Even President Roosevelt and his New Dealers sensed that war spending was not the ultimate solution; they feared that the Great Depression—with more unemployment than ever—would resume after Hitler and Hirohito surrendered. Yet FDR’s team was blindly wedded to the federal spending that (as I argue in my 2009 book New Deal or Raw Deal?) had perpetuated the Great Depression during the 1930s.
FDR had halted many of his New Deal programs during the war—and he allowed Congress to kill the WPA, the CCC, the NYA, and others—because winning the war came first. In 1944, however, as it became apparent that the Allies would prevail, he and his New Dealers prepared the country for his New Deal revival by promising a second bill of rights. Included in the President’s package of new entitlements was the right to “adequate medical care,” a “decent home,” and a “useful and remunerative job.” These rights (unlike free speech and freedom of religion) imposed obligations on other Americans to pay taxes for eyeglasses, “decent” houses, and “useful” jobs, but FDR believed his second bill of rights was an advance in thinking from what the Founders had conceived.
Roosevelt’s death in the last year of the war prevented him from unveiling his New Deal revival. But President Harry Truman was on board for most of the new reforms. In the months after the end of the war Truman gave major speeches showcasing a full employment bill—with jobs and spending to be triggered if people failed to find work in the private sector. He also endorsed a national health care program and a federal housing program.
But 1946 was very different from 1933. In 1933 large Democratic majorities in Congress and public support gave FDR his New Deal, but stagnation and unemployment persisted. By contrast, Truman had only a small Democratic majority—and no majority at all if you subtract the more conservative southern Democrats. Plus, the failure of FDR’s New Deal left fewer Americans cheering for an encore.
In short the Republicans and southern Democrats refused to give Truman his New Deal revival. Sometimes they emasculated his bills; other times they just killed them.
Senator Robert Taft of Ohio, one of the leaders of the Republican-southern Democrat coalition, explained why he voted against much of the program: “The problem now is to get production and employment. If we can get production, prices will come down by themselves to the lowest point justified by increased costs. If we hold prices at a point where no one can make a profit, there will be no expansion of existing industry and no new industry in that field.”
Robert Wason, president of the National Association of Manufacturers, simply said, “The problem of our domestic economy is the recovery of our freedom.”
Alfred Sloan, the chairman of General Motors, framed the question this way: “Is American business in the future as in the past to be conducted as a competitive system? He answered: “General Motors . . . will not participate voluntarily in what stands out crystal clear at the end of the road—a regimented economy.”
Taft, Wason and Sloan reflected the views of most congressmen, who proceeded to squelch the New Deal revival. Instead they cut tax rates to encourage entrepreneurs to create jobs for the returning veterans.
After many years of confiscatory taxes, businessmen desperately needed incentives to expand. By 1945 the top marginal income tax rate was 94 percent on all income over $200,000. We also had a high excess-profits tax that had absorbed more than one-third of all corporate profits since 1943—and another corporate tax that reached as high as 40 percent on other profits.
In 1945 and 1946 Congress repealed the excess-profits tax, cut the corporate tax to a maximum 38 percent, and cut the top income tax rate to 86 percent. In 1948 Congress sliced the top marginal rate further, to 82 percent. Those rates were still high, but they were the first cuts since the 1920s and sent the message that businesses could keep much of what they earned. The year 1946 was not without ups and downs in employment, occasional strikes, and rising prices. But the “regime certainty” of the 1920s had largely returned, and entrepreneurs believed they could invest again and be allowed to make money. As Sears, Roebuck and Company Chairman Robert E. Wood observed, after the war “we were warned by private sources that a serious recession was impending. . . . I have never believed that any depression was in store for us.”
With freer markets, balanced budgets, and lower taxes, Wood was right. Unemployment was only 3.9 percent in 1946, and it remained at roughly that level during most of the next decade. The Great Depression was over.
(Editor’s Note: This essay was first published in FEE’s magazine, The Freeman, in February 2010.)
SUMMARY
•Wars aren’t cures for depressions. They simply divert manpower and resources away from what consumers want to what government wants to win the conflict
•FDR’s “New Deal” prolonged the depression and fortunately, attempts to revive it to keep the economy going after World War II were squelched
•The economy didn’t collapse after WWII because reductions in federal spending and taxation encouraged entrepreneurship
#38
“THE MINIMUM WAGE HELPS THE POOR”
BY LAWRENCE W. REED
THE ANCIENT SAGE SOCRATES, A GIANT IN THE FOUNDATION OF WESTERN PHILOSOPHY, was known for a teaching style by which he aggressively questioned his students. He employed his “Socratic method” as a way to stimulate logical, analytical thought in place of emotive or superficial pronouncement. Rather than lecture or pontificate, he would essentially interrogate. The result was to force his Greek pupils to see the full implications of their conclusions or to realize that what they had accepted as solid was nothing more than the intellectual equivalent of crumbled feta.
In his 2014 and 2015 State of the Union speeches, President Obama called upon the U.S. Congress to enact a hike in the hourly minimum wage from $7.25 to $10.10. (The dime may have been added because a nice round number without a decimal would sound unscientific.) Economists have long argued that raising the cost of labor, especially for small and start-up businesses, reduces the demand for labor (as with anything else). But progressives routinely call for increases in the minimum wage—with the usual, oversized measure of self-righteous breast-beating about helping workers. Maybe what is needed is not another lecture on the minimum wage from an economist, but rather an old-fashioned Socratic inquisition. If the old man himself were with us, here’s how I imagine one such dialogue might go:
Socrates: So you want to raise the minimum wage. Why?
Citizen: Because as President Obama says, minimum wage workers haven’t had a raise in five years.
Socrates: Can you name one single worker who was making $7.25 five years ago who is still making $7.25 today? And if you can’t, then please tell me what caused their wage to rise if Congress didn’t do it. Come on, can you name just one?
Citizen: I don’t happen to have a name on me, but they must be out there somewhere.
Socrates: Well, we’ve just been through a deep recession because successive administrations from both parties, plus lawmakers and your friends at the Fed, created a massive bubble and jawboned banks to extend easy credit. The bust forced many businesses to cut back or close. Now we have the weakest recovery in decades as ever-higher taxes, regulations, and Obamacare stifle growth. No wonder people are hurting! Do you take any responsibility for that, or do you just issue decrees that salve your guilty conscience?
Citizen: That’s water over the dam. I’m looking to the future.
Socrates: But how can you see even six months into a murky future when you refuse to look into the much clearer and more recent past? You guys think the world starts when a problem arises, as if you’re incapable of analyzing the problem’s origin. Maybe that’s why you rarely solve a problem; you just set everybody up to repeat it. If you really look to the future, then why didn’t you see this situation coming?
Citizen: Look, in any event, $7.25 just isn’t enough for anybody to live on. Workers must have more to meet their basic needs.
Socrates: An employer doesn’t have an
ything to pay an employee except what he first gets from paying customers. I wonder, whose “needs” do you consider when you decide to buy or not to buy: the workers’ or your own? Have you ever offered to pay more than the asking price just to help out the guy who made the product? And if customers like you won’t do that, where do you expect the employer to get the money?
Citizen: That’s not a fair question. My intent here is purely to help.
Socrates: Sounds to me like the answer is “no,” but let’s move on. Why do you assume your intentions mean more to a worker than those of his employer? It’s the employer who’s taking the risk to offer him a job, not you. You’re only making speeches about it. Don’t you see a little hypocrisy here—you, who are personally offering no one a job, self-righteously criticizing others who are actually creating jobs and paying wages even if they’re not all at a wage you like?
Citizen: Employers are interested only in profits.
Socrates: Are you saying employees are not? Are they more interested in working for companies that lose money, and if so, then why don’t they all line up for government jobs?
Citizen: Well, government “loses” money almost every year in the sense that it spends more than it takes in, and there are plenty of people who are happy to work for it.
Socrates: But government has a printing press. It also has a legal monopoly on force. When it borrows in the capital markets, it shoves itself to the head of the line at everybody else’s expense. Are you saying these are good things and that we’d be better off if the private sector could do these things too? Try to keep up with me here.
Citizen: I repeat, employers are interested only in profits. People before profits, I say! I even have a bumper sticker on my car that says that.
Socrates: So are you saying that employers would be better people if, instead of seeking profits, they tried to break even or run at a loss? How does that add value to the economy or encourage risk-takers to start a business in the first place?
Citizen: You’re trying to belittle me but I went to a state university. All of my sociology, political science and gender studies professors told us that raising the minimum wage is good.
Socrates: Were any of those tenured, insulated, and government-funded pontificators actual job-creating, payroll tax-paying entrepreneurs themselves, ever?
Citizen: That’s beside the point.
Socrates: (Sigh.) Figures.
Citizen: Look, $10.10 isn’t much. I think you must be mean-spirited and greedy if you don’t want people to be paid at least $10.10.
Socrates: Yeah, like the guys in government check their personal ambitions at the door when they take office. I’d like to know how you arrived at that number. Was it some sophisticated equation, divine revelation or toss of the dice? Why didn’t you choose $20.00, which is not only a nice round number but also a lot more generous?
Citizen: Well, $20.00 would be too high, for sure. Too much of a jump at once.
Socrates: It sounds like you think the cost of labor might indeed affect the demand for it. Good! That’s progress. You’re not as oblivious about market forces as I thought. What I want to know is why you apparently don’t think higher labor costs matter when you raise the minimum wage from $7.25 to $10.10. Do you think everyone, regardless of skill level or experience, is automatically worth what Congress decrees? Do you believe in magic, too? How about tooth fairies?
Citizen: Now hold on a minute. I’m for the worker here.
Socrates: Then why on earth would you favor a law that says if a worker can’t find a job that pays at least $10.10 per hour, he’s not allowed to work?
Citizen: I’m not saying he can’t work! I’m saying he can’t be paid less than $10.10!
Socrates: I thought we were making progress, but perhaps not. Can you tell me, if your scheme becomes law, what happens to a worker whose labor is worth only, say, $8.10 because of his low skills, lack of education, scant experience, or a low demand for the work itself? Will employers happily employ him anyway and take a $2.00 loss for every hour he’s on the job?
Citizen: Businesses need workers and $2.00 isn’t much, so common sense and decency would suggest that of course they would.
Socrates: So employers who employ people are too greedy to pay $10.10 unless they’re ordered to, but then when Congress acts, they suddenly become generous enough to hire people at a loss. Who was your logic instructor?
Citizen: Can we hurry this up? I’ve got other plans for other people I have to think about.
Socrates: OK, just one last question. Which is better, a job at $8.50 per hour or no job at all at $10 per hour. Simple math here. Pick one.
Citizen: A nice job at $10 per hour.
Socrates: I give up. You progressives are incorrigible. You’re the only people on whom my teaching method has no discernible impact. It seems that logic, evidence and economics count for nothing as long as you feel good about your intentions.
Citizens: You ask too many questions.
At this point, in utter frustration, Socrates drinks the hemlock—or at least he does in this imaginary episode.
As an economist, I wish that raising people’s wages were as simple and easy as waving a wand or passing a law but that’s just not the way the world works.
(Editor’s Note: A version of this essay was previously published in FEE’s magazine, The Freeman, in February 2014.)
SUMMARY
•Millions of people who are utterly unaffected by the minimum wage because they are already earning something higher to begin with see their wages rise almost every year—some even during recessions. It’s not a decree of Congress that does this; it’s factors such as productivity, capital investment and competition in the labor market
•You can’t expect employers to pay workers more than their productivity is worth just because Congress demands it. At higher prices (or wages), less is purchased. That’s a law of economics more powerful than a minimum wage law from Congress
•If raising the minimum wage to $10.10 makes sense, why stop there? Why not declare that everyone must be paid $50/hour?
#39
“FREE MARKETS EXPLOIT WOMEN”
BY ANNE RATHBONE BRADLEY
A GROWING DEBATE IN THE UNITED STATES IS THAT WORKING WOMEN ARE exploited by a free labor market where they are paid, on average, significantly less than their male counterparts. Followed by this assertion is the conclusion that capitalism exacerbates the gender-wage gap and exploits women. As Curly, one of the Three Stooges, said in a famous skit, “I resemble that remark!”
As a female economist in a male-dominated field, I am sympathetic to these concerns and most certainly know that while no markets are perfect, freed markets have done the best to help women increase their skills, education and overall comparative advantage as well as to allow them a space to offer their skills in the service of others.
How does this happen and what’s the evidence?
Let’s start with the mechanics of how freed labor markets offer the best opportunities for women to prosper. The first necessary condition is equality before the law. In a world where women are not equal before the law and are not allowed to even show up for certain types or sectors of employment, the supply of labor is constrained. There are simply fewer people available to offer their labor when we eliminate half of the potential workforce. This has extremely negative and culturally-discriminatory effects and it also thwarts economic freedom. Firms aren’t as productive as they could be. It took hundreds of years for this to be established in the United States. In many countries women are still not equal and often held hostage under the law. For example, in Saudi Arabia it is illegal for women to drive and all women are required to have a male guardian, thus making work and employment costly and difficult. It is no accident that without equality before the law, Saudi Arabia ranks 127th of 136 in gender-wage parity.
The second necessary condition is a fluid supply of labor. That is, people need to be free to choose their profession. Those pro
fessions cannot be mired down with excessive regulatory burdens that act as barriers to entering the labor force. For example, needless licensing, excessive taxation, and burdensome regulations stifle entrepreneurship and labor participation. Making it costly to enter the labor force constrains economic growth and personal prosperity. When the process of competition unfolds, those who offer salaries in exchange for labor are forced to compete with other firms who are bidding for the same labor. In a society where women are free under the law to pursue employment in industries without excessive barriers to entry, what we see is a great equalization of pay between men and women.
What’s the evidence?
It is only when individuals can claim and keep the income we make without restriction that we can prosper. A freed labor market is precisely what allows this to happen. It has been empirically proven to be the best opportunity for women to unleash their creative talents on the world. It is why I got to choose to enter a math-heavy, male-dominated, PhD program. I was free under the law to choose my pursuit and it was then up to me to see if I could do it. I didn’t have to bribe anyone or have a male guardian or jump through gender-biased regulatory hoops. I just had to show up and do the hard work—with no guarantee of success.
What is the result of a largely freed labor market? The most recent Bureau of Labor Statistics report suggests that the result is an increasing trajectory of wage equality. Most of the 17.9 percent wage gap in the United States can be explained by number of hours worked, marriage and age. Women who work full-time and who have never married make 95.2 percent of male earnings narrowing the gender-wage gap to less than five percent. Married women with children work fewer hours which accounts for a large portion of the wage gap.
Excuse Me, Professor: Challenging the Myths of Progressivism Page 16