Popular Causes and Unpopular Effects

A quarter century ago most of the world's leading gov ernments, sorely beset by the practical difficulties of eco nomic depression and encouraged by the theoretical blessing of Lord Keynes and his disciples, adopted some thing like the old legislator's philosophy. They cast off the "snuffiing orthodoxies and petty taboos" of classical economics and proceeded to give the people what they wanted. The Popular Causes Reduce taxes they emphatically did not, but they did the next best thing: they threw as much of the direct From The Guaranty Survey, November 1957. Albert C. Wilcox, editor. [273 ] burden as possible upon business concerns and individ uals in the higher income brackets, the easy targets, the financially vulnerable and politically defenseless minor ity. Then they distributed the proceeds under the names of numerous "social programs": farm subsidies, unem ployment compensation, old-age benefits, public housing, and many others.

They sought to strengthen the bargaining position of labor unions in their dealings with employers. They more or less fully accepted responsibility for "full employ ment," that is, for keeping business prosperous, or at any rate active. The keystones of the whole structure were easy money, free spending, and political regulation of various phases of the people:>s economic lives. It would be unrealistic and unfair to suppose that these measures were inspired solely by demagogiC considera tions of political advantage. To some extent, they arose from genuinely good intentions. The economy was func tioning badly. Human beings needed relief. Business recovery needed, or seemed to need, stimulation. Eco nomic institutions that were rightly or wrongly blamed for the collapse appeared to require reform. War Is Forever The semicompulsive nature of the inflationary and regulatory measures of the depression years became even stronger during the war period. If the joint objectives of relief, recovery, and reform had seemed imperative [274 ] before, winning the war was now even more so. Arti ficially easy money, huge Treasury deficits, and new forms of economic regimentation were accepted without protest.

Even when the war was over, the situation retained much of its emergency character. Large areas were phys ically devastated and economically prostrate. The war time military alliance fell apart, and the "cold war" began. The economic future looked very obscure. Under such conditions, the return to economic orthodoxy, the relinquishment of emergency stimulants and controls, was rendered doubly difficult. Moreover, men were tempted to ask, why should the emergency stimulants and controls be relinquished? Had not economic orthodoxy broken down in practice? Had it not been superseded by a new economics that made easy money, free spending, and political controls and regulations theoretically defensible? Who could quarrel with such manifestly desirable objectives as fair prices, adequate housing, full employment, high wages, and security and welfare for all? Why should not the people in their collective capacity, functioning through the State, endeavor to promote these objectives, substituting purposeful action for the "economic drift" of the prewar and predepression years?

The Unpopular Effects Experience is providing some answers. It is being dis covered that good intentions are not enough. If good [275 ] intentions are to accomplish anything, they must be translated into concrete economic measures, and such measures mayor may not produce the intended effects. Even if they do, they are almost sure to produce unin tended ones as well. Where some groups are benefited, others are hurt. Competition for productive efficiency tends to degenerate into a scramble for political favor. Government of, by, and for the people tends to become government of, by, and for pressure groups. The promise of cradle-to-grave security weakens economic incentive, tends to make men financially irresponsible and reduce them to the moral level of dependent children. Why should a man strain nerve and muscle to provide for himself, to keep his job, to lay something by for a "rainy day/' to make provision for his old age, to protect his family from want, when a paternal state promises to do these things for him? Every personal financial misfortune, every source of dissatisfaction with one's economic lot, tends to become a grievance against the State.

Even worse, if possible, is the fact that governments, in their efforts to provide the "social services" demanded of them, are finding themselves under insupportable fi nancial pressure. Taxpayers demand relief while pressure groups demand larger benefits. Despite intermittent cam paigns of retrenchment, national budgets rise inexorably to new heights. In some countries, taxpayers simply re fuse to bear the burden, and' deficits mount. In some, a temporary expedient is found in exorbitant drafts on re serves of foreign exchange. In still others, a precarious fiscal equilibrium is maintained by postponing promised [276 ] tax relief. Almost everywhere, the purchasing power of money declines with varying degrees of speed and regu larity. To accelerate the inHationary process, the labor unions whose growth governments have fostered demand higher wages under pain of strikes on such a scale as to cripple whole economies. The wage demands and strike threats increase with every rise in the cost of living; and when the wage demands are granted, the cost of living rises again. And to make effective resistance more difficult, restrictive credit policies can be invoked only at the risk of precipitating business recession and thus colliding with the "full-employment commitment," perhaps the most cherished of all the "social programs" Welfare States espouse.

Intentions and Consequences When the United States government undertook to de termine what were "fair" prices for farm products and to insure that such prices were actually received by farmers, the unintended effects were overproduction, underconsumption, the loss of foreign markets, the use of substitutes, the accumulation of surpluses, a govern mental ':'dumping" program that involved heavy losses and aroused foreign resentment, and a level of farm prices that was certainly unsatisfactory to farmers and probably lower than would have prevailed in free markets. When the government tried to protect tenants against [277 ] high housing costs by retaining rent controls after the war, the unintended effects were that new building and even normal maintenance were discouraged, the hous ing shortage was prolonged, and people were obliged for years to live in antiquated structures. When the government intervened in the interests of "adequate" housing, the construction industry and its suppliers were overloaded, building costs rose to un precedented heights, and it became virtually impossible to provide housing for low-income families except by outright subsidies.

When the government decided that the unionization of workers should be encouraged and protected by law, it initiated the growth of a colossus that rigidified costs, encouraged layoffs, produced the national-emergency strike, forced the government into the position of virtual arbitrator, and served as the most powerful engine of inflation in the economy. Almost the only thing it did not do is what it was presumably intended to do, namely, cause real wages to rise faster than productivity. When our own and other governments assumed or accepted the responsibility of protecting the people against the risks of unemployment, disability, old age, and other hazards, they built into their economies an inflationary bias against which they.are still striving, in most cases with very indifferent success, and which, un less arrested, must eventually bring hardship rather than welfare, insecurity rather than security, to the intended beneficiaries.

Thus the popular causes that governments espoused a [278 ] generation ago are having some highly unpopular effects. One of the most unpopular, and rightly unpopular, is inflation, because inflation nullifies the security and wel fare at which the popular causes are aimed. In resisting inflation, however, governments are finding themselves forced to take measures which run counter to the popular causes and which are nearly or quite as unpopular as the inflation itseH. In Great Britain and the United States, monetary au thorities seem determined to effect price stabilization, even at the risk of some sacrifice of the "full-employment commitment." This policy, however, is arousing strong opposition, and the political repercussions that might occur in the event of a substantial business downturn are not pleasant to contemplate. In France, government after government has tried to meet the demand for price stabilization, only to fall because its proposed stabilizing devices were politically unacceptable. Conditions in other countries show similar variations, but almost every where the same dilemma, the same necessity of choosing between irreconcilable objectives, is being experienced in one form or another.

The basic difficulty is that, although inflation is un popular, the causes that are producing it remain popular. Men still cling to the belief that governmental authority and governmental largess can somehow bring them eco nomic benefits that free private enterprise cannot bring them. The dilemma will be resolved only when the peo ple realize that true economic progress can come only from higher productivity, and that higher productivity [279 ] can come only from saving, investment, and invention which are achieved by individual effort in an environ ment of freedom and incentive. This progress takes time, but there is no substitute for it. Attempts to hasten it by means of artificially easy money, extravagant spending, and political intervention in economic affairs only pro duce industrial and monetary disorder, which at best re tards progress and at worst can stop it altogether. [280 ] MORE FRENCHMEN TO ALGERIA?