Monday, April 28, 2008

Woodrow Wilson's The New Freedom: Hoisted By His Own Petard

Woodrow Wilson, The New Freedom: A Call for the Emancipation of the Generous Energies of a People. Englewood Cliffs, NJ: Prentice-Hall. Classics in History series. 173 pages. $1.95.

Woodrow Wilson was a Mugwump and was, according to Frank E. Leuchtenberg's introduction to this book. an advocate of liberal (libertarian) ideas until he was elected governor of New Jersey. Even then and thereafter much of his rhetoric is couched in the philosophies of individualism and laissez faire. This book is a compilation of articles in a magazine called World's Work that Wilson wrote in 1912 (the original edition was published in 1913) when he was campaigning for president against Theodore Roosevelt (running on the Progressive Party ticket) and William Howard Taft. The Republican vote was divided between Roosevelt and Taft, and Wilson, a Democrat, won.

Unlike the Republican Theodore Roosevelt, who argued for close government regulation and licensure of "trusts", Wilson argued for a loose regulatory regime. Wilson passionately believed in entrepreneurship and the importance of Americans' working for themselves. Arguably, he was more free market and individualist in orientation than any post-New Deal president, including Ronald Reagan. Of the major post-World War II political figures only Barry Goldwater would have been more interested in economic freedom. It is ironic that Wilson inadvertently did as much as any president to stall economic freedom and laissez faire during his administration notably thorugh the installation of the federal income tax as part of the United States Revenue Act of May 1913 and the Federal Reserve Act in December 1913. It is noteworthy that the federal income tax was an addendum to a tariff reduction bill (the Revenue Act of 1913)that reduced tariffs to their lowest levels in more than 50 years. Moreover, the income tax applied to only one percent of the population (those couples earning over $4,000 per year) and had been authorized by the Sixteenth Amendment, also ratified in 1913. The top rate of 7% was payable by those earning over $500,000 per year, which would be equivalent to more than $10 million per year today.

As much as any man's, Wilson's career reflects human inability to foretell the future or to grasp the facts. Wilson saw the trusts (not so much big business as the conglomerate trusts) as a threat to human freedom. He believed that government subsidies to big business, to include tariffs and land grants, permitted inefficient trusts to flourish. Wilson believed that the kind of close regulation of the trusts that Roosevelt advocated in the 1912 election would have resulted in regulatory capture of government by business. He believed that access to credit should be democratized and likely believed that establishment of the Federal Reserve Bank would loosen the control of credit by big business and Wall Street and improve availability of credit to entrepreneurs. He saw progressivism as a way to protect the rights of entrepreneurs and small business. He did not anticipate that special interests would capture Fed policy and he did not anticipate that the Federal Reserve Bank would serve to narrow access to credit ever further.

Although Wilson argues for greater government assertiveness with respect to monopoly and the trusts, he does so in a way that emphasizes the importance of eliminating government intervention on behalf of the trusts and favoritism by government. In his essay "What Is Progress?" he argues that (p.36) "the laws have not kept up with the change of economic circumstances" and that the law had not adjusted to changes in business, but he is not overly aggressive, and somewhat obfuscatory, about the changes that he would have proposed. He argues (p. 40):

"I believe, for one, that you cannot tear up ancient rootages and safely plant the tree of liberty in soil which is not native to it. I believe that the ancient traditions of a people are its ballast...You must knit the new into the old...If I did not believe that to be progressive was to preserve the essentials of our institutions, I for one could not be a progressive."

Wilson's writing illustrates that progressivism was in large part empty of meaning. Roosevelt argued that progressivism meant that there should be centralized control and direction of industry. Wilson argued that progressivism meant the protection of the man on the make from big business and monopoly. Both called themselves "progressives". Wilson opposed tariffs and argued that they interfere with business competition. Roosevelt favored protection and government integration with big business. Wilson, unlike Roosevelt, was no friend to privilege for business, and he criticized Roosevelt for his close link to George W. Perkins, organizer the US Steel and International Harvester trusts (p. 117).

In his essay "The Old Order Changeth" Wilson illustrates the progressives' interest in "the new". Progressivism is the ultimate modernist philosophy. He writes (p. 20):

"We have come upon a very different age from any that preceded us. We have come upon an age when we do not do business in the way in which we used to do business...You know what happens when you are the servant of a corporation. You have in no instance access to the men who are really determining the policy of the corporation...Your individuality is swallowed up in the individuality and purpose of a great organization."

Yet Wilson does not advocate breaking up big business or excessively regulating it. He was as suspicious of government welfare as of employment in big business. He was no New Dealer. Many of the reforms he advocated, such as workers' compensation and disclosure requirements associated with the issuance of financial securities (p.28) were barely more than changes that modernized common law principles rather than being intrusively regulatory. Wilson emphasized bringing "light" to bear on business practice in order to make the economy fairer. But the remedies he proposed were not intrusive to the operation of business. On the other hand, they have not succeeded in his objectives. For as the late 1990s illustrated, unscruplous businesses can find their ways around regulations; and disclosure requirements are not protection against fraud. But having such requirements is not overly burdensome to business and likely encourages stability in the markets.

He argues vigorously for the importance of the entrepreneur and individual enterprise (p.26):

"The originative part of America, the part of America that makes new enterprises, the part into which the ambitious and gifted workingman makes his was up, the class that saves, that plans, that organizes, that presently spreads its enterprises until they have a national scope and character--that middle class is being more and more squeezed out...what alarms me is that they are not originating prosperity. No country can afford to have its prosperity originated by a small controlling class...There has come over the land that un-American set of conditions which enables a small number of men who control the government to get favors from the government; by those favors to exclude their fellows from equal business opportunity; by those favors to extend a network of control..."

Perhaps the most telling paragraph in the book is on page 56:

"For my part, I am very much more afraid of the man who does a bad thing and does not know it is bad than of the man who does a bad thing and knows it is bad; because I think that in public affairs stupidity is more dangerous than knavery, because harder to fight and dislodge

Wilson established an income tax to compensate for the repeal of tariffs. At the time, he thought the top rate for those making over $10 million in today's dollars was 7%. He established a Federal Reserve Bank thinking that it would democratize credit. Within twenty years the Fed had caused the Great Depression and within 50 years both the Fed and the income tax had become the government's chief tools to suppress individual initiative, to steal from the populace to further the aims of elitist liberals who depend on a monopoly of power, and to suppress entrepreneurship. His legacy was hoisted by Wilson's own petard.

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