Current Economic Affairs/Chapter 9
CHAPTER IX
WHAT ARE OUR ECONOMIC RESTRICTIONS?
After the Civil War in the United States there was a tremendous development of industry, and the public was impressed with the importance of promoting business in every way. In pursuance of that movement laws were enacted making it more convenient to organize corporations, and other laws were enacted for the assistance of business development. Among them was tariff legislation for the protection of domestic industries in connection with which the cooperation of workers was invited with the promise that so their wages might be elevated. With the growth of domestic business competition became severe, even destructive, and capital took steps to restrict it. The railway companies of the country engaged in some practices that were high-handed. Gradually the public took fright and began to take steps to correct and prevent what seemed to it to be evils. It is possible that the public was right in making up its mind that the railways and industries of the United States were to some extent and in some directions proceeding on lines that were adverse to the common interest. It is probable that even if that were so there would have come corrections by virtue of natural economic laws. With no calm consideration of the subject, however, and probably with but imperfect understanding of it, the people through Congress began to enact restrictive legislation. This began with the Interstate Commerce Act, which was followed by the Sherman Law, and that in turn by other statutes, such as the Clayton Act and the Trade Commission Act. There developed in such ways a series of economic restrictions, which soon were extended in many directions and generally with but little thought respecting their ultimate consequences.
In other papers and addresses I have urged repeatedly the removal of economic restrictions as an advisable means for the promotion of American welfare. Just what do I mean by this? What are the economic restrictions that I have in mind? It is useful to answer those questions and offer explanations respecting them. But before proceeding to do that let us have a clear understanding of theory.
In urging the removal of economic restrictions let it not be imagined that I am recommending a reversion to the doctrine of laissez faire, which meant “let things take their own course,” the abolition of everything in the way of restraint or regulation, everything in the way of concert and combination in industry. As a scientific doctrine laissez faire fell to the ground, but that did not by any means set up the opposite principle of state regulation, the doctrine of paternal government. “For my part,” said Cairnes, “I accept neither one doctrine nor the other; and, as a practical rule, I hold laissez faire to be incomparably the safer guide. Only let us remember that it is a practical rule, and not a doctrine of science; a rule in the main sound, but like most other sound practical rules, liable to numerous exceptions; above all, a rule which must never, for a moment, be allowed to stand in the way of the candid consideration of any promising proposal of social or industrial reform.” This clear exposition of thought by one of the great British economists of 50 years ago may well be kept as a guiding principle to-day.
If I were going not merely to recite a list of the economic restrictions that we have imposed upon ourselves but also discuss the causes that led to their erection and the manner in which they have operated this paper would be of great length. Indeed, many of these things are already the subjects of bulky books. My thought is simply to mention the principal of them and make some brief remarks respecting their present effects. My enumeration will probably be incomplete and my analyses imperfect, owing to the magnitude and complications of many of the subjects, but I shall at least offer some ideas in regard to them.
One of the greatest of our economic restrictions is our present tariff law, which raised rates of duties on imports to higher points than ever before, with the avowed purpose of restricting foreign competition. In other words we have set up a great barrier against foreign trade. We say specifically that we do not want to let our people buy freely the products of Europe’s work. Yet work is the chief thing that. impoverished Europe has to sell. If we do not permit Europe to sell to us with reasonable freedom, how can Europe obtain the wherewithal to buy from us our surpluses of products, especially raw materials, that we need to sell? Also in what other manner can Europe repay the great indebtedness that she has incurred to us?
I do not mean to be understood as urging a complete abolition of our tariff. It has played a useful part in the development of important new industries in this country and may still be doing so in occasional instances. A tariff on luxuries is a sound economic method of raising revenue. A tariff on raw materials may be necessary for the maintenance of domestic industries of indispensability in time of war. A tariff may be defensible as a means for preventing the disturbance of “dumping” at other times. A tariff system, however, whose purpose is to curtail foreign trade in general and eliminate common competition is an economic restriction of very great danger.
Rather closely associated with the tariff barrier is the restriction upon immigration that we have imposed, although it is a restriction that is of both economic and political nature. In it there are two thoughts, one of them being that we have been pouring too much infusible material into our melting pot. This is the political thought and with it there is bound to be a great deal of sympathy. It may be pointed out however that the admission of immigrants does not necessarily imply the granting of citizenship; also that it would be possible to exclude the kind of immigrants who are undesirable and admit freely those who would serve useful purposes. The other thought in the restriction of immigration is economic, reflecting the wish to limit the supply of labor.
The correlation between restriction of imports and restriction of immigrants is that on the one hand we will not let the people of Europe work freely for us at home while on the other hand we will not let them come hither freely to work for us here. The lowering of these barriers, both or either of them, would tend to make the products of labor cheaper in this country, in other words would tend to reduce the cost of living, which it is highly desirable to bring about. The removal or modification of both or either of these restrictions would tend also to increase the markets for our raw materials, which also is a thing highly desirable to bring about. The removal or modification of the tariff barrier would be much more effective than the immigration barrier and much quicker in its results. Notwithstanding the great height at which the tariff barrier has been fixed the pressure from Europe is creating a strong tendency to overflow it. Our export balance is diminishing, if not disappearing.
Among our economic restrictions of purely internal effect one of the greatest is the vicious system of federal taxation, which is founded on the fallacies that the American people became rich out of the war and that there has been an increased concentration of wealth among a relatively small class of the people. Our system of federal taxation is therefore founded upon the thought that is vulgarly though graphically expressed in the phrase “soak the rich.” This is put into practical effect by heavily increasing surtaxes, falling upon relatively few people, while the system of levying and collecting income taxes is such that probably some millions of people who ought each to pay a little escape any payment at all.
While recognizing the validity of taxing people according to their ability to pay, it may be held that our existing method constitutes an economic restriction of most serious character. Its vicious effects are manifold. Among the most important are the destruction of incentive to enter into new enterprises with hope of large profit if the government is going to appropriate a large share thereof; the diversion into tax free investments of capital that should be employed industrially, the diversion often leading to extravagance and waste; the deliberate swelling of legitimate business expenses in times of prosperity in order to diminish net profits, thus intensifying the peak of the business cycle, whereas if such expenditures were deferred the nadir of subsequent depression might be tempered.
The prime consequence of our heavy surtaxes is the withdrawal of large capital from heavily taxable enterprises and developments, as represented by the common stocks of railroads and industrial corporations. All of these are in process of being transferred to small stockholders, to whom income surtax is a matter of indifference. But the larger consequence is necessarily a contraction in business which Wall Street has no difficulty in foreseeing. There would probably be more revenue collected with an income surtax of 20 per cent than with one of 50 per cent. Before there can be any development of business there must be promise of a profit. If the business is more risky than the average there must be promise of a profit higher than the average. Take away this incentive and business stagnates. The government is working to that end when it takes away in the form of taxes one-third or one-half of the profit resulting from a business venture. There is not much incentive to men to take risks in any industry when all the risk must be borne by the individual and if success comes ultimately a large part of the gain is taken away by the government.
The proponents of high surtax justify them on the ground that they are a burden on the rich. In fact the rich are neither so numerous nor so wealthy in the aggregate as is commonly supposed, but even if they were it would be unwise to tax them so severely and by thus reducing their surplus curtail what otherwise would be invested in capital goods, which reacts unfavorably upon all classes of people.
The restrictions with which the operation of our railways has been tied up are of deleterious consequences. The acme of these is to be found in the Transportation Act of 1920, which while possessing some good features has a very bad one in the creation of the U. S. Labor Board, giving governmental authority over conditions of employment of labor for the operation of the railways and the rates of wages that shall be paid. Railway labor is therefore put into a class by itself by congressional action.
The extent and nature of the restrictions that have been imposed on the railways were graphically portrayed by Charles Frederick Carter in a recent address wherein he charged that they cost the people of America at least a billion dollars a year; how much in fact “Omniscience alone knows.” He suggested that “if Senator La Follette and his followers were sincere in their desire to reduce rates they could accomplish that result by the simple expedient of repealing the foolish laws that hamstring railroad management.” The following paragraphs are in Mr. Carter’s own words:
At the last short session 134 bills to Regulate the Railroads Some More were introduced in Congress. And it was alleged recently that 400 bills to Regulate the Railroads Some More had been written ready for introduction as soon as Congress meets. If you doubt the possibility of finding 400 things which can be done to the railroads that have not already been done, I beg to assure you that you have underestimated the infinite resources of demagogy.
But what is there about railroads that needs so much regulation? Well, there are ashpans, for instance. You couldn’t expect locomotive builders to know how to make an ashpan, so Congress kindly helped them out. And cylinder cocks! Locomotives are required by law to have cylinder cocks. Up to the hour of going to press it has never occurred to a steam engine builder to design a cylinder without cocks, but Congress took no chances. Then there is the dimensions of cabooses. The length and beam and depth of hold of cabooses are profound problems of state, worthy to engage the mightiest intellects, and it has engaged them.
Rates, wages, hours that men may work, what they may do when they do work, the kind and character of equipment, methods of financing, details of accounting, terms of contract between carrier and shipper, grade separation, train schedules, use of terminals, leasing of lands, purchase, construction or abandonment of track—all this and numberless other details are prescribed by law.
The legislation dictating the conditions under which our ocean shipping must be conducted, especially with reference to the employment of seamen is an economic restriction of the first order. Insofar as it applies to coastwise shipping, wherein the limitation of the right to American vessels may be politically well-justified, the effects are similar to those of economic restrictions upon railway traffic, which may remain obscure for a long time. In overseas traffic, however, the effects have been quick and in no wise uncertain, for therein American ships come immediately into competition with those of foreign ownership which are not subject to our restrictions. The consequence has been an inability to keep the American flag extensively upon the high seas. As a remedy for this economic evil it is proposed to give shipowners a subsidy at the expense of all the people in order to offset the drawbacks of the restrictions that are imposed upon them. Without entering into any argument respecting the pros and cons of this controversial subject it is obvious that an approach to laissez faire in maritime traffic is vastly sounder than paternalism.
In some states there are legislative restrictions upon the right to work. Thus most states require chauffeurs to be licensed before they are permitted to operate automobiles. In this instance the restriction, imposed under the police powers of the states, is proper for the protection of the public. In some states there are laws excluding men from work as miners in collieries unless they have a license as such, the obtaining of which requires considerable time.[1] These laws are put upon the statute books with the pretence of promoting safety in mining, but mining engineers know that they are ineffective for that purpose, which is best attained in quite a different way.[2] In fact these laws are but pretexts for excluding competitive labor in times of strikes, and as such they are economic restrictions.
Some of the greatest economic restrictions are not legislative but are what have grown out of customs and practices, especially of labor unions. I shall not here discuss the effect of labor unions upon wages, except in a general way. Wages spring from production and represent the division thereof among capital, management and labor. The aggregate of their shares of the three parties can exceed 100 per cent by no possibility. The conditions of modern civilization are too complex to permit a division of produce in kind. Therefore it is sold at market in terms of money, which consequently becomes the medium of exchange and the division is made in dollars, pounds sterling, or whatever be the monetary unit. The exchange value of each commodity is determined by the conditions of supply and demand, which thus makes the division among the several industries. No industry may successfully dictate respecting this unless it possesses a monopoly, and then only within limits. It is easier for successful dictation respecting the division between capital and labor within an industry but that also is subject to limitations. This consideration may be extensively developed, but my present purpose is merely to dismiss the item of wage demands of organized labor as being inherently of the nature of an economic restriction. They become that only when they constitute an impediment to competition and to the free operation of the law of supply and demand. Realization of labor union aspirations for the complete unionization of labor, with closed shops, might make them such.
The immediate economic restrictions of labor unions that are of grave concern are unmistakeably hampering. These may be generalized as the discouragement of work. Specifically they prescribe arbitrary limitations upon performance, they restrict the personnel of a trade, they allocate the right to work among jurisdictions outside of which no member of the particular union is allowed to function even in simple matters, they impose wasteful rules upon employers, they deny to outsiders the right to work. Such restrictions tend to diminish competition and production. Respecting that there is no shadow of doubt. The evidence of this has been stated so many times and is so conclusive that there is no need to repeat it here. The effects of labor unions in these ways are far more disastrous economically than is anything that they are able to do with regard to wages.
Mr. Alfred, the president of the Pere Marquette railway has pointed out what happens when a locomotive bas been sent to the shop for repairs because of a broken stay bolt. Up to the time of the McAdoo administration of the railroads this was a matter that could be put right by a boiler-maker and his helper, and in much less time than such a replacement takes now. Here are the stages of the operation as laid down by the various shop crafts:
- 1. The cab carpenter and his helper remove the running board.
- 2. The sheet metal worker and his helper take off the jacket.
- 3. The pipemen remove the pipe.
- 4. The machinist and helper remove the running board bracket.
- 5. The ox-welder and helper burn out the staybolt.
- 6. The boilermaker and helper take out the staybolt.
- 7. The boilermaker and helper put in the staybolt.
- 8. The running board bracket is replaced by machinist and helper.
- 9. The running board is fastened on by a cab carpenter and helper.
- 10. The jacket is replaced by a sheet metal worker and helper.
- 11. The pipe work is replaced by a pipefitter and helper.
Twelve men are thus ordained to do the work of two! This is merely one instance of many. Not only is needless work created in this utterly wasteful way, but the shop foremen are continually at a loss lest they offend some particular union in the allotment of work. They never know when a dispute between two of the unions will arise.
The policy of labor unions in “making work,” either by increasing the number of men that are to do a specified job or reducing the performance of a man doing one job constitutes an economic restriction of the first order of magnitude, one whereof the consequences are bound to be grave. There are some of their evil practices that may be, and should be, forbidden by law. The great remedy is, however, the open shop and the establishment of free competition and the general right of everybody to work, which theoretically is possessed by all citizens but practically is not.
There are some great laws upon our statute books, that theoretically are not economic restrictions, but which practically became so owing to the manner of administration which may be different in different hands. Among these are the Sherman law and the Trade Commission law. In their intentions both of these laws are just the opposite of being economic restrictions. The Sherman law aims to preserve competition, and the free play of supply and demand, which is beneficent. The Trade Commission Law aims to prevent unfair practices in commerce and industry, which also is desirable. As administered, however, both of these laws have been directed in ways to make them restrictive of commercial enterprise. It was only by virtue of the Supreme Court of the United States interpreting the Sherman law by what is generally characterized as the “rule of reason” that business conditions are even tolerable.
In spite of the many decisions of the Supreme Court, however, the men who are directing our industries at the present time are uncertain whether or not they may be hailed into court by the whims or misconceptions of bureaucrats in the government. The behavior of these administrators of these laws has been compared to that of a drunken man with a gun. The persons who are threatened have to make the best of it and try by suavity to get the gun away from the hand that is controlled by a disordered brain. Even so innocent a matter as joint action for the collection of industrial statistics, which is of great importance in contributing toward equilibrium in industry, is entered upon with hesitation lest there be charges of violation of the Sherman law.
The Trade Commission law contains elements of a character most destructive to the business of this country. The Clayton law is clearly an economic restriction of the first order. The Sherman law aims to preserve competition by forbidding collusion among the managements of business for the regulation of production and prices. The Clayton law specifically exempts labor unions from that prohibition. It is open therefore to the labor unions to acquire full control of the labor in an industry and dictate its terms to the peril of all the people, as has happened in the anthracite coal mining industry.
- ↑ The state of Pennsylvania requires laborers to work two years in the mines before they may obtain licenses as miners.
- ↑ Safety in mining, whether coal or metalliferous, is best promoted by the enactment of a code of rules prohibiting dangerous practices, adequate inspection of practices by the state, and punishment of both managers and miners for infractions of rules. The labor unions have never been willing to endorse such a program and may be considered to stand against it.