The Forgotten Man

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Before FDR
stole the term coined by Yale Professor William Graham Sumner, "The
Forgotten Man" was a hypothetical "D" who was stuck
with the bill after "A" and "B" got together
to find a way to help poor, suffering "C." (FDR of course,
tried to make us forget about "D" by claiming "C"
was "The Forgotten Man.")

I
have attempted to make my new book (The
Big Ripoff: How Big Business and Big Government Steal Your Money
)
a book for the Forgotten Man. Specifically, I describe how big businesses
lobby for and profit from big government programs – higher
taxes, stricter regulation, corporate welfare – that rip off
consumers, entrepreneurs, and taxpayers.

The Forgotten
Man is an abstraction, but in researching some big ripoffs for The
Big Ripoff I came across a man whose name is now immortal among
lawyers, but who still is fairly called "The Forgotten Man."

His name is
Pennington: James Pennington. In the field of anti-trust, that name
is now synonymous with the collusion between big business, big government,
and big labor. Lest his story be forgotten, I will tell it here.

The 1950s began
with labor unrest in the coal industry. Mineworkers, protesting
their wages, shortened their weeks and threatened to walk out. Things
were approaching a crisis. That year labor and ownership came face
to face.

George H. Love
had worked in a coal mine in his youth, but then went to Harvard
Business School. By 1950, Love had pieced together a coal empire,
combining a handful of coal companies into Pittsburgh Consolidated
Coal Company, the world's largest coal company. When Love sat down
at the table he was representing not only his own coal giant, but
all the big soft coal mine operators in the country.

Across from
him was John L. Lewis. The son of Welsh immigrants, Lewis was working
the mines by the age of 15. At 37 years old, he was the head of
the United Mine Workers of America (UMW). He founded the Congress
of Industrial Organizations, which is now the "CIO" of
the AFL-CIO.

When the two
hammered out an agreement giving Lewis almost everything he wanted
on wages and hours, newspapers called it "submission"
on the part of Love. As the agreement played out for the rest of
the decade, it began to look like something else. A jury later it
called it "a conspiracy."

The agreement
was modified over the next few years, and by 1958, the coal companies
Love had represented were paying far higher wages than any other
industry. They were also prohibited from buying coal from or selling
it to non-union shops, and could not lease their land to non-union
shops.

This arrangement,
it turns out, was a good one for the big coal companies. The large
mine operators were already shifting towards increased mechanization
of mining. This increased productivity, which offset the higher
wages. If George Love paid a worker 50% more, but the worker dug
up twice as much coal each day, Love was paying less per ton than
before. These machines, however, were expensive, and the smaller
coal companies could not afford them. If all mineworkers demanded
these wages, the small coal companies would go out of business.

Even with mechanization,
Love and Lewis knew these agreements would drive up the cost of
mining coal.1 This was unproblematic
as long as the costs were being absorbed by the whole industry —
which was almost the case. There still remained, however, small
coalmine operators who did not sign onto Love's agreement. The agreements
surely made things harder for the little guys, with the higher union
wages dragging away most potential labor. But they could still survive
as long as they had customers. Given their lower costs, these small,
non-union mines (such as James Pennington's Phillips Brothers Coal
Company) could get customers by charging less for their coal than
Love's mines would.

So, the unions
and big coal mines tried to take away these small coal companies'
labor. A union organizer in 1955 beat Andrew Frost for refusing
to sign a union contract, Frost testified in court.2
But this wasn't enough, so big business and big labor had to take
away their customers. The typical way to do that would be to offer
a better product or lower prices. But coal is a commodity: a ton
of Mr. Pennington's coal is no worse than a ton of Mr. Love's. Also,
Love was charging more, and had to, thanks to his higher wages.
Why, then, would a buyer ever willingly pay higher prices for a
commodity? He would do so only if he were spending someone else's
money. Enter big government.

During the
Depression, Franklin Roosevelt created the Tennessee Valley Authority,
which was supposed to create jobs and electrical power at the same
time. The TVA originally was in the business of building and operating
dams, which would use water to generate electricity. By 1954, however,
it was in the business of coal-run power plants. This made it the
largest coal customer in the country.

In 1954, the
TVA bought 8 million tons of coal from the "dogholes in the
mountains" as Lewis called the small coal mine operators.3

Lewis and Love
would set this right. Lewis met with Dwight Eisenhower's Secretary
of Labor, James Mitchell. The Labor Department, Lewis argued, should
invoke the Depression-era Walsh-Healey Act, which allowed the federal
government to set a minimum wage for any company receiving a government
contract worth $10,000 or more.

Love, of course,
agreed with Lewis, and all the biggest coal companies joined forces.
They leaned on the Eisenhower Administration to go even farther
than Lewis's original request, and stop making even small purchases
(exempt from Walsh-Healey) from small mine operators.

Lewis and his
big business cohorts got their way, and the federal government agreed
to freeze out any coal company not paying union wages – all
in the name of protecting the worker, FDR's "Forgotten Man."

But what about
Sumner's Forgotten Man? The small operators were now unable to sell
coal or subcontract for the big operators (thanks to the labor agreements)
and also unable to sell to the biggest coal customer in the country:
Uncle Sam. From the small mine operators' perspective, a conspiracy
of big labor, big business, and big government, was threatening
their existence. Some tried to make due under these restrictions.
Others caved and signed the union contracts.

James Pennington
ran the Phillips Brothers Coal Company, which, facing all these
handicaps for non-union operators, signed on with Lewis's agreements.
Soon he found it impossible to afford the high costs, and he was
unable to make the contributions (40 cents per ton) to the mineworkers'
retirement fund that the agreement demanded.

Pennington
went out of business, but then he fought back. He went to court
in 1961, alleging a conspiracy in restraint of trade that violated
anti-trust laws. Pennington argued that the big coal companies and
the UMW had conspired to drive him and other small coal companies
out of business by demanding the companies contribute 40 cents to
a UMW retirement fund for each ton of coal mined and by imposing
the high minimum wage. He also alleged that the unions loaned millions
of dollars to the companies to help them conspire against the little
guys.

Pennington's
argument, as summarized later by the Supreme Court, was: "the
union entered into a conspiracy with the large operators to impose
the agreed-upon wage and royalty scales upon the smaller, nonunion
operators, regardless of their ability to pay and regardless of
whether or not the union represented the employees of these companies,
all for the purpose of eliminating them from the industry, limiting
production and pre-empting the market for the large, unionized operators."

In May 1961,
a jury found the union guilty. In December 1963, a federal appeals
court upheld that verdict. UMW went to the Supreme Court.

Justice Byron
White wrote that the agreements between Love and Lewis might have
constituted a conspiracy in constraint of trade, but that bilateral
agreement wasn't what drove Pennington under. The nail in Pennington's
coffin was the entrance of the government into the conspiracy. According
to White, that government's involvement also made the conspiracy
legal.

The opinion
read: "Joint efforts to influence public officials do not violate
the antitrust laws even though intended to eliminate competition."4

The irony in
the case of Pennington is that as long as the conspiracy did not
involve the government, it was ineffective and illegal. Once the
government entered, the big business-big labor plan to drive out
the small guy started to work.

The net effect
of coal companies' going out of business was a marginal upward pressure
on coal prices for consumers. This meant that electricity bills
were higher than they would have been. To the degree the TVA was
paying more for coal, its customers and its patrons — the taxpayers
— were paying more. The agreements also led to massive unemployment
in the coal mining industry.

James Pennington
lost his coal company, and then his court case. In so doing, he
won eternal fame among anti-trust lawyers. The Noerr-Pennington
doctrine, combining the coal case with a similar case (Noerr)
in the realm of trucking and railroads, lays out, in effect, that
a conspiracy in restraint of trade is legal as long as one of the
co-conspirators is the government.

Notes

  1. A.H. Raskin,
    "Mines to Pay Part of Coal Price Rise," The New York
    Times, March 13, 1950.
  2. Associated
    Press, "Mine Union Tried in Antitrust Case," The
    New York Times, April 19, 1961.
  3. Joseph
    A. Loftus, "Lewis Scores U.S. on u2018Doghole' Coal," The
    New York Times, February 2, 1955.
  4. 381 U.S.
    657, 14 L.Ed.2d 626, 85 S.Ct. 1585.

July
11, 2006

Tim
Carney [send him mail]
is the author The
Big Ripoff : How Big Business and Big Government Steal Your Money
,
now available from John Wiley & Sons. He is also the Warren
T. Brookes Journalism Fellow at the Competitive Enterprise Institute.

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