April’s Fools

Posted on April 21, 2012 by Bruce Kauffmann

“Taxes are the price we pay for a civilized society.” -Oliver Wendell Holmes, Jr. – Supreme Court Justice

“April is the cruelest month.”-T.S. Eliot, Poet

Among the many ways that our beloved Founding Fathers proved their wisdom was their rejection of an income tax, preferring to raise revenue through duties, imposts and other indirect forms of taxation. It took a constitutional amendment, our 16^th, to produce the madness and “cruelty” that abounds leading up to this weeks April filing deadline. And that amendment was the result of a too-clever-by-half strategy by leaders of the Republican Party—a strategy that backfired.

The story begins early in the 20^th Century when our nation’s “Captains of Industry” (sometimes called robber barons), such as John D. Rockefeller, J.P. Morgan, Andrew Carnegie and others, were amassing obscene fortunes through monopolistic practices that stifled competition and suppressed the wages of the average worker. As a result, the cry went up to “soak the rich” through a direct tax on incomes above a certain level. Sensing a political opportunity, congressional Democrats introduced a series of income tax bills, only to see them repeatedly defeated by conservative Republicans.

These victories were costly for Republicans, however, because they were soon labeled “the party of the rich” (still are), which bode ill for upcoming elections. As a result, Republicans decided to turn the tables on Democrats by pretending to support a constitutional amendment approving a direct federal income tax. GOP leaders reasoned that this “support” would deflect voter anger on the one hand, while on the other hand preserve the status quo because they were convinced the necessary three-fourths of the states would never approve such a controversial amendment. Thus did Republicans, who for years had successfully stymied income tax legislation, join with Democrats to approve an amendment calling for just such a thing. The House vote was 318-14 in favor. The Senate vote was unanimous.

But Republicans badly underestimated the groundswell of public enthusiasm for a “soak the rich” income tax, and to their amazement and horror, state after state quickly voted for ratification until, in 1913, the 16^th Amendment was added to the Constitution. It gave Congress the power to “lay and collect taxes on incomes, from whatever source derived …” A new era had begun.

Alas, if it all looked so innocent in 1913 when only about one percent of the population even earned enough money to pay the federal income tax, it doesn’t look so innocent now when only about one percent of the population (thanks to the advice they get from their accountants and lawyers) even understands the federal income tax.

And guess what, dear reader? They are the same group of people, and neither you nor I belong. Happy Tax Day.

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Adam Smith’s “The Wealth of Nations”

Posted on March 7, 2012 by Bruce Kauffmann

What Charles Darwin’s Origin of the Species was to science, Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations was to economics. Published this week (March 9) in 1776, The Wealth of Nations explained, and justified, the capitalist economic system under which we still operate today.

Smith’s two most famous theories describe how “the division of labor” and “the invisible hand of the market” contribute to a nation’s wealth. Smith uses a pin factory to explain the division of labor, in which “One man draws out the wire, another straightens it, a third cuts it, a fourth points it …” and so on. Thus making a pin is divided by many distinct operations, which might produce, Smith theorizes, 48,000 pins a day, meaning that if 10 men work in the operation, each man might be said to have made 4,800 pins that day. Had each man tried to make pins by himself, Smith writes, he might not have produced a single pin.

Thus dividing the labor multiplies the capacity to produce things, which makes diversification more likely, which results in many different trades and industries. That, in turn, leads to “exchanging,” in which, for example, pin makers trade excess pins for other goods that they need but can’t themselves produce.

This exchange mechanism, Smith explains, is a function of the value of goods and services, which itself is determined by the amount of labor that went into those goods and services — and by their availability. “The market price for every particular commodity is regulated by the proportion between the quantity that is actually brought to market and the demand of those who are willing to pay the natural price of the commodity,” he writes. In other words, supply and demand.

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Henry Ford’s Five-Dollar Days

Posted on January 5, 2012 by Bruce Kauffmann

This week (Jan. 5) in 1914, Henry Ford, the head of the Ford Motor Company, stunned the business world by announcing that, henceforth, Ford employees would not only share in the car company’s profits, they also would be paid the unheard of sum of five dollars a day. That doubled their previous wage.

Ford’s fellow captains of industry were not amused, calling his wage hike bad business, misplaced altruism and a terrible precedent, but Ford — who was anything but an altruist — saw the move as both a cost-cutting measure and one that would increase productivity.

Recall that Ford previously had introduced the moving assembly line in which stationary workers, repeating the same function over and over, assembled cars using standard, interchangeable parts. This was a quantum leap in operational efficiency and greatly reduced production time, but it had a down side. The work was mind-numbingly boring, and since it required no real skills, employees had no pride in their work. As a result, absenteeism was a chronic problem as employees either frequently called in sick or simply quit. Such a high turnover rate was also expensive, both because it was disruptive and because money had to be spent retraining replacement workers, many of whom also were soon calling in sick or quitting.

But after Ford announced the five dollar wage, a princely sum in 1914, workers flocked to Ford’s plant. Absenteeism plummeted, costs went down, productivity increased and sales of Ford’s famous Model T skyrocketed. By 1916 the Ford Motor Company had sold nearly a million cars and earned profits of $60 million.

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