In the midst of the worst federal deficit crisis in U. S. history, the current administration seems poised to hike costs for doing business with the federal government. According to the Wall Street Journal (“Procuring the Union Agenda,” March 9), “the Obama Administration is planning to force companies to raise pay and benefits for workers if they want continued access to federal contracts.”
Instead of having companies bid for federal contracts on the basis of low bids and quality products, the government would require all bidders to offer vaguely stated high benefits to their workers–a kind of Cadillac plan–before being eligible to win any bids. The first time the government tried this kind of tactic was in the 1930s–first with the Davis-Bacon bill, which drove up costs for taxpayers, and second with the National Recovery Act (NRA), which again drove up the costs of doing business with the federal government.
In the case of the NRA, the government refused a low bid on trucks to the government by Ford Motor Company because Henry Ford, an independent-minded man, had not signed the high-cost NRA code of business. At a press conference, FDR defended his decision to have the government pay $169,000 more for trucks, rather than do business with the more competitive Henry Ford.
Given that federal spending last year was 25 percent of GDP (as opposed to an average of about 20 percent in past years), that possible new law will keep federal spending high–perhaps creating a “new normal” of 25 percent federal spending. Of course, new taxes will have to be added to pay for the costs of the Cadillac union benefit plans, but President Obama seeks the votes of union members — and higher taxes may be the price he wants others to pay for his votes.
Under FDR, federal spending sharply increased and created a “new normal,” which necessitated higher income taxes (up to 79 percent on top incomes) and higher excise taxes on gas, cars, telephone calls, and even movie tickets. Are we headed for a “new normal” paid for by higher taxes?
“I do not think that this country is ready to be treated like Russia for a while.” Thus wrote Henry Ford in 1933–after President Roosevelt, through the National Recovery Act, tried to legally force all carmakers to fix prices for their cars and agree not to give customers any discounts. GM and Chrysler went along with FDR, but Ford refused to be regimented by the federal government. “There is a lot of the pioneer spirit here yet,” he said.
Even today, more than 75 years later, we see the pioneer spirit in Ford Motor Company persist. The February results are in: Ford Motor Company outsold GM in cars and light trucks. In fact, Ford’s sales have been respectable during the last year while GM has steadily declined. Should we be surprised?
Not really. True, Alan Mulally is an excellent CEO for Ford and is very competent. But Ford’s decison not to take federal aid–just as Henry Ford did 75 years ago–gives the company a surprising edge. They can make the cars they want to make, do the advertising they want to do, and offer attractive financing to potential buyers. GM, with strong federal oversight, is not as free to run its business in the most efficient manner possible.
Put another way–privately run companies have strong advantages over government run (or subsidized) companies. The Ford example is one of many. John Jacob Astor, the first American to be worth $10 million, built his fortune on his privately run American Fur Company. A government-subsidized fur company was his chief competitor, and it eventually lagged so far behind Astor that Congress finally shut it down in the 1820s. In railroads, James J. Hill privately financed his Great Northern Railroad–the only transcontinental railroad never to go bankrupt. By contrast, the Union Pacific and Central Pacific Railroads–with massive federal aid–both went broke during the 1890s and both consumed millions of taxpayer dollars in financing.
When people run their own businesses, they try to appeal to other people to buy their products. When the federal government gets involved, it skews the incentives. Soon we have CEOs trying to secure federal aid from Congress more than they are trying to make products people want to buy. The historical record suggests that a free economy works better for customers than an economy riddled with federal subsidies and a web of regulations. Three cheers for Alan Mulally and Ford Motor Company for illustrating this lession once more.
by Burt on February 26, 2010
Let’s say you go online and book an airplane ticket from your nearest airport to a city halfway across the country. The ticket price is $300. Not bad. That’s 50% less (using inflation adjusted dollars) than it was in the 1970s before airline deregulation. Even in the midst of increased fuel costs, labor costs, and the costs of the plane itself, the airlines have managed to keep plane travel relatively cheap.
How much of the cost of that $300 ticket do you think you are paying in taxes as a passenger? In 1972, the answer to that question was $22.00. The answer today is $60.00, and some politicians are trying to increase that large sum by about six dollars more. Those passenger taxes are sometimes called “hidden taxes” because you don’t realize they are there. They are included as part of the overall ticket price, and you assume that the ticket price represents costs or profits to the airline. Once again, it is really politicians taking advantage of low plane fares to sneak in taxes that most customers never see or discover. In 2009, passengers paid the federal government $18,000,000,000 in taxes on their plane fares, and that doesn’t include federal taxes paid by all the airlines for doing business and making profits.
Richard Anderson, the CEO of Delta Airlines, is especially frustrated because those “ticket taxes are not being channeled directly to air traffic control modernization.” In other words, some of the increase in ticket taxes is simply money going to Washington for politicians to divvy up in targeted subsidies to different voting groups.
What can we do about hidden taxes? One thing is to try to remove the veil of secrecy from them. The more we know about all the taxes we pay, the more likely we are at least to resist their being increased. We should ask businesses to list for us how much of, say, our tank of gas consists of revenue sent to Washington. Perhaps we could have two dials on the gas pumps–one telling us how much our total price is and the other telling us how much of that price we are sending to Washington. In a similar manner, we could ask that the amount of tax we pay for a carton of cigarettes or a fifth of gin be posted on the product. The withholding taxes on our incomes pose the same issue. If Americans discover how much they are paying in hidden taxes, they would be more likely to resist the lure of government subsidies from Washington–subsidies made possible by hidden taxes.
Can you think of even better ways of calling attention to the legal confiscation of our property by politicians in Washington?
by Burt on February 24, 2010
The Senate (with the help of a few Republicans, including Scott Brown) is passing the new Obama “jobs bill,” which will spend another $100+ billion supposedly to create new jobs. On the surface, the jobs bill idea seems logical: we have high unemployment; why not have the government spend $100 billion to create new projects that would give employment to more Americans?
And yet all previous jobs bills of this kind have failed. The $150+ billion stimulus package President Bush launched in 2008 led to more, not less, unemployment. The $787 billion stimulus bill that President Obama supported in 2009 raised such high hopes–but unemployment that year soared from 8 to 10%. A roughly similar result occurred when FDR threw his many New Deal programs at unemployment in the 1930s, and after almost seven years, the U. S. unemployment rate was a colossal 20.7%–higher than at any time in U. S. history except for the Great Depression years of Hoover and FDR.
These “jobs bills” fail because all “government spending” must come from taxpayers, or from borrowing (which means repayment with interest by future generations). We are simply turning our tax dollars over to politicians to spend the way they want. And when they spend it, they invariably use it to send pork projects into their districts to help them secure re-election. And those pork projects are often economically unsound. The conclusion here is this: no nation’s government has ever spent itself into prosperity. And no nation ever will. The proven way to increase prosperity is to cut tax rates and give citizens more freedom to earn and spend money the way they want. When President Reagan did that in the 1980s, he helped launch a 25 year run of U. S. prosperity (President Clinton also kept the prosperity going with capital gains cuts and serious welfare reform). Will we learn from the past, and turn to freedom instead of government taxation? History is a marvelous teacher.
by Burt on February 22, 2010
The Tea Party movement is marvelous because it is a return to bedrock principles of limited government and balanced budgets. The Founders were so committed to both of these ideas that they created a government not easily abused (checks and balances) and not easily manipulated by potential tyrants. The Founders also, from Washington on, paid down the national debt, and the U. S. became a nation with a national surplus by the mid-1830s, while James Madison was still alive. They gave us freedom from the British, a workable Constitution, and within the lifetime of some of them, a paid-off national debt. To paraphrase Churchill, few have given so much to so many.
In the early 1900s, the Progressives, by contrast, wanted to centralize power and make government more intrusive. They wanted a powerful executive to cure alleged abuses and fine tune the economy. The Founders believed that setting up freedom would produce inequalities of condition because people were unequal in ability, willingness to work, and in luck. As long as all had a right to life, liberty, and the pursuit of happiness (the pursuit of happiness, not a guarantee of it) society would function well. The Progressives believed that by 1900, human nature had changed; we knew more; we could trust elected leaders with much greater power. They believed we could redistribute wealth and create greater equality of condition, which they deemed desirable. The original progressive income tax had a top rate of 7%. It was up to 25% by the 1920s; 63% under Hoover; 79% under FDR in the 1930s; and 94% at the time of FDR’s death. In other words, envy and greed–the taxing of the few to capture the votes of the many–became a political exercise that prolonged the Great Depression and would have sustained it after WWII if we had not cut taxes and increased freedom.
The Founders valued freedom and property rights; the Progressives did not like the results of freedom and property rights, and they favored an enlarged state to micromanage the economy and redistribute wealth. The Founders did not believe human nature was capable of managing this feat, and they would have been discouraged to see the results of Progressives’ tinkering with the Constitution. The Tea Party movement is an encouraging return to our inalienable rights of life, liberty, and the pursuit of happiness.
