Onward and Upward! Bet on Capitalism—It Works

O’Neil Center 2015-16 Annual Report 1

2015-16 Annual Report • William J. O’Neil Center for Global Markets and Freedom • SMU Cox School of Business TABLE OF CONTENTS

A Message from the Dean...... 1

Onward and Upward!...... 2

‘The Bet’—Bigger than Two Men...... 5

Data Divide Optimists, Pessimists ...... 12

2015-16: Year in Review...... 17

The William J. O’Neil Center for Global Markets and Freedom was founded in 2008 with an initial grant from William J. O’Neil, a 1955 SMU business school graduate, and his wife Fay C. O’Neil. Its broad mission is the study of why some economies prosper and others do poorly, focusing on two critical issues for the 21st Century economic environment— globalization and economic freedom. The center’s programs promote understanding of how capitalism works among the general public, policy makers, business managers and the next generation of business leaders. To these ends, the O’Neil Center teaches SMU Cox students, conducts economic research, publishes economic reports, sponsors conferences and educates the public through the media and speeches.

SMU will not discriminate in any program or activity on the basis of race, color, religion, national origin, sex, age, disability, genetic information, veteran status, sexual orientation, or gender identity and expression. The Executive Director for Access and Equity/ Title IX Coordinator is designated to handle inquiries regarding nondiscrimination policies and may be reached at the Perkins Administration Building, Room 204, 6425 Boaz Lane, Dallas, TX 75205, 214-768-3601, [email protected].

Design by WiswallMcLainDesign A Message from the Dean

Dean Niemi

Our views of the world are heavily page focuses on this perennial divide 2015-16. Since its founding in influenced by the environment between optimists and pessimists. 2008, the center has remained true we live in. We here in Texas feel O’Neil Center founding director to its mission of studying why some pretty good about the economy W. Michael Cox and his co-author economies prosper and others remain because we’ve seen steady growth Richard Alm answer a question poor, building an outstanding record in employment, incomes and that’s growing more pressing in of scholarly research, publications, population. For the same reason, these uncertain times: Is American on-campus conferences, guest optimism marks a handful of other capitalism headed into inevitable speakers, teaching and speeches in states, mostly in the Southeast and decline, as so many pessimists claim, Texas and beyond. This past year, the Mountain West. or will human ingenuity, spurred by the O’Neil Center took several big In other parts of the country, our free-enterprise system, continue to steps forward by recruiting a scholar decades of job losses and declining deliver the progress and prosperity that who focuses on state-level economic population have left many Americans marked this country for most of its freedom, launching a research somewhere between apprehensive history? Cox and Alm make a case for project on the Texas economy and and downright pessimistic. It’s not optimism, supported by hard evidence starting a program to help Texas because they’re all that different and anchored by the inherent nature teachers improve their teaching of from Texans; it’s because the of capitalism. The essay gives all of us free enterprise. economic realities they encounter a lot to think about. every day give them little reason to The Year in Review section expect a brighter future. reports on the O’Neil Center’s Albert W. Niemi, Jr. The essay that starts on the next accomplishments in academic year Dean, Cox School of Business

O’Neil Center 2015-16 Annual Report 1 Onward and Upward! Bet on Capitalism—It Works

By W. Michael Cox and Richard Alm

In the early 1980s, two college The Bet. The actual wager amounted in a bit, but settling up didn’t end professors faced off in a highly public to a few hundred dollars in cash, but the feud between pessimists who battle about American capitalism and it carried much higher stakes in the see capitalism as a destructive force the future of humankind. Paul Ehrlich currency of intellectual prestige. and optimists who see it as the best predicted the world, with too many The Bet took place in 1980—a time chance for expanding human welfare, mouths to feed, would soon run out when the intellectual climate tilted in especially among the poor. of resources, leading to a bleak future favor of Ehrlich, and Simon initially Today, pessimists seem once again of growing scarcity and widespread struggled to be heard. It focused on the ascendant, channeling Paul Ehrlich starvation. Julian Simon offered inflation-adjusted prices of five industrial with warnings about a future of a far more upbeat view, a future metals over the upcoming decade as a growing scarcity and potential of abundance with higher living test of whether the world was heading catastrophe as climate change raises standards for more and more people, toward scarcity or abundance. sea levels and temperatures around the thanks to almost limitless potential If the metals’ prices rose, it would globe. The optimistic voices—heirs to of human ingenuity operating in a signify the world was running out of Julian Simon—press on, making the capitalist system. important commodities, vindicating case that capitalism, if unshackled, For more than a decade, the two Ehrlich’s pessimistic view of the will provide a better life for more of professors slugged it out in the arena future. If the prices of the five metals us. They point to the 1 billion people of public opinion, largely through declined, it would indicate that around the world who have risen a series of books and articles, the humans had produced more than out of extreme poverty as China, academics’ weapons of choice. Along enough to meet growing demand, India and other countries embraced the way, they made their disagreement supporting the optimistic view that capitalism in recent decades. personal with a bit of impromptu Simon championed. The Bet didn’t resolve the issue of political theater that history knows as We’ll tell you who won The Bet scarcity or abundance partly because

2 O’Neil Center 2015-16 Annual Report of limitations imposed by its small and specialization in market economies savaged capitalists for plundering the sample of five metals, single decade of made both individuals and societies working class—although, somewhat data and muddled concept of how to better off. In Smith’s view, progress was ironically, he had an optimistic side, calculate real prices as a measure of possible in a capitalist system. proclaiming a future of material human progress. We now revere Smith as the founder abundance. It just wouldn’t arrive, “Onward and Upward!” takes a of modern economics, but it wasn’t Marx declared, until capitalism had fresh look at The Bet, expanding it long before the pessimists raised been eradicated from the Earth. to include more goods and services, their objections. Thomas Malthus The critics of capitalism remained extending the time period and using published An Essay on the Principle vehement, but the Industrial more precise concepts to gauge scarcity of Population in 1798, arguing that Revolution hurtled forward, bringing or abundance. Recasting the Ehrlich- population would grow to exhaust with it the greatest material progress Simon wager in this way will allow any increases in the resources that in human history. According to today’s Americans to see for themselves sustain life, condemning the mass Angus Maddison, global real income whether it’s wise to bet on capitalism. of mankind to a meager existence at per capita was just $615 a year in subsistence wages. 1700—less than $2 a day. Today, it’s A Long-Simmering Dispute David Ricardo let some sunlight 12 times higher at more than $7,600. into Malthus’ gloomy scenario by Under its capitalist system, the Does capitalism work? The rivalry asserting that wages could rise above United States did quite a bit better, between optimists and pessimists on this subsistence when new investment or with average real income increasing question goes back to the earliest days technology pushed up productivity 33-fold from $1,257 in 1800 to more of economic thought. In 1776, Adam and pay, increasing the demand than $40,000 today. Smith’s The Wealth of Nations struck a for labor faster than its supply. A Rising incomes fueled optimism hopeful note by focusing on how trade generation after Ricardo, Karl Marx about capitalism, but the relative

O’Neil Center 2015-16 Annual Report 3 prosperity didn’t silence the pessimists. “The foundation of Simon’s optimism was a conviction In the waning decades of the 19th Century and the first years of the 20th Century, that markets will spur human beings to increase the America’s Progressives campaigned for government intervention to remedy the supplies of resources that grow scarce or develop ills they associated with markets—from industrial concentration and instability substitutes that are cheaper and more plentiful.” to child labor and unsafe products. Pessimism spreads in hard times, Making ‘The Bet’ was a conviction that markets will so it’s not surprising that the Great spur human beings to increase the Depression of the 1930s cast a dark Ehrlich burst into the spotlight in supplies of resources that grow scarce cloud. Bad government policies had a 1968 with his book The Population or develop substitutes that are cheaper lot to do with the economic collapse, Bomb, which revived Malthus’ thesis and more plentiful. The Ultimate but British economist John Maynard that population would overwhelm Resource, the title of one of Simon’s Keynes and others ushered in a new available resources, especially food. books, captured his faith in the power age of government meddling in an The consequences, Ehrlich warned, of markets and minds to develop better economic system they now regarded would be widespread famine and a and cheaper ways to meet the needs of as fatally flawed. collapse of global living standards, a growing population. In effect, Simon After World War II, the United starting in the 1970s. The only way tells us that human beings are different States entered into a new era of to avert this catastrophe would be from other animals. prosperity. A sprawling American government policies and social norms Ehrlich and Simon differed widely middle class could afford houses, that limited population growth. in how they saw the world and human cars, televisions, vacations and Ehrlich’s reasoning was simple and beings’ place in it—one pessimistic, other trappings of the good straightforward, especially for a biologist the other optimistic. Their views life. Voices rose to celebrate the trained to think about the interaction of could never be reconciled, and by economic progress as a triumph of species and their environments. When the late 1970s the two professors capitalism—most notably Milton it came to the natural limits imposed had become increasingly bitter rivals Friedman, the highly influential by finite resources, he asserted, human in a contest to shape public opinion. author of Free to Choose. In his being were no different than other What started as an academic debate wake came such scholars as Thomas animals. Ehrlich appreciated that eventually figured into national Sowell and Walter Williams. technology could raise productivity and politics and the 1980 race for the The post-World War II era’s allow the economy to support more White House (see Box 1). champions of free enterprise people, but he thought the advances No matter how eloquently argued, didn’t go unchallenged. Amid the could never stave off a calamity he opinions about future scarcity and unprecedented abundance, pessimists regarded as inevitable. abundance were unlikely to change continued to espouse negative views Julian Simon, then an economist many minds; what Simon needed was of capitalism, shifting their reproach at the University of Illinois, rejected an objective way to prove he was right. from subsistence wages to such issues the idea that rising population would Scarcity lies at the core of economics as poverty amid plenty, prosperity’s doom humanity. In his mind, people as the reason why we have to pay for empty consumer culture and the were a blessing not a curse. Resources most goods and services. In markets, growing threat of industrial pollution. weren’t fixed; quite the opposite, prices rise and fall in response to The environmental movement’s history since the time of Malthus changes in supply and demand. So rise in the 1960s provided the stage had shown that innovation could Simon quite naturally hit on prices for Paul Ehrlich, then an obscure overcome scarcity and raise living as a way to gain some ground in his University of California at Berkley standards for the masses. dispute with Ehrlich and his allies. biologist specializing in butterflies. The foundation of Simon’s optimism Simon challenged his adversaries

4 O’Neil Center 2015-16 Annual Report BOX 1

“We must rapidly bring the “The most important benefit world population under of population size and growth control, reducing the growth is the increase it brings to the rate to zero or making it stock of useful knowledge. negative. Conscious regulation Minds matter economically as of human numbers must be much as, or more than, hands achieved.” or mouths.” Paul Ehrlich Julian Simon ‘The Bet’—Bigger than Two Men

Disputes between college professors rarely spill out growth as damaging or the prospect of an end to of academia and into Americans’ living rooms. One progress. He joined the fight in earnest in 1980, with an that did involved Paul Ehrlich and Julian Simon, who article in Science magazine that attacked the prevailing squared off from the late 1970s to the 1990s. Two orthodoxies of finite resources and ecological limits. compelling and combative protagonists tackling high- The Ultimate Resource in the title of his 1981 book stakes issues struck a chord with the general public. referred to human beings, with their inexhaustible The Population Bomb, Ehrlich’s best-seller that capacity for developing technologies that make people warned of the looming cataclysm of a world running better off and overcome scarcity. short on the resources needed to sustain life, came Simon started as that lonely voice in the wilderness. out in 1968, just as environmentalism was gaining Moving from downstate Illinois to Washington, D.C., momentum in mainstream America. An engaging he rose to prominence by defending capitalism with and witty personality, Ehrlich became the celebrity gusto, writing prolifically and matching Ehrlich’s flair face of the movement, speaking widely, engaging the as a champion of his ideas. He won a devoted following media and even appearing with Johnny Carson on among a new generation of economists and politicians The Tonight Show. who favored free enterprise over bigger government. Scholars had worried about overpopulation for If the 1970s were Ehrlich’s decade, the 1980s decades, but Ehrlich and his allies had the good belonged to Simon. In the 1980 election, Ronald Reagan fortune of perfect timing. The energy crisis of the wrested the White House from Carter, campaigning on 1970s gave Americans a foreboding sense of scarcity. a Morning in America theme that envisioned a future of In 1972, the Club of Rome’s Limits of Growth report economic growth and limitless possibilities. painted a doomsday scenario of industrial collapse, At age 84, Ehrlich is president of Stanford rampant pollution and cratering population. The University’s Center for Conservation Biology, still Global 2000 Report to the President, released in insisting that overpopulation will lead the world to 1980, was just as dismaying. The spread of Zero ruin. Simon died in 1998, but his admirers still cite Population Growth chapters testified to Ehrlich’s his optimistic ideas about capitalism’s penchant for ability to galvanize the public. progress. So in a very real sense the Ehrlich-Simon The gloom and doom percolated into politics. debate remains with us—one side seeing a world Elected in 1976, President Jimmy Carter fully rushing headlong toward scarcity and collapse and embraced the zeitgeist of a future of scarcity and limits. another countering that capitalism will continue to Julian Simon simply couldn’t accept population deliver better living standards to more people.

O’Neil Center 2015-16 Annual Report 5 Bringing ‘The Bet’ Up to Date the results would suggest increasing abundance and Ehrlich would pay. EXHIBIT Julian Simon won the wager on the inflation-adjusted prices of five metals from 1980 to 1990. Continuing The Bet through 2015, Simon still would In October 1990, Simon opened 1 have won most of the time—but by smaller margins. The five metals’ an envelope to find a check from prices spiked in 2007 and 2011 over the past decade, and Paul Ehrlich Ehrlich for $576.07, accompanied would have prevailed in those two years. by a calculation of inflation-adjusted Price Index: 1980 = 100 prices for the five metals over the past 120 decade. Over all, the real price of the metals basket had fallen more than 50 Ehrlich Wins percent. Tin was down 70 percent; 100 Simon Wins chromium and copper also became The Bet Ends 1990 cheaper—all in a decade in which world population rose by 800 million. 80 77.6 Weighted Average CPI-Adjusted Prices of Five Metals* Making ‘The Bet’ Better 60 Ever since Ehrlich paid up, optimists have celebrated Simon’s winning The

40 Bet as confirmation that capitalism tends toward abundance rather than scarcity. Not everyone accepted

20 the verdict, suggesting that Simon might have just been lucky in picking *Tin, copper, nickel, chromium, tungsten a decade of unusually weak metal

0 prices. What happened in the 1980s 1980 1985 1990 1995 2000 2005 2010 2015 might not hold for other times—a testable hypothesis. to a simple wager on the future prices nickel, chromium and tungsten. The Scholars have simulated The of a few commodities. He’d even let prices of these metals had risen in the Bet over different time spans, and the pessimists pick which ones. Rising 1970s, so the doomsayers went into Simon doesn’t always emerge the prices would point to increasing scarcity. The Bet feeling confident. victor. Writing for the Property and Falling prices would signal increasing The winner would be determined Environment Research Center, David abundance. Vexed at Simon’s needling, by the difference between the $1,000 McClintick and Ross B. Emmett ran Ehrlich and his allies decided to accept starting value and the five metals’ The Bet for each decade of the 20th the wager in October 1980. worth a decade later, adjusted for Century, concluding that Simon They agreed to start with $1,000 inflation. If the real prices rose, it would have won in only five of them— allocated equally to five metals chosen would point to increasing scarcity, and the 1900s, 1910s, 1940s, 1980s and by the Ehrlich team—tin, copper, Simon would pay. If they declined, 1990s. Katherine A. Kiel, Victor A.

Tin Copper Nickel Chromium Tungsten

6 O’Neil Center 2015-16 Annual Report Matheson and Kevin Golembiewski, resources. Getting a read on scarcity trouble of acquiring it. What is bought all of them then at Holy Cross, found or abundance requires an absolute with money … is purchased by labor.” that Ehrlich would have won slightly standard—units of human labor. The Bet should be scored in work- more than 60 percent of the 98 10- If every product required 10 percent hour prices—the hours and minutes year intervals between 1900 and 2007. more human labor, relative prices it takes an average worker to earn the Commodities prices remained low would not change. Yet, workers would money required to buy something. in the 1990s but spiked after 2005. produce 10 percent less each hour and Work-hour prices are typically based Extending The Bet a quarter century grow poorer in terms of what their on average hourly wages—but beyond 1990 shows that Simon still time could buy. Now consider the these data have a flaw. They don’t would have won in 2015—but by a opposite case—every good requiring capture non-cash benefits, which are smaller margin than in the 1980s (see less labor by the same amount. Once becoming a bigger share of what a Exhibit 1). He’d have won if the wager again, relative prices wouldn’t fall, but typical worker earns (see Exhibit 2). had ended in most other years after workers would be able to consume in The data on total compensation 1990. However, Ehrlich would have greater abundance. include wages and benefits, and they’re come out on top by a few dollars if Adam Smith showed us the real a more accurate way to calculate work- The Bet had ended in 2007 or 2011, meaning of real. He recognized that hour prices because they incorporate all two years marked by particularly sharp money wasn’t the ultimate measure the rewards from work. For the average increases in commodity prices. of the cost of goods and services: “The U.S. worker, inflation-adjusted total Having the winner vary from one real price of everything … is the toil and compensation rose steadily from $24.68 period to another leaves The Bet’s results frustratingly ambiguous. However, the original wager on the Benefits Gap Growing Today’s working Americans are receiving a larger part of their incomes 1980s and the subsequent simulations EXHIBIT in the form of benefits—such as health care and retirement plans. Non- were based on misconceptions about wage earnings rose from 19 percent of wages in 1951 to 44 percent in the best way to adjust for inflation 2 2015. Including these benefits provides the best gauge of the rewards and properly measure the five metals’ from each hour of work. real prices. Making The Bet better Hourly rates, $2015 might make its meaning clearer. $35 Money prices generally rise over time—so the dollars and cents we $30 spend today don’t buy as much as they did yesterday. The common practice for dealing with this involves using the $25

Consumer Price Index (CPI) or other Benefits deflator to adjust for the fluctuating $20 value of money—and The Bet and its reconstructions followed that script. Adjusting for inflation in this way $15 tells us whether the prices in the five- metal basket have risen more or less Wages than the general rate of inflation. $10 However, finding that one good becomes more or less expensive in $5 terms of another isn’t the best way to determine whether the world has been running short of vital 0 1951 1959 1967 1975 1983 1991 1999 2007 2015

O’Neil Center 2015-16 Annual Report 7 an hour in 1980 to $32.88 in 2015. “Since 1990, the work-hour prices of The Bet’s five Over time, work-hour prices of most goods and services fall faster metals fell almost twice as fast as the CPI-adjusted than CPI-adjusted prices because prices. In work-hour terms, Simon wins The Bet in employee compensation tends to rise faster than the overall price index. every year from 1980 to 2015.” Since 1990, the work-hour prices of with 20 metals than with five metals. As with the basket of 20 metals, we The Bet’s five metals fell almost twice Metals aren’t the only commodities find one outlier that didn’t become as fast as the CPI-adjusted prices that might be relevant in reaching cheaper in time at work—apples still (see Exhibit 3). In work-hour terms, a verdict on scarcity or abundance. cost what they did in 1980 (see Exhibit Simon wins The Bet in every year Indeed, Malthus and Ehrlich focused 5). The rest of the foods meet the test from 1980 to 2015, removing the primarily on food in drawing their of greater abundance. Work-hour ambiguity from the results. dim views of mankind’s prospects. prices fell by 50 percent or more for So we took a look at work-hour potatoes, oats, wheat, soybeans, corn, Making ‘The Bet’ Broader prices of 15 common foods, plus an beans, rice, peanuts, milk and pork. assortment of other commodities Among the non-food commodities, The Bet’s other key shortcoming that, broadly speaking, contribute to cotton fell by 75 percent in work- is its narrow base of just five metals. the availability of clothing, shelter, hour prices. Coal and oil were down They account for only a small slice utilities and transportation. by nearly 60 percent. of the economy, and their prices might not be representative of what’s happening in the broader ‘The Bet’ in Work-Hour Prices Using work-hour prices for the five metals, Simon would win every year commodities markets. Enlarging the EXHIBIT since The Bet began in 1980. Despite spikes in 2007 and 2011, work- bundle of metals to 20 is a good first hour prices declined by almost 42 percent over those 35 years (blue step toward increasing confidence in 3 line). Continuing the wager on its original terms would result in a real the implications of The Bet. price decline of 22 percent (black line). Aside from mercury, the work-hour Price Index: 1980 = 100 prices of the 15 added metals look a lot 120 like the five metals that Ehrlich chose in 1980. Overall, the work-hour prices Ehrlich Wins of the 20 metals fell nearly 50 percent 100 from 1980 to 2015 (see Exhibit 4, top Simon Wins The Bet panel). Cadmium, cobalt, titanium Ends 1990 and silver had the biggest declines in 80 real prices—all becoming more than Weighted Average 77.6 CPI-Adjusted Prices of Five Metals* 75 percent cheaper. What would happen if Ehrlich and 60 58.2 Simon had specified this basket of 20 metals? The overall result of the five- metal scenario holds: Simon wins The 40 Bet in just about every year in terms Weighted Average of what really matters—work-hour Work-Hour Prices of Five Metals prices (see Exhibit 4, bottom panel). 20 With 2015 as the payoff date, Simon’s *Tin, copper, nickel, chromium, tungsten margin of victory over Ehrlich would 0 have been 4.5 percentage points larger 1980 1985 1990 1995 2000 2005 2010 2015

8 O’Neil Center 2015-16 Annual Report Bigger Basket of Metals If Ehrlich and Simon had decided to place their wager on this commodities EXHIBIT Through 2015, Simon wins the original bet for the five metals in work-hour prices. Adding 15 metals provides a broader test of whether supplies have bundle, there’s little doubt that Simon 4 grown scarcer or more abundant at work-hour prices (upper panel). Twenty would win quite easily. Measuring real metals doesn’t change the outcome—Simon still wins at work-hour prices prices the right way and looking at every year through 2015 (lower panel, blue line). longer time periods and larger samples of products makes The Bet better—

Work-Hour Cost of 20 Metals: 2015 vs. 1980 but the outcome stays the same. Price Index: 1980 = 100 140 Everyday Abundance

120 Most people don’t pay much attention to trading in metals and basic Original Five Metals Additional 15 Metals commodities. The goods and services 100 they buy regularly are an altogether different matter. Consumer spending 80 makes up 70 percent of the U.S. economy, so it’s very important to ask 60 whether Americans are experiencing greater scarcity or abundance in their 40 everyday lives. Taking a long and broad view, work- hour prices of all U.S. consumer goods 20 have fallen nearly 90 percent since 1900 (see Exhibit 6, top panel). Market 0 prices have risen more than 23-fold Tin Zinc Steel Lead Gold Nickel E-S 5 Silicon All 20 Silver Cobalt Copper Mercury Titanium in those 115 years, but today’s total Tungsten PlatinumAluminum Cadmium Chromium Manganese Magnesium Molybdenum compensation is 208 times higher,

Ehrlich Wins leading to the enormous gains in the 100 value of hours and minutes of work. The Bet Simon Wins Ends 1990 So work-hour prices are lower—by a large margin. 80 Turning to the period since 1980, Weighted Average the year Ehrlich and Simon made their CPI-Adjusted Prices of 20 Metals 71.5 wager, the decline in work-hour prices for all consumer goods has been 25 60 percent. Apple introduced the iPad 53.7 tablet computer in 2010, and its work- hour price has already fallen nearly 15 40 percent. With more time, work-hour Weighted Average prices have fallen even further for other Work-Hour Index of 20 Metals gadgets—more than 99 percent since 20 1984 for cell phones, 94 percent since 1987 for camcorders and 96 percent since 1997 for DVD players. 0 These price declines don’t take into 1980 1985 1990 1995 2000 2005 2010 2015

O’Neil Center 2015-16 Annual Report 9 account the value of improvements in Moving Beyond Metals quality. The clunky cell phone of 1984 EXHIBIT Other commodities saw work-hour prices fall from 1980 to 2015. The pattern just made telephone calls—when it holds for a wide range of basic products—from leather, wood and fiber to worked. Today’s smart phones are 5 basic foodstuffs and fossil fuels. Nearly three-quarters of the commodities pocket-sized computers that can surf show declines in real prices of 40 percent or more. Had The Bet focused on the Internet, fire off messages, take commodities at work-hour prices, Simon would win every year. and send photographs, run a wide Work-Hour Cost: 2015 as a Percent of 1980 100 variety of apps and so much more. Cheaper and better—that has been 90 a major theme of American capitalism. The pattern holds for homes, cars, air 80 travel, home furnishings and so many 70 other familiar products (see Exhibit 6, bottom panel). Given Ehrlich’s 60 worries, it’s particularly gratifying to 50 see that food hasn’t been growing scarcer. Take a basket of 12 food 40 staples, including milk, bread, sugar, 30 coffee, bacon, eggs and a few fruits and vegetables. What took 9 hours 20 and 30 minutes of work to buy in 10 1919 now just takes 1 hour and 38 minutes—an 83 percent reduction in 0 Oil the food basket’s real cost. Wool Oats Corn Rice Eggs Milk Beef Pork Coal Cotton Wheat Beans LeatherLumber Apples Peanuts Chicken TomatoesPotatoes Soybeans As with metals and commodities, the Natural Gas data on real consumer prices point to increasing abundance. But questions from the trends in work-hour prices. Net worth is up, partly because of scarcity and abundance really aren’t The readings from per capita income of a huge increase in the value of on the lips of most Americans. What and total compensation show that the U.S. stocks. Gains don’t stop there. they usually talk about is their living average American has continued to fare Health, safety and security have been standards, particularly whether today’s well, even in the past decade. improving for most of us; so have families can emulate past generations When it comes to living standards, working conditions. in achieving upward mobility. direct measures provide another way Declining work-hour prices haven’t Pessimists shake their heads in of finding out which way we’re going. made life better just for the rich. dismay. They proclaim that U.S. Inflation-adjusted consumption per Wealthy households are the first households are struggling to keep capita doubled from 1980 to 2015—so beneficiaries of most new products. up with the rising cost of living we’re collectively consuming a lot more As goods get cheaper, middle class because today’s jobs don’t pay than we did when Ehrlich and Simon and poorer households can afford to enough to support a middle-class made The Bet (see Exhibit 7, top panel). buy them. That’s what happened for family. Adjusted for inflation, median A smaller share of our household a wide range of consumer products household income and average hourly budgets go to meeting basic needs, from 1900 to 2015—telephones, earnings have been largely flat for the leaving more for enjoying leisure electricity, automobiles, stoves, past decade (see Box 2). time. Smart phones and cars are refrigerators and clothes washers Other data from the same commonplace. Today’s homes are early in the 20th Century, VCR/DVD government statistics mills corroborate larger and more likely to be fitted with players, computers, digital cameras and the more optimistic story that emerges central heat and air-conditioning. smart phones in more recent years (see

10 O’Neil Center 2015-16 Annual Report Consuming Interest Exhibit 7, bottom panel). Money prices for consumer goods move steadily upward (red lines), but What’s more, products are spreading EXHIBIT Americans’ true cost of living is better measured in hours and minutes of work. into households more quickly in recent 6 Overall, work-hour prices have fallen nearly 90 percent since 1900 (solid black years. It took decades for half of all line). They’ve declined 25 percent since Simon and Ehrlich made their bet in households to own washers, yet only a 1980 (dotted black line). The table shows work-hour data for individual products. few years elapsed before computers, cell Cost Index phones and digital cameras reached 50 3200 2271 percent penetration. Shorter waits for

1600 new products indicate an easing of the disadvantages of living on low incomes. 800 Ehrlich and his followers took a All consumer goods, money prices global view, worrying less about 400 scarcity in the United States than 249 famine in places like India. They 200 might concede that Americans 100 100 probably wouldn’t face any persistent shortages. How abundance came to 75 50 mark the United States, however,

All consumer goods, work-hour prices gets to the very heart of the question 25 raised by The Bet. The answer takes us to the reason Simon expected 13 11 to win—the power of markets to 6 overcome scarcity. 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 What Makes All the Difference The Falling Real Cost of Everyday Products Today’s Work-Hour Prices as Percent of Early Year Shortages of food and other goods have been the lot of mankind for most Product Early 2015 vs. Product Early 2015 vs. Year Early Year Year Early Year of history, and no country pulls itself out of poverty by happy accident. iPad 2010 85.3% Camcorder 1987 5.7% Quite the contrary, abundance arises Movie 1917 74.6% Dryer 1940 5.5% from an economic system that rewards New home 1920 69.4% Coca-Cola 1900 5.0% the innovation that leads to greater Pizza 1940 59.2% DVD player 1997 3.9% productivity and output. 7-day cruise 1972 40.5% Air travel 1926 3.3% That economic system is capitalism. Men’s suit 1927 38.6% Range 1910 2.9% Markets mobilize the incredible power Dry cleaning 1946 36.8% Dishwasher 1913 2.6% of human ingenuity, encouraging Auto rental 1970 28.7% Washer 1911 2.4% individuals and companies to discover Automobile 1908 26.0% Color TV 1954 2.1% better ways to achieve greater abundance Gasoline 1920 20.5% Microwave 1967 1.8% by increasing supply and lowering costs. Levi’s jeans 1897 16.9% Refrigerator 1916 1.2% Capitalism sets into motion a Food basket 1919 16.9% Calculator 1972 0.7% virtuous cycle that diminishes scarcity. Room A/C 1952 10.8% Cell phone 1984 0.5% Incentives to innovate push human Mattress 1929 10.1% Electricity 1902 0.5% beings to introduce technologies Hershey bar 1900 9.4% Computing 1984 0.009% that increase productivity, which Chicken 1919 7.6% Phone call 1915 0.0005% contributes to workers earning higher

O’Neil Center 2015-16 Annual Report 11 BOX 2 Data Divide Optimists, Pessimists

Inflation-adjusted median household income rose 25 matches won’t tell us which view makes more sense. We percent over three decades, going from $44,339 in 1967 need to look at what’s behind the gaps in the numbers. to $57,915 in 1999. It then fell 3 percent to $56,245 On living standards: With the kids grown, aging Baby in 2015 (left chart, red line). With their incomes shaky, Boomers are reaching retirement age. As some of them American households have struggled to maintain their begin to kick back, labor-force participation has fallen living standards—or so the narrative goes. below 63 percent, contributing to the sag in median Another data set tells a starkly different story. household income. Consumption per capita stood at $14,237 in 1967, The smaller household incomes aren’t crimping living and it rose steadily to an all-time high of $38,146 in standards. With more people living alone and fertility 2015—a total gain of 168 percent (left chart, blue line). rates falling, the average American household shrunk These numbers support an alternative narrative: the U.S. from 3.2 members in 1967 to 2.5 in 2015. Spreading economy can still deliver higher living standards. each household’s income over fewer people leaves room Hourly wages, adjusted for inflation, averaged $22.80 to boost consumption per capita. in 2015, up an underwhelming 19 cents since 2003 On the value of work: Health care, savings plans, (right chart, red line). With pay essentially flat, the path to Social Security, paid time off and other non-cash benefits upward mobility has become a much harder climb. have risen from 19 percent of wages in 1951 to 44 percent When benefits earned on the job are included, however, today. Total compensation captures these benefits, the value of work in America has never been higher. producing a more accurate measure of the value of work. Inflation-adjusted total compensation rose from $24.99 In addition, the consumer price index (CPI), typically in 1991 to $32.85 in 2015—a gain of 31 percent (right used to compare wages over time, overstates inflation chart, blue line). and makes data on real wages artificially low. The total American capitalism’s critics are likely to latch onto compensation calculation uses the price deflator for the household income and hourly wage data. Those who personal consumer expenditures, which differs from the favor free enterprise will find per capita consumption and CPI by an average of 0.4 percentage point a year. Over total compensation more persuasive. Ideological shouting the long haul, the small difference adds up.

Consumption per Household Median Person in $2015 Income in $2015 $2015 $41,000 $123,000 $34 $32.85 $38,146 $32 $37,000 $111,000 Two Views of Worker Pay Two Views of Living Standards $30 $33,000 $99,000

$28 Total Compensation $29,000 $87,000 (PCE adjusted for inflation) Consumption $26 $25,000 $75,000 $24 $22.80 $21,000 $63,000 $56,245 $22 Income $20.35 Hourly Wages $20.48 (CPI adjusted for inflation) $17,000 $44,339 $51,000 $20

$14,237 $13,000 $39,000 $18 1967 1975 1983 1991 1999 2007 2015 1967 1975 1983 1991 1999 2007 2015

12 O’Neil Center 2015-16 Annual Report wages. These pay gains are key to the Still Making Progress falling work-hour prices that produce Declining work-hour prices contribute to higher living standards. Indicators evidence of greater abundance. Rising EXHIBIT show positive trends in consumption and wealth; health, safety and living standards follow, increasing the 7 security; and conditions in the workplace (top). As products become more capacity for innovation. affordable in work time, they spread from a few wealthy consumers to a We’ve seen it happen with the larger and larger share of households (bottom). constraint imposed by the Earth’s supposedly finite capacity for producing CONSUMPTION AND WEALTH 1980 2015 Consumption per capita ($2015) $19,182 $38,146 food. Ehrlich didn’t believe the world Share of household budget spent on: could feed its population of 3.5 billion Food, clothing, shelter and utilities 35.6% 27.6% Entertainment and recreation 8.9% 14.3% in 1968; today, the planet supports a Adults owning a smart phone 0% 68% Average size of a new home (square feet) 1,595 2,701 population of more than 7.4 billion. New homes equipped with central heat and air 63% 91% Fertile minds have been as Households with computers 0.2% 84% Households with 3+ internet-connected devices 0% 90% important as fertile soil. We’ve Households with two or more vehicles 51.5% 57.0% found ways to improve seeds and Work hours required for 1,000 miles of air travel 8.3 4.3 Work hours for the gasoline to drive 1,000 miles 6.1 2.7 plants, control pests and diseases, Median family net worth ($2015) $47,037 $92,334 irrigate crops, mechanize planting Mean family net worth ($2015) $121,361 $607,791 Market capitalization of all listed U.S. firms ($2015) $3.4 trillion $25.1 trillion and harvesting and store food for HEALTH, SAFETY AND SECURITY future consumption. The spectacular Life expectancy at birth 73.7 78.8 gains in agricultural productivity Overall death rate (per 100,000) 1,007.3 724.6 Death rate: heart disease 517.0 218.6 since Malthus’ time have been one of Death rate: cancer 206.4 161.2 Automobile deaths per billion miles driven 32.9 11.1 mankind’s greatest accomplishments. Airline deaths per 100 billion miles flown 53.9 0.2 It wouldn’t have happened without Overall accident death rate 43.4 40.5 capitalism. Demonstrating this WORKING CONDITIONS Average work week (Index: 1980 = 40) 40.0 38.5 proposition requires the concept of Output per hour worked (Index: 1980 = 100) 100.0 198.3 an economic freedom capital stock, Work-hour cost of CPI bundle (Index: 1980 = 100) 100.0 64.4 Employee benefits as a percent of money wages 37.3 44.1 which broadly measures nations’ Mean retirement age 63.7 62.9 commitment to free enterprise. Work-related deaths per million workers 134 31 Work-related non-fatal accidents per 1,000 workers 85 34 The Economic Freedom of the World (EFW) report locates more than 150 countries between the poles Spread of Products into American Households Ownership/Use of free markets and government 100% control of the economy. The annual Radio rankings combine data on the size of government, respect for property 75% rights, the soundness of money, Color TV openness to free trade and the Electricity Refrigerator burdens of regulation. Clothes Washer Freedom capital stock recognizes that 50% Air Cond. reaping the benefits of free enterprise requires maintaining pro-market Telephone policies over time. It’s calculated as Clothes Dryer Computer Smart Phone Stove VCR/DVD Digital Camera 25% Dishwasher a declining weighted average of each country’s EFW scores back to 1970.

Cell Phone The United States ranks among Microwave Internet Auto Indoor Plumbing DVR the Top 5 countries in freedom 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

O’Neil Center 2015-16 Annual Report 13 Reason for Optimism 10 percent scrape by on a meager A nation’s economic freedom capital stock measures how well it maintains $3,613 a year—less than 7 percent of EXHIBIT policies that favor private initiative over government control. Looking at more the top decile’s income. 8 than 150 countries, those that embrace capitalism see positive outcomes, The wide gap indicates that the including higher per capita incomes. As countries turn away from economic optimistic scenario of growing freedom, the results become progressively more pessimistic. abundance Simon championed Per Capita Income, $2015 characterizes capitalist economies $60,000 that rely on the invisible hand of $53,777 the market. The pessimistic view of $50,000 increasing scarcity associated with Ehrlich and his followers shows up in $41,611 less-free economies dominated by the $40,000 heavy hand of government. Pessimists almost always call for greater government control over the $30,000 $27,309 economy as the way to avert whatever calamity they imagine lies over the $20,000 $16,320 horizon. It’s tragic that they’re $13,047 seeking to expand an economic philosophy that has proven to $10,000 $8,364 $6,501 $4,997 $5,956 increase the likelihood of making the $3,613 resources that support life scarcer. 0 Least Deciles of Nations Ranked by 2013 Most Free Less More Free Pessimism or Optimism? 10% Free Economic Freedom Capital Stock Free 10% capital stock, along with Hong Kong, The decile with the most enduring A grumpy lot, pessimists may make Singapore, Switzerland and Canada. commitment to capitalism has the us want to crawl into a cave and None of these countries spends much highest average per capita income at hide. However, it would be foolish time worrying about scarcity—at least $53,777 a year (see Exhibit 8). Average to blithely dismiss them as out-of- as a domestic issue. per capita income drops off steadily touch misanthropes. Like canaries in To generalize, we divide countries as freedom capital diminishes. By the a coal mine, they can alert us to the into groups of 10 percent based fourth decile, it has been reduced by dangers that lurk in this volatile world on their freedom capital scores. two-thirds. Countries in the lowest we live in. Paying greater heed to the

Artificial intelligence 3-D printing

14 O’Neil Center 2015-16 Annual Report worriers, for example, might have “The optimistic scenario Simon championed been wise in the years leading up to the financial crisis of 2008-09. characterizes capitalist economies, while the Optimists’ sunny outlook might pessimistic view associated with Ehrlich shows up make them more pleasant company, but they can be faulted for living in in less-free economies dominated by government.” fantasylands far removed from the real world and its troubles. Blindly time. Whether abundance will endure catastrophe of The Population Bomb. accepting the Pollyanna’s happy view beyond the present day depends Rather than bigger government of life increases the risk of being on human ingenuity’s capacity to imposing top-down remedies that unprepared for the real world’s continue to deliver the innovations stifle the economy’s capacity to inevitable adversities. that lead to abundance. produce, it would be better to enlist Pessimists and optimists have The great hope lies in today’s vast the innovative power of capitalism always been with us, and they will inventory of science and technology, to forestall the challenges of rising always be with us, but deciding made even more valuable by the temperatures. With proper incentives, between them should come down to ability to communicate and share the private sector will find solutions one factor—the evidence. That was information. Computers and the that won’t make the world poorer— Julian Simon’s mindset in proposing Internet have been around for ways to remove carbon dioxide from The Bet in the first place. He wanted decades, but they still offer plenty of the atmosphere or lessen dependence the world to examine the evidence on productivity-enhancing possibilities. on fossil fuels. scarcity or abundance. Relatively untapped are the emerging Science and technology, as Skeptics may still dismiss the declining technologies of the 21st Century, wondrous as they are, won’t create real prices for The Bet’s five metals in such as artificial intelligence, three- greater abundance without the the 1980s—too small a sample or too dimensional printing, commercial economic freedom of capitalism. For unusual a decade, they’ll protest. It’s drones and self-driving vehicles. a better future, today’s world should a lot harder to brush off the similar Inventive minds no doubt will find heed the wisdom of Julian Simon and results for a larger basket of 20 metals, ways to use them to make the world a bet on capitalism. It works. a wide range of basic commodities and more productive place, allowing living consumer goods in general. Work-hour standards to continue rising. W. Michael Cox is founding director of prices have been falling for a great many New threats will arise, of course. the William J. O’Neil Center for Global goods and services for a long time. The dire predictions from scientists Markets and Freedom (wmcox@smu. It makes a strong case for who fear climate change echo edu). Richard Alm is writer in residence abundance—looking backward in Ehrlich’s jeremiad about the looming at the center ([email protected]).

Commercial drones Self-driving cars

O’Neil Center 2015-16 Annual Report 15 Notes and Data Sources

Acknowledgment Exhibit 5: at Bloomberg.com. Life expectancy The authors thank John F. Papp, Moving Beyond Metals at birth, overall death rate, death commodity specialist at the U.S. Agricultural and farm prices: U.S. rate for heart disease and cancer, Geological Survey, for his help in Department of Agriculture. Available at overall accident death rate: Center for obtaining historical price data and for usda.gov. Leather and lumber prices: Disease Control. Available at cdc.gov. several conversations during the early U.S. Department of Labor, Bureau of Automobile deaths per billion miles stages of the analysis. Labor Statistics. Available at bls.gov. driven: National Highway Traffic Safety Coal, oil and natural gas prices: U.S. Administration. Available at nhtsa. Box 1: Energy Information Administration. gov. (Data are for commercial carriers ‘The Bet’—Bigger than Two Men Available at eia.gov. See also sources in the U.S.) Work-related death rates Paul Sabin, The Bet: Paul Ehrlich, Julian for Exhibit 2: Benefits Gap Growing. per million workers and work-related Simon, and Our Gamble over Earth’s non-fatal accidents per 1,000 workers: Future, Yale University Press, 2013. Exhibit 6: National Safety Council. Available at Consuming Interest nsc.org. Average work week, output Exhibit 1: Overall Price Index: U.S. Department per hour worked and mean retirement Bringing ‘The Bet’ Up to Date of Commerce, Bureau of Economic age: U.S. Department of Labor, Bureau Metals prices: United States Analysis. Available at bea.gov. See of Labor Statistics. Available at bls.gov. Geological Survey, Department of the also sources for Exhibit 2: Benefits Work-hour cost of a CPI bundle: See Interior. Available at usgs.gov. CPI: Gap Growing. sources for Exhibit 6: Consuming U.S. Department of Labor, Bureau of Interest. Employee benefits as a percent Labor Statistics. Available at bls.gov. Exhibit 7: of wages: See sources for Exhibit 2: Still Making Progress Benefits Gap Growing. Exhibit 2: Consumption per capita, household Benefits Gap Growing budget shares: U.S. Department of Spread of Products: Cox, W. Michael, Wages: U.S. Department of Labor, Commerce, Bureau of Economic and Richard Alm. Time Well Spent: Bureau of Labor Statistics. Available at Analysis. Available at bea.gov. Adults The Declining Real Cost of Living in bls.gov. Benefits percentages:1951- owning a smart phone: Pew Research America. Dallas: Federal Reserve Bank, 85 from U.S. Chamber of Commerce. Center. Available at pewinternet.org. 1997 Annual Report; “Residential Available at uschamber.com. Data for Average and median size of a new Energy Consumption Survey.” U.S. 1986-2013 from Employee Benefits home, percent of new homes with Energy Information Administration. Research Center. Available at ebri. central heat and air conditioning: Available at eia.gov. “American org. Figures for 2014 and 2015 are U.S. Department of Census. Available Housing Survey for the United States: estimates using data on employee at census.gov. Households with a 2009.” U.S. Census Bureau. Available benefits from the U.S. Department computer and 3+ internet connected at census.gov. of Labor, Bureau of Labor Statistics. devices: Ericsson. Available at Available at bls.gov. ericsson.com. Households with two Box 2: or more vehicles: American Housing Data Divide Optimists, Pessimists Exhibit 3: Survey. Available at census.gov. Median household income: U.S. ‘The Bet’ in Work-Hour Prices Work hours required for 1,000 miles Department of Census. Available at See sources for Exhibit 1: Bringing ‘The of air travel and airline deaths per census.gov. See also sources for Exhibit Bet’ Up to Date, and Exhibit 2: Benefits 100 billion miles flown: Airlines for 2: Benefits Gap Growing and Exhibit Gap Growing. America. Available at air-transport. 6: Consuming Interest. org. Work hours for the gasoline to Exhibit 4: drive 1,000 miles: Energy Information Exhibit 8: Bigger Basket of Metals Administration. Available at eia.gov. Reason for Optimism See sources for Exhibit 1: Bringing ‘The Median and mean family net worth: Economic freedom rankings and Bet’ Up to Date, and Exhibit 2: Benefits Board of Governors of the Federal scores: Economic Freedom of Gap Growing. Reserve System. Available at the World Project. Available at federalreserve.gov. Market freetheworld.com. Per capita income: capitalization of all listed U.S. firms: The World Bank. Available at Bloomberg Business Week. Available worldbank.org.

16 O’Neil Center 2015-16 Annual Report 2015-16: Year in Review

The 2015-16 academic year began O’Neil Center, Tuszynski will work receptionist’s desk, replacing it with with Robert Lawson taking over as primarily with Stansel on updating a large conference table, 12 chairs, director of the O’Neil Center for the EFNA index, and she will take on bookshelves and four study carrels. Global Markets and Freedom. In related research projects. She expects to The remodeling gives the center space his first year, the center continued complete her doctorate in December. for meetings, student reading groups successful programs established in Daniel Serralde joined the O’Neil and seminars. Students with an O’Neil seven years under founding director Center in May as the economic Center affiliation are welcome to use W. Michael Cox, and it expanded education coordinator, with primary the space for a quiet place to study. its reach to include free-enterprise responsibility for the Teaching Free Liberty Fund, a national organization courses for high school teachers and a Enterprise in Texas program. It dedicated to economic and political focus on economic freedom in Texas offers continuing education courses freedom, helped us fill the bookshelves, and other states. for Texas high school teachers, with donating its entire catalog of freedom- During the year, the O’Neil Center the goal of helping them meet the focused titles by James Buchanan, added three new members. Dean state’s mandate to provide economics F.A. Hayek, John Stuart Mill, Adam Stansel, a George Mason University instruction with an emphasis on the Smith, Gordon Tullock, Ludwig von Ph.D. who had been a professor at free-enterprise system and its benefits. Mises and many kindred spirits. Jerry Florida Gulf Coast University, came Fullinwider, a frequent O’Neil Center on board in January. Since 2013, benefactor, donated several dozen Stansel has been the primary author books from his personal collection. of the Economic Freedom of North The O’Neil Center revamped its America (EFNA) report, a data-driven website in January, making it easier to assessment of the balance between locate information about the center’s markets and government control in faculty and staff, research, events, each of the continent’s states and In addition to Lawson, Cox and the economic education programs and provinces. Stansel also created the three newcomers, the O’Neil Center media exposure. The center’s e-mail first index that measures economic includes SMU Cox Dean Al Niemi, alerts and social media efforts on freedom for the nation’s 380-plus professor Mike Davis and writer-in- Facebook and Twitter will give our metropolitan statistical areas (MSAs). residence Richard Alm. After serving supporters early notice regarding new Lawson arrived at SMU in 2011 as Lawson’s research assistant for postings on the website. with expertise in measuring economic two years, Ryan Murphy moved up The center created its first official freedom for countries, serving as a to faculty rank as research assistant logo (above). It tells people who we co-author of the Economic Freedom professor. For a second year, Dwight are by linking the O’Neil Center’s of the World report. With Stansel on Lee continued his affiliation with name with the established brand of board, the O’Neil Center is the only the O’Neil Center as a senior fellow, the highly regarded SMU Cox School research institute with expertise in visiting campus twice during the of Business. measuring economic freedom on all academic year and continuing to use three levels—national, state and MSA. his SMU affiliation in his writings and New Initiatives Target Texas In April, the O’Neil Center added other professional activities. Meg Tuszynski, who had been Before the fall semester began, As a group, the O’Neil Center working at George Mason University’s the O’Neil Center’s office suite professors have more than a century Mercatus Center while pursuing her received a much-needed facelift. We of classroom experience teaching Ph.D. in economics at GMU. At the removed the hulky, seldom-used about the American free-enterprise

O’Neil Center 2015-16 Annual Report 17 system. The new Teaching Free Oaks hotel in Houston. Cox taught courses in the future. Enterprise in Texas program gives two interrelated modules on how the The success of the pilots led the them an opportunity to use this skill constant churning of free enterprise center to schedule additional Teaching set to help improve the teaching of generates material progress and Free Enterprise sessions in Austin and economics in Texas high schools. raises living standards. Lawson made San Antonio, plus return engagements Houston-based homebuilder Richard presentations on the gains from trade in Dallas and Houston. (For more on Weekley provided initial funding for and the importance of economic Teaching Free Enterprise, see Conversation Teaching Free Enterprise with a five- freedom to prosperity. with Daniel Serralde, below.) year commitment of $1.25 million. The seven-hour program received At the start of 2016, the O’Neil In February, the William J. O’Neil high marks on participants’ evaluations. Center launched the Texas Economic Foundation gave the program a boost “This changed my thinking about Freedom project, led by Cox. The new by matching Weekley’s pledge. economics,” one teacher wrote. “It initiative will take a Texas view of the Rather than teaching high school framed my thinking in a way that I hadn’t center’s signature research mission, students directly, the center decided thought of before today.” Another focusing on the Texas model of low time and money could be better spent said: “Both Dr. Cox and Dr. Lawson’s taxes and smaller government, with focusing on teachers, giving them the presentations were great.” And a relevant comparisons to other states. knowledge and classroom materials third complimented the entire event: The Texas economy, with its they need to explain free enterprise “It was professionally done and well strong growth and job creation, has more effectively. organized.” All participants responded been on the minds of O’Neil Center Teaching Free Enterprise kicked that they’d recommend Teaching Free researchers from the beginning, off with pilot sessions in February Enterprise classes to colleagues and starting with the first annual report on the SMU campus and at Westin they’d sign up for another one of our essay “The Ascension of DFW: How

A Conversation with Daniel Serralde Helping Texas High Schools Teach Economics the Right Way

In setting up the Teaching Free Enterprise in Texas program, the O’Neil Center needed someone who knew the ins and outs of high school education. It found the right person in Daniel Serralde. He’s a former Texas high school teacher and an educational scholar, with a master’s degree in educational leadership from the University of North Texas. He brings to the table years of experience in working with the state’s educational establishment, including the Texas Education Agency. Serralde joined the O’Neil Center in May as economic education coordinator, with primary responsibility for Teaching Free Enterprise. He had worked on the program from the beginning as North Texas field director for the Libre Institute, the O’Neil Center’s partner in running pilot events in Dallas and Houston. Q: What’s the goal of Teaching Free Enterprise in Texas? A: Texas leads all states in economic growth and job creation because it lets free enterprise work. To keep a good thing going, the next generation of Texans needs to understand the importance of such core concepts as creative destruction, economic freedom, free trade and the catalysts for economic progress. A few years ago, Texas lawmakers mandated the teaching of free enterprise and its benefits—so we’re right on target. Lawson at the Teaching Free Enterprise event in Dallas.

18 O’Neil Center 2015-16 Annual Report to Keep a Good Thing Going” (2009). market freedom as the job creation, lower The next year’s essay, titled “Looking secret to DFW’s job- unemployment and living for the ‘New’ New World,” focused creating machine, how costs, higher wages and on why Texas leads all other states in amenities may lead to less income inequality. attracting migrants from other states. higher taxes, an index Voting with their feet, The Texas Economic Freedom project they created to show Americans are moving adds a new online publication The Texas where Texas cities stand to MSAs with more Economy. Topics of the first six issues on metropolitan area air economic freedom. included Texas’ strong gains in growth service, the wealth of cities Lawson and his co- and employment, the diminished threat and the resiliency that comes authors released the of low oil prices and the leading growth from Texas’ growing economic diversity. 2015 installment of the Economic sectors of the past two decades. Alm Freedom of the World (EFW) report began a series of The Texas Economy O’Neil Center in Print in September. The EFW provides articles on the evolution of the Texas an empirical measure of economic economy—one on how geography and The O’Neil Center published its freedom in more than 150 countries, geology have shaped the economy and sixth annual report, highlighted based on five criteria: the size another on King Cotton, slavery and by the essay titled “The Wealth of of government, legal system and early efforts to populate Texas. Cities: Pursuing Economic Freedom property rights, sound money, Since 2010, Cox and Alm have been Closer to Home.” Using Stansel’s freedom to trade internationally, and writing D CEO magazine columns on MSA index, co-authors Cox and Alm the regulatory burden. the Texas and DFW economies. In found economic freedom associated The most economically free 2015-16, they wrote about: labor- with faster economic growth and countries in this year’s report were

Q: Why teach teachers? A: Teachers have a multiplier effect. When you change teachers’ hearts and minds, you impact every student those teachers encounter in the classroom. In just one year, a high-school teacher typically reaches 200 or more students; the next year, the teacher will reach another 200, with 200 every year after that. Through our program, teachers will develop the knowledge and skills they need to make economics a more compelling subject in their schools. When students are more economically literate, they will make better choices in their lives as workers, consumers, investors and voters. Q: How will the O’Neil Center’s program teach about free enterprise? A: We’re focused on teaching economics as a subject of daily life. We want to provide course outlines and classroom materials that stimulate the interest of Texas students by teaching them economics as an active, involved and life-changing discipline. We hope to spark a total rethinking of the state’s economics curriculum, which has typically been dull and boring, focused too much on theoretical economics and very little on real-life application of economic concepts. We’re clearing up misconceptions about free enterprise and teaching that it isn’t something to be feared or scorned. In school and outside it, students are going to encounter a lot of critics of the system that produced the world’s most successful economy. We want to give the teachers and students the information they need to intelligently evaluate these messages. Q: What are the teachers saying about the program? A: The comment that gave me the greatest satisfaction came from a former colleague from a high school I taught at in South Dallas. He’s currently in his 11th year of teaching, and he told me, “This is the best professional development program I’ve ever been to in my life!” Our partners in the state’s Education Service Centers and school districts’ Professional Development Departments are also raving about the program, calling it world-class, eye-opening and amazing. I guess this comes from designing a program with the student and teacher at the center of the educational experience. We’re seeing an immediate adoption rate in excess of 35 percent, which is extremely high in the education world, so we got off on the right foot. We’ll be looking for ways to improve as we move forward. We’ll add more professors, more courses and more events in all parts of the state.

O’Neil Center 2015-16 Annual Report 19 is a certain status connected with hard-to-find experiences. His essay “The New Aristocrats: A Cultural and Economic Analysis of the New Signaling,” published by the Adam Smith Institute, struck a nerve in the British press. The Daily Mail, Spectator and Guardian newspapers wrote stories based on Murphy’s research. Quillette, an online journal, published a shortened version of Murphy’s original article. Lee contributed two pieces to Regulation magazine: “Does Freedom Need Bootleggers?” and “Nailing the Mouse, but Missing the Elephant,” a review of The Rule of Nobody by Philip Howard. Regulation also published Murphy’s “How States Can Effectively End Federal Income Taxation—and Phil Gramm Why They Should.” The Library of Hong Kong, Singapore, New Zealand, Investor’s Business Daily published two Economics and Liberty published Switzerland and the United Arab Cox and Alm articles—“The High Cost Lee’s “The Sharing Economy Is as Emirates. For the United States, the of Less Freedom: Lower U.S. Living Old as Markets” and “Bootleggers, latest report revealed a further ebbing Standards” and “Cities, Just Like Baptists, Anger, and Voters.” in its economic-freedom ranking— Nations, Need Freedom to Grow.” Real In 2015-16, O’Neil Center’s from 12th to 16th. The United States’ Clear Politics ran Stansel’s “Economic scholars published their research in EFW scores peaked in 2000, when it Liberty is Down in American but a number of academic journals (see ranked second in the world. Up in Texas.” He gave Florida a inside back cover). In addition, several The O’Neil Center continued reaching similar treatment in the Naples Daily O’Neil Center articles have already the broad public via newspapers’ op-ed News. Lee had an Atlanta Journal- been accepted for future publication. pages. The Dallas Morning News printed Constitution guest column titled The media continued to seek “Economic Freedom Down Again in “‘Price Gougers Satisfy Need.” out O’Neil Center scholars for America” by Lawson and “Tyranny, Murphy put a modern twist on commentary and analysis. Cox Not the Free Market, Spurs Human Thorstein Veblen’s conspicuous appeared nationally on Fox News Trafficking” by Lawson and Murphy. consumption by noting that there seven times, giving his views on the

Robert Lawson Albert W. Niemi W. Michael Cox Michael Davis Dean Stansel

20 O’Neil Center 2015-16 Annual Report meetings of the Federal Reserve’s Open Market Committee. In October, The Dallas Morning News ran a Q&A with Lawson under the title “How Free Are We Really?” Stansel was a frequent commentator on radio shows in Florida and other states. At the end of the academic year, Cox, Davis, Niemi and Lawson all ranked among the Top 10 in the SMU Cox tally of media mentions.

Bringing Ideas to Campus

Early October saw about 300 business leaders and students gather in the SMU Cox Collins Center for the O’Neil Center’s seventh annual conference. The five speakers addressed the topic of “Keeping the Texas Economy Strong,” a theme George Will designed to highlight the center’s yet, Texas has had double the increase nation once known for its dynamism,” continuing interest in its home state. in per capita income. On job creation, slowing economic growth. “Making Former U.S. Senator Phil Gramm Texas employment rose five times dependency the norm works directly set the tone for the day with a rousing faster than the nation as a whole over against capitalism,” he said. morning keynote that began with the past decade. Will held up a sheaf of paper three anecdotes from his years in politics. Then “Texas is what America once was inches thick, telling the audience he turned to the Texas model, which and what America could be again,” that its tiny type spelled out the he lauded for freeing of low taxes and Gramm said. provisions of just one law. According smaller government the private sector to Columnist and TV commentator to Will, this massive doorstop typifies grow the economy and create jobs. George Will, the luncheon keynote, how modern government puts A Ph.D. economist, Gramm used lamented the burdens imposed by policy beyond the comprehension precise data to drive home his point. the size and complexity of an ever- of most Americans. If citizens can’t On economic growth, the Texas state larger federal government. According understand government, they can’t budget per capita has been half that to Will, increasing dependency on control it. Instead, it controls them. of New York, a big government state; government will inevitably sap “a The rest of the “Keeping the Texas

Richard Alm Ryan Murphy Daniel Serralde Meg Tuszynski Dwight R. Lee

O’Neil Center 2015-16 Annual Report 21 keep spending low, make school choice universal, reduce dependence on property taxes, end corporate subsidies, get public pensions under control and end criminal penalties for some offenses. “Prosperity requires freedom to precede it,” Rollins said. “If we want to have a strong economy, we must have a free society.” James K. Galbraith: The University of Texas at Austin professor agreed Texas had “a successful model,” but he reminded the audience that Texas’ prosperity hasn’t been solely due to the private sector. Governments at all levels have played a role—for example, through the federally financed interstate highway system. According to Galbraith, we shouldn’t forget that federal money Brooke Rollins boosted such Texas industries as Economy Strong” program included: Stansel’s MSA index, which ranks aerospace, electronics and health Dean Stansel: A few months before Houston second and Dallas-Fort Worth care. Border security pumps resources joining the O’Neil Center, Stansel third in economic freedom among the into a poor region of the state. “Texas described the EFNA’s measurement nation’s biggest urban areas. is not unique in having benefitted of state-level economic freedom, then Cox also presented his latest work from federal investment, but thanks pointed out that Texas has consistently on how greater diversity—the creation to its particular political weight in our been at or near the top of the annual of new industries—has helped the nation’s history, it has done extremely rankings. He showed that greater Texas economy continue to grow well,” Galbraith said. economic freedom leads to better despite the recent decline in oil prices. To allow continued access to the economic outcomes—i.e., faster “We remade our economy from oil to conference presentations, the O’Neil growth in per capita incomes, larger something else,” Cox said. “We had Center has posted videos of all employment gains and higher rates of the economic freedom to do it.” speakers except Will on its website. population growth. Brooke Rollins: The president of Previous conferences are available on “The Texas model shows that the Texas Public Policy Foundation, the site as well. economic freedom leads to high an Austin-based research institute, In addition to the conference, the economic growth—and the EFNA stressed the importance of free- O’Neil Center enhanced intellectual confirms that,” Stansel said. market policies for strengthening diversity on the SMU campus by W. Michael Cox: The O’Neil Texas over the next decade. sponsoring an eclectic assortment of Center’s founding director presented While saluting today’s high degree of speakers. In September, Helen Chan, his Wealth of Cities research on economic freedom, Rollins suggested a government economist, gave O’Neil how economic freedom boosts the avenues for further improvement— Center faculty and staff a briefing on performance of U.S. metropolitan repeal the “complex and onerous” Hong Kong, which has consistently areas (MSAs). The research relies on business margins tax, continue to ranked No. 1 in the EFW report.

22 O’Neil Center 2015-16 Annual Report The next month, the O’Neil Center hosted Danish monetary-policy guru Lars Christiansen, founder of Markets and Money Advisory and senior fellow at the Adam Smith Institute. In a classroom session with more than 100 SMU students, Christiansen discussed the European Union’s malaise as the logical end to misguided monetary policy. The O’Neil Center subsequently teamed up with the Federal Reserve Bank of Dallas to sponsor an evening program, with Christiansen warning that the United States has been forcing deflationary monetary policy on China. In January, University of Oklahoma professor Kevin Grier gave an O’Neil Center seminar on “The Economic Consequences of Hugo Chavez: A Synthetic Control Analysis.” Using a methodology that constructs counterfactuals based on real-world James K. Galbraith outcomes, Grier finds that the overall world’s impoverished nations sustain Cox gave 20 speeches around the economic consequences of the Chavez economic development. country, many of them to professionals administration were bleak. in the financial services industry. His In February, Eaton Vance Have Ideas, Will Travel topics included U.S. economic growth, investment strategist Marshall L. personal and corporate tax rates, interest Stocker presented his finding that O’Neil Center faculty members rates and monetary policy, the stock financial and political shocks are took to podiums across the nation market, trade policy and economic unlikely to promote greater economic and around the world, speaking freedom. On the Texas economy, Cox’s freedom. In a seminar co-hosted with on a range of topics. Lawson gave speeches addressed the state’s dwindling the SMU Economics Department, 13 public lectures on the Economic dependence on oil, its growing economic Chapman University professor Bart Freedom of the World report, finding diversity, labor markets, migration, taxes, Wilson presented his behavioral study eager audiences as close to home as regulation, school quality, the cost of that shed light on the relationship Arlington and Dallas and as far away living and the importance of economic between human cooperation and as Israel, Lithuania, Latvia, Estonia freedom for states and cities. language in prehistoric times. and Georgia (the country). Five O’Neil Center members Adam Martin, research fellow at In addition to his presentation went to the Association of Private Texas Tech University’s Free Market at the O’Neil Center conference, Enterprise Education (APEE) annual Institute, gave an O’Neil Center Stansel spoke on aspects of state meeting in Las Vegas. Lawson gave seminar in April on the “Myths of and MSA economic freedom in a talk on “What Matters More? Economic Development and Foreign Fort Lauderdale, Florida Gulf Coast Institutions or Specifications?”— Aid,” discussing why trillions of University in Fort Myers, Alabama’s based on his forthcoming academic dollars in government largesse have Troy University and Virginia’s James paper, written with Murphy. Stansel done little good in helping the Madison University. gave two presentations: “Economic

O’Neil Center 2015-16 Annual Report 23 Freedom in the U.S. States in the 19th Freedom of the World colleagues The readings focused on poverty, Century” and “An Exploratory Note gathered at SMU for a similar meeting, property rights, the rule of law, on the Relationship between Labor scheduled for the day after the O’Neil entrepreneurship and gains from trade. Market Freedom and Female Labor Center conference. Murphy contributed Parallel groups at Texas Tech and Force Participation.” two papers on issues related to the Baylor read the same materials, and Murphy’s APEE presentation was measurement of economic freedom: all three groups gathered on the SMU titled “Beggaring-Thy-Neighbor at the “Explicitly Addressing the Missing campus for two days of in-depth State and Local Level.” Lee spoke on Values Problem” and “What Matters discussion and activities in November, “Tax Reform as a Discovery Process,” More? Institutions or Specifications?” joined by a group from the University “Taking Simple Ideas and Rendering In February, Lawson and Stansel of Central Arkansas. Citadel professor Them Completely Incomprehensible” went to Austin for a Texas Public Russ Sobel gave the 60 students and “Higher Costs Appeal to Voters: Policy Foundation conference on presentations on productive and Implications of Expressive Voting.” “Economic Freedom vs. Government: unproductive entrepreneurship and In addition to his APEE presentations, Which Provides the Best Opportunity economic progress under capitalism. Murphy presented a paper on for Prosperity?” Stansel made a Baylor hosted the spring-semester “Economic Freedom of North America presentation discussing the findings of reading group gathering, where at the State Borders” at the Southern the 2015 EFNA annual report. Baylor professor David Corey lectured Economic Associations’ annual meeting on economics and the good life. in New Orleans and at the Public Choice Molding Young Minds The O’Neil Center continued to Society conference in Fort Lauderdale. support student groups devoted to Closer to home, he gave a seminar on O’Neil Center professors performed free-market ideas. At a March dinner “Intergovernmental Organizations and their regular teaching duties for SMU sponsored by the O’Neil Center, the Economic Freedom” at SMU’s Tower Cox in 2015-16, with Lawson and Cox newly formed SMU chapter of the Center for Political Studies. handling classes in microeconomics Adam Smith Society, a nationwide APEE was just the start for Lee, too. for MBA students. Niemi attracted organization for MBA students, He spoke around the country on a some of the best undergraduates to his listened as Lee explored the Theory of range of topics: “Economic Challenges Evolution of American Capitalism class. Moral Sentiments and The Wealth of to Achieving the American Dream” Cox taught non-business majors in Nations in a talk titled “Adam Smith: Dallas’ National Center for Policy his summer Markets and Freedom class. Two Books and Two Moralities.” Analysis in October; “The Political Davis taught international finance, The center joined with the SMU Economy of Economic Freedom” at macroeconomics and a course on chapter of Young Americans for the Southern Economic Association decision-making under uncertainty. He Freedom to co-sponsor an April lecture meeting in New Orleans in November; also accompanied students on Global by Steve Forbes, who gave an audience “Tax Reform as a Discovery Process” at Leadership Program trips to Buenos Aires, of 200 his anti-Big Government the Public Choice Society conference Santiago, Hong Kong and Shanghai. prescription for reviving America by in Fort Lauderdale in March; and W. Grady Rosier, president of food repealing Obamacare, instituting a flat “In Defense of ‘Price Gougers’: An distributor McLane Co., provided tax and reforming the Fed. Economist’s Quest to Reduce Hatred support for the O’Neil Center’s free In January, the O’Neil Center and Decriminalize Helping Others” market reading group for a third provided funding for three Liberty@ at Ohio State University and nearby straight year. In the fall semester, SMU leaders to attend Students for Kenyon College in April. Lawson led discussions of readings on Liberty’s annual meeting in Washington, EFNA scholars held their annual such topics as free trade, Prohibition, D.C. In March, the SMU student meeting at SMU in June, providing urban planning, sweatshops, inequality group joined with America’s Future an opportunity for allied organizations and immigration. In the spring, the Foundation, another organization to discuss the index and its scholarly O’Neil Center expanded to two dedicated to free-market ideas, to host uses. In October, Lawson’s Economic reading groups, both led by Stansel. a screening of the filmPoverty, Inc.

24 O’Neil Center 2015-16 Annual Report Scholars at Work The O’Neil Center enhances its reputation and influence by publishing academic research on economic freedom and related issues. The following shows the depth and breadth of the center’s academic publications for the 2015-16 academic year:

Robert Lawson’s journal articles were: • “The Relationship between Income, Economic Freedom, and BMI” in Public Health (with Ryan H. Murphy and Claudia R. Williamson); • “Good Cops, Bad Cops, Whatcha Gonna Do?” in the Journal of Private Enterprise (with Keri Lawson); • “Why Statutory Incidence Matters” in the Journal of Private Enterprise (with E. F. Stephenson); • “Do Travel Visa Requirements Impede Tourist Travel?” in the Journal of Economics and Finance (with S. Roychoudhury); • “Can Two Observations Confirm a Theory? A Comment on Max U Versus Humanomics” in the Journal of Institutional Economics; • “Gross Receipts Taxes” in For Your Own Good: Paternalism, Taxes, and Fiscal Discrimination in the Twenty-First Century, edited by Todd Nesbit and Adam Hoffer.

In addition to the publication with Lawson, Ryan Murphy wrote: • “Immigration Causes American Businesses to Fail and That Is a Good Thing” in the Journal of Entrepreneurship and Public Policy (with Rick Weber); • “The Willingness-to-Pay for Caplanian Irrationality” in Rationality and Society; • “Rational Irrationality Across Institutional Contexts” in the Journal des Économistes et des Études Humaines.

After joining the O’Neil Center in January, Dean Stansel had two articles published in scholarly journals: • “The Determinants of the Severity of State Fiscal Crises” in Public Budgeting and Finance; • “Takings and Tax Revenue: Fiscal Impacts of Eminent Domain” in Review of Law and Economics.

Dwight Lee published the following journal articles: • “Tax Reform as a Discovery Process” in For Your Own Good: Paternalism, Taxes, and Fiscal Discrimination in the Twenty-First Century, edited by Todd Nesbit and Adam Hoffer; • “The Beast Is Not Easily Starved” in Public Choice; • “Higher Costs Appeal to Voters: Implications of Expressive Voting” in Public Choice.

PO Box 750333 Dallas, TX 75275-0333 oneilcenter.org 214.768.4210