Fighting Back Against Controls

By now every member of this audience must have heard every argument the mind of man can conceive for and against consumer rationing, government allocation programs, excess profits taxes, and price controls, to cope with the so-called energy crisis. And everyone here knows the reasons commonly assumed to explain the crisis.

The blame goes, in approximately declining order of magnitude, to price controls; Federal Power Commission pricing policies for natural gas; various efforts both reasonable and hysterical to curb environmental pollution; oil pro-rationing traceable back to the New Deal; oil import quotas; Near East tensions and war; labor policies in the coal industry; disagreements with Canada stemming from increased nationalism there and protectionism here; fears of nuclear energy; the American consumers' taste in automobiles and household temperatures; and finally the near disappearance of the sperm whale.

Among the myriad solutions proffered for solving the problem, not too much has been said yet about nationalization of the energy industries, though the thought has been bruited about. Most discussions have focused on the imposition of further price controls and consumer rationing, and to a lesser degree on such ideas as government dictation of the output mix of petroleum refineries; mandatory closing of gasoline stations on Sundays; a federal speed limit; and apparently someone's slipping into our bedrooms at night, not to tuck us in, but to lower our electric blanket thermostats by six degrees; and on and on and on.

Finally, like a plaintive melody kept in the background by louder and shriller orchestrations, we occasionally hear a very different proposal, that the government forthwith cease in every respect to interfere with the functioning of the fuel market. Advocates of this last view are, however, generally considered to be naive theorists who vastly oversimplify the problem; do not understand the complexity of modern industrial America; and still prescribe 19th century economic nostrums for 20th century problems. After all, how could "doing nothing" ever cure a crisis of the magnitude we presently face?

Well, one answer to that question is that the crisis everyone is talking about does not really exist. That remark usually gains attention, not because it is readily recognized as a simple truth, which it is, but because it is generally considered to be a bad joke stated mainly for its shock value. Still, as was nicely explained by Professor W. Philip Graham in the WALL STREET JOURNAL of November 30, 1973: "Crises, as opposed to simple scarcity, result from market disruptions; and the only sector of society which possesses the power to disrupt a large market is the government." Professor Graham is correct. However, the government, plus the mass media and one hell of a lot of economic boobs, can also create an hysteria that many people are presently mistaking for a real crisis.

Of late, it is difficult to find a news story on the subject that is not headlined "Rationing Necessary to Cure Fuel Shortage," or words to that effect. T.V. commentators of erudite voice and visage and editors turned amateur economists tell us daily that some form of rationing is required to deal with the fuel shortage. A large and perhaps crucial segment of the literate public actually believe that the "cure" for a shortage is some form of government rationing. Well, there are a lot of things rationing can do—all of them bad. But one thing it can absolutely never do is to increase the total supply of any commodity.

I was encouraged recently by a headline over a recent column on this subject by Pulitzer Prize winning WASHINGTON POST columnist David Broder. That headline really laid it on the line. It stated simply: "Politicians Fooling Public on Crisis." But my optimism was short lived. It turned out that Mr. Broder was simply angry about Congress' delay in adopting what he considered urgently required legislation to ration gasoline and set prices. He thought that the members of Congress lacked the guts to adopt the politically unpopular but economically correct controls. Apparently, sometimes a little guts can be a dangerous thing.

Broder's column contained some nice, though obviously unintended irony. He stated that during World War II "despite all the horror stories today's politicians are telling, it appears that rationing was darned effective. Automobile mileage was cut in half in the first year the rationing plan was in operation. And despite a black market that involved widespread forgery of coupons and some blatant hijacking…the official estimates were that 95 percent of the available fuel supplies moved through legitimate channels." I wonder how many of his readers noticed that in the absence of those same controls 100 percent of our fuel supplies would have moved through legitimate channels. And incidentally, even that five percent slippage amounted to a quarter of a million barrels of gas and oil a day. It is also interesting that Broder gives credence to "official estimates" of the amount of economic crime the government admitted to in the 1940's. I wonder how he treats the "official estimates" of crime surrounding Watergate and the 1972 election.

WHO GAINS?

It is interesting to conjecture about who the possible beneficiaries of our newest crisis discovery are, and I do not have reference to horse breeders or manufacturers of Franklin stoves. First, I suppose we might note that an administration in serious political straits can claim to have a firm hand on the government reins by dealing resolutely with a dramatic crisis. The traditional form of this argument was that governments risked wars to take the public's mind off domestic failures.

But, as some embarrassed administration critics recently learned, governments are not as likely today to play games about war risks as they may have been in the pre-nuclear era. But a nice little energy crisis can serve almost as well. It usually starts with a grave, short-notice, prime-time presidential warning on national T.V. He makes a call for patriotic, voluntary sacrifices by every citizen and inevitably ends by saying, "together, under my leadership, we will see this through," or words to that effect.

The next morning's papers, however, begin to carry subtle suggestions by third or fourth echelon officials about the possible necessity for regulation and controls. This is usually followed by a series of gradual escalations approaching real compulsion and the inevitable aggravation of the economic circumstances. At the moment, to its great credit, the administration in Washington is holding fast. But the pressures from Congress and elsewhere for fuel rationing and tighter price controls may soon become irresistable.

Other segments of government may be even better served by our new found crisis. The huge federal bureaucracy, fast becoming the most potent political force in the country, has developed sensitive antennae for programs that guarantee larger government payrolls. General controls during World War II required over a quarter of a million paid administrators, so control of the vastly larger present economy would promise several million new jobs at the least. After all, it is hardly imaginable that controls would or could be stopped merely with gasoline and fuel oil.

Next we consider the Congress and a widely held belief that Congress in recent years has given up tremendous powers to the President. This belief created some minor consternation last week when the Senate adopted the National Energy Emergency Act of 1973, or, as some said, our economic Gulf of Tonkin Resolution. On paper, that bill gives the President the greatest peacetime economic powers one Act has ever conveyed. Some critics view this power as being given to the President at the expense of Congress, but the matter is not that simple, nor Congressmen that simpleminded. The President, and the few people close to him who actually follow his bidding, do not and cannot in fact administer these laws themselves. Such laws are administered by that veritable army of bureaucrats over whom, as recent events make more clear than ever, the President has little or no real control.

Anyone who has observed Washington lobbying practices closely realizes that key Congressmen, especially the chairmen of important committees and subcommittees, exercise far more control over the working bureaucracy than do the evanescent presidential appointees far removed from the day to day work of the actual bureaucracy. Thus, I find it perfectly understandable why Congress continues to adopt regulatory laws that are allegedly to be administered by the executive branch. The advent of the regulated economy has lodged tremendous administrative or executive authority in the hands of key Congressmen, and it would be surprising if experienced politicians did not seize the opportunity provided them by a full blown energy crisis to secure more of this power.

The news media must surely bear a good part of the responsibility for creating our present crisis atmosphere. That is, after all, their stock in trade. Remember the Maine? But that presents me with a cheap shot, and anyway, who has not already heard that story. There are more interesting groups to consider.

Businessmen, yes, businessmen, must take a good share of the blame for the present needless turmoil. Much of the public, correctly or not, looks to the business community for popular guidance on economic issues. And so, when President Nixon proclaimed price and wage controls on August 15, 1971, in what may yet prove the most disastrous executive decree in American economic history, the public could surely not help noticing that the loudest approval for the move came from the business community. And what could possibly have confused the public more about the workings of unregulated markets and the profit system than all that damnably misguided talk by businessmen recently about corporate social responsibility? Well, that chicken really came home to roost in a hurry, for as Ralph Nader and John Kenneth Galbraith, among others, tell us, support of rationing and price controls is a crucial part of a corporation's social responsibility. Perhaps in the future the business community will not be quite so quick to truck with that devil.

IDEAS HAVE CONSEQUENCES

At any given moment, there exist a set of widely held intellectual views that largely determine which remedies experts will offer to solve real or imagined problems. In the "crisis" that was discovered in 1933, the then current ideology generated the various alphabet agencies and intensive, if often misguided, antitrust law enforcement. The race and environmental "crises" of recent vintage brought the corporate social responsibility idea to the forefront. Now two different pieces of current intellectual dogma propel the hue and cry for controls.

The first of these is the idea that there is a serious maldistribution of wealth in America. A little over a year ago that same notion played a role in the shift of control of the Democratic Party from those with relatively moderate economic views to those with a considerably more radical bent. The same idea, now apparently even more widespread, is playing a large role in today's crisis.

If you ask fairly intelligent people why they now favor price control and rationing of gasoline, a surprising number reply that these measures are necessary to prevent wealthy people from getting all of the gas, leaving the poor with none. Yet, there are few more pernicious economic suggestions than that we should allocate commodities on the basis of either some egalitarian right or a proven "need" for the particular goods. This argument contradicts the basic premise of a free society that individuals command resources by using the rewards they receive in the marketplace.

Advocates of this notion argue that gasoline has a special quality that distinguishes the ethics of its distribution from that of other commodities. After all, they say, the poor must be able to get to their jobs. But how about housing, or clothing, or travel, or medicine, or education, or, for that matter, movies or soap? Should we destroy an incredibly efficient market distribution system that has served well the rich and the poor alike in order to accomplish some miniscule redistribution of wealth? And should we require that even that small subsidy to the poor to be taken in the form of gasoline; as would be the case with nontransferable ration coupons? How about the nondrivers among the poor, or those who must depend on deliveries? Nonetheless, to underestimate the strength of this argument in America today is to fail to understand much of the popular appeal of rationing and price controls as correct solutions to the energy crisis.

The second ideological argument for price controls, or for a special high tax on petroleum products, is that the large petroleum companies should not be allowed to make "windfall" gains because of the fuel shortage, though apparently the government should. Even apart from popular misconceptions about who actually would profit most in this situation, this attitude utterly fails to understand the function of profits.

First and foremost, profits serve as a correct and efficient signal for the production of more goods. The reason why the amount demanded at a specific price increases, or the reason the supply lessens, is completely irrelevant to the economic function profit serves in increasing production. Penalizing profits simply prevents this miraculous device from performing its critical function efficiently. In passing, it might be noted that no one has proposed special tax relief for those industries, like automobiles, that are suffering "windfall losses" at this time.

DON'T SURRENDER

This brings me then to a conclusion that I rather think may offend some members of this audience or at least cause some painful soul-searching. I want to call on the business community of the United States to announce publicly and vigorously, both as individual companies and through associations such as this one, that they will not cooperate with the government beyond the legally compelled minimum in developing or complying with any control programs.

Many industrialists, particularly in the petroleum industry, have already been asked to serve on government allocation committees. I urge them to keep the public's interest and their own clearly in mind. Do not join these committees; do not give even the appearance of cooperation to those who would destroy the most successful economic system ever devised; and do not be misled by the belief that you can save a little of the pie by playing along with the government officials or by manipulating their proposals. Remember you have already been tried and convicted before these proceedings even began. For every such short term benefit you can measure in pennies, you and the public will ultimately experience losses measured in dollars and lives.

The threats of controls and higher taxes, the vilifications by politicians and the media, and the calls to patriotism and social responsibility are but the carrots and sticks of political bullies who can ultimately rationalize the last ounce of control over our private lives.

If you have any faith in the economic and social miracle that is the free market system, use every legal means at your command to vex, confuse, delay, undermine and avoid every regulation adopted or proposed by Congress, the administration, and the bureaucracy. Instruct your lawyers and your accountants to stay as narrowly within the letter of the law as they possibly can while still keeping you out of jail. You are not legally obliged to follow the spirit of a law and not morally obliged to follow the spirit of a law that is without any redeeming economic or social justification.

Force the government into litigation at every turn. Whenever possible, on constitutional or other colorable grounds, seek individually or in a class action to enjoin the enforcement of price controls and allocation regulations. Force the government to prove the constitutionality of every one of these intrusions, and seek declaratory judgments when there is the slightest possibility of confusion in the interpretation of regulations.

Finally publicize as widely as possible the inevitable inefficiencies, mistakes, and human miseries that will develop with these controls. They are and will be all around us, and no one will have to look far for examples. That price controls prevented production of the equipment necessary to produce more oil refining capacity is the kind of thing that the public should be made to understand. The public should not be allowed to believe that racketeering, black markets, favoritism, misallocations, delays and inconveniences are sacrifices they must endure in the nation's interest. These are, after all, unnecessary costs resulting from economic stupidity or political knavery.

Paul McCracken has characterized as one of the "more unfortunate aspects of rationing…its adverse effect on public morality.…Thus," he said recently in the WALL STREET JOURNAL, "those with 'flexible' standards of morality, or who have political pull, or who can work some other angle, will do relatively well, while the ordinary decent citizen will wind up with the dry gasoline or oil tank." With all deference to Dr. McCracken's perfectly correct prognosis of what will occur, I must disagree with his characterization of the effect on public morality.

It has often been pointed out that the Russian system of central economic planning could never have reached its present production levels were it not for a broadly functioning and officially ignored black market. That misnamed free market has, of course, kept many a Russian alive and happier than he would otherwise be. The same may now become true in America.

Businessmen should help the public understand that morality, in the case of arrogant, intrusive, totalitarian laws, lies in the barest possible obedience and in refusal to cooperate willingly beyond the letter of the law. The business community should have the courage to inform the public that the stakes are very high and that they are the potential victims.

Henry G. Manne is Kenan Professor of Law and Political Science at the University of Rochester. Professor Manne first presented this speech to the 78th Annual Congress of American Industry, National Association of Manufacturers, on December 6, 1973.