The Government Veto System
NOVEMBER 01, 1966 by LAWRENCE FERTIG
Mr. Fertig, syndicated newspaper columnist on economic affairs, is author of the book, Prosperity Through Freedom (Regnery, ¹96¹), available from the Foundation for Economic Education, Irvington, N. Y. $3.95.
Just when the Soviets admit the virtues of the free market economy by trying to imitate some phases of it, our drive in the United States is perceptibly in the other direction—toward more government intervention in the market. Just when the Soviet leaders are making sheep’s eyes at the market economy because they can see that direction by bureaucracy is no substitute for the flexibility of the free market — the United States substitutes government fiat for market forces in a number of vital areas.
This basic change has been taking place in the American free-enterprise system practically unopposed by the American public or by important business interests.
The new system cannot be called government control because it has not gone quite that far. A fair characterization of this new arrangement would be to call it the Government Veto System. The basis of the Government Veto System is direct action by the Administration to veto prices which it does not like in major markets in the economy. To be sure, this veto has been employed to date only in the case of "key" prices, but it has been proven time and again in the history of various countries that controls tend to breed still more controls. The objective which the controllers hope to achieve always proves elusive, whether it be in the control of commodity prices or of money. When the controllers are disappointed, their tendency is to blame lack of success on an insufficiency of power. So they ask for more controls and more power.
The Veto Power in Practice
There are five main areas where the United States government has used extra-legal pressure in an attempt to control the economy by the veto system.
First, there is an attempt to control prices for major products — especially steel. At various times the prices of steel, copper, molybdenum, and other products were rolled back after the government exerted pressure on the producing companies.
In regard to steel, President Johnson so far has officially not employed the strong-arm methods adopted by President Kennedy. He has not openly berated the steel companies, nor sent representatives of the Attorney General’s office to the heads of steel companies before dawn to interrogate them. Nevertheless, his influence on steel prices has been powerful. It was only in August this year, after the wage price guidelines had been flouted repeatedly by various unions — especially by the airline mechanics — that the steel companies were able to achieve a slight increase in price for about a third of their production. This long delay occurred despite the fact that the government’s own index of steel prices, prepared by the Federal Bureau of Labor Statistics, showed no increase from the end of 1958 to July this year. (The Index stood at approximately 102.3 in both periods.)
The veto system also operates against American corporations in their dealing with foreign countries. Pressure is brought against corporations to limit their investments in overseas operations. This is called "voluntary" control, although it is obvious that government coercion is behind it. Administration officials look over the shoulders of officers of major corporations and make the decision as to how much they shall invest abroad.
The veto system also applies to banks. They are restrained in the total which they can lend to borrowers in foreign countries. The declared purpose of this curtailment of dollar outflow is to aid the U.S. in retaining its gold stock and to improve the deficit in the U.S. balance-of-payments to foreign countries. But the gold outflow and the balance-of-payments deficit are due to entirely different causes. They are due to the government’s monetary and fiscal policy. Nevertheless, in seeking to correct the problem, government officials clamp down on banks and corporations.
The price of borrowing money (interest rates) is another area where the Federal government veto system tries to operate. For a time it was successful in preventing privately-owned banks from assessing the grass roots market and raising prime interest rates. But inflation, caused by government deficits and easy-credit policies, was so strong that interest rates continued to rise until they reached the highest level in a generation. Month by month, Treasury officials exerted pressure on the banks to prevent a free market price for hiring of money.
Thus there exists a very effective veto, although it is completely extra-legal and is effective only because of the coercive power of government.
Congress has passed no law giving the President power to control any of these prices or policies. Nevertheless the power of the Executive Office is so great that no industry and no business can flout the government without fear of reprisal. Every businessman knows what this reprisal means. The Attorney General’s office can use its power on antitrust matters. The Federal Bureau of Investigation can make special investigations. The Defense Department can withhold contracts. There are many, many ways in which the government can act to bring recalcitrants into line.
In the area of wages, as well as prices, the Federal government has tried to exercise veto power. The President’s economic advisers laid down "guideposts" for wage rises. Until the airline mechanics strike the rule was that no wage rise should exceed 3.2 per cent. This figure is reported to be the average annual productivity gain of American industry in the last five years. Everyone knows that control over wages has been honored more in the breach than in the observance. In the case of major industries (automobile, construction, electrical, dock workers, and others) government officials have collaborated in violating their own guideposts.
After settlement of the airline mechanics strike, P. L. Siemiller, President of the International Association of Machinists, proudly said the settlement "destroys all existing wage and price guidelines now in existence." Government veto on wage rises has been far less effective than on prices. But it continues to be a stated government policy.
Why has the government moved in the direction of intervention in the market instead of letting supply and demand set prices? Why has it substituted decisions by some economists or some bureaucrats for the free forces of the market which have operated so successfully in the American economy?
The answer is quite plain. Government inflationary monetary policy plus Federal deficits have so vastly increased potential demand that the Administration is embarrassed to let the law of supply and demand work naturally.
As a result of government policies, the money supply (demand deposits plus currency) increased at a phenomenal rate in the last two years. This increase in the quantity of newly-created money sought to express itself in every way possible. This unprecedented increase in bank deposits and currency exerted upward pressure on prices in one market or another.
When the effects of this inflationary policy became evident to the public and prices began to rise steeply, officials became alarmed and decided to step in. Thus the government tries to substitute its command (veto over prices) for the answers which would be given by the operation of the free market. The result of such a policy is an unhealthy repressed inflation.
In trying to replace the price system even partially by government fiat, appeals are always made to "social responsibility." Every businessman and every labor union leader is supposed to wear two hats. In deciding what is in the best interests of his company or his group he wears one hat. When he goes into a deep study to decide, if he can, what is in the public interest, he must wear another hat. But how to determine precisely what is in "the public interest" and where "social responsibility" lies is impossible for anyone to judge. Every individual knows precisely what is in his own interest, and the competitive free market economy decides for him whether he can gain his objective. But how can he become a seer and judge whether his action is in the interest of 190 million people every time he makes a decision? The attempt to force people to act "in the public interest" instead of their own is merely an attempt by bureaucrats in government to impose their own judgments on the economy.
At this point I would like to borrow from Professor Milton Friedman, who has made so many solid contributions to the free market philosophy. In a talk he made to the Institute for Religious and Social Studies he discussed the subject of social responsibility and made some acute observations.
Almost without exception, appeals to "social responsibility" arise because of an unwillingness to let the price system work. They constitute an attempt to replace the price system by some alternative device. But no one has yet invented or discovered a device that can do the job which the price system does: of coordinating the activities of countless millions of people impersonally and without any need for central control; of providing a mechanism that simultaneously transmits information about changing demand and avail-abilities, gives economic agents an incentive to act appropriately in response to the information transmitted, and adjusts consumption to available supplies in the short run of rationing the supplies while simultaneously providing for adjusting production to consumption in the long run. The attempts to use alternative devices have been numerous and often on a very large scale —witness legal price control in the United States during wartime or central economic planning in Russia. In all cases, they have been largely unsuccessful, and the price system, albeit with large scale distortions introduced into the signals on which it operates, has remained a major means for organizing economic activity.
Because the price system works impersonally, automatically, and quietly, because it has no press agents, there is a tendency when it works well to take it for granted and for the non-economist hardly to recognize that it is performing a function. It is natural for him to think he can manipulate prices without any serious consequences; but he invariably finds when he does so that he has mounted the tiger, and he is driven to an ever-widening range of measures because of the difficulty of dismounting. Our agricultural price support program, no less than legal price-control and the voluntary restraint programs, are all striking examples.
Our Image Abroad
In pursuing this policy of Federal vetoes on important prices, the United States government has unfortunately had to turn its back on its own international policies and preachments. The U.S. State Department has advised foreign nations repeatedly against exchange controls, against impediments to the free flow of goods and money across national boundary lines. It has admonished many countries — in South America particularly — to avoid inflationary policies which would inevitably lead to restrictive price-wage policies and exchange controls. But it is now evident that when the United States faced inflationary pressures due to its own policies, it did not subscribe to the advice it gave other nations. Instead of relying upon monetary discipline, balanced budgets, and the free market, the United States adopted a policy of controls in many vital areas.
For the sake of achieving doubtful, ephemeral benefits, the U.S. government seriously weakened its economic and financial leadership of the noncommunist world, which is essential for the defense of the West against totalitarianism. Only by a return to the principles of the free market can this country re-assert that leadership.