1. 1946

1946

How ‘Stabilization’ Unstabilizes

September 30, 1946

After much wavering, the Truman Administration was finally brought, months ago, to acknowledge that price control could not work without wage control. But while its price ceilings have been fixed and rigid, its wage ceilings have from the first been vague, movable, and, in fact, fictitious. It has never applied the same principles to wage control as to price control and, to do it justice, it has never applied the same vocabulary. Prices have frankly been fixed; but wages have merely been “stabilized.” Whatever nebulous meaning may once have attached to this word was completely lost in the settlements of the New York trucking and maritime strikes. It was at last made crystal clear that there is no national “wage policy” or “wage line” that cannot be destroyed the moment any powerful union chooses to challenge it through a strike.

The history of these “wage policies” has now become drearily repetitive. The various wage boards set up by the Administration, ostensibly for the purpose of “stabilizing” or holding down wages, have been in reality wage-boosting agencies. The famous 18½-cent wage-increase formula was an open invitation to every labor union leader to demand at least that. He could hardly afford to ask less for his members than the amount the President himself had declared to be only their just due. This “stabilization” policy could be put into effect as long as the government was forcing the oil, motor, steel, and other industries to pay greater increases than the unions could obtain through their own unaided bargaining power. The new 18½-cent higher ceiling was smashed the moment John L. Lewis decided to smash it. The government cooperated with him in smashing it, in fact, by seizing the mines and negotiating and signing the new ceiling-smashing contract with him itself. One consequence of this was the New York trucking strike and its settlement by wage boosts of 31 cents an hour.

The truth is that the government by its own policies has finally placed itself in a position where it must surrender to every strike. It not only fails to penalize; it rewards every strike by giving the strikers more than they would have got without striking. A never-ceasing round of strikes under these circumstances can hardly be regarded as a mystery. Every time the government buys off one present strike by forcing the employers to grant the substance of the demands made it buys itself twenty future strikes.

And it begins by creating a situation in which it is all but impossible for a union to lose a strike. By the Wagner Act the government turned itself, in effect, into a union-organizing agency. One provision of that act makes it in practice impossible for an employer to dismiss men on strike and to hire permanent workers to take their place. Local governments, in addition, fail to provide adequate police protection not only for substitute workers but even for workers who wish to continue peaceably at their old jobs. Under these conditions all the natural risks are taken out of strikes, the previous function of the strikers cannot be taken over by anyone else, vital production must come to a halt, and the deadlock can only be broken by giving in to the strikers’ demands.

The least that we may hope for is that the Administration will candidly recognize the situation it has brought about, and will now give up the pretense that it has any “wage stabilization policy” or that it can enforce any. But the logical and indeed the only workable corollary of abandonment of a wage control that has always been fictitious is an abandonment of price control; otherwise artificial scarcities must continue to be brought about and production must continue to be discouraged, unbalanced and disrupted. Yet the administrators hang on grimly to every inch of price control that the present extension law permits, and even interpret the law to retain far more control than Congress intended.

Though the national production of meat this year was substantially higher than in the prewar years, both the Price Decontrol Board and the Secretary of Agriculture calmly ruled it to be “in short supply.” Restoration of price control then brought about the worst meat shortage in our history.

The government’s “stabilization” policy, in short, continues to create worse difficulties than any it was designed to solve.

New Ironies of Price Control

October 7, 1946

It is hard to decide which has been more harmful—the new Price Control Extension Act or its administration. The law itself provided that controls could not be reimposed on meat unless meat was “in short supply.” As the production of meat when the present law went into effect was substantially above the prewar average, meat could have been decontrolled immediately. But the Price Decontrol Board, instead of adopting the simple standard of supply mentioned in the law, put meat back under control on the ground that it was in short supply “in relation to demand at reasonable prices.”

Under this elastic standard, price control can be retained indefinitely. A comparison of present with past supplies is definite and measurable, but a comparison of supply with “demand at reasonable prices” depends on the concept of reasonableness in the minds of administrators.

The new price-extension law was so badly conceived that only expert administration could have made it work. The administrators proceeded to follow the precise combination of policies likely to do the most harm. First, meat was needlessly put back under control. Then, as if to make certain that there would be a meat famine, grains and animal feeds were left free of controls, while the OPA delayed a couple of weeks in restoring ceilings.

Livestock raisers, fearing a profit squeeze, rushed their unfattened cattle to free markets while they lasted. This added temporarily to the supply of meat at the cost of a long-term shortage. When controls were restored, livestock raisers decided to fatten the cattle that remained on the range rather than sell it; at the latest, they figured, price control would end next June.

The result has been the worst meat famine in the nation’s history. Residents of New York City found themselves for the first time reduced to trying horse flesh. Poultry and egg prices soared. Die-hard price controllers blamed this rise on the free market, though it should have been obvious that when a scarcity of meat was brought about by price control, the whole demand would concentrate on the substitutes remaining, and force their prices far above any levels that would have existed without price controls over other items.

The crisis reached a point where even the Democratic Majority Leader of the House, who had fought tenaciously to have price control restored, called for a 60-day suspension of controls over meat and other scarce foods. Republicans were prompt to denounce this as a political trick, and to point out that it would suspend price control over meat until safely after the elections and then probably reimpose it. But wholly apart from the political aspects, a mere 60-day “suspension” of meat controls would be another economic error. That was precisely what we had in July and August. A second price-control suspension would produce the same kind of results. When producers are left with a sword of Damocles hanging over them, they do not act as they would in a free market. The government cannot monkey with the price mechanism in this way without courting disaster. Only one thing will do now—the definite termination of meat control and, in fact, the definite termination of all price control.

What is particularly ironical is that the restoration of price control itself brought about the very shortage in meat that the Decontrol Board and the Secretary of Agriculture declared to exist when there was no shortage. It would be embarrassing for Secretary Anderson to declare meat now not to be in short supply, in order to get rid of price controls, when he declared it to be short at a time when it was obviously more plentiful than today.

The dilemmas of the administrators are no worse than the paradoxes in the law itself. In the agricultural realm it provides for price controls only over commodities in short supply. But the effect of holding down the price of goods in short supply is to increase their consumption, discourage their production, and intensify the shortage. The only defensible course with regard to goods in short supply would be to ration them without controlling their price. This would restrict demand without reducing incentives.

Between price controls and priorities, production has been thrown into more chaos than we have ever seen in peace times.

Inflation, Deflation, Confusion

October 14, 1946

In the last two years left-wingers have been fond of referring to private enterprise as a “boom-bust” economy; OPA officials have contended that only price fixing can prevent a repetition of the 1920–21 boom and collapse, and British statesmen have insisted that their new “democratic socialism” will work beautifully if only mercurial America doesn’t crack again and drag the rest of the world down with it. Small wonder that so many people now ask each other whether the recent slump in the stock market does not at last foreshadow this long-predicted business setback.

The question is not easy to answer, because the American economy has now become the football of political policies and counterpolicies that are not inherent in it but essentially external. These conflicting political policies are on the one hand those tending to create inflation, and on the other those tending to bring about disruption.

The inflationary forces are obvious, and until now have been controlling. Their primary causes are government deficit financing and other political policies that increase the volume of money and credit. Past inflationary forces are roughly measured by the increase in the national debt to $265,000,000,000 and of money and credit to more than three times the prewar volume. Potential future inflation is indicated by a still unbalanced budget in prospect (in spite of a balance in the first quarter of the current fiscal year), and by a policy of artificially low interest rates that promotes further increases in credit and further monetization of the public debt. As long as inflation raises prices faster than costs it stimulates business expansion, new ventures, and employment.

Against this, however, are equally powerful forces of disruption. The chief of them is price control, administered in a spirit hostile to profits and business. This has distorted relationships among profit margins and disrupted and unbalanced production. Builders find themselves with bricks and no doors, glass, or bathtubs. Automobiles wait on assembly lines for bumpers or batteries.

The profit squeeze from the top meets another from the bottom. Endless strikes, interrupting output, are followed by endless wage increases. To encourage or compel such wage increases the Administration ignores elementary property rights, seizes coal mines, and signs wage-boosting contracts itself. These wage increases must ultimately either raise costs to the point where many firms can no longer operate, or force up prices to levels that will cut off buying. In either case they will slow down production and force unemployment. Add to all this a basic hostility to business on the part of Washington agencies which is reflected in countless harassments.

Which of these two sets of forces will dominate the next six to twelve months—the inflationary or the depressive? That is impossible to say until we know the complexion of the next Congress and the main decisions that key political figures—President Truman, Secretaries Snyder, Byrnes, and Anderson, Paul Porter, Wilson Wyatt, Marriner Eccles, and members of the PDB, ICC, OWMR, NLRB and CPA—are going to make. The decisions of such men are incomparably more important today in determining the future course of business than the merely derivative decisions made by private businessmen.

One thing we could not have simultaneously is both “inflation” and “deflation,” for we could not have simultaneously both an expansion and contraction of the money supply. But we could have a frustrated inflation. We could have simultaneously, as experience in Europe has already proved, both inflation and industrial disruption, inflation and unemployment, inflation and stagnation.

The real danger we face in the next six to twelve months is that if the present combination of political policies brings about this result, Administration officials, instead of removing the throttling controls that cause it, may decide that the real trouble has been insufficient inflation, and may embark upon the disastrous policy of further increasing and debasing the money and credit supply. Our greatest enemy today, in short, is the economic illiteracy and confusion on the part of those who insist on “planning,” “stabilizing,” and straitjacketing the economy and who have the political power to do it.

Price-Fixing Brings Bottlenecks

October 21, 1946

The meat shortage may serve as an illustration of the way in which price fixing brings about scarcity in general. As a result of ceilings, cattle raisers found it more profitable to fatten their cattle on the lots than to send them to market. This led to a whole series of other shortages. A soap crisis is being created because soap is mainly made from tallow and tallow comes from steers. Synthetic rubber and hence tire production are threatened in turn by the shortage of soap. A meat shortage also means a hide, leather, and shoe shortage. A bread shortage may come from a scarcity of lard needed in baking, for lard comes from hogs.

Production is held back everywhere by missing vital parts: automobile makers wait for sheet steel and radio makers for cabinets. The National Association of Home Builders, reviewing the veterans’ housing program, has pointed out that “the success of the veterans’ program will be measured not by the supply of the most available building material but by the supply of the least available building material.” It points, as one illustration, to the critical shortage of nails, “fast approaching a national scandal.” But as the remedy it proposes, not the termination of price fixing, but “incentive pricing” for nails.

Such a proposal indicates that even the chief victims of price fixing still fail to recognize that the problems which confront price fixers are inherently insoluble. If there is to be incentive pricing for nail manufacturers, why not incentive pricing for everyone? How can the government allow a higher rate of profit for nail makers as compared with brick makers, for example, without laying itself open to charges of favoritism?

How can it decide, in fact, just what rate of profit on nails as compared with bricks is necessary to bring forth just the right amount of nails as compared with the right amount of bricks? Or just the right amount of nails and bricks compared with the right amount of each of tens of thousands of other commodities? The output of every part must be synchronized with that of scores or hundreds of others if there are not to be bottlenecks which slow down whole industries.

The persistent belief among many businessmen that price fixing would be all right if it were “fairly administered”—if it allowed “cost of production plus a reasonable profit”—completely overlooks this problem. A uniform percentage profit for everyone (assuming that price fixing could achieve it) would give no more incentive for producing an article in critically short supply than one in relative excess.

The most brilliant of bureaucrats could not solve through price fixing the problem of balancing and synchronizing the production of thousands of different commodities in relation to each other. Yet this problem is solved quasi-automatically through the mechanism of free markets. When a given article is scarce in relation to demand its price immediately rises; the profit margin in making that article becomes greater than for making articles in ampler supply; manufacturers expand its output and new firms take up its production until the shortage is relieved and the price and profit margin once more fall to an equilibrium level with that in other lines. There is no delay and red tape in getting “price adjustment”; price changes occur daily and hourly the moment unfulfilled demands or increases in supply anywhere make themselves felt.

It is true that, in spite of all the complaints about specific shortages under price fixing, the figures of overall production, as compiled by the Federal Reserve Board, have been high. For July the Federal index of industrial production was 78 percent above the 1935–39 average. But before we attempt to explain this apparent paradox, serious questions must be raised concerning the accuracy of the Reserve index. Andrew Court of General Motors has pointed out that while the Reserve index showed automobile production 78 percent above the 1935–39 average in July, actual production that month was about 300,000 cars and trucks compared with an average of 335,000 for the 1935–39 period—i.e., down 10 percent instead of up 78 percent.

The Reserve index error is apparently the result of measuring production of cars and parts by the treacherous figure of man-hours worked instead of by the actual number of cars and trucks produced.

Meat and the Speed of Decontrol

October 28, 1946

President Truman took exactly the right action on meat after giving all the wrong reasons for it. His arguments on the radio were necessarily inconsistent because he was attempting to do an inconsistent thing—to make the voters angry at the Republicans for trying to do in July what he himself was at last being forced to do in October.

It was the President’s veto that brought about the summer price-control holiday he was deploring. This holiday was in fact salutary. For the first time in years it gave the American public a glimpse of the free market. In spite of the manipulation of index numbers by government agencies, the public knew that it was buying meat below the black-market prices that most buyers had previously been forced to pay. And the public was really getting meat.

Mr. Truman and his advisers now say, in fact, that it was then getting too much meat and that this is the real reason for the subsequent shortage. The figures do not support this contention. For a short six weeks meat production was up an average of only 30 percent above the corresponding period of the preceding year. But the stockmen who did rush unfattened and unfinished cattle to slaughter did so, not primarily because there was then a free market, but because they correctly feared an early reimposition of controls. The President himself conceded the truth of this when he wisely refused to declare another price-control holiday and announced instead that meat controls would be permanently lifted.

But Mr. Truman’s final wise act threw a sad light backwards on the price-control record of his Administration. He and his assistants had roundly denounced the Senate when it twice voted for termination of controls on meat. The Price Decontrol Board, had it acted with common sense and adhered strictly to the requirements of the law, would not have put meat back under control on Aug. 20. The Secretary of Agriculture had a chance to decontrol meat on Sept. 1 merely by failing to list it as “in short supply.” Production of meat was in fact then running above the prewar rate. He had a second opportunity on Oct. 1, but consistency with his September ruling forced him to pass it by.

When the Democratic Majority Leader of the House then called in alarm for a 60-day suspension of price controls on meat, the President flatly rejected the idea. Instead, Price Administrator Porter rushed to inform the country that “stabilization” was more important than steaks—in other words, that it was more important that the OPA should continue to fix ceiling prices on meat than that there should be any meat to buy. And then Mr. Truman acknowledged that, after all, it was price control that had been bringing about the shortage; and he lifted it.

A few weeks must elapse before meat on the hoof can become meat on the dinner table. Empty trade “pipelines” must be filled up; meat in storage on Oct. 1 was the lowest in 30 years. As a result of this unprecedented shortage brought about by price control, meat prices temporarily soared, but began to decline in a few days and should be back in a few months to reasonable levels.

One of the most encouraging aspects of the President’s radio talk was his clear recognition that “the lifting of controls on meat . . . cannot be treated as an isolated transaction”; that we must “speed up the removal of price controls” and wage controls, and move “toward a free economy.” It remains to be seen how seriously these words will be taken and how quickly put into effect. At the moment of writing this our whole price-control system is a mass of fantastic contradictions. The price of whisky (except in new barrels) is controlled, but the price of milk is not. Lamb prices go where the market sends them; but automobiles are held down by government edict so that the poor can buy their share of Lincolns and Cadillacs.

How can this economic nightmare be brought to an end? The way to decontrol is to decontrol. The mere announcement of speedy decontrol makes it necessary, for it tempts middlemen to hold goods off the market until prices are free. Not only should decontrol proceed as rapidly as the present messy law allows, but the President should call Congress in special session immediately after election to repeal remaining price controls on everything except rent, and to turn rent control over to the states.

Squeezing the Price Balloon

November 4, 1946

The recent crisis in meat brought out an important consequence of price control that until now has been overlooked. It was illustrated most vividly by what happened to poultry and egg prices. When beef, lamb, and pork were put back under price controls in September, an immediate result was an increased price of poultry and eggs. The price controllers, naturally, blamed the free market. But the public had the good sense to realize that when price ceilings made meat impossible to get, and the whole demand for meat was concentrated on the only available substitutes, the prices of poultry and eggs were being forced substantially above what they would have been in a free market for everything. When ceilings were taken off meat, poultry and egg prices immediately dropped. And when ceilings were removed from margarine and other fats, the price of butter immediately dropped.

These effects on particular commodities merely illustrated a broad principle. The day after the President lifted meat ceilings, a regional price administrator declared that the OPA had never governed the entire economy. American consumers, he estimated, spent a total of $250,000,000,000 a year; the OPA at its maximum had never controlled more than $100,000,000,000 of this, and after the release of meat it controlled only about $65,000,000,000 of goods.

These estimates are of doubtful accuracy, but they will do well enough to illustrate the principle. If the public buys altogether some $250,000,000,000 of goods and services of all kinds (I suppose the OPA administrator included in this total real estate, securities, professional services, and other items never brought under ceilings) while the government controls the prices of only $65,000,000,000 or even $100,000,000,000 worth, what happens to the prices of the other $150,000,000,000 worth?

To the extent that prices of controlled commodities are kept down by price-fixing, consumers will be able to get them for less. They will have just that many more dollars left over, therefore, to bid up the prices of the uncontrolled commodities. In other words, to squeeze down the prices of the controlled commodities is to force up the prices of the uncontrolled commodities.

What we have fundamentally is a certain total volume of money or money incomes bidding for a certain total volume of goods. If we increase that volume of money or money incomes without a corresponding increase in the volume of goods, the inevitable effect is to push up the prices of those goods. If we hold down the prices of part of those goods, we must either pile up a certain amount of unspent savings in the hands of the public, or we must divert part or all of that unspent amount to the uncontrolled goods. If you squeeze a toy balloon at one place, it will swell all the more at some other, because the gas pumped into it has to go somewhere. In the same way, if you prevent money from having its effect on goods at one place, it must affect goods all the more at some other. The money has to go somewhere.

This brings us to a major conclusion precisely the opposite of that usually drawn. The ultimate effect of fixing the prices of only part of the goods in an economy is not necessarily to reduce the general price level at all.

Perhaps the best solution of our immediate economic problem that is politically feasible is to decontrol everything but rents on old houses. But if we do this we must not retain rent control itself too long. For one consequence of holding down rents is merely to divert that much more purchasing power to the bidding up of other commodities or services.

Because the problem that price fixing seeks to solve cannot be solved by partial price fixing, it does not follow that it can be solved by fixing the price of everything. Such a plan could be made to work in the long run only by universal allocation and universal rationing, not merely of raw materials but of labor. That could only lead to totalitarianism. The problem can be solved only by dealing, not with the mere symptoms and consequences, but with the basic cause of inflation. That basic cause is the increased issue of money and bank credit, and the policies that encourage it.

Leonard Ayres on Business Cycles

November 11, 1946

The death of Leonard P. Ayres last week at the age of 67 left a vacant chair in American economic life that will not be easily filled. His business forecasts were better known and more heeded than those of any other individual. With a firm theoretical grasp he combined an unexcelled knowledge of living facts. He ranks high among statisticians. His writing was distinguished for its clarity and compactness, and his charts for their telling simplicity. He arrived at his results by an elegant economy of means.

The last Cleveland Trust Bulletin to come from his pen, dated Oct. 15, was typical of his best writing. Two paragraphs from it not only illustrate his forthright analysis, but throw a sharp light on the current business situation:

“It is nearly incredible that this great essential [automobile] business, with its huge backlogs of unsatisfied demands, should be losing money in this postwar period. If the automobile industry and the construction industry were prosperous, this country would be experiencing a business boom that could be of exceptional duration. As things are, both of them are far from being prosperous. Their output is low and erratic; their prices are high; and their customers are dissatisfied. They are making progress toward greater efficiency of production, but it is disappointingly slow progress. Conditions in these two industries typify those in many other industries. The companies are suffering from shortages of materials, extreme wage increases, and low per capita production by employees.

“We have great productive capacity. We have more workers employed than ever before. There is ample credit available on easy terms for almost any constructive enterprise that needs credit. We have great accumulated shortages of many kinds of goods, and large numbers of eager buyers competing for opportunities to buy the things they want. It is preposterous that under this combination of conditions the prospects for profits are so dubious that we have had a collapse of security prices. Wage costs per unit of production have advanced too rapidly, and price relationships are disorganized.”

In 1939 Ayres published a volume on “Turning Points in Business Cycles.” He found that over the previous 75 years a certain economic sequence had occurred “with almost complete regularity:” A rise in short-term interest rates had brought about a downturn in bond prices. This had been shortly followed by a downturn in stock prices. Declines in security prices had created unfavorable markets for new securities; the volume of new issues had consequently shrunk. With this decrease in the inflow of new funds into productive enterprise, a business decline had been started.

If we apply this description of the business cycle to current conditions, we find that part of this sequence has already occurred. Short-term interest rates began to stiffen perceptibly in March. In the first week of April high-grade bonds reached their peak level and then began to decline. The high point for stocks was not reached until May 29, and a violent fall has since taken place.

All this, however, does not in itself mean that a business decline is now necessarily in the offing; it may be doubted whether General Ayres himself, on this ground alone, would have predicted such a decline. For short-term interest rates today are highly artificial; their rise has been slight; they are still fantastically low; they still promote inflation. They can be held down to the present levels, in fact, only by a continued inflationary policy of keeping the money market flooded with funds. A moderate rise in short-term interest rates today need mean nothing more than the termination of dangerous artificial situations that should never have been permitted to occur.

A far more serious menace to continued prosperity has been a recent rise in wage rates without any corresponding rise in productivity. Leonard Ayres in his last Bulletin calculated that manufacturing costs per unit of production had risen by March of this year 64 percent above their 1939 level; 42 percent of this increase occurred in the preceding eleven months. Unless we can now achieve an increase in the volume of production without corresponding increases in hourly pay, this startling rise in costs may lead to a crisis.

The Consequences of Decontrol

November 18, 1946

In his sweeping decontrol order four nights after the election President Truman proved that he could recognize a mandate when he saw one. His decontrol order was not only, with the exception of one or two paragraphs, an eminent example of good sense; it was also, with this exception, an eminent example of good sportsmanship. Mr. Truman would have been more than human if he had not accompanied his decontrol order with at least a little attempt at face saving; but that little was unfortunate.

He declared that “the real basis of our difficulty is the unworkable price-control law which the Congress gave us to administer.” It is true that the price-control law was unworkable; but this was precisely because of the provisions that Mr. Truman and his administrators had themselves insisted on, and not because of the amendments that Congress had inserted over their opposition. Some of its “fair-price” amendments never got a chance to go into effect; the so-called Decontrol Board did nothing but recontrol; and it is improbable that the President could have decontrolled first meat and then practically everything else without the discretionary decontrol powers which Congress insisted on giving his administrators without his or their request. Price control had lost popular support not, as the President asserted, because the law was “inadequate,” but because it was altogether too adequate.

Nor is it true, as the President declared, that “in the fifteen months since V-J Day the stabilization program has preserved a large measure of general economic stability during a period in which explosive forces would otherwise have produced economic disaster.” It is not true, either, that the situation today is “far more favorable for the return to a free economy” than it was only four months ago, when the President insisted on retention of overall price control for an additional full year.

On the contrary, it is altogether probable that prices will be higher this winter than they would have been if price controls had been lifted on V-J Day. For the effect of peacetime price control has been to retard, unbalance, and discourage production and to produce shortages. The net effect, also, of government intervention in labor relations and wages has been to raise wage rates faster than they would otherwise have been raised and to jack up production costs.

The first result of the President’s decontrol order will be price advances in most of the products that have been controlled and sharp advances in the products that have been controlled most tightly. The most spectacular advances will make the headlines, thus giving a distorted view of the overall picture. The advances will be blamed on decontrol. But the real reason, as in meat, will be the shortages brought about largely by control itself, supplemented by the wild swings inevitable when both buyers and sellers are first groping for the real equilibrium price.

While advances are still going on in some commodities, declines will be taking place in others, for the very reason that all commodities will be competing freely for the consumer’s dollar, so that if more of it has to go for one commodity, less of it will be left for others. It may be doubted whether the general price level in the next few months will rise more than another 5 or 10 percent. And any general rise in the price level will be basically due, not to the absence of price controls, but to the increase in money and bank credit in recent years brought about by the war and by governmental policy. With the false remedy of price control out of the way, public attention will at last be able to concentrate on the real remedy for inflation, which is to halt the increase in the money supply.

In retaining ceilings on rents, the President doubtless followed the only course that seemed to him at the moment politically possible. But it is unfortunate that he did not at least remove rent ceilings at once on all new and remodeled housing; for such rent ceilings merely prevent a great deal of such housing from being built, and so themselves prolong the housing crisis. The next step should be to remove rent ceilings from all houses or apartments voluntarily vacated by the former tenants. The third step should be to allow at least some moderate maximum increase on new leases for old tenants.

Repeal Anti-Employer Legislation

November 26, 1946

If we are not to have a further great wave of strikes, if labor costs of production are not to be forced up to levels where it at last becomes impossible for industry to operate, there must be basic changes both in the text and administration of our labor laws. If the election of a Republican Congress was a mandate for anything, it was a mandate for this.

Central to any improvement in labor relations is revision of the Wagner Act. Any discussion which ignores the need for this must be set aside as unrealistic. The Wagner Act overshadows all labor relations and all wage negotiations, even where there is no direct appeal to it. It would not be difficult to suggest a dozen major amendments to the act, all of which would improve it. But would they improve it enough to make it do what it ironically professes to do—“diminish the causes of labor disputes”? The real question is not so much what amendments should be added to the Wagner Act as what part of it, if any, it would be wise to retain.

Let us take in illustration Senator Ball’s proposal to strip from the Wagner Act its legalization of the closed shop, and to write into the law, instead, a provision that membership in a labor union must not be a condition of employment. Such a change would remove an obvious self-contradiction in the act. Its supposed central principle makes it an unfair labor practice for an employer “by discrimination in regard to hire or tenure...or condition of employment to encourage or discourage membership in any labor organization.”

If this principle is to be retained in law, then it should be retained in just this two-sided form. But this would make it logically compulsory to outlaw the closed shop, maintenance-of-membership clauses, the check-off, or any other device which makes employment contingent on union membership or compels the individual worker to join or stay in a union.

Could a two-sided law of this sort be enforced? If not, should the present purely one-sided act be retained? That act forces the employer (though not the union) to “bargain collectively.” No one has yet succeeded in saying precisely what this means. It has been interpreted as meaning that the employer cannot break off negotiations even when he is slandered and abused by union representatives. It has even been interpreted as compelling the employer to make some kind of counteroffer, “to meet a union half-way,” no matter how unreasonable its demands or what he can afford.

The employer is not allowed to “dominate or interfere with” any union or to “restrain or coerce” any employee in the exercise of union rights. These fair-seeming provisions have in practice been used to deprive employers of ordinary freedom of speech. J. Warren Madden, then chairman of the National Labor Relations Board, told a Senate committee in April 1939 that an employer who called a union leader a Communist might be held guilty of coercion under the Wagner Act even if his statement were completely true.

By the mere way in which it defines an “employee,” the Wagner Act makes it illegal for an employer to discharge a striker and hire another permanent worker to take his place. Add to all this the failure of local governments to protect against violence and intimidation the workers who wish during a strike to continue peacefully at their jobs. Add the practice in some states of paying unemployment insurance to strikers. By government policy, all the natural risks have been taken out of striking. It has been made all but impossible for a union to lose a strike. Should we be surprised that unions now keep raising their demands and threatening new strikes?

A commonly proposed remedy is to leave all present restraints on employers but to “balance” them by corresponding restraints on labor. It may be doubted whether such restraints would be enforceable. What we need at bottom is not “anti-labor legislation” but the repeal of anti-employer legislation. People are not born employers; they become employers by choice, and they can quit by choice if too much discouraged. Unless we restore to the employer the freedom to select his own employees, the freedom to hire and discharge solely on the basis of what is good for the business, we cannot maintain discipline, efficiency, or production—which means that we cannot maintain living standards.

How to Taper Off Rent Control

December 2, 1946

Now that ceilings have been removed on everything else, it is clear that rent controls ought to be whittled down. With the ceilings removed on wages and materials, on everything that goes into a house, it becomes administratively and economically absurd to maintain price ceilings on new houses. That is the best of all ways for assuring that they will not be built. For the same reason, it is obvious that rent ceilings of any kind should be removed on new housing. The only way to solve the housing problem, the only way to bring down rents in the long run, is to increase the supply of housing. The quickest way to increase the supply of housing is to provide the maximum incentives for its production. It is preposterous that the only major thing on which we should continue to squeeze down the profit margin is precisely the thing of which we are most eager to increase the supply.

It will be argued by many, however, that price and rent incentives are needed only to maximize the production of new housing, and that to take the ceilings off rents of existing houses would merely increase the living costs of tenants, and put windfall profits into the hands of landlords, without doing anything to increase the housing supply. But this argument has several flaws. It is not so easy to differentiate between “old” and “new” housing. Housing is not merely to be measured by square footage of floor space; it must also be measured qualitatively. Housing is continuously being repaired, improved, modernized; remodeled, extended, transformed from single homes to small apartments, from residential to business use, and vice versa. Whether or not any of these changes are made in rented property depends upon the absolute or relative profit incentives involved. When rent control removes these incentives, property is simply allowed to deteriorate.

The country’s available housing must at any time be rationed among its families. Under normal conditions it is rationed, like every other commodity, through the price or rent system through the competitive bids and offers of buyers and sellers, of tenants and landlords. Under rent control it is rationed by chance, luck, and favoritism. Those who happened to be in the housing they wanted to be in at the end of the war found themselves comfortably frozen in by OPA regulations. Veterans, war workers, and others who had given up their housing during the war found themselves frozen out by the OPA regulations and unable to compete on an equal bidding basis against existing floor-space holders.

In August, according to the Department of Commerce, the nation’s income payments were 152.3 percent greater than in 1935 to 1939. In the same month, however, according to the Bureau of Labor Statistics, average rents had gone up only 8.7 percent. This means that the overwhelming majority of people have been called upon to pay a much smaller percentage of their income for rent than before the war. The result has been that residential floor space has been used more wastefully. An average of 3.1 persons, according to a census report, occupied the same number of rooms in 1945 as 3.3 had occupied in 1940. This is the real secret of the housing “shortage.” It is caused primarily by rent control itself. Yet this shortage has become in turn the basis for insisting that rent control must be continued.

One final argument is that the removal of rent control would cause inflation, and raise the cost of living. Inflation, however, is caused by the overissuance of money and bank credit. It is true that the removal of rent ceilings would be followed by an increase in rents, but this would not necessarily lead, in the long run, to an increase in living costs. For with more of consumers’ incomes being paid for rent, just that much less would be left to bid up the prices of everything else. It is precisely because rents have been kept down so drastically that, with existing money incomes, other prices have been bid up as high as they have.

Popular adherence to artificially low rents is still so powerful that it would be doubtless politically unrealistic to recommend immediately the entire elimination of rent controls. A possible compromise might involve (1) an immediate removal of all price and rent controls on new houses; (2) a maximum permissible increase in rents for existing tenants of 15 percent in the next calendar year, with complete decontrol thereafter.

What’s Wrong with Our Labor Policy

December 9, 1946

The coal strike has vividly revealed what is wrong with our present labor laws and previous labor policies. This, unfortunately, is no assurance that right policies will now be applied. A crisis may force men to revise their ideas; but no crisis, however great, can force them to think clearly. So the coal strike has revived all the old schemes for compulsory arbitration and for making strikes on public utilities illegal.

But if the coal strike has proved anything at all it is that these schemes simply do not work. The Smith-Connally Act, under which the government has been trying to combat John L. Lewis, is precisely such a scheme. It makes “wartime” strikes against the government illegal. But the first serious attempt to enforce this provision of it has proved futile. The government is afraid of making a martyr of Lewis. And it has no assurance that jailing him will stop the strike.

Compulsory arbitration of labor disputes, in fact if not in name, was tried during the war. It worked only when it gave the unions substantially what they wanted. When it did not, Lewis and other union leaders simply ignored or defied the War Labor Board, and the government was too frightened to do anything about it. The Railway Labor Act, in fact if not in name, imposes compulsory arbitration, certainly so far as the employer is concerned; but whenever one of the railway emergency boards has handed down a decision that the unions did not like they have defied it, and the government has been obliged to change its decision.

The assumption behind all the proposals for government “fact-finding” or compulsory arbitration of labor disputes is that the government board or “court” will know what is the “fair” or “right” wage and will settle the strike on that basis. This overlooks all the realities. The truth is that when a governmental board decides such questions it almost invariably, and sometimes grossly, favors the union—not merely because this seems the best political course, but because this is the way to make the decision stick. For the board is usually trying to avert a threatened strike or settle an existing one. It is therefore much more concerned to satisfy the union than the employer. And the very fact that government intervention of this sort exists or can be appealed to destroys any real collective bargaining. Neither side will make a settlement if it thinks that a government board will award it something better.

Finally, even if the government board or “court” were courageously impartial, and much better informed on economic affairs than politically appointed boards are in the habit of being, it would be no more capable of fixing a “right” wage for each class of worker and occupation than of fixing a right price for each article. Compulsory arbitration of labor disputes means, in effect, government wage fixing. Government wage fixing would soon politically necessitate a return to government price fixing. Such a scheme, in short, would drive us back toward a controlled if not a totalitarian economy.

Only when such remedies are recognized as false are we likely to adopt the real remedy. This is simply to repeal the discriminatory curbs on employers and the discriminatory immunities to unions that we have enacted in the last fifteen years, and to subject both employers and unions impartially to the common-law provisions against force, fraud, intimidation, and violence. We may add whatever machinery of mediation or voluntary arbitration we think likely to be helpful; but the solution lies in restoring common rights and duties.

It is true that this will not prevent all strikes; nor will any remedy under a free system. But it would mean a tremendous improvement over the present legal situation, which, by making it all but impossible for a union to lose a strike, has put enormous irresponsible power into the hands of labor leaders. The Lewis coal strikes of 1927 and 1932, before we had a Wagner Act, collapsed completely. His union was shattered and prostrate until it was put on its feet first by the NRA, and then by the Wagner Act. What the Federal government needs to do today is not to prosecute Lewis in the courts, but simply to stop building him up. He seems very tall because he is standing on the Wagner stilts. Kick these out from under him, and he will shrink to normal size.

Inviolate Rights—For One Side

December 16, 1946

Federal Judge Walter J. La Buy has decided that the Lea Act, or “anti-Petrillo law,” is unconstitutional. The Lea Act makes it unlawful to use “force, violence, intimidation, or duress” to “coerce, compel, or constrain” a broadcasting company to employ any “person or persons in excess of the number of employees needed...to perform actual services.” Judge La Buy proceeds to argue that “the number of employees needed” cannot be objectively established, and that the law would therefore make the guilt or innocence of the union wholly dependent upon the judgment or “whim” of the employer.

Such a conclusion ignores the fact that it is not the number of employees that matters, or even the objective necessity for their services. It is the use of “force, violence, and intimidation” to impose upon employers more workers than they want. Has it become “unconstitutional” to forbid unions to use force, violence, and intimidation” for this purpose—or any other?

Candor must concede that the Lea Act is inherently foolish. Judge La Buy correctly argues that under the Lea Act “broadcasting station employees are singled out and held to a more rigid rule than any other employees.” The Lea Act implies that it is all right for telephone unions, or railway unions, or barber shop unions, to force employers to hire more men than they need. It implies, in fact, that it is all right for a union to force any employer whatever to do anything else it can think of.

At least one ground on which Judge La Buy holds the Lea Act to be unconstitutional that it makes acts unlawful “when applied to these [broadcasting] employees and no others”—could have been avoided if the Lea Act had simply made it unlawful for unions to try to secure any end at all by “force, violence, intimidation, or duress.” But such a law, stating a rule that the common law has always been supposed to apply to everyone anyway, ought not to be needed at all.

Judge La Buy’s decision is a fresh reminder of how one-sided the application of so-called constitutional guarantees has become. One ground on which he sets aside the Lea Act is this: “A statute which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application violates the first essential of due process of law.” Yet under the Wagner Act it is an unfair labor practice for an employer “to refuse to bargain collectively.” And nobody has yet succeeded in defining precisely what this means.

In 1940, a House committee sought to reduce the vagueness of this requirement by proposing that it should not be construed as “compelling or coercing either party to reach an agreement or to submit counterproposals.” The American Federation of Labor succeeded in having this proposed definition withdrawn.

Judge La Buy, again, argues that “peaceful picketing” is “a form of speech and discussion that cannot under the First or Fourteenth Amendments be curtailed by any legislative enactment.” Let an employer denounce a union, however, in the unbridled terms in which the union denounces him, or let him advise his employees not to join that union, and he will soon find that his own freedom of speech is not beyond dispute.

“Under the Thirteenth Amendment,” continues Judge La Buy, defending strikes, “the right of any worker to leave his employment at will, or for no reason at all, is protected and that right is inviolate.” But let an employer try to discontinue employing somebody at will, or for no reason at all, and he will soon find that his right to do this is anything but inviolate.

It is not because the coal unions enjoy the unrestricted right to strike that John L. Lewis did and can at any time bring the nation’s coal industry to a halt. It is because the coal operators, under the Wagner Act, have lost the right to negotiate with anyone else but Mr. Lewis. It is because they have lost the right to drop strikers and hire other permanent workers to take their place. The Lewis union, because of ill-advised strikes beginning in 1927, had fallen almost completely apart in 1932. It was Section 7a of the NRA in 1933, supplanted by the Wagner Act in 1935, that put the union together again, and at last put it in undisputed control of the entire coal industry.

Twenty Labor-Act Revisions

December 20, 1946

John L. Lewis’s cancellation of the coal strike was not a surrender but a strategic postponement. In ordering the miners back to work “until 12 o’clock midnight, March 31, 1947,” he was in effect issuing a new strike call for that time.

There is no longer any excuse for regarding Mr. Lewis as an isolated accident. His solid support by both AFL and CIO leaders makes him a fitting symbol of the real labor problem today. That problem is not “Labor versus Capital” but the irresponsible and unbridled power of labor-union bosses.

The only proper way in which Lewis and other union bosses can be curbed is by a thorough revision of existing labor law, particularly the Wagner Act. Short of repeal, here are the amendments necessary:

1—Remove the joker which deprives management of the power to dismiss strikers and offer permanent employment to other workers. This more than any single provision has encouraged strikes by making it impossible for employers to take the normal means to counteract them.

2—Halt the NLRB’s drive to unionize foremen and other representatives of management.

3—Forbid unionists as well as employers to “interfere with, restrain, or coerce” workers in the exercise of their right to join or not to join unions.

4—Restore employers’ freedom of speech about unions wherever it does not involve actual threats.

5—As long as the law forbids employer “discrimination. . .to encourage or discourage membership in any labor organization,” it must in consistency also forbid the closed shop, “maintenance of membership,” and the checkoff.

6—Define “collective bargaining” so that it cannot be construed to require either party to meet a demand of the other in whole or in part.

7—Require unions as well as employers to bargain under this clarified definition.

8—Permit a majority union to bargain for its own members, but not “exclusively” for all workers unless the employer consents.

9—Remove the NLRB power to name any bargaining unit larger than the workers for a single firm. This would not illegalize nationwide unions, but simply withdraw Wagner Act support from them.

10—Restrict the NLRB’s power to throw off the ballot whatever it chooses to call a “company union.” Allow employees “representatives of their own choosing.”

11—Permit employers as well as unions to ask for bargaining elections.

12—Provide that any union claiming NLRB protection must come with clean hands; must use legal methods; must not be run by racketeers; must elect officers at reasonable intervals, publish accounts, have reasonable initiation fees and dues, and must not exclude new members unless they cannot meet fair skill standards.

13—Confine Federal intervention to workers clearly in interstate commerce.

14—Delete the clause that in NLRB proceedings “the rules of evidence prevailing in courts of law shall not be controlling.”

15—Put the burden of proof on the complainant.

16—Allow appeals from NLRB decisions to the courts.

17—Make factual findings of the NLRB no longer “conclusive” unless they are clearly sustained by the evidence.

18—Punish unfair labor practices by reasonable indemnification of the aggrieved employee but not by his compulsory reinstatement.

19—Repeal or revise the Norris-LaGuardia Act to make unions once more responsible for acts of their agents and to permit courts to halt union intimidation or violence.

20—Allow antitrust acts to apply against clearly antisocial practices of union monopolies.

Will all this mean excessive union regulation, a violation of labor’s basic rights? If so, union leaders are free to choose between two-sided law of this kind and terminating the present one-sided coercions against employers. It should be pointed out, however, that a revised labor law of this kind would do nothing to illegalize strikes. It would even continue to leave some unions free to act antisocially. But it would at least no longer fasten such unions on employers by law.

The New CIO Wage Drive

December 30, 1946

Preparing to soften up industry for its new wage drive, the CIO leadership has laid down a greater barrage than ever of statistics, theories, and fulminations. What stands out in the “study” made by Robert R. Nathan for the CIO is the double standard used in making wage and price comparisons.

Average hourly earnings of manufacturing labor in October of this year reached $1.13. This is the highest hourly wage for any month in American or world history. Average weekly earnings in October, at $45.83, though higher than those for any month since V-J Day, were, however, $1.50 less than those of January 1945. The Nathan report makes all its weekly wage comparisons with this January 1945 figure. It does not trouble to remind the reader that this was the absolute wartime weekly wage peak. Nor does it remind him that manufacturing labor worked an average of five hours more a week in January of 1945 than it did this October. Is it consistent to ask for higher pay for a longer week while rejecting lower pay for a shorter week? Mr. Nathan himself admits that hourly labor costs, even with considerably less overtime, were 8.6 cents higher in October this year than in January 1945.

When Mr. Nathan is discussing corporation profits, however, 1945 is promptly abandoned as the basis for comparison. That basis then becomes 1936 to 1939. In taking these four years as a norm, Mr. Nathan neglects to point out that nearly half of all corporations had no profits whatever to report then, and that there was an average of 8,000,000 unemployed throughout the period. Is that the sort of era the CIO now wishes to restore?

Incidentally, if that period were also taken for measuring wages, Mr. Nathan would have to point out that weekly money wages have since doubled. After full allowance for the increased cost of living, “real” weekly wages are still 33 percent higher than 1936 to 1939 levels.

If Mr. Nathan had written down corporation earnings, as he does wages, to their comparative purchasing power, he would have had to make drastic reductions in his calculated percentages of increase. But he does not even compare money corporation earnings in 1936 to 1939 with actual corporation earnings today. He compares them with his own very high forecast of what these earnings are going to be. His guess may possibly be right; but he has hitherto not done well as a prophet. It was he who was responsible for the official OWMR forecast in October of 1945 that unemployment would rise to 8,000,000 in the spring of this year.

Suppose, however, that the profit forecasts of Mr. Nathan and the CIO leaders prove to be correct. How do they decide what profits are “enough” and what are “too much”? The unprecedented wages of American workers have been made possible by our national accumulation of capital and our willingness to risk it in enterprises that give jobs. Capital always runs the risk not only of losing its return, but of being lost itself.

Does the CIO know exactly how great a return is necessary not only to permit capital savings, but to induce investors to risk them in creating jobs? Profits as a percentage of the national income are today even—if we accept Mr. Nathan’s high guesses—actually below the level normally attained in prewar years of reasonably good employment. Corporate profits are normally about 9 or 10 percent of the national income. Would that be too high a price to pay for full employment and the highest general living standard in the world?

Mr. Nathan and the CIO leadership look at wage rates only from one side—as the basis of labor’s purchasing power. They refuse to look at them from the other side—as management’s costs of production. They know that goods priced too high must mean a reduction in sales. They try to ignore or deny what is equally true—that labor priced too high must mean a reduction in employment. When wage rates force up production costs to a point where business cannot operate, or force up prices to a point where consumers can not or will not buy goods, neither purchasing power nor production is increased. Both, on the contrary, are destroyed.

That a new wave of wage increases will force this result is the real danger the country faces today. It is precisely the opposite of the danger that Mr. Nathan and the CIO leadership now profess to fear.