The Road Not Taken; H. Hazlitt

Henry Hazlitt The Road Not Taken THE Foundation for Economic Edu cation, which publishes The Freeman, was set up in 1946. This seems to me as appropriate a time as any to review what has happened since its establishment in the realm of the government interventions and economic controls-the prohibitions and compulsions-that. FEE was set up to combat. In 1946, of course, these controls were already established over a wide-ranging area. A formidable network of what might be called Utraditional" controls was already in Henry Hazlitt, noted economist, author, editor,re viewer and columnist, has been a Trustee of The Foundation for Economic Education since he helped launch It In 1946. This article Is from his address before Trustees and guests of FEE at Irvington-on-Hudson, N.Y., November 1'9, 1978. 90 existence in the early 1930s; but this was enormously extended and tight ened by the advent of the New Deal.

It was then established that the government could repudiate with impunity its most solemn pledges the gold clause, for example; that it could abrogate contracts containing or assuming this clause; that it could allow labor unions to resort to violence and vandalism with rela tive immunity (as in the Norris LaGuardia Act of 1932); that the government could act as a union organizing agency, and force em ployers to ((bargain collectively" with such unions-that is, to make at least some concessions to their demands-as in the Wagner Act of 1935. And so 011. But let us now come to 1946, the THE ROAD NOT TAKEN 91 year FEE was founded. That was the year when the International Mone tary Fund, which had been set up by the Bretton Woods Agreement of 1944, began to operate. The IMF had been set up ostensibly-believe it or not-to ~~stabilize" currencies. And this was to be done by phasing that absurd and tyrannical thing, the gold standard, out of the monetary system. Instead, the member coun tries pledged themselves to keep their currencies convertible at a fixed rate only into the dollar. If the dollar were kept convertible into gold, it was assumed, that would be sufficient to stabilize the whole world currency system and make the value of each national money unit dependable.

Of course none of the Fund's gen eral rules were expected to be obeyed too strictly. That would have interfered with the freedom of each country's monetary authorities to manipulate their currency in the way that seemed to them most expe dient at any given moment. There fore, it was explicitly provided in the Fund's Articles of Agreement that any country could devalue its own currency at least 10 percent in any one step, and it was explicitly stipu lated that (~the Fund shall raise no objection." In addition, it was under stood that the Fund was to come to the rescue of any country whose cur rency got into trouble, even through its own inflationary policies. The stronger currencies were to support the weaker ones, thus insuring that the stronger would also be weakened. The Results of Bretton Woods We all know now what this finally led to. The American monetary au thori ties could not bring themselves to take seriously the grave responsi bili ty they had assumed in agreeing to make the dollar the world's an chor currency. Keeping the dollar convertible into gold, even if only at the demand offoreign central banks, seemed to them a mere technical requirement, an unnecessary an noyance and burden imposed upon them by some still persisting super stitions about gold. As the U.S. in creased its paper-money issue, con version became increasingly incon venient. It practically stopped de facto in 1968, and in August, 1971, it was stopped openly and officially.

Since then practically every nation's currency has become an irredeema ble paper currency. Every currency fluctuates every day in terms of every other. Money values, world trade, and capital flows become more and more disorderly and un predictable. And all this has happened because the world's so-called statesmen and national monetary managers, when they met at Bretton Woods in 1944, were thinking only of their own im mediate problems, and had no un92 THE FREEMAN February derstanding of what the conse quences of their patched-up scheme would be in the long run. The same kind of shortsighted ness has been the common charac teristic of nearly all the government interventions. of the last thirty years. We may select our examples almost at random. Minimum Wage Laws Take minimum wage laws. A na tional minimum wage was first enacted in this country in 1938. At that time the average hourly wage in American manufacturing was about 63 cents. Congress set a legal minimum of 25 cents. In 1945, the year before FEE was set up, the av erage factory wage had risen to $1.02 an hour, and Congress raised the legal minimum to 40 cents.

It all seemed very reasonable, very compassionate, very necessary, to those who urged and those who voted for it. Could the country toler ate ruthless exploitation of un skilled workers with no bargaining power? Could it tolerate ~~starva tion" wages? The obvious remedy seemed to be to prohibit such wages. Employers were forbidden to offer jobs at wages below the new legal minimum. An ironic thing happened. As in creased capital investment, in creased productivity, and competi tion among employers (all with a little help from inflation) kept raising the average hourly dollar wage, and making each existing legal minimum wage level obsolete, Con gress acted as if its prescribed minimums had brought this rise about. It kept amending the law every few years. It kept raising its minimum wage faster than the market was raising the average wage. It acted on the principle that whatever average wage the market produced, it would never be high enough. Congress has acted as if by constantly boosting the legal minimum it could hurry the market along. The minimum wage, at $2.65 an hour in 1978 and $2.90 in 1979, is scheduled to keep going up to $3.35 an hour on January 1, 1981.

Is this helping the poor? Is it help ing the unskilled worker? The re sults show that it is doing exactly the opposite. Minimum wage laws overlook the obvious. It should be obvious that the first thing that must happen when a law prescribes that no one shall be paid, say, less than $106 for a forty-hour week, is that no one who is not worth $106 a week to the employer will be employed at all. And if statistics can show any thing they show this. The minimum wage laws were passed to help espe cially the unskilled, the teenagers, and the blacks. We have no com parative figures on the unskilled as such, but we do have comparative figures on the teenagers and the 1979 THE ROAD NOT TAKEN 93 blacks. There has always been a tendency for teenage unemployment to run at a somewhat higher rate than that of men and women twenty years old and over, but it took the minimum wage levels and their suc cessive increases to make the con trast a startling one.

It is difficult to get comparative statistics going back beyond 1948. In that year the unemployment rate for both white and non-white teen agers stood at 10 percent. But as the minimum wage rate was jacked up year by year, not only did the overall teenage rate of unemployment keep rising, but it kept rising much more for black teenagers than for white. In 1954 unemployment for black teenagers stood at 14.9 percent against 13 percent for white. By 1968 the black teenager unemploy ment rate had risen to 26.6 percent against 11.6 percent for whites. In 1977 it rose to 37 percent for black teenagers against 15 percent for white. Between 1977 and 1978 un employment for 16 to 17 year-old blacks rose from 38.7 percent to 50.4 percent. So the minimum wage law and its successive hikes has simply driven into unemployment the very people it was most designed to help. The potential production of these people has been lost to the economy.

And what is the response to this consequence by the Congressmen who voted for the law and for the annual increases? They have simply ignored it. They would consider it political suicide, in fact, to oppose the minimum wage law. Unemployment Insurance A similar history can be traced for unemployment insurance. This was one of the great New Deal Hreforms" adopted in 1935. The argument for it was appealing. Workers suffered terrific hardships when they were laid off. Even when they were work ing, they lived in. dread of sudden unemployment. Certainly they should be assured of unemployment compensation when they were forced to look for new jobs. The first State-Federal un employment insurance programs, beginning about 1940, were sur rounded with safeguards. Un employment compensation was to be about one-half of the worker's previ ous earnings, but it was to run typi cally for only sixteen weeks, and there was to be at least a two-week waiting period for the worker, after losing his job, before he would be eligible for that compensation. But gradually, all these safeguards were weakened or removed. The typical waiting period was reduced from two weeks to one, and in some States to none at all. The period for paying the compensation was extended from sixteen weeks to twenty, then to twenty-six weeks, then to thirty nine (in an emergency, of course), 94 THE FREEMAN February then in some States to sixty-five weeks. In 1969 President Nixon called upon the States to provide for maximum weekly benefits of two thirds of the previous average week 1y wages instead of one-half.

The result of prolonging and in creasing unemployment compensa tion, naturally, has been to prolong and increase unemployment. It was found a year or so ago by a commit tee of the State Senate of New York that a number of New Yorkers re peatedly worked the minimum twenty weeks required and then col lected sixty-five weeks of un employment benefits. Though un employment compensation may be only one-half of previous working salary, the unemployment compen sation is tax-free, so the net loss from not working is sometimes quite tolerable. In a typical case in Penn sylvania, for example, a man whose previous weekly take-home pay was $140 can draw $96 a week in tax free compensation. A study made by the U.S. Department of Labor itself found that Han increase in un employment benefits leads to an in crease in the duration of unemploy ment." This country can have as much unemployment as it wants to pay for.

Rent Control Still another example of our shortsighted legislation is rent con trol. This is usually imposed in the early stages of an inflation. As the inflation goes on, the discrepancy between the rent the landlord is allowed to charge, and the rent necessary to yield him a return comparable with that in other in vestments, becomes greater and greater. The landlord soon has neither the incentive to make re pairs and improvements, nor the funds to make them. When the rent control is first im posed, the government promises that new buildings will be exempt from it; but this assurance is soon repudiated by a new law. It becomes unprofitable to build new rental housing. New mortgage money for it becomes increasingly difficult to ob tain. Landlords of old housing often can no longer supply even heat and other essential services. Some can not even pay their taxes; their prop erty has in effect been expropriated; they abandon it and disappear. Old rental housing is destroyed quicker than new housing is built.

Some favored tenants, already in possession, are momentary benefi ciaries, but tenants or would-be ten ants as a whole, in whose interest the legislation has been professedly passed, become the final victims. The irony is that the longer rent control is continued, and the more unrealistic the fixed rents become as compared with those that would yield an adequate return, the more certain the politicians are that any 1979 THE ROAD NOT TAKEN 95 attempt to repeal the rent control would be ~~politically suicidal." The-Energy Crisis The limits of space compel me to pass over any analysis of a score of other government interventions in recent years in the economic field, and to come immediately to the two or three that mainly characterize the economic situation today, not only in our own country, but throughout the world. In 1974 the Organization of Petro leum Exporting Countries-the OPEC-quadrupled crude oil prices.

It is instructive to notice that this was done by a combination of gov ernments. They did what private industry is always accused of doing-forming a monopolistic conspiracy-but what the hundreds of private oil well owners and com panies would never have been able to impose and enforce no matter how much most of them might have wanted to do so. This OPEC action produced a pro found economic shock throughout the world. And what was the re sponse of our own government? Did it retain or insist on a free market to give the greatest possible incentive to petroleum production and explo ration on the one hand and economy in consumption on the other? No. It did the exact opposite. It imposed an elaborate and incredibly compli cated set of price controls on domestic crude oil and on natural gas, to encourage continued wasteful con sumption and to reduce the incen tives to output and exploration. It preferred to protect the short-term interest of American consumers at the cost of their real long-term interest, and at the cost of both the short-term and long-term interest of .American producers.

Rampant Inflation Now let us turn to the government policies that most obviously affect us in all our daily activities government finances and monetary inflation. Throughout our history as a nation, when we were on the gold standard, federal government surpluses were the rule. Deficits except in the two world wars-were rare and comparatively small. But in 1931, we began to run chronic deficits-in the first few years by accident, and then by deliberate pol icy. In the last ten years or so, these deficits have been acceleratively larger. These deficits-again since the early 1930s-have been accom panied by mounting monetary infla tion. The dollar's purchasing power has been reduced, for example, to about 22 cents compared with that of 1940. To bring this inflation to an end, what policy must we follow in the immediate future? Obviously what needs to be done .is to bring the budget back to balance at the ear96 THE FREEMAN February liest possible moment. Obviously what needs to be done is to halt the accelerative increase in money and credit, to stop printing more paper dollars. But the situation is now so bad that practically no politician dares to suggest this course.

About half of our Federal expendi ture programs consist in the trans fer of income from the wealthy or the middle-classes to the so-called needy. In other words, they force the productive to support the unproduc tive. In the official budget these pro grams are not gathered under a sin gle head. But there is a table, on page 191 of the official budget for fiscal 1979, called ~~National Need: Providing Income Security," which estimates the total of such expendi tures for fiscal 1979 at $160 billion. Who is there-among our office holders-who is going to suggest cutting these expenditures? And by how much? And who is there who is going to suggest halting the reckless expansion of our money supply and risking a recession? The situation is so bad that no politician dares to suggest where to begin in correcting it. Once more, that is considered the path of political suicide. The Dilemma This is the ominous dilemma that confronts us. Some of my readers must have recognized that the title of this article is taken from the title of a poem-uThe Road Not Taken" -by Robert Frost. The last stanza of that poem reads: I shall be telling this with a sigh Somewhere ages and ages hence: Two roads diverged in a wood, and I I took the one less traveled by, And that has made all the difference.

Perhaps most of us have had a similar experience, either figura tively or literally. You may have driven on a throughway, for exam ple, toward a destination to which you had never driven before, and may have been told, or may have figured out from a map, that you should get off, say, at Exit 23. And then, suddenly and too late, you realize that you have driven past Exit 23. You can't turn back. You must look for the next exit, which may be miles ahead, and hope you will know what to do when you get there. You realize that you are going to be late, so you start almost uncon sciously to speed up, but are aware that you are only going faster in the wrong direction. We have reached such a dilemma in our political and economic life. We have taken the wrong road, and we have been on it so long that getting back on the .right one seems almost hopeless. The longer we stay on the wrong political road, the more difficult it is to correct the error.