the freeman 07-08-2010

Features8 Greece:The Canary in the U.S. Coal Mine? by Steven Horwitz

12 Yet Again with the National ID by Becky Akers

16 Why Doctors Don’t Want Free-Market Medicine by Theodore Levy

19 A Free-Market Energy Vision by Robert L. Bradley, Jr.

25 Are Profits Fit Only for Serfs and Slaves? by Richard W. Fulmer

27 The Rise of Government and the Decline of Morality by James A. Dorn

32 Subsidizing More College Students Won’t Help the Economy by George C. Leef

36 More Border-Picture Economics by T. Norman Van Cott

Columns4 Ideas and Consequences ~ Good Economists, Bad Economists, and Walmart

by Lawrence W. Reed

14 The Therapeutic State ~ The Art and Science of Pseudology by Thomas Szasz

23 Our Economic Past ~ Foreign Lenders: Friends Indeed to a U.S.Treasury in Need

by Robert Higgs

34 Peripatetics ~ Government as Consumer by Sheldon Richman

39 Give Me a Break! ~ Politicians Smother Cities by John Stossel

47 The Pursuit of Happiness ~ Unions Lose Respect by Charles W. Baird

Departments2 Perspective ~ The Government Turns on Goldman Sachs by Sheldon Richman

6 Higher Income Taxes Are Benign? It Just Ain’t So! by Jeb Bleckley and Joshua Hall

Book Reviews

42 Taming the Beloved Beast: How Medical Technology Costs Are Destroying Our Health

Care System

by Daniel Callahan Reviewed by Arnold Kling

43 The Invisible Hook:The Hidden Economics of Pirates

by Peter T. Leeson Reviewed by E. Frank Stephenson

44 Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives

and Bankrupting the Nation

by Steven Greenhut Reviewed by George Leef

45 Whatever Happened to Thrift? Why Americans Don’t Save and What to Do about It

by Ronald T.Wilcox Reviewed by Robert P. Murphy

Page 43

Page 16

Page 39

VOLUME 60, NO 6 JULY/AUGUST 2010

Goldman Sachs took a beating during the spring.The SEC and a Senate committee were inves-tigating whether it behaved improperly when

it participated in a bet against the shaky mortgages fueling the housing boom and allegely failed to disclosethis to buyers of its “synthetic collateralized debt obliga-tions.”

The allegation of wrongdoing is an empirical ques-tion, of course, but a few things occurred to me as thecase was unfolding:

Financial firms have been roundly criticized for their“herd mentality”—that is, their incentive to run head-long into too-risky mortgage-backed instrumentsbecause everyone else was doing it. No firm wanted tobe on the sidelines having to explain to its clients whyeveryone was making tons of money but them.Yet hereGoldman went against the herd, and was coming underfire precisely for that reason. By betting against the sus-tainability of the boom (if that’s what it did) on the basisof hedge-fund trader John Paulson’s analysis, it injectedneeded information about the housing bubble into themarket. More information is always better than less,and no social good would come from restrictions onactivities that produce information that goes against the trend, such as short selling and trading credit default swaps.Whether fraud was in the picture, I can’tsay (it seems doubtful), but I am confident that Gold-man’s hedge strategy—and its delight over makingmoney when mortgage-backed securities started losingvalue—would have drawn criticism in any event. It’s ano-win situation.

Second, the absolute worst place to get to the bot-tom of things is in Congress. Every member of thecommittee had an overriding incentive to engage indemagoguery, information be damned. Goldman Sachsis not exactly a positive household name, so which con-gressman could have resisted the temptation todenounce the company in public? It’s an easy targetwith no downside risk.

If there is evidence of criminal activity, there areappropriate agencies for such investigations. Better

2T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

The Government Turnson Goldman Sachs

Perspective

Published byThe Foundation for Economic Education

Irvington-on-Hudson, NY 10533Phone: (914) 591-7230; E-mail: [email protected]

www.fee.org

President Lawrence W. ReedEditor Sheldon Richman

Managing Editor Michael NolanBook Review Editor George C. Leef

ColumnistsCharles Baird David R. Henderson

Donald J. Boudreaux Robert HiggsStephen Davies John Stossel

Burton W. Folsom, Jr. Thomas SzaszWalter E.Williams

Contributing EditorsPeter J. Boettke Dwight R. Lee

James Bovard Wendy McElroyThomas J. DiLorenzo Tibor Machan

Joseph S. Fulda Andrew P. MorrissBettina Bien Greaves James L. Payne

Steven Horwitz William H. PetersonJohn Hospers Jane S. Shaw

Raymond J. Keating Richard H.TimberlakeDaniel B. Klein Lawrence H.White

Foundation for Economic Education

Board of Trustees, 2009–2010Wayne Olson, Chairman

Harry Langenberg Peter J. BoettkeWilliam Dunn Frayda Levy

Jeff Giesea Kris MaurenEthelmae Humphreys Roger Ream

Edward M. Kopko Donald Smith

The Foundation for Economic Education (FEE) is anonpolitical, nonprofit educational champion ofindividual liberty, private property, the free market,

and constitutionally limited government.The Freeman is published monthly, except for combined

January-February and July-August issues. Views expressed by the authors do not necessarily reflect those of FEE’s officers and trustees. To receive a sample copy, or to have The Freemancome regularly to your door, call 800-960-4333, or e-mail [email protected].

The Freeman is available electronically through products and serv-ices provided by ProQuest LLC, 789 East Eisenhower Parkway, POBox 1346, Ann Arbor, Michigan 48106-1346. More informationcan be found at www.proquest.com by calling 1-800-521-0600.

Copyright © 2010 Foundation for Economic Education,except for graphics material licensed under Creative CommonsAgreement. Permission granted to reprint any article from this issue, with appropriate credit, except “Politicians SmotherCities.”Front cover: Rudy Cech Back cover: flickr.com/piazzadelpopolo

3 J U LY / A U G U S T 2 0 1 0

P E R S P E C T I V E : T h e G o v e r n m e n t Tu r n s o n G o l d m a n S a c h s

yet, if the “victims” of Goldman Sachs really believethey are victims, let them sue. This is not to say thatcriminal-justice agencies are above demagoguery—politically ambitious U.S. attorneys are notorious forit—but at least we should be spared the spectacle ofself-righteous congressmen pontificating on mattersfor which the Congress itself is heavily responsible:the housing boom and encouragement of dubiousmortgages. We already suffer the obscenity of Sen.Chris Dodd and Rep. Barney Frank rewriting thefinancial rules to prevent, so they say, a repeat of thedebacle that they themselves did so much to bringabout. These people are the systemic risk.

Finally, we must not lose sight of the fact that whatever Goldman did, it was in the context of a corpo-rate State, a banking cartel, and loose fiat money, inwhich Big Finance exercises extra-market power derivedfrom the rules written by Congress and the regulatoryagencies.That’s the derivative to worry about.

These are hardly free-market enterprises. It is nocoincidence that current and former Goldman princi-pals have their fingerprints all over the government’sbailout response to the meltdown and that the firm wasa major beneficiary. In an actual free market—withoutinflationary fiat money, implicit guarantees behindunderwriters of dubious mortgages, and regulatoryprotection against open competition—a financial deba-cle such as we’ve seen is unlikely to have occurred.Even so, that doesn’t mean that everything that went onwas a crime.

* * *

Greece, one of many overextended welfare states, isfacing the kind of fiscal crisis that some people fear is inAmerica’s future. Steven Horwitz thinks we’d better pay

attention.Congress keeps trying to create a national ID,

despite repeated rejections. Now the politicians are try-ing to smuggle it in via immigration. Becky Akerswon’t let them past Customs.

Doctors say they want government out of medicine,but do they mean it? Theodore Levy analyzes the eco-nomics and decides they really don’t.

Energy is on everyone’s mind, and everyone has aplan. As Robert Bradley, Jr., shows, the best plan is noplan at all.

“Profit” remains a dirty word, but maybe if peopleunderstood how pervasive it is in human action, they’dthink differently. Richard Fulmer explains.

When government grows, it doesn’t only shrinkfreedom. It also sets in motion a moral atrophy. JamesDorn revisits this issue.

President Obama wants more people to go to col-lege. George Leef says too many go already.

A nighttime satellite photo of the border betweenNorth and South Korea couldn’t be more revealing.T.Norman Van Cott explains the economics behind thestark contrast.

Here’s what our columnists have whipped up:Lawrence Reed visits Walmart.Thomas Szasz identifiesthe essence of psychiatry. Robert Higgs digs into thegovernment’s debt. John Stossel shows how politiciansruin cities. Charles Baird sees respect for unions sinkingever deeper. And Jeb Bleckley and Joshua Hall, readingthe claim that higher taxes are benign, rebut, “It JustAin’t So!”

Books on medical costs, pirates, public-employeeunions, and thrift come under our reviewers’ micro-scopes.

—Sheldon Richman

B Y L AW R E N C E W. R E E D

Good Economists, Bad Economists,and Walmart

Ideas and Consequences

Good economists are seldom popular with thepolitical class.This is not unique to democraticsystems; dictators like good economists

even less.Why?As a rule, politics doesn’t educate. It obfuscates, pon-

tificates, and prevaricates. It often seeks to advance theinterests of the few at the expense of the many. It is aplayground for the shortsighted and the demagogic.Economics, on the other hand, tells us a great dealabout how material life can be improved through theoperation of entrepreneurship and markets. It informsus that there are laws beyond those that legislaturespass, and consequences for ignoring them.

The good economist takes the dis-cussion of economic matters to thelofty level it deserves. While othersspout clever sound bites, unsubstanti-ated charges, and snake-oil remedies,the good economist raises his handand calmly declares, “Wait a minute!Let’s look at the facts. Let’s separatethe wheat (truth, logic, and evidence)from the chaff (nonsense, falseassumptions, and panaceas).”

Last summer at the FreedomFest conference in LasVegas I witnessed a remarkable debate on the question,“Wal-mart: Good or Bad for America?” The debaterswere Al Norman, described as the “guru of the anti-Wal-Mart movement,” and Richard Vedder, Ohio Uni-versity economist and coauthor with Wendell Cox ofthe 2007 book, The Wal-Mart Revolution: How Big Box Stores Benefit Consumers, Workers, and the Economy.The clash between Norman and Vedder couldn’t havetypified better the difference between good and badeconomics. Norman is no economist, but he’d be a badone if he were. His arguments against Walmart were justas specious and superficial as those of New York Times

columnist and Nobel laureate Paul Krugman, who doeshave the audacity to call himself an economist.

Krugman on numerous occasions has poured hisvitriol on the retail giant, whom he charges with wag-ing a “war on wages.” His diatribes were often cited acouple of years ago when the anti-Walmart drumbeatreached a fever pitch in Washington and in politicalcampaigns around the country.

Big Box of Polarization

The Norman/Krugman critique of Walmart is littlemore than an anti-capitalist rant against a company

that pays no more than it has to in order to attract theworkers it needs and sells its wares at prices others

sometimes find it difficult to competewith. Not surprisingly, demagogicpoliticians have used their argumentsin a populist crusade for governmentto “do something” about Walmart.

Perhaps it was inevitable that theone company virtually all of us havepatronized would become a politicalfootball. Any firm that makes its wayto the top spot on the Fortune 500

list, as Walmart did for the first time in 2002, is boundto attract attention and polarize people, getting praiseand admiration from some and envy and hostility fromothers. More than a few people have come to assumethat bigness in business automatically implies a woefultrail of victims; some of those folks then make a nicecareer out of convincing the victims to accept theirhelp.All too often emotion drives the debate at least asmuch as information does.

As an occasional patron of big-box retail stores likeWalmart, I could never quite relate to many of the rou-tine attacks on them. On each visit I park in an ample


Lawrence Reed ([email protected]) is the president of FEE.

Many people assumethat bigness inbusiness automaticallyimplies a woeful trailof victims.

parking lot. I’m greeted by employees who smile, sayhello, ask to help if I seem to need assistance, and thankme as I walk out the door. If I’m unhappy with price orservice (I can’t remember the last time I was), I know Ican get a quick refund and shop elsewhere. My searchcosts as a consumer are usually lowered by buyingthere, and it seems my wallet benefits as well—nodoubt because competition makes big-box retailers passon their natural economies of scale in the form oflower prices.

The sheer volume of Walmart’s trade alone suggeststhat far more people vote for Walmart with their dollarsthan for president or Congress. I could choose to workfor Walmart myself but I don’t; if I did accept an offerto work for the company, I could quit at the drop of ahat if I felt exploited.

Even as an economist, I stilllearned much that I didn’t know froma 2007 book by Michael J. Hicks, TheLocal Economic Impact of Wal-Mart. Iauthored the book’s foreword, fromwhich I’ve drawn heavily for this col-umn. Hicks shows that Walmart’sinfluence on labor markets is surelyless than most would expect, in partbecause it employs less than 1 percent of the U.S. work-force.The company receives comparatively little in theway of subsidies in spite of the misguided generosity ofstate and local governments that try to pick winnersand losers in the marketplace.

The anti-Walmart campaigns of today are eerilyreminiscent of the Luddite crusades against chain storesseven decades ago—proof of the old adage that themore things change, the more they remain the same.The 1975 law against resale-price-maintenance agree-ments probably gave a huge, unintended boost to big-box retailers at the same time it hurt smaller, moretraditional stores.And it’s quite likely that other big-box

retailers have more to fear from an efficient, aggressivelycompetitive Walmart than do locally owned mom-and-pop shops.

But as Hicks himself explains, economics is lessabout a particular firm than it is about the markets inwhich it operates and the market forces that both pro-pel and discipline the behavior of all firms.

Good economists know all this. Bad ones advisepoliticians to save us from a company millions ofAmericans endorse every day with their hard-earneddollars.

Corporations: Dropping Like Flies

Corporate mortality in free (or relatively free) mar-kets is markedly high. The average person lives

longer than most companies do.Competition, after all, is a dynamic,ongoing, leapfrog process wherebytoday’s leader can become tomorrow’sfollower, or even disappear altogether.Size is hardly a guarantee of perma-nence. Indeed, the vast majority of thefirms on the Fortune 500 list 40 yearsago are no longer with us. It should besobering to even Walmart’s most

severe critics that not even their behemoth nemesis cansafely behave as though markets don’t matter.

So while the Normans and the Krugmans and theirpolitical friends deliver their jeremiads, the rest of ushappily choose to buy—or choose not to buy—fromthe object of their wrath. If justice prevails, Walmart’sfate will hinge on keeping its workers and customershappy, not its critics.

Nothing clarifies and informs quite like facts—backed up with solid evidence, emotion-free analysis,and sound, logical reasoning. That’s why bad econo-mists are generally more popular in government thangood ones.

5 J U LY / A U G U S T 2 0 1 0

G o o d E c o n o m i s t s , B a d E c o n o m i s t s , a n d Wa l m a r t

The average personlives longer than mostcompanies do. Size ishardly a guarantee ofpermanence.

In a recent issue of the online magazine Slate, for-mer New York Governor Eliot Spitzer attempts todebunk the alleged myth that higher taxes reduce

growth (www.tinyurl.com/y4trlve). Spitzer opens withthe undeniable truth that the “American debate overtaxes is ferocious and highly partisan.” If only he hadcontinued to state the obvious, we would not feel com-pelled to write this response.

Spitzer, however, does not stop there. He begins bylonging for a simpler time, a time before people tooknotice of obscenely high levels of taxation. After all,Spitzer reminds the reader, it was the great FranklinDelano Roosevelt who argued in1942 that in a time of “grave nationaldanger” no American ought to havean after-tax income in excess of$25,000 (about $325,000 in today’sdollars).“Can you conceive of a mod-ern president suggesting that noAmerican should earn more than$323,000 after taxes?” he wistfullynotes.

Taxes and Growth

Sadly, Spitzer’s defense of high marginal tax rates didnot end with normative statements in favor of

higher taxes on the wealthy. After a brief and surpris-ingly lucid explanation of how correlation is not causa-tion, he states,“[I]t’s obvious that there is no correlationbetween higher marginal tax rates and slowing eco-nomic activity. During the period 1951-63, when mar-ginal rates were at their peak—91 percent or 92percent—the American economy boomed, growing atan average annual rate of 3.71 percent.The fact that the

marginal rates were what would today be viewed asessentially confiscatory did not cause economic cata-clysm—just the opposite.”

Then he adds, “And during the past seven years,during which we reduced the top marginal rate to 35percent, average growth was a more meager 1.71 percent.”

We could, of course, play the same game by choos-ing different starting and ending points (say, the late1940s or 1990s). However, we prefer to stick to a dis-cussion of the peer-reviewed academic literature, asSpitzer promises to do when he cites a Yale Law Review

article while defending his claim that“more sophisticated efforts” to find arelationship between marginal taxrates and economic growth have pro-duced “murky” results. According toSpitzer, this review of the literature inthe Yale Law Review “concludes thatthere is scant, if any, legitimate aca-demic support for the proposition

that moderate, as opposed to dramatic, increases in mar-ginal tax rates have any impact on the willingness of thewealthy to participate in the economy.”

Setting aside the question of what “moderate”increases in marginal tax rates are, it needs to bepointed out that this article is not a review of the liter-ature at all but a book review! It is hard to fathom thata book review—even a review of a book on how thewealthy respond to changes in taxes—can overturn the

Higher Income Taxes Are Benign?It Just Ain’t So!


J E B B L E C K L E Y A N D J O S H U A H A L L

Jeb Bleckley ([email protected]) is a Koch Colloquium Fellow andJoshua Hall ([email protected]) is an assistant professor, both in thedepartment of economics and management at Beloit College.

Marginal taxes are theones that matter forbehavior.

7 J U LY / A U G U S T 2 0 1 0

basic economic conclusion that higher income tax ratesinhibit growth.

Marginal taxes are the ones that matter for behaviorbecause, as the Austrian economist Carl Menger firstpointed out his 1871 book, Principles of Economics, indi-viduals behave according to their subjective valuationof the marginal benefits and costs of an action. Higherincome tax rates therefore reduce the marginal utilityof working—since after-tax income goes down—andwill usually reduce the number ofhours worked or the amount ofincome realized.This is because if youare getting less reward you will be lesswilling to suffer the least pleasant partsof your job, giving an incentive to cutback on your hours or some similaraction.

Plenty of Evidence

Thus it is no surprise that if youwere to look at the economics lit-

erature you would see plenty ofresearch showing that higher mar-ginal income tax rates reduce growth.In a 2006 issue of Tax Notes, forexample, Harvard economist Martin Feldstein esti-mates that a 1 percent increase in marginal income taxrates would cause taxable income to fall by $6.6 bil-lion. When combined with the decline in payroll taxrevenues, Feldstein estimates that every additional dol-lar of revenue raised costs taxpayers $1.76 when all thecosts of raising the revenue are included. As we areunaware of any government projects or programs thatyield more than $1.76 in output for every $1 spent, we

feel it is pretty safe to say that higher marginal tax rates will lower growth.

These results hold at the state level as well. Univer-sity of Colorado at Boulder economists Barry Poulsonand Jules Gordon Caplan looked at state marginalincome tax rates and economic growth from 1963 to2004 in a 2008 article in the Cato Journal.They foundclear evidence that “higher marginal tax rates had anegative impact on economic growth in the states.”The

same has been found across majordeveloped countries, as a 2002 articlein the European Journal of PoliticalEconomy pointed out.

Growth and Well-Being

As you can see, had Spitzer delveda little deeper into the academic

economics literature, he would havefound ample evidence in favor of theconclusion that marginal tax ratesaffect economic behavior, includingeconomic growth. Even if the empir-ical evidence showed otherwise, ofcourse, this would not have made thecase for higher marginal tax rates.

Maximizing growth is not the same thing as maximiz-ing well-being. Even if growth does not fall in responseto higher marginal income tax rates because peoplework more to pay the higher tax bill, that doesn’t meanthey are better off. Clearly they would prefer a worldwhere they had more after-tax income and the libertyto spend it as they wanted. Whether the criterion iseconomics or liberty, however, the answer is the same:Higher marginal tax rates are a bad idea.

H i g h e r I n c o m e Ta x e s A r e B e n i g n ? I T J U S T A I N ’ T S O !

Maximizing growthis not the same thingas maximizing well-being. Even if peoplework more to payhigher tax bills,keeping growth up,that doesn’t meanthey are better off.

With everything that was going on in the U.S.economy this past winter, the beginnings ofthe crisis facing the Greek economy were

certainly easy to miss. As that crisis has now come tofull flower, American observers overlook it at theirperil: Greece’s problems, and those of other Europeancountries, might well represent a possible future for the U.S. economy if we cannot get our fiscal house inorder.

Like a canary in acoal mine, the crisis inGreece should serve asa warning that pollut-ing the fiscal air withlarge budget deficits, agrowing public sector, and high debt-to-GDP ratios is a sureway to kill an econ-omy. A serious exami-nation of the situationin Greece should leadother Western coun-tries to think carefullyabout the paths theyare on. Continuing growth in government expendituresmeans continued deficits, which means growing debt—which means temptation to inflate and the possibility of default.

The cycle of deficits and debt leads down a dead-end road. Once a nation starts on that road, it mustmake a conscious decision to turn around or it will finditself with the same sorts of problems that plagueGreece.

Understanding the crisis that faces Greece, andcould face the United States, requires a short detourinto the world of fiscal policy. In their path-breakingbook, Democracy in Deficit, Richard Wagner and Nobellaureate James Buchanan offer one of the clearestexaminations of the nature of the bind we find our-selves in.They argue that for most of the history of theWest, governments treated their budgets much like ahousehold would treat its budget: Expenses should be

paid out of currentincome, with twoexceptions. First,large expenditureson capital items withlong lives could befinanced with debt.Second, in times ofcrisis, especially war,debt was an accept-able way to pay. But,they note, the expec-tation was that anysuch debt incurredwould be paid offwith surpluses dur-

ing the life of the capital item or after the war.Tempo-rary deficits were acceptable, but permanent ones werenot.

Permanent debt was problematic because its costswere borne by future generations. This reduced future

B Y S T E V E N H O R W I T Z

Greece: The Canary in the U.S. Coal Mine?


Contributing editor Steven Horwitz ([email protected]) is theCharles A. Dana Professor of Economics at St. Lawrence University andthe author of Microfoundations and Macroeconomics:An AustrianPerspective, now in paperback. He writes a column at TheFreemanOnline.org.

economic growth while unjustly taxing not only those“without representation” but also those who had noteven been born yet!

The rise of Keynesian economics changed all of this byoffering a theory of government and the economy thatdrove a stake through the heart of the old implicit fiscalconstitution. Keynesian economics removed the long-observed constraints on deficit spending by arguing thatgovernments should use the budget to steer the economy:running deficits during recessions to stimulate macroeco-nomic aggregates and surpluses during good times to pre-vent the economy from getting out of hand.

Politicians were thrilled with this change, sinceincreasing spending without raising taxes is a sure-fireway to get votes. Because most government spendingconcentrates benefits on a few identifiable groups butspreads the future costs of borrowingthinly across many people, it is easy to get votes for spending. Perennialdeficits resulted because politicianshad no incentive to do what Keynes-ian blackboard models advised: runsurpluses in good times. Budget sur-pluses are generally vote losers forpoliticians. Buchanan and Wagnerdemonstrate that once the oldrestraints were broken, a cycle ofspending, deficits, and debt was sureto follow.

To finance that rising debt governments must beable to sell bonds. As long as bond markets have confi-dence that governments will be able to pay back thedebt, the bonds will be sold.And because most govern-ments are considered politically stable, governmentbonds usually have no risk attached to them and thusprovide safe, if low, returns.

If bond buyers hesitate, however, governments faceone of two scenarios:They will have to sell their bondsat a lower price, which implies higher future interestpayments, or they will use their central banks to createmoney to buy up their own bonds, which is likely tobe inflationary. Rising debt is also self-perpetuatingsince continued deficits mean more interest payments,which increase future expenditures and contribute tofuture deficits.

Herculean Profligacy

Against this background, Greece found itself introuble early this year.After the country moved to

the euro in 2001 it had better access to investment mar-kets; politicians naturally reacted by dramaticallyincreasing government spending. Government accountsfor approximately 40 percent of Greek GDP, and gov-ernment workers there have some of the most lavishbenefits in Europe, including the possibility of retire-ment at age 50 or earlier. That large State sectorexplains Greece’s low ranking (81st) on the Index ofEconomic Freedom. Not surprisingly, it has a highdegree of economic and political corruption, as well asrampant tax evasion. By 2009 the budget deficit was12.7 percent of GDP and the debt was 113 percent ofGDP. The government tried to cover up the extent of

its debt by fudging its numbers,which helped precipitate the crisis.

The most obvious sign of Greece’sproblems was the rise in the interestrate on its ten-year bonds to 7 per-cent, which is high for governmentbonds. (By contrast, the yield on U.S.ten-year bonds averaged 3.5-4 per-cent for the first three months of2010.) Those high rates reflected aloss of confidence in Greece’s abilityto pay its debts. The problem, ofcourse, is that those high rates exacer-

bate the self-perpetuating nature of deficits by requir-ing larger interest payments in the future, leading togreater deficits.

Since Greece, as a euro country, has no central bankof its own to buy up its bonds, and foreign investors(who own 80 percent of the debt) found the lendingtoo risky, concerns about default rose substantially,prompting calls for emergency bailout loans fromhealthier European Union countries such as Germany.

The Greek government proposed a variety of meas-ures to try to cut expenditures, including raising theretirement age, overhauling the tax system, and reduc-ing government-employee pay and benefits. Govern-ment workers and other union members, predictably,reacted with protests and threatened social unrest if theausterity measures took effect.

9 J U LY / A U G U S T 2 0 1 0

G r e e c e : T h e C a n a r y i n t h e U . S . C o a l M i n e ?

Because mostgovernment spendingconcentrates benefitson a few identifiablegroups, it is easy toget votes forspending.

This is the trap that Buchanan and Wagner identi-fied. By concentrating benefits on the few, governmentspending creates beneficiaries who would sustain con-centrated losses when spending was cut—giving themevery reason to resist the cuts. So Greece finds itself ina bind:To reduce its debt and the possibility of defaultit must cut spending, which is enormously unpopularamong influential constituencies.The near trillion-dol-lar bailout engineered in May only enables Greece andother beneficiaries to delay the difficult decisions theywill eventually have to make.

If we look at some comparable numbers in theUnited States today, we can see how far the Bush andObama administrations have taken us down Greece’spath. The most recent data from the CongressionalBudget Office (CBO) are sobering. If the Obamaadministration’s proposed budgets pass, the deficitwould be $1.5 trillion this year and $1.3trillion in 2011, representing 10.3 per-cent and 8.9 percent of projected GDP,respectively. That is not far from the12.7 percent Greece faced in 2009.TheCBO estimates the deficit will fall as apercentage of GDP toward the middleof the coming decade, but that rests onthe heroic assumptions that new reasonsfor major welfare-state, corporate-bailout, and militaryspending will not be found and that spending on thehealth insurance revamp does not grow in the expo-nential ways we have seen with other social programs.

At the end of 2009 the cumulative debt of the U.S.government was about $12 trillion, with $7.5 trillion—53 percent of GDP—held by the public. The CBOestimates that at the end of 2020 publicly held debt willbe a staggering $20.3 trillion—90 percent of GDP—with total debt being notably higher than that. By2020, therefore, we will not be far behind whereGreece is now. Looked at differently, in 2020 the valuecreated by the U.S. economy for the year would be justenough to pay off our total public holdings of debt, butbarely. The CBO also provides some evidence for theself-perpetuation process: Between 2010 and 2020 netinterest payments are projected to more than quadruplein nominal dollars, and as a share of GDP they will risefrom 1.4 percent to 4.1 percent of GDP.

New Money for the New World

The United States, however, has one piece of thepuzzle that Greece lacks, which could change

the way this process unfolds. As noted, Greece is onthe euro, so it lacks a domestic central bank withwhich to monetize its debt.The United States has theFederal Reserve, so one outlet the federal govern-ment has, if skeptical bond markets demand higheryields, is the Fed’s purchase of bonds with newly cre-ated money.

Buying bonds in the open market is how the Fednormally increases the money supply, so this is not anew process. When the Fed does this, it returns theyield to the Treasury, thereby giving the government aninterest-free loan. Each time the Fed buys a govern-ment bond from the public, it enables the governmentto run additional debt—float more bonds—without a

net increase in interest payments.The Fed could also buy bonds

directly from the Treasury andinstantaneously extend an interest-free loan through the creation ofnew money. Historically, it has notdone this, but since the currentrecession and financial crisis beganin 2008, it has dipped its toe into

those waters. Doing so will become increasingly tempt-ing for the Fed if the rising level of U.S. debt begins toscare off bond buyers.

Of course the danger of doing this too much isinflation. The Greek economy has a very low rate ofinflation at the moment, thanks to the relative stabilityof the euro. However, many other countries facedwith similar fiscal situations have resorted to theprinting press, generating high levels of inflation thatdid major damage to their economies.

The U.S. government will be tempted to monetizethe debt. If China’s demand for U.S. bonds weakens,driving up yields, the alternative to reducing deficitsand paying off debt, or getting a bailout, will be mon-etization and debasement of the dollar. It will betempting because the costs of inflation are disguised,dispersed, and stretched over the long run. Politiciansrarely get punished for it as they get punished for cut-ting expenditures.


S t e v e n H o r w i t z

Politicians rarely getpunished for inflationas they do for cuttingexpenditures.

11 J U LY / A U G U S T 2 0 1 0

Fresh from their defeat in forcing national identitypapers on us with REAL ID, the feds are tryingonce more. Their plea this time isn’t terrorism

but immigration—though they’re pretty much thesame, according to the State.

Introduced in 2005 to combat the waves of terroriststhronging our shores, REAL ID was supposed tothwart the bad guys by transforming our drivers’licenses into a national ID card. We’d have submittedthis card on demand to government’s agents—as do thevictims in totalitarian regimes. Never mind that “almostno empirical research has been under-taken to clearly establish how identitytokens can be used as a means of pre-venting terrorism,” according to Pri-vacy International, or that “terroristshave traditionally moved across bor-ders using tourist visas,” unless they“are equipped with legitimate identi-fication cards.”The 9/11 hijackers andthe Madrid bombers, respectively,provide two recent examples.

Any Pretext Whatsoever

Governments itch to tag their subjects like so manycattle, on any pretext whatsoever. Ours thought it

had a dandy excuse in the attacks of 9/11, and who canblame it? Many Americans would eagerly sell their fewremaining liberties so long as a politician assured themthat said sale secured the homeland. Ergo, the fedsinvented a bogus link between terrorism and America’sfreedom from a national ID.They swore they’d preventanother 9/11 so long as we followed orders to carry“enhanced” drivers’ licenses.

Surprisingly, rebellion bloomed—and this amongstates that have supinely obeyed any number of anti-constitutional decrees since 1865. Fifteen passed legisla-tion prohibiting their DMVs from turning licenses intoa de facto national ID; another ten officially denouncedREAL ID.

No matter:The feds slapped an alias on their failedlegislation—PASS ID—and reintroduced it. But in casesuch cosmetics can’t con us, a couple of senators areaiming at the same goal via another American bugaboo:immigration.

Increased Workplace Patrols

Sen. Lindsay Graham (R-SC) andSen. Charles Schumer (D-NY)

propose to “reform” yet again thefeds’ cruel and unconstitutional poli-cies on immigration. Their nationalID card piggybacks on Social Secur-ity cards rather than drivers’ licenses.

“The plan calls for a big increasein immigration agents patrolling

workplaces,” the New York Times reported. The Bushadministration already tried such raids; their inhuman-ity devastated whole towns, not just immigrants, andObama’s government supposedly discontinued them.But senators seldom boast an enviable learning curve.Graham and Schumer would also “require all workers,including legal immigrants and American citizens, topresent a tamper-proof ”—that is, biometric—“SocialSecurity card when they apply for jobs.”

B Y B E C K Y A K E R S

Yet Again with the National ID


Becky Akers ([email protected]) is a freelance writer in New York City.This article first appeared at TheFreemanOnline.org.

Governments itch to tag their subjectslike so many cattle,on any pretextwhatsoever.

In propaganda the Washington Post obligingly pub-lished, the senators wrote, “A tamper-proof ID systemwould dramatically decrease illegal immigration,experts have said, and would reduce the governmentrevenue lost when employers and workers here illegallyfail to pay taxes.” But, “there’s no such thing as a fool-proof ID system,” as experts have also said.And “reduc-ing lost government revenue” as a reason for nationalID adds insult to injury.We should pack papers so thegovernment can keep more of what itloots from us?

The senators also promise thatthough “we would require all U.S. cit-izens and legal immigrants who wantjobs to obtain a high-tech, fraud-proof Social Security card,” we’re safefrom bureaucratic prying because “nogovernment database would houseeveryone’s information.” If youbelieve that, you no doubt believe aswell that these politicians have onlyour best interests at heart, have stud-ied rather than exploited this topic,and are competent to decide for uswho our future neighbors, friends,and relatives will be.

Certainly, Graham and Schumer don’t have immi-grants’ best interests at heart. Indeed, whether immi-grants can live here is determined solely by whether wecan use them to “ensur[e] America’s future economicprosperity.” Ergo, the senators’“legislation would awardgreen cards to immigrants who receive a Ph.D. or mas-ter’s degree in science, technology, engineering or mathfrom a U.S. university. It makes no sense to educate theworld’s future inventors and entrepreneurs and then

force them to leave when they are able to contribute toour economy.”

Nationalist Agenda

Forget about those hungry, tired, and poor yearningto breathe free; the persecuted; and the tortured. If

you can’t advance politicians’ nationalistic agendas, youwon’t find a toe-hold here.

The senators aren’t content to menace only immi-grants; they also threaten and penalizeAmericans who, unlike themselves,are productive: “Prospective employ-ers would be responsible for swipingthe [national ID] cards through amachine”—and who pays for thegizmo?—“to confirm a person’s iden-tity and immigration status. Employ-ers who refused to swipe the card orwho otherwise knowingly hiredunauthorized workers would face stifffines and, for repeat offenses, prisonsentences.”

Our rulers have spent the last 150years ginning up fear of immigrants,pitting established Americans againstnewcomers, contriving a hobgoblin

from which they squawk about rescuing us. They’vesucceeded so well that modern Americans happily donchains so long as it means immigrants wear them, too.National ID, raids on offices and factories, a wall on oursouthern border: Nothing is too dictatorial when itcomes to controlling migration.

Schumer and Graham are betting Americans’ fear ofimmigrants outweighs their love of liberty. Tragically,that looks like a winning wager.

13 J U LY / A U G U S T 2 0 1 0

Ye t A g a i n w i t h t h e N a t i o n a l I D

“Reducing lostgovernment revenue”as a reason fornational ID addsinsult to injury. Weshould pack papers sothe government can keep more of what it loots from us?

B Y T H O M A S S Z A S Z

The Art and Science of Pseudology

The Therapeutic State

The common belief that the scientist’s job is toreveal the secrets of nature is erroneous. Naturehas no secrets; only persons do. Secrecy implies

agency, which is absent in nature.This is the main rea-son the so-called “behavioral sciences” are not merelyunlike the physical sciences but are in many ways theiropposites.

“Nature,” observed Thomas Carlyle (1795-1881),“admits no lie.” While nature neither lies nor tells thetruth, persons habitually do both.As the famous Frenchmathematician and philosopher Antoine AugustinCournot (1801-1877) observed, “It is inconceivable that [in the science of politics] telling the truth can everbecome more profitable than tellinglies.” Indeed, deception and prevar-ication are indispensable tools for the politician and the psychiatrist—experts expected to explain, pre-dict, and prevent unwanted humanbehaviors.

The integrity of the natural scien-tific enterprise depends on truth-seeking and truth-speaking byindividuals engaged in activities wecall “scientific,” and on the scientificcommunity’s commitment to expose and reject erro-neous explanations and false “facts.” In contrast, the sta-bility of political organizations and of the ersatzreligions we call “behavioral sciences” depends on theloyalty of its practitioners to established doctrines andinstitutions and the rejection of truth-telling as injuri-ous to the welfare of the group that rests on its com-mitment to fundamental falsehoods. Not by accident,we call revelations of the “secrets” of nature “discover-ies,” and revelations of the secrets of powerful individu-als and institutions “exposés.”

Because nature is not an agent, many of its workings

can be understood by observation, reasoning, experi-ment, measurement, and calculation. Deception anddivination are powerless to advance our understandingof how the world works; indeed, they preempt, prevent,and substitute for such understanding.

Psychiatry is one of the most important institutionsof modern American society. Understanding modernpsychiatry—the historical forces and the complex eco-nomic, legal, political, and social principles and prac-tices that support it—requires understanding theepistemology of imitation and the sociology of distin-

guishing “originals” from “counter-feits.” With respect to disease, theprocess consists of two parts: One partis separating persons who suffer fromdemonstrable bodily diseases fromthose who do not, but pretend orclaim to; another part is separatingphysicians who believe it is desirableto distinguish between illness andhealth, sick persons and healthy, fromphysicians who reject this desidera-tum and insist that everyone who actsor claims to be sick has an illness anddeserves to be treated. In an effort toclarify the difference between medi-

cine and psychiatry—between real medicine and fakemedicine—I proposed a satirical definition of psychia-try, slightly revised as follows:

The subject matter of psychiatry is neither mindsnor mental diseases, but lies, beginning with the namesof the participants in the transaction—the designationof one party as “patient,” even though he is not ill, andthe other party as “therapist” even though he is nottreating any illness. The lies continue with the decep-


Thomas Szasz ([email protected]) is professor of psychiatry emeritus atSUNY Upstate Medical University in Syracuse. His latest book isAntipsychiatry: Quackery Squared.

Nature has no secrets;only persons do.Thisis why the so-called“behavioral sciences”are not merely unlikethe physical sciencesbut are in many waystheir opposites.

tions that comprise the subject matter proper of thediscipline—the psychiatric “diagnoses,” “prognoses,”and “treatments”—and end with the lies that, like shad-ows, follow ex-mental patients through the rest of theirlives—the records of denigrations called “depression,”“schizophrenia,” or whatnot, and of imprisonmentscalled “hospitalization.” If we wished to give psychiatryan honest name, we ought to call it “pseudology,” or theart and science of lies and lying.

The imitation of illness is memorably portrayed byMolière (1622–1673) in his famous comedy, The Imagi-nary Invalid (Le malade imaginaire).The main character isa healthy individual who wants to be treated as if hewere sick by others, especially doctors. Since those days,we in the West have undergone an astonishing cultural-perceptual transformation of which we seem largely,perhaps wholly, unaware. Today medical healing isregarded as a form of applied science.At the same time, the medical profes-sion defines imaginary illnesses as realillnesses, in effect abolishing thenotion of pretended illness: Officially,malingering is now a disease “just asreal” as melanoma.

The view that pretending to bementally ill is itself a form of mentalillness became psychiatric dogma dur-ing World War II. Kurt R. Eissler(1908-1999), then the quasi-official pope of theFreudian faith in America, declared: “It can be rightlyclaimed that malingering is always the sign of a diseaseoften more severe than a neurotic disorder. . . . Thediagnosis should never be made but by the psychia-trist.” Now, more than 50 years later, this medicalizedconcept of malingering is an integral part of the mindset of every well-trained, right-thinking Westernpsychiatrist. For example, Phillip J. Resnick, a leadingAmerican forensic psychiatrist, declares: “Detectingmalingered mental illness is considered an advancedpsychiatric skill, partly because you must under-stand thoroughly how genuine psychotic symptomsmanifest.”

In World War I soldiers afraid of being killed in bat-tle malingered; psychiatrists who wanted to protect

them from being returned to the trenches diagnosedthem as having a mental illness, then called “hysteria.”Today, almost a hundred years later, soldiers returninghome and afraid of being without “health care cover-age” diagnose themselves as having a mental illness,called “post-traumatic stress disorder (PTSD)”: Almost50 percent of the troops returning from Iraq suffer frompost-traumatic stress disorder (PTSD) and depression“because they want to make sure that they continue toget health care coverage once their deployments haveended.” (Syracuse Post-Standard, Nov. 25, 2007, E1).

Psychiatrists and the science writers they deceive—and who eagerly deceive themselves—love to dwell onhow far psychiatrists have “progressed” from their pastpractices.They have indeed, if we consider creating evermore mental illnesses/psychiatric diagnoses “progress.”Today psychiatrists assert that the person who regards

himself as a mental patient suffers froma bona fide illness and laud him for hisinsight into his “having a disease” and“need for treatment.”At the sametime, they lament the person who“denies” his mental illness, his “lack of insight” into being ill, and his “negative attitudes toward treatmentseeking.” For example, from the Inter-national Journal of Eating Disorders welearn: “Considering that males have

negative attitudes toward treatment-seeking and are lesslikely than females to seek treatment, efforts should bemade to increase awareness of eating disorder symptoma-tology in male adolescents.”

Counterfeit art is forgery. Counterfeit testimony isperjury. But counterfeit illness is still illness—mental illness, officially decreed “an illness like any other.”Theconsequences of this policy—economic, legal, medical,moral, personal, philosophical, political, and social—aremomentous: counterfeit disability, counterfeit disease,counterfeit doctoring, counterfeit rehabilitation, and thebureaucracies, courts, industries, and professions study-ing, teaching, practicing, administering, adjudicating, andmanaging them make up a substantial part of thenational economies of modern Western societies and ofthe professional lives of the individuals in them.

15 J U LY / A U G U S T 2 0 1 0

T h e A r t a n d S c i e n c e o f P s e u d o l o g y

Counterfeit art isforgery. Counterfeittestimony is perjury.But counterfeit illness is still illness—mental illness.

You may have heard that the AMA and “Amer-ica’s physicians” favor universal health care.That’s true of the AMA, but that organization

represents fewer than 20 percent of the nation’s doc-tors. And it’s true of many academic university physi-cians, but anecdotally it is obviously untrue of mostdoctors in private practice. Many of those docs desire to“get government out of medicine.”

But those physicians have a problem, of a sort that“getting government out of medicine” doesn’t solve.I’ll describe the problem in amoment; but first, an economicinterlude:

When special interests get spe-cial grants of power from govern-ment, they benefit, of course. Butthe benefits—what economistscall rents—are not static. Overtime they tend to dissipate,because the prices of the factorsof production required to obtainthem are bid up. A new marketequilibrium is formed. Someexamples:

• The chattel-slave system present during the firstcentury of this country’s existence gave the lie to thenoble words of the Declaration of Independencethat all men are created equal. I have much sympa-thy for abolitionist William Lloyd Garrison’s famousepithet that, because it sanctioned slavery, the Con-stitution was a “covenant with death and an agree-ment with hell.” But slavery persisted. Economichistorians have asked why. Nobel laureate economist

Stanley Engerman, in his work Time on the Cross,coauthored with Robert Fogel, investigated thetricky economics of slavery. Do slaves financiallybenefit the slave owner? One would think theymust, and at first that had to be true. But one had topurchase slaves. What is the “market price” of aslave? In theory it would be the same as with anyother long-term capital good: the discounted mar-ginal value of the revenue stream the slave couldgenerate over his lifetime of work. People who

bought slaves before markets werewell established may have benefit-ted, but over time the economicbenefits of slavery were transmitteddown the structure of production.So the slave owner ended up pay-ing, on average, the discountedvalue of what the slave would endup producing.This is not to say thatslave-owners therefore had nointerest in maintaining the slave sys-tem.While not making large profitsin holding slaves, they were at risk

of incurring large capital losses if slavery ended.• Few people think today that Social Security is agood deal. Young people doubt it will be aroundwhen they retire. Middle-aged people and thoserecently on Social Security know they could havedone better had they been allowed to invest themoney themselves in a diversified low-risk portfolio.Granted, those who turned 65 in the early yearsafter FDR began the program benefitted, as they

B Y T H E O D O R E L E V Y

Why Doctors Don’t Want Free-Market Medicine


Theodore Levy ([email protected]) is a physician in the Southwest.

Noel Hidalgo [flickr]

received benefits without incurring costs. But thosedays are long gone. Now people on Social Securitymay only break even, and surely in the future theywill suffer a financial loss. Nonetheless, current recip-ients don’t want the system to end, because they’dlose even the little money they’re counting on.• In New York City and other large metropolitanareas, before you can legally drive a taxi, you have topurchase a medallion (license) from the government.The nominal price of a medallion is not high, but torestrict the supply of cabs the municipality sharplylimits the number sold. So (as with ticket scalping)in the resale market the price is much higher thanthe face value, sometimes severalhundred thousand dollars or more.The system benefitted the taxicompanies operating at the timelicensing was enacted—unsur-prisingly, these were the verycompanies that lobbied forthem—because restricting medal-lions restricted taxi supply andincreased the amount the compa-nies could charge their customers.But it didn’t help make a largerprofit for the taxi owners whocame along later, because thelarger fees they were able to earnfrom a lower supply of cabs wereoffset by the exorbitant cost of thenow-expensive medallions. Andyet, although making only marketincomes, the current taxi owners have every incen-tive to maintain the medallion system because elim-inating it now would cause them an even greaterloss when the market price of medallions fell tozero.

What does any of this have to do with medical care?Medical licenses are like taxi medallions. The AMAassiduously sought the licensing of medical profession-als from its very beginning in 1847. At that time, ironi-cally, schooled physicians had little more to offerpatients than charlatans did and often caused moreharm than good through what was known as “heroic

therapy,” treatments like leeching and the use of arseni-cal purgatives. Finally, about a hundred years ago, med-ical services were cartelized. After the release of theFlexner Report (1910), the number of medical gradu-ates declined by approximately half over the nextdecade, a decrease falling disproportionately on minor-ity and female physicians.

How Much Training?

The question is not whether it’s a good thing tohave better-trained doctors; the question is

whether overtraining is possible, and how to knowwithout market competition whether we’ve reached

that point. A recent physician surveyasked if doctors thought every M.D.needed all the training he received tobe able to provide high-quality care.Many respondents answered no.

Perhaps doctors as good as thosecurrently practicing could be trainedin six or seven years—rather than the12 or more today. Perhaps a combina-tion of less human training but bettercomputer diagnostics would be ofvalue. Perhaps an apprenticeshipmodel would work better than thecurrent didactic educational model.Without a competitive market, there’sno way to tell.

No doubt most physicians are sin-cere when they say they can’t imaginea system with less training that would

protect the patient from charlatans. But it’s also truemost citizens under Soviet rule couldn’t imagine howshoes would reach market without central command,and no doubt at least some plantation owners were sin-cere in their concern that if slavery ended, the slaveswould not know what to do or where to go.

Most everyone has met a bad doctor. And yet he,too, spent four years in medical school and passed theboards as presently constituted. If quality were the onlyconsideration, isn’t that evidence that four years plusresidency is not enough? Should medical school beeight years long? The point, of course, is that extratraining before practice has a cost as well as a benefit.

17 J U LY / A U G U S T 2 0 1 0

W h y D o c t o r s D o n ’ t Wa n t F r e e - M a r k e t M e d i c i n e

The question is notwhether it’s a goodthing to have better-trained doctors; thequestion is whetherovertraining ispossible, and how to know withoutmarket competitionwhether we’vereached that point.

Just as the economic rent (the excess earnings overthe amount necessary to keep the factor of production inits current use) from taxi medallions was dissipated overtime as the cost of obtaining the medallions increased, sotoo the economic rent of a medical license over timedoes not go to doctors but rather to those who cancharge doctors more to meet the license and practicerequirements. In the decades after Medicare spendingincreased the income of physicians, the price of medicalschool skyrocketed. So while licenseddoctors made more money, becoming adoctor with a license cost more money.Doctors all complain about the highcost of malpractice insurance, but fewrealize that one reason such insurancecommands a high price is that doctorscan pay it.

Trouble Breaking Even

Current doctors have all paid hugecosts to be where they are today.

Yet many of them describe troublebreaking even financially, even thoughthe average doctor makes a greatincome compared to the averageAmerican. Like those currently col-lecting Social Security, they would behurt by a change in the system that lowered theirincomes.

So most doctors do not really want “less govern-ment” in health care. They want the type of govern-ment control and regulation that restricts supply andlimits innovation to that which directly benefits themedical cartel. They don’t want nurses doing things—even simple things—without physician supervision forthe same reason dentists don’t want dental hygienists todo even simple basic cleanings without dental supervi-

sion.They prefer to view ancillary personnel as subor-dinates rather than competitors. Like most otherlicensed professionals, they complain only about theregulations that harm them to the benefit of others, notthose that benefit them at the expense of others.

Society was better off ending slavery and would bebetter off ending the Ponzi scheme of Social Securityand the legal cap on taxi medallions. But there arealways special interests who will be hurt by socially

beneficial reforms. No one likes tosee himself as a special interest. Butphysicians as a group would likely befinancially harmed by a true freemarket in health care, one that endednot only the burdensome regulationdoctors all complain about but alsothe restrictions placed on who islegally allowed to offer serviceslabeled as “health care,” restrictionsthat redound to physicians’ benefit.

Fortunately for the physicians,almost no one is calling for a freemarket in health care. Doctors wantregulations that free them to practiceas they wish, while still having thegovernment assure that everyone canget health insurance and thus pay

doctors for practicing as they wish. Patients want asmuch care as they need and desire, paid for by others.Insurance companies want to maintain their cozy rela-tionships with state regulators, built up over years, andnot have to compete nationally, and are thereforeopposed to calls to end the prohibition of interstatesales of health insurance. Everyone calls for help fromthe State, which, as Bastiat pointed out, is the fiction by which everyone tries to live at the expense ofeveryone else.


T h e o d o r e L e v y

Like most otherlicensed professionals,doctors complainonly about theregulations that harm them to thebenefit of others, notthose that benefitthem at the expenseof others.

Energy is the master resource. Without it otherresources could not be produced or consumed.Even energy requires energy: There would not

be usable oil, gas, or coal without the energy to manu-facture and power the requisite tools and machinery.Nor would there be wind turbines orsolar panels, which are monuments toembedded fossil-fuel energy.

And just how important are fossilfuels relative to so-called renewableenergies? Oil, gas, or coal generatesthe electricity needed to fill in forintermittent wind and solar powerand ensure moment-to-moment reliability. So renewable energy, ironi-cally, is codependent on nonrenew-able energy short of (currently)prohibitively expensive battery tech-nology firming the flow of electricity.

As a component of all productsand services, energy needs to beaffordable, convenient, and reliable.To this end, public policy shouldrespect consumer preference andallow energy producers to meet the demands of the marketplace. This requires a respect for privateproperty rights and voluntary exchange to facilitate theglobal exchange of energy and its innumerable subcomponents.

Global energy supplies are primarily the productof government, unfortunately, not the free market. Instate-run economies political elites make the deci-sions that otherwise would be made by the multitude.Win-win exchanges are supplanted by government-

dictated win-lose transactions. Wealth is redistributed.Pure waste results from the intervention of (political)third parties into what otherwise would be mutuallyadvantageous self-interested exchange.

For example, electric utilities may be forced to buywind power, solar power, or anotherpolitically correct energy under statelaw. A mandate is required because afree marketplace would not supportsuch expensive, unreliable—noncom-petitive—supply.

Oil and gas producers may beunable to access offshore propertiesbecause of government constraint. Insuch cases, supply is not produced and higher-cost substitutes elsewherepick up some of the slack. Consumersare left with less supply and higherprices. Economists have a name forthis: inefficiency.

Government intervention may alsogive life to uneconomic projects. Suchventures may include carbon captureand storage, a “smart” electricity grid,

or even a nuclear plant that requires a federal loan guar-antee. Resources that go to these projects do not go toother, more economical projects (which may or maynot be in the energy sector) as judged by the market-place. Resources are again misallocated.

B Y R O B E R T L . B R A D L E Y, J R .

A Free-Market Energy Vision

19 J U LY / A U G U S T 2 0 1 0

Robert Bradley, Jr. ([email protected]) is the CEO and founder of theInstitute for Energy Research of Washington, D.C., and Houston,Texas,and author most recently of Capitalism at Work: Business, Government,and Energy. He thanks Dick Fulmer, Roger Donway, and DanielSimmons for comments.

As a component ofall products andservices, energy needsto be affordable,convenient, andreliable. Public policyshould allow energyproducers to meetthe demands of themarketplace.

Proponents of government intervention cite “mar-ket failure” as the reason for regulating or subsidizingenergy projects. Negative externalities created by self-interested exchange require the government to modifytransactions in ways ranging from a prohibition to a tax,they say.

Nonmarket Failures

But there are two other types of failure that alsomust be considered before rushing to policy judg-

ment.One is analytic failure, in which the outside evalua-

tor’s prescription for intervention (such as a per-barrel“energy security” tax on oil imports or a per-ton “cli-mate change” tax on carbon dioxide emissions) over-corrects or undercorrects for the “real” problem. Theerror might be purely intellectual—orit might reflect the personal prejudiceof the analyst. Fallible self-interest inthe marketplace has a counterpart inthe ivory tower.

Second, there is government failure,whereby even the “correct” analyticalblueprint is altered and violated in thepolitical process. Special-interest tin-kering adds to or subtracts from thecore proposal, and political actorsresort to “logrolling,” where extrane-ous issues are added to the legislationjust to win votes.

House passage of a cap-and-trade energy bill lastyear and health insurance legislation enacted this yearare stark evidence of sausage-making in Washington,D.C.—and something scarcely recognizable in “we thepeople” textbooks.

Thus “market failure” does not automatically require agovernment correction. This suggests a differentapproach. Knowing that political solutions are likelyto be as bad as or worse than the problems, allegedmarket failures should be scrutinized to see if theyare really serious problems. And if so, can the realproblems be addressed by novel voluntary approachesand reforms rather than by government dictates?

Intellectual and political debates over energy haverevolved around four “sustainability” issues: depletion,

pollution, security, and climate change. Whole booksaddress these issues, most from the market-failure view-point, concluding that mankind is on a perilous pathand government-engineered energy transformation isnecessary.

But students of energy history and energy policymust ask: Has a political makeover of any industry everworked well for consumers and taxpayers? Or has it had the opposite effect? Creative destruction—a marketmakeover from shifting consumer demand—is onething; having government pick winners with carrotsand sticks is quite another.

Free-Market Sustainability

The arguments for allowing free markets, ratherthan government planning, to address the four sus-

tainability issues can be summarizedas follows:

1. Estimated quantities of recov-erable oil, gas, and coal have beenincreasing over time, according tothe statistical record. Human ingenu-ity in market settings has and willcontinue to overcome nature’s limits,leaving in its wake errant forecasts ofresource exhaustion. The resourcechallenge is political: restricting accessand perverting incentives prevents

the ultimate resource—human innovation and entre-preneurship—from expanding energy supplies andmultiplying energy’s productive utilization.

2. Statistics of air and water quality in theUnited States show dramatic environmentalimprovement and, in fact, indicate a positive correla-tion between energy usage and environmentalimprovement. While improvements have beenachieved by politicized, command-and-controlenvironmental regulation, the results could havebeen achieved at lower cost through market meth-ods.

3. Energy security in the electricity market isassured by abundant domestic coal and the fact thatalmost all U.S. gas imports come from Canada. Mostof the oil needed for transportation comes from


R o b e r t L . B r a d l e y, J r.

“Market failure” doesnot automaticallyrequire a governmentcorrection. Politicalsolutions are likely tobe as bad as or worsethan the problems.

domestic supplies supplemented by imports from avariety of countries led by Canada and Mexico. Oilimports from unstable or unfriendly nations, such asVenezuela and those in the Middle East, can bemore effectively addressed by privatizing U.S. oil andgas resources than by government penalties againstoil imports that cannot distinguish between “good”and “bad” barrels. Even if the United States were touse the powers of government to pare domestic oilconsumption, the resulting drop in world oil priceswould encourage non-U.S. demand and subsidizeforeign industry.The world oil market will continueto exist and thrive even with reduced U.S. participa-tion, and this will become moretrue over time.

4. The global warming scare isplagued by open scientific ques-tions, economic tradeoffs, and thereality that carbon-based energy isnecessary for economic growth.Carbon rationing (via the KyotoProtocol) is a failed policy for thedeveloped world and a nonstarterfor the developing world. Notonly have targeted reductionsproved to be elusive, the economiccosts of carbon rationing are notunlike those from (postulated)deleterious climate change.

The recent oil spill in the Gulf ofMexico raises an additional sustain-ability issue: unexpected setbacksthat cause massive property damage and even fatalities.Short-run problems, however, can result in longer-term gains so long as the firm faces full liability and pays restitution to the victims. Accountability inprivate property settings encourages companies tosquare profits, people, and the environment—andavoid the financial losses that come from performancefailure. Currently companies have their liability fordamages capped by law at $75 million, though poli-tics could potentially nullify the cap in any given case, as it apparently will in the BP Deepwater Hori-zon incident.

Rather than expand government, public policyshould end preferential subsidies for politically favoredenergies and privatize such assets as public-landresources and the Strategic Petroleum Reserve. Multi-billion-dollar energy programs at the U.S. Departmentof Energy should be eliminated. Such policy reformcan simultaneously increase energy supply, improveenergy security, reduce energy costs, and increase thesize of the private sector relative to the public sector.

To Al Gore the “planetary emergency” is five billionto six billion people using oil, gas, or coal for most oftheir energy needs. But the real energy problem is thatnearly one and a half billion people do not use modern forms

of energy. Rampant statism in place ofprivate property, voluntary exchange,and the rule of law is behind thisproblem.

Energy-impoverished people usedried dung and primitive biomass tostay warm and cook their meals,destroying their health and shorteningtheir lives. Without electricity ormachines, they do not have cleanwater, reliable lighting, or other meansfor comfortable, sanitary living. Thishere-and-now problem demandsenergy freedom and an end to debili-tating energy statism.

The free-market vision stresses thatthese impoverished people should notbe subject to energy rationing by gov-ernment. Solar panels and industrialwind turbines can only generate a

fraction of the energy produced by diesel generators ora conventional power plant—and are much less reliable.Energy brawn is needed, not inferior but politicallycorrect energies that appeal to energy planners.

Property Rights vs. the Resource Curse

More fundamentally, these victims of statism needprivate property rights to in-ground minerals

and ownership title to energy infrastructure. In this way,they can overcome the so-called resource curse wherebysiphoned energy wealth underwrites government con-trol and bad economic policy.

21 J U LY / A U G U S T 2 0 1 0

A F r e e - M a r k e t E n e r g y V i s i o n

The real energyproblem is that 1.4billion people haveno access to cleanwater, reliablelighting, or othermeans forcomfortable, sanitaryliving because of statism.

Countries worldwide should reject energy planningfrom a politically endowed elite. Government plannerssuffer from a “fatal conceit” that their knowledge andgoals must override those of the masses. But on-the-spot energy consumers and energy producers, guidedby prices and profit/loss, have much more collectivewisdom than faceless bureaucrats commanding from onhigh. Top-down planning misdirects and destroysdespite the best efforts of even well-educated, well-meaning bureaucrats.

Freedom—the use of reason and persuasion in placeof coercion—is a worthy goal. In the U.S. energy sec-tor, market reliance, though compromised by both pro-business and anti-business government intervention, has

produced economic coordination, fostered economicgrowth, and democratized wealth. Government inter-vention, on the other hand, such as occurred in the1970s with U.S. oil and gas price controls, has producedshortages, civil strife, and bureaucratic waste.

Markets are not perfect, inspiring some to deviseand champion government intervention. But politicalsolutions must contend with analytic failure, imple-mentation problems, and public-sector (taxpayer) costs.Imperfect markets, in other words, may well be betterthan “perfect” regulation in the real world.The burdenof proof, therefore, should be on government interven-tion, rather than on voluntary transactions premised onprivate property and governed by the rule of law.


R o b e r t L . B r a d l e y, J r.

B Y R O B E R T H I G G S

Foreign Lenders: Friends Indeed to a U.S.Treasury in Need

Our Economic Past

When the U.S. government wishes to spendmore money than it receives as tax revenue,it covers the shortfall by borrowing, and

foreign lenders have become increasingly importantsources of such borrowed funds.

Reliance on foreign lenders is as old as the republic.Indeed, loans from the French and the Dutch provedcritical in keeping the American revolutionaries afloatwhile they broke from the British Empire and estab-lished their independence. Later, the huge foreign debtbecame a major reason for the newnational government’s assumption ofthe states’ war debts and for the cre-ation of the First Bank of the UnitedStates and other measures AlexanderHamilton devised to establish the newgovernment’s credit.

As a rule, however, the U.S. govern-ment had little need to borrow. Exceptduring wartime, it more or less bal-anced its budget, and indeed in manyyears of the nineteenth and early twen-tieth centuries, it ran a surplus, whichwas used to pay down the debt takenon during the preceding war. Onlyafter 1930 did chronic deficits becomea fixture of the federal government’sfinancial conduct. Even then, however, foreign lendingdid not play a large role until the latter part of thetwentieth century.

As late as 1970, according to a report issued by theFederal Reserve Bank of New York, foreigners heldonly about $20 billion, or less than 9 percent, of all pri-vately held U.S. securities outstanding. (A great deal ofthe total debt is held within the government, mainly bythe Social Security Trust Fund.) During the followingdecades, however, foreigners acquired a growing pro-portion of the debt held outside the government. In the

1970s foreigners purchased $10.5 billion, or about 31percent of the total sold to the public. In the 1980s,when large government budget deficits pumped up thedebt rapidly, foreigners purchased $27.5 billion, orabout 18 percent of the total sold to the public.

(Note that all such data are subject to a variety ofconceptual and measurement errors. All the figures onforeign holdings of U.S.Treasury debt discussed in thisarticle are admittedly flawed official estimates.)

During the 1990s, as the government first pared itsbudget deficit after 1992 and thenactually ran a small budget surplusduring fiscal years 1998 through2001, the foreign share of U.S.Trea-sury debt held by the publicincreased greatly, and by the end ofthe decade it had reached almost 40percent of the total, before dippingsomewhat during the recession earlyin the following decade.

After 2002 foreign holdings rose greatly as huge governmentbudget deficits accompanied theBush administration’s guns-and-but-ter policies, and the foreigners’acquisitions again outpaced those ofAmericans. By the third quarter of

2009 the foreign share of U.S. debt held by the publicstood at nearly 52 percent.

According to data issued by the Treasury and theFederal Reserve Board on March 15, 2010, the largestforeign holders of U.S. Treasury securities in January2010 were as follows: China (mainland plus HongKong), $1,036 billion; Japan, $765 billion; a group of 15

23 J U LY / A U G U S T 2 0 1 0

Robert Higgs ([email protected]) is senior fellow at the IndependentInstitute (www.independent.org), editor of The Independent Review,and author of Neither Liberty Nor Safety: Fear, Ideology, and theGrowth of Government (Independent Institute).

Reliance on foreignlenders is as old asthe republic.As arule, however, theU.S. government hadlittle need to borrowuntil chronic deficitsbecame a fixture inthe twentieth century.

countries designated “oil exporters,” $218 billion;Brazil, $169 billion; a group of four island nations plusPanama, designated “Caribbean banking centers,” $144billion; Russia, $124 billion; and Taiwan, $120 billion.These countries’ holdings altogether totaled $2,576 bil-lion, or about 70 percent of the $3,706 billion ownedby all foreign holders at that time.

China’s Emergence

China’s emergence as the leading foreign holder ofU.S. Treasury debt has occa-

sioned a great deal of commentary,including many expressions of appre-hension. Many writers still view theChinese as enemies of the UnitedStates, notwithstanding the two coun-tries’ close financial and trade ties,among other important links. Xeno-phobes worry that should the Chinese“dump” their holdings of U.S. govern-ment debt, they would create financialhavoc and jeopardize U.S. nationalsecurity.

To be sure, Chinese governmentleaders and other Chinese spokesmenhave recently expressed serious con-cern about the U.S. Treasury’s abilityto service its rapidly growing debt.They worry that the U.S. government is getting itselfinto deeper and deeper financial difficulty by runningbudget deficits well in excess of $1 trillion per year infiscal years 2009 and 2010 and, according to projec-tions, only slightly smaller deficits for many years tocome.The persistent recession that began early in 2008,from which little recovery was evident even in the firstquarter of 2010, has done nothing to allay Chinese fearsabout the U.S. Treasury’s precarious condition. Otherforeign holders of U.S. government debt have expressedsimilar worries.

Late in 2009 mainland China reduced its holdings ofTreasury securities somewhat, from a high of $940 bil-lion in July 2009 to $889 billion in January 2010, a

reduction of $51 billion, or 5.4 percent. Meanwhile,however, Hong Kong’s holdings rose by $36 billionduring these months, offsetting most of the reductionby mainland China. The overall Chinese holdingsdeclined, then, by only $15 billion, which is scarcelyenough to justify anyone’s nightmares.

Likely and Unlikely ScenariosIn any event, fear that the Chinese (or other large

holders) might suddenly dump large quantities of Trea-sury debt is difficult to take seriouslybecause, owing to the great amountof such debt they now hold, any suchsell-off would cause a tremendous fallin the price of the securities andcause huge capital losses for the Chi-nese holders. Not being fools, theChinese are unlikely to resort to suchdumping. Instead, they have begun towarn the U.S. government that unlessit gets its financial house in betterorder, it might provoke them to selloff more of their holdings—and certainly to refrain from adding tothem, notwithstanding the enormousamount of such securities the Trea-sury will have to sell in order tofinance the U.S. budget deficits pro-

jected for many years to come.The most likely scenario, then, is for the Chinese to

monitor the Treasury and Congress carefully and to usediplomatic pressure to try to discipline the waywardAmericans as much as possible without angering themexcessively and thereby tempting them to act rashly ina fit of nationalistic pique. Other large holders of U.S.government securities no doubt will also exert pres-sures to rein in the fiscally irresponsible U.S. govern-ment and the Fed, lest the latter resort to monetizationof the government’s huge deficits, thereby creatingprice inflation that reduces the real value of the nomi-nal interest and principal payments the Treasury hascommitted itself to make on its outstanding debt.


R o b e r t H i g g s

The most likelyscenario is for theChinese to monitorthe U.S.Treasury andCongress carefullyand use diplomaticpressure as much aspossible withoutinspiring a fit ofnationalist pique.

In their recent book, From Poverty to Prosperity,Arnold Kling and Nick Schulz relate that ancientRomans believed it honorable to gain wealth

through battle and conquest, but dishonorable to profitby engaging in commerce. Such work was consideredso demeaning that it was left to the children of freedslaves. Because of the associated disgrace, those involvedin commerce tended to leave business as soon as theycould afford to do so. Kling and Schulzsuggest such attitudes explain why theinvention of the steam engine by Heroof Alexandria (in what was then theRoman province of Egypt) was largelyignored. Romans regarded the engineas a curiosity or toy; no one thought ofputting it to work.The European aris-tocracy clung to similar attitudes upuntil the twentieth century, as didmany in the antebellum South. Pro-ductive work was considered dishon-orable and to be left for serfs andslaves.

Are we headed back to those samebeliefs? In his State of the Unionaddress President Obama proposedforgiving student loans to those goinginto (honorable) public service, but not to those goinginto (dishonorable) commerce.The idea that making aprofit is morally tainted has become fashionable inrecent years, as has the belief that those who earn prof-its must “give back to the community” to atone fordoing so.

Yet making a profit is neither moral nor immoral—itis simply necessary to preserve life. Every living thing

must make a net energy profit if it is to survive. If livingcreatures do not consume at least as many calories in theform of food as they expend procuring, preparing, anddigesting that food, they will die. By analogy, if an oilcompany’s actions are to be of use to anyone (whetherthe company is owned by the State or private individu-als), it must produce more BTUs’ worth of petroleumthan it expends to find, produce, refine, and transport it.

Money Changes Everything

While the need for a net energyprofit is obvious, the introduc-

tion of money clouds the issue. Energyprofits may be all well and good, butmonetary profits? Money is evil! Yet itis money that enables us to keep score.Without money and prices based onfree exchange, it is impossible to deter-mine whether any cooperative activityis worth the cost.

Suppose, for example, a companydrills a well that will yield 100 barrelsof oil a day. Is it worthwhile for thecompany to produce the oil, or shouldit cap the well and look for one thatwill flow at a higher rate? Theoreti-

cally, a net energy balance could be performed todecide the question—that is, the BTUs contained inthe oil could be compared to those needed to produceit. Unfortunately, determining the energy cost of fabri-

B Y R I C H A R D W. F U L M E R

Are Profits Fit Only for Serfs and Slaves?

25 J U LY / A U G U S T 2 0 1 0

Richard Fulmer ([email protected]) is a senior fellow withthe Institute for Energy Research and coauthor (with Robert L. Bradley, Jr.)of Energy:The Master Resource.

The belief that only plunder yieldedhonorable profits meant a 1,500-year waitfor someone to put Hero’s steam engine towork.commons.wikimedia.org

cating, transporting, and installing tanks, pumps, pipe,valves, fittings, nuts, bolts, and gaskets would be a mon-umental task, as would determining the energy neededto transport and refine the oil.

Suppose, however, that the necessary calculationscould somehow be made, and it turns out that produc-ing the oil would result in a net energy gain. Whatthen? Should the company produce the maximum 100barrels a day, or would that just leave it with a storageproblem? An energy balance cannot answer this ques-tion because it does not indicate demand.

But there is still another problem. The only reasonwe could even consider performing a net energy bal-ance to determine whether the oil should be producedis that energy appears on both sides of the equation. Iam, for example, willing to invest 50 BTUs in order toobtain 100 BTUs’ worth of oil in return, but howmuch energy should I expend to pro-duce, say, a pound of copper?

In a free market, prices—gener-ated by the free buying and selling ofprivately owned things—allow us tocalculate the costs and benefits ofproduction, to determine consumerdemand, and to compare the relativevalues of different goods. The oilproducer does not need to know how much energywas used to make a valve. All he needs to know is itsprice. The manufacturer’s costs for materials, labor,overhead, and energy are all reflected in that price.Knowing the price of the equipment and of its trans-portation and installation enables the oil producer todetermine his costs. Knowing his costs and knowingthe price consumers are willing to pay for a barrel ofoil enables him to calculate the monetary profit (orloss) that will result from recovering the oil. Becausethe prices the producer pays for equipment, parts,services, and labor include the value of energyexpended, the producer can be reasonably sure that ifhe makes a net monetary profit, he will also be mak-ing a net energy profit.

Asking whether it is moral to make energy or mon-etary profits makes no more sense than asking whether

it is moral to eat. Like eating, making a profit is neithermoral nor immoral, it is simply necessary.

Fair Profits

That is not to say, however, that because making aprofit is necessary, anything done in the name of

profit is acceptable. Trading labor for food is onething, snatching a crust of bread from a child’s hand isquite another. The question of morality, then, lies inhow a profit is made, not in the bare fact that a profitis made.

There are only two ways in which a person mayobtain goods to ensure a net profit and sustain life: pro-duce it himself or obtain it from someone else.There areonly two ways to obtain a thing from another: Take itwith or without the other’s consent. If a good is obtainedwith consent (without either fraud or coercion), it must

have either been exchanged for a serv-ice or another thing of value, or itmust have been received as a gift or ascharity.A thing obtained by consent isobtained morally.

If a thing is taken without consent,it is obtained immorally. This is trueeven if it was taken legally. In mostsocieties, outright theft and fraud are

illegal but most societies have legalized some degree of“rent-seeking”—that is, manipulating governmentrules to obtain unearned profits. Such legalized plunderis minimized in states whose economies are based onthe free market and maximized in those in which gov-ernment intervenes heavily. Mercantilism, political (or“crony”) capitalism, socialism, fascism, and communismare all based on varying degrees of nonconsensualexchange.

If we are to live, we have no choice but to makeprofits. We can choose, however, how we make them.Will we do so by producing and freely exchanginggoods and services with others, or will we once moreconvince ourselves that such activities are beneath us,fit only for serfs and slaves? Will we, like the Romans,choose to believe that wealth is honorable only if it isgained by plunder?


R i c h a r d W. F u l m e r

If a thing is takenwithout consent, evenif it is taken legally, itis obtained immorally.

The recent financial crisis has expanded thepower of government. Tea parties haverevealed the disillusion of millions of Ameri-

cans with the rise of government and the decline ofmorality.The crisis has damaged, unfairly, the vision ofmarket liberalism. It is essential, therefore, to reexam-ine and articulate the principles of a free society andto understand the danger to liberty that the new pro-gressivism poses.

Since this essay was first presented at the historicChautauqua Institution in 1995, thefederal government has grown in sizeand scope. Today Congress spendsnearly $4 trillion, the federal share ofGDP has risen to 25 percent, and theU.S. debt exceeds $12 trillion. Wash-ington has bailed out financial, insur-ance, and automobile firms while alsotaking control of the mortgage mar-ket. We are now more dependent ongovernment for our health care, pen-sions, and future than ever before.

Politicians thrive on using otherpeople’s money and promising freelunches.The growth of government has politicized lifeand weakened the nation’s moral fabric. Governmentintervention—in the economy, the community, andsociety—has increased the payoff from political actionand reduced the scope of private action. People havebecome more dependent on the State and have sacri-ficed freedom for a false sense of security.

One cannot blame government for all of society’sills, but there is no doubt that economic and social leg-islation, especially since the mid-1960s, has had a nega-

tive impact on individual responsibility. Individuals losetheir moral bearing when they become dependent ongovernment. Subsidies, bailouts, and other aspects of the“nanny state” socialize risk and reduce individualaccountability. The internal moral compass that nor-mally guides individual behavior will no longer func-tion when the State undermines incentives for moralconduct and blurs the distinction between right andwrong.

More government spending is not the answer to oursocial, economic, or cultural prob-lems.The task is not to reinvent gov-ernment or to give politics meaning;the task is to limit government andrevitalize civil society. Governmentmeddling will only make mattersworse.

If we want to help the disadvan-taged, we do not do so by makingpoverty pay, restricting markets, pro-hibiting educational freedom, dis-couraging thrift, and sending themessage that the principal function ofgovernment is to take care of us. We

do so by eliminating social engineering and all kinds ofwelfare, cultivating free markets, and returning to ourmoral heritage.

At the beginning of the twentieth century there wasno welfare state as we know it. Fraternal and religiousorganizations flourished. Total government spending

B Y J A M E S A . D O R N

The Rise of Government and the Decline of Morality

27 J U LY / A U G U S T 2 0 1 0

James Dorn ([email protected]) is vice president for academic affairs at theCato Institute.The original print version first appeared in the March 1996Freeman (www.tinyurl.com/lqgxwc) and was reprinted with minorrevisions as Cato’s Letter #12 (1996).

There is no doubtthat economic andsocial legislation,especially since themid-1960s, has had anegative impact onindividualresponsibility.

was less than 10 percent of GDP, and the federal gov-ernment’s powers were limited.

Immigrants were faced with material poverty, true,but they were not wretched.There was a certain moralorder in everyday life, which began in the home andspread to the outside community. Baltimore’s Polishimmigrants provide a good example. Like other immi-grants, they arrived with virtually nothing except thedesire to work hard and to live in a free country.Theirethos of liberty and responsibility is evident in a 1907housing report describing the Polish community inFells Point:

A remembered Saturday evening inspection of fiveapartments in a house [on] Thames Street, with theirwhitened floors and shining cook stoves, with thedishes gleaming on the neatly ordered shelves, thepiles of clean clothing laid out for Sunday, and thegeneral atmosphere of preparationfor the Sabbath, suggested standardsthat would not have disgraced aPuritan housekeeper.

Yet, according to the report, a typicalPolish home consisted “of a crowdedone- or two-room apartment, occu-pied by six or eight people, andlocated two floors above the commonwater supply.”

Even though wages were low, Polish Americans sac-rificed to save and pooled their resources to help eachother by founding building and loan associations, asLinda Shopes noted in The Baltimore Book. By 1929, 60percent of Polish families were homeowners—withoutany government assistance.

Dependent Not Self-Reliant

Today, after spending billions of dollars on anti-poverty programs since the mid-1960s, Baltimore

and other American cities are struggling for survival.Self-reliance has given way to dependence and a loss ofrespect for persons and property.

The inner-city landscape is cluttered with crime-infested public housing and public schools that aremostly dreadful, dangerous, and amoral—where one

learns more about survival than virtue. And the way tosurvive is not to take responsibility for one’s own lifeand family—which government intervention makesmore difficult through occupational licensing, the min-imum wage, and other impediments to self-help—butto vote for politicians who have the power to keep thewelfare checks rolling.

Dysfunctional behavior now seems almost normal aspeople are shot daily and births out of wedlock arecommon. (The replacement of Aid to Families withDependent Children with Temporary Assistance toNeedy Families, as a result of the welfare reform duringthe Clinton administration, was a bipartisan recognitionof the perverse incentives under AFDC. ) In addition tothe moral decay, high tax rates and regulatory overkillhave driven businesses and taxpayers out of the city andslowed economic development. It’s not a pretty picture.

In sum, the growth of government and the rise ofthe “transfer society” have under-mined the work ethic and substitutedan ethos of dependence for an ethosof liberty and responsibility. Virtueand civil society have suffered in theprocess, as has economic progress.

The Founding Fathers recognizedthat the nature of government isforce, and they sought to limit its useto the protection of life, liberty, and

property. Markets, both formal and informal, couldthen be relied on to bring about economic prosperityand social harmony.

In a free society the relationship between the indi-vidual and the State is simple.Thomas Jefferson said itwell: “Man is not made for the State but the State forman, and it derives its just powers from the consent ofthe governed.” The fact that the Founders never fullyrealized their principles should not divert attentionfrom the importance of those principles for a free soci-ety and for safeguarding the dignity of all people.

From a classical-liberal perspective, the primaryfunctions of government are to secure “the blessings ofliberty” and “establish justice”—not by mandating out-comes, but by setting minimum standards of just con-duct and leaving individuals free to pursue their ownvalues within the law.The “sum of good government,”


J a m e s A . D o r n

Self-reliance hasgiven way todependence and aloss of respect forpersons and property.

wrote Jefferson, is to “restrain men from injuring oneanother,” to “leave them . . . free to regulate their ownpursuits of industry and improvement,” and to “not takefrom the mouth of labor the bread it has earned.”

The Jeffersonian philosophy of good governmentwas widely shared in nineteenth-century America.Indeed, Jeffersonian democracy became embodied inwhat John O’Sullivan, editor of the United States Maga-zine and Democratic Review, called the “voluntary princi-ple” or the “principle of freedom.” In 1837 he wrote,“The best government is that which governs least . . . .[Government] should be confined to the administrationof justice, for the protection of the natural equal rightsof the citizen, and the preservation of the social order.In all other respects, the voluntary principle, the princi-ple of freedom . . . affords the true golden rule.”

During the nineteenth century most Americanstook it for granted that the federalgovernment has no constitutionalauthority to engage in public charity(to legislate forced transfers to helpsome individuals at the expense ofothers). It was generally understoodthat the powers of the federal govern-ment are delegated, enumerated, andtherefore limited, and that there is noexplicit authority for the welfare state.From a classical-liberal, or market-lib-eral, perspective, then, the role of gov-ernment is not to “do good at the taxpayers’ expense,”but “to prevent harm.”

The general-welfare clause of the Constitution can-not be used to justify the welfare state.That clause sim-ply states that the federal government, in exercising itsenumerated powers, should exercise them to “promotethe general welfare,” not to promote particular interests.The clause was never meant to be an open invitation toexpand government far beyond its primary role ofnight watchman.

Yet “Progressives” who sought to use government todo good (with other people’s money) overtook thevision of limited government. “Public charity” gradu-ally became the norm. Unlike private charity, however,government transfers always involve coercion or thethreat of force. Doing good with other people’s money

without their consent is not a virtue but a vice—or,rather, a crime.

The transformation of the framers’ constitutionalvision began with the Progressive Era, accelerated withthe New Deal, and mushroomed with the Great Soci-ety’s war on poverty, which created new entitlementsand enshrined welfare rights.Today, more than half thefederal budget is spent on entitlements—the largestbeing Social Security, Medicare, and Medicaid. Thenewly passed health insurance legislation will add fuelto the fire of the welfare state. The $100 trillion inunfunded liabilities in Social Security and Medicarewill place a heavy burden on future generations.

Freedom from Responsibility

During the transition from limited government tothe welfare state, freedom has come to mean free-

dom from responsibility. Such free-dom, however, is not true freedombut a form of tyranny, which createsmoral and social chaos.

The modern liberal’s vision ofgovernment is based on a twistedunderstanding of rights and justice—an understanding that clashes withthe principle of freedom inherent inthe higher law of the Constitution.Welfare rights, or entitlements, are“imperfect rights,” or pseudo-rights;

they can be exercised only by violating what legalscholars call the “perfect right” to private property.Rights to welfare—whether to food stamps, publichousing, health care, or business subsidies—create alegal obligation to help others. In contrast, the right toproperty, understood in the Lockean sense, merely obli-gates individuals to refrain from taking what is nottheirs. For the modern liberal, justice refers to “social(or distributive) justice”—an amorphous term, subjectto all sorts of abuse if made the goal of public policy, asF.A. Hayek has aptly noted in The Constitution of Libertyand other writings.As a norm for action, the concept of“social justice” leads to uncertainty and competition forgovernment favors.The result is bigger government andcorruption. The cost of the pursuit of social justice isthe loss of freedom. Instead of creating certainty by

29 J U LY / A U G U S T 2 0 1 0

T h e R i s e o f G o v e r n m e n t a n d t h e D e c l i n e o f M o r a l i t y

Doing good withother people’s moneywithout their consentis not a virtue but a vice—or, rather,a crime.

limiting the range of government actions under a justrule of law, the modern “liberal” State has produceddiscord. Indeed, when the role of government is to dogood with other people’s money, there is no end to themischief government can cause.

Many Americans seem to have lost sight of the ideathat the role of government is not to instill values butto protect those rights that are consistent with a societyof free and responsible individuals. Everyone has a rightto pursue happiness, but no one has the right to do soby depriving others of their liberty and their property.

When democracy overreaches, there is no end tothe demands on the public purse, and the power ofgovernment grows. The Founding Fathers sought tocreate a republic with limited government, not anunlimited democracy in which the “winners” areallowed to impose their will andvision of the good society on every-one else. In such a system politicsbecomes a fight of all against all, likethe Hobbesian jungle, and nearlyeveryone is a net loser as taxes rise,deficits soar, and economic growthslows.

Bankrupt in Every Way

Most voters recognize that thewelfare state is inefficient and

has a built-in incentive to perpetuatepoverty. It should be common sensethat when government promises something for nothing,demand will grow and so will the welfare state.That hasclearly been the case with health care spending underMedicaid and Medicare—and it will be the case withObamacare. For all the money spent on fighting povertysince 1965, the official poverty rate has remainedroughly the same, about 14 percent. Government wasteis only part of the problem; the welfare state is also intel-lectually, morally, and constitutionally bankrupt.

Intellectually bankrupt. It is intellectually bankruptbecause increasing the scope of market exchange, notwelfare, is the viable way to alleviate poverty. The bestway to help the poor is not by redistributing incomebut by generating economic growth and removingimpediments to self-help and mutual aid. Poverty rates

fell more before the war on poverty when economicgrowth was higher.

The failure of communism shows that any attenua-tion of private property rights weakens markets andreduces choice. Individual welfare is lowered as a result.The welfare state has attenuated private property rightsand weakened the social fabric. When people look togovernment to provide retirement income, health care,mortgage guarantees, and various business subsidies,private initiative gives way to collectivist thinking. Eco-nomic decisions become politicized, and people leanmore and more on government.

Morally bankrupt. In addition to being inefficient andintellectually bankrupt, the welfare state is morallybankrupt. In a free society people are entitled to whatthey own, not to what others own.Yet under the pre-

tense of morality politicians andadvocacy groups have created rightsout of thin air. The rights to educa-tion, health care, housing, a minimumwage, and other “necessities” are nowdeemed sacrosanct. Politicians havebecome the high priests of the newState religion of welfare rights andself-proclaimed “benefactors” ofhumanity. If there is a problem—anyproblem—Congress is there to solveit, regardless of whether the Constitu-tion gives it the power to do so.

The truth is, “the emperor has noclothes.” Politicians pretend to do good, but they do sothrough coercion not consent. Politicians put on theirmoral garb, but there is really nothing there. Govern-ment benevolence, in reality, is a naked taking. Publiccharity is forced charity, or what the great French lib-eral Frédéric Bastiat called “legal plunder.”

Constitutionally bankrupt. The welfare state is alsoconstitutionally bankrupt; it has no basis in the framers’constitution of liberty. By changing the role of govern-ment from a limited one of protecting persons andproperty to an unlimited one of achieving “social jus-tice,” Congress, the courts, and presidents have brokentheir oaths to uphold the Constitution.

In contrast Congressman Davy Crockett, who waselected in 1827, told his colleagues,“We have the right, as


J a m e s A . D o r n

Many Americansseem to have lostsight of the idea that the role ofgovernment is not toinstill values but toprotect rights.

individuals, to give away as much of our own money aswe please in charity; but as members of Congress we haveno right to appropriate a dollar of the public money.”

Polls show that most Americans distrust governmentand that more young people believe in UFOs than inthe future of Social Security. Those sentiments expressa growing skepticism about the modern welfare state.President Obama’s election does not mean most Amer-icans have abandoned the principles of the Constitu-tion and are in a rush to move toward a socialist state.What can be done to meet the challenge of safeguard-ing freedom?

What Can Be Done

First and foremost, we need toexpose the intellectual, constitu-

tional, and moral bankruptcy of thewelfare state. We need to change theway we think about government andrestore an ethos of liberty and respon-sibility.The political process will thenbe ready to begin rolling back thewelfare state.

Although Americans have grownaccustomed to the welfare state, itsdisappearance would strengthen thenation’s moral fabric and reinvigorate civil society. Weshould end the parasitic State—not because we want toharm the poor, but because we want to help them helpthemselves.

The federal government has become bloated andunable to perform even its rudimentary functions. It isawash with debt and is endangering America’s future.The collapse of communism and the failure of socialismshould have been warning enough that it is time tochange direction.

It is time to limit the size and scope of governmentand to get the State out of the business of charity. Pri-vate virtue, responsibility, and benevolence can thengrow naturally along with civil society—just as they didmore than 150 years ago when Alexis de Tocquevillewrote in his classic Democracy in America:

When an American asks for the cooperation of hisfellow citizens it is seldom refused, and I have oftenseen it afforded spontaneously and with great goodwill. . . . If some great and sudden calamity befalls afamily, the purses of a thousand strangers are at once

willingly opened, and small butnumerous donations pour in torelieve their distress.

The role of government in a freesociety is not to legislate morality—an impossible and dangerous goal—or even to “empower people”; therole of government is to allow peoplethe freedom to grow into responsiblecitizens and to exercise their inalien-able rights.

The modern liberal’s idea of“good government” has divorced

freedom from responsibility and created a false sense ofmorality. Good intentions have led to bad policy. Themoral state of the union can be improved by followingtwo simple rules:“Do no harm” and “Do good at yourown expense.” Those rules are perfectly consistent inthe private moral universe. It is only when the secondrule is replaced by “Do good at the expense of others”that social harmony turns into discord as interestgroups compete for scarce resources at the publictrough.

31 J U LY / A U G U S T 2 0 1 0

T h e R i s e o f G o v e r n m e n t a n d t h e D e c l i n e o f M o r a l i t y

The modern liberal’sidea of “goodgovernment” hasdivorced freedomfrom responsibilityand created a falsesense of morality.


Governments in the United States subsidize col-lege education heavily. State universitiescharge students very low tuition rates, and the

federal government has a host of grant and loan pro-grams designed to make college affordable to mostfamilies. (As politicians make those programs more generous, schools have spent more and raised tuitions,thus creating an upward cost spiral—but that’s anotherstory.)

One of the simplest of all eco-nomic lessons is that when govern-ment subsidizes something, more of itis produced than otherwise. That’sbecause subsidies upset the naturalcalculation of costs and benefits thatpeople make. The subsidized thingbecomes artificially more attractive toconsumers; as they buy more of it,resources are drawn away from non-subsidized things. Subsidies causeinefficiency.

In higher education, subsidies haveled to a great surplus of young peoplegoing to college and a deteriorationin academic standards. As higher edu-cation has expanded—at the end of World War II lessthan one high school graduate in ten enrolled in post-secondary education; now about 70 percent do—schools have increasingly drawn in weak anddisengaged students. Rather than risk losing such stu-dents (and the money they bring in), many collegeshave relaxed their admission standards, allowed orencouraged grade inflation, and dumbed down theircurricula.

Nevertheless, some politicians and education leadersclaim that the nation badly needs to “produce” stillmore college graduates. In a speech to Congress inFebruary 2009 President Obama declared a nationalgoal of having the world’s highest percentage of work-ers with college degrees by 2020. One of the nation’smajor educational foundations, Lumina Foundation,proclaims that its mission is to get more studentsthrough college and maintains that the United States is

falling behind other countries in itslevel of “educational attainment.”

That was the subject of a debate Iparticipated in on February 26.Arguing for the resolution that theUnited States needs more collegegraduates to remain an economicpower were former Secretary of Education Margaret Spellings andMichael Lomax, president of theUnited Negro College Fund. OhioUniversity economics professorRichard Vedder and I opposed it. Ifyou care to watch the debate, whichtook about an hour and a half, you’llfind it at www.tinyurl.com/yz6qk4o.

For those who prefer a synopsis, read on.The affirmative debaters contended that college

education:• raises people’s incomes substantially; graduates on

average earn nearly a million dollars more overtheir careers than nongraduates;

B Y G E O R G E C . L E E F

Subsidizing More College Students Won’t Help the Economy

George Leef ([email protected]) is book review editor for The Freeman.

Higher-educationsubsidies have led to a great surplus ofyoung people goingto college and adeterioration inacademic standards.

• provides people with the skills they need to suc-ceed in “the knowledge economy”;

• opens up opportunities for people to advance,especially those from poor backgrounds; and

• will help America remain competitive with othernations.

Professor Vedder and I took issue with these claims.First, we contended that the “earnings premium”

argument is fallacious. Even though it’s true on averagethat people with college degrees earn more, that isn’tnecessarily true at the margin. That people with collegedegrees (many of them earned decades ago when stan-dards were higher) have high earnings on average tellsus nothing about the next student who gets a degree.Since many people who obtain college degrees todaywind up working in low-skill, low-paying jobs, there isno basis for the assumption that col-lege education raises incomes.

Second, we argued that collegecoursework doesn’t automaticallyimprove an individual’s skills andknowledge. Although some studentsbenefit greatly from their studies,many others enter college with verypoor capabilities and graduate withlittle or no improvement. Mostemployers aren’t looking for in-depthknowledge that only a college-edu-cated individual could have; ratherthey are looking for good basic skills and trainability—and they complain that many students are lacking inthat respect.

Third, we argued that having a college degree doesn’t necessarily open up any opportunities becausebachelor’s degrees are so common now that having oneis no distinction. Moreover, there are other and oftenmore effective ways for people to advance than goingto college. Many vocational paths are less costly andoffer better long-term prospects than a college degree.

Fourth, we argued that since we already have a glutof college graduates in the labor force, adding to it doesnothing to make the United States more competitive.Furthermore, there is no causal link between increasingnumbers of people holding college degrees and the cre-ation of high-skill, high-paying jobs.

Finally, we argued that putting more and more peo-ple through college exacerbates the problem of creden-tial inflation—that is, employers’ insisting that applicantshave college degrees to be considered for jobs that don’trequire any academic training. Credential inflationalready shuts out individuals who don’t have collegedegrees from many jobs they could easily do.

In response to our case against the resolution, theaffirmative side said nothing.

Perhaps I should just leave the matter there, butthere is more to be said against the idea of trying toincrease college attendance and graduation throughgovernment action.

For one thing, the notion that the country would bebetter off if it put more people through college is cutfrom the same bolt of cloth as the notion that the

country would be better off if itincreased the percentage of peoplewho own their own home. That isanother noble-sounding idea thatpoliticians tried to achieve throughsubsidies and manipulations. Eventu-ally, it proved to be harmful to manyindividuals who were persuaded totake out mortgages they couldn’t payoff. Similarly, numerous young Amer-icans are today struggling to make thepayments on their college loan debtout of incomes far below what they

were all but promised. Government planning schemesalways have a lot of collateral damage.

For another, if we are serious about improving theproductivity of the economy, a marginal increase in thepercentage of workers with college credentials is adiversion from policies that would actually matter. Likewhat? Well, governments channel resources away fromproductive, competitively determined uses and intowasteful, politically determined uses. Governments’innumerable laws and regulations interfere with effi-ciency, the minimum wage and occupational licensingbeing examples. And governments drive away investorsand entrepreneurs with high taxes.

Many policy changes would increase the vitality ofour economy. Pushing a few more young peoplethrough college is not one of them.

33 J U LY / A U G U S T 2 0 1 0

S u b s i d i z i n g M o r e C o l l e g e S t u d e n t s W o n ’ t H e l p t h e E c o n o m y

That people withcollege degrees havehigh earnings onaverage tells usnothing about thenext student whogets a degree.


B Y S H E L D O N R I C H M A N

Government as Consumer

Peripatetics

Destutt de Tracy, as I discussed in the June issue(www.tinyurl.com/24jggno), was a Frencheconomist whom Thomas Jefferson did his

utmost to bring to the attention of America. The firstpart of Tracy’s A Treatise on Political Economy (1817), thetranslation of which Jefferson arranged, is a primer ineconomics that will satisfy any aficionado of Austrianeconomics. It builds up a theory of exchange andcommercial society beginning with a notion of valuerooted in subjective utility and using a praxeologicalmethod.

Tracy’s book also discussed the nature and economiceffect of government. And how refreshingly lucid is histreatment! It makes most modern descriptions of gov-ernment look childish by comparison.

Government Consumes Wealth

Today mainstream observersregard government as a source of

investment in society. Across the politi-cal spectrum, overlooking differencesin detail, one finds agreement thatgovernment spending, at least at somelevel, creates value.

Tracy did not see it that way. Like other liberal,free-market economists of early nineteenth-centuryFrance, Tracy saw the State essentially as a predator, adestroyer of value, and the source of class conflict.(Which is not to say he thought government should beabolished.)

“In every society the government is the greatest ofconsumers,” he wrote.This puts him at odds with mostof what is believed about government now. Govern-ment spending, he insisted, does not create wealth.

Nor does it stimulate others to create wealth, a beliefthat is dominant today. Prosperity cannot be achievedthrough consumption, he held, and he didn’t buy the“multiplier.”

“[T]hose who persuade themselves that consumptionscan be a cause of direct riches, maintain that the leviesmade by government, on the fortunes of individuals,powerfully stimulate industry; that its expenses are veryuseful, by augmenting consumption; that they animatecirculation; and that all this is very favourable to thepublic prosperity. To see clearly the vice of thesesophisms, we must always follow the same track, andcommence by well establishing the facts.”

He then proceeded to refute Keynes—a mere 119years before publication of The General Theory ofEmployment, Investment, and Money.

“The expenditure [government] makes does notreturn into its hands with an increase of value. It does not

support itself on the profits it makes. Iconclude, then, that its consumption isvery real and definitive; that nothingremains from the labour which it pays;and that the riches which it employs,and which were existing, are con-sumed and destroyed when it has availeditself of them. . . .” (This and all otheremphases are added.)

In other words, real investment ina free market, which is driven by entrepreneurs’attempts to satisfy consumers who—crucially—are freeto say no, produces value, as indicated by the resultingprofit.Thus we know that the output is esteemed morehighly than the untransformed inputs. Governmentspending is not of that nature.

But what about government spending on infrastruc-ture, those “shovel-ready projects” so beloved by thechampions of government “stimulus”? Tracy cleverlypulls the rug out from under the argument by seemingat first to approve of such spending. Unlike the waste ofother government spending, he says,

Sheldon Richman ([email protected]) is the editor of The Freeman.

Tracy saw the Stateessentially as apredator, a destroyerof value, and thesource of class conflict.

“It is quite otherwise with funds employed in publiclabours of a general utility, such as bridges, ports, roads,canals, and useful establishments and monuments.Theseexpenses are always favourably regarded, when notexcessive.They contribute in effect very powerfully topublic prosperity.”

And yet, “they cannot be regarded as directly pro-ductive, in the hands of government, since they do notreturn to it with profit and do not create for it a rev-enue which represents the interest of the funds theyhave absorbed. . . .”

Besides,Tracy wrote, even govern-ment projects aiming at valued out-comes crowd out private efforts thatwould have been more efficient.

“[W]e must conclude that individ-uals could have done the same things,on the same conditions, if they hadbeen permitted to retain the disposalof the sums taken from them for thissame use; and it is even probable thatthey would have employed them withmore intelligence and economy.”

Even spending on science wouldbe better left to private entrepreneurs.

“Finally, we may say the same things of what thegovernment expends, on different encouragements ofthe sciences and arts. These sums are always smallenough and their utility is most frequently very ques-tionable. For it is very certain that in general the mostpowerful encouragement that can be given to industryof every kind, is to let it alone, and not to meddle with it.The human mind would advance very rapidly if onlynot restrained; and it would be led, by the force ofthings to do always what is most essential on every

occurrence. To direct it artificially on one side ratherthan on another, is commonly to lead it astray insteadof guiding it.”

Sterile and UnproductiveNow Tracy goes in for the kill:

“From all this I conclude, that the whole of the publicexpenses ought to be ranged in the class of expensesjustly called sterile and unproductive, and consequentlythat whatever is paid to the state, either under the titleof a tax or even of a loan, is a result of productive

labour previously executed, whichought to be considered as entirely con-sumed and annihilated the day it entersthe national treasury. Once more Irepeat it, this is not saying that thissacrifice is not necessary, and evenindispensable. . . . But [every citizen]should know that it is a sacrifice hemakes; that what he gives is immedi-ately lost, to the public riches, as tohis own; in a word, that it is anexpense and not an investment.”

The upshot? For Tracy it is thatgovernment should be kept small and inexpensive.Note the jab he gives to “the greatest politicians”:

“Finally, no one should be so blind as to believe thatexpenses of any kind are a direct cause of the augmen-tation of fortune; and that every person should knowwell that for political societies, as well as for commercialones, an expensive regimen is ruinous, and that the bestis the most economical. On the whole, this is one ofthose truths which the good sense of the people hadperceived for a long time before it was clear to thegreatest politicians.”

35 J U LY / A U G U S T 2 0 1 0

G o v e r n m e n t a s C o n s u m e r

Even governmentprojects aiming atvalued outcomescrowd out privateefforts that wouldhave been moreefficient.


Isuggested in the May issue that an aerial photo-graph of the border between barren Haiti and theheavily forested Dominican Republic was a predic-

tor of the recent Haitian earthquake devastation(www.tinyurl.com/33w8du7). Not the earthquake,mind you, but the devastation that followed.

The property-rights vacuum that encouragedHaitians to cut trees downwithout replanting alsomotivated them to skimp on construction durability.When the “big one” came,buildings collapsed and tensof thousands died. Incentivesmattered, big time.

A satellite photo of theKorean peninsula provides asimilar border-economicslesson. Taken at night, thephoto shows South Korea litup like a Christmas tree. Tothe southeast, Japan is muchthe same and, to the northand west, China’s glowing,too. But North Korea has just one isolated dot of light.The message: In a vibrant region, North Korea is a fail-ure, especially compared to its brethren just over theDMZ.

Economic statistics confirm the message. SouthKorea is the world’s 15th largest economy. North Koreais an economic coffin, at or near the bottom of allnational economic rankings except misery.Things werenot always this way, however. Some 60 years ago livingstandards were actually higher in the north.

What happened? The short answer is that the SouthKoreans accepted private property rights as an organiz-ing principle for economic activity.The North Koreansshunned such rights, opting for the seeming sureness of top-down economic decision-making. Institutionalchoices trumped Koreans’ common cultural her-itage and language to produce a disparity in living stan-

dards surely unimaginableto those who made thechoices.

The Heritage Founda-tion publishes an Index ofEconomic Freedom, ofwhich the security of pri-vate property is an impor-tant component. Of the179 countries in the 2010index, South Korea is 31stand North Korea is . . . youguessed it, 179th. Eco-nomic data for closed soci-eties like North Korea are sketchy. Nevertheless,Heritage estimates South

Koreans’ average income to be a double-digit multipleof that of their northern counterparts.

The contrast is sobering. But before we get toogushy about South Korean economic institutions, anote of caution is in order. South Korea has long pur-sued “crony capitalism,” where a number of chaebol—large industrial conglomerates, usually controlled by a

B Y T. N O R M A N VA N C O T T

More Border-Picture Economics

T. Norman Van Cott ([email protected]) is a professor of economics at BallState University.

North Korea remains an island of darkness in a vibrant region.

single family—enjoy preferential status with the gov-ernment. Samsung, Hyundai, and LG are three of thebetter-known chaebol. Among the special privileges ofchaebol is access to government finance not open toothers. The effect of such “privileges” is to limit entryof non-chaebol competitors. It also lets them deploy var-ious tariffs and subsidies to keep imports—especiallythose from politically unpopular countries—artificiallyexpensive.

Attempts at market closure are certainly not uniqueto South Korea, but it does make it difficult to labelSouth Korea a wide-open, free-market economy. ThatSouth Korea has experienced prosperity in the pres-ence of such impediments leads statist-types to assertthat its government officials must have “picked thewinners.” How myopic, risk-averse bureaucrats, largelyimmune from the consequences oftheir decisions, can have such insightgoes unexplained.

Success Despite Cronyism

The more important point, how-ever, is that the notion that mar-

ket closure somehow promoteseconomic advancement is fatuous andat odds with all economic logic andevidence.The adage about correlationnot implying causation certainlyapplies here. Market closure, with orwithout a miraculous ability to “pickwinners,” stunts advance, reducing living standardsbelow what they otherwise would be. South Koreansenjoy relatively high living standards despite their gov-ernment’s crony capitalist practices, not because of thepractices, though the families in charge of the chaeboland people pursuing lifetime employment as salarymencertainly get some extra benefits.Absent such practices,overall living standards would be even higher.

At the same time, the fact that the two Koreas are sofar apart in economic institutions and economic out-comes is a useful reminder that living standards don’tjust happen.The goods and services responsible for oursurvival and enjoyment of life must be produced.Theydon’t spontaneously appear like Old Testament mannaor multiply like New Testament loaves and fishes.

The problem is that there’s not enough land, labor,and capital to produce everything people want. Conse-quently, every society must have processes that deter-mine what gets produced and who produces it. Theyardsticks for measuring the effectiveness of theseprocesses are the extent to which people value what isproduced and that this production occurs at minimumcost or sacrifice.

For example, raising beef cattle in downtown Bostonfor American Vegetarian Society conventions fails onboth counts. Not only would the beef be of no value toits intended users, it would also be exceedingly costly interms of other things that could have been produced onthe Boston real estate. It would destroy wealth.

Raising cattle on, say, Montana ranches for NationalFootball League training camps would be at the other

end of the spectrum. Low opportu-nity cost and high consumption valuetranslate into wealth creation.

Private property in a truly freemarket harnesses self-interested sellersand buyers to act as wealth creatorsnot destroyers. First, such sellers willseek out the buyers who value theirproducts most highly, since they willbe willing to pay the most. Second,self-interested buyers will be drawn tolower-cost producers, since they willbe most willing to sell at lower prices.The result is high consumption value

at low cost—more wealth.

Smile Like You Mean It

Lest you think that this process begins and ends inself-interested behavior, note that self-interested

sellers are also constrained to act as if they cared aboutbuyers.To wit, they must offer buyers terms that bene-fit buyers. Otherwise, buyers don’t buy. Likewise, self-interested buyers must act as if they cared about sellersby offering terms that benefit sellers, or sellers don’tsell. Wealth accrues to people on both sides of the transaction.

My idealistic students tell me that acting as if youcare about your counterparts in the marketplace isn’tgood enough. It’s so shallow; we need to really care, say

37 J U LY / A U G U S T 2 0 1 0

M o r e B o r d e r- P i c t u r e E c o n o m i c s

The notion thatmarket closuresomehow promoteseconomic advance-ment is fatuous andat odds with alleconomic logic andevidence.

these students. Put differently, my students are telling methat economic actions should be grounded in benevo-lence and love. It’s a fair comment.What’s the answer?

Interestingly,Adam Smith noted in his 1776 master-piece, The Wealth of Nations, that “In civilized society[man] stands at all times in need of the co-operationand assistance of great multitudes, while his whole lifeis scarce sufficient to gain the friendship of a few per-sons.” It’s not that benevolence and love are incapableof motivating our actions. It’s just that their operativerange is limited by the extent we want to live in aneconomy with the high living stan-dards that follow on a substantial divi-sion of labor and its accompanyinganonymity.

So I tell my students that if theywant to really care, join a commune. Notsurprisingly, they take a rain check.

To think that top-down, czar-likegovernment directives could evenremotely approximate the market’s assignments of pro-duction tasks and consumption benefits is wrongheaded.There is no way so-called economic czars could evercommand the millions upon millions upon millions ofbits of information about buyer valuations and produceropportunity costs for countless numbers of goods andservices. It simply cannot be done.And if a society tries?Lights out! Look again at that satellite photo.

Individual sellers and buyers in free markets have noneed for information on such a cosmic scale. Readilyobserved prices provide each, individually, with theeconomic equivalent of green lights and red lights toguide their activities in wealth-creating directions.Thelights flash green when selling prices rise relative tocosts; they flash red when costs rise relative to sellingprices.

Moreover, and this is key, each seller only needs toknow the price of what he sells and his costs, just aseach buyer only needs to know the price of what she

buys relative to the value she placeson the item. Do sellers have to knowwhy prices are what they are, or whytheir costs are what they are? No. Dobuyers have to know why prices arewhat they are, or why their con-sumption valuations are what theyare? No.

Sellers and buyers respondingindividually to the green and red lights embodied inprices permit these millions of bits of informationabout potential sellers and buyers to get processed intomarket outcomes. Production assignments for a vastarray of goods and services go to their lower-cost pro-ducers and the corresponding consumption benefits goto their higher-valued users. No one knows a lot, butlots of lights go on. Look at that photo again.


T. N o r m a n Va n C o t t

Do buyers or sellershave to know whyprices are what theyare? No.

39 J U LY / A U G U S T 2 0 1 0

B Y J O H N S T O S S E L

Politicians Smother Cities

Give Me a Break!

Ilike my hometown, but I must admit that NewYork has problems: high taxes, noise, traffic. Forbesmagazine ranks my city the 16th most miserable in

America. Ouch! Of course, that makes me wonder:What’s America’s most miserable city?

Cleveland, says Forbes. People call it “the Mistake bythe Lake.” Cleveland, once America’s sixth-largest city,has been going downhill for decades.

Why do some cities thrive while others decay? One reason is thatsome politicianssmother their citieswith the unintendedconsequences of theirgrand visions, whileothers have the goodsense to limit govern-ment power.

In a state thatalready taxes its citi-zens heavily, Cleve-land’s politicians drownbusinesses in taxes.

One result: Since2000, 50,000 peoplehave left the city. Half of Cleveland’s population has left since 1950.

But the politicians haven’t learned. They still think government is the key to revitalization.While Indianapolis privatized services, Clevelandprefers state capitalism. It owns and operates a big gro-cery store, the West Side Market. Typical of govern-ment, it’s open only four days a week, and two of those days it closes at 4 p.m.The city doesn’t maintainthe market very well. Despite those cost savings, thecity manages to lose money running the market. It also loses money running golf courses—$400,000 last year.

Another way that cities like Cleveland cause theirown decline is through regulations that make buildinganything a long, drawn-out affair. Cleveland has 22 different zoning designations and 673 pages of zoningguidelines.

Houston, We Have a Solution

By contrast, Houston has almost no zoning.This per-mits a mix of uses and styles that gives the city vital-

ity. And the paperwork inHouston is so light that abusiness can get going in asingle afternoon. In Cleve-land one politician braggedthat he helped a businessget though the red tape in“just 18 months.”

Randall O’Toole,author of The Best-LaidPlans: How GovernmentPlanning Harms Your Qualityof Life,Your Pocketbook, andYour Future, says Houstondoes have rules, but theyare more flexible andresponsive to citizens’

needs because they are set by neighborhood associationsbased on protective covenants written by developers.

Politicians’ rules rarely change because the politiciansdon’t have their own money on the line. Cleveland’smanagers thought that funding gleaming new sports sta-diums (which subsidize wealthy team owners) and otherprestigious attractions like the Rock and Roll Hall ofFame would revitalize their city.

John Stossel hosts Stossel on Fox Business Network and is the author ofMyths, Lies, and Downright Stupidity: Get Out the Shovel—WhyEverything You Know Is Wrong. Copyright 2010 by JFS Productions,Inc. Distributed by Creators Syndicate, Inc.

Cleveland controls zoning and subsidizes the wealthy by funding bigconstruction projects. It’s lost half its population since 1950.flickr.com/sarah606/

Urban policy expert Joel Kotkin says, “This wholetendency to put what are scarce public funds into convention centers and . . . ephemeral projects is delusional.”

Stadium Strikeouts

But politicians claim that stadiums increase thenumber of jobs.

Not so, says J. C. Bradbury,author of The Baseball Econo-mist:The Real Game Exposed.“There’s a huge consensusamong economists that thereis no economic developmentbenefit to having these stadi-ums,” he says.

The stadiums do createjobs for construction workersand some vendors. But “it’s acase of the seen and theunseen,” Bradbury says,alluding to the nineteenth-century French economistFrédéric Bastiat. “It’s very easy to see a new stadiumgoing up. . . . But what you don’t see is that somethingelse didn’t get built across town. . . . It’s just transferringfrom one place to the other.

“People don’t bury their entertainment dollars in acoffee can in their backyard and then dig it up when abaseball team comes to town. They switch it fromsomething else.”

Stadiums are among the more foolish of politicians’boondoggles.There are only 81 home baseball games ayear and 41 basketball games. How does that sustain a

neighborhood economy?But the arrogance of city

planners knows no end. NowCleveland is spending taxpay-ers’ money on a medical con-vention center that theplanners say will turn Cleve-land into a “Disney World”for doctors.Well, Chicago’s $1billion expansion of thecountry’s biggest conventioncenter—McCormick Place—was unable to prevent anannual drop in conventions,

and analysts say America already has 40 percent moreconvention space than it needs.

Politicians would be better stewards of their cities ifthey set simple rules and then just got out of the way.I won’t hold my breath.


J o h n S t o s s e l

Houston lets neighborhoods control their zoning rules. It has almostfour times as many people as in 1950.

Start your weekday morning with

One click of the mouse … and FEE’s popular news e-commentary will come to your computer five days a week.

Subscribe online: www.thefreemanonline.org or e-mail: [email protected]!

41 J U LY / A U G U S T 2 0 1 0

Book ReviewsTaming the Beloved Beast: How MedicalTechnology Costs Are Destroying Our Health Care Systemby Daniel CallahanPrinceton University Press • 2009 • 288 pages • $29.95

Reviewed by Arnold Kling

Daniel Callahan has written abracing and exasperating book

on health care policy. It is bracing inits realistic assessment of the tradeoffsand dilemmas facing U.S. policy-makers, but exasperating in its assess-ment of the relative merits of usingmarket processes or governmentintervention to resolve these issues.

Callahan, a senior scholar at Yale, makes the follow-ing major points:

1. Americans spend an ever-increasing share ofnational income on health care.

2. Much of that increased spending goes for proce-dures that use advanced medical technology.

3. Medicare recipients are participating in thisspending surge; as a result Medicare cannot besustained financially without substantial changes.

4. European governments control health spendingby restricting supply in the health care industry.

5. To incorporate supply restrictions in the UnitedStates, our cultural values would have to change.

On the last point, Callahan elaborates:

American health care is radically American: individ-ualistic, scientifically ambitious, market intoxicated,suspicious of government, and profit-driven. I putchanging those values within health care in the classof a cultural revolution . . . .

The medical model that needs change encompassesa combination of Manichean and utopian values:that suffering . . . is inherently evil; that death isintrinsically wrong . . . and that endless medicalprogress should be pursued.

Overall, this makes for a much more sober view ofthe health care issue than what was reflected in therecent debate over health care reform. During thatdebate policy wonks made frequent references to“bending the cost curve,” promising to make this apainless process with reforms such as electronic medicalrecords and crackdowns on Medicare fraud.

Callahan argues that “such efforts can be likened toone of the endemic problems of end-of-life care, that ofembracing hope and unlikely treatments and of refusingto grant the obvious fact that the patient is dying.”That is, we don’t know when to give up. Callahan does.

Although Callahan sees it as a serious failing thatmany Americans lack health insurance, he also believesthat those who are insured have excessive coverage. Hispreference, to be imposed by law, would be to baninsurance coverage for many drugs and medical proce-dures he deems wasteful, such as reproductive assistancefor women over 35 and joint surgery for individualsover 65 who want to continue an athletically active life.Callahan views the issue of insurance coverage as aconcern for public policy—saving resources for thethings he regards as most important—not a matter forpersonal choice based on market prices.

In Callahan’s opinion, we Americans spend toomuch of our health care money on the elderly and notenough on younger people. As he puts it, “[A] healthcare system should help young people to become old,but not to help the old to become even older.” He rec-ognizes the role that Medicare plays in distorting thedistribution of health care, by taking income away fromworking-age families and using it to subsidize healthcare for the elderly. Rather than recommend eliminat-ing or reducing this distortion, however, his approachwould be to use government policy to steer healthresources in his preferred direction.

Unsurprisingly, Callahan has minimal faith in mar-kets and maximum faith in government. He writes, “Aregulation-free, unfettered competition offers no rea-sonable possibility of controlling costs.The attraction oftechnology for patients and physicians, abetted by ener-getic and relentless industry marketing, has shown itselfcapable of overwhelming the private sector’s controlefforts.” He continues that the trouble with the freemarket is that it allows individuals to maximize their


own well-being rather than the well-being of “the sys-tem,” therefore compelling government to force “anaccountability that is absent in private sector medicine.”

Thus Callahan paints a picture of the private sectoras a brutal jungle, with suppliers relentlessly forcingtheir expensive technologies on helpless consumers.Adam Smith’s famous observation that we do not needthe benevolence of the baker to put bread on our tableseems to have eluded Callahan. He certainly fails toperceive its relevance to health care.

Meanwhile he takes it for granted that governmentactors are sensitive to the general interest and account-able to the public. I would instead argue that accounta-bility works better in the private sector, where workersare fired for making mistakes, unsuccessful businesseshave to shut down, and investors who make unwisedecisions suffer losses. I’d also note that when politi-cians make wasteful and harmful decisions, they rarelysuffer any adverse consequences.

Taming the Wild Beast shows that market advocatesand interventionists can agree on many features of thediagnosis of the health care dilemma. Still, our prescrip-tions are diametrically opposed, reflecting differences inour understanding of how markets and governmentoperate and the importance of liberty.

Arnold Kling ([email protected]) is the author of Crisis ofAbundance: Rethinking How We Pay for Health Care.

The Invisible Hook: The Hidden Economics of PiratesBy Peter T. LeesonPrinceton University Press • 2009 • 296 pages • $24.95

Reviewed by E. Frank Stephenson

If you had a childhood interest inpirates and a teenage love for eco-

nomics, what would you do as anadult?

If you are George Mason Univer-sity economics professor Peter Lee-son, you write a book on theeconomics of piracy. That book, TheInvisible Hook, is a rollicking good

read—more fun than any person should be allowed tohave without a parrot, a hook, and an eye patch. Lee-

son’s goal, however, is more than merely collectingentertaining pirate anecdotes.

Instead, he argues that the “rational choice [frame-work of economics] is the only way to truly understandflamboyant, bizarre, and downright shocking piratepractices.” Accordingly, as indicated by the subtitle,this book is part of Leeson’s larger and impressiveresearch agenda on privately created law and order.That pirates are a suitable part of such an agendabecomes apparent, Leeson explains, once one realizesthat pirates were stateless (and often violent) peoplewho nonetheless organized crews of 80 or more forplundering expeditions.

Leeson presents his argument in six main chapterssandwiched between introductory and concludingchapters cleverly framed as a management coursetaught by Professor Blackbeard. Chapter two explainsthat pirate ships’ leaders were democratically electedand were constrained by a system of checks and bal-ances. Lest one think rogues and sea dogs were princi-pled Madisonians, Leeson explains that the organizationof ships arose out of pirates’ prior experience on mer-chant ships. Such ships had autocratic, often predatory,captains to protect the investment of the vessels’ absen-tee owners from crew shirking or theft. By contrast,stolen pirate ships had no concern about absentee own-ers and were therefore free to create an organizationalstructure that minimized captains’ abusiveness.

Chapter three explores pirate codes, the constitu-tional framework underlying pirate societies. Thesecodes, which had to be agreed to by all pirates on aship, aligned incentives among pirates and their leadersby having egalitarian pay structures; sought to minimizeconflict on ships by proscribing activities such as gam-bling, bringing women aboard, or drinking belowdecks after 8 p.m.; and specified penalties for transgres-sions. Remarkably, pirates established puritanical rulesto increase crew cohesion in the pursuit of profit, albeitill-gotten.

Leeson next applies the economics of signaling toexplain pirates’ use of the “Jolly Roger” flag. Althoughpirates were willing and capable fighters, conflict riskedbodily harm, damage to their ships, or destruction ofthe pirates’ booty. Hence skull-and-bones flags, whichdistinguished pirate ships from less fearsome state-spon-

43 J U LY / A U G U S T 2 0 1 0

Book Reviews

sored vessels flying national flags, and signaled to poten-tial prey that resistance would be met with death. Theflag thereby served as a cost-minimizing device byinducing merchant crews to surrender rather than fight.

Signaling and reputation-building also help explainthe practice of torture. Beyond scaring merchant shipsinto surrendering, pirates also sought the cooperationof their officers and crew, rather than passive resistancesuch as hiding valuable lucre. They carefully cultivatedreputations for barbarous treatment, which terrifiedcrews into making pirates’ profit-seeking easier. Besidesusing torture to weaken the passive resistance of cap-tives (and occasional acts of arbitrary sadism), piratesalso tortured would-be captors sent by the governmentand abusive merchant captains.

In chapter six Leeson turns his attention to piratecrews, arguing that pirates relied much less on con-scription than popular portrayal would have us believe.Conscription, after all, would threaten the cohesive-ness that pirates sought. It was also unnecessary: The combination of captain cruelty on legitimate ships andhigh remuneration on pirate ships produced a steadystream of would-be swashbucklers. The reason for themisinterpretation, Leeson suggests, is that pirates delib-erately sought to make their voluntary participationappear to be conscription in order to minimize thelegal consequences (likely hanging) should they becaptured. As part of this ruse pirates even staged showsintended to fool onlookers into thinking that captiveswho were willingly joining them were instead beingimpressed.

Leeson also describes another surprising feature ofpirate ships:Though slavery remained common and dis-crimination the norm, pirate crews contained a sub-stantial contingent of black sailors. Not that they wereparagons of tolerance—some of the black sailors wereslaves. Many, though, were free and equal members ofpirate democracies. Leeson explains that slaves, likeconscripts, endanger crew cohesion.The Public Choicelogic of dispersed benefits and concentrated costs maderacial tolerance preferable to slavery. While each piratewould have to divide any surplus generated by slaveswith his crewmates, the costs—increased likelihood ofcapture and hanging if slaves hampered crew unity—were fully borne by each crew member.

Leeson’s book is magnificent. It also carries animportant implication: If rogue pirates could organizethemselves into relatively peaceful societies, then per-haps modern people should look less to coercive Statesolutions and more toward emergent order arising fromvoluntary human interactions.

Frank Stephenson ([email protected]) chairs the department ofeconomics at Berry College in Rome, Ga.

Plunder! How Public Employee Unions Are RaidingTreasuries, Controlling Our Lives and Bankruptingthe Nationby Steven GreenhutThe Forum Press • 2009 • 316 pages • $18.95

Reviewed by George Leef

Karl Marx was right—sort of.He was right in saying that

society is riven by class warfare, buthe got the classes wrong. It’s not thecase that capitalists exploit workers,but rather that tax consumersexploit taxpayers.

That truth has long been kepthidden from the average American

by deceptive propaganda about the workings of democ-racy and the supposed nobility of “public service.” Butpeople are starting to comprehend. Articles in majornewspapers have recently disclosed the crucial fact thatgovernment employees are generally paid substantiallymore than comparable private-sector workers and enjoymore generous and secure benefits. And now StevenGreenhut’s Plunder! will no doubt fan the flames ofresentment against the political class for its constant andstepped-up picking of the pockets of productive people.

Greenhut, a California-based writer (whose previ-ous book, Abuse of Power, I reviewed in the July 2005Freeman, www.tinyurl.com/33b3zu4) shows that gov-ernment employees, especially unionized ones in stateswhere unions have great political clout, are living it upon wealth extracted from the rest of the population viataxation.To make matters worse, politicians keep grant-ing them pay and benefit increases even when the cur-rent levels clearly will lead to unmanageable deficits.


Book Reviews

For some places the wolf is already at the door.Thecity of Vallejo, California, recently declared bankruptcybecause tax revenues no longer cover its extremelyheavy personnel costs, including a city manger whosetotal compensation package is $400,000 and a 190-per-son fire department, half of whom earn more than$170,000 per year.The city is decrepit, but the “publicservants” go on bleeding the taxpayers white.

Not only are these people paid astoundingly highsalaries, but they also can retire at an early age and col-lect 90 percent of their final salary for life. On top ofthat, many claim purportedly work-related disabilities,shielding half their generous benefits from taxation.There are public boards to evaluate those claims, but(naturally) they are dominated by the public unions andrubberstamp nearly every one.

Politicians of both major parties go along with theplunder. Democrats, who receive vast campaign “con-tributions” (unionized workers actually have no choice;their money goes wherever union officials dictate) havelong favored schemes to redistribute wealth as long as itleads to votes. Republicans have more recently gottenaboard. Most of them can’t resist the “law and order”cachet that comes from helping police, firefighter, andprison-guard unions get what they want. Both partiestreat the rare politician who dares to buck the systemlike a leper.

Greenhut gives his readers a superb lesson in PublicChoice theory. The subject of overpaid, coddled gov-ernment employees is a pure case of concentrated bene-fits triumphing over dispersed costs in a democracy.

Whenever the gravy train comes under attack, theunions and their political allies counterattack with apowerful arsenal.A particularly egregious lie they resortto is that their high, early pensions are justified becausepolice officers and firefighters tend to die at an earlyage. Greenhut produces evidence conclusively refutingthat claim. Truth, however, doesn’t matter. The unionsand their allies go right on making this and other falsestatements to keep the public complacent. Anotherdevious tactic is to seek out auditors who will use cre-ative accounting to mask the extent of the underfund-ing problem.

Greenhut specifically targets the public educationsystem, so high in cost and so low in productivity.Tax-

payers are forced to pay huge amounts of money to propup a socialistic monstrosity that many of them havenever had anything to do with.The education establish-ment and teachers’ unions never stop demanding more,with syrupy messages that it’s all “for the kids.”

The outrages are not just financial, either. Greenhutshows that our “public servants” don’t just live high onthe hog at everyone else’s expense.They also connive toput themselves above the law. In California, for exam-ple, many government employees are eligible for speciallicense plates that identify them as part of the “family”and thus immune to punishment for traffic violations.Moreover, there is something akin to the Mafia’s codeof silence that lets police and guards get away with actsof violence that ought to land them in jail.

Greenhut sums matters up, writing, “We’ve seen amassive transfer of wealth from the private sector to thepublic sector, from taxpayers to tax consumers. Theresult is a class of coddled, overpaid and underworkedpublic ‘servants’ whose pay and retirement levels cannotbe sustained without cutbacks in public services andhigher taxes.”

George Leef ([email protected]) is book review editor of The Freeman.

Whatever Happened to Thrift? Why AmericansDon’t Save and What to Do about Itby Ronald T.WilcoxYale University Press • 2008/2009 • 176 pages • $30.00hardcover; $20.00 paperback

Reviewed by Robert P. Murphy

Keynesianism is back in vogue,and prominent economists

are dusting off their discussions of the “paradox of thrift.” So amidthe apologies for bigger govern-ment deficits, it is refreshing to readRonald Wilcox’s Whatever Happenedto Thrift? For those interested in the subject of saving, this volume is

a good read.Too often when I have read handwringing over

“the” savings rate, the worrier doesn’t feel the need to

45 J U LY / A U G U S T 2 0 1 0

Book Reviews

explain why we should care about savings in the firstplace. After all, the consumption/saving tradeoff is areflection of individual preferences. If you want to savemore, fine, go ahead—but don’t force your views onthe rest of us!

Wilcox, a professor at the University of Virginia’sDarden School of Business, easily handles such anobjection from standard economic theory. He cites asurvey which found that 68 percent of workers thoughttheir savings rate was too low, then says, “Even if wetake [the economist’s view], the fact that many peoplereport feeling uncomfortable with their level of savingsand seek ways to increase it should give us pause.” If thereader gives him a chance,Wilcox shows that he is notsome bossy sermonizer. On the contrary, he shows thatthere are reasonable senses in which we can say,“Amer-icans don’t save enough.”

Take the issue of Americans’ financial literacy. In asurvey Americans over the age of 50 were asked toevaluate this claim: “Buying a single company stockusually provides a safer return than a stock mutualfund.” Only 52 percent considered the statement false.One doesn’t have to be a paternalistic busybody to bedisturbed by such findings.

If we concede that many Americans are financiallyilliterate, then it is a simple step to concluding that theyprobably don’t save enough. After all, the cost of sav-ing—forgone consumption in the present—is obvious,whereas the benefit (higher consumption in the future)is remote.The virtues of discipline, abstinence, and thriftall work together. Someone who is ignorant of basicfinance is likely to err on the side of saving too little.

Of course, even if one thinks Americans ought tosave more, it doesn’t follow that the government shouldtinker with tax policy to encourage a change in behavior.Sure, switching to a consumption tax might help peo-ple save more, but is that really any business of the government?

Yet that’s too glib a dismissal of the problem, forthe income tax really does introduce a bias into theconsumption/savings decision. After receiving histake-home pay, a worker can either spend the money

now “at par” or use the after-tax income to buy aninvestment such as a bond or share of stock. Thereturn on these investments reflects the tradeoffbetween present and future consumption. And yet theincome tax mutes the attractiveness of future con-sumption because any dividends from the investmentare taxed anew in the following period. For tax andpsychological reasons, Wilcox declares, “[S]upplantingthe current federal income tax system with a broad-based consumption tax is the single most potent pol-icy tool for increasing the savings rate of U.S.households.”

Of course, it would be naïve to think that a meretechnical adjustment to the tax code can provide asound footing to the economy. The real threat to theeconomy is how much the government seizes inresources year in, year out. Moreover, it is highly unre-alistic to think that politicians would leave incomesalone in exchange for a new federal tax on consump-tion.We should get rid of the income tax, with its anti-saving bias, and replace it with no new or increasedtaxes.

Another problem with the book is that Wilcox’ssuggestions “start with the government because soundpolicies there can pave the way for enlightened private-sector solutions as well.” For example, he recommendsthat the government “reinvigorate the marketing ofU.S. Savings Bonds.” But why devise new or improvedschemes to increase lending to the federal government,which squanders any resources it touches? Rather thanfocusing so much attention on government, Wilcoxshould have devoted his efforts to persuading his fellowcitizens that a higher rate of saving would be beneficial.

All in all, Wilcox’s book provides a quick yetnuanced summary of the relevant ideas and statistics invarious fields in order to gain perspective on the Amer-ican “savings problem.”Although its proposed solutionsoften fall short, the book identifies an importantnational problem.

Robert P. Murphy ([email protected]) is an adjunct scholar withthe Ludwig von Mises Institute and author of The Politically IncorrectGuide to Capitalism.


Book Reviews

B Y C H A R L E S W. B A I R D

Unions Lose Respect

The Pursuit of Happiness

Ihave often argued that American labor unionsenjoy much more respect than they deserve. InFebruary the Pew Research Center released the

results of its latest nationwide survey of public opinionregarding labor unions (www.tinyurl.com/y4vuv2s[PDF]). It seems that, at last, labor unions are sufferingsignificant losses of respect.

Table 1 shows the percentage of Americans whogave unions favorable and unfavorable ratings in theyears 2001, 2005, 2007, and 2010.These results are con-sistent with earlier Gallup polls that showed that in2008, 59 percent of Americans approved of unionswhile in 2009, only 48 percent approved.They are alsoconsistent with a Rasmussen poll released in March2009 that showed that only 9 percent of union-freeworkers would prefer to unionize.

Table 2 shows the percentage of Americans whoagreed and disagreed with the proposition that “unionsare necessary to protect workers” in the years 2003,2007, and 2009. While the figures for 2009 show thatmore study is needed on this question, the trends areencouraging.

Table 3 shows the percentage of Americans whoagreed and disagreed with the proposition that “unionshave too much power” in the years 1999 and 2009.Thistrend is also encouraging.The perception that govern-ment has too much power is growing. Since govern-ment-employee unions (GEUs) are becoming thedominant face of American unionism, I expect evenmore people to conclude that unions have too muchpower.

The Winter 2010 issue of The Cato Journal(www.tinyurl.com/y4d4mc7) provides excellent read-ing on this matter. It consists of 12 articles addressing the question “Are Unions Good for America?” Theauthors argue persuasively that the answer is no. In theconcluding article I imagine what might replace theNational Labor Relations Act (NLRA) when unionshave lost enough respect to make it possible to repealthat law.What follows are some highlights of the otherpapers.

Armand Thieblot surveys American union historyand concludes that, because labor law bestowed coer-cive powers on unions, “many individual union mem-bers simply found themselves beholden to a differentset of bosses, who took part of their pay for dues.”Under current union law, unions have almost run outof rent-seeking opportunities in the private sector.They now have turned to two types of political rent-seeking. They have diverted most of their organizingenergy to the capture of government employees (51.3

47 J U LY / A U G U S T 2 0 1 0

Charles Baird ([email protected]) is a professor of economicsemeritus at California State University at East Bay.

Year Favorable Unfavorable

2001 63% 28%2005 56 332007 58 312010 42 41

Year Agreed Disagreed

2003 74% 23%2007 68 282009 61 34

Year Agreed Disagreed

1999 52% 40%2009 61 33

Table 2: “Unions are necessary to protect workers.”

Table 1: Americans’ Opinions of Unions

Table 3: “Unions have too much power.”

percent of all union members are now governmentemployees), and they lobby for even more coercivepower over private-sector workers—for example, cardcheck. Thieblot wonders “whether there can be anyway to stop or divert substantive union control over theeconomic activities of the entire country.” In my view,President Obama’s appointment of Andy Stern, formerpresident of the SEIU, to his National Commission onFiscal Responsibility and Reform makes Thieblot’spoint.

Project labor agreements (PLAs) and prevailing-wage laws are two other forms of political rent-seek-ing. PLAs are schemes to strip away any advantagesthat union-free construction firms have over theirunion-impaired rivals when bidding on constructionprojects by requiring union-free firms to pay unionwages and benefits, use union hiringhalls to obtain workers (even workerswho are already their employees), andsubmit to union work rules. PLAsalso force all workers to pay uniondues and to contribute to union pen-sion plans. They are usually imposedby state and local governments, butby executive order Obama has forcedthem on federal construction projects. David Tuerckcritically examines the arguments unions use to justifyPLAs and finds them all spurious. On average theyraise the cost of government construction projects12–18 percent.

Prevailing-wage laws also apply to taxpayer-fundedconstruction projects. The federal Davis-Bacon Act(1931) was the first such imposition. Since then 31states have adopted their own versions. These lawsrequire all firms that work on government constructionprojects to pay union wages and benefits.Thus union-free firms cannot compete on the basis of worker com-pensation. Freeman book review editor George Leefdissects all the arguments that unions have used tolobby for such laws and examines the historical recordof their effects. He concludes that they all should berepealed.

Randall Holcomb and Jim Gwartney explain howAmerican labor law has resulted in significant declines

of economic freedom and prosperity. The authorsexplain the precipitous decline of private-sector uniondensity and the disastrous effects of American unions inthe auto and railroad industries, and they provide usefulinternational comparisons.

Opportunistic behavior by private-sector unionseventually results in capital flight from heavily union-ized cities. Capital flight causes declines in both popu-lation and real income in such cities. Stephen Waltersanalyzes the carnage, paying particular attention toDetroit.

According to the Pew survey, the demographicgroup most supportive of unions in America is blacks.Paul Moreno gives an extensive account of how unionshave long “used racial discrimination as an economicweapon.” While blacks are no longer excluded from

unions, many of them are subjectedto more subtle forms of discrimina-tion through such union-based insti-tutions as seniority rules.

The “high-wage doctrine” is thebelief that unemployment comesfrom lack of spending, which is inturn the result of insufficient moneywages. So when faced with unem-

ployment the remedy is to increase money wages.Those who believe this silliness and also think thatunions increase money wages are likely to approve ofunions. Lowell Gallaway destroys the high-wage doc-trine and in doing so eliminates one of the most effec-tive arguments in favor of unions.

Unions used to endorse free trade because it lowersworkers’ cost of living. Now unions oppose it ostensi-bly to protect American jobs. Daniel Griswoldexplains how free trade actually increases jobs andworker compensation. The problem for unions, ofcourse, is that under free trade “unionized firms justfade away.”

Unions abhor right-to-work laws because in thosestates that have them, unions cannot force workers topay union dues. Moreover, unions find it more difficultto organize in those states. Richard Vedder explainshow right-to-work laws promote liberty, prosperity,and quality of life.


C h a r l e s W. B a i r d

Unions lobby forever more coercivepower over private-sector workers.

the freeman 07-08-2010

Documents

good economists

rise of government

goldman sachs

injectedneeded information

housing boom

freemarket medicine

robert higgs34 peripatetics

borderpicture economics