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The stupidity of free-market chic ... in the Middle East.

The Stupidity of Free-Market Chic . . . . . . in the Middle East

As compensation for the loss of a good chunk of their ideological foundation in the past two years, American conservatives have had the satisfaction of watching liberals slink quietly away from their old economic biases. Surveying the "end of history" a year ago, George Will merrily observed, "There are a few brackish backwaters of Marxism--Managua, Pyongyang, Cambridge, Massachusetts--but no longer is it de rigeur for 'advanced' thinkers to think that bourgeois society is a backward, doomed stage of development toward a shimmering socialist future." The subsequent success of Violetta Chamorro in Nicaragua and John Silber in Massachusetts suggests it's getting less de rigeur by the day. A friend in Cambridge reports that guests make fun of her for keeping Marx on the shelf.

Mercifully, no one freely uses the word "corporate" to mean "evil" anymore. Liberals are finally willing to recognize that businessmen can contribute to society. But many are settling on a new bias that is no less knee-jerk--that "free market" means "good," which leads to the dangerous assumption that government intervention inevitably sours the economy. This bias pervades the breathless reporting on economic change (always called "reform") in the Soviet Union and Eastern Europe (see Jonathan Rowe, p. 20). It is also affecting the way Americans view their own government, as free market chic creeps from the editorial pages of The Wall Street Journal into the organs of conventional liberal opinion. "Re-regulate?" asked The New York Times last summer in a classic editorial oversimplification of the debate about transportation and telecommunications. "Not on your life."

This spreading bias has manifested itself most starkly in the American response to Saddam Hussein. George Bush, who in some ways--working through the U.N., bringing the Arabs on board--has handled the Middle East crisis superbly, nonetheless seemed far more willing to send tens of thousands more potential victims into the desert than he was to offset the economic impact of the invasion by tapping the strategic petroleum reserves--or even by calling vigorously for conservation at home. By the time Bush finally opened the reserves, it was too little, too late. "[T]he core explanation for the administration's caution seems to be a deep reluctance to tamper with private markets," reported the Times, which to its credit endorsed the idea of tapping the reserves early in the crisis. Meanwhile, the closest Bush has come to issuing a clarion call for national sacrifice on behalf of the military effort has been to point out in an advertisement during a baseball playoff game that if our troops in Saudi Arabia can take the time to send in their absentee ballots, Americans at home can certainly take a few moments to go to the polls. Few liberals are outraged about this laissez-faire approach. We may be on the verge of war in the desert, but here in the U.S. it's still business as usual. Why? Perhaps because today's de rigeur thinking precludes the notion of government using the national economy as a weapon.

The free-market bias has served to short-circuit public discussion of the crisis. Recently on National Public Radio's "All Things Considered," Philip Verleger of the Institute for International Economics was asked why American companies were selling gasoline abroad when we might soon be facing shortages at home. He admitted the sales "may seem to be unpatriotic" but offered this justification: "It's hard to explain to voters, but it's how the market works." Oh. That's okay, then. Meanwhile, Americans have continued sucking down gasoline at virtually the same rate as before the crisis, as though their consumption had nothing to do with the national predicament. This victory of the consumer over the citizen must be what everyone means by "the triumph of capitalism." Unfortunately, the pricing scheme of this free market seems to be slightly off: Blood may still be thicker than water, but in America it's now cheaper than oil.

Gas attack

The tragedy of the widespread acceptance of this business-as-usual response is that, were Bush willing to consider options that involved government intervention in the economy, he might have stumbled on a more elegant means of sticking it to Saddam--one that wouldn't cause inflation or kill Americans. The OPA would have shown him the way. Thrown together in the early days of World War II, the Office of Price Administration eventually controlled almost every price--of any dress, any peach, any stove or pork chop--in the United States. While the broader history of the OPA holds some important lessons for free marketeers (which we'll come to), of immediate interest is one specific OPA program: gasoline rationing. During World War II, bold leadership and a widely perceived threat persuaded Americans to cut the nation's gasoline and fuel oil consumption almost in half.

The federal government first resorted to gasoline rationing on the East Coast to deal with a real, immediate shortage, unlike the perceived shortage we face today. In May 1942, pipelines to carry oil from Texas and Oklahoma to the East had not been completed, and oil tankers were providing target practice for German submariners. Today, we have plenty of oil, since Iraq and Kuwait accounted for only 3.5 percent of our supply--an amount that swollen U.S. public and private reserves plus increased production by oil-exporting nations could easily offset until the boycott starves Iraq. Indeed, you might think that after punching in an 8 percent reduction in the world's supplies and coming up with a doubled price of oil, the free market would check the batteries in its calculator. But the market (sorry, but we all affectionately personify it these days) is adding in other factors: The price rise is based not on the current cut in supply but on expectations that there's going to be a war.

It seems reasonable to assume that the market could be either right or wrong about this. If the market is right, then the government should be intervening to prepare Americans for the economy-wrecking oil shortages a Persian Gulf war would cause; if the market is wrong, then the government should be intervening to head off the inflationary effects of a purely speculative doubling of oil prices. Either way, we should be doing something to counter the economic threat that Saddam is posing to the United States in addition to the political threat he's posing to the world order. Stationing troops in Saudi Arabia may help with the second problem, but only by exacerbating the first. Gas rationing, in concert with the boycott, could have handled Saddam on both counts, without loss of life.

Just the ticket

Within a month after Pearl Harbor, ration boards made up of volunteers recruited and organized by the OPA were allocating tires in every American community. Eventually, these boards managed 18 rationing programs, including shoes, coffee, meat, and canned fruit and vegetables. After being rationed on the East Coast, gasoline was added to the responsibilities of all boards in December 1942, not in order to preserve gasoline, which was running short only in the East, but to preserve rubber.

Motorists were entitled to one of three ration tickets, depending on their needs as determined by a board. An "A" card went to all car owners to cover basic requirements like getting to the store. It was the only ration for which those with no war-related reason to drive were eligible. "B" cards went to people who couldn't car pool or use public transportation to get to and from work; the amount of the ration depended on the distance the holder had to travel. Car owners who had to travel in the course of working were issued "C" cards. This category included maintenance men, candidates on the campaign trail, and, believe it or not, doctors (today, the only guys making house calls carry pizzas). Commercial users of gasoline, such as truck and bus lines, received special "T" coupons, and farmers got "R" coupons for their tractors and other equipment. When a motorist paid for his fuel, he would also hand over the requisite number of coupons. It's this community-based system that makes rationing a superior tool for cutting demand than the free-market liberal's cherished device, the gasoline tax. A gas tax large enough to quickly cut demand could never discriminate as precisely on the basis of need-to-travel and as a result would be extremely inflationary.

Most people cooperated, though many complained to their local board, which had limited authority to issue extra coupons in hardship cases. As one Oregon housewife put it, reporting in an official history of the OPA on her five years' work as a volunteer board clerk: "We discovered that the American people are basically honest, and talk too much." Although demand for motor transport shot up as the wartime economy began humming, the results of the rationing system were impressive. The average gas consumption per passenger car went from 607 gallons in 1941 to 416 gallons in 1943. During that same period, total annual private car consumption dropped from 18 billion gallons to 10.8 billion. In his memoirs Promises to Keep, Chester Bowles, who served as Connecticut district administrator for the OPA before becoming head of the national agency in the summer of 1943, wrote, "The program worked for two reasons. First, we went to great lengths to explain it constantly to the public, and second, everyone recognized that the decision in regard to his ration was made not by some bureaucrat in Washington but by members of his own community who served on the local volunteer ration board."

According to the experts, Saddam Hussein's original goal in taking Kuwait was to force the increase in oil prices that OPEC wouldn't support. Through gas rationing, the United States, which buys more oil than the six other top oil-consuming nations combined, could have taught him an unforgettable lesson in demand-side economics. By using rationing to keep demand in check, the United States could have held the price of oil at its pre-invasion level of $21 per barrel, or lowered it. Meanwhile, the boycott, combined with the threat of air strikes should Iraq make a move for Saudi Arabia, could have closed the noose around Saddam's neck without deployment of ground forces. In other words, we would have all the benefits of the actions Bush has taken so far with none of the costs: no unpredictable shocks to the economy, much less risk to human life. Yes, this synopsis has blithely skipped over a number of complications, such as the inevitable black market. But the stubborn fact is that rationing worked before. If our crooks and our economy have since become more sophisticated, so have our cops and our economists. Rationing at least merited serious consideration, but free marketeers would instantly lose their membership cards if they dared clear their throats and raise the idea. Let's hope they don't have greater cause to regret this than just a recession. Bush would have a far easier time convincing Americans oil is worth rationing than he will convincing them it's worth dying for.

It should worry Americans profoundly that the administration is not considering rationing or even less ambitious demand-side reforms--from lowering speed limits to limiting business tax deductions for employees' parking costs--that would constitute "interference" in the market. Unfortunately, this failure is perfectly consistent. As The Wall Street Journal observed of the Sununu-Darman-Boskin triumvirate that shapes domestic and economic policy: "Under their approach, economic growth is the holy grail, free markets are sacrosanct, and free trade is the American mantra. They constitute a powerful 'blocking coalition' that swats down proposals at odds with this philosophy." Lyndon Johnson could have taught this threesome something about the wisdom of locking out opposing counsel.

It seems gratuitous to point out that blanket condemnation of government regulation is as silly as blanket advocacy of it. But then along comes the staid New York Times to elevate silliness to a virtue: "Deregulation has been a triumph. That flies in the face of traditional liberal reliance on government regulators to protect ordinary consumers. That image was relevant in the 19th century, when farmers needed protection from monopolistic railroads. But it does not easily apply to the modern economy, even in industries with limited competition." Huh? Writing off the advances in consumer protection in 20th-century America is like writing off the progress in Italian art after the 15th-century. The system may have creaked and groaned, but some good work got done. Auto safety comes to mind. So does clean air. Followed by clean water, food inspection, traffic lights, and the jailing of Ivan Boesky.

Probably the most extreme case of government interference in the American marketplace occurred during World War II, through the offices of the OPA. It's an instructive example, because, unlike Richard Nixon's clumsy "Phases," which free marketeers trot out whenever anyone mentions price control, the OPA's regulation was so encompassing--and it worked so well. Because of the American experience in World War I, when widespread profiteering spawned massive inflation and 22,000 new millionaires, Roosevelt was actively invetigating the merits of price stabilization by the timeof the Battle of Dunkirk in May 1940. In February 1941, his early team of stabilizers enacted the first of their "price schedules,c intended to control prices of second-hand machine tools. The government had no legal authority to enforce the measure. "The legality of these price schedules is unquestionable," Rep. Henry Steagall noted wryly. "they rest firmly on the constitutional right of free speech."

While Congress was burning up seven months dickering over the Emergency Price Control Act that FDR requested, OPA was rushing ahead with its preparations. The agency grew tenfold in its first year, raiding the staffs of moribund agencies and the faculties of universities around the country. By the time Congress passed the bill in January 1942, John Kenneth Galbraith, as head of OPA's price division, had already placed about half the country's wholesale prices under control by issuing price schedules, brokering voluntary agreements, and sending out threatening letters. The speed and flexibility with which OPA acted owed a great deal to the novelty of the operation and the youth of the staff: In the spring of 1942, the average age of the OPA administrator and his chief deputies was barely 30.

As OPA went to work, the inflationary pressures were becoming enormous. War planners calculated that the military alone would need $100 billion annually to fight the two-front war. In 1940, the entire American GNP was just under $100 billion. OPA's big thinkers quickly discovered that their item-by-item, "selectivist" approach to price control was insufficient. As Rep. Albert Gore declared in urging a more universal approach in the fall of 1941, "To try to halt general price levels by placing a ceiling on selective commodities is like trying to impound a stream by building a dam only halfway across it." On April 28, 1942, OPA issued the General Maximum Price Regulation ("General Max"), which controlled all goods and services not already controlled. In effect, OPA had taken over the entire marketplace.

Despite the controls, inflation continued to drift upward until FDR's famous "hold the line" order of spring 1943. Shortly thereafter, Bowles, the new director of OPA, stopped inflation dead. The New Republic declared in 1944, "We are fighting a war and getting rich too. . . . The system is under attack from every side. Labor wants higher wages. Farmers want higher prices. Corporations want to end renegotiation. The legislature hates subsidies. And yet the darn thing runs. . . . On a makeshift and extemporized basis, detailed and complicated controls beyond anything in American history have been imposed. And instead of runaway prices, most prices have been pegged." Meanwhile, "Farmers, labor, and corporations are making the biggest profits on record . . . national income is roosting in the tall pines." Between 1940 and 1943, liquid savings by individuals increased more than nine times. And what about inflation? "At this point in World War I . . . cost of living was up 64 percent. Today, cost of living is up only 26 percent. And in the past 11 months, according to Mr. Bowles, there has been no upward move in the cost-of-living average at all."

The 16-cent decision

As with rationing, Bowles believed that the keys to OPA's success in controlling prices during the war years were the 5,600 price and ration boards, staffed by a quarter-million volunteers working on average 32 hours each week--"by all odds the greatest grass-roots administrative effort in our history," he wrote. "A volunteer member of a local ration board was subject not only to heavy pressures but often to considerable abuse. He had to be part public servant, part diplomat and part publicist." Here's an example of how these boards functioned, taken from the March 8, 1944 minutes of Board No. 31 in Washington, D.C. As background, you should know that anyone who was overcharged had the right to sue the merchant for triple the amount of the overcharge or $50:

Fourth case. Mr. B. reports that he purchased at this delicatessen a box of crackers for 45 cents, he presented a receipt showing he had been overcharged by 16 cents.

Mr. S. asked Mr. A. if he had anything to say. His reply was he was taken to the hospital in January and came back to his store the middle of February . . . that truthfully he was not aware of the correct selling price until he called the price clerk and had her figure his mark-up. He offered to refund the 16 cents to Mr. B. He asked the panel members if they thought he would be so foolish to give a receipt if he had any intention of wrongdoing. Mr. S. asked Mr. B. what he wanted and Mr. B. replied he thought he would take it to court and sue for $50 damages.

Mr. S. reminded Mr. B. . . . This man (grocer) had been checked six times in the past 3 months and each time was found in compliance and had never had a complaint or occasion to be called before the board before . . . he would advise Mr. B. to give Mr. A. another chance and then if he is caught willfully overcharging he will be dealt with severely by the board.

At this point Mr. B. made the statement he would think it over and on second thought he probably wouldn't sue at all.

Money will be refunded. Case dismissed.

While the OPA was in full swing--from the spring of 1943 to the spring of 1945--the Bureau of Labor Statistics' index of consumer prices rose less than 2 percent. The coalition that had kept the agency going began to unravel after V-J day, however. By the end of the war, pent-up demand for consumer goods was staggering. Advertisers had kept consumers primed through the lean war years: "Many dealers have Coffeemaster, but if your dealer should not, it is because of the 'all out' war production program at the Sunbeam factory. In such a case, put Coffeemaster on your "VICTORY LIST" of things to get first when peace returns. (We'll continue to advertise so you'll remember.)" Americans had been saving at a rate of $33 billion per year, and they were ready for their reward. So were manufacturers and retailers.

The backlog of demand wouldn't have been much of a problem had controls stayed in place until factories returned to producing consumer goods. But the price control line began to bend too soon. In the summer of 1946, Congress passed a new price control bill that was stuffed with exemptions for assorted industries. Bowles wrote Truman that "the bill would simply serve to legalize inflation" and resigned. By fall, Truman, lashing out at the "few men in Congress who, in the service of selfish interests, have been determined for some time to wreck price controls no matter what the cost might be to our people," was forced to lift first controls on meat, then on all wages and most prices. Consumers quickly bid up the limited goods available, and inflation soared. As Harvey Mansfield wrote in his official history of OPA, "Decontrol was not a rational triumph of enlightened self-interest."

State control of prices clearly can be a disaster in the long term. You don't have to go to Eastern Europe for evidence. Just consider the condition of housing in New York City: City government control of rents--a holdover from World War II--has forced up prices on uncontrolled apartments, discouraged new building, and encouraged landlords to harass their tenants and let their property go to seed. But as the OPA proved, over the short term even massive government control can work.

How much for the girl?

Even more important, a degree of state control over the economy in the long term is crucial to prevent abuses of the environment and workers' and consumers' health--again, a point that seems self-evident after a moment's reflection. This is the most dangerous deficiency of both the current prevalent bias and the former, pro-regulation one: the shorthand terms of debate over economic issues--"free marketeers" on one side, "big government" types on the other--hide more than they reveal. It's ridiculous to talk about American "free" markets, since the government is constatly interfering to invent new markets and modify existing ones--creating a tax break for companies that make ethanol, for example, or outlawing child prostitution. Would free marketeers argue that the Emancipation Proclamation constituted illegitimate government interference in the marketplace? Should we "deregulate" the nuclear weapons trade? How about ownership of property? Even George Bush's solution to the Gulf crisis--sending troops to Saudi Arabia and cutting off the Iraqi pipelines to restore OPEC's role as peaceful price-fixer--is just price control by another name (war) and with an added cost (human life).

By regarding the government and the market as antagonistic forces rather than cooperating and compensating ones, Americans blind themselves to the vital importance of the federal government's most peculiar institutions: the regulatory agencies, where so much of the action is and so little of the reporting gets done (witness the S&L debacle). The pertinent question isn't whether or not there should be government interference but what form that interference should take--that is, how Americans as citizens define the marketplace for Americans as producers and consumers. Those definitions depend more on nuance than on the yes or no of "free market" and "big government."

Deregulation of the trucking industry has in many ways resulted in better service to the consumer; small entrepreneurs have been allowed into the marketplace to compete, lowering prices. But at the same time, deregulatory zeal has led the federal government to neglect vital safety issues, such as size and maintenance of trailers. Likewise, airline deregulation has resulted in better service for long-distance passengers. But it's also permitted a handful of large airlines to divide up the country into distinct regional monopolies, shutting out smaller competitors and jacking up fares on less-traveled routes. The solution isn't what the Times calls "re-regulation," by which it must mean a return to the days of the Civil Aeronautics Board and regulated routes and fares. It's to use new government regulation to carefully eliminate the natural barriers of the industry that we've discovered as the government-shaped air travel marketplace has developed in the past few years, thereby allowing market forces to go to work. Ditto for the cable television industry.

These days, the collapse of the S&Ls is the favorite example of the perils of "deregulation" for the remaining big-government types and for those freemarket liberals still anxious to assert their lefty credentials. The problem is, they're wrong. The industry was in fact doomed by stupid regulation in the late sixties. Much of the "deregulation" of the early eighties--widely regarded on the Left as the financial sector's answer to crack--was needed, and faulty primarily because it came too late. The real problem behind the rapid escalation of the S&L mess in the eighties was not "deregulation" but an absence of "oversight" (that is, enforcing the rules that remained on the books and analyzing the market to ensure they were adequate). That problem arose because the freemarket Reaganauts confused the two terms. Now the big government crowd, thrashing around in the same Manichean universe, is making the same mistake.

A free-market bias that discourages any intervention in the economy can have exactly the same negative effect that wage and price controls can have: freezing inequities and inefficiencies into place. The government has to be flexible enough to respond to developments in the marketplace in order to fine tune it--opening access to airline hubs, increasing emissions and mileage standards for cars as the technology improves, determining the legitimate uses of genetic engineering in humans. That means voters have to understand that the choice isn't beween the free market and big government, that the distinction harshly symbolized by Bush's joyriding in his cigarette boat--between citizen and consumer, between republican life and economic life--is phony. Individual economic action inevitably has consequences for political life, and vice versa. If today's voters and politicians understood that as well as those price and ration board volunteers did, they'd realize that the national economy, as the aggregate of all our individual getting and spending, should be recruited to serve the national interest long before any 18-years-old.

James Bennet is an editor of The Washington Monthly. Research assistance was provided by Joshua Ray Levin.
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Author:Bennet, James
Publication:Washington Monthly
Date:Nov 1, 1990
Previous Article:The Shattered Bloc.
Next Article:The stupidity of free-market chic ... in Eastern Europe; how American economics is hurting Polish capitalism.

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