Obama Is Right on Labor's Past, Wrong on Jobs

April 12 (Bloomberg) — New jobs and old cases. Those are the two challenges irking President Barack Obama as he prepares his re-election campaign.

Four years after the financial crisis, new jobs still aren't materializing sufficiently. What's more, the Supreme Court recently signaled it might find Obama's principal achievement, health-care legislation, unconstitutional.

In his desire to demonstrate that today's court is out of line, Obama raced a full century back for jurisprudential evidence. "We have not seen a court overturn a law that was passed by Congress on an economic issue, like health care, that I think most people would clearly consider commerce, a law like that has not been overturned since Lochner," he said, referring to a 1905 case.

Critics promptly leaped all over him for highlighting what they deemed the wrong jurisprudence: Obama meant Schechter Poultry Corp. v. United States, a New Deal case, some said. Others wrote whole articles about how he probably should have mentioned West Coast Hotel Co. v. Parrish, or Wickard v. Filburn.

But Obama was wise to think of Lochner. You can even say that the president's second problem — jobs — started with Lochner.

Lochner was once a man, rather than a case. Joseph Lochner was a Bavarian immigrant who spent eight years learning the baker's trade before opening his own bakery in Utica, New York, in the 1890s. Lochner's business grew "by neatness and the excellence of its products," as the Utica Herald reported.

Baker's Rules

But in the 1890s, the state of New York passed a Bakeshop Act, limiting hours to 10 a day and 60 a week. The master baker regarded this law as an intrusion that inhibited his efforts at commerce. Lochner therefore intentionally kept a more junior baker, Aman Schmitter, at work for more than 60 hours; Schmitter stayed longer to learn cake baking. Lochner was not ashamed but rather proud of his decisions. He believed business could best succeed when worker and employer decided the rules.

Lochner lost in Oneida County. The court there sentenced him to pay a $50 fine or spend 50 days in jail. But the baker won in the U.S. Supreme Court. New York State did not have the right to interfere in private contracts, the court said. One of those who prepared the case for Lochner's side was a leader of a bakers' union, Henry Weismann, who had helped write the Bakeshop Act in the first place; Weismann now regretted his participation in the Progressive legislation, telling the New York Times, "at the time when I gave my energies toward passing it I did not recognize the injustice it would work."

Lochner, the case law, prevailed for decades, without discernible damage to its industry or the U.S. economy. The market in fact did much to solve a problem that the authors of the Bakeshop Act had assumed only legislation could address. Even without big laws, by 1919 only 3 percent of bakers were working more than 10 hours a day.

What employers and employees for their part liked about the culture of Lochner was the freedom. The flexibility employers enjoyed made it easier for them to fire, but also to rehire. In the recessions of the early part of the century, or the teens, or even the 1920s, unemployment often soared: In 1908, it hit 7.4 percent; in 1921, 11.3 percent. But often, though not always, jobs came back fast. The 11.3 percent unemployment of the recession of 1921 dropped to 4.3 percent in 1923.

Yet the Lochner era did end, when in 1937 the court ruled against a business that refused to pay the minimum wage in a case called West Coast Hotel. Other broader regulations of the workplace were also winning approval from the Supreme Court.

1930s Regulation

In Wickard v. Filburn, the court said even wheat consumed by a farmer on his own farm could be regulated; in National Labor Relations Board v. Jones & Laughlin Steel Corp., it found a heavy-handed labor law, the Wagner Act, constitutional. Federal lawmakers have since felt confident writing other regulations, right down to Obamacare.

None of these laws sounds bad. But the cumulative effect of such laws is to inhibit the freedom of the employer enough that he or she hesitates to rehire. A survey of small employers conducted this January by the Wells Fargo/Gallup Small Business Index found that 48 percent of companies were hesitating to rehire because of the potential cost of health care; 46 percent checked the box that said "worried about new government regulations." These "worried" people are the Joseph Lochners and West Coast Hotels of 2012.

There's something precious about hassling Obama over constitutional legal arcana. A basic law here warrants more attention than Lochner and Obamacare put together, at least if we want to get down to acceptable levels of unemployment. That law is one the Supreme Court can't alter: the law of the market.

(Amity Shlaes is a Bloomberg View columnist and the director of the Four Percent Growth Project at the Bush Institute. The opinions expressed are her own.)

© Copyright 2012 Bloomberg

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