I appreciate Conrad Black’s continued efforts to illuminate the ongoing discussion about the New Deal. Accumulating new evidence has probably led to more reflection about it than had occurred during the previous half-century, and that’s all to the good since we’re being urged to proceed with a New New Deal now.
Perhaps the most important economic question during the 1930s was how to revive private-sector employment. I believe FDR’s biggest mistake lay in not focusing single-mindedly on this problem and shelving other ideas until recovery was achieved. Instead, FDR pursued “reforms” that conflicted with the recovery of private-sector employment, and that’s a major reason he didn’t achieve it during the 1930s.
As we’ve discussed previously, giving people government jobs expands public-sector employment, not private-sector employment. Government-sector jobs consume wealth produced by taxpayers. Government spending to create government jobs was the principal reason why taxes tripled during the New Deal period.
It didn’t make sense to try stimulating employment with spending that would necessitate growth-impeding higher taxes, at least until obstacles to employment had been eliminated. FDR’s predecessor, Herbert Hoover, created obstacles to employment that made the depression worse — especially increasing taxes, propping wages above market levels, and providing support for compulsory unionism (the Norris-LaGuardia Act), all of which added to the cost of hiring people. FDR made the situation even worse by further increasing taxes, propping wages even higher above market levels, and providing more support for compulsory unionism (National Labor Relations Act) and cartels that supported compulsory unionism (National Industrial Recovery Act, Motor Carrier Act, Civil Aeronautics Act). All of these made it more expensive and difficult for employers to hire people.
I’m focusing on the economic effects of FDR’s policies because we’re trying to answer an economic question: how to revive private-sector employment. It hasn’t been satisfactory to keep trying to answer an economic question with a political story.
We’ve discussed the National Industrial Recovery Act, but let me point out how a New Deal cartel measure we haven’t talked about created obstacles to the recovery of private-sector employment. In 1935, FDR signed the Motor Carrier Act, which extended the regulatory authority of the Interstate Commerce Commission to cover the bus and trucking industries. (The ICC had been established in 1887 to restrict competition in the railroad business.) As far as the trucking industry was concerned, ICC regulation meant establishing barriers to entry, which strengthened regional trucking cartels. Trucking companies were permitted to operate only if they had obtained an ICC license (“a certificate of public convenience and necessity”). As the economist Thomas Gale Moore explained, “Truckers already operating in 1935 could automatically get certificates, but only if they documented their prior service. New trucking companies, on the other hand, found it extremely difficult to get certificates.” In addition, the ICC restricted the routes that trucking companies could take and the geographical areas they could serve.
By limiting the number of trucking companies, ICC regulation made it easier for the International Brotherhood of Teamsters to establish bargaining monopolies. Once the Teamsters had organized licensed companies, they could be confident there wouldn’t be any new competitors to disrupt their deal, so the union had the industry by the throat. In effect, ICC regulation made it easier to establish a closed shop. Whoever wanted to drive a truck had to pay dues to the union and be represented by the union.
Moreover, the Motor Carrier Act authorized the ICC to suppress price competition in the trucking industry. Any trucking company wishing to change a rate had to file a notice with the ICC 30 days before the change was to take effect. Competitors could inspect filings about proposed rate changes. If anybody protested a proposed rate change, it was suspended until the ICC could investigate its legality, which took a while. Protests and slow ICC proceedings effectively meant there couldn’t be any discounting in the trucking business.
Teamsters could aggressively push for more lucrative contracts, confident that there wouldn’t be any non-union competitors offering to haul goods for less. The Teamsters had been concerned that owner-operators of trucks – who were paid by the load, not by the hour — might under-price unionized companies, but the ICC didn’t permit it to happen.
The Teamsters supported ICC-licensed trucking companies that lobbied aggressively against any additional companies’ being licensed in their market. The Teamsters also lobbied the ICC for higher freight rates to protect trucking-company profits. The companies passed along the costs of their expensive Teamsters contracts to consumers, who had no choice in the matter.
It’s no coincidence that New Deal labor laws and cartel laws were accompanied by escalating labor-union violence and corruption. Although the most-discussed violence arose from conflicts between employers and unions, a considerable amount also occurred between unions struggling for monopoly bargaining power in the same markets. For instance, Teamsters fought warehouse unions for the power to represent warehouse workers.
Now consider the 1970s. There was increasing recognition that cartel laws contributed to labor-union corruption and overall labor costs, discouraging employment. Pres. Gerald Ford called for less trucking regulation. Pres. Jimmy Carter followed up. The ICC began trucking deregulation in 1978, and Congress passed the Motor Carrier Act of 1980. It eliminated most restrictions on the issuance of licenses for new trucking companies, on routes that trucking companies could serve, and on the areas they could serve. Trucking companies could cut rates as much as 15 percent without being challenged, or they could negotiate lower-cost contracts with shippers. This was a big step toward deregulation.
Trucking rates declined about 25 percent in the five-year period between 1977 (the year before ICC trucking deregulation began) and 1982. The number of trucking companies increased dramatically — doubling from about 20,000 in 1980 to 40,000 in 1990. Deregulation made it much easier for non-union workers to get jobs in the trucking industry.
Some 200 unionized trucking companies went out of business in the years following deregulation. The contracts, the corruption, and the disruptions associated with the Teamsters all made it hard to survive in a competitive marketplace. New trucking companies had powerful incentives to be non-union, and consequently, between the 1970s and the 1990s, the number of drivers covered by the Teamsters’ National Master Freight Agreement plunged by about 60 percent.
Meanwhile, total trucking employment increased, as trucks hauled about three-quarters of all freight in the United States. A study by James Peoples and Margaret Peteraf, at the University of Wisconsin-Milwaukee and Northwestern University respectively, found that truckers were 155 percent more likely to be non-union owner-operators after deregulation than before.
Although labor laws remained in effect, deregulation made clear how much New Deal–era trucking cartel laws had helped to sustain the monopoly power of the Teamsters. The Teamsters basically priced themselves out of the market, and they lost the monopoly profits that had enabled Jimmy Hoffa and his associates to engage in so many crooked deals. Deregulation of New Deal cartel laws probably did more than all the congressional investigating committees to curb union corruption.
One could make similar comments about other New Deal cartel laws. The Civil Aeronautics Act, for instance, established the Civil Aeronautics Board, which controlled airline routes and rates. The CAB didn’t license a single new interstate airline for four decades, until it began to be phased out in 1978. Industry growth and employment took off after discounting was legalized, giving us an idea of how private-sector employment had been suppressed by the New Deal cartel laws.
Bottom line: Under FDR, the federal government created and intensified obstacles to private-sector employment. While FDR expressed sympathy for the unemployed and set up relief agencies to help them, he actually made it harder for them to find jobs. I think it would have made sense for Hoover and FDR to begin their work by asking a humble question: whether the government was doing anything to make private-sector hiring more difficult, and if so, how those obstacles could be eliminated as quickly as possible.
We’re in much the same situation today, as the Obama administration struggles with the consequences of severe distortions in financial markets, while the administration creates more distortions via cheap loans, breaks for people who aren’t making their payments, and taxpayer bailouts of firms that churned out dodgy paper.
Hopefully, today there will be more candor in acknowledging that government intervention in the economy, however well-intended, involves very serious hazards. During the Great Depression, as now, politicians often do not anticipate the extent to which people will respond to policy changes, like a tax increase or an easy money policy. Political power magnifies the harm done by inevitable human errors, and instead of harming a city, state or region, an error in federal policy can inflict harm across the country and beyond. Since there’s no reliable way to keep bad or incompetent people out of power, harmful programs might be politically impossible to stop, even though many people know about the harm they will do.
“Progressives” have long had a huge blind spot about the limits on what could be accomplished by expanding political power. Theodore Roosevelt was as clueless as FDR. Unfortunately, Obama appears to have the same blind spot, despite his obvious intelligence.