21. 1966

1966

Manipulating Money

January 3, 1966

The action of the Federal Reserve Board in raising the discount rate from 4 to 4½ percent on Dec. 5 touched off a string of controversies. Let us look at three of the main questions it raised.

1—Was the Fed justified in raising the money rate?

Yes. Failure to act, or even further delay, would have touched off a dangerous inflation. The question may be raised, in fact, whether the action went far enough. It was accompanied by official assurances of “continued provision of additional reserves to the banking system, in amounts sufficient to meet seasonal pressures as well as the credit needs of an expanding economy.” How will this be translated into action? If the Fed continues to expand the money supply as rapidly as in the recent past, it can nullify its discount-rate increase.

2—Should the Federal Reserve Board be independent, or should it be forced to “coordinate” its money and credit policies with those desired by the Administration in power?

Clearly the Reserve Board should be independent. The government in office should not have the power to dictate or overrule its decisions. This was the express intention of Congress in setting up the Reserve System. This is precisely why the seven governors of that system are appointed for overlapping terms of fourteen years each. Without this independence the interest rate, and money and credit, would become the direct playthings of politics. For the politicians in power not only want perpetual prosperity, full employment and “economic growth,” but they are convinced that these can only be brought about by continuous cheap money and currency expansion—in other words, by chronic inflation.

During and after World War II, when the Treasury was allowed to dictate, it forced the Fed to create billions of new dollars to buy its bonds. Other illustrations were seen in recent weeks when the inflationists in Congress “investigated” the Reserve Board for raising the discount rate, when the President “regretted” its decision, and when the Secretary of the Treasury voiced the extraordinary opinion that higher interest rates here would probably do nothing to stem the flow of dollars abroad (a chief reason why it was done), but would simply lead Europe and Japan to push their own interest rates even higher. “Long before we could level rates here and abroad through this process,” the Secretary asserted, “we would drive this country into a recession.” His own theory seems to be that interest rates are not determined by market conditions but solely by government money managers; and that foreign governments have a suicidal desire to push up interest rates at home to recession-creating levels.

3—Should governments be in the business of fixing interest rates and manipulating the money supply?

This is the first question that ought to be raised rather than the last. If the Fed is forced to “coordinate” its policies with those of the Administration in power the outcome is almost certain to be chronic inflation. But the dilemma is that if the Fed tries to act independently the result may be dangerous discoordination. The Fed cannot put its foot on the brake while the Treasury puts its on the gas. If the Treasury runs a chronic deficit it leaves the Fed no choice but to buy and monetize government securities.

When government officials are in the business of manipulating interest rates and the supply of money, everyone has a different opinion of what they ought to do. The Fed governors cannot agree even among themselves; their vote on the discount-rate increase was 4 to 3. A thousand “monetary economists” voice a thousand different opinions as to the exact “timing” and “policy mix” that are called for—what interest rate, what size budget deficit, what open-market operations—and when. To apply the proper mix and timing all we have to be sure of is the future.

But none of these insoluble problems arises if we stop assuming that it is the function of government to fix interest rates and to manipulate the money supply. Its function and duty are to maintain the integrity of the currency unit at all times (by, say, keeping it always convertible into a fixed amount of gold). It should leave interest rates to the market.

LBJ’S Budget Dilemma

January 17, 1966

For the last five fiscal years, the government has been run at a continuous deficit. Spending has been increased year by year. In the current fiscal year it is expected to exceed $105 billion, some $24 billion more than in fiscal 1961. In addition, substantial tax cuts have been enacted. The result has been an annual deficit averaging more than $6 billion.

This fiscal record has been accompanied by five years of uninterrupted boom. And the boom, following the tenets of the “new economics,” has been attributed to the fiscal policy.

But now Mr. Johnson finds himself confronted with an embarrassing dilemma. The cost of the war in Vietnam is mounting ominously. This comes on top of the scores of Great Society programs rushed through Congress last year. These alone, if uncurbed, could call for $10 billion more spending in the next fiscal year than in the current one. Even in the current fiscal year the deficit is expected to reach $8 billion. With the economy already overheating, with labor shortages in many lines, with consumers’ prices every month going to a new high record, how big a deficit can be tolerated in the next fiscal year, without letting loose a serious inflation?

For in a situation like the present one even orthodox Keynesianism prescribes that “expansionary” policies should be terminated, if not thrown into reverse. This means not only that the recent $6 billion average annual deficit must not be allowed to grow, but should be completely wiped out.

UNPALATABLE COURSE

But politically such a course would be not only unpalatable but almost unthinkable. If the Great Society expenditures are not forthcoming or are drastically curtailed, there will be a deafening outcry from the favored groups to which they have been promised. The political loss to the Johnson Administration will be far greater than if the subsidies had never been proposed. Should taxes be raised, then—say by canceling the tax cuts made in the last two years? This would be politically even more repugnant. As the tax cuts were proportionately greatest on the lower incomes, the argument would be made that the little fellows were the biggest victims of the tax restoration. Besides, the public was told that a tax cut is the way to increase revenues. Can it now be persuaded that a substantial tax-rate boost will really bring in the needed added revenue?

NEVER TIME TO BALANCE

The present dilemma is the inevitable product of past fiscal philosophy and practice. In the 1930s it began to be said that those who asked for an annually balanced budget were ridiculous “puritans” preaching an outmoded orthodoxy. The new slogan was a “compensated economy.” The budget was to be balanced only over the “business cycle.” There were to be deficits in all the bad years and balanced budgets or surpluses only in the good years. But it soon turned out that hardly any year was considered good enough in which to risk even a balanced budget, let alone to achieve a compensating surplus. To plan for a substantial surplus was considered fiscal folly. Even to balance the budget was to invite a dreaded “fiscal drag.” So the only answer left was continual deficits.

If this doctrine was not invented by the politicians, it exactly suited their needs. They adopted it with alacrity. That is mainly why we have had 30 deficits in the last 36 years. Nothing is more popular than voting big handouts from the public till to innumerable pressure groups. Nothing is more unpopular than raising taxes to pay for them. If Congress (like some of our state legislatures) were obliged to accompany every proposed new appropriation with higher taxes to pay for it, our Federal nondefense expenditures today might not be half as large as they are.

Nothing breeds fiscal irresponsibility faster than cutting the connection between expenditures and taxes. There is no real watchfulness over increased expenditures when nobody is being asked to pay for them, when they are going to be paid for by “the other fellow” in the sweet by-and-by.

The policies promoted by the “new economics” are not only unsound in all their economic assumptions; they are politically demoralizing. We shall soon learn whether they are also politically irreversible.

The Right to Replace

January 31, 1966

The New York transit strike was handled with incredible ineptitude; but the Transit Authority and the new mayor were not solely to blame. They operated in an ideological climate and in a legal framework that made sensible action difficult.

If the strike had occurred in a different atmosphere (like that, say, in 1919 when Calvin Coolidge broke the Boston police strike) we can imagine a vastly different official attitude. The city authorities would have announced at the very beginning their determination to keep the buses and trains running. They would have immediately hired drivers for the buses and motormen for the trains, offered them permanent employment and given them police (or even National Guard) protection. Strikers would have been considered as having quit their jobs, and would have had to apply individually for reinstatement.

If such an announcement had been made before the strike deadline, it is unlikely that the strike would have been called. Even if it had been, it is probable that the city would have had buses running the first day and some trains within two or three days. Either the strike would have collapsed or the union would have quickly accepted a much more reasonable settlement than it did.

FEAR OF VIOLENCE

Instead, a disastrous strike was allowed to paralyze transportation for twelve days, and to inflict hardship and suffering, and losses estimated at $1 billion, most of them irrecoverable, on the people of New York. In the end, the strikers were handsomely rewarded for their callousness and defiance of law by the most extravagant and costly wage increase in the city’s transit history—an increase that went far beyond what they would have got if they had not struck. And what is most amazing is that the obvious course of keeping at least the buses running never publicly occurred to the mayor or the Transit Authority.

The chief reason why this straightforward course was not taken was never mentioned. The city authorities feared vandalism and violence on the part of the strikers. For the strikers set up picket lines, the very purpose of which was to prevent anybody else from taking the jobs that they themselves had vacated. Their right to do this was not questioned.

It was not always so. In earlier days a realistic judge would decide that picketing in numbers, so far from being peaceful exercise of free speech, “tends, and is designed by physical intimidation, to deter other men from seeking employment in the places vacated by the strikers. It tends and is designed to drive business away from the boycotted place, not by the legitimate methods of persuasion, but the illegitimate means of physical intimidation and fear.” (Judge Henshaw in 1909.)

FREED TO INTIMIDATE

And only last June, Enoch Powell, one of the leaders of the British Conservative Party, declared: “[British] law permits things to be done in furtherance of a trade dispute which would be criminal or would give rise to a right to damages if they were done in any other circumstances. . . . Private coercion of the trade union rests [on] the freedom to intimidate—technically this is called peaceful picketing, but it is what you and I call intimidation—the freedom to damnify another person with impunity; and the immunity of trade unions from action of tort—all provided the acts in question are in ‘contemplation or furtherance of a trade dispute’.”

The American legal situation is in some respects even worse. Yet one-sided laws, and the fear of violence, are not the only reasons why steel mills no longer attempt to keep operating during a strike, why newspapers don’t dare to publish and why New York City did not even try to keep its buses and subways running. A confused public opinion must also take part of the blame. Union propaganda has succeeded in making “strikebreaking” the most wicked crime on the calendar. But if no strike can ever be broken, the strikers must always win, no matter how extravagant their final demands, and more and more strikes, with consequent economic paralysis, must be encouraged and rewarded.

If the New York transit strike at last causes a realistic reappraisal of law and opinion on picketing, it may have been worth its cost.

Irresponsible Budget

February 14, 1966

If we accept the budget on its face, it is better than the country was led to fear. Administrative spending is put at $112.8 billion, instead of $115 billion, and the budget deficit is put at $1.8 billion, which would be the smallest in seven years. Yet even $112.8 billion spending would be the highest for any year in our history—$6.4 billion more than in the current fiscal year, and $46.6 billion more than ten years ago. The deficit would be the 31st in the last 37 years.

In the cash budget, which includes social security, and more fully reflects the economic realities, total spending for fiscal 1967 is put at $145 billion. This is $10 billion more than in the current year and $72.5 billion more than ten years ago.

Many dubious accounting gimmicks have been used to keep down the expenditure figures, to put up the revenue figures and to get a low deficit estimate. For example, the government proposes to sell private investors $4.7 billion of Federal financial assets. But the expected proceeds from these sales, instead of counting as revenues, are counted as a reduction of expenditures. Scores of items scattered through every crevice of the new budget launch or continue programs that are sure to grow substantially later.

HOW RELIABLE?

The government counts on a huge $11 billion increase in revenues. But only $1.2 billion of this is to come from “temporarily rescinding” previous excise-tax cuts. About $3.7 billion is to come from advancing corporate and individual income-tax payments. These are nonrecurring items. Again, the Treasury counts on $1.6 billion “receipts” by a shift to silverless coins. The rest of the expected $11 billion increase in revenues represents optimism about “economic growth.”

Suppose now, instead of accepting the spending and revenue figures on their face, we ask how reliable the estimates are. If we judge by the past, the answer is not reassuring. Last year Mr. Johnson estimated fiscal 1966 spending at $99.7 billion; it is now placed at $106.4—$6.7 billion higher. A similar error for 1967 would mean administrative spending of $119.5 billion and a deficit of $8.5 billion, even if present accounting gimmicks were retained.

Suppose we go back to Mr. Johnson’s predecessors. In January 1962 President Kennedy said: “I am submitting for fiscal 1963 a balanced Federal budget.” But there turned out to be a deficit of $6.3 billion. In January 1961 President Kennedy submitted expenditures which he promised “will not of and by themselves unbalance the earlier budget.” But the deficit for 1962 was $6.4 billion. In fact, with few exceptions the budget estimates of the last 37 years have either grossly underestimated deficits or promised surpluses that never materialized.

NON-DEFENSE BILLIONS

The truth is that we have never had a responsible budget—in the sense, say, that Great Britain has a responsible budget: one that, once adopted, both the legislature and the executive must scrupulously adhere to. What we have is a set of Presidential guesses not binding on anybody. But the budget just submitted by Mr. Johnson is irresponsible even in its proposals. At a time when he himself declares inflation to be our most serious economic danger, and when he is forced, according to his own estimate, to increase national defense expenditures in 1967 by $10.3 billion because of Vietnam, it is irresponsible to propose also an increase in welfare programs by $3.3 billion. If he had refrained from this increase he would have been able to report at least an intended surplus of $1.5 billion instead of an intended deficit of $1.8 billion.

The President talks as if only unavoidable defense costs create his budget problem. But if we compare even the 1967 budget with that of ten years ago (1956), we find defense costs up only $20.5 billion while all other costs are up $52 billion.

The new budget is undoubtedly inflationary. But it would be inexcusable to increase the already excessive and growth-stunting burden of taxation on the American people on the plea that this is necessary to combat the inflation. The way to prevent further inflation is to start slashing billions of fat out of 1967’s projected non-defense spending of $83.6 billion.

Big-Brother State

February 28, 1966

The annual Economic Report of the President, a child of the Employment Act of 1946, has come to be considered a sort of official economic textbook. Yet it is primarily a political rather than an economic document. I described it here in 1952 as “political propaganda paid for by the taxpayers.”

That description would apply to most of the annual economic reports, and certainly to the latest, which reads like a campaign speech. Most of it hammers in the message that you never had it so good and implies that you owe it all to the Great Society programs. The rest of it proposes still more controls and spending programs. All of these, of course, are to be piled on top of all the welfare and subsidy programs that have grown up during the preceding 36 years. The idea that private competition, free enterprise and individual initiative ever accomplished anything is scarcely acknowledged.

These welfare programs are expensive, though in the President’s Economic Report, otherwise crammed with euphoric figures, this expense is not mentioned. The government’s total cash expenditures in fiscal 1967 will be $145 billion, of which $83.6 billion will be nondefense spending. Both figures will be the highest on record. Compared with only five years ago (fiscal 1961) non-defense spending will be up $31.8 billion. Compared with ten years ago (fiscal 1956) it will be up $52 billion.

ALL TO SPONGE ON ALL

All this must be collected from the taxpayers. The government has nothing to give to anyone that it does not first take from the community. Yet Mr. Johnson constantly talks as if his Great Society programs will fill far more needs than the people could fill for themselves. Everybody is to live at the expense of everybody else.

This bewildering multiplicity of new programs adds up to the Big Brother state. Are there any unfulfilled desires anywhere? Then the government will fill them. If there are or ought to be any limits to the sphere and powers of the state, the Economic Report gives no hint of what they are.

The report makes scores of recommendations, but with one or two exceptions (e.g., more pollution control) nearly all of them are questionable. Instead of proposing that the government refrain from further inflation, the report seeks to end the balance-of-payments deficit by continuance of controls. It proposes that international monetary inflation be facilitated by “creation of new [non-gold] reserve assets.” It proposes that the aims of foreign aid be expanded. It proposes that the Federal government “rebuild” the cities—i.e., that the taxpayers of every city pay for the rebuilding of all the other cities—as if this somehow relieved them of the cost. It proposes to increase compulsory unionism even further by repealing Section 14(B) of the Taft-Hartley Act. It proposes to raise the minimum wage and so make it still harder for teen-agers and unskilled workers to get jobs.

WHO MAKES INFLATION?

But what is of most immediate importance in the Economic Report is its discussion of inflation and the need of “maintaining cost-price stability.” At one point, it is gratifying to see, the report comes close to acknowledging that the primary responsibility for inflation lies with the government’s own policies: “The basic precondition for price stability is a fiscal-monetary policy that deters total demand for goods and services from outrunning potential supply.” But the report quickly takes this back by adding: “But the extent of the fiscal or monetary restraint that will be needed to avoid inflationary pressures will depend directly on the restraint and moderation exercised by those who have power over wages and prices.”

This is a clear reversal of cause and effect. If the government stops increasing the quantity of money, the average level of wages and prices cannot be raised. An excessive increase in the price of any given product will either reduce demand for that product or leave less purchasing power for other products. But if the government continues to print more money, and then tries to sit on individual prices, it will unbalance and disrupt production. Only governmental monetary policy, by commission or neglect, can create inflation.

An Election Proposal

March 14, 1966

To extend the terms of members of the House of Representatives from two years to four, but to make these terms coincident with the President’s, as Mr. Johnson has proposed, would have profound side effects on business. They would not be good.

Most of the arguments that the President has put forward for extending the term of congressmen to four years are sound. They would have more time to learn their job and to acquaint themselves with issues. They would have to devote less time and expense to getting themselves re-elected. But Mr. Johnson’s arguments for making every congressman’s election and four-year term coincident with the President’s are unconvincing.

Some senators and representatives had already suggested that four-year terms for House members be staggered so that half of them would be elected at the same time as the President and half in his midterm. This would certainly be moving in the right direction. But in his message of Jan. 20, Mr. Johnson sought to counter this proposal with the objection that it would “create an unnecessary and wholly unfair division” in the House. This is a very odd objection. The Senate from the beginning of its existence has been divided into thirds, with overlapping terms. In all his years in the Senate, Mr. Johnson did not complain of this division as either unnecessary or unfair.

ONE-FOURTH EVERY YEAR

Mr. Johnson complains that: “‘Off-year’ elections are notorious for attracting far fewer voters—perhaps as much as 15 percent fewer—than Presidential elections.” He does “not believe the Congress will wish to make the House the least representative of our three elective elements by perpetually condemning half its membership to a shrunken electorate.”

This is surely a strange argument. Today the whole membership of the House, and a third of the Senate, is “condemned” in off-year elections to a “shrunken electorate.” But no one has previously suggested that this weakens their political position. On the contrary, the congressmen elected in Presidential midterm are more likely to be elected on their own merits, and not merely on the President’s coattails or the party label.

The principle of staggered elections and overlapping terms, which already governs the Senate, should be carried still further. There would be clear advantages in electing one-fourth of the members of the House every year for four-year terms—and even in electing one-sixth of the members of the Senate every year, instead of the present one-third every two years, for six-year terms.

The primary advantage would be those “frequent elections” which the authors of the Federalist Papers thought the best assurance for securing that the House of Representatives should have “an immediate dependence on, and an intimate sympathy with the people.”

IN CONSTANT TOUCH

Annual elections would keep both Congress and the President in constant touch with and response to public opinion. It would keep constantly alive the people’s interest in the policies of their government. It would give them a sense of constant control of these policies. In Britain intense interest is taken in a by-election, to fill a vacancy in Parliament, for whatever indication this may give of a new temper or verdict of the voters. Annually staggered elections to Congress would do this in a balanced and systematic way.

In the past, the months just prior to a national election have usually been marked by hesitation and uncertainty in business and the markets. The election of one-fourth of the members of the House each year would obviate the fear of a violent reversal of established policies, a complete overturn of the House, the election of a preponderance of new and inexperienced members. Above all, it would obviate the consequences of a momentary landslide, and a lopsided rubber-stamp Congress that had ridden in on the coattails of a charismatic Presidential candidate. Policies would not be fixed for four long years by the mood or fears dominant in a single election. Congress would be more likely to remain what the Founding Fathers intended a check and balance on Presidential power, and not merely one more instrument of that power.

Slash the Spending

March 28, 1966

For the last five years the “new economists” have denied that their policies led to more inflation. Now that they are at last forced to recognize this, they are proposing one of two cures, or both. The first is price and wage controls; the second is another tax increase. The first is not a cure at all but merely an additional disease. The second is harmful and unnecessary.

The simple cure for inflation is to stop inflating. The direct cause of inflation is the increase in the quantity of money and bank credit; the direct cure is to stop this increase. In order to make this possible we must stop the budget deficits. There are two ways to do this. One is to increase taxes; the other to cut expenditures.

But a further tax increase, on top of the $5 billion annual increase in social-security taxes that went into effect Jan. 1, and on top of the $6 billion increase just enacted, i.e., on top of the unparalleled tax burden of $145 billion that the American people already carry for 1967, would discourage production and constrict the economy. No one has been more insistent on this result in the last few years than the new economists themselves. They supported a tax reduction when we could not afford it. As we already had an inflationary deficit, the tax cut simply made it greater. It was therefore a sham tax cut. It merely substituted inflation, which President Johnson has called “the most unjust and capricious form of taxation,” for other taxes.

HUGE NON-DEFENSE COST

And it was the wrong kind of tax cut, both politically and economically. If everyone’s taxes had simply been cut by an equal percentage, it would now be politically easy to restore them by a corresponding percentage. But proportionately the tax cuts were greatest on the low-bracket incomes, making income-tax rates even more steeply progressive than they already were. The Administration and Congress would therefore not dare now to restore personal income tax rates to their previous levels because they would be accused of making the increase greatest on the lower incomes.

Yet with the clear threat of further inflation, it is imperative that we reduce or eliminate the “inflationary gap,” i.e., the excess of expenditures over revenues. The best way to do that is to reduce expenditures.

We are being told that this cannot be done, because the present huge spending is necessary to pay for the war in Vietnam. But this is not so. In the cash budget for the fiscal year 1967 total national defense expenditures are estimated at $60.5 billion. Non-defense spending comes to $83.6 billion. If we compare the 1967 budget with 1956, we find that defense costs in this eleven-year period have risen only $20.5 billion while non-defense spending has increased by $52 billion. The way to prevent further inflation is to start slashing this enormous non-defense total.

SAVING $10 BILLION

How many billions need to be slashed off? Technically, the 1967 cash budget is already estimated to be in balance. But if (allowing for the dubious accounting gimmicks and the probable underestimate of expenditures) we assume that the real deficit will be at least $5 billion to $10 billion, then this is the amount that expenditures should be cut.

Anyone who thinks there is anything unreasonable or impossible about a cut of these dimensions need merely look at the increase in non-defense spending in the last few years. For 1967 it is $12 billion more than in 1965, $23 billion more than in 1963 and $32 billion more than in 1961. All we have to do to cut out even $10 billion is to cut out the new spending programs added since 1965 alone. If we don’t want to do it that way, we might do it by slashing one or two of the more dubious categories of spending such as the $4 billion for foreign aid, the $3 billion for farm subsidies, the $4 billion for the most expensive road-building program in history, the $4 billion for putting a man on the moon or part of the $46 billion of welfare spending.

But don’t let anyone tell you that we need to levy $5 billion or so of increased taxes (on top of $145 billion already there) to “prevent inflation” or to pay for the Vietnam War. The money is “needed” only to pay for the extravagant Great Society programs of the last few years.

Minimum Wage vs. Jobs

April 11, 1966

If there is anything that economists of nearly all schools are agreed upon, it is the folly of minimum-wage laws. They hurt most the very people they are designed to “protect.” When a law exists that no one is to be paid less than $50 for a 40-hour week, then no one whose services are not worth $50 a week to an employer will be employed at all. We cannot make a man worth a given amount by making it illegal for anyone to offer him less. We merely deprive him of the right to earn the amount that his abilities and opportunities would permit him to earn, while we deprive the community even of the moderate services he is capable of rendering. In brief, for a low wage we substitute unemployment.

Among eminent economists who have recently expressed their opposition to minimum-wage laws are Prof. James Tobin, formerly President Kennedy’s economic adviser; Prof. Arthur Burns, former head of the President’s Council of Economic Advisers, and Prof. Gottfried Haberler of Harvard. As Professor Tobin has put it:

“People who lack the capacity to earn a decent living need to be helped, but they will not be helped by minimum-wage laws, trade-union wage pressures or other devices which seek to compel employers to pay them more than their work is worth. The more likely outcome of such regulations is that the intended beneficiaries are not employed at all.”

CONTINUAL BOOSTS

The Fair Labor Standards Act of 1938 fixed a minimum wage of 25 cents an hour. This was raised to 30 cents in 1939, to 40 cents in 1945, to 75 cents in January 1950, to $1 in March 1956, to $1.15 in September 1961 and to $1.25 in September 1963.

In an illuminating study published in The Management of Prosperity (Columbia University Press, $3.50), Professor Burns has found that each time the minimum was raised, it was set at approximately half of the average manufacturing wage. However, the statutory minimum was only 29 percent of average hourly earnings in manufacturing just before the increase in 1950, while the corresponding figure reached 40 percent just before the increase of the minimum in 1956, 43 percent before the increase in 1961 and 47 percent before the increase in 1963.

Thus, over the years there has been a strong rise in the ratio of the legal minimum to the average wage. The minimum wage rose 67 percent between early 1956 and 1964, while average hourly earnings in manufacturing rose 34 percent. Meanwhile, the Federal minimum has become effective over a greater range of industry, and many states have likewise raised or expanded the coverage of their minimum wages.

UNSKILLED MOST HURT

The result of all this has been to force up the wages of unskilled labor much more than those of skilled labor. A result of this, in turn, has been that though an increasing shortage has developed in skilled labor, the proportion of unemployed among the unskilled, among teen-agers, females and non-whites has been growing. The ratio of the unemployment rate of teen-agers to that of male adults, Professor Burns finds, was invariably higher during the six months following an increase of the minimum wage than it was in the preceding year.

“The broad result of the substantial increase of the minimum wage in recent years,” Professor Burns concludes, “has therefore been a curtailment of job opportunities for the less skilled workers.” And his calculations indicate that “another increase of 25 cents in the minimum wage would be likely to raise the unemployment rate of non-white teen-agers by as much as 8 percentage points.” Teen-ager employment has improved recently at least in part because the minimum wage has not been raised since September 1963.

Professor Haberler concludes that “Raising the minimum wage would thus be an irresponsible antisocial measure, reducing job opportunities of the poor, promoting inflation and retarding growth.”

Yet under pressure from the union leaders, Congress is all set to give another boost to the compulsory minimum wage from its present level of $1.25 an hour to $1.40 next February and $1.60 in February 1968 and to extend the coverage to more than 6 million more workers.

Why Inflation Grows

April 25, 1966

While expressing constant concern about inflation, the Johnson Administration is still inflating. It is scolding the symptoms while doing nothing to stop the causes.

The cause of inflation is the increase in the quantity of money and credit. The money supply (including time deposits) now stands at a new high record of $317 billion, 9 percent higher than a year ago, and 48 percent higher than at the end of 1960.

One main reason for the increase in the money supply is the action of the Federal Reserve System in buying and “monetizing” U.S. Government securities. It holds today $41.1 billion of them, which is $3.3 billion more than a year ago. Interest rates are still kept low enough to encourage continued expansion of bank credit.

The rapid increase in the money supply has been in turn brought about by the Federal deficits. We are heading into the 31st deficit in the last 37 years. The real cash deficit for 1967 is concealed by various bookkeeping gimmicks and an underestimate of probable expenditures. Objective analysts expect the real deficit to be $5 billion to $10 billion.

TAX CUT OR SPENDING?

The deficit can be reduced or wiped out either by reducing expenditures or by raising taxes. By all odds the sounder course is to start restraining nondefense expenditures, and certainly not to impose any further tax increase. Cutting planned expenditures by $5 billion or $10 billion might be awkward for vote-conscious politicians but could be done with economic advantage all around. Planned nondefense expenditures for 1967 are $12 billion more than in 1965, $23 billion more than in 1963 and $32 billion more than in 1961.

Those who argue that the only way to eliminate the deficit is to raise taxes are by implication making the preposterous claim that every dollar of the $83.6 billion of nondefense expenditures planned for the next fiscal year is essential and untouchable. Yet this nondefense total alone is $52 billion higher than ten years ago.

The Republicans in Congress are on the right track in pushing for a cut in spending. Their voting record in this respect is far from perfect, but it is immensely better than that of the Democratic majority. In seeking to cut a uniform 5 percent out of each domestic appropriation bill the Republicans, it is true, are not adopting the most defensible course. A family forced to cut expenses would hardly think it sensible to cut both its food budget and its annual vacation in Europe by the same percentage.

The Republicans in Congress would be in a stronger position if they (and, we may hope, Democrats too) were to memorialize the President to submit an amended budget cutting at least $5 billion out of his present proposed total cash spending of $145 billion for 1967. This ought not to be too difficult. The nondefense part of this spending alone is $6 billion more than in the current fiscal year and $12 billion more than in 1965. If the President refused to make his own cuts, he would be in a poor position to criticize the cuts made by Congress.

There are decisive reasons why a further tax increase at this time would not be justified:

1—Such an increase is not necessary if present unparalleled nondefense spending is cut.

2—All tax increases retard and restrict economic growth.

3—They would not bring in revenues that would be proportionate to increased rates.

4—The tax reductions made in the last two years, in the face of existing deficits, were political. The Treasury’s own estimates showed that 78 percent of the reduction in personal income taxes enacted in 1964 was made in the taxable income brackets of $4,000 and under. Congress would not dare to restore the 1963 rates for fear of being accused of throwing the burden on the low incomes. But the necessary revenue simply could not be raised by restoring the rates only in the brackets above $10,000.

5—Finally, an increase in taxes of $5 billion would be completely futile if the President and Congress continued to increase spending with the casualness and recklessness of the last few years. We would face the grim prospect of a thumping tax increase plus still more inflation.

There is no substitute for a curb on spending.

Retarding Growth

May 9, 1966

The Johnson Administration now daily proclaims its concern about inflation, while it completely ignores its own chief role in creating it and puts the blame on everybody else, particularly businessmen. It neglects the right remedies and presses for the wrong ones. But of all the strange things it is doing, perhaps the strangest is to urge businessmen to reduce their investment in new plant and equipment.

The fear that productive capacity is expanding too fast, or that costs of production are being reduced too much, reveals a complete confusion of cause and effect. The present high rate of plant expansion and capital-goods expenditures is not a cause of inflation; it is simply one of the results of inflation. The direct cause of inflation is the increase in the quantity of money and credit. The newly created money must go somewhere. If the Administration can succeed in keeping it from going into productive investment, it will merely go into unproductive consumption.

WHY PLANT EXPANSION

The reason a good deal of the new money is going into plant expansion is clear. The new money increases monetary demand in varying degrees for nearly all products. It tends to raise their prices. Corporations, making bigger sales and bigger profits, are encouraged to invest in additional and newer plant and equipment to expand their output and increase their margins of profit. If they expect inflation to continue, their stimulus to plant expansion is even greater. The sooner they expand, the cheaper they can get their new plant and equipment; the longer they delay, the more it will cost them—not to speak of the profit they will lose if expansion of output is delayed.

Of course this has its dangers. Inflation and the expectation of more inflation create distortions, illusions and false expectations. Much of the new investment will go into the wrong places. It will not pay off. But the cure is for the government to halt its inflation before it is too late; it is not to call up businessmen and to ask them to exercise “voluntary restraint” in new investment. This vague admonition may merely reduce or prevent precisely the new investment that most needs to be made, without preventing gross malinvestment by those less vulnerable to political pressure.

The quantity of money and credit (including time deposits) has been increased by 9 percent in the last year and 48 percent since the end of 1960. The way to reduce or halt this rate of increase is for the Federal Reserve System to stop buying and monetizing government securities (it has made encouraging moves in this direction in recent weeks), and for the government to stop all attempts to hold down interest rates.

INTEREST RATES HIGH?

Historically the present 5½ percent prime lending rate of the banks seems high. But if we assume the continuance of the 2.8 percent annual rate of increase in consumers’ prices, this 5½ percent reduces to a real interest rate, allowing for dollar depreciation, of only about 2.7 percent. This is why business borrowing demand continues to be heavy.

There is an obvious inconsistency between the Administration’s call for investment cutbacks and its decision to retain the 7 percent investment tax credit. But let us hope this inconsistency is resolved in favor of keeping the investment credit. It would be a serious mistake to suspend it. It was enacted by Congress, on President Kennedy’s recommendation, to stimulate capital investment, promote economic growth and make American industry more efficient and more competitive abroad. It is a necessary offset to an excessive corporate income tax. It tends to increase productivity, to provide better-paying jobs, to reduce costs and hence to reduce prices to consumers.

It was designed to be permanent. To try to turn it into an off-again, on-again countercyclical device would lead to belated and unpredictable responses and create business uncertainty. It would substitute the unreliable judgment and timing of government bureaucrats for that of businessmen close to their own special markets.

Let the government stop its inflation, and leave the investment decisions to private enterprise.

The Attack on Profits

May 23, 1966

It was bound to happen. Any observer of any previous inflation anywhere could have safely predicted it. The government, having deliberately adopted inflation as a policy, is now blaming businessmen for the unpopular part of its consequences. The attack is led by the very man who has been the chief advocate of the government’s present inflationary policies—Gardner Ackley, chairman of the President’s Council of Economic Advisers. He has been the official spokesman for the “new economics,” for big spending, chronic deficits, cheap money and every other policy that leads to an expansion of the money and credit supply and a lower value of the currency unit. It is he who now exclaims that profits are much too high. “And so I ask you,” he warns businessmen, “to stop, look and listen. Is that price increase you are considering really necessary?” His speech before the United States Chamber of Commerce was ominously reminiscent. The particular rationale for inflationary policies that Ackley has adopted was first advocated by John Maynard Keynes in 1935. Because the chief problem of that time was depression and unemployment, Keynes entirely forgot his own eloquent warning in his “Economic Consequences of the Peace” in 1919:

KEYNES’S WARNING

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. . . . Lenin was certainly right. . . . The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. . . .” The governments of Europe, being many of them at this moment reckless in their methods as well as weak, seek to direct onto a class known as ‘profiteers’ the popular indignation against the more obvious consequences of their vicious methods. These ‘profiteers’ are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot help but get rich quick whether they wish it or desire it or not. If prices are continually rising, every trader who has purchased for stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore, the European Governments are carrying a step further the fatal process which the subtle mind of Lenin has consciously conceived. The profiteers are a consequence and not a cause of rising prices. . . .”

ROLE IN PRODUCTION

Even Keynes failed to recognize all the distortions brought about by inflation. For a great part of the profits reported by corporations in an inflation are illusory. The deductions for depreciation and replacement, for example, are increasingly inadequate. Moreover, profits are a residual amount, and therefore their fluctuations in either direction are always more violent than those, say, of wages. In 1932 and 1933, profits were actually a negative sum. Ackley’s implication that present profits are excessive because businessmen are overcharging, and that they could easily make a substantial voluntary cut in prices, is refuted by the government’s own comparisons of profits after taxes per dollar of sales. In 1965 these averaged 5.6 cents. An average cut of only 1 or 2 percent in prices would have brought profits per dollar of sales below the 4.5 percent average level of the five years 1959–63. Moreover, profit margins are different for each firm. A price cut that one firm could easily “afford” might force another in the same industry to close down. The cure for high profits is high profits. High profits stimulate production, attract competition, increase supply and thereby tend to lower prices. Profits, wages and employment go up and down together. When profits are highest employment is highest. Any direct government attempt to squeeze profits is bound to hurt wages and employment. Last year corporate profits after taxes were only 8 percent of the national income. Yet profits play a vital and indispensable role in causing, guiding, allocating and increasing production. There is only one way for the government to stop the distortions and unpopular effects of inflation, and that is to stop inflating.

The Cost of Guideposts

June 6, 1966

It would be immensely reassuring if the Administration not only abandoned all efforts at “voluntary” price control and all threats of compulsory price control, but quietly dropped all the nonsense about “guideposts” that the Council of Economic Advisers has been preaching for four years. No one has yet spelled out all the harm that these guideposts have done and are still doing. They are imposed without legal authority and by veiled threats of public censure, antitrust prosecution, income-tax investigation, cancellation of defense contracts or other penalties. The guideposts are discriminatory as between unions and businessmen. Union workers are supposedly “entitled” to a 3.2 percent annual advance in wage rates, based on some calculation of “average growth of labor productivity,” but business is not entitled to any price advance at all. The guideposts are discriminatory as between industries, because public obloquy can be more effective in a line of production, such as steel, aluminum or automobiles, dominated by a few big nationally known corporations, which make easy targets, than in a line of production in which there are thousands of small firms, no one of which can be easily turned into a political scapegoat.

The guideposts are discriminatory as between unions, because when a powerful union contemptuously ignores them, the Administration is either silent or makes a barely audible murmur after the damage has been done. We have yet to see a President demand a rollback of wages.

FUNCTION OF PRICES

Nearly all criticism of the guideposts has concentrated on such discrimination. Unfortunately, much of it has implied that there can really be such a thing as “fair” wage and price controls. The truth is that though the standards adopted by the CEA for fixing guideposts are completely untenable, there are no tenable standards. These guideposts are all based on crude notions of “fair” wages, “fair” prices and “fair” profits; but what is essential is functional wages, prices and profits.

All price-fixing does harm. Even if the government were not continually cheapening the dollar by continually increasing the money supply, it would do immense harm to try to “hold the line” by freezing every price just where it is. Prices have work to do. They guide and allocate production. A price rise for product X usually reflects an increased demand for X or an increased cost of producing X; a price fall for product Y usually indicates a reduced demand for Y or a reduced cost of producing Y. It is precisely the daily relative changes in prices and profit margins that direct more production into the products that are more wanted and release labor and capital resources from products that are less wanted. To freeze relative prices is to reduce, distort and unbalance production.

REMEDY POSTPONED

All this would be true even if the government were not constantly increasing the quantity of money. But when it cheapens the dollar and then tries to “hold the line” on prices, the harm is immensely multiplied.

An incisive analysis of the cause of inflation and the harmfulness of the guideposts was made in a recent speech by Milton Friedman, economist at the University of Chicago:

“Inflation is always and everywhere a monetary phenomenon, resulting from . . . a rise in the quantity of money relative to output. . . . The guideposts confuse the issue and make correct policy less likely. If there is inflation or inflationary pressure, the governmental monetary authorities are responsible. It is they who must take corrective measures if the inflation is to be stopped. Naturally, the authorities want to shift the blame, so they castigate the rapacious businessman and the selfish labor leader. By approving guidelines, the businessman and the labor leader implicitly whitewash government for its role and plead guilty to the charge. They thereby encourage government to postpone taking the corrective measures that alone can succeed. . . .

“Whatever measure of actual compliance there is introduces just that much distortion into the allocation of resources and the distribution of output. . . . The more faithfully [the guideposts] are complied with, the more harm they do.”

Income-Tax Illusions

June 20, 1966

An increasing number of economists (though still a minority) are beginning to have second thoughts about the wisdom of the progressive income tax. Their misgivings arise from three main suspicions: (1) that it is unjust; (2) that it undermines incentives and sets back economic growth; and (3) that the high rates at the upper end of the scale do not even produce increased government revenues, but tend to reduce them.

The argument that a discriminatory “progressive” tax rate is unjust was stated as long ago as 1833 by the Scottish economist J.R. McCulloch:

“The moment you abandon the cardinal principle of exacting from all individuals the same proportion of their income or of their property, you are at sea without rudder or compass, and there is no amount of injustice and folly you may not commit.”

The principle that the same rate of tax should apply to everybody was almost universally established before the “graduated” income tax came along. This principle is still adhered to in every other type of tax—realestate taxes, sales and other excise taxes, import duties and even social-security taxes. It is accepted that a man whose house and land are worth ten times as much as another’s should pay ten times the tax but not (as can happen under progressive rates) 30 times the tax.

NO ASSIGNABLE LIMIT

Some economists are beginning to recognize that all arguments in support of progression can be used to justify any degree of progression. No one dreamed, when the income tax was adopted in Great Britain in 1910 and in the United States in 1913, that within a generation Britain would be taxing the higher incomes up to 97½ percent, and the U.S. up to 91 percent. When a majority imposes on a minority a punitive rate of taxation that it refuses to accept for itself, democracy becomes irresponsible.

The higher rates in the progressive income tax undermine incentives and reduce production and capital accumulation. The early sponsors of the progressive income tax recognized this, but they had other aims in mind. In the Communist Manifesto of 1848, Marx and Engels frankly proposed “a heavy progressive or graduated income tax” as an instrument by which “the proletariat will use its political supremacy to wrest, by degrees, all capital from the bourgeois, to centralize all instruments of production in the hands of the state” and to make “despotic inroads on the right of property, and on the condition of bourgeois production.”

RATES VS. REVENUE

Progressive rates of income taxation are not necessary to raise great revenues. A simple calculation, based on the Treasury’s own figures, shows that, with the same existing exemptions and deductions, a flat rate of 18.6 percent would raise all the revenue now raised from the scale of rates ranging from 14 to 70 percent. If all rates now above 50 percent were reduced to that level, then (on the basis of 1963 incomes) a maximum of $233 million revenue would be lost. This is not enough to run the government, at present spending rates, for a full day. For 1963, more than two-thirds of the total income tax was paid by people with adjusted gross incomes under $15,000.

Yet perhaps the most serious evil of the progressive income tax is that it produces the illusion in the overwhelming majority of taxpayers that the “rich,” the other fellows in the brackets above them, are really paying for most of the benefits that the majority get from the government. This illusion is shared even by taxpayers (all those with taxable incomes above $6,000) who are in fact paying more than the 18.6 percent average rate that would yield the necessary revenue. This illusion makes them accept a burden of government expenditure and taxation that they would not otherwise tolerate. Though this aspect of progressive income taxation is very little discussed today, its menace was recognized as early as 1899 by W.E.H. Lecky:

“Highly graduated taxation realizes most completely the supreme danger of democracy, creating a state of things in which one class imposes on another burdens which it is not asked to share, and impels the State into vast schemes of extravagance, under the belief that the whole costs will be thrown upon others.”

Shortsighted Remedy

July 4, 1966

The latest and in some ways the most thorough study that has ever been made of “The United States Balance of Payments” has just been published in a large book of 200 pages by the International Economic Policy Association. This is a private research group whose membership includes twenty major U.S. corporations. It makes, altogether, 33 recommendations for solving the payments deficit. Most of these are in the right direction, and some of them are excellent.

The most important recommendation is negative: the Administration should abandon as soon as possible its restraints on foreign investment.

By trying to restrain and penalize foreign investment, the government is in effect treating such investment (which even in total accounts for less than 10 percent of our outgoing payments) as if it were actually the cause of the payments deficit. Making foreign investment the scapegoat is completely arbitrary. It happens also to be foolishly shortsighted.

WHOSE DEFICIT?

The IEPA study, in fact, points out that for several years the private sector as a whole, as a result of export surpluses and income on private investments abroad, has generated a payments surplus, while Federal spending (foreign aid, military outlays, etc.) has been “consistently in deficit by over $3 billion a year, notwithstanding tied aid and military-hardware sales.” The study calculates that exports to affiliates of U.S. manufacturing corporations account for 35 percent of total U.S. exports of manufactured goods. In addition, direct investments abroad by U.S. companies return earned income which exceeds the outflow of capital in nearly every industry and in practically every area of the world.

The government insists that its foreign aid, even though it is given away, does not seriously add to the payments deficit. This is because, it argues, 80 percent of AID’s economic assistance has been in the form of goods and services procured in the United States. The IEPA study admits that this device of “tying” aid to purchases in the U.S. may curtail the direct adverse impact on the payments balance. But it points out that the government’s calculation fails to allow for the “substitution” effect. The aid-receiving country, in other words, may use its aid dollars merely to buy goods it would otherwise have bought here commercially with dollars it already owned. It is then able to transfer its earned dollars for purchases in other countries.

SUBSTITUTION EFFECT

Strong evidence that this is happening on a large scale is provided by a comparison of our aid to and trade with Latin America. U.S. net disbursements to Latin America almost doubled from the level of the 1956–1960 period, when they averaged roughly $360 million, to an average of about $652 million over the 1961–1964 period. Total Latin American imports went up from an average of $7,650,000,000 a year between 1956 and 1960 to an annual average of $8,060,000,000 during 1961–1964, an average increase of $413 million. Yet total Latin American imports from the U.S. declined by an average of $100 million, despite the doubling of total aid and the “tying” of such aid.

There is reason to think that the “substitution” principle has an even wider application than the IEPA study estimates, but there is not space to consider its ramifications here. If the study has a serious weakness, it is in not giving sufficient emphasis to the effect of inflation and our chronic budget deficits in making the deficit in the balance of payments inevitable.

But the great merit of the study is its proof of the harmfulness of governmental restraints on foreign investment. A substantial part of our exports depends upon such investment. The study urges the government to give assurances that, in addition to maintaining the gold value of the dollar, it will not try to restrict or control the movement of capital. “The only really long-run factor working in the direction of eliminating deficits,” the study insists, “is the growth in exports, income, royalties and fees which are related to direct private investments abroad. Any prolonged limitations in this area can serve only to weaken whatever long-range strength there is in the U.S. position.”

Socialism, U.S. Style

July 18, 1966

New York City’s first subway opened in 1904. The fare was 5 cents. The subways remained under private ownership until 1940. The fare was still 5 cents. But meanwhile wholesale prices had gone up 32 percent; wage rates had tripled; the lines were granted tax exemption by the city. They petitioned for higher fares. But the 5-cent fare was sacred. The city fathers decided that the only way to keep it was to eliminate private profit and run the trains themselves.

So the subways were bought by the city in June 1940. On July 1, 1948, the fare was doubled to 10 cents. On July 25, 1953, it was tripled to 15 cents. Between 1940 and 1953 other consumer prices went up 91 percent, but New York subway fares went up 200 percent. The lines were still run at heavy loss. Even by its own method of accounting, the Transit Authority has lost money in seven out of the last ten fiscal years. If even one of its several subsidies from the city is deducted, it has lost money heavily in every one of those years.

The Transit Authority, which runs the subways for the city, is required by law to operate within revenues received from operations. This is a rather technical requirement. In the first place, capital funds (such as for subway construction, subway cars and buses) are provided by the City of New York. There is a subsidy for carrying schoolchildren, and a subsidy for Transit Police.

$62 MILLION LOSS

In the fiscal year ended on June 30 last, the Transit Authority reported an operating deficit of $62 million. This deficit was achieved in spite of a tax subsidy of $166 million to Transit for the fiscal year. The subsidy was made up of New York City’s outlays for all debt service, construction and new equipment of $116 million; the subsidy for student fares of $20 million, and the subsidy for Transit Police of $30 million.

And now the fare has been raised to 20 cents—a 300 percent increase since 1940. The extra 5 cents is expected to bring in something in excess of $60 million, but probably will not be enough to cover the operating deficit even when all the subsidies are included. A 25-cent fare may be less than a year away.

As the charge for the service has been going up, the quality has been going down. The trains run less frequently; they don’t meet schedules; they get older and dirtier, and so do the stations.

The Wall Street Journal recently complained in an editorial: “The change-makers in the municipally operated subway system refuse, usually with great rudeness, to accept a $5 bill or anything higher. . . . A person finding himself with nothing under $5 has no choice but to trudge back up the stairs and find a store willing to make change. Nine times out of ten the shopkeeper will do so in perfectly friendly fashion. The contrast is illuminating. The salesman in the store knows his livelihood depends on courtesy and service. To many a minion of bureaucracy, however, people are nuisances at best and to be treated as such.”

This is “public” ownership. This is how socialism, U.S. style, works.

SUBSIDIZING FARES

A theory has developed that municipal transportation ought not even be expected to pay its way. This theory is merely the outgrowth of government ownership. When cities own and operate the subways, the fare must be subsidized. When governments own the railways, the railway fare must be subsidized. When governments own the telephone and telegraph lines, the lines are subsidized. When governments own the power and the light companies, power and light are subsidized. When governments own the airlines, the airlines are subsidized. Governments run the mail service, and the mail is carried at a loss. Nothing is expected to pay its own way.

A subsidy on bread would be more defensible than any of these, but the government doesn’t yet own and run the bakeries.

The socialist argument begins by saying that fares are too high because private industry is under the necessity to make a profit. What is overlooked is that it is precisely the need to make a profit, or to avoid a loss, that leads to economy, efficiency and good service. Government ownership removes the incentive to all three.

Prices Have Work to Do

August 1, 1966

The Administration forced the leading producer of molybdenum, a metal used in steel alloys, to cancel a 5 percent price increase announced a few days before. Why? To show the labor unions that the Administration isn’t afraid of them.

Believe it or not, this is the reason government officials gave when they disclosed to reporters their “basic motive for applying pressure on the company for the rollback.” As one prominent news account put it: “They wanted to demonstrate to unions, as much as to management, that the Administration’s anti-inflationary wage-price guidelines are not a dead letter.”

One would think the obvious way to demonstrate this would be to forbid wage increases beyond the guidelines or to force some union “voluntarily” to roll back a wage increase. Of course the Administration (fortunately) has not the slightest intention of doing this.

Let us look at the harm, however, that it is actually doing. The forced cancellation of the molybdenum price increase was arbitrary, discriminatory and without any sanction of law. In recent months the Administration has allowed price increases to occur in scores of items—services, apparel, shoes, tires, coal—without comment. It continues to force its rollbacks in industries—steel, aluminum, molybdenum—in which the bulk of the product is produced by a few big companies politically vulnerable to intimidation.

BLAMING MOLYBDENUM

When it forced the rollback in steel, the Administration’s excuse was that steel entered into so many products that a rise in steel prices would touch off another round of inflation. This excuse was lame enough as applied to steel (the total market value of which is only 2.6 percent of the gross national product), but it is completely absurd for officials to be speaking of the “direct inflationary impact” of a rise in molybdenum, the market value of which is less than one-fiftieth of 1 percent of the gross national product. To pounce on molybdenum as a scapegoat, out of thousands of products, is legally indefensible and economically ridiculous.

It is also economically harmful.

Prices have work to do. They guide consumers and producers. Molybdenum is in short supply. The rise in price would have led to more economy in consumption. And the rise was needed, according to the industry, to finance new facilities to produce the metal. It is not “in the national interest” to reduce incentives and funds for increased production.

NEEDED SIGNALS

It was absurd for Gardner Ackley to demand a cancellation of the price increase on the ground that the leading producer, American Metal Climax, was making profits above the average. This represents a complete failure to understand the working of a free-enterprise system. It is precisely constant relative price changes, and the consequent differences in profit margins in different commodities, that draw labor and capital resources away from the production of goods in relative oversupply and into increased production of goods in short supply. To freeze the price mechanism is to destroy the price signals and to prevent these necessary readjustments in production. It is the constant changes in price relations and in relative profit margins that determine the ever-changing balance in the relative production of thousands of different commodities and services.

It is the Administration, not private business, that is inflating. The cause of inflation is the increase in the quantity of money and credit. The Administration keeps increasing the quantity of money and credit. The nation’s money supply (demand deposits plus currency) averaged $171.6 billion in June, up 5.8 percent over the twelve-month period. By comparison, money rose at a 2.2 percent average annual rate from 1951 to 1965. If we include time deposits in the money supply, the rate of increase over the past year has been 9.3 percent. Higher interest rates discourage credit expansion and inflation; lower interest rates encourage credit expansion and inflation. The Administration is doing all it can to keep interest rates below the level at which a free market would set them. It inflates, and points an accusing finger at molybdenum.

How We Create Strikes

August 15, 1966

The crisis on the airlines is merely the latest example of the bankruptcy of most of the labor legislation of the last 40 years.

The naïve theory of the Wagner Act of 1935, ironically called “an act to diminish the causes of labor disputes,” was that it was above all “the denial by employers of the right of employees to organize and the refusal by employers to accept the procedures of collective bargaining [that] lead to strikes.” The simple cure was to abolish this gross “inequality of bargaining power” by turning the government into a union-organizing agency and compelling employers to bargain exclusively with certified unions. One-sided compulsions were laid on employers. One-sided immunities were granted to unions. And of course: “Nothing in this act shall be construed so as to interfere with or impede or diminish in any way the right to strike.”

So it has been. The number of annual strikes tripled after the Wagner Act went into effect. In 1947 the consequences became so bad that Congress passed the Taft-Hartley amendments. These made the Wagner Act slightly less disruptive but retained its essential one-sidedness.

THE PUBLIC HELPLESS

The result today is that a single labor union, until its demands are met, can halt the country’s railroads, tie up its shipping, shut down its steel mills, silence the newspapers of a great city, walk out on patients suffering or dying in hospitals, ground 60 percent of the nation’s airlines, and prevent others from taking the jobs that its own members have refused to perform. The public must stand by helpless.

The machinists’ strike on the airlines illustrates this enormous irresponsible power. To avert a strike, President Johnson appointed an emergency board under the Railway Labor Act. That board recommended a 3.5 percent annual increase over 42 months in the average $4.15 an hour in wages and benefits already received. This award was in excess of the government’s own 3.2 percent “non-inflationary guidelines.” The companies accepted the award; the unions rejected it.

The President originally used his full prestige to urge acceptance of the award, based on “testimony that runs into the hundreds of pages.” When the union said no and continued the strike, Mr. Johnson made it clear to the airlines (which all need Federal approval for routes, rates and airmail subsidies) that he wanted them to give more. They then offered increases of 4.3 to 4.5 percent a year, which the union negotiators accepted. The President was still somehow able to assure the country that the agreement was “essentially within the general framework” of the emergency board recommendations (it was 25 percent higher), and even that it “will not be inflationary.”

Then the union rank and file turned thumbs down even on this.

TIME TO REEXAMINE

Whatever happens now, irreparable harm has already been done. The airline machinists were offered rewards, not penalties, for spurning the recommendations of a government board, and frustrating or stranding travelers. Other unions will note these rewards, demand at least as much, be at least as intransigent.

Compulsory back-to-work laws and longer “cooling-off” periods only postpone the reckoning as long as unions are given a legal stranglehold over industries. In the last generation we have removed the chief risks from striking and made it next to impossible for an employer to combat a strike.

When an employer is confronted with a strike today he hardly dares to try to carry on his business. First, union monopolies are so tight that it is difficult to find other sources of labor. Secondly, if he tries to hire replacements, he meets violence and vandalism on the picket line, and the Norris-LaGuardia Act in effect denies him injunctive relief. Thirdly, if these obstacles are overcome, the National Labor Relations Board, even years later, may order him to rehire all the original strikers with back pay.

Until Congress is willing to reexamine and drastically revise its labor legislation of the past, we will continue to have strike chaos or be forced into the evils of compulsory arbitration.

Forced Arbitration?

August 29, 1966

When the striking machinists’ union, before exacting its guideline-smashing 6 percent settlement, turned down not only the 3.5 percent wage-increase award offered by the President’s emergency board but even the 4.3 to 4.5 percent increase then offered by the airlines under White House pressure, even newspapers that prided themselves on their “liberal” opinions began to demand compulsory arbitration.

When a major strike is causing great public hardship, such a demand seems plausible. The strike is obviously harming not only the workers and industries involved but other workers and industries. The damage done may be nationwide and grave. Should not the government have a right to prevent it? Every strike will eventually be settled on some terms. Why not have an impartial tribunal fix such terms, and save the costs, waste and disruption of a prolonged and bitter strike?

What is usually overlooked by the advocates of compulsory arbitration is that we already have something very close to it, and it has obviously failed. The airlines strike was handled under the Railway Labor Act, which we have had since 1926. Under that act, when a strike has been called, the President has the power to require the workers to stay on the job for 30 days while he names an emergency board to study the dispute and report its recommendations within that time. President Johnson had already done this. When the machinists rejected the Presidential board’s recommendations and walked out, it was not the first time transportation workers had done so. They have done it repeatedly. In practice the board’s final recommendations have been binding in effect on the employers while unions have rejected them.

IT KILLS BARGAINING

Once it is known, or even suspected, that a governmental board will eventually recommend settlement terms, serious collective bargaining usually stops. Each side makes only enough concessions to give the appearance of bargaining. Both sides reserve their real arguments for the arbitrators.

Compulsory arbitration could only increase the number of threatened strikes. The tendency of all arbitrators is not to find what settlement terms would be “just,” but to find some acceptable middle ground between the employer’s last offer and the union’s demand.

After the first major compulsory award had been made, the government arbitration boards would face the demands of all other unions who felt they had had a less favorable deal. The arbitrators will be under tremendous pressure to make all their awards “consistent.” But what will “consistency” consist in? In granting all other unions the same percentage wage increase? Or the same dollar and cents wage increase? And from what common past base would the increase be measured? Or would the boards fix the same “just” wage rate for everybody, regardless of skill or past differentials? In any case, the tendency would be toward universal government wage-fixing—toward a rigid and regimented economy.

PUBLIC MADE HELPLESS

How would the compulsory awards be enforced? It was already illegal for the New York City transit workers to strike, but when they contemptuously defied the law and the public, nobody dared to penalize them.

But if we should not try to impose compulsory arbitration, if we cannot forbid strikes, and if the imposition of longer back-to-work “cooling off” periods merely postpones the eventual capitulation to excessive union demands, is the public helpless?

We are so only to the extent that we have made ourselves so. In the last 40 years, through the Railway Labor Act; the Norris-LaGuardia Act; the Wagner Act; the Taft-Hartley Act and an incredible set of National Labor Relations Board decisions, we have taken nearly all the major risks out of strikes. We have made employers almost powerless to combat them. We have given unions special privileges and immunities. In brief, we have built up enormous irresponsible union power.

Yet Congress not only refuses to repeal, revise, or even to re-examine any of these laws; it acts and talks as if they had nothing to do with the recent epidemic of irresponsible strikes.

Parting Words

September 12, 1966

In September 1946 I wrote my first regular column for Newsweek. Now, just twenty years later, I am writing my last.

This twenty-year record, I confess, is overshadowed by the phenomenal performance of my colleague Raymond Moley, who in 1963 rounded out 30 years on Newsweek without missing a single issue, and is still at it. But this leaves me the runner-up for continuity among Newsweek columnists, and I’ll have to settle for that.

My twenty years on Newsweek have been very pleasant ones. I have enjoyed complete freedom, within self-imposed bounds of good taste, to say what I want. Except for a special post-election issue once in four years, and one or two issues devoted to a single subject, no editor has even suggested what topic I should write on. No one, without my consent, has even changed my particular wording. When one considers how probable it is that the editorial management of Newsweek has not always agreed with me, my case is an impressive illustration of the full freedom of expression enjoyed by the Newsweek columnists.

FREEDOM OF WRITING

This respect for the integrity of the individual writer, I am happy to say, is not confined to this magazine. For twelve years prior to my service here, I wrote editorials for The New York Times. These voiced the opinions of the newspaper, and were of course unsigned. Yet at no time there was I ever asked to write a sentence that I personally did not believe to be true. And this was the situation also on the New York newspapers I worked on in my vicissitudinous youth—The Wall Street Journal, the old Evening Post, the Tribune, the Evening Mail, the Herald, the Sun—all but the first, alas, now deceased.

I do not think my experience has been exceptional. No doubt there are newspapers and magazines that try to tell their editors what to write, and that run items or opinions primarily to please the advertisers; but they represent a sort of journalistic underworld, and are certainly not typical.

I am grateful to the many readers who have taken the trouble to write to me about my columns or the subjects with which they dealt. I tried to answer all letters that were reasonably polite. Naturally I have liked the praise and the expressions of agreement; but I have found even most of the hostile letters helpful. At the very least they have usually called my attention to some point that I failed to make sufficiently clear.

One point that I have apparently often failed to make sufficiently clear, judging by some of these letters, is that, when I criticize some alleged “liberal” or “anti-poverty” measure, I do not do so out of callousness, or because I have any less desire than my correspondents to reduce poverty or increase aggregate real wages.

SHORTSIGHTED CURES

I have opposed minimum-wage laws, for example, because the main effect of such laws is to create unemployment. They increase the incidence of unemployment most of all among teen-agers, the unskilled and Negroes. I have often defended employers, because they are the ones who provide employment. To get full employment it is necessary not to destroy incentives for employers—a necessity that self-styled “friends of labor” too often forget. I have opposed excessive corporate and personal income-tax rates because they seriously reduce both the funds and the incentive for new investment. Yet it is above all the rate of new investment that directly determines the rate of increase in labor productivity and in real wages.

In brief, I do not differ from my “liberal” correspondents in their goals, but simply in their proposed methods of achieving them. In trying to bring about some wished-for result directly and immediately, they too often fail to see that the ultimate results of the policies they propose will be exactly the opposite of what they desire. The difficult problem we face is how to mitigate the penalties of misfortune and failure without undermining the incentives to effort and success.

I shall shortly begin a twice-a-week nationally syndicated column. Yet it is sad to leave old associates and friends. I thank the readers who liked my articles for their thoughtfulness in writing to say so, and those who didn’t for their forbearance.