The Road Not Taken

Henry Hazlitt, noted economist, author, editor, reviewer 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 19, 1978.

The Foundation for Economic Education, 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 "traditional" controls was already in existence in the early 1930s; but this was enormously extended and tightened 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 relative immunity (as in the Norris-LaGuardia Act of 1932); that the government could act as a union-organizing agency, and force employers 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 on.

But let us now come to 1946, the year FEE was founded. That was the year when the International Monetary 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 countries 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 general 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 expedient at any given moment. Therefore, 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 stipulated that "the Fund shall raise no objection." In addition, it was understood that the Fund was to come to the rescue of any country whose currency 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 authorities could not bring themselves to take seriously the grave responsibility they had assumed in agreeing to make the dollar the world’s anchor currency. Keeping the dollar convertible into gold, even if only at the demand of foreign central banks, seemed to them a mere technical requirement, an unnecessary annoyance and burden imposed upon them by some still persisting superstitions about gold. As the U.S. increased its paper-money issue, conversion became increasingly inconvenient. 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 irredeemable 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 unpredictable.

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 immediate problems, and had no understanding of what the consequences of their patched-up scheme would be in the long run.

The same kind of shortsightedness has been the common characteristic 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 national 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 average 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 tolerate ruthless exploitation of unskilled workers with no bargaining power? Could it tolerate "starvation" 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 increased capital investment, increased productivity, and competition 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, Congress 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 helping the unskilled worker? The results 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 anything they show this. The minimum wage laws were passed to help especially the unskilled, the teenagers, and the blacks. We have no comparative figures on the unskilled as such, but we do have comparative figures on the teenagers and the 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 successive increases to make the contrast 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 teenagers 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 unemployment 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 unemployment 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 "reforms" adopted in 1935. The argument for it was appealing. Workers suffered terrific hardships when they were laid off. Even when they were working, 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 unemployment insurance programs, beginning about 1940, were surrounded with safeguards. Unemployment compensation was to be about one-half of the worker’s previous earnings, but it was to run typically 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),

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 weekly wages instead of one-half.

The result of prolonging and increasing unemployment compensation, naturally, has been to prolong and increase unemployment. It was found a year or so ago by a committee of the State Senate of New York that a number of New Yorkers repeatedly worked the minimum twenty weeks required and then collected sixty-five weeks of unemployment benefits. Though unemployment compensation may be only one-half of previous working salary, the unemployment compensation is tax-free, so the net loss from not working is sometimes quite tolerable. In a typical case in Pennsylvania, 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 "an increase in unemployment benefits leads to an increase in the duration of unemployment." This country can have as much unemployment as it wants to pay for.

Rent Control

Still another example of our shortsighted legislation is rent control. 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 investments, becomes greater and greater. The landlord soon has neither the incentive to make repairs and improvements, nor the funds to make them.

When the rent control is first imposed, 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 obtain. Landlords of old housing often can no longer supply even heat and other essential services. Some cannot even pay their taxes; their property 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 beneficiaries, but tenants or would-be tenants 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 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 Petroleum Exporting Countries—the OPEC—quadrupled crude oil prices. It is instructive to notice that this was done by a combination of governments. They did what private industry is always accused of doing—forming a monopolistic conspiracy—but what the hundreds of private oil well owners and companies 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 profound economic shock throughout the world. And what was the response of our own government? Did it retain or insist on a free market to give the greatest possible incentive to petroleum production and exploration on the one hand and economy in consumption on the other? No. It did the exact opposite. It imposed an elaborate and incredibly complicated set of price controls on domestic crude oil and on natural gas, to encourage continued wasteful consumption and to reduce the incentives 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 policy. In the last ten years or so, these deficits have been acceleratively larger. These deficits—again since the early 1930s—have been accompanied by mounting monetary inflation. 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 earliest 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 expenditure programs consist in the transfer of income from the wealthy or the middle-classes to the so-called needy. In other words, they force the productive to support the unproductive. In the official budget these programs are not gathered under a single 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 expenditures 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—"The 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 figuratively or literally. You may have driven on a throughway, for example, 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 unconsciously 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.

If—to take one example out of a hundred—rent control has been imposed for only a short time, so that the average of controlled rents is still about 90 percent of what free market rents would be, it is no great political problem to remove the controls. But if, as has sometimes happened, rent controls have been imposed so long in a severe inflation that the controlled rents averaged only 10 percent of free market rates, then any attempt to remove the controls might bring on riots. This has happened frequently in recent years in countries in which, for example, the government has been subsidizing food prices and can no longer afford it.

The wrong road has been the road of government economic intervention. The right road would have been to permit and encourage free markets. There are, it is true, a number of politicians today who praise the free market in speeches, but there are very few people, even among economists, who understand why the free market solves so many intractable problems and performs so many near miracles.

The market does this because it reflects and responds to everybody’s demand and to everybody’s supply, and it reflects to some extent everybody’s expectations regarding the future. This means that it makes the maximum use of everybody’s knowledge, and not merely the knowledge of a handful of officials. It reflects this knowledge by constant daily changes in prices of individual commodities and services. These price changes are daily directing production out of this commodity and into that, reducing surpluses and relieving shortages.

The market does not fulfill this function perfectly, because everyone’s knowledge is limited and subject to error; and these errors do not necessarily cancel each other. But the market is constantly and quickly correcting these errors. It works incomparably better in maximizing and properly directing incentives than any other imaginable system. Only when this truth is sufficiently recognized by the public will the free market be restored.

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