Rule by Guideline

September 13, 1965

A few months ago, George Champion, chairman of the Chase Manhattan Bank of New York, expressed his alarm over the trend in Washington toward what he called “government-by-guideline.” There are guidelines for wages and prices, guidelines for antitrust enforcement, for labor-management behavior and for television advertising. And bankers have been given a special set of guidelines for the balance of payments and for lending rates.

This trend operates behind a façade of friendliness and partnership between government and business, accompanied by much talk of “reasoning together” and “voluntary restraint.” “But always in the background,” said Champion, “is the subtle threat that failure to comply with the guidelines voluntarily will bring sternly coercive measures—measures applied, for the most part, without public debate in the halls of Congress or legal appeal in the courts.”

Most of these guidelines are misconceived economically. Yet the whole trend toward government by guideline is based on the assumption that bureaucrats know more than the market. This trend, Champion concluded, “is one of the most insidious and dangerous on the national scene today.”

ANOTHER ‘REQUEST’

Since he made his speech, government-by-guideline has shown, unfortunately, no signs of slowing down. On Aug. 18, for example, the White House reported that whereas consumers had received the benefit of about three-fourths of the $1,750,000,000 excise tax reduction enacted two months earlier, some manufacturers (e.g., of phonograph records, pens, pencils and matches) had failed to pass along the reduction. This failure, added the White House press secretary, “bears closer examination.” Meanwhile the government would “request these manufacturers to keep faith with the hope of the Administration and Congress in passing this legislation and to pass on the benefits.”

Here is a perfect specimen of the government-by-guideline technique. Everything is to be “voluntary”; manufacturers are “requested,” not ordered. But if they fail to do what the White House wants, there is a thinly veiled threat that something unpleasant will happen to them, even though the government has no legal right to force any price-tag reduction.

Apart from its disturbing legal implications, the White House statement is economically naïve. Manufacturers do not, as the statement implies, pass along a tax cut in full because they are public-spirited fellows, or fail to do so because they are selfish profiteers. In both cases it is costs, consumer demand and competition that decide final prices, just as they did before the tax was reduced. In the lines that failed to “pass on” the full tax cut, an upward price adjustment may have been overdue. The White House statement implies that prices and profit margins in each line were just what they should have been before tax cuts.

POWER CREATES POWER

How does the government come to have the power to impose guidelines over business decisions that it has no explicit legal authority to control? The answer is simple, and may be stated in the form of a political law: when a government has too much power in any direction, it can easily use it to usurp more power in other directions.

For example, the Federal government now spends one dollar out of every five now spent in the United States. Many business executives fear to oppose even unauthorized government “guidelines” for fear that they will lose government contracts, or have existing ones adversely renegotiated. Or they fear that they may suddenly be prosecuted for violating one of the vague and contradictory antitrust laws. Or they fear that their income tax may be hostilely examined. Or they fear that they may be cited for violating Federal labor laws.

In all these cases enormous discretionary powers rest in the hands of government officials. Even if an Administration never abuses these powers, and never uses them for economic reprisal, the mere fear that it may do so is enough to intimidate most businessmen. A government can usurp still more power precisely when it already has too much power.