All Commentary
Tuesday, November 1, 1966

Protective Taxes and Wages

Had he written it today instead of in 1883, William Graham Sumner could not have commented more appropriately on the disastrous consequences of union political practices.

The discussion of protectionism in the United States constantly turns upon questions of wages. The question has two forms. The em­ployed argue that protective taxes will make their wages high. The employers argue that protection is necessary for them because they have to pay high wages….

Protective taxes aim to keep for­eign products out of the country, in order to secure the home mar­ket to the home producers. These taxes, therefore, make commodities dear, scarce, and hard to get. But the commodities in the country are what constitute the wages of la­borers. If the amount of these commodities is rendered smaller than it might be, how can that raise wages, looking of course not at money wages, but at real wages, or the comfort attainable by the laborer?

There is no real propriety in discussing wages apart from other elements in the comfort of the population. Protective taxes lessen the available comfort in the reach of all members of society; they curtail the enjoyment which each citizen might get out of each hun­dred dollars of income. If I dis­cuss wages as a separate question, I do so only because the question has been so raised, not because I concede that the laborers have any separate interest which can be, or ought to be, discussed by itself. It is pure demagogism to represent it as one of the functions of the Government to make wages high or in any way to pet the laboring class. The protective taxes press upon all, even upon the protected, who mutually plunder each other.

The lowering of real wages, by making commodities scarcer and dearer, is the way in which the wages-class are subjected to their share of the effects of protective taxes….

Why Wages Are High

The fallacy in the notion that protective taxes make wages high is the same as the fallacy in the notion that trades-unionism makes wages high. Protection and trades-unionism act on the same princi­ple. Trades-unionism inculcates negligence, slackness, and shirk­ing. It teaches the men not to take pains, not to try to excel, not to do good work, and the philosophy of it is that the men should not try to produce, but should try not to produce, on the theory that if things are made scarce and dear and hard to get, that makes “work,” and so makes wages high. If that philosophy were sound, all the classes which consume but pro­duce nothing — like soldiers, pau­pers, idle women, idle rich, gam­blers, criminals, and convicts —would be all the time raising wages, and they would lower wages if they should go to work, and not only consume but also produce. On the same philosophy, the Pitts­burg rioters were sound econo­mists when they let the city burn down, thinking that it would make work and raise wages.

The protectionist and the trades-unionist both think that wages are increased when things are made scarce and hard to get. First, they confuse wages with work, and then they confuse work with toil, and they think that they have increased wages, that is, good things to en­joy when they have only increased the toil by which things are ob­tained. Wages are raised only by industry, thift…not by any dark and crafty devices.The truth is that wages are raised only by industry, thrift, temperance, prudence, and econ­omy, producing abundance and in­creasing capital, not by any dark and crafty devices for producing scarcity and bad work.

We may now look at the other notion, — that high wages make protective taxes necessary. People who believe this must have a queer idea of the economic laws of so­ciety. They must think that a blessing and a calamity are not to be distinguished from each other. The wages paid in any industry are only one of the conditions of production….

Inefficient Management

If a capitalist says that he can­not pay the current rate of wages, the first answer that should be made to him is to tell him not to do it then, for he must be misap­plying his capital in some way or other. The market rate of wages is set by the supply and demand of labor, and there must be some industries which are able to win profits while paying that rate.

But when our petitioners appear before committees of Congress to ask for protection, and allege that they need it because wages are high, when has any one of them ever been subjected to an examina­tion to learn whether he under­stands the business he has en­gaged in, or has an adequate cap­ital, or has faithfully devoted him­self to business, or has judiciously located his establishment, or has bought his raw materials wisely, or has adopted new machinery rap­idly enough, and yet not too rap­idly, or has organized his industry with good judgment, and so on in­definitely? Surely these inquiries would be to the point when a man pleads for power to tax his fellow-citizens to make up the losses of his business.

Wages are one of the essential expenses of any business. If it cannot pay wages at the market rate, it is not a “business”; it is either a play or a swindle. If it is said, as it constantly is, that Amer­ican industry, in general, should be protected because American wages are high, the decision is made to turn on a single point when there are a score of conditions of indus­try which would need to be taken into account. What are the facts as regards cost and convenience of raw materials, facilities of transportation, cost and quality of ma­chinery, climate as affecting indus­try, the character of the people for in­dustry, intelligence, and sobriety, security of property and order un­der the Government, excellence or otherwise of the tax system? These are the conditions of industry as between nations, not comparative rates of wages….

Who Pays the Tax?

It is said that we cannot com­pete with those who pay fewer wages than we. There are two classes of persons with whom one cannot compete,—his inferiors and his superiors. A physician might find that he could not compete with a laborer in digging a ditch, or with a great financier in man­aging a bank. Could any tax en­able him to compete with the banker; that is, to compete with his superior? On the contrary, if he should complain that he could not compete with the laborer be­cause he could not afford to em­ploy his time in an occupation which is less remunerative than his own, everyone would ask him why then he desired to compete?

Now, could a tax enable him to compete with the laborer? Indeed, it could. It could intervene to de­prive him of the services of the laborer and force him to dig his own ditch, abandoning a profes­sion in which he could earn ten dollars a day to spend his time in an occupation worth only a dollar. This last is the only way in which protective taxes enable us to com­pete. Our high wages are proof that we can better occupy our time.They put us in a position such that we abandon occupations in which we might earn the high American rates, in order to do things which other people would do for us at half the price.

Lower wages abroad, therefore, are not a reason for protective taxes, but just exactly the con­trary. Our high wages are a proof that we can better occupy our time. They are a proof that we have means of employing our cap­ital and labor, which are highly remunerative; and to make them an argument for protection is like arguing that a rich man needs charity or a strong man help.

Comparative Advantages

Suppose a physician earning $10,000 a year buys his vegetables from a local farmer whose income is around $3,000. Does that mean that the doctor’s income will decline toward that of the farmer? On the contrary! Both are specialists. By having some­one else raise his vegetables, the doctor can specialize and be­come even more proficient in his job. If he were forced to raise his own vegetables and if the farmer were forced to doctor himself, neither would be as well off. Specialization and free trade im­prove the conditions of all participants. This is as true for foreign trade as for domestic trade.

Tariffs encourage the production of some things in which the country is less efficient and discourage the production of other things in which the country has a comparative advantage. The total value of production, so far as consumers are concerned, is less than it would otherwise be — and this means that real wages are held down by reason of tariffs. So, rather than protect­ing domestic wages generally, tariffs lower real wages in all countries affected.