VI.King Midas Joins Robin Hood

VI. KING MIDAS JOINS ROBIN HOOD King Midas was the man who once had the power to turn everything he touched into gold. Robin Hood was a popular bandit of medieval England. He justified his holdups on two grounds: a. The vested interests had "done him wrong." b. He robbed only those who could afford it and he gave much of his plunder to the poor. What a lot of good deeds Robin Hood might have done if he had lived when King Midas had his golden touch! King Midas could have made good on the instant the losses of those who were robbed by this charming bandit. In that way Robin's hijacking could have gone on forever, along with his benevolences, with no injury to anyone. Amazingly enough, modern governments do have this "golden touch" and they often do use it to support various legal or illegal rackets. Governments Have a "Golden Touch" Governments can make money out of almost anything—copper, lead, glass beads, wood and paper. Such money is often for a while "as good as gold," as far as its buying power is concerned.

This magic of government's golden touch reaches its highest form in the case of check money, or "deposit currency." Governments are also notoriously lavish in use of their credit. In fact it is hard to say sometimes whether a modern government is borrowing money or manufacturing it. Certainly a national government can borrow more easily than private persons because it can pay its debts by manufacture of new money, as well as by forced levies (taxes) on its citizens, including those citizens who lent it money. Having Fun on Easy Money By manufacturing money and by credit manipulations, a strong government can get great quantities of "easy money." It can use this easy money to help finance projects which would otherwise be too unpopular with the people.

44 DO WE WANT FREE ENTERPRISE? Ancient monarchs used to "debase" the currency by putting more lead and less gold or silver in the coins. By such means they got more money for their lady friends, finer palaces, bigger armies, and more costly entertainments. Modern rulers "inflate" the currency or credit for similarly uneconomic uses. Japan and Germany, for example, built their armies and carry on their wars in large part with such easy money. Our own United States Government has used this easy money in large quantities to help finance its wars, including loans to allies. The question here does not concern the object of the spending but whether most of the money might not better have been obtained by taxation. (See below, pp. 56-66.) To an increasing degree since 1920 the United States has been using its great monetary and financial powers as an economic marijuana. In the '20's it used a cheap money policy to offset the evil effects of the 1922 Tariff Act and to avoid agricultural deflation. How this aggravated the problem and led to over-expansion of credit in the real estate and securities markets has already been described. (See above, pp. 39-40.) The result was the crisis of 1929 and the beginning of a worldwide depression.

Sending Good Money After Bad Instead of encouraging the liquidation of unsound price and credit positions in 1930, the Federal Government sought to bolster them by still more lavish use of government credit and government controls. The Federal Farm Board purchases of farm commodities, the Hawley-Smoot Tariff Act of 1930, government spending for public works, government pressure in 1930-1931 for wage maintenance, the raising of railway wages and freight rates in 19311932, and the creation of the Reconstruction Finance Corporation—all were aimed at maintaining prices, credit and consumer spending rather than at removing the original causes of the depression. Private corporations cooperated by maintaining dividend rates in 1930 at 95 per cent and in 1931 at 70 per cent of 1929 levels despite a decline in profits of 83 per cent in 1930 and a huge aggregate loss in 1931. A few corporations, notably the Ford Company, raised wage rates even while business was declining.

These policies were based on the theory that we could spend our way back to prosperity.

KING MIDAS JOINS ROBIN HOOD 45 Private enterprise cannot long operate on this theory. Despite a sincere desire to maintain prices, wages, dividends, and expenditures for plant expansion, most corporations had to retrench after a few months or a year of experience with the spending theory. This retrenchment was all the more drastic because of the attempts to maintain boomtime dividends, prices, wage rates and investment policies in 1930.* King Midas to the Rescue Declining prices came to be regarded as the cause of the depression, and a movement for restricting price competition gained rapid headway during the fall and winter of 1932-1933. In the spring and summer of 1933 the spending theorists joined forces with the advocates of price-maintenance and took over the United States government—with general popular approval. The Agricultural Adjustment Act, the National Industrial Recovery Act, and devaluation of the dollar were designed to maintain or raise prices. These measures were supported by a huge Federal spending program financed by expansion of bank credit.

In 1935 the A.A.A. and the N.I.R.A. were upset by the United States Supreme Court. Business and employment immediately improved. The advocates of price-fixing, however, still controlled the government. Consequently new price-maintenance measures were devised and were accepted by a reconstructed Supreme Court: state and local "little N.R.A.'s," the Bituminous Coal Act, resale price-maintenance laws, the National Labor Relations Act, milk control laws, hundreds of new interstate and intercity trade barriers, minimum wage laws, the Federal Wage and Hour law, the Surplus Commodity Corporation, a new A.A.A., the food stamp plan. To effectuate these controls a host of other measures were adopted to use government's "golden touch" in expanding currency and credit: abandonment of the gold standard, a costly public works program, •There is considerable evidence that the liquidation was completed by the summer of1932 and that business was ready to resume its upward march. At this point, however,the United States underwent a political interregnum followed by a near-revolution.

46 DO WE WANT FREE ENTERPRISE? numerous government lending agencies, government guarantees for private loans, a "soldiers' bonus," unemployment insurance and pensions, subsidies to farmers, huge purchases of silver at greatly inflated prices, purchase of "surplus farm commodities." By inflating currency and credit these measures were intended to raise the rate of consumer buying which the price-maintenance schemes otherwise would have reduced. Thus the Midas touch of government was used to make good the various Robin Hood raids on consumers' pocketbooks and the public treasury. But why do consumers and taxpayers tolerate policies which restrict output, reduce the purchasing power of money and raise taxes ? The answer is to be found in the fallacious and fraudulent theories of Robin Hood economics, Robin Hood Economics Two-gun Charlie once heard a park-bench "economist" explain how business depressions were brought on by failure of businessmen to pay out enough money to wageearners and stockholders so that consumers could buy the goods produced. This convinced him that his "work" was a patriotic duty. It helped business as long as he took care to spend the proceeds of the holdups in buying the goods of his victims.

This made money circulate, increased sales, reduced overhead costs, and increased profits. Of course it was illegal, but this only made Charlie a martyr when the police caught up with him. Before we dismiss Charlie'9 theory as idle rationalization let's compare it with the theories used to defend certain popular policies: 1. "Depressions are caused by oversaving due to the fact that some rich people get more than they can spend and also to the fact that workers are not paid the full product of their labor. Therefore, higher taxes on profits and on large incomes will force money back into circulation and help business." 2. "If city people can be forced to pay higher prices and subsidies for farm products, farmers can buy more of the products of city industries. This will increase business, employment and incomes of city people so that they can buy more of both town and country products."

KING MIDAS JOINS ROBIN HOOD 47 3. "If we can force employers to pay higher wages, we can buy more of their goods. This will increase sales volume, reduce overhead costs, and increase profits." 4. "If my customers will pay me higher prices, I can pay higher wages, my workers can buy more goods-, other businesses will be helped, employment in general will expand, production will increase and everyone will be better off." In short, holders of these theories say: "Pay us more money, so that we can buy more from you. That will make us all more prosperous. If you won't do this voluntarily we shall take steps to force you." Coercive policies based on this Robin Hood brand of economics are of two general sorts: 1. Taxing one class for the benefit of another class. This reduces employment and purchasing power in precisely the same way as a spread of banditry. 2. Restricting output and trade to raise prices or rates of pay.

This has the impoverishing effects of an earthquake, fire or flood, each of which likewise reduces output and trade. Let us consider these policies in detail. A. Destructive Taxation The Robin Hood theory of taxation was directly responsible for the 1936-1937 Federal tax on undistributed profits. This tax was based on the notion that business could be made more prosperous by being forced to pay out more of its profits, either as taxes or dividends, in order to put more money into the hands of consumers. The same theory lies behind schemes like the Townsend old-age pension plan and the Ham and Eggs scheme. These propose to make the nation prosperous by taxing producers for the benefit of nonproducing pensioners. Robin Hood economics also has helped promote a perversion of the ability-to-pay principle in taxation. According to this perversion, taxpaying ability is measured by the producers' surpluses instead of by the consumers' surpluses. Consequently the United States places its highest tax rates on job-making, enterprise, thrift and efficiency.

Base rates for taxes on corporation profits-are double the base rates for taxes on other forms of income.

48 DO WE WANT FREE ENTERPRISE? The higher the total net profits of a corporation the higher is the rate of taxes it must pay. This means that the more successful job-makers are taxed at higher rates. In addition, when profits are paid out to the owners as dividends, they are taxed again at the same rate as other forms of personal income. The more efficient and profitable firms are those which should expand most rapidly. These are the firms which can pay higher wages and sell at lower prices. Yet discriminatory taxation takes from them their chief means for expansion—reinvested profits. What sort of an automobile industry would we have today if recent tax laws had been in effect 20, 30 or 40 years ago ? Could it have grown to anything near its present size? Would it be able to employ hundreds of thousands of workers, producing millions of cars in peacetime and millions of needed war machines in wartime?

Unemployment is one of our chief peacetime problems. This means a surplus of job-seekers and a shortage of job-makers. Yet our heaviest tax burdens are placed on job-makers, and the rates are increased in proportion to efficiency in performing this most useful service. Could the enemies of America devise a more effective method for destroying both our liberty and the industrial basis of our national strength? Near-confiscatory taxation of upper-bracket personal incomes has thrown another serious obstacle in the path of private enterprise. Roughly one-third of the venture capital going into development of new business and new jobs formerly came from incomereceivers above the $100,000 level. This source of funds for expansion of enterprise is now almost completely destroyed. It has been estimated that, after deduction of taxes, total net income going to these persons and families was reduced 90 per cent between 1929 and 1940, inclusive. In fact, it is doubtful if this class of income receivers is making any net contribution to the capital market after deduction of inheritance and estate taxes.* Aside from reinvested profits and high incomes the only other significant source of new capital necessary for our national progress and security is the savings of the upper middle classes (incomereceivers from $5000 to $100,000).

Dr. Imre de Vegh estimated that net income of these incomereceivers, after taxes, was reduced 42 per cent between 1929 and 1940. •Savings, Investment, and Consumption," by Imre de Vegh, Papers and Proceedings, American Economic Review, February, 1943.

KING MIDAS JOINS ROBIN HOOD 49 These and other restrictions on enterprise help explain the fact that sales of new corporation securities in 1933-1939 remained at 10 to 20 per cent of the average for 1920-1930. They also help explain why the United States Government had to provide 85 per cent of the new capital for financing the war effort in World War II as against approximately 10 per cent in World War I. Solicitors for philanthropic enterprises frequently tell the well-to-do prospect that his gift will not cost him much, because he would have to pay most of the money in taxes anyway. A corollary to this argument is equally sound and no less commonly expressed: "Why make further investments or work harder when I must bear all the losses while most of any gains I happen to make will be taken by taxes?" Thus Robin Hood tax policies kill the business goose which lays the golden eggs of consumer income.

B. Trade Union Restrictionism According to a popular trade union theory high wage rates are the key to business prosperity and full employment. A leading trade union publication attributed prewar unemployment to high taxes which reduced prospects for profits. The same article, however, argued that prospects for business expansion in the near future were "particularly favorable" because hourly wage rates were the highest in history.* In other words, employers supposedly are made prosperous by what they pay out, not by what they receive in return. This prosperity of the employers in turn gives rise to an increased demand for labor and thereby benefits the community as a whole. It follows from this theory that measures for raising wage rates promote the general good even though they restrict labor's output of goods and services. It also follows that measures to raise wage rates for one trade.

e.g., coal miners, benefit all other workers, e.g., carpenters who buy the coal. Supporting this theory is the belief that competition between workers for jobs reduces wages to levels set by the neediest and least efficient. Therefore, it is argued, wage competition must not be permitted between individual workers. Instead, minimum wage rates must be fixed by the average worker's standard of living. mMonthly Survey of Business, American Federation of Labor, July-August, 1939.

50 DO WE WANT FREE ENTERPRISE? Restrictionist policies resulting from these theories are: 1. compulsory unionism (closed shops), restriction of apprentices, closed unions, restriction of output, featherbedding, reduced working week and penalty over-time rates; 2. standard rates of pay which ignore differences in skill and efficiency, opposition to piece-work basis for wages, adjustment of wage rates to changes in living costs regardless of changes in labor efficiency; 3. wage maintenance in depression as a "recovery" measure, attempts to set wages according to the ability to pay of the more profitable enterprises and above the ability to pay of marginal employers; 4. government unemployment relief and old age pensions on a more and more liberal scale to help raise wage rates and increase consumer buying power. These policies raise costs of production, restrict output, reduce the demand for labor, retard economic progress, and endanger national strength and security.

C. Agricultural Restrictionism According to Robin Hood economics city workers are benefited by paying higher prices for farm products and by paying taxes for subsidies to farmers. "City workers are unemployed because the farmer cannot buy the surplus products of the cities. Give the farmer more money and everyone will be more prosperous." So runs the argument. Supporting this theory are two additional dogmas commonly preached by farm politicians: 1. "Competition among farmers permits the middlemen, who are better organized, to take more than a fair share of the consumer's dollar." As an argument for agricultural restrictionism this is no better than the assertion that two wrongs make a right. Where monopoly does exist in marketing of farm products it should be eliminated. In recent years, however, government policy, supported in many cases by farmers, has been a leading factor in promoting monopoly in this field.

2. "In comparison with other types of workers farmers are underpaid on the basis of the amount of hard work required." This raises again the question already discussed of whether or not producers should be paid according to the worth of their services as evaluated in competitive markets. (See above, pp. 17, 26,.35.) KING MIDAS JOINS ROBIN HOOD 51 These Robin Hood theories are used to support a policy of agricultural restrictionism intended to raise prices and incomes for farmers. These include: 1. restriction of production and sales through spurious soil conservation measures, prorate schemes, interstate trade barriers, marketing agreements and penalty taxes on competing products (e.g., oleomargarine and filled milk) ; 2. restriction of competition through monopolistic practices of certain farm organizations; 3. government subsidies, crop loans, tariffs and "surplus commodity" purchases.

These policies, whatever the excuse made for them, are means for coercing one class into paying tribute to another class. Their economic effects are the same whether they are legal or illegal, whether they are practiced by the few or the many, and whether they are for the benefit of the poor or the rich. When illegal they are termed rackets. When carried out by government it seems not unreasonable to call them legalized rackets. If prosperity requires maintaining a fixed ratio between farm and non-farm incomes it is hard to explain America's economic progress. During the past centuries the farmers' share of the national income and their relative importance as a market for urban goods wasdeclining from 90 to 95 per cent down to 10 per cent, the approximate figure in recent years. In fact, if maintaining a given ratio of income between different classes is necessary to prosperity it would be a mistake ever to disband armies because armies are important markets for goods.

The theory that one class can be benefited by paying tribute to another class is a cheat and a fraud. City people are benefited by the goods which farmers produce for them, not by the goods farmers take in return. It is to the interest of urban consumers to pay whatever prices are necessary to induce farmers to supply the desired quantities of farm products under competitive conditions. An honest policy of soil conservation is also in the public interest. But organized restriction of output to raise prices and tax-supported subsidies to raise incomes are no more to the economic interest of non-farmers than train robberies or bank holdups. Neither are they in the long-run interest of fanners.

52 DO WE WANT FREE ENTERPRISE? D. Business Restrictionism Business restrictionism is based on the argument that price maintenance promotes general prosperity. According to this theory, higher prices enable business owners to pay higher wages, buy more materials, contribute to charities and pay taxes. Thus the business restrictionist promises to make consumers, as well as other businessmen, more prosperous by charging them more for what they buy. We also find among businessmen the same fear of price competition which exists among trade unionists and farm restrictionists. The notion is widespread that price competition always levels down, causing a depressing spiral of falling prices, falling profits, falling wages, increasing unemployment and declining quality of goods. Supported by these Robin Hood theories a host of restrictions have been placed on business competition: interstate and intercity trade barriers, discriminatory taxes on chain stores, "little N.R.A." laws for dry cleaners and barbers, resale price maintenance laws, (see below, pp. 89-95), government fixing of retail milk prices, protective tariffs, (see below, pp. 67-88), market allocation (usually illegal), price maintenance agreements (usually illegal), pressure for protective railway rates, demand for uneconomic spending by government.

These policies restrict growth of the more efficient firms by restricting opportunity to capture markets from high cost operators through cutting prices. Thus they retard economic progress. Increased efficiency reduces costs. If business owners are strongly organized they may keep for themselves most of the gains from these cost reductions. If wage earners are well enough organized they may capture most of the gains. Under competitive conditions, however, the gains are more widely distributed. Business owners gain in proportion to the extent to which they introduce improvements more rapidly than competitors. Workers gain as more efficient firms expand operations and bid for labor against other employers. All classes gain as consumers from the decline in prices. As falling prices in one line release consumer purchasing power, demand increases for products of other lines, including products of new industries and services of new trades.

KING MIDAS JOINS ROBIN HOOD 53 Competition is a levelling process. In a retrogressive society it levels down, but in a progressive society it levels up. When enterprise is free, when science is advancing, and when capital is increasing faster than population, competition speeds adoption of improved methods. It expands output per worker, increases the demand for labor, and raises general levels of purchasing power, even while prices of particular goods are being reduced. Such were the conditions in the Americas for 300 years. To a lesser extent they prevailed in many other nations. In recent years, however, vested interests have been given increasing protection at the expense of community prosperity and progress. The world has been faced with a conspiracy of the inefficient. The Fallacy of Robin Hood Economics The conspiracy of the inefficient, however, gets most of its support from well-intentioned producers and consumers who honestly believe that prosperity can be promoted by scarcity policies and price maintenance.

They forget that a man's prosperity does not consist in what he sells or gives away but in what he is able to buy. Nor does a man's prosperity depend on the amount of money he has or the high prices he charges. Instead it depends on the abundance of commodities and services which he can obtain. This abundance and high purchasing power depend on high production. This high production is obtained by specializing on those things we can do best and getting other things by trade. Cheap transportation promotes prosperity by facilitating and inducing such specialization. High production is also promoted by greater use of tools, machinery and methods which increase output per man hour and free labor and purchasing power for new industries and services. Attempts to protect any vested interest against competition arising out of trade or labor-saving methods injure all other interests in the community.

For example, protection to a local industry against out-of-state competition may be provided by maintaining freight rates. Such protection is said to benefit the community by providing jobs for workers in the protected industry and profits for the owners. However, insofar as such protection maintains a higher level of 54 DO WE WANT FREE ENTERPRISE? prices than would otherwise prevail it reduces the purchasing power of all other workers and all other business owners. It is equivalent to a sales tax levied on all other producers for the benefit of those who are protected. It thereby reduces wage levels in all other trades and reduces local markets for all other commodities and services. Thus it reduces the demand for labor in all other trades to the extent that it maintains employment in the protected trade. In addition it prevents an increase which would be brought about in average income levels through transfer of labor to industries able to sell in competition with the goods of other areas. (See below, pp. 69-70.) Consumers are not benefited, therefore, by being charged higher prices so that they can be paid more money as wage earners or stockholders.

Employers are not benefited by being forced to pay higher wages so that they may sell more goods. Or^the contrary, trade restrictions and output restrictions which are used to raise prices or wage rates above competitive levels reduce prosperity for those who buy the restricted commodity or service. The further this is carried the greater is the loss. Occasionally monopolists in a particular line can get greater total net returns by selling a smaller quantity for more than they could have sold a larger supply. But this means merely that buyers (a) get less of the restricted commodity and (b) reduce their purchases of other goods in order to get the extra money to pay the restrictionists. It means that producers in other lines lose markets and get less in return for their efforts. It also increases competition for jobs in the unrestricted lines as workers are barred from the monopolized, or restricted, fields.

Gains to the monopolists, moreover, quickly disappear as other producers adopt similar tactics and raise prices of the goods which the first monopolists buy. What to Do? Farm groups refuse to yield their special privileges while industry has its price-maintenance policies and labor has its featherbedding restrictions on output. Business is not in a good position to talk free markets to wage earners or fanners when it demands restriction of price competition for itself, KING MIDAS JOINS ROBIN HOOD 55 Local communities justify their logrolling for Federal pork on the ground that they are paying for similar government projects elsewhere. Until each of us becomes conscious of the beam in his own eye there is little hope of removing the mote from the eye of someone else. The fallacies common to all monopolistic restrictions and legalized rackets must be recognized and attacked together. The advantages of free enterprise, competition and increasing productive efficiency must be recognized by leaders in every line.

Logrolling for liberty must replace logrolling for special privilege. Meanwhile the ease with which government can borrow from the banks, who dare not refuse to lend, provides the means for corrupting Congress and the people, expanding the bureaucracy and financing new experiments in government restriction of enterprise. We hope to use inflation—the Midas touch—to offset the restrictive effects of Robin Hood restrictionism and yet to escape the usual results of inflation. How ? The answer is more price control, this time to keep prices down instead of up. Will it do the trick? Will price control enable us to eat our inflation cake yet escape the deflation stomach-ache which usually follows ?