone but their own members. It means, in brief, restoring free collective bargaining.
Some will think that it also means prohibiting industrywide unions, or any union extending beyond a single plant or corporation, and otherwise making unions subject to the antitrust laws. Such measures are of dubious necessity and dubious enforceability. But certainly labor law must be made more balanced and two-sided. Either we should enact right-to-work laws, or illegalize the closed union. Either we should once more permit “yellow-dog” contracts, or prohibit compulsory union membership. The right not to join a union should be as clear as the right to union, and the right to work as clear as the right to strike.
January 28, 1963
President Kennedy’s State of the Union Message was a tour de force. It covered almost every conceivable project or dream. But it said not a word about the most urgent problem now facing the country—that of paralyzing strikes. We must assume either that the President does not consider the subject important, or that he is perfectly satisfied to give any labor union, big or little, power to silence a city’s newspapers, to halt its transportation, to immobilize the country’s shipping, or to shut down any industry whatever, until that union’s demands, no matter how unreasonable, are met.
Mr. Kennedy’s emphasis was on a tax cut of the huge amount of $13.5 billion, phased over three years. But this is not to be accompanied by any corresponding reduction in expenditures. On the contrary, these are to be increased. A strange recommendation in the face of an already officially predicted deficit of $8.8 billion in the current fiscal year. The President is frankly planning another deficit, even a series of deficits. His only restriction is that they are to be “manageable” and “temporary.”
BROKEN PROMISES
But what assurance can we have that they will be either? What is considered “manageable”? How long is “temporary”? We have been living on such promises now for 30 years. They have never been kept. I cited the sad record in a Newsweek column of Nov. 21, 1953. It began with Roosevelt’s pledge of March 10, 1933: “I give you assurance that . . . within a year the income of the government will be sufficient to cover the expenditures of the government.” (The budget was never balanced in any of the twelve years that FDR was in office.) It came down to Eisenhower’s pledge of Feb. 2, 1953: “The first order of business is the elimination of the annual deficit.” (There was a deficit for fiscal 1953, 1954, and 1955.)
The net outcome has been 27 deficits in the last 33 years As I concluded my column of ten years ago: “Each President began with pious promises of a budget balance, but there were always reasons why this could be done only in some indefinite future, and not now. Meanwhile the national debt keeps mounting and the purchasing power of the dollar keeps shrinking.”
Is there any reason to suppose that the even vaguer promises of Mr. Kennedy are more likely to be kept? It is not found in his own record. Secretary of the Treasury Dillon said on Oct. 17, 1961: “Let me repeat so there will be mistake. The President intends to submit to Congress next January a balanced budget for fiscal 1963.” Mr. Kennedy did indeed, as promised, submit a budget in January 1962 ostensibly balanced for fiscal 1963, but now admits that there will be a deficit of $8.8 billion.
CRUEL DECEPTION
Nor does the present program of rising expenditures and huge tax cuts give any reason to hope for a budget balance within the foreseeable future. The tax cuts are not of a kind likely to stimulate increased revenues or maximum economic growth, but merely increased inflation.
And if the tax cut lets loose this inflation, it will be a cruel deception of the American people. Taxpayers will not be left with more purchasing power. It will be eaten up in higher prices. Inflation is itself a tax. If evenly spread, it would be equivalent to a flat-rate income tax and flat-rate capital levy without exemptions. But it is never evenly spread. It falls on the industrious and thrifty. It is escaped by nimble speculators.
It is true, as the President declares, that our Federal taxes are now oppressive and “too heavy a drag” on production and growth. But when such enormous sums must be raised, there is no magic reform that can make them unburdensome. The only cure is to slash our exorbitant expenditures. This would not be difficult. Our defense expenditures for the fiscal year 1964 are budgeted at $55.4 billion. This means that non-defense expenditures, including social security, farm-price support, and foreign aid, exceed $67 billion. All Congress needs is courage and a carving knife.
February 4, 1963
Mr. Kennedy is the first President who has ever openly advocated deficit-financing as a policy. He is planning a deficit of $11.9 billion for the fiscal year 1964 and expects deficits in succeeding years. He lumps them all together by calling them a “temporary deficit.” Eventually, because of the stimulus that a huge tax cut combined with increased expenditures is expected to give to the economy, these “transitional” deficits are expected to cure themselves and bring about a surplus.
Taxpayers will uneasily remember that they have heard all this before. They have been hearing it off and on, in fact, ever since the days of the New Deal. “It has taken courage for the Federal government to go into the red,” said Franklin D. Roosevelt on July 8, 1938, “but it has been worth it.” Somehow the promises that deficits would bring surpluses have never been kept. We have had 27 deficits in the last 33 years.
Is there any prospect that the theory will work better this time? Before we try to answer that question, let us see what is being proposed.
Mr. Kennedy is proposing that the Federal government spend in fiscal 1964 more than it has ever before spent in its history, in peace or war. He is asking for “administrative” expenditures of $98.8 billion This tops even the $98.4 billion of the peak war year, 1945. In the cash budget (which includes old-age pensions, etc.) he proposes to spend the unparalleled sum of $122.5 billion.
NON-DEFENSE SPENDING
Throughout his Budget Message the President gives the impression that this record budget is brought about mainly by increased defense expenditures. That thesis cannot be maintained. True, he is proposing defense expenditures for 1964 of the record amount of $55.4 billion. But as total cash expenditures will reach $122.5 billion, this means non-defense expenditures of $67.1 billion.
And non-defense spending has risen faster than defense spending. If we compare 1964 with 1954, we find that while total defense expenditures have increased $8.4 billion, non-defense expenditures have increased $22.9 billion and, counting social security, etc., $42.2 billion.
If Congress is sincerely looking for places where it can cut the budget, it need not look far. It might look at the scheduled expenditures of $4.2 billion for space research connected with defense), at the $3.7 billion scheduled for foreign aid, at the $5.8 billion for farm programs, at the $6.7 billion for “commerce and transportation,” at the $1.1 billion for housing subsidies, at the $6 billion for veterans’ programs, and at the glorious $27.4 billion for “health, labor, and welfare.”
NO FOURTH DIMENSION
The President speaks of all these and many more programs as “a necessary payment on future progress.” He insists that others “are for activities which will promote increased productivity and economic growth, yielding substantial benefits in the future.” But this is to talk as if the money for these programs came out of some fourth dimension. It is to forget that it is taken away from the taxpayers. It does not “meet more national needs.” It causes every tax-paying family to meet fewer of its own needs. It leaves less for private persons and private business to invest in the future, in increased productivity or economic growth.
So far we have taken the budget estimates at face value. But suppose, as there are strong reasons for thinking, that expenditures are even more than $98.8 (or in cash, $122.5) billion; that revenues are less than $86.9 billion, and that the deficit is more than $11.9 billion? This is more than possible. A year ago the President estimated a surplus for the current fiscal year of $500 million. This has now become an expected deficit of $8.8 billion, because expenditures are $1.8 billion more and revenues $7.5 billion less than he estimated.
The budget that Mr. Kennedy has submitted, in brief, is irresponsible. Even if the deficit is no greater than the $11.9 billion he estimates, the course he proposes of raising expenditures and cutting taxes can lead only to more inflation, and will undermine confidence in the world’s anchor currency, the dollar.
February 11, 1963
While the attention of Congress is being diverted by fantastic proposals to slash taxes in the face of an already huge prospective deficit, ominous developments have taken place in the field of labor.
The Atlantic and Gulf coast dock strike, which had kept 100,000 people out of work for more than a month, tied up nearly 700 ships, caused untold spoilage of fruit and other cargoes, and total damage estimated at $700 million to $1 billion, has been “settled.” It remains to be seen whether the settlement doesn’t cause even more damage in the long run than the strike.
This settlement was dictated by the Kennedy Administration. The terms were heavily weighted in favor of the union against the industry. On the wage and “welfare” side they granted the union a 39-cent-an-hour package over two years—far in excess of any “guidepost” even the President’s Council of Economic Advisers had dared to propose. (Dock workers’ pay has averaged around $3.65 an hour.) But the chief issue involved was the outrageous featherbedding of the ILA union, which the employers had sought to mitigate. The President’s three-man board simply swept this issue under the rug by recommending that it be put off for a two year “study.”
SOME PROTESTS
This highhanded action has at least drawn a vigorous protest. The Wall Street Journal writes: “The same government which blew its top at a steel company for announcing modest price increases less than a year ago, and threw its full force into rolling back those increases . . . apparently thinks the dock settlement is just fine. President Kennedy says he is ‘gratified.’ In a sense the government should be gratified, for the government dictated the settlement; there is no other word for it. . . . Senator Morse and his colleagues on the President’s three-man board took the bulk of the union’s demands and the government told the companies to knuckle under. . . . The upshot is a settlement that settles nothing and therefore may well prepare the way for more vicious strikes later.”
The National Association of Manufacturers calls the settlement imposed by the Wayne Morse board “a bare-knuckled display of government power unsanctioned by law.”
The New York Journal of Commerce calls the settlement a “crushing victory over management,” and adds: “Mr. Kennedy might just as well have raised the tariff, imposed a tax on exports, or simply raised taxes on firms engaged in foreign commerce to the tune of $18 million to $26 million a year. . . . It is the President himself who has finally given the answer to the question of whether he would crack down on excessive labor demands with the same ardor that he cracked down on steel price increases. It can be stated in three flat words: he will not.”
BUYING MORE STRIKES
Where will Mr. Kennedy go from here? When it was pointed out to him that if he dictated steel prices he might logically be asked to dictate all other prices, he disavowed such an aim and treated his crackdown as an isolated episode. But having dictated a thumping wage increase for a featherbedding union, how can he deny an equal award to other unions?
The Kennedy Administration has been toying for a long time with the idea of compulsory arbitration of labor disputes. This has been shown in the Council of Economic Advisers’ notion that it can set up wage-determining “guideposts,” in former Secretary Goldberg’s statements and interventions, and in present Federal interventions. But conservatives and liberals who rightly fear this outcome are confused and divided among themselves. Some ask for antistrike legislation. Others suggest putting the unions under the antitrust laws. But the real need is simply to restore freedom of bargaining. Bargaining cannot be free as long as the law permits mass picketing or any other form of physical intimidation, coercion, or violence. And it cannot be free as long as employers are legally compelled to bargain solely with specified unions, or as long as the compulsory union shop is explicitly sanctioned by Federal law.
February 18, 1963
The President’s special message to Congress on tax reduction and “reform” rests on a network of outworn economic fallacies. Its basic assumption is that the way to reduce unemployment and increase economic growth is to cut the tax rates on the lower income groups and to squirt more “purchasing power” into the economy through huge government spending and huge deficits.
The truth is that enactment of the President’s program would bring on inflation and imperil the dollar as a world currency. There is no reason to suppose that it would either reduce unemployment or promote economic growth. Unemployment is caused by discoordination of the wage-price system. As long as unions are granted their present powers to extort wage rates beyond the level of marginal labor productivity, they will perpetuate and increase unemployment in the very face of inflation. So far as economic growth is concerned, it can be promoted only by policies less hostile to profits, risk-taking, success, and investment. Only encouragement to investment can raise wages.
PENALIZING SUCCESS
Most of the tax cuts recommended by the President are not calculated to encourage business or employment to expand. They increase, rather than diminish, the incentive-stifling progression in the tax-rate schedule. As the President himself points out: “The overall savings are proportionately highest at the lower end of the income scale”—nearly 40 percent for those with incomes of less than $3,000, and less than 10 percent for those with incomes in excess of $50,000. And the so-called “reforms” largely take back whatever relief the tax-rate cuts do give to the middle and upper income level taxpayer.
As one investment house (Aubrey G. Lanston & Co., New York City) bitterly puts it: “As far as individuals are concerned, the plums in this tax package would go to the person who doesn’t own his own home; doesn’t save and provide capital to American industry through stock ownership; doesn’t carry his proportionate share of the support of our churches, hospitals, colleges, and charitable causes; doesn’t pay much in taxes to support city schools and other local services and to pay for state government; and doesn’t happen to fall into ill health. Nearly l million taxpayers would be removed from the tax rolls, in fact, to vote themselves greater future benefits without even the need to fill out and turn in a nominal tax return.”
A 50 PERCENT TOP
With a few exceptions the “reforms” recommended by the President would make income-tax paying more unfair as between different taxpayers rather than less. The exceptions are the proposal to allow an indefinite carryover of capital losses, the proposal to remove the present limit on deductions for catastrophic medical expenses, and the proposal to permit those who receive widely fluctuating amounts of income from year to year to average them out for tax-rate purposes. This last reform would be much less necessary if it were not for our steeply graduated tax-rate schedule—particularly the rates over 50 percent.
The proper course for Congress would be to concentrate on slashing nondefense expenditures, to balance the budget at present tax levels, and to postpone the whole “tax reduction” program as such. It is true, as the President concedes, that our present tax burden “reduces the incentive for risk, investment, and effort thereby aborting our recoveries and stifling our national growth rate.” But the way to reduce it is to slash the spending that makes it necessary, not to invite deficits and inflation.
While waiting for the appropriation committees to do this, revenue-raising committees of Congress might well go ahead now with tax reforms but real reforms, designed to maintain revenues while reducing deterrents to economic growth. There is room to mention only one such reform here. Slash all income-tax rates above 50 percent to that level. All these rates together bring in less than $1 billion a year, or less than 1 percent of what the government spends. Yet it is impossible to estimate how much they choke incentive and discourage investment.
February 25, 1963
Some day, presumably, the New York newspaper strike will be settled. But it is unlikely that the terms of the settlement will be such as to promote the prosperity of the papers. Hence it is unlikely that the terms will be in the long-run interests of the employees themselves.
The precedent established in the month-long dockers’ strike is ominous. Wholly apart from the fact that the wage boost forced on the shipping industry by the extralegal Presidential board went far beyond the “guideposts” set even by the Council of Economic Advisers, the real issue of featherbedding was untouched. The settlement, therefore, tends to entrench make-work practices and to discourage all future efforts toward efficiency. The real issue in the New York newspaper strike also is union insistence on bogus and featherbedding and preventing economies through modernization.
THE MUZZLED PRESS
There is mounting concern within the newspaper profession. James Reston, chief of the Washington bureau of The New York Times, wrote in a column intended for syndication:
“The present system is intolerable for the public, the unions and the publishers alike. The President of the U.S. cannot censor the New York papers. The Congress of the U.S. is specifically forbidden to abridge their freedom . . . but Bert Powers, the boss of the New York printers, cannot only censor them but shut them down. What is ‘free’ about a press that can be muzzled on the whim of a single citizen?
“This is anarchy. . . . The papers will have to be published, in New York if possible, elsewhere if not; in union shops if possible, in non-union shops if not. And they will have to be distributed through the mails if necessary. The present situation cannot be accepted in a democratic society. . . . Values and duties have become so confused that even the suggestion of publishing without the consent of the unions is now regarded as a declaration of war. How the old editors who founded our press would have hooted at that!”
The Times, by sending out an order to kill this column, showed how far intimidation has gone.
Why didn’t the New York papers continue publication, strike or no strike, instead of allowing themselves to be shut down and silenced for more than two months? Continued publication was not prima facie impossible. When, more than three years ago, a strike hit the two daily newspapers of Portland, Ore., the papers continued publication the next day, first combined, and later again as separate papers. They have continued publication, though the strike has never been settled.
WHY NO PUBLICATION
Why didn’t the New York papers follow suit? Probably for three main reasons. First, fear of the word “strikebreaking.” Second, fear of vandalism and picket-line violence. Third, fear of being cited as violators of the Wagner-Taft-Hartley Act.
The Federal government is moving toward compulsory arbitration of labor disputes. Its dictated settlement of the dock strike reveals the pattern. It allows a situation to develop in which no other solution seems possible. It affects to be following a “hands-off” policy, but under existing laws it is intervening on the side of the unions, and even of union intimidation, every day.
The Norris-La Guardia Act encourages picket-line violence. It denies injunctive relief to employers who are suffering irreparable injury from clearly unlawful conduct. The Wagner-Taft-Hartley Act gives unions a privileged status enjoyed by no other private groups. It forces employers to bargain exclusively with them, even when their demands are beyond all reason. The law is hypocritical. It makes it “an unfair labor practice for an employer . . . by discrimination in regard to hire or tenure of employment or any term or condition of employment to encourage or discourage membership in any labor organization” and then explicitly sanctions imposition of the compulsory union shop.
There will be labor chaos as long as such legislation remains. How long will it take for the President and Congress to recognize this?
March 4, 1963
On the argument that it will put zip in the economy and reduce or wipe out unemployment, the President and his advisers are planning to increase spending and cut taxes, and so bring about a budget deficit for the next fiscal year of some $12 billion. On the argument that it will help “the little fellow,” as well as increase “mass purchasing power,” the biggest tax slashes are to be made on incomes of $3,000 or less and the smallest percentage cuts on the largest incomes. As, in addition, nearly a million low-bracket taxpayers are to be removed from the tax rolls altogether, the net effect will be to increase tax discrimination against those who earn the higher incomes.
Let us assume that neither of these proposals is designed for mere vote-catching, but is made with perfect sincerity. It is nonetheless true that both of them rest on flagrant economic fallacies. Budget deficits would hurt, not help, workers and people with low incomes. Punitive taxation on people with higher incomes, and limitation or disallowance of honest deductions (stigmatized as “loopholes”) must also hurt, not help, workers with low incomes.
INFLATION IS A TAX
Cutting taxes on low incomes, at the cost of a huge budget deficit, will not increase the purchasing power of low-income groups. For if the deficit is financed by borrowing from the banks and increasing the money supply (as it almost inevitably will be), it will create inflation. It will drive up prices. And the higher prices will eat up any increase in nominal dollar purchasing power. The lower-income groups will not be able to buy any more with their increased supply of depreciated dollars than they could with fewer but better dollars. Their “increased purchasing power” will fade away.
Equally fallacious is the idea that budget deficits create prosperity and increase employment. They do mean inflation. They do raise prices. But they can increase employment only to the extent that they lower real wages—i.e., only to the extent that the rise in prices is not offset by an equal or greater increase in wage rates. Any prosperity brought by inflation is at best evanescent. It can be kept going only by greater and greater doses of inflation.
The belief that deficits cure unemployment got a crushing refutation in the ’30s, when for ten years an average annual deficit equivalent to $19.7 billion today (as a percentage of GNP) was accompanied by average unemployment of 18.6 percent of the labor force.
DON’T PUNISH SUCCESS
Punitive taxation of corporations and of high-income earners also hurts workers and low-income earners. For whatever hurts profits and capital accumulation, whatever discourages saving and investment, means fewer jobs, makes labor less productive, and makes real wages lower than they otherwise would be. Again and again in the last year the Administration has deplored whatever hurts “initiative, risk-taking, and effort.” But its spending and tax recommendations bear little relation to this verbal concern.
A program that would truly help workers and other low-income groups would be almost the exact opposite of the one the Administration is proposing. It would slash spending enough to balance the budget at present revenue levels. For it would recognize that all expenditures have to be paid in one way or another; that a deficit is paid for by inflation; and that inflation is a peculiarly vicious form of tax, falling most heavily on workers.
A program truly designed to help wage-earners would terminate the punitive tax rates on high incomes. It would slash such rates immediately to a top level of 50 percent, on the ground that anything above that is prima facie confiscatory and a profound discouragement to initiative, effort, risk-taking, capital accumulation, saving, and the investment that increases employment, productivity, and real wages. For the same reason it would mitigate estate taxes, capital-gains taxes, and double taxation of dividends.
In brief, it would halt all punitive policies and approve a tax program to maximize production.
March 11, 1963
What is the rationale behind Mr. Kennedy’s extraordinary proposal that, in the face of a huge deficit of nearly $9 billion in the current fiscal year, we should increase spending, drastically cut taxes, and bring about still another deficit of nearly $12 billion in fiscal 1964, plus an indefinite number of deficits thereafter? On its face, this program seems the height of fiscal irresponsibility. How can it be defended?
The most elaborate defense of it is to be found in the President’s annual Economic Report published on Jan. 21. The report consists of a twenty-page message to Congress signed by the President and a 268-page report of the Council of Economic Advisers (164 pages of text, 104 pages of tables) signed by Walter W. Heller as chairman. It is impossible to say how much Mr. Kennedy’s policies are based on chairman Heller’s economic theories, or how much the theories are an attempt to rationalize the policies that Mr. Kennedy has decided to adopt. In either case the outlook is ominous.
For the theories set forth in the full report, and summarized in the President’s message, are utterly fallacious. And if policies based on them are persisted in, they must imperil the dollar and ultimately lead to a disastrous inflation.
WAGE DISTORTIONS
Mr. Kennedy, laudably, wants to cure unemployment. But he never mentions, and the whole Economic Report never mentions, the main cause of unemployment, which is the excessive wage rates successfully insisted on by some unions in key lines. Practically all unemployment is attributed by the President to “insufficient demand.” And insufficient demand is always interpreted to mean insufficient money supply. So unemployment is always to be cured by more government spending and more money, while wage-rate distortions are systematically ignored.
The way to cure unemployment and give zip to the economy, on this theory, is to have huge and continuous deficits, to increase spending, and to cut taxes. “The main block to full employment,” says the President, “is an unrealistically heavy burden of taxation. The time has come to remove it.” The President speaks as if the burden of taxation had nothing to do with the amount of government spending. This spending, in fact, is to be increased. The question may well arise in the reader’s mind: why not abolish taxes altogether? Then there would be no block to full employment whatever.
‘DEFICITS FOR STRENGTH’
Indeed, Mr. Kennedy is not daunted by paradox. He tells us that if we fail to cut taxes, we will slide into recession, and then “the cash deficit for next year would be larger without the tax reduction than the estimated deficit with tax reduction.” We have entered the world of Alice in Wonderland, where the “prudent” and “responsible” thing is planned deficits, and where “if we were to try to force budget balance by drastic cuts in expenditures . . . we would not only endanger the security of the country, we would so depress demand, production, and employment that tax revenues would fall and leave the government budget still in deficit.”
But what if the Heller theory fails? What if heavy unemployment persists (as in the ’30s) even with constant huge deficits? What if the vague hope is not realized that some miraculous prosperity will balance the budget in spite of reduced taxes? Mr. Kennedy himself concedes that “if we were currently straining the limits of our productive capacity . . . tax reduction would be an open invitation to inflation, to a renewed price-wage spiral.” What if this inflation occurs (as is altogether probable) even under present conditions of more than 94 percent employment?
It would be flattering to call this Heller-Kennedy budget theory Keynesism. It carries the logic of deficits to lengths that would have appalled Keynes himself. For Keynes (as Per Jacobsson has just reminded us) at least recognized that excessive real wage rates make full employment impossible.
The Heller-Kennedy spend-more-and-tax-less theory can lead only toward fiscal and monetary chaos.
March 18, 1963
The American public, as H.L. Mencken used to point out, lives through a succession of crazes. In the economic field the last generation has lived through many. Once the great watchword was “full employment.” Now the supreme goal is “economic growth.” Even the American Bankers Association has just held “A Symposium on Economic Growth.”
If we took the word “growth” to be merely a shorthand expression for an improvement in economic conditions, this would be a vast improvement over previous catchwords. But the “growth” mania rests on a special set of assumptions and has taken a peculiar form. It assumes that there is something called “the gross national product,” or “GNP,” that can be precisely measured. Anyone who has seriously studied how these statistics are compiled knows that they are full of arbitrary and questionable assumptions. GNP is measured in a dollar that is itself constantly fluctuating in value. The GNP can be pushed up to any amount simply by inflating the currency enough.
Dollar fluctuations are only one of the dubious elements. Government expenditures are counted as part of GNP. So if the government seizes half of Peter’s income and pays it over to Paul, the GNP total counts the addition to Paul’s income but not the subtraction from Peter’s. GNP is built out of arbitrary decisions as to what activities are “productive” and what are “unproductive.” On the one hand it includes only goods and services that pass through the market. On the other hand it involves double counting at a hundred points.
WHY 4 PERCENT?
Every country measures its GNP in a different way. Every GNP figure is an arbitrary estimate subject to error. The estimate of Communist countries, with no free-market guides, is wholly unreliable. Yet the growth zealots assume that all these estimates can be precisely compared. They even assume they can precisely measure and compare annual percentage rates of growth. And for some reason they have made their goal a precise annual rate of growth. Thus President Kennedy, addressing the American Bankers symposium, recommends “pushing our economy to 4 percent [annual rate of growth] instead of 3 percent.” This, he adds, “might total over the next ten years in today’s prices $400 billion more in output of goods and services.” But why just 4 percent? Why not 5 percent or 6 percent, which would mean many hundreds of billions more still in goods and services?
And why a fixed rate of growth at all? No individual sets such a goal for his own income. If Paul has an income of only $1,000 this year, he will hardly be satisfied with $1,040 next year. He wants to jump to $5,000 or $10,000 right away, or as soon as possible. If Peter already has an income of $25,000, he may not fight very hard for $26,000 next year, or any increase at all.
TELEVISION RECORD
Does a specific industry want or need to grow just 4 percent a year? In a Newsweek column (March 2, 1959) I pointed out that the output of TV sets increased 2,757 percent between 1946 and 1947, 387 percent between 1947 and 1948, 211 percent between 1948 and 1949, and 146 percent between 1949 and 1950. And then “growth” stopped entirely. So what? The U.S. has more and better TV sets than any country in the world.
What we need is not some fixed national “rate of growth” established by the fiat of government officials, but freedom for each of us to improve his own economic condition as much as his energy and talents allow.
The true role of government is to protect life and property and to stop killing incentives. It will not promote growth by cutting taxes while maintaining or increasing huge government spending. That can only bring about deficits, inflation, and debasement of the dollar. It can best promote growth by preserving a sound currency, by ensuring free and fluid markets in goods and labor, and by encouraging saving and investment. It is above all investment, which puts more and better machines in the hands of the workers, that increases their productivity and wages and promotes “economic growth.”
March 25, 1963
Unemployment took a turn for the worse in February, rising to 6.1 percent of the labor force, the highest in fifteen months. On the day this was announced there came a chorus of demands for a quicker and bigger tax cut, more government spending, bigger deficits, more inflation.
President Kennedy, following Labor Secretary Wirtz and AFL-CIO president George Meany, warned that this “intolerable” unemployment would grow worse unless Congress quickly approved his tax-cut proposals. The Democrats on the House-Senate Economic Committee called for a $6 billion tax cut this year instead of the President’s own plan for a mere $3 billion.
These Democrats, under the leadership of Senator Douglas of Illinois, support the Administration’s goal of a $10.3 billion net tax reduction over three years, but feel that the amount allocated for 1963 is too small. “The largest doses should be given when the patient is the sickest,” they say. And they add: “The widespread demands for stimulative tax reductions are, by the same token, demands for stimulative monetary action. Monetary policy must now help fiscal policy to do the stimulative job which, unfortunately, the monetary authorities haven’t done.”
This is an unmistakable demand for outright and reckless inflation.
WHY UNEMPLOYMENT?
Before it allows itself to be stampeded, Congress should ask a few questions. Why has unemployment gone to the highest level in fifteen months? Why is it 24 percent higher than the average for the Eisenhower Administration? (In the eight years from 1952 through 1960 unemployment averaged 4.9 percent.) Is this the way the New Frontier economics has “got the country moving again”?
What is the trouble? Is the money supply too small? It has increased 15 percent since 1953, when unemployment was only 2.9 percent. Haven’t there been enough deficits? The deficits since the end of fiscal 1953 have averaged $3.2 billion a year. And we have recently been doing much better than that. The deficit for fiscal 1961 was $3.9 billion, and for 1962, $6.4 billion. For the present fiscal year we are promised a deficit of $8.8 billion. and for fiscal 1964 of about $12 billion. Why, with all this new “purchasing power” pouring into the economy, does unemployment increase?
Could it be that “insufficiency of purchasing power” is not the cause of the unemployment? Could it be that unemployment is the result of encouraging unions to gain excessive demands? Isn’t the unemployment a sign that, in the lines in which it occurs, wage rates and labor costs are too high? Are some unions pricing their members out of the market?
DOUGLAS VS. DOUGLAS
This is what economists contend. And Paul H. Douglas, when he was a professor of economics, and before he got Senatorial ambitions, was among them. In 1934 he wrote a massive book called The Theory of Wages, in which he arrived at the conclusion that “if wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly rates so that the total income of the working class would be reduced.”
Applying this to the present situation, may not our unemployment of 6 percent indicate that wage rates are 2 percent higher than the productivity level that would permit full employment and maximum payrolls? (As 2 percent is an average figure, the assumption would be that most wage rates are not too high but that a few wage rates are much too high.)
Why is Senator Douglas, why is every member of the Kennedy Administration, completely silent on this possibility? Why does no one dare to ask whether full employment might not be restored by a little wage adjustment? Why is everyone shouting for tax reduction, spending increases, deficits, more inflation, all of which threaten the future of the dollar?
Of course we need tax cuts, particularly of the taxes on investment and production. But the only way to get them without courting a disastrous inflation is to slash intolerable government spending.
April 1, 1963
In the summer of last year, at the United Nations, the representatives of 71 countries attended a conference on coffee. They drew up an elaborate agreement to “stabilize” (i.e., to hold up) the price of coffee. This involved fixing export quotas for 36 producing nations. This International Coffee Agreement was signed on behalf of the U.S. Government on Sept. 28. By the end of November, 54 governments had signed. But the agreement must still be ratified by the U.S. Senate. On March 12, Under Secretary of State George C. McGhee argued before the Senate Committee on Foreign Relations in favor of such ratification.
The argument in favor of the agreement, as stated by Secretary of State Dean Rusk, is that it “offers the best prospect of arresting any further decline in world coffee prices, thus helping to assure stability in foreign- exchange earnings of coffee producers in some 35 developing countries in Africa, Asia, and Latin America.” It is chiefly intended to help Latin American producers, particularly in Brazil and Colombia, which respectively account for 39.2 percent and 13.1 percent of total world exports. It would be chiefly at the expense of U.S. consumers, who import 51.7 percent of total world imports. Of the other 70 importing nations, the most important are France, with 9 percent of the total, and West Germany, with 8 percent.
CROPS DESTROYED
Will the agreement in fact help to “stabilize” coffee production and prices without excessive cost? Neither theory nor experience gives any reason for supposing that it will. Listen to the judgment of Karl Brandt, director of Stanford University’s Food Research Institute, in Challenge magazine (February 1963):
“Such price-fixing . . . while it might mitigate the violence of short-term price fluctuations, inevitably caused profound and serious dislocations for production, processing, stockholding, and consumption. . . . The ‘stabilization’ of cotton prices in the U.S. has not only frozen production in high-price locations, but it has spurred and accelerated cotton production in other countries. And 60 years of efforts to stabilize coffee prices have led to such extreme methods as destroying within a period of twelve years a quantity equivalent to three years’ total world coffee consumption. This did not appreciably help Brazil or Colombia, but instead spurred competitive production in other parts of the world, primarily in Africa. . . . International commodity agreements, at best, do not offer more than a temporary sedative that may give the political sensation of relief.”
OUR DOUBLE STANDARD
Enormously complicated bureaucratic controls will have to be set up within each nation in order to carry out this international coffee agreement. It fixes export quotas for 36 countries. But in order to comply, each of these countries will have to fix production or acreage quotas for each of its thousands of individual producers. Thus the marginal producers, which a free market would eventually eliminate, will be frozen in. The inefficient producers will keep going. Costs as well as prices will be kept high. Such agreements not only eliminate competition between nations, but competition between individual producers within nations.
It is bad enough when the U.S. penalizes its own consumers in order to benefit its own marginal producers of wheat or cotton. It is more ironic when it proposes to penalize its own consumers in order to benefit the marginal coffee producers of other countries, and to do so by conspiring to forbid a free market. McGhee admits that the “international” coffee agreement “would collapse without our participation.”
But the most bitter irony of all is that the U.S. Government has signed a document proposing to resort, and to an enormously greater extent, to precisely the practices for which it puts American businessmen in jail. The double standard was never more flagrantly or cynically applied. Price-fixing in industrial products is condemned and punished as a crime. Price-fixing in labor, or in farm products, domestic or foreign, is lauded and enforced as desirable, benevolent, and imperative.
April 8, 1963
Let us hope that the settlement of the New York newspaper strike will not be followed merely by a sigh of relief but by absorption of its elementary lessons and action to prevent similar calamities.
It has been a strike in which everybody lost. There will be no victors. Let us pass over the incalculable loss to the New York public in being deprived of the daily news for nearly four months; the losses of small newsstand owners, department stores, specialty stores, theaters; the staggering losses of the newspapers themselves, and the losses that their 20,000 employees, including the strikers, can never make up. Let us concentrate on one question: how was it possible for one private citizen, or at best a small handful of men, to do what Congress and the President are expressly forbidden to do in the Constitution—not only to abridge the freedom of the press, but to shut it down entirely for nearly four months?
In the enormous discussion of the New York newspaper strike, the answer to this question was almost never frankly given. Yet that answer is clear. Partly this result was possible because Federal law gravely abridges the bargaining freedom of individual workers and of employers. It is so drawn as in effect to deny them injunctive relief from irreparable injury. The main reason the newspapers stayed closed was the simple fear of their managers that any attempt to publish would lead to violence and bloodshed.
FEAR OF VIOLENCE
It is greatly to be deplored that no one attempted to publish. Even if the fears had proved justified, at least the public would then have recognized clearly that what was keeping the newspapers shut down was the threat of union violence and vandalism, and the inability or unwillingness of the city authorities to protect the workers or the plants.
Those who are tempted to accuse the newspaper owners of timidity and cowardice, however, should seriously consider the risks they faced. Victor Riesel, in a recent syndicated column, gave details from unpublished accounts by Federal investigators of “shootings, slashing of tires, planting of nails on roadways, rubber truncheoning of opponents; beatings, breaking of arms and some really major assaults too numerous to list here.”
Yale & Towne’s Philadelphia plant, in late 1961, courageously and successfully stayed open during a stormy five-and-a-half-month strike, but had to organize its defense with the care of a military operation. To collect evidence it took 2,000 still photographs and 6,000 feet of motion-picture film during the strike. Its operations (I quote from the October issue of Mill & Factory) “included . . . a big magnetic broom to pick up nails thrown by strikers in the main driveway of the plant during the night hours. The broom picked up over a thousand nails in one day.”
THE KOHLER STRIKE
Those who want an illuminating case history, showing how even an “honest” union like the United Automobile Workers operates, should read The Kohler Strike by Prof. Sylvester Petro of the New York University School of Law (Regnery, 1961). There they will find described in detail the techniques of mass obstruction, violence, and vandalism, and how those who try to return to work can be frightened by vicious telephone calls in the night, by acid sprayed on their cars, by paint bombs hurled through their living-room windows.
The remedy? Mainly enforcement of the laws against violence. As Petro writes: “There are plenty of police. If hundreds are used to keep order when it is a question of protecting Communist bullies visiting the United Nations in New York City, it is not asking too much to have adequate police protection against union bullies.” It will help, too, if all picketing in numbers is outlawed. Among other measures Petro suggests: “The special privileges of compulsion granted unions by the NLRA must be repealed, and personal freedom must be restored to workingmen. . . . The duty to bargain must be repealed, for it cannot be enforced without reaching a result which nobody wants: namely, agreements, compelled by governments.”
April 15, 1963
Opinion is beginning to clarify about the President’s tax cut and tax “reform” proposals, but a good deal of ambiguity remains.
Practically everybody favors a tax cut. But the tax cut advocates fall into at least five groups: those who want a tax cut (1) with increased expenditures; (2) with unchanged expenditures; (3) with a smaller cut in expenditures; (4) with an equal cut in expenditures, and (5) those who favor a tax cut only with a big enough cut in expenditures to balance the budget. The whole discussion would be clearer if everybody stated frankly to which of these five groups he belonged.
It is impossible to discuss taxes realistically in isolation from the level of expenditures. Too many people seem to have forgotten that the only reason we have to pay taxes at all is to meet government expenditures. And we do have to meet them. The planned $12 billion deficit for 1964 has been well described as a plan to borrow $12 billion from the American people to pay for their own tax cut.
But we can ask ourselves this hypothetical question: given the necessity of raising the same amount as existing taxes raise, could a better tax system be devised for doing it? This is the question of tax reform.
PUNITIVE RATES
True tax reform would be far more thoroughgoing than, and quite different from, the “reforms” the President has advocated. True reform would reconsider our balance between direct and indirect taxes. And it would re-examine the whole principle of the “progressive” income tax.
This device rests ostensibly on grounds of “social justice.” Yet it embodies the morally dubious assumption that a majority has a right to impose on a minority punitive tax rates that it would not dream of accepting for itself. The moral, legal, and economic harm done by the application of this discriminatory principle has been analyzed at length by F.A. Hayek, Milton Friedman, and other economists.
Our steeply graduated rates have not been successful even in raising revenue. It has been calculated that a flat income-tax rate of 23½ percent, with present exemptions, would raise as much revenue as the whole present scale of rates ranging from 20 to 91 percent. It has also been calculated that the basic rate of 20 percent yields 85 percent of the entire personal income-tax revenue, which means that the whole progression up to 91 percent yields only 15 percent. Finally, all the progressive rates above 50 percent yield less than $1 billion—i.e., less than 1 percent of our total revenues (including those from flat-rate social-security taxes) and enough to run the government for only four days.
DESTROYING INCENTIVES
Yet the harm that these punitive rates above 50 percent do in destroying incentives to effort, production, and investment, and in siphoning off the major part of the funds otherwise available for investment, is incalculable. Our present tax system is probably more responsible for our present slow rate of economic growth, of which the Administration is constantly complaining, than any other factor.
Public opinion is not yet prepared to accept a simple proportional income tax. But wiping out all tax rates above 50 percent would give an immense impetus to effort, risk-taking, and investment. The moral argument for such a ceiling is that any tax above 50 percent is prima facie confiscatory. As former Under Secretary of the Treasury Roswell Magill has put it, “a taxpayer’s interest in earning a dollar of additional income should at least equal the government’s.” The economic argument for such a ceiling is that it would do more in the long run to increase the real disposable income of workers and others in the lower income brackets than any temporary cut in their own tax rate.
Such a ceiling might possibly in the first year result in a trifling loss of revenue, but it would be certain in the long run to bring a substantial increase in revenues.
This 50 percent top should, of course, apply not only to personal income taxes, but to corporate taxes and estate taxes.
April 22, 1963
The dominant argument of the Administration for tax cuts and bigger deficits is that these deficits are necessary to speed up “growth,” to reduce unemployment, and to save us from an economic tailspin.
This theory, now treated in Administration circles as an axiom, receives no support from experience. I have several times in this column referred to its crushing refutation in the ’30s. In the ten fiscal years from 1931 to 1940, inclusive, there was a deficit every year. The average annual deficit was 3.6 percent of the gross national product of the period, equivalent today to an annual deficit of $20 billion. Yet the average unemployment in that ten-year period persisted at 18.6 percent of the labor force. The same percentage today would mean nearly 14 million jobless.
Now the Machinery and Allied Products Institute, in testimony presented by its economist, George Terborgh, to the Joint Economic Committee of Congress, has made a careful and detailed statistical analysis of the relation of budget deficits and surpluses to changes in the GNP for the sixteen-year period from 1947 to 1962 inclusive. The comparisons are broken into three-month periods. Surpluses and deficits are measured in terms of the “national-accounts” budget, which the Administration favors, instead of the conventional “administrative” budget.
SIXTEEN-YEAR RECORD
What does the comparison show for these 64 quarter- years? “Of 51 quarters with a rising GNP, more than half (28) were associated with a Federal surplus, 23 with a deficit, while of 13 quarters with declining GNP, nearly all (12) were associated with a deficit.
“It may be objected that there is a lag between the budget position and the response of the economy, hence that we should `lead’ the former by a reasonable period. If we lead it by six months, the picture is not greatly altered. Of 51 quarters with rising GNP, 24 show budget surpluses in the second quarter preceding, 27 deficits. Of 13 with falling GNP, 7 show surpluses, 6 deficits.”
Let us interpret these comparisons. If Federal budget deficits really stimulated the economy, and surpluses depressed it, as the Administration assumes, we should expect to find expansion predominating during deficit periods and contraction predominant during periods of surplus. We find no such correlation. On the contrary, for simultaneous comparisons we find a slight positive correlation between surpluses and rising GNP (or deficits and declining GNP).
EFFECT OF WAGE RATES
But we did not need the statistical record of the ’30s, or of the sixteen years from 1947 through 1962, to show us that the theory of growth by deficits or reducing unemployment by deficits was unsound. The only thing that deficits can produce is inflation. Inflation can temporarily stimulate an economy (at a high cost in the long run) only if, during the inflation, wages and other costs stand still, or at least rise less than prices. In that case the restoration of profits, or of the prospect for profits, can stimulate increased production and re-employment.
But this result is altogether unlikely today, when unions are encouraged to make ever-greater demands and when strikes are encouraged and even subsidized by legislation that takes the chief risks out of strikes and even pays unemployment insurance to strikers.
Unemployment could be sharply reduced, without deficits and without inflation, if unions ceased to be encouraged to make demands that price their members out of the market.
Unfortunately Terborgh, in spite of his own statistical results, comes to the wrong conclusion that what is really needed to stimulate the economy is to increase the money supply by monetizing “enough” of the deficit. This is an inflationary recommendation, particularly ill-advised in our present gold and balance-of-payments dilemma. But Terborgh is right in insisting that if there is to be tax reduction, “first priority should be given to two long-overdue reforms, a reduction in the corporate rate and a scale-down of high-bracket personal rates.”
April 29, 1963
The President’s statement on the steel price increase this April was very moderate compared with that of last April. But even this year’s statement contained many ambiguities and left some crucial questions unanswered.
The first unanswered question was this: at what point would “selected” price rises, “prompted by changes in supply and demand,” which the President would tolerate, become “across-the-board” increases which he would not?
The total quantitative effect of the new steel prices on prices paid by the consuming public will probably be trifling. The price increases so far announced, which range from about 3 to 5 percent, apply to less than half the output of steel. The increase for all steel products appears to average about 1 percent. The industry’s output is in turn valued at 2½ percent of gross national product. A rise of less than 2 percent in a product that itself accounts for less than 3 percent of GNP hardly constitutes a national crisis.
Yet such a price rise can be very important to the steel industry itself. There has been no net steel price increase since 1958, though there have been five increases in steel wages raising wage-costs some 50 cents an hour. The industry’s dollar volume of net profits in 1962, at $567 million, was the lowest in ten years. Its profit margin on the sales dollar was 4.1 percent, the lowest since 1945. In its return on net assets it ranked 40th among 41 manufacturing industries. The three largest companies slashed their dividends. Five companies reported net losses. Employment in the industry dropped 13,000 compared with 1961 and 103,000 compared with 1957.
NO LEGAL BASIS
Yet the President declares that he is “interested in protecting the American public—and it is the American public which would suffer most from a general increase in steel prices.” How can the American public benefit, in either security or employment, from a sick steel industry?
And what does the President mean when he warns the steel industry that a price rise would “aggravate their competitive position” and be against “their own enlightened self-interest”? Is he implying that he knows better how and where to set prices than do the people in the industry?
The most ominous assumption in Mr. Kennedy’s statement and actions this year, as last, is that he has the legal and moral right to tell the steel industry, or any other, just when, where, and how to set its prices. The whole procedure is without sanction of law. It is government by whim, by personal displeasure, by vague threat of punitive action, a menace to the whole concept of the rule of law.
FREE MARKETS DECIDE
It is also selective and discriminatory price-fixing, without the explicit general standards that legal price-fixing would have to set. The President postpones a trip to Florida to issue a statement on a 2 percent increase in the price of steel, but is silent on a 100 percent increase in the price of two New York morning newspapers. Government officials last year announced “guideposts” which indicated that prices should be frozen where they were but wages could rise about 3 percent a year. Then the government this year stepped in and settled the East Coast dock strike by ordering a wage rise that knocked down even its own guideposts.
This does not mean that overall legal price- and wage-fixing would be preferable. All government price- and wage-fixing tends to reduce, distort, unbalance, and disrupt production. The whole attempt to set up price- or wage-fixing “guideposts” is economically nonsensical. The only solution to this infinitely complicated problem is free competition and free markets.
The President’s expressed reason for his concern about steel prices is to head off “another inflationary spiral.” But the real threat of inflation today comes from the policies of the Administration itself—from unparalleled spending and planned deficits. As long as the government keeps pumping more dollar purchasing power into the economy, prices and wages must rise.
May 6, 1963
After his talk to the nation’s editors on April 19, President Kennedy was asked about his attitude toward both price increases and wage increases in the steel industry. “Now I know,” he remarked in replying, “that there are important editorial interests in this country who really don’t feel that this is the President’s business.” He went on to contend that it was.
A little further clarification on this point would be useful. The President has as much right as any other citizen to say whether in his personal opinion a certain price is “too high” or a certain wage is “too low.” But he has no moral right to use his office to try to impose a particular wage increase or veto a particular price increase by vague threats of punitive action, especially when Congress has not given him the legal right. Nor is it wise for Congress and the President combined to try to fix particular prices or wages in a private industry.
No one knows precisely how many prices there are in the American economy. The OPA once moderately estimated the number at 9 million. This implies trillions of interrelations. Prices and wages are interconnected and interdependent, in a web of inconceivable intricacy. To change any one may be to affect a thousand.
DISCOURAGING STEEL
What is the effect, for example, if the government, by intimidation or law, prevents a price increase in steel? The steel industry is already sick. Its dollar volume of net profits in 1962 was the lowest in ten years. Its profit margin of 4.1 cents on the sales dollar was the lowest in seventeen years. In its return on net assets it tied for last place among 41 manufacturing industries. Consolidated employment in the industry was down 11,000 compared with 1961, and 169,000 compared with 1957.
Yet it is precisely in this industry that a very small price increase (averaging about 1 percent) is followed by front-page headlines and a special statement from the President. The effect of governmental pressure to hold down steel prices below the level to which market forces would bring them could only be to make the industry still less profitable, to reduce employment in it still further, to discourage new investment and expansion, to keep it smaller and sicker than it would otherwise be. (The U.S. share of world steel production declined from 46 percent in 1950 to 25 percent in 1961.)
It is an error to suppose that by holding down steel prices below the market level the President or government could hold down “the price level.” The general price “level” depends upon the amount of money and credit in circulation. If steel prices are held down arbitrarily, while the amount of dollar purchasing power is unchanged, the tendency must be for more of other things to be bought or for their prices to be pushed up.
DUTY OF GOVERNMENT
It is often said that steel prices enter into many other prices, and that a price rise in steel will be “pyramided” by fixed percentage markups on finished goods. It is true that users of steel will try to “pass on” any price increase, but it does not follow that competition will allow them to. Again it is the total amount of money and credit that will determine the outcome.
What, then, is the function of the government, and the “business” of the President? It is to maintain freedom of competition, and to refrain from inflation.
But as regards competition, the Federal government has applied a flagrant double standard. It is constantly attacking the steel industry for “monopoly,” though there are more than 275 individual companies in the industry, and though the U.S. since 1959 has been a net importer of steel. Yet the single labor union covering the whole steel industry owes its immense monopolistic bargaining power to Federal law.
And so, far from refraining from inflation, Mr. Kennedy is planning a deficit for this fiscal year of about $9 billion, and another deficit for fiscal 1964 of nearly $12 billion, and is opposing any serious effort to reduce or eliminate these inflationary deficits, either by reducing expenditures or maintaining present taxes.
May 13, 1963
In my column from Stockholm of Oct. 29 last year, I referred to the findings of the Swedish Taxpayers’ Association in a study shortly to be published. This study is now available, and it throws considerable light not only on Sweden’s system but on “progressive” income taxation wherever it exists.
The Swedish system is somewhat more complicated than our own. After exemptions of only about $400 for single persons and $800 for a family (converting Swedish kronor at a rate of five to the dollar), individuals pay first a local proportional income tax averaging about 15 percent. Then they pay, on the rest of their income, national taxes ranging from 10 to 65 percent. Thus the marginal top rate not only can exceed 70 percent, but a person with a taxable income of only $4,000 may pay about 40 percent. The top rates above 70 percent apply to incomes above $30,000.
SWEDISH EXPERIENCE
Here are some of the findings of the Swedish study: the basic national income-tax rate of 10 percent brings in about 70 percent of total national income-tax revenue. If the maximum national rate stopped at 25 percent, the tax would bring in 90 percent of its present revenue. If the maximum rate stopped at 45 percent, the government would receive 99 percent of its present revenue. In short, the rates between 45 and 65 percent bring in only 1 percent of total national income-tax revenue. Swedes earning less than $6,000 a year pay 81 percent of all taxes; those with incomes above $6,000 pay 19 percent.
(It is instructive to notice how closely some of these figures parallel our own experience. The basic 20 percent rate yields 85 percent of the entire revenue from our personal income tax. Our whole progression up to 91 percent yields only 15 percent. And all the progressive rates above 50 percent yield less than 1 percent of total revenues.)
When most people hear such figures their first assumption is that “the rich” must be evading taxes. The Swedish study admits there may be some tax evasion, but estimates that the ratio is about the same at all income levels. The popular overestimate of the share of the tax burden that can be laid on the rich by progressive taxation, it points out, is “due to very exaggerated ideas as to the number of persons involved and their relative share of the income of the community.”
DESTROYING INCENTIVE
The total number of income-tax payers in Sweden in 1960, for example, was 3,478,254. The number of taxpayers with incomes over $20,000 was 4,350, or only one in 800, and their total income was only 1.6 percent of the total income reported. Even total confiscation of income in excess of $10,000, the study points out, would not add even 2 percent to total revenues.
This brings the taxpayer association’s study to the effect of these high taxes and harsh progressive rates on production and the creation of income. The study does not attempt any quantitative estimate, but contents itself with pointing out that “the inducement to work longer hours or to invest money in more or less venturesome enterprises declines at the same rate as the earnings of the taxpayers are reduced by taxes.”
The study does make, however, one interesting quantitative observation. Most Swedish taxes are levied for the purpose of redistributing income in the form of subsidies or social services, such as old-age pensions, free education, free school meals, free hospital care, etc. The study estimates that “if all redistributive measures were abolished, taxation would be reduced by about 65 percent.” But as two-thirds of this “redistributive” tax money returns in effect to the identical groups that paid it, one may ask whether this enormous monetary merry- go-round pays off.
Perhaps the most serious harm done by progressive taxation is not merely that it reduces incentives, production, investment, and growth, but that, by fostering the illusion that “the rich” are paying the bill, it contributes to the enormous growth in government expenditure.
May 20, 1963
If the Kennedy Administration continues the economic policies it has pursued since it came to office, if it reduces taxes while increasing expenditures, if it runs deficits in the current and next fiscal year of $9 billion to $12 billion, if it continues to press for easy-money policies, and the Federal Reserve continues to accede to them, what will be the consequences for the dollar?
Let us see how far we have come even over the last four years. At the end of 1958 our gold stock amounted to $20.6 billion. Net foreign short-term claims against this amounted to $13.6 billion. Today, however, our gold stock has fallen to $15.8 billion and net foreign short-term claims against it have risen to more than $20 billion. In other words, potential foreign claims exist to draw out our entire gold stock and $4 billion besides.
Our gold and creditor position continues to deteriorate. In 1958 the deficit in our national balance of payments was $3.5 billion; in 1959, $3.7 billion; in 1960, $3.9 billion; in 1961, $2.4 billion; in 1962, $2.2 billion. Administration spokesmen continually refer to the diminished rate at which we went into debt in 1961 and 1962 as an “improvement” or “reduction” of our balance-of-payments deficit. But this is wholly unwarranted. It is as if a man who went into debt $3,500 in 1958, $3,700 more in 1959, and $3,900 more in 1960 were to declare that his financial position was better now because he had only gone further into debt by $2,400 in 1961 and by $2,200 in 1962. The simple truth would be that a debt of $11,100 accumulated at the end of 1960 would have increased to $15,700 at the end of 1962. This is the real analogy.
IF WE CONTINUE
Moreover, even the rate of deficit accumulation is estimated to have increased again, in the first quarter of 1963, to $3 billion annually. We have been able to postpone gold losses by currency swaps and other expedients. But all of these deal merely with symptoms. We cannot permanently halt the deficit in our balance of payments or staunch the gold loss until we put our house in order.
If we continue our present fiscal and monetary policies, we must continue to lose gold. It is impossible to say at what point the loss of gold would precipitate a run on the remaining gold supply. If such a run starts, our government will be tempted—or feel forced—to resort to one of four main expedients:
1. Borrow heavily from the International Monetary Fund. 2. Try to get through the fund a general devaluation of world currencies. 3. Devalue the dollar alone. 4. Suspend gold exports.
AN AVOIDABLE CRISIS
Any one of these courses would be a blow to the prestige of the United States and to the prestige of the dollar. Other countries probably would not lend to us through IMF unless we agreed to put our house in order—to stop the deficits, stop increasing the money supply, allow interest rates to go up. But why wait until we are humiliatingly forced to do what it is in our interest to do now voluntarily?
Another general devaluation of world currencies would tremendously shock confidence. It would be a signal for renewed world inflation on a huge scale. Devaluation of the dollar alone—say say to $70 an ounce for gold—would double prices of imports overnight, touch off a huge domestic inflation, and end the dollar as a key currency. Suspension of gold exports would put us on a pure paper basis The dollar would plummet immediately in the foreign-exchange market What happened to it eventually would depend on our monetary and budget policy from there on out.
Yet such a crisis is not inevitable. As John Exter of the First National City Bank of New York has pointed out, we might still end our balance-of-payments deficit overnight if we merely “turned off the faucet” of new money and credit and allowed interest rates to go up. All that is necessary is for the Administration to put its house in order and to abandon the specious idea that budget deficits and easy money are either necessary or sufficient to create prosperity and full employment.
May 27, 1963
Instead of the Administration’s proposals for tax cuts and tax “reforms,” many businessmen and congressmen are advocating the cuts without any reforms. This attitude seems shortsighted. In the face of a huge prospective deficit, we cannot afford a heavy general tax cut. Yet tax reforms—of the proper type—are today not merely possible but urgent.
The most important of these reforms would be the abolition of all tax rates above 50 percent. Such rates are prima facie confiscatory. Their yield is negligible. On the personal income tax it amounts to less than 1 percent of total Federal revenues. But these rates have a profound effect in discouraging new risk investment and in slowing down the growth of employment and real wages.
If this rate reform were made, it would make other essential changes easier. One of these is reform of the capital-gains tax, today one of the most harmful of all our taxes.
Capital gains are not income. They cannot prudently be treated as income. This has been repeatedly emphasized by economists. We need not repeat their arguments here. It is sufficient to point out that the very people who are most insistent that capital gains be taxed at income-tax rates refuse to treat capital-value changes as equivalent to income changes. If a man has a short-term net capital gain of $1 million, they want to tax this at the same rate as added income. But if he has a net capital loss of $1 million, they will not permit this to be deducted from his ordinary income, but only $1,000 of it in any one year. On the part of the government this is a cynical heads-I-win-tails-you-lose tax.
GAINS VS. INCOME
Nor is the situation much improved by the lower maximum rate of 25 percent on long-term capital gains. Again there is no equivalent deduction against income tax for net long-term capital losses.
In Newsweek of Jan. 14 I pointed out not only the injustices but the harmfulness of the present capital- gains tax in “locking in” capital, in penalizing investors for transferring investments into new ventures, in discouraging investment of risk capital, and in stunting economic growth. I suggested half a dozen different ways in which the tax could be reformed. Here I should like to elaborate on one of these:
Segregate capital gains and losses from ordinary income. Have these capital gains or losses reported on a separate return. Tax these segregated net capital gains either at nominal flat rates or at the same rates as ordinary income. If ordinary income-tax rates are used, allow a reduction of, say, 2 percentage points of the capital gain for every month that the capital asset has been held. Thus if the capital asset has been held only one month, 98 percent of the gain would be taxed. If the capital asset has been held 24 months, 52 percent of the gain would be taxed. If it has been held for 50 months or more, there would be no tax. Deductions of losses would be allowed against gains, with an indefinite carry-forward of losses until absorbed.
TAPERING OFF
This would be similar to the tapering-off system used in Sweden. An individual would no longer be locked in with an investment indefinitely. After four years and two months, at least, he could sell or exchange it without tax penalty. In certain cases, for an investment held longer than six months, the tax might be steeper than today. But this could be avoided by the option of a shift to the present 25 percent maximum, and a tapering off each year to a 20, 15, 10, 5, and 0 percent flat rate respectively.
Some rate advantage might be gained from segregated capital-gain returns by a person whose income and short-term capital gains were about equal, but even this would seldom occur if the top income-tax rate were 50 percent. The great dispute about the “evasion” of income taxes through “turning income into capital gains” would practically disappear.
Such a system of taxing capital gains would be much less damaging to investment and growth than our present system. In Britain long-term capital gains are not taxed at all. In Sweden the tapering-off period is about the same as here proposed.
June 3, 1963
Even present taxes do not raise enough revenues to cover present expenditures. The Administration is not planning to cut expenditures but to increase them. The proposal to cut taxes now, to bring a deficit of $11 billion or more in fiscal 1964 and an indefinite series of deficits thereafter, is fiscally irresponsible.
It amounts to saying to the American people: “We are making you a present right now of a big fat tax cut. But of course you will have to lend us the $11 billion needed to make up the shortage.”
Clearly this does not make sense. If we assume that the Federal government ever expects to repay its debts in an honest dollar, it will have to raise taxes again later, not only to the present revenue level, but much above it, in order to pay off next year’s increase in debt.
The proposed tax cut is shortsighted for another reason. The plan is to make the main revenue cuts in the lower brackets—to reduce the basic 20 percent rate eventually to 14 percent, and to take nearly a million people off the tax rolls. Some day, given reasonable economy in government, such a change may be possible. But not with present levels of expenditure. Once such cuts are made, it will be politically impossible to restore present rates in anything less than a clear national crisis.
All this does not mean that important tax reform is not possible now. Suppose the proposal was for a tax reform that would keep revenues at approximately the present level, with expenditures cut to balance the budget at this level. What reforms would be most desirable?
Here are six The first and third were discussed here last week.
1—Abolish all personal income-tax rates above 50 percent. Such rates are prima facie confiscatory. Their yield is negligible, amounting to less than 1 percent of total Federal revenues.
2—Keep the 20 percent basic income-tax rate, but abolish the first upward jump to 22 percent on taxable incomes between $2,000 and $4,000. Make this bracket subject to a tax of only 20 percent. These two reforms would reduce the number of tax-rate brackets from 24 to eight.
3—Segregate capital gains and losses from ordinary income. Have them reported on a separate return. Tax these segregated net capital gains either at the same rates as ordinary income, or at nominal flat rates. If ordinary income-tax rates are used, allow a reduction of, say, 2 percentage points of the capital gain for every month that the capital asset has been held. If flat rates are used for capital assets held longer than a year, make the maximum rate, say, 25 percent for assets held between one and two years. Taper this rate down to 20 percent for assets held over two years, 15 percent over three, 10 percent over four, and 5 percent over five years. Let such assets be sold or exchanged without tax penalty if held over six years. Allow deduction of losses against gains, with an indefinite carryover until they are absorbed.
4—Make the maximum Federal tax on estates 50 percent, instead of the present maximum of 77 percent. And instead of demanding full payment of the tax within fifteen months after death, allow it to be paid, without interest or other penalty, in up to ten annual installments, with a maximum tax equal to 5 percent of the value of the estate in any one year.
5—Reduce the corporation income tax from 52 percent to 50 percent. Impose this only on undistributed income. Tax income paid out as dividends only 47 or 48 percent.
6—Repeal the new “investment credit,” but allow much faster depreciation write-offs, or a substantial write-off (say 35 percent) in the first year.
All these reforms have a common purpose: to simplify our tax system; to start reducing the number and extent of punitive discriminations; to mitigate double taxation, and reduce the excessive deterrents to initiative, effort, risk-taking, capital accumulation, saving, and investment.
Our present tax system is above all shortsighted. When it discourages individual effort, penalizes the transfer of investments, forces the sale or liquidation of family businesses, discourages new corporate replacement and investment, it not only slows down our economic growth, but reduces tax revenues themselves.
June 10, 1963
The rejection by the wheat farmers of the Administration’s strict production control plan, in the national referendum of May 21, marked a turning point in the 30-year history of governmental crop controls and price supports in this country. For the first time the wheat growers turned down the offer of a higher price support at the cost of still more controls. For the first time they voted for less money in exchange for more freedom. For the first time they voted against Santa Claus. Under that benign white beard, he was beginning to look suspiciously like Big Brother.
When one considers the immediate monetary offer and the tremendous propaganda for it, the farmers’ decision was astonishing. If they voted for the government’s plan to control the wheat supply, they were promised a support price of $2 a bushel. If they voted against it, they were told by the Department of Agriculture and by the President that they could not expect more than $1 or $1.10 a bushel. Urging them to vote Yes were all the propaganda resources of the Agriculture Department (with its 100,000 employees), and the chief farm organizations with the exception of the American Farm Bureau Federation. On the day before the election President Kennedy personally appealed for a Yes vote.
DRACONIAN CONTROLS
What moved the farmers to turn all this down was the Draconian stringency of the controls they were asked to accept. They were not merely asked, as in the past, to withdraw a certain percentage of their acreage from wheat in order to be eligible for price supports. Every farmer would have been restricted to an exact maximum number of bushels, based on his “historic” production. He would have been subject to the tightest control of production and marketing ever seriously proposed in this country. The real issue, in the words of the Farm Bureau, was this: “Is government supply management going to be the future way of life for the American farmer? Who will manage your farm—you or the Federal government?”
Apparently, also the farmers did not take seriously the Department of Agriculture argument that they were choosing between $2 wheat and $1 wheat. The effective support prices under the certificate plan would have been a blend of two prices—$2 for certificate wheat and $1.30 for non-certificate wheat. Even if the growers disapproved the program, they knew that the Secretary of Agriculture, under existing law, would be required to support wheat for those staying within their acreage allotments at 50 percent of parity, or $1.25. And finally, they were apparently confident that the Administration and Congress would have to come forward with another plan.
SELL THE WHEAT BACK
The farm price support program has been a mess from the very beginning. The mess gets worse and more expensive year by year. It is often said that the crop restriction plan was defeated by the agricultural “revolution.” But this is at best a half-truth. The contrast most often cited now is that between the national average of 14.5 bushels of wheat per acre in 1947–49 and that of 25.1 bushels last year. But this result has been in large part brought about by the price support and acreage plans themselves. The farmers raised the average per acre yield (1) by taking their least productive acreage out of cultivation and (2) by pouring more fertilizer and labor into the remaining acres—a procedure that paid because of the support price itself.
The only solution to the farm problem is a return to the free market. This column suggested several years ago—and now renews the suggestion—that the government sell its surplus of more than a billion bushels of wheat back to the farmers themselves on a quota basis and below the average estimated cost of production—or say about 95 cents a bushel.
But this or any other extricating solution is now blocked by the folly of our government in renewing the International Wheat Agreement last year. In practically every direction, in fact (e.g., sugar and coffee), the Administration has rejected the free market and plunges deeper into regimentation and controls.
June 17, 1963
The decision of the House Ways and Means Committee to tax long-term capital gains more leniently is a step in the right direction. But it once more raises the question whether there is any economic justification for a capital-gains tax at all.
Economists have long pointed out that capital gains are not income. Capital values are the result of income, the “capitalization” of income. Security values rise and fall with income (and dividend) fluctuations. Corporate income is already taxed twice. First, the whole amount is taxed directly (about 52 percent); then whatever part reaches the stockholders as dividends is taxed again at personal income-tax rates. Price changes cannot be regarded as income legitimately subject to income tax, since the physical asset itself is unchanged. A capital- gains tax on securities is not merely double taxation but triple taxation.
Since 1933 neither Congress nor the Treasury has honestly believed that capital gains are indistinguishable from other forms of income. Otherwise they would have allowed all capital losses to be deducted in full from other forms of income. How can they justify taxing even short-term gains at ordinary income-tax rates as long as they refuse to allow deduction of short-term losses in full not only against short-term gains but against all other forms of “income”? The allowance of a maximum deduction of $1,000 a year of capital losses against income is a token pretense of two-sidedness in a cynical heads-I-win-tails-you-lose tax.
A TRANSFER TAX
The “capital-gains” tax is a sort of haphazard capital levy. It is in reality a transfer tax. It penalizes anybody who transfers from an investment he considers less promising to one he considers more promising—or who is forced to raise cash. With these exceptions, the capital-gains tax is optional; the taxpayer can indefinitely postpone or avoid it by not selling. And when the penalty on selling is as heavy as it now is, he is better off not selling unless he is certain (which he can seldom be) that his eventual loss from holding an asset will be greater than his immediate loss from selling it.
The Ways and Means Committee has provisionally decided to make this tax a little less onerous and to encourage some investors to sell investments with which they are now “locked in.” While still taxing short-term capital gains (on assets held for less than six months) at ordinary income-tax rates, and while still taxing 50 percent of the capital gain on assets held between six months and three years (or at a maximum rate of 25 percent on the whole gain) the committee proposes taxing only 30 percent of the capital gain on assets held longer than three years.
TAPERING OFF
But as long as the committee is willing to go this far, why not carry out the logic of the change? If it keeps its present dual method of approach, it could tax 50 percent of the capital gain on assets held one year more than six months, 40 percent of the gain on assets held two years more, 30 percent of the gain on assets held three years more, 20 percent of the gain on assets held four years more, 10 percent of the gain on assets held five years more, and put no tax on assets held longer than six and a half years. It could accompany this schedule with maximum tax rates, respectively, of 25, 20, 15, 10, 5, and 0 percent of the whole gain.
And if this seems too complicated it could always, like Great Britain and other countries, refrain from taxing long-term capital gains at all.
It is excessive and discriminatory income taxes, in fact, that create the so-called problem of capital gains. When the government levies confiscatory rates up to 91 percent on high incomes, a corporation must pay an executive whose top income gets into higher brackets up to $10 more for every $1 more he can retain in net income. This is prohibitive, so the corporation substitutes a stock-purchase option. Then the government frowns on this as an evasion and a “loophole” and resorts to complicated tax provisions to stop it. But if it levied a proportional income-tax rate to begin with, or at least halted at a top rate of 50 percent, the “stockoption problem” would hardly exist.
June 24, 1963
Many “liberals” are showing signs of disillusion with the welfare state that they once so ardently espoused. One such is Irving Kristol, co-founder of Encounter magazine in London and now senior editor and vice president of Basic Books in New York. In the June issue of Harper’s he openly wonders whether the welfare state has now become obsolete.
His puzzlement is detailed and documented. “There is a real question as to whether the welfare state, as it is taking shape in America today, is not exhibiting delusions of omni-competence.” Kristol finds that well-intended government regulating and spending agencies “soon achieve a life of their own, beyond all trial and error”; that “things are out of hand”; that bold new government programs soon come to be operated by “the job-hungry second-rate.” He begins to wonder why public housing is “so hideously dreary,” and he admits that he “can hardly pick up a newspaper these days without my anti-bureaucratic nerve being given a shock.”
MEDICARE
He is particularly effective in analyzing the illusions behind Medicare: “Any medical insurance program is going to cost the taxpayer money. The mute appeal of a state-run monopoly is the illusion that over a period of time, and in some undefined way, people may get more than they put either because the Federal government will magically ‘close the gap’ or because ‘someone else’ (the rich or the employers or whoever) will be called upon to make up the difference. This idea is appealing, but baseless. It is as appealing, and as baseless, as the notion that government money is something additional to the people’s money, instead of being identical with it. It is as appealing, and as baseless, as the belief that the steeply progressive income tax significantly reduces the tax burden of the average citizen. . . .
“Public welfare outlays by Federal, state, and municipal governments have doubled since 1955, and now amount to more than $40 billion a year.”
Yet even after drawing up this powerful indictment of the welfare state, Irving Kristol does not suggest that we abandon it, but merely that we stop regarding it as the sole road to welfare: “The idea of a welfare state does not necessarily imply that the state should itself always dispense all welfare. Perhaps it would suffice for the state to establish a legal framework for a society in which individual welfare is recognized as a social responsibility without at the same time necessarily being a direct responsibility of the state.”
FREE ENTERPRISE
But Kristol apparently fails to see that what is essential and basic in such a legal framework was established long ago. It is the institution known as Free Enterprise, or Capitalism. It stresses, on the one hand, personal economic freedom, including freedom to choose one’s occupation, freedom to start new ventures, and freedom of consumer choice. It stresses, on the other hand, private property—i.e., the right of the individual to keep the fruits of his labor. These institutions of freedom and private property maximize productive incentives. And as each of us spends the monetary rewards for his efforts on the things that he considers most likely to promote his or his family’s welfare, the free-enterprise system also tends to maximize welfare.
There is, of course, a certain area of collective needs—national defense, police and fire protection, sanitation, roads and streets—that must be paid for by coercive taxation. But this “public” sector is necessarily parasitic on the “private” or voluntary sector of the economy. The reason the “public sector” should be held to a minimum, the reason the burden of proof should be on every effort to extend it, is that the increased taxation that necessarily accompanies this extension reduces both productive incentives and the individual’s freedom to decide how to spend his own earnings.
The wastes and absurdities in bureaucracy that “drive people mad” are not accidental. They are an inevitable product of the welfare state itself—“the great fiction,” as Bastiat called it more than a century ago, “by which everybody tries to live at the expense of everybody else.”
July 1, 1963
At the basis of our present Federal tax system lies the so-called principle of “progression”—the principle that taxes should be levied not in any uniform proportion, but more and more steeply with an increase in a man’s income. Though our generation has come to accept this discriminatory principle, it is important to remember that it is still relatively new and still relatively rare. All local real-estate taxes (perhaps the oldest of existing taxes) are proportional. The man whose property is assessed at $20,000 is taxed only twice as much as the man whose property is assessed at $10,000—not three times as much or four times as much.
Nearly all city and state sales taxes are also proportional. There is, say, a flat 4 percent tax on a purchase of $1,000 as on a purchase of only $10. The proportional principle is applied even in most Federal taxes—import duties, corporation taxes (with only one extra “bracket”), and social-security taxes.
KILLING INCENTIVE
The big exception is the personal income tax. We have all come to accept this progressive principle, in the alleged interests of “social justice,” and we are only just beginning to notice that it is not a very effective device for increasing revenues. It has been calculated that a flat income tax of 23½ percent, with present exemptions, would bring in all the revenue now brought in by the whole scale of “progressive” levies from 20 up to 91 percent. It has also been shown that taxes at the basic 20 percent rate bring in 85 percent of the whole revenue from the present income tax, while all the surtaxes up to 91 percent bring in only 15 percent of that revenue. It has been shown also that all the personal income-tax rates above 50 percent bring in less than 1 percent of our total Federal revenue.
But the relative unproductiveness of these progressive rates is not their worst defect. Much more important is their effect in discouraging effort and retarding that economic growth which everyone is so eager to attain.
The government professes to wish to encourage everybody to add as much as possible to the wealth and income of the country. But when it finds people who are productive far beyond the average it puts increasing penalties upon them, till it gets to the point where from some people it seizes $9 out of every extra $10 they earn. It is not merely that this undermines the incentives of the most productive part of the population, but the funds taken by the higher-income-bracket rates are precisely the fund that would otherwise have been likely to go into investment—into the expansion of existing enterprises or the launching of new ones. In other words, into growth.
DANGERS OF A CUT
The system of progressive income-tax rates is so generally accepted that there is no hope that the system will be changed, or even open-mindedly reexamined, at this time. But if Congress resorts to the folly of reducing taxes without reducing expenditures, and turns an already certain deficit into a much greater one, perhaps it will at least make practically the entire reduction in the upper-bracket rates. It could reduce these, say, to a maximum of 50 percent, to leave the taxpayer as much incentive to earn an extra dollar as the government has. The loss of revenue would be at most negligible; there might even be an increase in revenues.
If, however, Congress cuts the basic 20 percent personal income-tax rate down to 14 or 15 percent, as the Administration has proposed doing, the loss of revenue will be massive. And what is perhaps most serious, it will be politically next to impossible to put the rates back again. Restoration of the high-bracket income-tax rates, on the other hand, should their reduction prove costly in revenues, would be politically easy.
Relief to the lower-income brackets could be more safely attained by keeping the basic 20 percent rate, but abolishing the first upward jump to 22 percent.
Progressive taxation, by fostering the illusion that “the rich” are paying the bill, has contributed as much as any factor to the enormous growth in government expenditure.
July 8, 1963
Though the United States has already poured more than $4 billion foreign aid into India, it is planning to pour in more, including nearly $1 billion for a government- owned steel mill.
The Clay Committee Report declared that “the U.S. should not aid a foreign government in projects establishing government-owned industrial and commercial enterprises which compete with existing private endeavors.” But the Administration seems determined to go ahead. India’s Minister of Steel and Heavy Industry warns us that India will build the plant “with or without United States aid.”
American officials who want our taxpayers’ funds to pay for this socialistic project argue that India “is starved for steel.” But even if we grant this, why can’t India simply import the steel? Why can’t she buy it from us? Our own steel industry is working far below capacity. Our steel exports have declined. Why should we further tax Americans, including our own steel industry, to subsidize more foreign competition?
BUYING STEEL ABROAD
Would a subsidized government steel industry be good for India itself? It is doubtful. Writing in the Indian magazine Swarajya, the American economist Milton Friedman declares: “The Achilles heel of the Indian economy at the moment is the artificial and unrealistic exchange rate. . . . So long as the exchange rate is as far as it currently is from a realistic rate, foreign assistance will simply be poured down a bottomless well.” He adds: “India has become a protected economy in which items are produced domestically at a multiple of the cost at which they could be obtained from abroad.” India wants a subsidized steel mill largely because a new privately financed mill at Bokaro simply would not pay.
Aid for such a steel mill would be a direct American subsidy for foreign socialism. But it does not follow that our foreign-aid program would be desirable even if it abstained from such follies. The principal reform needed in our foreign economic aid program is to abolish it.
Let us see what some of the beneficient results would be. The governments of the underdeveloped nations would want to continue their policies of government planning, socialism, wage-boosting, inflation, and “economic expansion.” They would let loose a propaganda barrage saying they had been betrayed, and if they could no longer get aid from us they would go to Russia. But it would soon occur to the more sober-minded among them—recalling Cuba, for instance—that this was not the most promising route to prosperity and freedom. A few of their statesmen would point out that some countries, like Canada and those of Western Europe, had done very well by attracting private American investments. So they would send officials here to consult with American corporations and investment bankers.
INVESTMENT CLIMATE
The bankers would tell them that American investors would be interested only if a climate were created attractive to investment. Asked what would bring such a climate, they would suggest that the borrowing government balance its budget, stop inflating its currency, stop “land reforms” that destroy property rights, stop excessive taxation, stop discriminating against foreign investments, stop expropriation and nationalization—in brief, stop socialism and try free enterprise.
“But this is dictating our internal policies!” some of the underdeveloped diplomats would protest. “Not at all,” the private bankers would reply, “this is merely telling you the conditions likely to attract investors.”
And if these reforms were adopted, the governments of the backward countries would be amazed to find not only that private foreign capital was attracted, but that their private domestic capital, instead of fleeing abroad for safety, was being invested at home, and that rapid progress was beginning as the result of increased domestic confidence.
Most of the sponsors of government-to-government foreign aid, alas, are socialists at heart, and have still to learn that the secret of prosperity is free enterprise.
July 15, 1963
Four years ago the present writer published a book called The Failure of the ‘New Economies’. It was an analysis of the fallacies in Lord Keynes’s book The General Theory of Employment, Interest, and Money, which had been published in 1936. That book had become not only the dominant influence on the kind of “economics” taught in the colleges and universities, but the dominant influence on the economic policies being pursued by most Western governments. The Keynesian doctrines have encouraged a constant race between increasing wage demands by the labor unions and monetary inflation in order to make ever-higher wage rates payable.
It is amazing how long it has taken for a reaction against these doctrines to gather force and to find adequate expression. After the appearance of Keynes’s General Theory a score or more of brilliant attacks on his ideas appeared as articles or as chapters in books. I brought some of these together, in 1960, in a symposium, “The Critics of Keynesian Economics.” Among them was an article by W.H. Hutt, professor of commerce and dean of the Faculty of Commerce at the University of Cape Town, on “The Significance of Price Flexibility.” This had appeared in 1954.
DEMOLISHES TO BUILD
Hutt had, in fact, been troubled by the Keynesian obfuscations for many years, and as early as 1939 had published his Theory of Idle Resources, which brilliantly dissected one of them. But the practical unanimity with which his academic colleagues embraced the Keynesian revelation, and ignored or waved aside his privately communicated criticisms, caused him to lose his own intellectual confidence and to delay or withhold any major publication.
Now at last he has published a full-length book, Keynesianism—Retrospect and Prospect (Regnery, $7.50), which analyzes and demolishes not only the fallacies of Keynes himself but of the whole school of Keynesians and post-Keynesians. It is not merely destructive. Though, as Hutt himself puts it, “it sets out to restate some of the essentials of ‘orthodox’ or ‘classical’ economic teachings in a form . . . more appropriate for contemporary controversies,” it does much more than this. It throws new light on a score of unsettled economic problems. Hutt has made a major positive contribution. He has written, in fact, one of the most penetrating and important economic books of the last 25 years.
AN ACT OF GOVERNMENT
There is not space here to discuss adequately his exposures of Keynesian errors and misconceptions or his contributions to positive understanding—his discussion of the nature of economic coordination through the price system, of the nature of money, of income and how it is “generated,” of the consumption fallacy, the multiplier fallacy, the acceleration fallacy, the capital-saturation fallacy, and of the validity of “Say’s Law.” Nor is there room to discuss his final chapter on the amusing attempts of the “Keynesians of the Right” to grope their way back to orthodoxy while still trying to cling to the obfuscating Keynesian concepts and vocabulary.
I have space only to call attention to Hutt’s brilliant and powerful chapter on the chief practical consequence of Keynesianism—the almost universal policy of inflation. Since the appearance of the General Theory, “there has been a sort of race between inflation and the unions. . . . What a deterioration since the pre-1914 era Simply because no one ever doubted then that governments would honor convertibility obligations there were no balance of payments difficulties, no hot money flights, no devaluation scares, no complaints of world liquidity shortage, no restraints on international settlements, no blocking of foreign balances, and no quantitative trade restrictions for payment-balancing purposes. World discoordination is the product of the continuous misdirection of expectations which the Keynesian technique necessitates. . . . [Yet] people are very slowly awaking to the truth that inflation is an act of government, and that it is almost always (in these days) the consequence of calculated, even if reluctant action.”
July 22, 1963
It seems only yesterday that everyone was hailing the Common Market as an epoch-making step toward world freedom of trade, and a great new force to which the rest of us would have to adjust. Our own government gave it moral and political support. We frowned on the efforts of Britain and other countries to form a countervailing Free Trade Area, and urged them to seek admission to the Common Market, or (as it is officially called) the European Economic Community. Finally, the U.S. decided that its own most important step in the field of foreign trade should be to negotiate reciprocal tariff reductions with the Common Market, and enacted a law specifically designed to do that.
Then came a series of blows, delivered chiefly by President de Gaulle. When Britain, after many misgivings, applied for admission to the Common Market, her application was peremptorily rejected. Our own efforts to get the Common Market to reduce its high tariffs against imports of our poultry met with failure.
The shock was not only to Britain and the U.S., but to the Common Market countries themselves. Suddenly they realized that in France’s (or at least de Gaulle’s) opinion, they were at best junior partners, and that the Common Market was to be a union under French hegemony.
RECONSIDERATION
These political shocks have led to reconsideration of the economic consequences of the Common Market. From a dispatch by Edwin L. Dale, Jr. in The New York Times, we learn that “Doubts about the economic impact and benefits of the Common Market are being expressed both inside and outside the community.”
Economic analysts in several countries, it seems, have been putting together figures designed to show that the Common Market has had very little, if anything, to do with the general economic performance of the six member countries. Among their conclusions are the following:
1—“Economic growth of the member countries—France, West Germany, Italy, Belgium, the Netherlands, and Luxembourg—has actually been slower since the Common Market began than before. It is not argued that the Common Market has held back growth, only that it has not affected growth much either way since coming into being on Jan. 1, 1958.”
2—“The rate of investment in new plant and equipment also appears to have been unaffected.”
3—“Trade among the member countries has grown rapidly, but no more rapidly than before the Common Market began to dismantle tariff barriers. Recently this trade has been growing more slowly.”
TREATING ALL ALIKE
We need not take these new statistical studies as necessarily proving anything either way. There are always such a multitude of economic forces and factors at work that a net statistical change cannot safely be ascribed to any one of them. But it is time to ask whether the Common Market, looked at economically, was really such a good idea in the first place. Is it in fact a move toward greater freedom of world trade, or is it a move toward great protectionist blocs? It has tended to split Europe into two camps rather than unite it. If Britain were admitted, it would be at the cost of breaking up the “common market” long established as the British Commonwealth.
The Free Trade Area, which our government discouraged, was actually far more promising as a step toward freer world trade than the Common Market. For the “Outer Seven” agreed to lower tariffs vis-à-vis each other without necessarily imposing a high uniform tariff wall against non-members, as the Common Market requires.
But there is a policy far better than either of these, to which no serious attention is paid in the present world. It is the policy of each nation, without joining blocs or calling endless world conferences, simply reducing its own tariffs to benefit its own consumers, and not discriminating against any nation but treating all alike. It is the policy most likely to bring freer world trade and greater prosperity, and the only policy compatible with world peace.
July 29, 1963
The politicians and planners in Washington are as sincerely eager to eliminate unemployment as anybody. But if they are really to solve the problem, they need to understand how jobs come into being, and who brings them into being. It is not merely some impersonal and automatic thing called “consumer purchasing power.” Jobs exist because employers provide them. And employers start new ventures, or expand old ones, only when they see a prospect of profit commensurate with the risks.
The interests of “Labor” and “Business” are not antagonistic. On the contrary, in the long run they are practically identical. Employees can have well-paying jobs and maximum employment only if employers and risk takers have adequate incentives. As President Kennedy once put it: “Our primary challenge is not how to divide the economic pie, but how to enlarge it.”
But maximum output and full employment are often blocked because politicians and planners have a grossly oversimplified idea of who constitutes “Business.” They think of “Business” as made up of a few giant corporations or the heads of such corporations. They lecture these imaginary few on their “social responsibilities” and duties. And when “Business” is hesitant they chide the businessmen for their lack of confidence and for their “neurotic search for unending reassurance.”
3 MILLION EMPLOYERS
The picture of business as consisting of or dominated by a few giant corporations is quite false. Let us look at the situation concerning corporations alone. In 1959 more than a million of them—1,074,120, to be exact—filed income-tax returns. True, there were giants among them. As many as 2,319 had assets of more than $50 million each. But 590,000, or more than half, had assets of less than $100,000 each.
In addition to these million corporations there were 949,000 active partnerships, and 9,142,000 businesses and farms under a sole proprietor! Nor were the contributions of these unincorporated enterprises negligible. Where corporations reported a net income of $47 billion in 1959, unincorporated enterprises reported $46 billion.
Nor do small businesses, whether incorporated or not, make a negligible contribution to employment. In 1959, there were, in fact, more than 3.3 million separate employers reporting under the Social Security Act. Of these, only 54,000 employed 100 or more persons each. More than 1.9 million employed only three or fewer each. About 3 million employed fewer than twenty persons each, yet these small firms provided more than a fourth of total employment in commerce and industry.
NEED FOR CONFIDENCE
This is how American business is made up. It consists of literally millions of employers, literally millions of risk takers. Who are these millions of small risk takers? They are people who, having saved a little money, start a hot-dog stand or a roadside diner or a filling station; or open a bakery or a paperback-book store or a dress shop or a TV repair service; or install a new “laundrymat” or a new bowling alley; or build a house in the suburbs for resale, or remodel a building for doctors, or develop a new shopping center. What they do, and how many of them do it, depends on the risk climate in which they operate.
These small risk takers have no automatic assurance of success. At the beginning of 1961, a fairly typical year, there were 4.7 million firms in operation; but during the year 398,000, or nearly one in every twelve, were discontinued. Fortunately the ranks were filled by 437,000 new businesses.
The extent to which these millions of small risk takers start new ventures and create new jobs depends on their estimate of the chances of making and keeping a profit compared with the risk of losing their whole capital.
These are the people the politicians and planners should keep in mind, and not only the heads of a few giant corporations, in order to recognize the need of maintaining a climate of “business confidence.”
August 5, 1963
The Administration’s proposal to tax foreign securities is unfortunate from every angle. It is a further abridgment of the economic liberties of American citizens. It is another roadblock to free markets. It is a clearly protectionist measure. It is a beggar-my-neighbor policy. It seeks to cure our balance-of-payment problems at the cost not only of increasing such problems for other nations but of disrupting their economies.
There were so many leaks in the proposal, even before the President announced the Canadian exemptions, as to make it futile in accomplishing its intended purpose of “helping the balance of payments.” The attempts to plug these leaks would lead inevitably to exchange controls. The proposal to give the President discretionary powers to discriminate as among securities and countries would substitute uncertainty and administrative favoritism for a rule of law.
The tax would, of course, do nothing to cure the balance of payments. On the contrary, its mere proposal has undermined confidence in the dollar. And the irony is that all punitive measures of this kind would be entirely unnecessary if the Administration had the courage and understanding to take the proper measures.
HURTING OUR CUSTOMERS
The proposal to impose a so-called “interest equalization tax” of 2.75 to 15 percent on foreign securities offered in the American market had all the earmarks of a panicky idea that no one had thought through. Immediately after the President’s message, stocks collapsed on the Canadian and Japanese markets. Within three days the President announced that “new” Canadian security issues would be exempt from the tax. The Canadians had meanwhile pointed out that while $457 million in new Canadian issues were purchased by U.S. citizens last year, Canada still had a $565 million deficit in her trade with the U.S.
In other words, Canada was buying from us more than she was selling to us—and our loans and investments made part of this excess buying possible. But this also applies to Japan, which also buys from us more than she sells to us, and also partly because of our loans to her. And this applies to still other countries.
When one contemplates all its loopholes and exemptions—all direct investment, all securities or loans of less than three years, loans of commercial banks, securities of “less developed” countries—it is hard to understand what compensation even the Administration expects from its disruptive proposal.
INFLATION CONTINUES
And all such measures are quite unnecessary. The deficit in the balance of payments could be stopped overnight if the government would halt the inflation. It took a timid step in this direction when the Federal Reserve increased the discount rate from 3 percent to 3½ percent. But this move was too little, too late, and too isolated. In such a situation the raise should have been at least one full percentage point. It should not have been accompanied by assurances that long-term interest rates were going to be kept down. It should not have been preceded and contradicted by the Federal Reserve’s inflationary policy of buying Federal securities and so increasing the paper money supply. (The Federal Reserve held $31.7 billion of government securities on July 17, an increase of $2.7 billion in twelve months. In the same period the money supply has increased about $4 billion.)
In the same week that the Federal Reserve raised the discount rate, moreover, the world learned that our Federal budget deficit in the fiscal year ended June 30 was $6.2 billion, with the prospect of a deficit twice as big in the new fiscal year. Yet on top of all this the Administration is recommending increased expenditures and has renewed its suggestion for a substantial tax cut.
It is continuing this policy of inflation, which is the basic cause of the dwindling confidence in the dollar, as the result of the quite false Keynesian idea that inflation is the cure for unemployment. Because it will not accept the only real cure, it is plunging deeper and deeper into dangerous and disruptive expedients.
August 12, 1963
The Administration would be well advised if it dropped entirely its unfortunate proposal for a tax of up to 15 percent on foreign securities sold in this market. If it nonetheless persists, Congress should certainly not enact it in any form. It is already so riddled with exemptions that it has become “more holes than cloth,” but though this means that it could have at best a negligible effect in “saving dollars,” even if it worked the way the Administration expects, it does not mean that it cannot do great harm.
It is a misfortune that it was ever proposed. For it has convinced both Americans and foreigners that a dollar emergency must exist to make such an emergency measure necessary. And it has raised fears both at home and abroad that still more drastic controls will be resorted to if this one does not work—which few expect it to do.
SOURCE OF STRENGTH
The President’s message asking for this control was, in fact, full of inconsistencies and contradictions. At the very moment when he was asking for a barrier to trade and to capital movements he announced: “This nation will continue to adhere to its historic advocacy of freer trade and capital movements.” And in the very message in which he asked for a tax intended to discourage or inhibit further long-term foreign investment in order to protect our balance of payments, he was explaining how lucky it was that we had made precisely such foreign investments in the past:
“Our payments deficits, measured in terms of our loss of gold and the increase in our short-term liquid liabilities to foreigners, have consistently been equaled or exceeded by the growth of our long-term high-yielding foreign assets—assets which have been and will continue to be an increasing source of strength to our balance of payments. Today, Americans hold more than $60 billion of private investments abroad, and dollar loans repayable to the U.S. Government total over $11 billion. At the end of 1962, all of these assets exceeded our liabilities to foreigners by an estimated $27 billion. And they have shown an increasing strength over the years: our total income from these sources in 1959 was $3 billion; in 1962 it had risen to $4.3 billion, and we expect further substantial increases in the coming years.”
What the President is proposing is that a prohibitive tax now be put on voluntary private foreign investments, likely to bring in such future dollar income in interest and dividends, in order that the government may continue to tax this money away and pour it into “underdeveloped” countries—from which it is highly unlikely that we will ever get a dividend or interest return.
EXCHANGE CONTROLS?
The tax on foreign securities would not work; but the danger is that in trying to make it work the government would move deeper and deeper into exchange controls. We have already gone far. Under Republican and Democratic administrations, the government first made it a crime for Americans to buy or hold gold at home. Then to buy or hold it abroad. Then Americans traveling abroad were only allowed to bring in $100 of duty-free goods. Now we are to tax foreign security purchases. Will the next step be to limit the amount of money our tourists and businessmen may spend abroad? (This has already been suggested by Senator Javits.)
The whole compartmentalized item-by-item approach to the balance of payments is fallacious. In his message the President had to confess, at the same time he was estimating that the $100 limit on duty-free goods “achieved a saving” last year “of more than $100 million,” that our “total tourist spending in foreign countries rose another 10 percent . . . to nearly $2.5 billion.” And overlooked by the sponsors of the tax on foreign investments is that these investments have made possible a large part of our export surplus.
We can solve the balance-of-payments problem only by dealing with its basic cause—our domestic inflation. If we were to halt this inflation—by stopping budget deficits and cheap money—we could cure the balance-of-payments deficit overnight. But this is the one course that the Administration will not take.
August 19, 1963
In spite of the growing seriousness of the balance-of-payments problem, and an already ominous prospective budget deficit, the Administration is renewing its pressure for tax reduction. Its argument is that such a tax cut will stimulate the economy. This argument might have some validity if taxes were reduced on investors and on productive enterprises. But these are the very groups on which taxes are to be increased—on the ground that more revenues must be raised to compensate for those lost by reducing taxes on those who are already, proportionately, being taxed least.
Specifically, the Administration has recommended not only that stockholders no longer be permitted to exclude from their taxable income $50 of the dividends they receive each year, but be disallowed the 4 percent credit they may now take on the rest. In June the House Ways and Means Committee tentatively rejected both recommendations. But now a compromise is being considered to increase the dividend exclusion to $100 a person and disallow the 4 percent credit entirely.
52 PERCENT TO START
This is precisely the opposite of what ought to be done. There is no more justification for the exclusion of the first $50 of dividend income from taxation than there would be for the exclusion (on top of existing exemptions and deductions) of the first $50 of wages or any other form of income. This exclusion ought no longer to be allowed. But the 4 percent dividend credit is an entirely different matter. It is not only justifiable; it is a mere token mitigation of a flagrantly oppressive double taxation.
Suppose a married man is a one-tenth partner in a business that earns $200,000. His share is $20,000. Assuming for simplicity that this is his total net taxable income above exemptions, he pays income tax on this amount of $5,280. Then he is through. He can keep the remaining $14,720 for his family (at least before state and other taxes).
But suppose he owns, instead, 2 percent of the shares of a corporation that earns $1 million. His share is again $20,000. But the corporation must pay about 52 percent of this in income taxes, or $10,290, before the taxpayer ever sees it. (This is no different in principle from a withholding tax paid at the source.) Suppose, now, the entire remaining $9,710 is paid to him in dividends. Though he already has been taxed much more heavily than the man who received $20,000 from a partnership, his taxes have only begun. His remaining $9,710 is considered his taxable income to start. Out of it, on the same assumption that this is his full taxable income, he would pay on this (with his 4 percent credit but without a $50 exclusion) a tax of $2,023, leaving him only $7,687—or just about half of what he would have had from a partnership. Disallowing the 4 percent credit would raise his tax to $2,124, leaving him only $7,586.
IN BRITAIN AND CANADA
Thus investment in corporations (upon which we mainly depend for industrial employment) is already heavily penalized. Our tax system reflects the delusion that a corporation’s income is something in addition to that of its individual stockholders. The tax on corporation income is, in fact, a tax on income of the individual stockholders. Other countries recognize this. Canada allows a 20 percent credit on dividends. The British levy two taxes on the net profits of corporations: a tax of 15 percent, and in addition an “income” tax of 38¾ percent, bringing the total to 53¾ percent. But when a shareholder receives dividends, he is credited with having already paid his “standard rate” (38¾ percent) of personal income tax on these dividends.
So in the interests of promoting investment and economic growth our income-tax credit on dividends should gradually be increased rather than diminished. To protect it against misunderstanding or demagogic attack, however, it might be changed in form. Instead of allowing the individual dividend receiver a tax credit, a differential tax might be placed on corporation income itself—say, for a start, a 52 percent tax on undistributed profits, but only a 50 percent tax on profits paid out as dividends.
August 26, 1963
The 290-page report of the Brookings Institution on “The United States Balance of Payments in 1968” can only tend further to undermine confidence in the dollar. Its diagnosis of the disease is false. Its analysis of causes constantly puts the cart before the horse. Its forecasts are mere guesses. Its proposed remedies would aggravate the disease. If persisted in they would destroy the dollar as an international currency.
We cannot, unfortunately, dismiss this report as merely reflecting the opinions of a private institution, or even merely the opinions of its particular authors. For the institution was explicitly asked by Walter Heller, acting on behalf of the Council of Economic Advisers and the Treasury, to make this report. The American taxpayers paid for it. Though it is called an “independent” study, it comes to the same conclusions on leading economic problems as the Council of Economic Advisers, and often in the same phraseology. It is, in brief, a quasi-official document. That is why it is so disturbing.
CRYSTAL GAZING
The report rests on basic misunderstandings. It predicts “substantial improvement in the U.S. balance of payments by 1968” and even suggests that “the basic deficit will be eliminated by 1968, and that there will be pressures toward a basic surplus.” The truth is that everything depends on what the government does. If it were to stop the budget deficits, stop printing more money through the Federal Reserve, stop holding down interest rates, it could halt the balance-of-payments deficit overnight. What it will be doing five years from now nobody knows, and therefore nobody knows, what the balance of payments will be in 1968. But it doesn’t take a year, a big staff, and 290 pages to find that out.
The report, like the reports of the Council of Economic Advisers, is based throughout on ultra-Keynesian assumptions. It talks as if solving the balance-of-payments problem were an alternative to achieving sound prosperity, growth, and long-run employment, instead of being, as it is, a necessary means of achieving these goals. It believes that it is huge government spending and cheap money that create jobs. The effect of excessive wage rates on increasing unemployment is never mentioned. On the contrary, the report suggests (in true Keynesian style) that any reduction in money wage rates increases unemployment—though it inconsistently recommends that a country with a balance-of-payments deficit might wisely prevent “the general level of its money wage rates from increasing as fast as output per man-hour.”
FOR WORLD INFLATION
The report’s implied cure for our economic ills, in brief, is unrestrained inflation. Of course it never uses that phrase candidly. It recommends “expansionary fiscal policy” and “lowering of interest rates” (which is Keynesian for budget deficits and monetary inflation), and deplores the “undesirable constraints” that balance-of-payment worries put on these policies. It says “the classical means of improving the balance of payments” are “deflationary measures” that “cut employment and real incomes.” It even pretends that efforts to improve the net balance of payments would require “very substantial declines in total production and income.”
So the report’s remedy for the dollar problem is not for our government to halt its inflation, but for everybody to embark on a world inflation so that nobody will run short of money. This, of course, is not said in these blunt words. We are to set up a new “international monetary system” which “must provide enough liquidity.” (“Liquidity” is Keynesianese for cash.) “Substantial amounts [of credit] should be obtainable automatically by deficit countries” (i.e., us). These countries must be given “enough time” to “restore equilibrium.” The report does not say what happens if they use the time and credit to continue their inflationary spree. The legal requirement for a 25 percent gold reserve is “irrational.” It “long ago ceased to serve any useful purpose” and “should be abolished.”
I have only one question. Is this report likely to restore international confidence in the dollar?
September 2, 1963
Neither the Treasury nor the House Ways and Means Committee that adopted its proposed tax cuts has any reason to feel proud of what it did.
Let us recall some elementary principles that everyone seems to want to forget. Taxes are imposed, not out of pure cussedness, but to raise revenues. Their function is to raise enough revenues to pay for the government’s expenditures. Taxes, in other words, are a purely derivative problem. The real problem is to cut expenditures. But nobody wants to face this. So everybody can be a cheap Santa Claus by voting for tax cuts while voting for more expenditures.
When taxes fall short of meeting expenditures, the tax cut is not real. Either visible taxes must be correspondingly increased in subsequent years (if there is any honest intention of ever having even a “cyclically” balanced budget or ever paying off any of the national debt), or the deficit must be paid for by the hidden tax of inflation, i.e., of higher prices and cheaper dollars. If inflation worked out evenly, it would be a proportional income tax and capital levy on rich and poor alike. It never works out evenly, but falls most heavily on those least able to protect themselves. In brief, any tax cut that leaves a deficit is a deception and a sham.
HUGE DEFICITS
On Aug. 13, Secretary Dillon predicted a deficit of $9.1 billion for the current fiscal year 1964, compared with his estimate in January of $11.9 billion. But he also forecast still another deficit of $9.4 billion for fiscal 1965. The day after the Secretary announced these tremendous deficits, the Ways and Means Committee adopted tax cuts, starting in the election year that begins next January, that will amount when fully effective, according to Treasury estimates, to $11.9 billion annually. How much of this cut was allowed for in Secretary Dillon’s estimates of the day before was not clear. In any case the Treasury, this far ahead, has persistently underestimated the deficit. For the fiscal year ended June 30 last, it originally estimated a surplus. There was actually a deficit of $6.2 billion.
The same thing happened in the preceding fiscal year, which ended with a deficit of $6.3 billion.
If a tax cut were justified at all with present spending programs, it would not be the kind of tax cut that the Treasury has recommended and the Ways and Means Committee adopted. There would be an argument for a tax cut that ended confiscatory rates, that made the scale of progression less steep, that mitigated the taxes that do most to discourage effort, production, and growth. Such reforms would make possible greater revenues in spite of lower rates.
MASSIVE REVENUE LOSS
But the new tax bill does the opposite. For the present personal income tax scale ranging from 20 to 91 percent, it substitutes a scale ranging from 14 to 70 percent. The result is that the tax cut at the bottom of the scale amounts to 30 percent and at the upper end of the scale varies from about 15 to 23 percent. Moreover, owing to a new “minimum standard deduction” gimmick, 1.5 million taxpayers would be taken off the tax rolls entirely.
The result is that 1.5 million fewer people will give a hoot how high government spending goes. The loss of revenue will be massive. It will be politically almost impossible to put these people back on the rolls or to restore the 20 percent basic rate. If, as Congressman Bruce Alger of Texas proposed, there had been simply a flat tax cut of 20 percent all down the line, the political problem of restoration would not be so serious. If the top rates had been slashed to a maximum of 50 percent, there would have been a maximum revenue loss of $1 billion in the first year and probably increased revenues in succeeding years because of the incentives that would have been restored. Instead, the penalization of investment was made even steeper by the proposed termination of the 4 percent dividend credit.
True, the new tax bill has a few good features. But in the context of planned deficits of more than $9 billion a year, its tax reductions are a fraud that will deceive only the shortsighted.
September 9, 1963
One of the great economic puzzles of the last half dozen years is that, though we have been inflating our money-and-credit supply at a disquieting rate, this has not been correspondingly reflected in our price level. Since the end of 1957 our nominal “money supply” (currency outside of banks plus demand deposits) has risen from $136 billion to $150 billion, an increase of about 10 percent. If we include time deposits in the total, the increase has been from $193.4 billion to $254.4 billion, or 31 percent. The Federal Reserve System has engineered this inflation by increasing its purchases and holdings of U.S. Government securities from $23,982,000,000 at the end of 1957 to $32,237,000,000, an increase of $8,255,000,000, or 34 percent.
Yet when we turn to the official price indexes, we find that consumer prices have risen only a little more than 9 percent since the end of 1957, and wholesale prices a bare 1½ percent. Those who measure inflation not by money-and-credit supply but by price levels have therefore argued that there has been no real inflation in the last six years and that the fears of it have been unfounded.
They are wrong. What has happened is that most of our inflation has been exported. Broadly speaking, we have paid the cost of it, and Western Europe and the rest of the world have had the advantage of it.
EASY-MONEY FUTILE
Why and how has this happened? One apparently obvious answer is the $36 billion or so that our government has given in foreign aid and military assistance since the end of 1957. But this is only an indirect cause. The direct reason is that we have not only inflated, but inflated faster than the rest of the world.
More than 200 years ago the British philosopher David Hume pointed out that if a country with a gold currency tried to increase its money supply by bank credit or by added paper money, even if convertible, the only effect, other things unchanged, would be to drive out an equal quantity of gold. Now since the end of 1957 the U.S. has lost a little more than $7 billion gold (which it is interesting to compare with the $8 billion increase in the Federal Reserve’s holdings of government securities). In addition, our short-term dollar liabilities held by foreigners have increased more than $10 billion. In brief, our inflation has been futile. We have, without intending so, inflated mainly for the benefit of foreigners. We have increased our nominal money supply since the end of 1957 by $14 billion. But foreigners now hold $7 billion more in gold, and $13 billion more in liquid dollar assets, or $20 billion more. Our inflation has caused our cumulative balance-of-payments deficit of $22 billion since the end of 1957.
SYMPTOMS VS. CAUSE
All this seems to have escaped the attention not only of our government economists and monetary managers, but of almost our entire banking community. But at least one man, John Exter, vice president of the First National City Bank of New York, for the last two years has been trying to tell his banking colleagues, government economists, and all Keynesian expansionists that it is our easy-money policy that produces our balance-of-payments deficits; that these deficits are a drag on our economy; that our easy money has been in vain; that its economic consequences have been a massive movement of reserves to other countries from our own, where they increase foreign money supplies, not our own; stimulate foreign economies, not our own; employ foreign labor, not our own.
He has also been pointing out that our efforts to plug up specific channels of gold and dollar outflow—such as prohibiting Americans from holding gold, reducing the customs-free tourist allowance, tying our foreign aid to purchases in the United States, bringing or keeping military dependents home, taxing foreign investment are all futile, because they attack the symptoms of the disease and not its cause.
It is our inflation, created through budget deficits, easy money, and Federal Reserve money creation, that is the cause of our balance-of-payments problem. Until it is stopped, the dollar must continue to weaken.
September 16, 1963
When Congress, in the last week of August, under the threat of a nationwide railway strike, passed a law imposing compulsory arbitration, and when the President, on the afternoon of Aug. 28, signed the bill with the threatened strike less than six hours away, a few oldsters may have recalled another ominous day 47 years ago—Sept. 2, 1916 when Congress, under the threat of such a strike, passed the Adamson Act (giving the rail unions a basic eight hour day, with pro rata for overtime), while the union leaders sat in the gallery holding their stop watches over the lawmakers.
After the passage of the present compulsory arbitration law (by 90 to 2 in the Senate and 286 to 66 in the House) grave misgivings were expressed by many liberals. Would the precedent spread? How could it be prevented from spreading? What is the future of collective bargaining? What will happen to the freedom of workers and of management?
But, on the other hand, many asked, was not compulsory arbitration the only alternative to an “unthinkable” nationwide railroad strike? Hadn’t everything else been tried? Hadn’t four and a half years of bargaining proved fruitless?
FOUR YEARS TO NOWHERE
The answer to the last question is clearly Yes. On Nov. 2, 1959, the railroads, charging that union feather-bedding rules were costing them $600 million a year, proposed work rules changes. They got nowhere with the unions. Under the Railway Labor Act of 1926, a Presidential Railroad Commission was set up. It studied the work rules for thirteen months, and presented its report on Feb. 28, 1962. The railroads accepted the proposed settlement. The unions flatly rejected it.
Then the National Mediation Board offered to arbitrate. The railroads accepted the offer, but the unions refused. On July 17, 1962, the carriers served notice under the Railway Labor Act that the commission’s recommendations would be put into effect in 30 days. The unions filed suit challenging the railroads’ action, and successively lost in the Federal district court, the appeals court, and the Supreme Court. On April 2, 1963, the railroads served notice that in six days they would make effective the work-rules changes that the Supreme Court had affirmed their right to do.
The next day President Kennedy named Emergency Board No. 154 to recommend a settlement. On May 13 the board brought in a report accepting the philosophy of the Presidential commission, but making further concessions to the unions. The railroads accepted the recommendations; the unions rejected them. Later they rejected suggestions made by Secretary of Labor Wirtz, though the carriers accepted them.
37-YEAR RECORD
The story goes much further back. The Railway Labor Act was passed in 1926, nine years even before the Wagner Act, to try to prevent nationwide railroad strikes by imposing procedures close to compulsory arbitration. But in order to prevent strikes from being called the Presidential boards have nearly always decided heavily in the unions’ favor—leading, among other things, to the present fantastic featherbedding rules. In November 1941, a Presidential board awarded the operating unions a wage increase of 7½ percent, and the non-operating unions an average increase of 13½ percent. The awards were rejected by both groups. Thereupon President Roosevelt reconvened the board and ordered it to try again because of (unspecified) “new evidence.” The board took the hint, and obligingly revised its awards upward by about 10 percent. The new awards were accepted.
On April 25, 1946, the engineers and trainmen turned down an award of a Presidential board for a wage increase of 16 cents an hour. On May 22, President Truman proposed that the 16 cents an hour be hiked to 18½ cents. The unions still demurred, and struck on May 23. President Truman had seized the roads on May 17. He asked Congress for temporary authority to induct strikers into the army, to take out anti-strike injunctions, and to cancel strikers’ seniority rights.
Isn’t it about time we re-examined the Railway Labor Act?
September 23, 1963
It is unfortunate that even most of the professional economists who discuss our “balance-of-payments” problem seem never to have heard of, or have completely forgotten, what their predecessors of the eighteenth century wrote on the matter. In a famous essay “Of the Balance of Trade,” written about 25 years even before the appearance of Adam Smith’s Wealth of Nations in 1776, the British philosopher David Hume showed that in a world of free trade and metallic money the problem of an “adverse” balance of payments could hardly arise.
“There still prevails,” he wrote, “even in nations well acquainted with commerce, a strong jealousy with regard to the balance of trade, and a fear that all their gold and silver may be leaving them. This seems to me, almost in every case, a groundless apprehension; and I should as soon dread that all our springs and rivers should be exhausted, as that money should abandon a kingdom where there are people and industry.”
MONEY SEEKS A LEVEL
After showing that fears of this kind had proved unfounded, he went on to demonstrate why such fears were groundless. Suppose, he asked, that four-fifths of all the money in Britain were annihilated in one night. What would be the consequence?
Hume pointed out that there would be such a fall in prices, because of the scarcity of money, that Britain would be a wonderful market for foreigners to buy from and an impossible market to sell to. In very little time, therefore, Britain would get back the money it had lost. If, on the other hand, all the money in Britain were multiplied fivefold in a night, the contrary effect would follow. British labor and commodities would “rise to such an exorbitant height, that no neighboring nations could afford to buy from us; while their commodities, on the other hand, became comparatively so cheap that . . . they would be run in upon us, and our money would flow out.”
In a free market, in other words, and with a metallic currency, the precious metals will tend to distribute themselves among countries in proportion to goods so as to equalize prices (allowing for transportation costs) of goods in different countries. Money will seek its international level for much the same reasons as “all water, wherever it communicates, remains always at a level.”
HOW TO LOSE GOLD
Has all this been invalidated by the development of bank credit and paper money? On the contrary, though bank credit was then only in its infancy (1752), Hume correctly diagnosed its effects: “I scarcely know any method of sinking money below its level, but those institutions of banks, funds, and paper credit which are so much practiced in this kingdom. These render paper equivalent to money, circulate it throughout the whole state, make it supply the place of gold and silver, raise proportionably the price of labor and commodities, and by that means either banish a great part of those precious metals, or prevent their farther increase. What can be more shortsighted than our reasonings on this head? We fancy, because an individual would be much richer were his stock of money doubled, that the same good effect would follow were the money of everyone increased; not considering that this would raise as much the price of every commodity, and reduce every man in time to the same condition as before.”
In brief, Hume saw clearly what our monetary authorities have either failed to see or have seen only belatedly and inadequately—that the certain way for a country to lose gold is to inflate faster than other countries. This is the cause of our balance-of-payments problem.
But poor Hume, our “new” economists may reply, did not see that inflation can have a stimulative effect. He did see it, and he also saw through it: “Money when increasing, gives encouragement to industry, during the intervals between the increase of money and the rise of prices. A good effect of this nature may follow too from paper credit; but it is dangerous to precipitate matters, at the risk of losing all by the failing of that credit, as must happen upon any violent shock in public affairs.”
September 30, 1963
Strange are the ways of committees that select books. Take, for example, the first definitive list of books assembled for the White House Library as made public in mid-August. This was chosen under the leadership of James T. Babb, the librarian of Yale University. He had the assistance of what one report called “the best brains of the Library of Congress . . . and a host of distinguished scholars, librarians, publishers, and experts in many fields throughout the nation.” The authors had to be United States citizens except for creators of “a very few classics.” After more than a year of “agonizing” weighing and sifting, the selectors finally settled on 1,780 titles in almost 2,600 volumes.
What was the result? I will confine my comments to the 96 books on economics. The selection is haphazard so far as quality is concerned, and with a pronounced leaning to the left. One is glad to see in it John Bates Clark’s epoch-making work, The Distribution of Wealth (1890), and to find Irving Fisher represented by his admirable Theory of Interest. But after a handful of books, the puzzles begin.
SOME PUZZLES
Why, for example, is Frank Knight represented by The Ethics of Competition (a collection of miscellaneous essays brought together by former students), while by far his most important and original work, Risk, Uncertainty and Profit, is omitted? Why is F.W. Taussig represented by his specialized “Tariff History of the United States,” while his Principles of Economics, the most famous, lucid, and long-lived college textbook ever published in America, is unmentioned? Why are not such outstanding free-enterprise economists as Frank A. Fetter, Benjamin M. Anderson, H.J. Davenport, and T.N. Carver not represented by a single book? And why, finally, is the greatest contribution to economic theory in the present generation, Ludwig von Mises’s Human Action, simply left out?
There are plenty of anti-capitalist books on the list. Emerson P. Schmidt, chief economist of the United States Chamber of Commerce, has pointed out that books supporting the inflationist-controllist philosophy of the late Lord Keynes outnumber the Keynes opponents three to one. J.K. Galbraith, with his pro-bureaucratic tax-and-spend philosophy, is represented by no fewer than three books. The list is loaded with many a dull, pedantic compilation, and some pure junk.
AN INSPIRING STORY
But there are still greater puzzles. The American Booksellers Association, in collaboration with Robert Kennedy, the U.S. Information Agency, and the International White House Libraries Project, has assembled about 100 books to be presented to each of 100 heads of state. The declared purpose is “to help tell the story of the American way of life to the people of one hundred nations in all parts of the world.”
Yet one looks in vain for a single book on the list that does tell the inspiring story of American industry and American enterprise. The compilers had as possible choices John Chamberlain’s The Enterprising Americans, which tells this fascinating history in both human and technical terms, and H.F. Williamson’s Growth of the American Economy and J.W. Oliver’s History of American Technology.
Instead of complaining of bad choices, it is a much more grateful task to recommend good books that have not yet received the attention they deserve. I have been meaning for a number of weeks to write about two economics books that appeared earlier this year. The first is a primer, Essentials of Economics (Van Nostrand, $4), by a Mexican author, the late Faustino Ballvé. It is an admirable introduction, brief, simple, authoritative, and lively. The second is Economics of the Free Society, by Wilhelm Röpke (Regnery, $4.95), which, though it occasionally concedes too much to Keynesian theories for my taste, is on the whole, because of its humanity, erudition, penetration, and its felicitous and luminous exposition, the most satisfactory intermediate and medium length text available.
October 7, 1963
VIENNA—In the seventeen years since 1946 I have made ten trips to Europe, and like other visitors I have been struck each time by the steady and often accelerative increase in prosperity. Each year Europe seems more like America; the people are better fed, better dressed, better housed, and above all better automobiled. For example, in Austria, from which I am writing, the number of automobiles has increased ten times in the last ten years, and there is now one passenger vehicle for every fourteen people. Of course this growth has its bad side; and traffic jams in European cities, with their narrow winding streets, are often worse than in the U.S. But this increasing prosperity has now become an old story.
In Germany, at Wiesbaden, I attended a “German-American conference” of which the host organization was the German Institute for the Study of Middle and East European Problems, and the guest organization, the Foundation for Foreign Affairs of Chicago, which had been host to the German group in Chicago a year and a half ago. Among the speakers from the United States were Gen. Frank L. Howley, formerly in command of the American sector in Berlin, Stefan Possony of Stanford University, and Strausz-Hupé of the Foreign Policy Research Institute at the University of Pennsylvania. There were also some representatives from half a dozen European countries. Because so much difference of opinion was expressed, even between nationals from the same country, it would be impossible to present a consensus; so I yield to the temptation to quote only an epigram from journalist Robert Ingrim, who remarked that “Mr. Kennedy seems to fear nuclear bombs more in the hands of his friends [his European allies] than in the hands of his enemies.”
AUSTRIAN DILEMMA
From the end of the war, and until 1961, the Austrian economy showed almost the highest growth rate in Western Europe—an average of 12 percent a year from 1945 to 1961 and an average of 6 percent calculated from 1953 to 1961. For the last year and a half, however, the expansion has slowed down to a rate of only 2½ percent.
In fact Austria, which is heavily dependent on foreign trade (about a third of its entire production is exported), has arrived at a crossroads; either it must integrate its economy with that of the Common Market or it will be inescapably driven into the sphere of Soviet power and influence. Until now roughly half of Austria’s exports have gone to the Common Market and more than 60 percent of her imports have come from there. Already 17.5 percent of Austrian exports go to the Communist bloc. Some Austrian economists (notably Prof. Franz Nemschak, head of a semiofficial research organization) point out that unless association can be achieved with the Common Market, Austria will be forced into more bilateral trade with the Communist bloc, increased governmental planning, loss of productivity, and eventually complete loss of political freedom and independence.
FOREIGN ISSUES TAX
Most European bankers, businessmen, and economists with whom I have talked are appalled by our Administration’s proposed “equalization” tax on sales of foreign securities in our market. Of course they are concerned about the increased difficulty of meeting Europe’s capital needs. But they also quite honestly think the proposed action self-defeating from our own point of view. The proposal, they say, has undermined confidence in the dollar. Before the President’s proposal was made, an American underwriting group had almost finished arrangements for a $20 million loan to Austria. Based on previous experience, Europe itself would have bought 60 to 80 percent of this loan. Negotiations, however, had to be suspended in favor of short-term bank credits. So this could mean a net outflow of $20 million instead of only $4 million to $8 million.
But most of all Europeans are baffled by this move, on the part of the previous “banner-carrier” for free capital movements and international integration, back toward economic isolationism and restrictionism.
October 14, 1963
Our crop price support program is now some 30 years old. Its evils have been cumulative—so much so, that the problem of extricating ourselves seems all but insoluble.
In the summer issue of Modern Age, a quarterly review, Karl Brandt, formerly one of the three members of the President’s Council of Economic Advisers, and now director of the Food Research Institute at Stanford University, admitting the difficulty of auditing the full amount of the social and economic costs of the price-fixing policy, tries to list its “worst features”:
1—“The gigantic amount—over 80 million tons—of excess grain stocks which represent a misinvestment of many billions of dollars, a physical bulk which must be transported, stored, and handled at enormous expense, equivalent . . . to two solid lines of freight trains from New York to San Francisco.
2—“A price level set high above equilibrium, which is continually menaced by the existence of the giant surplus stocks: grain ‘in jail’ is still grain.
3—“The effected socialization of the holding of stocks of the price-fixed commodities.
4—“The impossibility of returning to a non-manipulated free market provided only with disaster insurance so long as these huge government stocks exist without a solid official commitment that they will not be returned to commercial markets.
5—“The gradual attrition of one of the most refined market mechanisms of the capitalistic economy—the future trading in commodities.
6—“The capitalization of the value of the allotments in the land values, and the boosting of farm real-estate values by the price-fixing.
7—“The loss of commercial export sales that could be made at lower, more realistic export prices.
8—“The encouragement of price-fixing for farm products in the European Common Market, in Japan, and other importing countries.
9—“The serious weakening of the bargaining power of the United States in its efforts to free the flow of agricultural products in world trade over import barriers, export subsidies, and bilateralism.”
All of these distortions, as Brandt points out, are merely by-products of the decision to protect the farmers’ income from disastrous declines by fixing prices.
But how do we ever end the program? Brandt’s own opinion is that “a sudden change of policy could put thousands of farmers through the wringer of foreclosure.” His own remedy would be a gradual restoration of free markets, a gradual lowering of support prices to a market level at which crops would move freely. But first of all we would have to abolish the enormous excess stocks of grain. “The proper way would be to reduce them by conversion to meat over some six years, outside market demands, and by a gradual liquidation that writes them off at a loss.” Not until these nuisance stocks are lifted from the market “can we disengage farm products from government buying and price-fixing.” Meanwhile, Brandt thinks, there might have to be an aid program that would “undoubtedly cost several billion dollars a year for several years.”
SELL IT BACK
The trouble with such a “gradual” disengagement program is that as long as the government sets any support price at all above the level of a free market it will go on piling up still more surplus stocks.
I have several times suggested in this column that the government sell its surplus of more than a billion bushels of wheat back to the farmers themselves on a quota basis and below the average estimated cost production. A farmer could either pay for and take his quota, or order it sold on the market and receive a check for the difference. There would be some objections, I admit, to this course also. And even this solution is now blocked by our government’s folly last year in renewing the International Wheat Agreement for another three years. This commits the U.S. to conduct all trade in wheat at a minimum price of $1.62½ a bushel. The government has not only walled itself as regards wheat, but by its sugar import quotas and its involvement in an international coffee agreement it is driving deeper and deeper into a centrally directed economy.
October 21, 1963
Representatives of ten leading industrial nations announced on Oct. 2 that they would start the first major negotiation and study of the world’s monetary system since the Bretton Woods Conference twenty years ago.
The project suggests misgivings concerning the workings of the system set up at that time. But the prospect of reform in the direction of a sounder system is not bright. For the basic assumption of all governments today is that they have not only the right but the duty to tamper constantly with the national money. This is known as “monetary management.”
The general lines along which the study and negotiations are likely to proceed are indicated in an article in the October issue of Foreign Affairs by Under Secretary of the Treasury Robert V. Roosa. This article may fairly be taken as reflecting present official U.S. policy.
Unfortunately Roosa begins by rejecting out of hand the only real solution—a return to a full international gold standard. He repeats the old charge that this was precisely the “system which broke down after World War I and led to the currency chaos of the ’30s.” The gold standard did not “break down.” It was deliberately abandoned and destroyed by monetary “managers” who wanted to dilute and inflate their national currencies, and rightly recognized the gold standard as the great barrier to their plans. The reason governments are now implacably opposed to a return to the full gold standard is that it would deprive them of their present powers to “manage” and “expand”—in brief, to inflate.
WORDS VS. REALITIES
Roosa, of course, puts this in more euphemistic words: “National policies for incomes, as well as for interest rates and credit availabilities, seem to be, or to be becoming, a normal part of the responsibilities which all governments now acknowledge in varying degrees for promoting growth, avoiding instability, and achieving external balance.” Compare these words with today’s realities. It is precisely these income and interest-rate “policies” that have retarded growth, created instability, and destroyed external balance. The dominant cause of the deficit in our balance of payments, and of our loss of gold, is our domestic inflation.
The monetary “reforms” that Roosa thinks will be considered all contemplate continuance of “the present gold-dollar-sterling-IMF system as the means of providing reserves,” as well as enlargement of currency swaps and other “cooperative credit arrangements,” enlarging the resources of the IMF and the drawing rights of its members, and even “endowing it with the capacity to create credit and the power to allocate such credit among members.”
All such proposals are ways of continuing and increasing credit expansion and currency inflation.
DEPRECIATION RECORD
In Roosa’s whole article there is not a word about the dreadful record of world currencies under the IMF system. On the contrary, we are told that “the Bretton Woods system is nearing the end of its second decade, a decade of remarkable achievement.” Remarkable indeed. The last two decades show the worst record of international inflation, depreciation, devaluation, and repudiation ever achieved in peacetime if not in war.
Let us skip over the devaluation of the British pound and scores of other currencies in 1949 and take the record of the last decade alone, as presented, say, in the July letter of the First National City Bank of New York. A table of 43 national currencies shows depreciation (in domestic purchasing power) in all of them over the 1952–62 decade, ranging from 1.3 percent annually for the U.S., to 2.9 percent for Britain, 3.5 percent for France, and 21.5, 25, and 35.2 percent annually for Brazil, Chile, and Bolivia respectively.
The only reason the system has “worked” until now is that the dollar, to which all the other currencies are tied, has been anchored to gold. But with the anchor itself in danger of drifting from its present gold base, the only “reform” the world’s monetary managers have to suggest is to increase the facilities for U.S. and world inflation.
October 28, 1963
The mere proposal by the President on July 18 of a retroactive tax on American purchases of foreign securities has already done great harm. It has brought about paralysis in such investment, created world uncertainty, and undermined confidence in the dollar. If the Administration does not withdraw the proposal, Congress should reject it promptly.
The proposal has now received impressive criticism from many quarters, but the most thorough analysis I have seen was in the Congressional testimony on Aug. 21 on behalf of the Investment Bankers Association of America by Amyas Ames, its president, and by Andrew N. Overby, chairman of its foreign-investment committee and former Assistant Secretary of the Treasury and deputy managing director of the International Monetary Fund. Let me summarize the chief points:
1—The proposed tax will adversely affect the U.S. balance of payments in the long run and will not significantly improve it in the short run.
Private foreign investment is an asset-creating expenditure. Current net capital outflows are offset by income from previous investments. From 1958 through 1962, income from all private foreign investment amounted to $15.4 billion compared with an aggregate net outflow for new investment of $16.6 billion. Moreover, in 1962 alone income amounted to $3.8 billion as compared with a net outflow of $3.3 billion.
Trade follows credit. With the dollars they obtain from U.S. purchases of their securities, foreigners buy our goods and services. Often the connection is direct. The Japanese Telephone Co. (KDD) raised $25 million through sale of securities in this country to lay a 3,000-mile submarine telephone cable from Tokyo to Hawaii. All of the money raised is being spent in America making jobs for American workmen. Apart from such examples of direct connection, our foreign investments provide foreigners with the necessary dollars to purchase our exports. If other things remain unchanged, our exports will tend to be reduced by the same amount as we reduce our foreign investments.
2—The proposed law is not addressed to the fundamental causes of the balance-of-payments deficit. The great “leakage” comes from foreign aid and other government programs totaling $4 billion in 1962 and overseas military expenditures reaching some $3 billion. There is little hope of correcting our balance-of-payments deficit unless we reduce these expenditures substantially, improve our cost position in relation to our competitors abroad, and increase the attractiveness of foreign investment in the United States.
3—The proposed tax would be more accurately described not as a tax at all but rather as a new protective tariff to limit the importation of foreign securities. So viewed, the so-called “tax” represents a retreat from our long-standing policy of freedom for capital movements.
4—The United States capital market, and foreign economies dependent upon it, may be seriously damaged. The U.S. is now the only free capital market in which the amount and terms on which an issuer can sell its securities are limited only by the marketplace. This is a precious national asset. It should not be dissipated without convincing reasons of national interest.
5—The proposed tax may create fears of further restrictions. We must not impair the value of the dollar as the key currency of the world. Diminished confidence in the dollar can only have an adverse impact on our balance of payments.
6—The proposed tax is discriminatory. It selects only one aspect of private expenditure abroad—private portfolio investment—for restriction through a special tariff while leaving unaffected private expenditures abroad for tourism, direct foreign investment, and commercial bank loans.
7—The proposed tax is administratively complex.
I have only one serious reservation to this admirable analysis. I wish it had recognized more clearly that the basic cause of our so-called balance-of-payments problem is our domestic inflation, reflected through our huge past and prospective budget deficits and our cheap-money policies. We are driving dollars and investment abroad as much by holding down long-term interest rates as by holding down short-term interest rates.
November 11, 1963
Representatives of the governments of the ten most powerful industrial nations (outside the Communist bloc) have begun a study of the world’s monetary systems. Such a study is long overdue. Yet the prospects that it will result in a real improvement are not bright. On the contrary, the most influential governments are pushing for an increase in world “reserves” and international “liquidity.” In plain English, they are pushing for more world inflation.
The real problem is how to bring this inflation to a halt. The real solution is to dismantle the International Monetary Fund system. This system has proved, in practice, a gigantic machine for world inflation. In the nearly twenty years of its existence, more and greater devaluations have occurred in national currencies than in any comparable period.
In Newsweek of Oct. 21, I called attention to this record, beginning with the scores of devaluations in 1949 touched off by the overnight devaluation of the British pound from $4.03 to $2.80. In the decade from the end of 1952 to the end of 1962, 43 leading currencies depreciated. The U.S. dollar showed a loss in internal purchasing power of 12 percent, the British pound of 25 percent, the French franc of 30 percent. The currencies of Argentina, Brazil, Chile, and Bolivia lost, respectively, 89, 91, 94, and 99 percent of their purchasing power.
INFLATION BUILT IN
This result was not accidental. It was made possible, if not in effect caused, by the IMF system.
It is amazing that this system, jerrybuilt at Bretton Woods in 1944, is not only still tolerated, but regarded as practically sacrosanct. Its paternity was not auspicious. Its two fathers were Harry Dexter White of the U.S. and Lord Keynes of England. White, who later served as U.S. executive director of the IMF, was reported by the FBI in 1945 (as revealed in an announcement by Attorney General Brownell in 1953) to be a Russian spy.
Keynes urged Britain to adopt the plan precisely because he regarded it as inflationist. It would provide, he argued in the House of Lords (May 23, 1944), “a great addition to the world’s stock of monetary reserves. . . . We are determined that, in future, the external value of sterling shall conform to its internal value as set by our own domestic policies, and not the other way round. . . . We intend to retain control of our domestic rate of interest, so that we can keep it as low as suits our purpose, without interference from the ebb and flow of international capital movements or flights of hot money.” Finally, Keynes assured his hearers, “If I have any authority to pronounce on what is and what is not the essence of a gold standard, I should say that this plan is the exact opposite of it.”
TIED TO THE DOLLAR
If there were no IMF, governments whose currencies were shaky as a result of their reckless fiscal and monetary policies would be forced to go to private bankers or investors to extricate them, and private investors would insist on guarantees of fiscal and monetary discipline as a condition of such help. But Keynes insured that a nation’s “domestic” inflationary policies “shall be immune from criticism by the Fund.” He provided for automatic borrowing rights, and left any aid conditions to the necessarily political decisions of other governments through their representatives on the IMF.
Other countries have been able to devalue freely. But because all other currencies are anchored by the system to the American dollar, this freedom is denied to the United States, which cannot devalue without creating world monetary chaos. Our government has, nevertheless, continued to follow irresponsible fiscal, monetary, and interest-rate policies calculated to make this result inevitable. And this is what makes the IMF system dangerous for every other member nation. For the future value of their own currencies, and their own economic stability, have become dependent on the uncertain “domestic” fiscal and monetary policies of the United States.
Why not take another look at the possible virtues of a return to a world gold standard?
November 18, 1963
The Department of Labor has announced that unemployment in October amounted to 5.5 percent of the labor force. It has been above 5 percent since late 1957.
These figures puzzle Europeans, whose official unemployment estimates are much lower. When I was in Europe in September, I was repeatedly asked for an explanation. My answer ran something like this:
1—It’s hard to tell whether the contrast is really as great as official estimates indicate. We count our unemployment differently from you. You usually count only the registered unemployed on the insurance rolls. We count in addition estimates based on a census sampling.
These additional unemployed are very generously estimated. Let me quote the Labor Department’s own words (from its September monthly report): “The unemployed total from the household survey includes all jobless persons who were looking for work, regardless of whether or not they were eligible for unemployment insurance. Also counted as unemployed are persons waiting to be called back to jobs from which they had been laid off; those scheduled to start new wage or salary j;obs within 30 days (except students); and those who would have been looking for work except that they were temporarily ill or believed no work was available in their line of work in the community.”
Of course if we count as unemployed everybody who says he wants job, but is not even bothering to look for one, we can get a high total.
And the wider our inclusions in the “labor force” the higher our estimates of “unemployment.”
2—The crucial question is how much of our statistical unemployment represents real economic distress. We get some light on this when we break the unemployed into categories. Then we find that (in September) the unemployment rate of males 16 to 19 years old was 14.7 percent, but that of males 25 to 34 years old was only 3.3 percent. For single men the unemployment rate was 10.5 percent, but for married men (“wife present”) the rate was only 2.3 percent. Most unemployed youths are probably supported by their parents. Those who really need jobs most, tend to have them most.
We also get instructive results when we ask how long the unemployed have been unemployed. We find that 47.8 percent, or nearly half, have been unemployed less than five weeks. Only 25.2 percent have been unemployed more than fifteen weeks, and only 14.3 percent more than 27 weeks (when unemployment insurance normally runs out). Stated another way, only 1.5 percent of the labor force are unemployed for more than fifteen weeks.
3—American legislation raises the unemployment rate. Our constantly rising legal minimum wage rate tends especially to cause unemployment among the lowest-paid workers. This is one reason why the jobless rate among colored workers averages 9.2 percent, compared with 4.2 percent among white workers.
4—Unemployment is also increased in the U.S. by high and long unemployment-insurance payments. We even subsidize strikes by unemployment insurance if the strike, say in New York, goes on for more than seven weeks. The extent of unemployment is not unrelated, also, to the size of relief payments.
5—Finally, of course, and perhaps most importantly, our Federal labor legislation is so drawn (and applied by the NLRB) that employers are almost impotent to resist excessive union demands. This encourages many unions to press demands that price a large percentage of their members out of the market, and even drive some employers out of business.
When I finished my answer, my European questioner would often ask: “But why don’t the American authorities correct the situation?” I replied that the causes I had emphasized were almost never publicly mentioned. Unemployment in the U.S. is officially attributed to two factors: (1) “insufficient aggregate demand” and (2) “automation.” Both explanations are fallacious; both lead to harmful policies. The “insufficient demand” theory causes pressure for constant deficit spending. And if automation throws people out of jobs on net balance, how can we explain why American employment this year is at the highest level on record?
November 25, 1963
It remained for Senator Morse, of all people, to blurt out the truth: “If foreign aid were submitted to a referendum of the American people, it would be overwhelmingly defeated.” Certainly it would be defeated in its present prodigal and promiscuous form.
But whenever Congress grows restive and attempts to curb at least some of the more flagrant items in the program, the executive branch shouts that it is “threatening world security.” President Kennedy even questions the good faith of opponents of the program. They “find it politically convenient,” he says, “to denounce foreign aid with one breath and the Communist menace with another.”
This begs the whole question. Has foreign aid reduced the Communist menace (especially as compared with alternative programs)?
The military assistance program, in such places as Formosa and Vietnam, has prevented or slowed up direct Communism aggression or conquest. But has our economic aid, scattered over nearly a hundred countries, done anything appreciably to arrest the spread of Communism? The argument that it has done so rests on the assumption that all these countries live in “poverty and despair,” and will turn in desperation to Communism unless their standard of living is substantially raised.
POVERTY, OR IDEAS?
There is in fact no evidence that the Communist ideology increases in proportion to poverty. Hungary and Rumania, Poland and East Germany are Communist today not because they were poor but because they conquered. Cuba is Communist, not because it was any poorer than other Latin American lands, but because armed revolutionists seized power. Italy is more prosperous—and more people vote Communist—than at any time in the past.
In brief, if countries voluntarily go socialist or Communist, it is because of ideology, not because of their economic level. If people are led to believe that socialism or Communism is the quickest way to raise their economic condition, they will adopt it. If they recognize, however, that the surest way to improve their economic condition is by adopting the principles of capitalism and free enterprise, that is what they will do.
The Administration has ignored this. Czarist Russia chronically exported a surplus of grain; Communist Russia cannot even feed its own people. Yet instead of exploiting this fact, our government rushes to relieve the Communist plight. It does not point to the failure of Khrushchev’s production boasts, because it accepted them. Lastly, Secretary Freeman was praising the “real progress” achieved by the Russians in the last five years in the production of grain.
NO CORRELATION
Has foreign aid appreciably raised income and living standards in the recipient countries? In the last fifteen years, of course, living standards have improved in nearly all countries. But no correlation is detectable between the rate of growth in each country and the amount or percentage of American foreign aid. The President belittles its cost to us. It is only “seven-tenths of 1 percent of our gross national output.” But then it must be similarly minute percentage of the total GNP of the hundred or so nations among which it has been scattered. How, then, could it substantially increase their living levels? Especially as it is offered to Latin American countries on condition that they embark on “national planning” and “land reform”—i.e., on still more socialism and welfare-statism.
Has our foreign aid improved our own economic conditions? The President contends that it has. “A cut of $1 billion in our total foreign-aid program may save $100 million in our balance of payments—but it costs us $900 million in exports.” He forgets that such “exports” are given away. They are paid for by our own taxpayers, who would otherwise have had the $900 million to buy things for themselves. The $100 billion total we have paid out in foreign aid set back our own capital development, our own economic growth, by $100 billion.
If our foreign aid finally destroys the dollar as the world’s anchor currency, whom will it have helped?
December 2, 1963
Though the assassination of President Kennedy came as an incredible shock, it did not bring the uncertainty and chaos that might have followed in a country under different institutions. The nation was not left in doubt for an hour concerning Mr. Kennedy’s successor. It knew almost immediately that it would be the Vice President, Lyndon Johnson. Yet the incident once more raises the question whether the constitutional and statutory arrangements for the succession to the Presidency, when the incumbent dies or is killed in office, are adequate or even reasonably satisfactory.
It is, of course, a gain for the orderly transition of power, and for the reduction of uncertainty, that the name of the successor should be known. But even the institution of a hereditary monarchy provides this kind of transition and certainty. What remains in doubt when a Vice President succeeds to the Presidency through the accident of death is not only what changes in policy he will attempt, but what support he will get from Congress, and whether he would in fact have been the choice of the country for President. The succession of Andrew Johnson following Lincoln’s assassination, and the bitter struggle with Congress that followed, culminating in the attempt to impeach him (which failed only by a single vote), dramatized all these doubts and misgivings.
ABOLISH THE OFFICE?
No one expects a repetition of anything approaching this now that another President Johnson has been brought into office by an assassin’s bullet. Because of Lyndon Johnson’s long and brilliantly successful experience as Majority Leader of the Senate and because he represents more nearly the center of his own party, it is probable, indeed, that he will gain more cooperation from Congress than President Kennedy did, and may even succeed in reconciling the Northern and Southern wings of the Democratic Party. But if this turns out to be so, it will be a lucky accident and a result hardly attributable to our institutional provisions.
Should the U.S. Constitution be amended to abolish the office of Vice President? When there is a Vice President in office it is difficult to discuss this abstract institutional question without being suspected of a personal bias for or against the incumbent. But when, as now, the office falls vacant, it seems opportune to consider it with the seriousness it deserves. I should like to take the liberty of quoting from a book I wrote more than twenty years ago, A New Constitution Now (1942).
CHOICE BY CONGRESS
“If the aim of a constitution is either to clarify the expression of the popular will or to bring the ablest men of a country into leadership, the institution of the Vice Presidency achieves neither purpose. On the contrary, the institution beclouds campaign issues. It forces many voters to choose a man they do not like in order to elect a man they do like. It would be an obvious improvement in our democratic machinery if only candidates for President were nominated and elected, and if the Constitution were amended to provide, following the precedent in a number of other countries, that in the event of the death of the President the successor to fill his unexpired term would be chosen by the House and Senate sitting as a single body. A President so chosen would be certain to be an outstanding man, who would receive the willing cooperation of Congress, and would represent the sentiment of the country at the time he came into office.
“Such a man could not fail to be a better choice, on the average, than a man who comes to the Presidency accidentally through the death of the President. Congress, in making its own choice of a successor, would be forced to act with the utmost seriousness and responsibility. Compare this with the irresponsible and frivolous attitude of a party nominating convention that chooses a Vice Presidential candidate to ‘balance the ticket’ with little real belief that he will ever become President—and with even a doubt whether he will ever become Vice President. The superiority of the method of Congressional choice is beyond question.”
December 9, 1963
In a single hour the shocking assassination of President Kennedy altered the whole political and economic outlook for the United States. Only the immediate knowledge that Vice President Johnson would take office on the same day reduced the uncertainty and confusion that would otherwise have prevailed. The incident should serve to remind us once again, however, of how inadequate both our constitutional and statutory provisions are to meet the contingency of the death or disability of a President in office.
Suppose President Kennedy had survived his wound but been seriously incapacitated? This is precisely what happened when President Garfield was shot on July 2, 1881, and lived on for 80 days. President Wilson collapsed on Sept. 25, 1919, and was not able to attend a Cabinet meeting until the following April. President Eisenhower suffered his heart attack on Sept. 24, 1955, and was incapacitated for two months. Yet neither during nor after any of these occasions did Congress attempt to clarify or amend the constitutional provisions regarding “disability.”
WHAT IS ‘INABILITY’?
The constitutional provision reads: Art. II, Sec. 1: “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.”
But what is “inability” or “disability”? Who is to certify it if the President himself is unable or unwilling to do so? Who has the authority to say whether or when the disability has been removed?
The most satisfactory solution of this problem would probably be to empower Congress itself to make these decisions, if a President were unable or unwilling to do so, and to elect, if necessary, an Acting President to discharge the powers and duties of the office until Congress declared the President’s disability to be removed.
As such a change would itself require a constitutional amendment, Congress should in the same amendment provide for the contingency of a successor to the President when there is, as now, no Vice President in office. In place of the present somewhat makeshift Succession Act, adopted in 1947, it should provide that Congress itself, sitting as a single body, choose the new President to fill the unexpired term. The amendment could direct the Speaker of the House, in the event that Congress was not in session, to act as President pro tem and call a special joint session for the purpose.
A NEEDLESS OFFICE
Finally, in such an amendment, Congress could abolish the needless office of Vice President, and provide, in the event of the President’s death, for the above procedure to choose his successor for the unexpired term.
Such an amendment would solve many problems at once. The new President so chosen would be certain to be a man of outstanding ability. He would have the confidence of the majority of Congress and would therefore be more likely to secure its cooperation than any other man.
If at the time of President Kennedy’s election there had been no Vice Presidential candidate, and Mr. Johnson had still been Senator Johnson and the Senate’s Majority Leader, it is altogether probable that he would still have been today the choice of Congress as President Kennedy’s successor. But Mr. Johnson’s position is in this respect unique. In no other case of a President’s death or assassination in office does it seem probable that his successor would have been the one chosen by Congress as the new President had he not been Vice President.
President Johnson, therefore, is in a unique position to ask for such a reform. We may not always be able to prevent some madman from killing a President in office, but we can and must prevent him from, in effect, selecting a new President for us.
December 16, 1963
Some bewildering contradictions have developed in our foreign economic policy. The government wishes to continue to give away, for example, some $4 billion a year in taxpayers’ money to aid foreign countries. It insists that this aid is having only a negligible adverse effect on our balance of payments. At the same time it is opposed to American citizens investing their own money at their own risk in foreign countries. It contends that such investments are a serious threat to our balance of payments. So it has proposed an almost prohibitive tax on them.
The government’s theory is fallacious and the facts are against it. In the long run the outflow of American capital to foreign countries is more than balanced by the inflow of income earned by that capital. From 1958 through 1962, income from all private foreign investment amounted to $15.4 billion compared with an aggregate net outflow of new investment of $16.6 billion. In 1962 alone income amounted to $3.8 billion compared with a net outflow of $3.3 billion.
In a message to Congress last summer, President Kennedy called attention to this. “Our payments deficits,” he pointed out, “measured in terms of our loss of gold and the increase in our short-term liquid liabilities to foreigners, have consistently been equaled or exceeded by the growth of our long-term high-yielding foreign assets—assets which have been and will continue to be an increasing source of strength to our balance of payments.”
SHORTSIGHTED TAX
Isn’t it shortsighted, then, to stop the further growth of these assets? Isn’t it obvious that, regardless of any immediate result, the proposed tax must adversely affect our balance of payments in the long run?
It is clear from the very nature of the transaction that a large part of our exports are made possible by foreign investment. With the dollars they obtain from American purchases of their securities, foreigners buy our goods. Our exports must tend to be reduced by the same amount as we reduce our foreign investment.
But though the government objects to private foreign investment, for fear it will hurt our balance of payments, it insists upon continuing to give away some $4 billion a year in foreign aid. And it argues that this will not substantially hurt our balance of payments. A cut of $1 billion in our total foreign-aid program, government officials maintain, could save only $100 million in our balance of payments, but would cost us $900 million in exports.
It is hard to see just how the government could go about proving this statistically. But to the extent that it is true, why doesn’t the same logic apply to our foreign investments? Why are they a threat to our balance of payments while foreign aid is not? Why wouldn’t cutting off $1 billion in foreign investments also cost us $900 million in exports?
LOANS CREATE EXPORTS
The truth is that it would. In the long run, in fact, cutting off $1 billion in foreign investment must cost us, other things remaining unchanged, $1 billion in exports. The real difference is that the exports made possible by foreign investment are real exports. Foreigners pay for them. The exports resulting from foreign aid are sham exports. We pay for them. Sound foreign investments build American economic strength. Foreign giveaway sets back our own capital development and economic growth.
The truth is the exact opposite of what our foreign economic policy assumes. Foreign investment creates exports and so creates jobs for Americans. It creates assets, and in future years must benefit our balance of payments through payments of interest, dividends, and return of capital.
Private foreign investment, also, really develops the countries into which it is put. For them it is wealth-creating and income-creating. It is, in fact, by far the quickest and most efficient means to their economic progress. And if a government, as in Argentina, is shortsighted enough to think it can seize past foreign investments in its country without killing off future investments, or even losing our foreign aid, it ought to be promptly taught the opposite.
December 23, 1963
It was a sad day when the House Ways and Means Committee approved the Administration’s proposed penalty tax on purchases by Americans of foreign securities. Such a tax is shortsighted and ill-conceived in every way. In the long run it will not help, but hurt, our balance of payments. In the long run it will reduce our own foreign-asset holdings. It will seriously damage our international capital market, and the foreign economies dependent on it. It will not increase, but further undermine, international faith in the integrity of the dollar.
Last week I pointed out here a glaring inconsistency in the Treasury’s argument. It holds that foreign-aid handouts have only a negligible adverse effect on our balance of payments, but that private American foreign investments are a serious threat to our balance of payments. The truth is, if anything, the exact opposite. As President Kennedy, in his message to Congress of July 18 last, pointed out: “Our payments deficits . . . have consistently been equaled or exceeded by the growth of our long-term high-yielding foreign assets-assets which have been and will continue to be an increasing source of strength to our balance of payments.”
The immediate adverse effect of foreign investments on our balance of payments is minor. They provide the funds with which foreigners buy our goods. They thereby increase our exports. And future receipts from these investments (in the form of interest, dividends, and return of capital) must benefit the balance of payments in future years.
PROMOTE WORLD GROWTH
But in addition to increasing the asset-strength of the United States, private foreign investment (as contrasted with government giveaway) does most to promote the fastest economic growth in the rest of the world. For private foreign investment goes to the places that promise the safest and biggest returns. This means that such investment goes to the places where property is respected and least liable to seizure, nationalization, prohibitive taxation, or other forms of harassment. It means that such investment goes where it seems likely to earn the highest returns—which means where it will be most productive—which means where it will do most to raise living standards.
The proposed penalty tax on purchases of foreign securities violates basic legal as well as basic economic principles. In its retroactivity it ignores the constitutional prohibition of ex post facto laws. It is discriminatory. Not only does it select for penalty only one form of private expenditure or investment abroad, while exempting others, but it discriminates by name against 22 countries—which happen to be the countries that manage their affairs best and where investment is safest—in the hope of deflecting investment into countries that have so mismanaged their affairs as to frighten off investment (as in South America) or to get themselves a chronic balance-of-payments deficit (as in India).
WHO IS TO BLAME?
What the tax proposal does, in effect, is to say: “You, you private investors, are causing our balance-of-payments deficit.” But the cause of that deficit is clearly the government’s own policies—not merely foreign aid, not merely huge and chronic budget deficits, but arbitrarily holding down interest rates, both short-term and long-term. When the government holds down long-term rates, it drives more American investment abroad and discourages foreign investment here. If the Federal Reserve stopped inflating, and allowed domestic interest rates to be determined by market forces, there would automatically be less American investment abroad and more foreign investment here. But the government prefers to keep this market interference and try to offset its evil results with still another market interference—and so carry us still deeper into a centrally mismanaged economy.
As the late President Kennedy wrote in his letter to David Rockefeller of July 6, 1962: “Private foreign investment . . . should not be subject to restrictions. . . . Government must confine its restrictive influences to its own expenditures.”
December 30, 1963
So the stage is all set for a tax cut of $11 billion in the calendar year 1964, and everyone seems delighted. No one in official circles any longer mentions the obsolete idea that the budget ought to be balanced. No one has so far indicated, in fact, that the deficit will be any less than the $9.2 billion that Secretary Dillon estimated about two months ago for the 1964 fiscal year, or the $9.2 billion that he estimated for the 1965 fiscal year.
So, at best, we are borrowing money to cut taxes. This does not look like a very farsighted operation. But the situation is graver than this. If the government proposed to finance its planned deficits by borrowing real savings, at least it would not be resorting to inflation. But the most vociferous proponents of a tax cut want it precisely because they do want it financed by inflation—i.e., through the creation of new money. And the Federal Reserve authorities have already begun to supply this inflation. The nation’s “money supply” in the official sense (demand deposits and currency outside banks) increased $6 billion between October 1962 and October this year. In a broader sense (including time deposits) the money supply increased $20.7 billion in that period, or 8.6 percent. This is an extraordinary increase for a single year. This, rather than the mere anticipation of a tax cut, has triggered the boom in the stock market and business.
WHY IT IS A SHAM
If Federal expenditures are allowed to run $9 billion beyond revenues, the difference must somehow be paid for. And if it is made up by inflation—i.e., by the government’s creating more money—this means that it is being paid for by a hidden tax, an iniquitous tax paid through higher prices. A tax cut at the cost of a deficit is a fraud.
Apart from the question whether there should be a tax cut at all at this time (without an even greater cut in expenditures to balance the budget), the kind of tax cut now proposed is far from the most likely to increase incentives and promote growth. What is most necessary to this end is to reduce the near-confiscatory rates on the higher incomes, and penalization of effort and success. But the tax bill as it passed the House does the reverse. By establishing a minimum standard deduction, it frees 1.5 million taxpayers from all tax liability. This must tend to remove the interest of that many more people in prudent fiscal management by the government, and increase the pressure for benefits they do not directly pay for.
TO RESTORE INCENTIVE
The House version of the new tax bill would make our income-tax structure even more steeply graduated than it already is. The percentage of reduction in the aggregate tax liability of various income brackets (as pointed out in the illuminating testimony before the Senate Finance Committee by Roger A. Freeman of the Hoover Institute at Stanford University) would run like this:
| Adjusted gross-income class | |
| Up to $ 3,000 | -38.3% |
| $ 3,000 to 5,000 | -26.2 |
| 5,000 to 10,000 | -19.9 |
| 10,000 to 20,000 | -16.4 |
| 20,000 to 50,000 | -15.1 |
| 50,000 and over | -12.6 |
| Overall | -18.8 |
But what is needed to increase what President Kennedy called “the financial incentives for personal effort, investment, and risk-taking” is, most of all, reduction of the near-confiscatory rates on the higher incomes. As Roger Freeman rightly declares: “Government should not hold a majority interest in anybody’s income, and the top rate of the personal income tax should not exceed 50 percent.” The vote of the Senate Finance Committee to give a few taxpayers in unusual situations (it is estimated it would affect only 14,000) the option of limiting their maximum tax rate on personal incomes to 50 percent, is a debatable step toward this goal; but it is at least an encouraging recognition that present confiscatory rates have been destroying effort and incentives without producing revenue.
