Saturday, August 31, 2013

‘Planning’ vs. the Price System

The British White Paper, “Economic Survey for 1947,” will repay the closest study by everyone interested in the survival of economic freedom. It typifies the attitude of the most sincere, well-meaning, and intelligent government planners everywhere. It makes no direct attack on the private-enterprise system. It contains, indeed, many statements with which every defender of that system will heartily agree, e.g.: “In the longer view, increased output per man-year is the only way to expand production and the standard of living.”

The White Paper decries “theoretical blueprints.” It tells us that the “essential difference between totalitarian and democratic planning” is that “the former subordinates all individual desires and preferences to the demands of the state,” but that a democratic government must “conduct its economic planning in a manner which preserves the maximum possible freedom of choice to the individual citizen.”

The authors of the White Paper seem to be quite unaware, however, of the extent to which their actual plans contradict these announced ideals. We soon find them declaring that “the government must lay down the economic tasks for the nation; it must say which things are the most important.” This means that neither producers nor consumers are permitted to do this for themselves. After repudiating “economic blueprints,” moreover, the authors of the White Paper set their own “targets.” They tell us by exactly what percentage exports must increase in 1947. “Export targets are being worked out for the individual industries to correspond with the global target.” They insist that the government must control imports “tightly,” and they present a “program for 1947” showing just how much food, raw  materials, machinery, oil, tobacco, and consumer goods can be permitted to enter. They have detailed quantitative programs for the production of coal, electric power, steel, railways, shipping, agriculture, building and capital equipment.

The one thing they seem to forget is that under a free price system these problems solve themselves. Production tends to increase most precisely where the greatest relative shortages exist, because under a free price system it is here that the greatest profit incentives are offered.

It is said that less than 10 percent of the British economy is or will be nationalized under present plans, and that “private enterprise” is responsible for the other 90 percent. But at every turn in Britain private enterprise is prevented from functioning. The White Paper itself points to “a large number of direct controls...rationing, raw-material controls, building licensing, production controls, import licensing, capital issues control, etc. Other controls again, such as price control, influence the course of production by limiting profiting margins.” The authors, however, give no sign of recognizing the extent to which these controls have reduced and unbalanced production. They talk, on the contrary, as if production could only be kept in balance by their own constant intervention at every point.

Yet such controls are as unnecessary and harmful in the field of foreign as of domestic trade. If American foodstuffs are more essential to British consumers than American movies, they can be trusted to make that discovery for themselves. If you forbid a British consumer to buy an American automobile, he will use the money to buy a British automobile or some other domestic product instead. That will mean one less British car or other home product available for export. Though the British consumer is deprived of what he wants, the trade balance is not improved. In peacetime “planned” imports are needless and foolish, and “planned” exports are still more so. The British must export what foreigners want, not what the government thinks foreigners ought to get.

Under free exchanges all such problems used to solve themselves. If a country bought more from abroad than it sold, it ran short of foreign balances. Equilibrium was usually soon restored by gold shipments or a corrective movement of prices and exchange rates. But price controls, exchange controls, and blocked currencies now prevent all such automatic signals and adjustments. Here is simply one more illustration of how one control brings on an ever-expanding network of controls.

Friday, August 30, 2013

How England Got That Way

England’s coal crisis is far from a mere cold-weather crisis. The record freeze hastened and intensified a collapse that was certain to come. It is, after all, a generally known fact that it is colder in winter than in summer. This news, however, seems to have come to England’s “long-range economic planners” as a stunning surprise. They are reduced to the humiliation of admitting that everything depends on the weather, and that it is “not feasible so far to give any forecast of conditions beyond noon tomorrow.”
But the British coal shortage was already obvious long before winter set in. The October figures of distributed stocks are crucial. In 1944, these amounted to 18,500,000 tons; in 1945 to 13,800,000 tons; in 1946 to only 10,900,000 tons—the lowest for winter stocks on record.

Behind such figures lies the long-range decline of the British coal industry. In 1913 Britain produced  287,000,000 tons of coal; exports (including bunkers) amounted to 94,000,000 tons—55 percent of all world coal exports. In 1929 coal production was 258,000,000 tons; exports 77,000,000. In 1938 production was 227,000,000 tons; exports 46,000,000. In 1945 production was down to 182,000,000 tons and exports to 8,000,000. In other words, exports had fallen to almost one-twelfth of the former level.

Passing over the results of the coal nationalization program, which has been in legal effect since last July and in formal effect since Jan. 1 of this year, the British crisis is sufficiently explained by the tight network of controls and the chaos of government “planning.” It is impossible to know to what extent that present shortage of miners results from the success of the British labor unions in preventing a free wage market. It is not the absolute level of wages in the coal industry that determines the number of workers attracted to it; it is the level compared with that offered in other lines. But if sufficient British labor cannot be attracted to the mines even by a substantial wage premium, then the obvious remedy is to admit Polish or other immigrant miners who would be delighted to take the work. British controls have prevented either solution.

Great Britain still retains general price-fixing. If it had depended upon free prices as its guide, it is wholly improbable that the present crisis would have arisen. The shortage of coal would have reflected itself long ago in a rise of price. This would have raised a brilliant red light for all to see. Consumers would have been forced, without appeals or allocations, to reduce their demands. Higher wages could have been offered to attract more miners. Imports of coal would have started to Britain long before winter set in. (Our own government still severely limits the quantity and grade of coal that can be exported; so it is only fair to point out that our own “planning” might have prevented this remedy even if Britain’s had been ready to accept it.)

No less serious a cause of the present crisis has been the price-fixing of other British goods. This prevents the British from knowing where their real relative shortages and surpluses are, and from automatically correcting them through the price-and-profit system. One reason why the British people have lost the incentive to work is that they cannot buy what they wish even with the money that their government leaves them after taxes. The economic planners do not trust the people. They tell them in the White Paper that if they are permitted to spend their money as they wish, they will buy “too many luxuries” and “not enough food and clothes and coal; too many toys and not enough children’s boots; too many greyhound tracks and not enough houses”; and so on. So the British people are treated as wards of the state. They are permitted to have not what they want but what the economic planners think is good for them.

Unfortunately the British people accept this totalitarian view. They are told, and the great majority of them still believe, that the “austerity” program of the Labor government is essential to the country’s economic salvation. It is true that individual austerity is something that most of them probably cannot escape. But the kind of planned and measured austerity imposed upon them by the government is not only unnecessary, but the most serious obstruction to their national recovery. Why this is so, I hope to explain more fully in a succeeding issue.

Thursday, August 29, 2013

Chinese Handwriting on the Wall

On March 1 the International Monetary Fund, with some 40 members, begins exchange operations. It could hardly start in less promising circumstances. Most of  the 40 nations have sent in the “par value” of their currencies. In very few cases do these official values at all correspond with the values as measured by black markets or free markets. The French franc is officially valued at 119 to the dollar; it has been selling on the outside market at 290 to the dollar. The Belgian franc, with an official value of 43 to the dollar, has been selling on the outside market at 60. The Dutch guilder, with an official value of 2.65 to the dollar, has been selling at 6.75. These are among the “stronger” currencies. The situation in Poland, the Balkans, Greece, and China is incomparably worse.

Yet the fund will buy the currencies of all member nations at par. This means that the relatively strong currencies—above all, the American dollar—will be forced to support the weak ones. It means that the United States will throw away further billions of dollars in buying foreign currencies far above their real values. This type of support by subsidizing the unsound policies of the governments that issue these currencies, postpones the day of reform. For the fund managers are given next to no power to insist on internal fiscal or economic reforms before they grant their credits.

Unfortunately the fund managers, instead of pointing to the dangers of this situation, have sought to rationalize it. “For practically all countries,” they said in a statement on Dec. 18, “exports are being limited mainly by difficulties of production or transport, and the wide gaps which exist in some countries between the cost of needed imports and the proceeds of exports would not be appreciably narrowed by changes in their currency parities.” This is not true. There would be a dramatic change in their trade balance if the currencies of these countries were allowed to sell at their real values. It is precisely because their currencies are ridiculously overvalued that the imports of these countries are overencouraged and their export industries cannot get started.

The current situation in China demonstrates how impotent the fund would be to correct any major decline in a currency. In recent weeks Chinese dollars have collapsed from an official quotation of 3,350 to one American dollar to 18,000 and more on the black market. Of the “stabilization” measures announced by the Chinese Government on Feb. 16 only those designed to reduce governmental expenditures and to increase revenues are likely to be effective. One of these is of outstanding importance. It provides for the public sale to private individuals or corporations, either directly or by the issuance of shares, of all government-operated enterprises except “those necessarily requiring government operation.” This proves that the road to Socialism is not, as usually supposed, necessarily a one-way street: A return to private enterprise is not merely possible, but simple.

But practically all the other measures announced by the Chinese Government—those seizing foreign assets of Chinese citizens, prohibiting private transactions in American dollars or dealings in gold, forbidding speculation and hoarding, and imposing price and wage ceilings all over again—must only make matters worse. Insofar as they are not evaded they must increase private fears and discourage trade and production. Yet, though exaggerated in extent, these Chinese measures are typical in principle of those now being taken by most countries to “stabilize” their currencies.

The steps by which China or any other country could permanently stabilize its currency would be far different. They would run somewhat as follows: (1) Reduce expenditures and increase revenues; balance the budget. (Engaged as it is in a civil war, this problem for China, however, is today obviously formidable.) (2) Announce that the volume of currency in circulation will not be increased beyond its existing amount. Keep the promise. (3) Remove internal price controls and all restrictions on trading in the currency. (4) Fix a provisional par value for the currency unit—but do not prohibit transactions above or below that value. (The fund agreement actually compels such a prohibition.) And finally, (5) provide for the ultimate conversion of that currency into a definite quantity of gold.

Wednesday, August 28, 2013

They Are the Workers’ Corporations

Persistent union propaganda has made most people overlook the most important single fact about the corporations. This is that the chief beneficiaries of the corporations are the workers employed by them. Labor must be paid before it can be determined what funds are left over for either the stockholders or the bondholders. The employees are not only first in priority but overwhelmingly first in the amount they receive.

Let us take as an example the year 1944. It was, with the exception of 1943, the year of highest corporation profits on record. Yet in that year, for every $1 left over after taxes for the stockholders, General Motors paid out $8 to its employees. United States Steel $15, du Pont $5, Bethlehem Steel $23, General Electric $8, Curtiss-Wright nearly $40, and Westinghouse Electric $15.
The Department of Commerce found that the employees received 61 percent of all corporate distributions in 1944, and that after deduction of other costs and taxes there were left for net profits 9 percent. The employees, in other words, got from the corporations in that year between six and seven times as much as was available for the stockholders.

The best data we have shows that the executives of manufacturing concerns get on the average about 6 percent of the total of wages and salaries paid out.

These facts, unfortunately, do not at all correspond with the general public’s idea or the average worker’s idea of the facts. In a recent survey, two-thirds of the workers interviewed actually believed that industrial companies pay out more to the stockholders and to top management than they do to the workers.

The typical factory worker, it was found, believes that wages take only about one-fourth of the money paid to workers, executives, and stockholders. The truth is that workers get five-sixths to even higher proportions of this total, depending on the conditions of particular years.

When we consider the stake that business has in this matter—when we consider that the ideas upon which the average worker and the general public act have the power either to preserve or destroy not only individual corporations but the whole private-enterprise system—it is incredible how little business has done to make these basic facts known. Practically all corporations today print reports to their stockholders; only a meager handful print reports to their jobholders. Half of the 50 largest manufacturing corporations do not bother to make public their annual payroll figure, though it is certainly far in excess of their dividend figure. Here is an incredible failure in “public relations.”

For illustrative purposes, I should like to call attention to one of the outstanding exceptions—the Johns-Manville Corp. Last June it published a two-column advertisement in more than 100 mediums throughout the country under the head “A Report to the Public by Johns-Manville.” “Here are the highlights,” this advertisement declared, of Johns-Manville’s annual statement in the critical year of 1945:

Total income $886,000,000

For all costs (except those shown below) 41,000,000

To employees for salaries and wages 36,500,000

To government for taxes 3,500,000

To stockholders in dividends 3,000,000

Leaving in the business 2,000,000

These items were then explained in more detail. It was explained, for example, that earnings after taxes were 6 cents per dollar of total income, that wages and salaries were 42½ cents per dollar of total income, that taxes were 4 cents per dollar of total income, and so on.

Within the next few weeks and months the great bulk of the corporation reports for 1946 will be published. This Johns-Manville “jobholders’ report” illustrates the kind of thing that every great corporation should do, first in its own selfish interest, and second in the interest of the whole private-enterprise system, which involves the interest of all the workers. For unless the workers understand the private-enterprise system, and understand what it means for them, they will destroy it. And unless management makes it possible for the workers to understand the system by taking every opportunity to explain the real facts, it will merely be cooperating in its own destruction.

Profits are the form of income that are now under most persistent attack. Yet when we consider the whole economy it is amazing how small profits actually bulk.

Tuesday, August 27, 2013

The Fruits of Foreign Lending

Now that the International Monetary Fund is no longer a dream but a reality, all the problems that were so lightly set aside by the rhetoric and propaganda used to get the plan adopted by Congress are beginning to emerge in their full dimensions. The whole approach at the Bretton Woods monetary conference was unsound. The International Bank, and particularly the fund, were set up to deal merely with the symptoms and consequences of international monetary chaos and not with its causes. The irony of the fund is that it could work only under practically ideal conditions, in which it would not be needed.

The first thing to remember is that monetary chaos is not primarily “international” at all. It exists basically within each nation. If each nation’s currency unit were freely convertible into a definite weight of gold, if there were no overissue of its currency, so that this convertibility could be at all times maintained, then the relationship of one currency to another would necessarily be fixed and stable. If the dollar were always convertible into, say, one-thirty-sixth of an ounce of gold, and the pound into one-ninth of an ounce of gold, then pounds would always be freely convertible into dollars at a ratio of one to four. But where there is no common unit of measurement there cannot be anything more than, at best, a temporary and unreliable exchange stability.

The Bretton Woods arrangements ignored all these basic considerations. They tried to cure international monetary instability by hiding its symptoms or preventing its consequences. They provided in the fund that when any nation’s currency started to slide downward, the nations with relatively strong currencies must use them to buy the weak currencies at par. Of course a currency can be kept at par by doing this—as long as the strong nations are willing to throw their money away and as long as that money holds out.

United States Steel or any other stock could be kept at par as long as someone with sufficient funds kept in a standing bid to take all the stock offered at par. But the SEC and the stock exchange would soon bring charges against such a bidder of flagrant manipulation. If a private agent, moreover, used his client’s money to buy stocks or anything else above the open-market price, he would be sued for breach of trust or dissipation of funds. But when governments do such things, they are given pleasanter names and are justified by the complex reasoning of “economic experts.”

The managers of the fund are not even permitted to make their buying of currencies contingent upon internal reforms in the nations whose currencies they are supporting. Insistence on such reforms is regarded as “interference” in the internal affairs of such nations or outside “dictation” of their policies. The nations with sound currencies are merely permitted—in fact, obliged—to finance the inflationary policies and all the other economic errors of the nations with sinking currencies.

The only real remedy for this fantastic situation would be for the United States to withdraw entirely from the fund. The articles of agreement themselves permit it to do this “at any time.” At the very least, if the fund is not to end in a disastrous failure, the United States ought to insist on an amendment unequivocally authorizing the managers of the fund to withhold the use of its resources from any nation which in their opinion is following either internal or external policies not conducive to exchange stability.

Among such policies the amendment should list specifically excessive deficit financing, excessive expansion of currency or bank credit, trade discrimination against other member nations, unreasonable exchange controls, a policy of autarchy, of military or diplomatic aggression, and so on.

When governments could no longer have their economic errors subsidized from the outside, at least major follies might be brought to a halt in time. Meanwhile, our government continues to pour out billions of dollars of foreign loans. A great deal of these will certainly never be repaid in full. Not only is our government failing to get really compensating monetary and trade reforms in exchange for these funds, but it is aggravating a domestic boom and inflation, and preparing a corresponding reaction for the future.

Monday, August 26, 2013

‘Stabilizing’ the Economy

President Truman’s recent economic report to Congress was a self-contradictory document, in which conflicting economic philosophies nestled cozily side by side. The report was full of expressions of faith in a free economy. Yet one recommendation after another was based on the assumption that the economy would not in fact be stable without government intervention and control at a score of crucial points. The phrase “consumer purchasing power” kept beating through the message like a tom-tom. The net result was a victory for the old New Dealers over the new Council of Economic Advisers.
For if there is any consistent basic assumption in the report, it is that the maintenance of “consumer purchasing power” is the one thing that matters. If this term means merely monetary purchasing power, it is naked inflationary doctrine. If it refers to real purchasing power (after price rises are allowed for) it confuses consequence with cause. It looks at everything purely from the consumer’s side. The problems of production below receipts from sales are ignored.

The president recommended that Congress should extend rent control beyond next June. The only reason he gave is that “a large increase in rents would substantially reduce consumer purchasing power.” But an increase in rents would not reduce national purchasing power at all. Landlords would have just as many additional dollars as tenants had fewer. The real difference would be that a larger percentage of the nation’s monetary purchasing power would go for rents, leaving a smaller percentage over for everything else.

The prices of other things (if there were no further monetary inflation) would fall to compensate for the rise in rents. The cost of living therefore would not on net balance increase.

Such a readjustment, it is true, would create strains in the economy. In many lines costs have already gone up to a point where producers could not absorb a price decline. This does not mean that it would be a mistake to remove rent control in June. It means, on the contrary, that it would be mistake not to make at least a beginning now in allowing rents to rise. For these economic strains will have been caused by the very fact that rent control in the first place was so much more stringent than any other form of price control.

To prevent a serious problem of readjustment to resume when rents are allowed once more to resume their normal relationships to the general price level, we should allow any future monetary inflation (if, as is probable, we fail to prevent such inflation) to be absorbed through a rise in rents instead of a still further rise in other prices. If we wish to continue rent control after June we must at least remove rent control from all houses not yet built, and allow at least a 10 or 15 percent increase in rents of existing apartments for the coming year.

The President wants social security benefits revised upward. These payments, he thinks, will “provide a desirable support to mass purchasing power.” If these additional social-security payments are financed by a budget deficit, they will simply produce the inflationary consequences that the President elsewhere in his report deplores. If the payments are financed out of taxes, as much purchasing power will be taken away by greater taxes as is added by the payments. There will be no net increase in “mass purchasing power.” On the contrary, bigger and longer unemployment insurance payments, as experience has shown, only buy more unemployment. This reduces production and real purchasing power.

The most topsy-turvy conclusion in the report is that: “In the present economic situation, it is clear that it would be unsound fiscal policy to reduce taxes.” The real conclusion, of course, is that it is entirely unsound fiscal policy to maintain such a fantastically high level of government expenditures. If expenditures were slashed sufficiently, then a substantial cut in taxes would still leave the desired surplus. The present level of taxation is a constant threat to production. It is a threat to the very maintenance of a healthy free enterprise system. Not unless the executive departments justify every dollar of the proposed huge $37,500,000,000 expenditure for 1948 can the President’s conclusion about existing taxes be accepted.

Sunday, August 25, 2013

How to Reduce the Budget

The most important thing about the budget for 1948 is its overall dimensions. It calls for expenditures, in the second full year of peace, of $37,500,000,000. This is more than was spent in four whole years just before the war or in twelve whole years around the ’20s. It permits no reduction whatever in the present wartime level of tax rates. And it provides a balanced budget only on the most optimistic assumptions.

A regular technique has now been established for disposing of those who express concern about a peacetime budget of these dimensions. It is to ask tauntingly: “Where would you cut?”—as if no answer could be given except something like “I’d refuse to pay the interest on the national debt,” or “I’d cut out national defense.” Sensible budget economies, of course, can never be made by offhand amateur efforts to throw out arbitrarily whole categories of expenditures. But it is absurd to conclude that substantial budget economies therefore cannot be made at all.

What is mainly wrong with the rhetorical “Where would you cut?” is its implicit assumption that the burden of proof is on those who wish to cut. The burden of proof, on the contrary, must be on those who wish to make the expenditures. Any dollar of expenditure that they cannot affirmatively justify ought not to be made. It is the duty of Congress, acting on behalf of the American people who are asked to pay the bill, to  scrutinize every dollar of these proposed expenditures with the utmost care.
The duty of scrutinizing requests for funds falls upon the Congressional appropriations committees. They need to do a far less perfunctory job than they have done in the last sixteen years. They need expert investigators. They need examiners who know what questions to ask and what evidence to require. Such a procedure would squeeze down present estimates, with few exceptions, all along the line.

The biggest items, of course, would profitably repay the closest scrutiny. Perhaps we do need to spend more than $11,000,000,000 for national defense in 1948. But the question is not closed by mere rhetorical insistence that “We cannot imperil our national defense.” This sum for one peacetime year is more than we spent on defense in the whole fourteen years from 1926 through 1939, in the latter half of which the Nazi and Japanese aggressions were yearly mounting.

It may be replied that we were starving our armed forces at that time. Yet it is still appropriate for Congress to ask first, whether we now need to spend more than $11,000,000,000 a year on defense, and second whether, if so, the armed forces are proposing to spend all the money in so effective a way that we shall actually be getting $11,000,000,000 worth of defense.

The same type of scrutiny might be made regarding expenditures for veterans’ benefits. For 1948 these are set down at $7,343,000,000. This is the estimate of the President a year ago for veterans’ benefits even in the current fiscal year. It exceeds our entire Federal expenditures for all purposes whatsoever in the fiscal year 1938. It will bear examination. If the President’s estimates for national defense and veterans’ benefits, as well as other major items in our national expenditure, are to be considered sacred and untouchable, we shall never get economy.

A final fact must be borne in mind when the budget is discussed. There are few Federal expenditures for which some plausible defense cannot be found. People tell us that we “must” keep this or that item in the budget because it does this or that good. What is forgotten is that every dollar of budget expenditure means the removal of a dollar from somewhere else by taxes. It is money that the taxpayers could and would otherwise use to buy things that they need themselves. Where the taxpayers are corporations, it is money that would probably be used for expanding plant, increasing production, providing employment and higher wages out of increased productivity.

The unparalleled burden of taxation on this country today discourages and retards increased production and industry growth at a thousand points. It is hurting our strength for either war or peace. This above all is what should be constantly kept in mind.

Saturday, August 24, 2013

The High Cost of Judicial Legislation

The decision of the Supreme Court in the Mount Clemens Pottery case on June 10 has brought on union claims for alleged unpaid wages that could completely ruin great American industries. We can find the simplest way to extricate ourselves from this “portal-to-portal” mess by retracing the legislative and judicial blunders that got us into it.

The Fair Labor Standards Act of 1938 prescribes a minimum hourly wage of 40 cents. But it goes on to provide that an employer must pay “not less than one and one-half times the regular rate” for all hours above 40 a week. It is the latter provision that extends  the control of the Federal government over the wages, high or low, of practically everybody. It benefits most the highest paid and penalizes most the employer who pays most. If he pays his workers only 40 cents an hour, he is penalized only 20 cents more for overtime, but if he pays them $1.50 an hour, he is penalized 75 cents more for overtime.
But Congress at least stopped with this blunder. It did not go on to redefine what constitutes an hour’s work. This meant that it accepted the established customs of industry in this respect. This was the sensible view taken by the special master appointed in the Mount Clemens Pottery case, by the Circuit Court of Appeals in overruling the district court, and by the Supreme Court minority.

But it was not the view of the Supreme Court majority. Mr. Justice Murphy argued that walking time to the place of work within the employer’s premises must be considered part of the working hours, because “without such walking on the part of the employees, the productive aims of the employer could not have been achieved.” On this logic, there is no reason why he could not have gone on to include in working hours the time spent by the worker in traveling to work from his home, or even the time spent in getting up, dressing, or reasonable sleep-for without such activities on the part of the employees, the productive aims of the employer could not have been achieved either.

Justice Murphy even boldly declared that “the statutory work-week includes all time during which an employee is necessarily required to be on the employer’s premises.” Yet there is no such definition whatever of the workweek in the statute. It is arbitrarily imposed by the Supreme Court.

This is a glaring case of judicial legislation. If the Supreme Court is to be free to rewrite legislation in this way, under the guise of telling Congress what it really meant to do, then it becomes a third house of Congress whose members cannot be reached by the voters and whose laws cannot be vetoed. This is intolerable. There is a simple way in which Congress can rebuke such judicial usurpation as it must be rebuked, and at the same time prevent the immeasurable harm that the Mount Clemens Pottery decision could work. It should pass a joint resolution reading somewhat as follows:

“In using the word ‘work-week’ in the Fair Labor Standards Act Congress did not mean to redefine this common term or to set aside long-established contracts or customs which had absorbed in the rate of pay of the respective jobs recognition of whatever preliminary activities might be required of the workers for that particular job. ‘Work-week’ is a simple term used by Congress in accordance with the common understanding of it. For the courts to include in it items that have been customarily and generally absorbed in the rate of pay but excluded from measured working time is not justified in the absence of affirmative legislative action.”

These are not my words. They are taken straight out of the dissenting opinion of the Supreme Court minority in the Mount Clemens Pottery case. This joint resolution could be supplemented, under ample precedents, by an amendment to the Fair Labor Standards Act closing the Federal Courts to all suits of the type now being filed by unions. Congress need not stand by helpless when a court presumes to tell it that its own law means what it does not mean.

If it wants to go farther, and undo some of the harm it has itself done, Congress should reduce the legal minimum overtime wage rate to 50 percent above the legal minimum regular rate. This would confine its intervention to the wages of marginal workers. It should stop trying to regulate everybody’s.

Friday, August 23, 2013

The ‘Purchasing Power’ Theory

The CIO argument for another general wage increase of 25 percent has caused such deep concern not merely because the statistics on which it is based are so misleading but because the policy the labor organization advocates is a threat to the survival of the free-enterprise system itself.

In the period 1929 to 1945, wages and salaries averaged 69.6 percent of the national income. Corporate profits averaged 4.9 percent. After allowing for wages from non-corporation sources, a 25 percent increase in wages, without any increase in prices, would wipe out corporate profits several times over.
The CIO will no doubt answer that this does not apply today because corporate profits are now so “fantastically high.” As George Terborgh has shown, however, corporate profits, even on the high guess of Robert Nathan, are today actually lower in relation to the national income than in any other full-employment, peacetime year on record.

Here is a fact that will repay contemplation. The last sixteen-year period, two-thirds of which was a period of mass unemployment, and the rest of abnormal profit taxation, has led us to forget what level of corporate profits, in relation to the national income, has been normal with full employment. The thesis of the CIO seems to be that high profits mean depression and low profits prosperity. The statistics show the precise opposite. Full employment goes with high profits, and mass unemployment with low profits or deficits.

From 1929 to 1945 the years of highest profits were the years of highest employment, the years of lowest profits the years of lowest employment. When corporations as a whole took a loss, in 1931, 1932, and 1933, we suffered the greatest mass unemployment in our history. The year in which labor got the greatest percentage of the national income it has ever had was 1932. From 1909 to 1929, the lowest profits came in 1921, the year of greatest depression and unemployment. A dozen of the 21 years from 1909 to 1929 were years of substantially full employment. In those dozen years the average ratio of corporate profits to national income was not 5 percent, but 9.75 percent.

The statistical case for the CIO purchasing-power theory, in brief, is simply nonexistent. The chief of the many fallacies on which the CIO purchasing-power theory rests is that of mistaking consequences for causes. It is true that when production is highest, real income is highest and real purchasing power is highest (though these must not be confused with income or purchasing power stated as monetary totals without allowing for price levels). But that is because production, real income, and real purchasing power are, in effect, three names for the same thing.

It does not follow that we can invoke or perpetuate prosperity merely by raising wage rates above their existing level, whatever it may happen to be. Even if this step had the first results that the purchasing-power theorists suppose, it would obviously deduct as much from the purchasing power of investors, employers, and all other groups in the nation who normally contribute about 30 percent of its purchasing power, as it would add to the purchasing power of labor.

But such a step does not have even the first results that the purchasing power theorists imagine. If the wage increase is confined to the strong unions, it forces an increase in the prices of what these unions make. That means a rise in the living costs, and a corresponding decline in the real purchasing power, of all other workers. If the wage increase is general, it must force a general increase in prices that cuts back the real purchasing power of everyone, including the workers who have received the increase. This rise in prices discourages buying, and therefore produces a contraction in production and employment. If, finally, an attempt were made to take the wage increase entirely out of profits, as the present CIO program contemplates, marginal producers would be thrown immediately out of business. Mass unemployment would once more be upon us.

That is why the present CIO plan is the most dangerous anti-labor program that has ever been proposed. What we need are the particular wage rates and prices that will encourage the highest possible employment, payrolls, production, and sales. These equilibrium wage rates and prices can be found only by free markets.

Thursday, August 22, 2013

The New CIO Wage Drive

Preparing to soften up industry for its new wage drive, the CIO leadership has laid down a greater barrage than ever of statistics, theories, and fulminations. What stands out in the “study” made by Robert R. Nathan for the CIO is the double standard used in making wage and price comparisons.
Average hourly earnings of manufacturing labor in October of this year reached $1.13. This is the highest hourly wage for any month in American or world history. Average weekly earnings in October, at $45.83, though higher than those for any month since V-J Day, were, however, $1.50 less than those of January 1945. The Nathan report makes all its weekly wage comparisons with this January 1945 figure. It does not trouble to remind the reader that this was the absolute wartime weekly wage peak. Nor does it remind him that manufacturing labor worked an average of five hours more a week in January of 1945 than it did this October. Is it consistent to ask for higher pay for a longer week while rejecting lower pay for a shorter week? Mr. Nathan himself admits that hourly labor costs, even with considerably less overtime, were 8.6 cents higher in October this year than in January 1945.

When Mr. Nathan is discussing corporation profits, however, 1945 is promptly abandoned as the basis for comparison. That basis then becomes 1936 to 1939. In taking these four years as a norm, Mr. Nathan neglects to point out that nearly half of all corporations had no profits whatever to report then, and that there was an average of 8,000,000 unemployed throughout the period. Is that the sort of era the CIO now wishes to restore?

Incidentally, if that period were also taken for measuring wages, Mr. Nathan would have to point out that weekly money wages have since doubled. After full allowance for the increased cost of living, “real” weekly wages are still 33 percent higher than 1936 to 1939 levels.

If Mr. Nathan had written down corporation earnings, as he does wages, to their comparative purchasing power, he would have had to make drastic reductions in his calculated percentages of increase. But he does not even compare money corporation earnings in 1936 to 1939 with actual corporation earnings today. He compares them with his own very high forecast of what these earnings are going to be. His guess may possibly be right; but he has hitherto not done well as a prophet. It was he who was responsible for the official OWMR forecast in October of 1945 that unemployment would rise to 8,000,000 in the spring of this year.

Suppose, however, that the profit forecasts of Mr. Nathan and the CIO leaders prove to be correct. How do they decide what profits are “enough” and what are “too much”? The unprecedented wages of American workers have been made possible by our national accumulation of capital and our willingness to risk it in enterprises that give jobs. Capital always runs the risk not only of losing its return, but of being lost itself.

Does the CIO know exactly how great a return is necessary not only to permit capital savings, but to induce investors to risk them in creating jobs? Profits as a percentage of the national income are today even—if we accept Mr. Nathan’s high guesses—actually below the level normally attained in prewar years of reasonably good employment. Corporate profits are normally about 9 or 10 percent of the national income. Would that be too high a price to pay for full employment and the highest general living standard in the world?

Mr. Nathan and the CIO leadership look at wage rates only from one side—as the basis of labor’s purchasing power. They refuse to look at them from the other side—as management’s costs of production. They know that goods priced too high must mean a reduction in sales. They try to ignore or deny what is equally true—that labor priced too high must mean a reduction in employment. When wage rates force up production costs to a point where business cannot operate, or force up prices to a point where consumers can not or will not buy goods, neither purchasing power nor production is increased. Both, on the contrary, are destroyed.

That a new wave of wage increases will force this result is the real danger the country faces today. It is precisely the opposite of the danger that Mr. Nathan and the CIO leadership now profess to fear.

Wednesday, August 21, 2013

Twenty Labor-Act Revisions

John L. Lewis’s cancellation of the coal strike was not a surrender but a strategic postponement. In ordering the miners back to work “until 12 o’clock midnight, March 31, 1947,” he was in effect issuing a new strike call for that time.

There is no longer any excuse for regarding Mr. Lewis as an isolated accident. His solid support by both AFL and CIO leaders makes him a fitting symbol of the real labor problem today. That problem is not “Labor versus Capital” but the irresponsible and unbridled power of labor-union bosses.

The only proper way in which Lewis and other union bosses can be curbed is by a thorough revision of existing labor law, particularly the Wagner Act. Short of repeal, here are the amendments necessary:

1—Remove the joker which deprives management of the power to dismiss strikers and offer permanent employment to other workers. This more than any single provision has encouraged strikes by making it impossible for employers to take the normal means to counteract them.

2—Halt the NLRB’s drive to unionize foremen and other representatives of management.

3—Forbid unionists as well as employers to “interfere with, restrain, or coerce” workers in the exercise of their right to join or not to join unions.

4—Restore employers’ freedom of speech about unions wherever it does not involve actual threats.

5—As long as the law forbids employer “discrimination. . .to encourage or discourage membership in any labor organization,” it must in consistency also forbid the closed shop, “maintenance of membership,” and the checkoff.

6—Define “collective bargaining” so that it cannot be construed to require either party to meet a demand of the other in whole or in part.

7—Require unions as well as employers to bargain under this clarified definition.

8—Permit a majority union to bargain for its own members, but not “exclusively” for all workers unless the employer consents.

9—Remove the NLRB power to name any bargaining unit larger than the workers for a single firm. This would not illegalize nationwide unions, but simply withdraw Wagner Act support from them.

10—Restrict the NLRB’s power to throw off the ballot whatever it chooses to call a “company union.” Allow employees “representatives of their own choosing.”

11—Permit employers as well as unions to ask for bargaining elections.

12—Provide that any union claiming NLRB protection must come with clean hands; must use legal methods; must not be run by racketeers; must elect officers at reasonable intervals, publish accounts, have reasonable initiation fees and dues, and must not exclude new members unless they cannot meet fair skill standards.

13—Confine Federal intervention to workers clearly in interstate commerce.

14—Delete the clause that in NLRB proceedings “the rules of evidence prevailing in courts of law shall not be controlling.”

15—Put the burden of proof on the complainant.

16—Allow appeals from NLRB decisions to the courts.

17—Make factual findings of the NLRB no longer “conclusive” unless they are clearly sustained by the evidence.

18—Punish unfair labor practices by reasonable indemnification of the aggrieved employee but not by his compulsory reinstatement.

19—Repeal or revise the Norris-LaGuardia Act to make unions once more responsible for acts of their agents and to permit courts to halt union intimidation or violence.

20—Allow antitrust acts to apply against clearly antisocial practices of union monopolies.
Will all this mean excessive union regulation, a violation of labor’s basic rights? If so, union leaders are  free to choose between two-sided law of this kind and terminating the present one-sided coercions against employers. It should be pointed out, however, that a revised labor law of this kind would do nothing to illegalize strikes. It would even continue to leave some unions free to act antisocially. But it would at least no longer fasten such unions on employers by law.

Tuesday, August 20, 2013

Inviolate Rights—For One Side

Federal Judge Walter J. La Buy has decided that the Lea Act, or “anti-Petrillo law,” is unconstitutional. The Lea Act makes it unlawful to use “force, violence, intimidation, or duress” to “coerce, compel, or constrain” a broadcasting company to employ any “person or persons in excess of the number of employees perform actual services.” Judge La Buy proceeds to argue that “the number of employees needed” cannot be objectively established, and that the law would therefore make the guilt or innocence of the union wholly dependent upon the judgment or “whim” of the employer.

Such a conclusion ignores the fact that it is not the number of employees that matters, or even the objective necessity for their services. It is the use of “force, violence, and intimidation” to impose upon employers more workers than they want. Has it become “unconstitutional” to forbid unions to use force, violence, and intimidation” for this purpose—or any other?

Candor must concede that the Lea Act is inherently foolish. Judge La Buy correctly argues that under the Lea Act “broadcasting station employees are singled out and held to a more rigid rule than any other employees.” The Lea Act implies that it is all right for telephone unions, or railway unions, or barber shop unions, to force employers to hire more men than they need. It implies, in fact, that it is all right for a union to force any employer whatever to do anything else it can think of.

At least one ground on which Judge La Buy holds the Lea Act to be unconstitutional that it makes acts unlawful “when applied to these [broadcasting] employees and no others”—could have been avoided if the Lea Act had simply made it unlawful for unions to try to secure any end at all by “force, violence, intimidation, or duress.” But such a law, stating a rule that the common law has always been supposed to apply to everyone anyway, ought not to be needed at all.

Judge La Buy’s decision is a fresh reminder of how one-sided the application of so-called constitutional guarantees has become. One ground on which he sets aside the Lea Act is this: “A statute which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application violates the first essential of due process of law.” Yet under the Wagner Act it is an unfair labor practice for an employer “to refuse to bargain collectively.” And nobody has yet succeeded in defining precisely what this means.

In 1940, a House committee sought to reduce the vagueness of this requirement by proposing that it should not be construed as “compelling or coercing either party to reach an agreement or to submit counterproposals.” The American Federation of Labor succeeded in having this proposed definition withdrawn.

Judge La Buy, again, argues that “peaceful picketing” is “a form of speech and discussion that cannot under the First or Fourteenth Amendments be curtailed by any legislative enactment.” Let an employer denounce a union, however, in the unbridled terms in which the union denounces him, or let him advise his employees not to join that union, and he will soon find that his own freedom of speech is not beyond dispute.

“Under the Thirteenth Amendment,” continues Judge La Buy, defending strikes, “the right of any worker to leave his employment at will, or for no reason at all, is protected and that right is inviolate.” But let an employer try to discontinue employing somebody at will, or for no reason at all, and he will soon find that his right to do this is anything but inviolate.

It is not because the coal unions enjoy the unrestricted right to strike that John L. Lewis did and can at any time bring the nation’s coal industry to a halt. It is because the coal operators, under the Wagner Act, have lost the right to negotiate with anyone else but Mr. Lewis. It is because they have lost the right to drop strikers and hire other permanent workers to take their place. The Lewis union, because of ill-advised strikes beginning in 1927, had fallen almost completely apart in 1932. It was Section 7a of the NRA in 1933, supplanted by the Wagner Act in 1935, that put the union together again, and at last put it in undisputed control of the entire coal industry.

Monday, August 19, 2013

What’s Wrong with Our Labor Policy

The coal strike has vividly revealed what is wrong with our present labor laws and previous labor policies. This, unfortunately, is no assurance that right policies will now be applied. A crisis may force men to revise their ideas; but no crisis, however great, can force them to think clearly. So the coal strike has revived all the old schemes for compulsory arbitration and for making strikes on public utilities illegal.

But if the coal strike has proved anything at all it is that these schemes simply do not work. The Smith-Connally Act, under which the government has been trying to combat John L. Lewis, is precisely such a scheme. It makes “wartime” strikes against the government illegal. But the first serious attempt to enforce this provision of it has proved futile. The government is afraid of making a martyr of Lewis. And it has no assurance that jailing him will stop the strike.

Compulsory arbitration of labor disputes, in fact if not in name, was tried during the war. It worked only when it gave the unions substantially what they wanted. When it did not, Lewis and other union leaders simply ignored or defied the War Labor Board, and the government was too frightened to do anything about it. The Railway Labor Act, in fact if not in name, imposes compulsory arbitration, certainly so far as the employer is concerned; but whenever one of the railway emergency boards has handed down a decision that the unions did not like they have defied it, and the government has been obliged to change its decision.

The assumption behind all the proposals for government “fact-finding” or compulsory arbitration of labor disputes is that the government board or “court” will know what is the “fair” or “right” wage and will settle the strike on that basis. This overlooks all the realities. The truth is that when a governmental board decides such questions it almost invariably, and sometimes grossly, favors the union—not merely because this seems the best political course, but because this is the way to make the decision stick. For the board is usually trying to avert a threatened strike or settle an existing one. It is therefore much more concerned to satisfy the union than the employer. And the very fact that government intervention of this sort exists or can be appealed to destroys any real collective bargaining.  Neither side will make a settlement if it thinks that a government board will award it something better.

Finally, even if the government board or “court” were courageously impartial, and much better informed on economic affairs than politically appointed boards are in the habit of being, it would be no more capable of fixing a “right” wage for each class of worker and occupation than of fixing a right price for each article. Compulsory arbitration of labor disputes means, in effect, government wage fixing. Government wage fixing would soon politically necessitate a return to government price fixing. Such a scheme, in short, would drive us back toward a controlled if not a totalitarian economy.

Only when such remedies are recognized as false are we likely to adopt the real remedy. This is simply to repeal the discriminatory curbs on employers and the discriminatory immunities to unions that we have enacted in the last fifteen years, and to subject both employers and unions impartially to the common-law provisions against force, fraud, intimidation, and violence. We may add whatever machinery of mediation or voluntary arbitration we think likely to be helpful; but the solution lies in restoring common rights and duties.

It is true that this will not prevent all strikes; nor will any remedy under a free system. But it would mean a tremendous improvement over the present legal situation, which, by making it all but impossible for a union to lose a strike, has put enormous irresponsible power into the hands of labor leaders. The Lewis coal strikes of 1927 and 1932, before we had a Wagner Act, collapsed completely. His union was shattered and prostrate until it was put on its feet first by the NRA, and then by the Wagner Act. What the Federal government needs to do today is not to prosecute Lewis in the courts, but simply to stop building him up. He seems very tall because he is standing on the Wagner stilts. Kick these out from under him, and he will shrink to normal size.

Sunday, August 18, 2013

How to Taper Off Rent Control

Now that ceilings have been removed on everything else, it is clear that rent controls ought to be whittled down. With the ceilings removed on wages and materials, on everything that goes into a house, it becomes administratively and economically absurd to maintain price ceilings on new houses. That is the best of all ways for assuring that they will not be built. For the same reason, it is obvious that rent ceilings of any kind should be removed on new housing. The only way to solve the housing problem, the only way to bring down rents in the long run, is to increase the supply of housing. The quickest way to increase the supply of housing is to provide the maximum incentives for its production. It is preposterous that the only major thing on which we should continue to squeeze down the profit margin is precisely the thing of which we are most eager to increase the supply.

It will be argued by many, however, that price and rent incentives are needed only to maximize the production of new housing, and that to take the ceilings off rents of existing houses would merely increase the living costs of tenants, and put windfall profits into the hands of landlords, without doing anything to increase the housing supply. But this argument has several flaws. It is not so easy to differentiate between “old” and “new” housing. Housing is not merely to be measured by square footage of floor space; it must also be measured qualitatively. Housing is continuously being repaired, improved, modernized; remodeled, extended,  transformed from single homes to small apartments, from residential to business use, and vice versa. Whether or not any of these changes are made in rented property depends upon the absolute or relative profit incentives involved. When rent control removes these incentives, property is simply allowed to deteriorate.

The country’s available housing must at any time be rationed among its families. Under normal conditions it is rationed, like every other commodity, through the price or rent system through the competitive bids and offers of buyers and sellers, of tenants and landlords. Under rent control it is rationed by chance, luck, and favoritism. Those who happened to be in the housing they wanted to be in at the end of the war found themselves comfortably frozen in by OPA regulations. Veterans, war workers, and others who had given up their housing during the war found themselves frozen out by the OPA regulations and unable to compete on an equal bidding basis against existing floor-space holders.
In August, according to the Department of Commerce, the nation’s income payments were 152.3 percent greater than in 1935 to 1939. In the same month, however, according to the Bureau of Labor Statistics, average rents had gone up only 8.7 percent. This means that the overwhelming majority of people have been called upon to pay a much smaller percentage of their income for rent than before the war. The result has been that residential floor space has been used more wastefully. An average of 3.1 persons, according to a census report, occupied the same number of rooms in 1945 as 3.3 had occupied in 1940. This is the real secret of the housing “shortage.” It is caused primarily by rent control itself. Yet this shortage has become in turn the basis for insisting that rent control must be continued.

One final argument is that the removal of rent control would cause inflation, and raise the cost of living. Inflation, however, is caused by the overissuance of money and bank credit. It is true that the removal of rent ceilings would be followed by an increase in rents, but this would not necessarily lead, in the long run, to an increase in living costs. For with more of consumers’ incomes being paid for rent, just that much less would be left to bid up the prices of everything else. It is precisely because rents have been kept down so drastically that, with existing money incomes, other prices have been bid up as high as they have.

Popular adherence to artificially low rents is still so powerful that it would be doubtless politically unrealistic to recommend immediately the entire elimination of rent controls. A possible compromise might involve (1) an immediate removal of all price and rent controls on new houses; (2) a maximum permissible increase in rents for existing tenants of 15 percent in the next calendar year, with complete decontrol thereafter.