VOLUME 60, NO 5 JUNE 2010

Features 8 Federal Deposit Insurance: A Banking System Built on Sand by Warren C. Gibson 14 The Myth of the Model by Max Borders 19 The New Financial Imperialism by Robert Stewart 23 Producing Jobs: Thoughts on Obama’s Plan for Small Businesses by Bruce Yandle 27 Are Welfare State Orphans in Good Hands? by James L. Payne 31 Orient Express to Hell by James Bovard 35 R. C. Hoiles and Public Schooling by Wendy McElroy Page 31 Columns 4 Ideas and Consequences ~ The 1932 Bait-and-Switch by Lawrence W.Reed 17 Thoughts on Freedom ~ The Private Provision of Public Goods by Donald J. Boudreaux 25 Our Economic Past ~ Comparing the Great Depression to the Great Recession by Burton W.Folsom, Jr. 29 Peripatetics ~ Jefferson’s Economist by Sheldon Richman 39 Give Me a Break! ~ The Right to Work by John Stossel 47 The Pursuit of Happiness ~ Drugs, Economics, and Liberty by Walter Williams Page 17

Departments 2 Perspective ~ “What Sort of Despotism Democratic Nations Have to Fear” by Sheldon Richman 6 Nuclear Energy Should Be Subsidized? It Just Ain’t So! by Art Carden and Mike Hammock

Book Reviews 42 Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses by Timothy P. Carney Reviewed by George Leef 43 The Case for Big Government by Jeff Madrick Reviewed by Robert Batemarco 44 Race & Liberty in America: The Essential Reader edited by Jonathan Bean Dred Scott’s Revenge: A Legal History of Race and Freedom in America by Judge Andrew Napolitano Reviewed by Roger Clegg Page 42 45 Financial Fiasco: How America’s Infatuation with Homeownership and Easy Money Created the Economic Crisis by Johan Norberg Reviewed by Waldemar Ingdahl Perspective “What Sort of Published by The Foundation for Economic Education Despotism Democratic Irvington-on-Hudson, NY 10533 Phone: (914) 591-7230; E-mail: [email protected] www.fee.org Nations Have to Fear”

President Lawrence W.Reed took that title from volume 2, section 4, chapter 6 of Editor Sheldon Richman Alexis de Tocqueville’s Democracy in America ( 1840). Managing Editor Michael Nolan Considering what has been happening legislatively Book Review Editor George C. Leef I (and not just in the last year-plus), it seems like a good Columnists Charles Baird David R. Henderson time to revisit Tocqueville’s writing about democratic Donald J. Boudreaux Robert Higgs despotism. Stephen Davies John Stossel He notes that despotism in a constitutional republic Burton W.Folsom, Jr. Thomas Szasz would be different from what it was in the Roman Walter E.Williams empire. How so? “[I]t would be more extensive and Contributing Editors more mild; it would degrade men without tormenting Peter J. Boettke Dwight R. Lee James Bovard Wendy McElroy them.” Thomas J. DiLorenzo Tibor Machan Specifically: “Above this race of men stands an Joseph S. Fulda Andrew P.Morriss immense and tutelary power, which takes upon itself Bettina Bien Greaves James L. Payne Steven Horwitz William H. Peterson alone to secure their gratifications and to watch over John Hospers Jane S. Shaw their fate.That power is absolute, minute, regular, provi- Raymond J. Keating Richard H.Timberlake dent, and mild. It would be like the authority of a par- Daniel B. Klein Lawrence H.White ent if, like that authority, its object was to prepare men Foundation for Economic Education for manhood. . . .” Board of Trustees, 2009–2010 But that is not its object. Rather, “it seeks, on the Wayne Olson, Chairman contrary, to keep them in perpetual childhood. . . . Harry Langenberg Walter LeCroy For their happiness such a government willingly William Dunn Frayda Levy Jeff Giesea Kris Mauren labors, but it chooses to be the sole agent and the Ethelmae Humphreys Roger Ream only arbiter of that happiness; it provides for their Edward M. Kopko Donald Smith security, foresees and supplies their necessities, facili- The Foundation for Economic Education (FEE) is a tates their pleasures, manages their principal con- nonpolitical, nonprofit educational champion of cerns, directs their industry, regulates the descent of individual liberty, private property, the free market, and constitutionally limited government. property, and subdivides their inheritances: what The Freeman is published monthly, except for combined remains, but to spare them all the care of thinking January-February and July-August issues. Views expressed by and all the trouble of living?” the authors do not necessarily reflect those of FEE’s officers He goes on with an almost spooky prophecy: and trustees. To receive a sample copy, or to have The Freeman come regularly to your door, call 800-960-4333, or e-mail “After having thus successively taken each member [email protected]. of the community in its powerful grasp and fashioned The Freeman is available electronically through products and serv- him at will, the supreme power then extends its arm ices provided by ProQuest LLC, 789 East Eisenhower Parkway,PO Box 1346, Ann Arbor, Michigan 48106-1346. More information over the whole community.It covers the surface of soci- can be found at www.proquest.com by calling 1-800-521-0600. ety with a network of small complicated rules, minute Copyright © 2010 Foundation for Economic Education, and uniform, through which the most original minds except for graphics material licensed under Creative Commons Agreement. Permission granted to reprint any article from and the most energetic characters cannot penetrate, to this issue, with appropriate credit, except “The Right to Work.” rise above the crowd. The will of man is not shattered, Cover: Jon Payne [flickr] but softened, bent, and guided; men are seldom forced

THE FREEMAN: www.thefreemanonline.org 2 PERSPECTIVE: “What Sort of Despotism Democratic Nations Have to Fear” by it to act, but they are constantly restrained from act- * * * ing. Such a power does not destroy,but it prevents exis- One of the most politically safe government pro- tence; it does not tyrannize, but it compresses, grams today is federal insurance of bank deposits. Yet enervates, extinguishes, and stupefies a people, till each there was a time when the idea of underwriting reck- nation is reduced to nothing better than a flock of less bank behavior was thought so ridiculous that even timid and industrious animals, of which the govern- President Franklin D. Roosevelt opposed it. Warren ment is the shepherd.” Gibson explores the FDIC. Tocqueville also sees the paradoxes of democracy. It’s not what we don’t know that gets us into trou- How relevant they still are: ble. It’s what we think we can model but can’t. Max “I have always thought that servitude of the regular, Borders explains. quiet, and gentle kind which I have just described The leading countries’ pressure on offshore financial might be combined more easily than is commonly centers—that is, low-tax jurisdictions that respect peo- believed with some of the outward forms of freedom, ple’s privacy—is nothing less than an updated version and that it might even establish itself under the wing of of imperialism. So says Robert Stewart. the sovereignty of the people. President Obama insists he wants to help small busi- “Our contemporaries are constantly excited by two ness create jobs. He even has a program for that. Is there conflicting passions: they want to be led, and they wish less here than meets the eye? Bruce Yandle thinks so. to remain free.As they cannot destroy either the one or Americans rightly have an intuition that bureaucra- the other of these contrary propensities, they strive to cies are inept. So why would the adoption of children satisfy them both at once. They devise a sole, tutelary, be trusted to one? James Payne wants to know. and all-powerful form of government, but elected by Once upon a time, central and eastern Europe were the people. They combine the principle of centraliza- ruled by brutal and incompetent communist regimes. tion and that of popular sovereignty; this gives them a And back then, when the World Bank thought Roma- respite: they console themselves for being in tutelage by nia had an enlightened despot, James Bovard took a lit- the reflection that they have chosen their own guardians. tle tour. He reminisces inside. Every man allows himself to be put in leading-strings, One of the founders of the modern libertarian because he sees that it is not a person or a class of per- movement was a newspaper magnate named R. C. sons, but the people at large who hold the end of his Hoiles. Nothing raised his ire like government-run chain.” (Emphasis added.) schools.Wendy McElroy tells why. Tocqueville concludes,“Thus their spirit is gradually And if that’s not enough, there are the columnists: broken and their character enervated. ...It is indeed Lawrence Reed looks back at FDR’s great bait-and- difficult to conceive how men who have entirely given switch in 1932. Donald Boudreaux considers the pri- up the habit of self-government should succeed in vate provision of public goods. Burton Folsom sees making a proper choice of those by whom they are to ominous parallels between Roosevelt and Obama. John be governed; and no one will ever believe that a liberal, Stossel is outraged that we need government permis- wise, and energetic government can spring from the sion to pursue many occupations.Walter Williams wants suffrages of a subservient people. no part of the “war on drugs.” And Art Carden and “A constitution [that is] republican in its head and Mike Hammock, encountering the argument that gov- ultra-monarchical in all its other parts has always ernment should underwrite investments in nuclear appeared to me to be a short-lived monster.” power, proclaim,“It Just Ain’t So!” Tocqueville might have had his timing off, but with Books on Obamanomics, big government, race, a fiscal crisis on the horizon—the product of a bloated and the financial mess come under our reviewers’ welfare state, an aging population, and a lackluster scrutiny. economy mired in corporatism—the “monster” is in Sheldon Richman trouble. Is it too late to turn things around? [email protected]

3 JUNE 2010 Ideas and Consequences

The 1932 Bait-and-Switch

BY LAWRENCE W. REED

arry Truman once said, “The only thing new argued otherwise, based on the very platform and in the world is the history you don’t know.” promises on which FDR ran. But until a few months HThat observation applies especially well to ago I was unaware of a long-forgotten book that makes what tens of millions of Americans have been taught the case as well as any. about Franklin Delano Roosevelt, the man under Hell Bent for Election was written by James P.War- whom Truman served as vice president for about a burg, a banker who witnessed the 1932 election and month. Recent scholarship (including a highly the first two years of Roosevelt’s first term from the acclaimed book, New Deal or Raw Deal,by FEE senior inside. Warburg, the son of prominent financier and historian Burton Folsom) is thankfully disabusing Federal Reserve cofounder Paul Warburg, was no less Americans of the once-popular myth that FDR saved than a high-level financial adviser to FDR himself. us from the Great Depression. Disillusioned with the President, he left the administra- Another example is a 2004 article tion in 1934 and wrote his book a by two UCLA economists—Harold year later. L. Cole and Lee E. Ohanian—in the In 1932, the country Warburg voted for the man who important mainstream Journal of Polit- elected a man said this on March 2, 1930, as gover- ical Economy. They observed that nor of New York: Franklin Roosevelt extended the whose subsequent Great Depression by seven long years. The doctrine of regulation and “The economy was poised for a performance looks legislation by “master minds,” in beautiful recovery,” the authors little like the platform whose judgment and will all the peo- show, “but that recovery was stalled ple may gladly and quietly acquiesce, by these misguided policies.” and promises on has been too glaringly apparent at In a commentary on Cole and which he ran. Washington during these last ten Ohanian’s research, Loyola University years. Were it possible to find “master economist Thomas DiLorenzo minds” so unselfish, so willing to pointed out that six years after FDR took office, unem- decide unhesitatingly against their own personal ployment was almost six times the pre-Depression interests or private prejudices, men almost godlike in level. Per capita GDP, personal consumption expendi- their ability to hold the scales of justice with an even tures, and net private investment were all lower in 1939 hand, such a government might be to the interests of than they were in 1929. the country; but there are none such on our politi- “The fact that it has taken ‘mainstream’ neoclassical cal horizon, and we cannot expect a complete rever- economists so long to recognize [that FDR’s policies sal of all the teachings of history. exacerbated the disaster],” notes DiLorenzo, “is truly astounding,” but still “better late than never.” What Warburg and the country actually elected in Part of the Great FDR Myth is the notion that he 1932 was a man whose subsequent performance looks won the presidency in 1932 with a mandate for central little like the platform and promises on which he ran planning. My own essay on this period (“Great Myths of the Great Depression”; www.tinyurl.com/7eecje) Lawrence Reed ([email protected]) is the president of FEE.

THE FREEMAN: www.thefreemanonline.org 4 The 1932 Bait-and-Switch and a lot like those of that year’s Socialist Party candi- Was FDR an economic wizard? Warburg reveals date, Norman Thomas. nothing of the sort, observing that FDR was “undeni- Who campaigned for a “drastic” reduction of 25 ably and shockingly superficial about anything that percent in federal spending, a balanced federal budget, relates to finance.” He was driven not by logic, facts, or a rollback of government intrusion into agriculture, humility but by “his emotional desires, predilections, and restoration of a sound gold currency? Roosevelt and prejudices.” did.Who called the administration of incumbent Her- “Mr. Roosevelt,” wrote Warburg, “gives me the bert Hoover “the greatest spending administration in impression that he can really believe what he wants to peace time in all our history” and assailed it for believe, really think what he wants to think, and really raising taxes and tariffs? Roosevelt did. FDR’s running remember what he wants to remember, to a greater mate, John Nance Garner, even declared that Hoover extent than anyone I have ever known.” Less charitable “was leading the country down the road to socialism.” observers might diagnose the problem as “delusions of grandeur.” Copying Hoover and the Socialists “I believe that Mr. Roosevelt is so charmed with t was socialist Norman Thomas, not the fun of brandishing the band IFranklin Roosevelt, who proposed leader’s baton at the head of the massive increases in federal spending FDR misled the parade, so pleased with the picture and deficits and sweeping interven- country with his he sees of himself, that he is no tions into the private economy—and longer capable of recognizing that he barely mustered 2 percent of the promises and put the human power to lead is limited, vote. When the dust settled, Warburg personal ambition that the ‘new ideas’ of leadership shows, we got what Thomas promised, dished up to him by his bright more of what Hoover had been lam- and power lust young men in the Brain Trust are basted for, and almost nothing that in charge. nothing but old ideas that have been FDR himself had pledged. FDR tried before, and that one cannot employed more “master minds” to uphold the social order defined in plan the economy than perhaps all previous presidents the Constitution and at the same time undermine it,” combined. Warburg lamented. After detailing the promises and the duplicity,War- So if Warburg was right (and I believe he was), burg offered this assessment of the man who betrayed Franklin Delano Roosevelt misled the country with his him and the country: promises in 1932 and put personal ambition and power lust in charge—not a very uncommon thing as politi- Much as I dislike to say so, it is my honest convic- cians go. In any event, the country got a nice little bait- tion that Mr. Roosevelt has utterly lost his sense of and-switch deal, and the economy languished as a proportion. He sees himself as the one man who can result. save the country, as the one man who can “save capi- In the world of economics and free exchange, the talism from itself,”as the one man who knows what is rule is that you get what you pay for.The 1932 election good for us and what is not. He sees himself as indis- is perhaps the best example of the rule that prevails pensable. And when a man thinks of himself as being all too often in the political world:You get what you indispensable . . . that man is headed for trouble. voted against.

5 JUNE 2010 Nuclear Energy Should Be Subsidized? It Just Ain’t So!

BY ART CARDEN AND MIKE HAMMOCK

n a March 5 Los Angeles Times op-ed, “Jump-start- In other words, we do not find the best way to build ing Nuclear Energy” (www.tinyurl.com/yb6ot4z), a computer chip by having the government offer loan IGreenpeace founder Patrick Moore, who now co- guarantees to firms that use particular production chairs the Clean and Safe Energy Coalition, lauds the processes.We let firms compete for customers, and in a Obama administration for its decision to “guarantee free market without government interference, firms loans for two advance-design nuclear plants in Geor- earn profits when they use resources wisely and pro- gia.” Nuclear energy diversifies our duce things people want at prices energy portfolio and doesn’t pollute they are willing to pay. the air the way fossil fuels do. We We certainly should Solving these problems—what to certainly should eliminate barriers to eliminate barriers to produce and how—requires informa- its use. tion embodied in prices. Few of us But that doesn’t mean federal loan the use of nuclear buy golden faucets, because they’re guarantees are in order. too expensive. Prices help producers Government should not be trying power. But that decide whether to use gold or steel, or to pick winners and losers in the doesn’t mean federal try to come up with something bet- energy industry. If one company has ter. F. A. Hayek called competition a its loans backed by the government, loan guarantees are “discovery procedure.” As they com- other companies without guarantees in order. pete with one another for profits, will have trouble borrowing capital. firms discover the best way to produce Bureaucrats don’t know and can’t things. The firms that can maximize know whether (or in what combination) nuclear the difference between the price of what they produce energy, biodiesel, ethanol, solar energy, hydroelectricity, and the cost of producing it will survive and thrive; fuel cells, or any other alternatives are “best” for meet- those that cannot must change or perish. ing our energy needs. This information can only Energy prices might not reflect the full costs of pro- emerge through market competition. duction and consumption.There are additional costs— This is not just about energy.We don’t know—once the harm caused by air pollution or climate change (if and for all—the best way to build a computer chip.We that’s what’s going on)—that producers do not pay but don’t know the ingredients for the next tasty trend in are imposed on the public generally. Therefore they food.We’re ignorant about a lot of things we would like produce too much energy from dirty sources like coal to know. Markets—and competition—produce the and too little energy from clean sources like nuclear information that allows us to make decisions. But gov- ernments distort it by intervening in the capital mar- Art Carden ([email protected]) teaches economics at Rhodes College kets, by doing things like guaranteeing loans to in Memphis. Mike Hammock ([email protected]) is a particular firms. Nashville-based economist.

THE FREEMAN: www.thefreemanonline.org 6 Nuclear Energy Should Be Subsidized? IT JUST AIN’T SO!

power. It is intuitively appealing, therefore, to have the These are superior, more market-oriented alterna- government simply pick a cleaner energy source and tives, but their effective implementation rests on simi- subsidize it. But this is a mistake that leaves too many larly implausible assumptions about the policymakers’ questions unanswered. It is a mistake for the same rea- knowledge and incentives. They assume we know (or son that it would be a mistake to order all chip manu- can know) all the relevant external costs of pollution. facturers to use a 32-nanometer process, or subsidize They further assume we know (or can know) the cake makers that use margarine: The government is in socially optimal level of emissions that would prevail in no position to know if these are the best processes to the absence of externalities. They also assume that produce the desired results. A 32-nanometer process people acting through the political process are would be expensive overkill for a pocket calculator, and immune to the perverse incentives the programs cre- many people prefer cakes made with butter.The market ate. At various times and places environmental initia- reaches these conclusions by punishing firms that tives have been co-opted by special interests.Thus we ignore them. should keep in mind that even more market-oriented Similarly, we do not know how much more nuclear regulations will be difficult to get right.There’s no real power to use, how many more plants to build, and at substitute for the free market. what point we should start using other energy sources We can take other actions in addition to those instead. designed to internalize the external- Firms competing in truly free mar- ities. For example, government- kets will find the best ways to get The government granted advantages for other forms desired results. Competition forces the should stop trying of energy production should be answers on them. repealed—the special tax treatment to pick winners and for oil exploration, wind, and ethanol What About Externalities? should be eliminated. Instead of tar- ut what about those costs that let the competitive geted favors, taxes should be cut Baren’t reflected in prices, the process sort across the board. We should remove ones from so-called externalities like regulatory barriers that make it hard pollution? things out. to start new power plants but easy to In principle there are better alter- keep innovative competitors out. natives to government interventions that choose win- And, importantly, special limited tort liability must not ners and losers.While far from ideal, pollution could be be permitted for nuclear power or anyone else; thus the taxed or tradable permits to emit certain pollutants Price-Anderson Act, which was passed in 1957 to could be established. Power companies with dirtier encourage civilian nuclear power, should be repealed. plants would suddenly find themselves at a disadvantage The government should stop trying to pick winners versus other companies with cleaner plants and would and let the competitive process sort things out. have an incentive to shift toward cleaner energy. Pollu- Moore argues that the nuclear plants will create tion-reduction mechanisms we haven’t even imagined jobs, but this is a canard.When the government assumes could emerge as firms search for ways to reduce their a company’s risks, it does not create net new economic pollution costs. Maybe nuclear power would make activity. It merely reallocates it from one line of pro- huge gains in the resulting competition; maybe it duction to another. Having government-guaranteed would not. We cannot know, but we can say that the loans for a nuclear power company means other busi- resulting victors in that competition will be the energy nesses go without loans. Without undistorted prices, providers that found ways to reduce pollution at the profits, and losses, there is no way to know whether lowest cost. value has been created or destroyed.

7 JUNE 2010 Federal Deposit Insurance: A Banking System Built on Sand

BY WARREN C. GIBSON

ederal deposit insurance grew out of a turbulent Before we take that closer look we might ask time in American history: the Great Depression. whether, as is widely assumed, the bank failures of the FDuring two waves of bank failures in the 1930s 1930s were an example of unregulated free markets an astonishing 9,000 banks closed and millions of run amok. During that time, as Milton Friedman and depositors lost some or all of their savings.The Federal Anna Schwarz pointed out in their classic, A Monetary Deposit Insurance Corporation (FDIC) began opera- History of the U.S., the number of bank failures in tions in 1934, insuring deposit accounts up to $5,000 Canada was exactly zero. Canada is closely linked to per person (roughly $80,000 in today’s money). the United States economically and culturally, making The bank failure rate this episode as near to a then dropped dramatically controlled experiment and never again rose any- as any macroeconomist where close to the level of could wish for. the 1930s. And such bank The difference? failures that have occurred Canada had just ten have cost insured deposi- nationwide banks with tors nothing; many unin- about 3,000 branches, sured depositors were while branch banking made whole as well. Bank across state lines, and runs are a distant mem- often within states, was ory, revived occasionally prohibited by U.S. law. by reruns of It’s a Wonder- Thus smaller communi- ful Life. ties could only be Yet it may be prema- served by relatively ture to pronounce weak, poorly capitalized deposit insurance a suc- banks. A hailstorm cess. It can take a long time for an unsustainable pro- might be enough to topple the local bank in a small gram to unravel: Witness Social Security and farming community as surely as if it were built from Medicare. Seventy-five years after the start of Social straw. Security and 45 years into Medicare, it’s common The banking system was also caught in the down- knowledge that both programs are headed for a finan- draft of a plummeting money supply.When banks hold cial cliff. A closer look at deposit insurance will show only a fraction of their liabilities as reserves, deposit cracks in its edifice, raising questions about its sustain- ability as well as the distortions that it has introduced Warren Gibson ([email protected]) teaches engineering at Santa Clara into the economy. University and economics at San Jose State University.

THE FREEMAN: www.thefreemanonline.org 8 Federal Deposit Insurance: A Banking System Built on Sand

inflows cause the money supply to multiply, but the FDR was right. Deposit insurance generates moral reverse happened during the Depression as worried hazard: an incentive to engage in more reckless behav- depositors began to cash out their accounts.The econ- ior when one’s misdeeds are covered by someone else. omy could have adjusted to a declining money supply Bank managers tend to make riskier loans than they in one of two ways: either by lowering prices and wages would without insurance, and depositors don’t worry or by Federal Reserve injection of new money. about the lending practices of the banks they patronize. Hoover’s jawboning and Roosevelt’s New Deal legisla- Currently many people, including me, buy bank certifi- tion precluded the first solution, while the Fed, out of cates of deposit through online brokers, perhaps not ignorance or confusion, failed to inject new money. even learning the name of the bank that got our With economic adjustment prevented by government money.The magic letters FDIC are all we look for. policies, a vicious cycle of souring bank loans, liquida- tion of deposits, further declines in the money supply, Savings & Loan and Moral Hazard and more business failures took hold. he savings and loan crisis of the late 1980s saw a Interestingly, Milton Friedman and Murray Roth- Tcatastrophic explosion of moral hazard. Deregula- bard, both free-market economists, reached opposite tion had lifted interest rate caps for S&Ls and allowed conclusions about the declining them to expand from residential money supply. While Friedman mortgages into commercial and con- blamed the Fed, Rothbard celebrated Four days after sumer lending. Competitive pressures what he saw as the people’s attempt to taking office, FDR sent managers scrambling into these overturn fractional-reserve banking, markets, which were mostly unfamil- which he believed is inherently fraud- endorsed Hoover’s iar to them, while at the same time ulent. Either way, the fingerprints of view and said, they had to compete vigorously for government were all over the bank deposits. With deposit insurance failures of the 1930s and the Great “We do not wish to offered to all chartered institutions Depression generally. make the United regardless of risk, S&Ls made many With the failure of so many banks, preposterous loans.When the dust set- U.S. Representative Henry Steagall States Government tled, roughly half had failed.A massive vigorously pushed deposit insurance taxpayer bailout followed and, as very legislation. Franklin Roosevelt was liable for the mistakes rarely happens to failing government among his opponents. Indeed, when and errors of agencies, the Federal Savings and Loan asked about guaranteeing bank Insurance Corporation was abolished deposits four days after his inaugura- individual banks, and in 1989—though its responsibilities tion in March 1933, Roosevelt said he put a premium on were shifted to the FDIC. agreed with Herbert Hoover: “I can Moral hazard is an aspect of all tell you as to guaranteeing bank unsound banking in insurance, public or private. But pri- deposits my own views, and I think the future.” vate insurance companies, if they those of the old Administration. The wish to survive and prosper, must find general underlying thought behind ways to limit policyholders’ risky the use of the word ‘guarantee’ with respect to bank behavior. Deductibles, copays, threats of cancellation, deposits is that you guarantee bad banks as well as good and rewards for prudent behavior return some mone- banks.The minute the Government starts to do that the tary incentive to policyholders. In addition, insurance Government runs into a probable loss. . . . We do not companies try to educate policyholders about prudent wish to make the United States Government liable for behavior. Crucially, in a free market private insurance the mistakes and errors of individual banks, and put a companies’ profit-and-loss statements tell whether premium on unsound banking in the future.” they’re getting it right. Government agencies lack

9 JUNE 2010 Warren C. Gibson

profit-and-loss discipline and are inevitably subject to 2009 and 2013, with most of those costs coming in political pressure.The FDIC’s legally mandated require- 2010. For the shorter term, the proposal calls on com- ment to hold reserves to back its liabilities may resem- mercial banks to prepay their deposit insurance premi- ble market discipline, but as we shall see, when the ums through 2011. When they do so, a new asset will mandate was violated, no one lost his job and no appear on their balance sheets: a prepaid expense. To investors lost any capital. gain their acceptance and cooperation, the FDIC pro- Private insurance companies invest most of their poses that this prepaid expense be counted as an asset reserves in productive activities such as corporate secu- that is just as safe as U.S. government securities and rities or real estate.They count on earnings from these therefore does not require additional capital backing. investments to balance low or even negative returns on This shuffle will be pretty much a wash for the com- their pure underwriting activities. The FDIC, by law, mercial banks, and the upshot is that the FDIC will holds its reserves in the form of Treasury securities. indirectly borrow its own future premium income, Any alternative would certainly be riskier and more hoping that income will materialize in amounts suffi- politically charged. Yet we must recognize that this cient not only to cover future bank failures but also to arrangement, as with the Social rebuild the DIF.We shall see. Security Trust Fund, is merely a The DIF is not the FDIC’s pass-through of the FDIC’s liabil- only problem. When closing a ities to U.S. taxpayers. failed bank, the agency tries to sell The FDIC reserve fund is as many of the bank’s assets as pos- called the Deposit Insurance sible, including branches, loans, Fund (DIF). For most of its his- and securities holdings. The tory, the DIF was kept within its FDIC’s goal is usually to make all statutory limit, which has varied depositors whole, not just insured over time but is currently a range depositors. It sometimes takes pos- of 1.15 to 1.25 percent of insured session of assets for which it can’t deposits. At least, that’s the statu- get an acceptable bid. In doing so tory range. It’s actually essentially it acquires assets that are difficult zero. But are the statutory num- to evaluate and thus greatly com- bers the right ones? No one can Ken Yee [flickr] plicate estimates of future liabili- be sure, but again, the FDIC lacks ties. a profit motive to help get it right. A spate of bank failures in 2008 and 2009, while far Disguised Risk less severe in number and magnitude than in the 1930s, ow let’s take a longer look at the business of bank- left the DIF with no unencumbered assets at all. The Ning. The very words we use, like “bank” and pace of bank failures continued during the first three “deposit,” can distort our thinking. The word “bank” months of 2010, while the number of problem banks comes from the bench or counter where medieval on the FDIC’s secret list jumped 27 percent in the money changers did business. The word “deposit” sug- fourth quarter of 2009, to 702. In short, the FDIC is in gests something like an ore deposit in the ground: the trouble. minerals are there and can be gotten out. We think of A restoration plan has been proposed to get the DIF banks as custodians of our money, keeping it safe for us back to 1.15 percent of insured deposits by about 2017, and making it available whenever we need it. But pres- a date that has been pushed back more than once.The ent-day banks are not deposit banks, locking our money plan relies heavily on an assumption that the economy away in a vault as the term would suggest, but rather loan will soon resume robust growth and that “only” about banks. Most of our deposits are loaned out and not all of $100 billion in failure costs will be incurred between them could be redeemed on short notice. This works

THE FREEMAN: www.thefreemanonline.org 10 Federal Deposit Insurance: A Banking System Built on Sand

fine as long as there is no large and sudden short-term voted for an increase in deposit coverage from demand for withdrawals. But we have come to believe, in $100,000 to $250,000 with little or no discussion of the part due to misleading terminology, that we can have costs of this move. This “temporary” increase has been rewards without risk. Interest paid on bank deposits is extended once and will likely become permanent. now essentially zero but as depositors, we still reap bene- Members of Congress are of course motivated by the fits such as ATMs and online banking with no fee and no campaign contributions of bankers and others, and may apparent risk. In short, as in so many areas of contempo- not know or care about the long-term consequences of rary life, we have been led to expect something for noth- such actions. ing. Thus proper labeling could help rationalize banking. Private Options Those who want utmost safety in the form of true ow might private firms handle bank deposit insur- deposit banking should be free to pay for it with fees Hance? Before the government takeover of the for storage of their currency or gold. Liability insurance banking system, private clearinghouses sometimes pro- for true custodial service should be very cheap. Those vided mutual aid among member banks. The Suffolk who wish to entrust their money to loan banking Bank in Boston was a notable example in the early should accept the risk, and if they 1800s. It supported country banks in want insured accounts, they—not Make no mistake, New England for many years by clear- taxpayers—should be prepared to pay ing their transactions and accepting for the insurance, at least indirectly. our current banking their currency at par. It earned a profit While there is nothing inherently system is, and has doing so. wrong with loan banking, we get too But could private firms ever be big much of it when it is disguised as long been, a cartel enough to provide bank deposit insur- deposit banking and backed by mis- ance in today’s multitrillion dollar priced and politically motivated gov- run for the mutual economy? Reinsurance firms offer ernment insurance. The result is a benefit of Wall evidence that they could. As their banking system that is more highly name indicates, General Re and other leveraged than it otherwise would be. Street financiers and such firms insure insurance compa- This in turn increases the severity of their regulators nies. Who insures the reinsurance business cycles—booms and busts. companies? No one. Absent govern- in Washington. ment intervention, these firms would FDIC Incentives experience diseconomies of scale ack to the FDIC.As we have seen, banks pay for its when they grow too large, provided it is clear that they Bservice in the form of insurance premiums. Cover- would not be in line for a government bailout should age is not mandatory, so the organization looks some- they get into difficulty. what like a private business. But in fact it is a monopoly Failure is an important aspect of the free market. supplier to banks (with a parallel institution serving Economist Joseph Schumpeter’s pithy phrase “creative credit unions). Private competitors are locked out, per- destruction” captures this notion and reminds us that haps not by statute, but by the FDIC’s implicit and failures, which will always be with us, should be liqui- explicit backing by the Treasury (explicit in the form of dated so that others can pick up the remains and apply a line of credit). Without a profit motive, the FDIC them to more promising enterprises. Shouldn’t this idea lacks the incentive to serve its bank customers and its apply to banks as well? Rothbard actually celebrated indirect depositor customers by offering innovative occasional bank runs as a way of putting the fear of services with effective moral-hazard controls. God into bank managers and depositors alike. Amaz- Though the FDIC lacks market incentives, it is ingly, Roosevelt’s initial response to the deposit insur- awash in political incentives. Thus in 2008 Congress ance proposal echoed Rothbard’s: “There are

11 JUNE 2010 Warren C. Gibson undoubtedly some banks that are not going to pay one Let us not be so naive as to believe that government hundred cents on the dollar.We all know it is better to deposit insurance is any different. Any benefit this sys- have that loss taken than to jeopardize the credit of the tem provides to small depositors is incidental to its real United States Government. . . .” objective: to serve the cartel. The banking system is in need of real reform. More Washington-Wall Street Banking Cartel regulation? More virtuous regulators? Only the naive, ake no mistake, our current banking system is, the ignorant, or the disingenuous can believe these Mand has long been, a cartel run for the mutual answers in the face of regulation’s long history of fail- benefit of Wall Street financiers and their regulator ure, the practical impossibility of detailed oversight, and friends in Washington. Case in point: Goldman Sachs the perverse political incentives that always operate. and Morgan Stanley were allowed to convert to bank The solution lies not in wiping out risk—there can be holding companies so that they could receive federal no real economic growth without risk. Instead, we bailout money.The $180 billion AIG bailout provided need rational incentives: Let risks be borne by those Goldman with 100 cents on the dollar for its holdings best able and willing to take them. of AIG credit default swaps.

THE FREEMAN: www.thefreemanonline.org 12

The Myth of the Model

BY MAX BORDERS

ost people don’t notice it, but “model” may eludes us.Almost all the arguments presuppose models. be the most dangerous word in the English There are Keynesian models, “new” Keynesian mod- Mlanguage right now. Models justify a lot of els, and unbranded models proffered by leading eco- the bad policies that have been, or soon will be, foisted nomic lights like Harvard’s Robert Barro. Comparative on us. For example, what was used to justify the fiscal analyses of these positions offer little except further evi- policy of the big “stimulus”? That’s right. And as I dence that, as Stanford’s John Taylor writes, “[T]here is wrote this, “experts” were using models to gear us up no consensus.” for another one. But why? These people aren’t stu- More than a year after the original pid. I’d like to suggest in nontechni- “stimulus,” not only are economists cal terms why the problem might be nowhere near consensus about its with the models themselves. effects but few if any of the models “Mainstream macroeconomics is used to justify it have turned out to ‘hydraulic,’” writes recovering ma- be right. Obamanomic adviser croeconomist Arnold Kling at Econ- Christina Romer, for example, has Log. “There is something called come under heavy criticism because ‘aggregate demand’ which you adjust her team’s plan has performed by pumping in fiscal and monetary abysmally.The model behind the plan expansion. I wish to reject this whole predicted unemployment would peak concept of macroeconomics.” I think at 8.3 percent. It exceeded 10 percent he’s right. In fact, as I’ve argued in before dropping back slightly. In these pages before, economies are not defending her plan she appealed to pumps to be primed, but economic counterfactuals—that is, how bad ecosystems (“Black Swans, Butter- things could have been without it. In 1949, Bill Phillips tried to model the economy flies, and the Economy,”March 2009; using this hydraulic contraption. That her team failed to reach its rosy Science Museum / Science & Society Picture Library www.tinyurl.com/crea2y). Econo- targets, she says, “prevents people mists are thus notoriously bad at pre- from focusing on the positive impact.” But did Romer dicting, much less planning, economies. That’s why ever consider the possibility that her model was just next-generation economics must focus on the funda- wrong? mentals—namely, the rules that give rise to successful When it comes to prediction and explanation, entrepreneurship and sustainable growth. Not aggre- macroeconomic models are often just as bad after the gates. Not models. Rules. fact as before it. There are just as many debates raging about the effects of the “stimulus” as explanations of Max Borders ([email protected]) is a writer living in North the crisis used to justify it. Consensus consistently Carolina. He blogs at maxborders.com.

THE FREEMAN: www.thefreemanonline.org 14 The Myth of the Model

“Institutions form the incentive structure of a soci- • They’re rendered either in impenetrable math or ety and the political and economic institutions, in con- with sophisticated computers, requiring a lot of sequence, are the underlying determinant of economic popular (and political) faith. performance,” said Douglass North in his Nobel Prize •Politicians and policy wizards hide behind this lecture. And he’s not alone in the wilderness. James impenetrability, both to evade public scrutiny and Buchanan, another Nobel Prize winner, says econo- to secure their status as elites. mists are simply asking the wrong questions: • Models vaguely resemble the real-world phenom- ena they’re meant to explain but often fail to track How do markets work? Standing alone, this is an with reality when the evidence comes in. inappropriate and unanswerable question. It must be • They’re meant to model complex systems, but replaced by the question: How do markets work such systems resist modeling. Complexity makes under this or that set of constitutional and institu- things inherently hard to predict and forecast. tional constraints? Economists’ scientific expertise • They’re used by people who fancy themselves can be brought to bear on the predicted effects of planners—not just predictors or describers—of alternative sets of constraints. The relevant question complex phenomena. is not how this or that outcome may be put in place through possible collective or polit- None of this is to argue we ical action. The question becomes should do away with measurement. instead, how can this or that set of At the end of Te mperature, blood pressure, and constraints be predicted to operate macroeconomists’ other indicators are all useful data so as to allow the generation of an for telling whether you’re healthy. order that meets certain criteria of yellow-brick road? But using proxy measures to deter- desirability? The difference between A curtain, behind mine an economy’s health is a far the two methodological stances cry from using models to reduce may appear minor, but much ill- which lies a model, dynamic systems to steady-state advised effort might be avoided if snapshots. economists would recognize the behind which lies What does this mean for eco- limits of their own discipline. an agenda. nomics as a discipline? I think it’s [“Economists Have No Clothes”; time we admit many economists are www.tinyurl.com/yd3tmab] just soothsayers.They keep their jobs for a host of reasons that have less to do with accuracy Buchanan not only laments the poor framing of and more to do with politics and obscurantism. Indeed, economic questions, but also says that even those where do you find them but in bureaucracies—those attempting postmortems of the 2008-09 financial crisis great shelters from reality’s storms? Governments and have been “embarrassed by their inability to offer ‘sci- universities are places where big brains go to be grand entific’ explanations.”Those who’ve dared to come for- and weave speculative webs for the benefit of the few. ward have offered little more than warmed-over And yet “ideas have consequences.” Bureaucracies Keynesian nostrums. Just think of folks like Romer, are power centers. So we have a big job ahead of us. Paul Krugman, and Joseph Stiglitz—all of whom have We’ve got to do a seemingly contradictory thing and recommended various versions of doubling down on make the very idea of complex systems simple. How the failed policy.At the end of their yellow-brick road? best to say it? Economists aren’t oracles? Soothsaying is A curtain, behind which lies a model, behind which lies not science? Ecosystems can’t be designed? an agenda. “The very term ‘model’ is a pretentious borrowing So what do all these macroeconomic models have of the architect’s or engineer’s replica, down-to-scale of in common? something physical,” says Barron’s economics editor,

15 JUNE 2010 Max Borders

Gene Epstein. “These are not models at all, but just and the journalist, the latter of whom wants to peg his equations that link various numbers, maybe occasion- story to something authoritative the wonk has to pro- ally shedding light, but often not.” vide. At the receiving end of this wonk-writer alliance Take this as a throwing down of are the rest of us—with little besides the gauntlet. Macroeconomic wizards common sense as a shield. And I owe us more than the circular justifi- A model is a don’t mean this as populism. It is cations for cushy jobs. rather a defense against scientism Likewise, we have to explain that a cognitive shortcut for launched from the turf of Austrian scientist’s model, while useful in lim- both the wonk and economics. ited circumstances, is little better than Complex phenomena can be a crystal ball for predicting big phe- the journalist, the counterintuitive. Sometimes they nomena like markets and climate. It is latter of whom wants require scrutiny by experts to make an offshoot of what F.A. Hayek called sense of them. Notwithstanding the “pretence of knowledge.”In other to peg his story to their expertise, experts are just as words, modeling is a form of scien- something authoritative. often wrong as right. Can we base tism, which is “decidedly unscientific policy decisions on what amounts to in the true sense of the word, since it coin flips? Models are a means of involves a mechanical and uncritical application of making the most fragile of hypotheses seem strong and habits of thought to fields different from those in which substantive. But the only thing we can really predict is they have been formed” (www.tinyurl.com/ybjtur2). that they’ll eventually shatter. A model is thus a cognitive shortcut for both the wonk

THE FREEMAN: www.thefreemanonline.org 16 Thoughts on Freedom

The Private Provision of Public Goods

BY DONALD J. BOUDREAUX

obel laureate economist Elinor Ostrom’s What about roads? important work shows that people are very Limited-access highways are no problem. Private Ngood at using voluntary action to solve prob- highway builders can erect tollbooths at entrances and lems that economics textbooks insist require the force- exits and charge for use of their roads. No free riders ful hand of government. Producing “public goods” will thwart builders’ efforts to collect payment from (such as irrigation systems for a community of farmers) willing customers. often promises large enough gains to stir the creative Local city streets are different. Having tolls at each juices of people—who, given enough freedom of intersection seems awfully inconvenient. action and security of rights, then One way of solving the prob- figure out how to cooperate to lem of privately supplying local provide them. This cooperation city streets was seen in St. Louis. often takes different forms from As reported by historian David what we witness in markets for Beito: typical private goods (such as “In 1867, property on Benton shoes). Place, the first private street in St. Along similar lines other Louis, went on the market. The scholars over the years have dis- street had been subdivided a year covered countless historical earlier by Montgomery Blair, examples of the successful private who had been Postmaster Gen- provision of public goods. Some- eral under Abraham Lincoln. times it is achieved by firms seek- Blair entrusted design of the ing monetary profit, while other street to Julius Pitzman. By the times it is achieved by people 1870s, at least four other private cooperating for gains that are real streets ringed Lafayette Park. but not monetized or exchanged Pitzman laid a park median on in conventional markets. the street, a feature emulated by The discovery of any such Reston, Virginia’s public services are delivered by a private later private places. Every lot company and governed by the consent of homeowners. instance always surprises the typi- Joshua Davis extended to the center of the cal economist, whose thinking is median. Following the pattern of stymied by too many wrongheaded models of eco- Lucas Place [a St. Louis street with some private char- nomic interaction. acteristics], each deed carried restrictions, including a Perhaps the most surprising of these discoveries is setback from the street of twenty-five feet. Business use the issue of private currencies (or “free banking”). F.A. and multifamily housing were not prohibited, however. Hayek, George Selgin, and my George Mason Univer- The restrictions provided for the annual election of sity colleague Larry White led the way in showing not only that sound money can be supplied privately but Donald Boudreaux ([email protected]) is a professor of economics at that it has been supplied privately—most notably in George Mason University, a former FEE president, and the author of Scotland from 1716 until 1844. Globalization.

17 JUNE 2010 Donald J. Boudreaux

three commissioners by the lot owners. The commis- maximum prices that buyers would pay for homes in sioners had authority to maintain the street, street light- these towns would have been lower. ing, the park median, sewers, and the alley by levying an Interestingly, not only was physical infrastructure annual assessment of fifty cents per front foot on each provided privately in Reston and Columbia, so, too, property.Armed with private-street ownership, Benton was perhaps the most important public good of all: law. Place’s residents enjoyed a range of powers not pos- By buying real estate in Reston or Columbia, a buyer sessed [by residents of nonprivate streets].The commis- also expressly agreed to abide by the town’s bylaws, sioners, exercising their proprietary rights, erected a which serve as constitutions. They specify limits on gate at one end of the street and a retaining wall at the property use (for example, no old cars on cinder blocks other. They could deny access to the alley or park in front yards) as well as procedures for making future median to residents delinquent in their assessments to collective decisions that affect all residents. Unlike con- the street association.” stitutions and statutes chosen by majoritarian voting, Note that the private payments for this private street these rules have the actual unanimous consent of the were simultaneously also payments for several other people they govern. public goods that people value: sewerage, a park, and In our 2002 paper, “Contractual Governments in street-cleaning services, among oth- Theory and Practice,” Randy Hol- ers. By bundling these public ameni- combe and I called the rule-making ties into a single package—namely, Unlike constitutions procedures and agencies formed by title to property on Benton Place— and statutes chosen such constitutions “contractual gov- the developer was paid for providing ernments.”We explained: this range of public goods. Persons by majoritarian voting, who didn’t buy property on Benton A single owner who intends to subdi- Place and live up to their express these rules have the vide property and sell individual agreement to pay annual assessments actual unanimous parcels forms the typical contractual got no residential rights to live there. government. The owner’s motivation Note, too, that Beito does not call consent of the people is to increase the value of the parcels. the assessments “taxes.” He’s right not they govern. As such, the creator of the contractual to do so. Everyone who bought prop- government has an incentive to create erty on Benton Place expressly agreed constitutional rules with the highest to pay the assessments according to the contractual value....The entrepreneur who forms a contractual agreements they signed with the developer.These pay- government is a residual claimant whose income ments, therefore, were made voluntarily. depends on the production of efficient constitu- tional rules. In municipal government, in contrast, Modern Examples there is no residual claimant. Mayors, city managers, olumbia, Maryland, and Reston,Virginia, provide and town-council members may have some incen- Cmore recent examples of cities whose infrastruc- tive for making efficient decisions, but not the direct tures were built and supplied privately. In both cases, incentive that they would have if they were able to private developers—James Rouse in Columbia and capture the profit from efficient decisions directly, as Robert Simon in Reston—planned and constructed is the case with contractual governments. Thus, a the streets, sewer lines, and parks. They then sold real direct incentive exists to produce efficient constitu- estate that included a prorated portion of the infra- tional rules under which a contractual government structure’s cost. will operate, unlike the situation that exists with Obviously these developers also had incentives to municipal governments. provide high-quality infrastructure.Were the streets too few, the park too small, the sewer lines too narrow, the Sounds like a pretty good system.

THE FREEMAN: www.thefreemanonline.org 18 The New Financial Imperialism

BY ROBERT STEWART

he Britannica Concise Encyclopedia defines imperi- The U.S. governments—federal, state, and local— alism as “the policy of extending a nation’s find that extracting 35–40 percent of incomes is not Tauthority by territorial acquisition or by the sufficient. They need more to continue their march establishment of economic and political hegemony toward the perfect welfare state and, in the case of the over other nations. Because imperialism always involves national government, military dominance of the world. the use of power, often in the form of military force, it As a result the tax burden under which the average is widely considered morally objectionable, and the American suffers is now about 20 times higher than term accordingly has been used by under George III. states to denounce and discredit The EU countries are even the foreign policies of their oppo- worse, with governments raking in nents.” around 50 percent of national out- For example, Britain colonized put. Even Louis IV of France would North America, and what now now be viewed as a benevolent constitutes the United States, until uncle compared to that. The U.S. 1783 when the Brits were kicked and EU governments intrude on the out because out they imposed high financial lives of citizens in every taxes.The Declaration of Indepen- conceivable way,from taxes to regu- dence had it exactly right: “He lations to absurd laws that shape and [King George III] has erected a control their citizens. multitude of New Offices, and sent hither swarms of Officers to Empire of the Welfare State harass our people, and eat out their he welfare state, even more substance.” Tthan the war on drugs or Today, the United States makes New Napoleon: Jeffrey Owens leads OECD’s attempt organized crime, drives the finan- to foist high-tax policies on low-tax jurisdictions. George III look like a piker. It is OECD.org cial imperialism of the U.S. and amazing how, with respect to taxes Europe. Financing the welfare and freedom, the U.S. government has copied and often states—most of them are technically bankrupt because been more ruthless than the British Empire.As a conse- of the huge costs of Social Security, public-sector pen- quence, the extent to which economic liberty has been sions, medical care, and aging populations—creates destroyed in America and what is now the EU is almost massive problems, so the United States and Europe look beyond belief. It is as if the American and French hungrily abroad for more money. revolutions never took place, or took place to provide Robert Stewart ([email protected]), a retired business executive, is a cradle-to-grave management by government over director of several Bermuda companies and investment funds, and the our lives. author of A Guide to the Economy of Bermuda.

19 JUNE 2010 Robert Stewart

Thomas Paine, who wrote of “the greedy hand of sion. Tax evasion eats at the fabric of society, not only government, thrusting itself into every corner and by starving health care, education, and other needed crevice of industry,”would be astounded at today’s situ- government services of resources, but also by under- ation. Some taxpayers subsidize other taxpayers, or pay mining trust—making honest folks feel like they are taxes that they later themselves get back as subventions, being taken advantage of when they pay their fair or pay for services they do not want or even positively share.” oppose. Industry after industry is regulated by millions It is dubiously alleged that offshore tax abuses cost of bureaucrats and thousands of pages of regulations. the U.S. treasury an estimated $100 billion each year in Not content with levying excessive taxes on their cit- lost tax revenues. (As Mitchell says, “That number is izens at home, large governments using the Organisation phony.”) “Tax havens are engaged in economic warfare for Economic Co-operation and Development (OECD) against the United States, and honest, hardworking have in their sights the tax policies of small and less- Americans,” Levin said. The implication is that no influential countries whose cardinal sin is to siphon off country should derive a comparative economic advan- revenues or poach wealthy taxpayers. tage from its fiscal policies and that such policies should Instead of fighting Britain, the United States has be harmonized with countries like the United States. now joined hands with its former An appropriate response might be colonial oppressor and several other that this $100 billion is channeled European countries in seeking to pre- The greatest enemy from tax havens into productive vent a major threat to their treasuries. of the modern State investment that creates jobs, wealth, (For some examples see Daniel and opportunities for Americans Mitchell’s July/August 2009 Freeman is not the terrorist, rather than disappearing into the rat- article, “In Praise of Tax Havens,” but the citizen hole of government spending. Or that www.tinyurl.com/l2crab.) What is tax policy should not be decided by the nature of this threat? who simply wants OECD bureaucrats. There are a number of countries, Truly in many ways the world has disparagingly called tax havens (or to keep his own changed—and not always for the bet- offshore financial centers), most of income or to protect ter—during the past two centuries. them small and insignificant, such as High taxes are good, and low taxes are Bermuda, Monaco, Liechtenstein, and his own wealth. bad now. Freedom to spend your Cayman, that are allegedly sabotaging money in the way you deem best is the grandiose plans of the United States and the Euro- no longer a virtue but a sin. Diversity is out, homo- pean Union to create their utopian welfare states and geneity in. Millions of people in the United States and undermining expensive military ventures in obscure Europe now depend on taxing others in order to enjoy places like Iraq and Afghanistan. income, medical care, and unemployment and other What on earth can these toe-holds on the world benefits. atlas be up to? The greatest enemy of the modern State is not the According to a March 2, 2009, floor statement of terrorist, criminal, hoodlum, or even the foreign aggres- Senator Carl Levin of Michigan on the introduction of sor; it is the citizen who simply wants to keep his own the “Stop Tax Haven Abuse Act,” (an earlier version of income or to protect his own wealth.“Need” is defined which was supported by then-Senator Obama) a tax as getting your hands on other people’s money, and haven is a foreign jurisdiction that maintains corporate, greed has come to mean the natural desire to protect bank, and tax secrecy laws and industry practices that your own property and assets from sequestration by make it difficult for other countries to find out whether governments. their citizens are using the tax haven to cheat on their The jihad against low-tax jurisdictions and the taxes. He went on to say “that secrecy breeds tax eva- imperialist tax policies being implemented by the

THE FREEMAN: www.thefreemanonline.org 20 The New Financial Imperialism

United States and the European Union have at least standard of living of everyone depends on capital four adverse consequences. investment, which today is not only tools, factories, and Privacy is reduced. Increasingly, the right to be left equipment, but human capital. Capital investment alone or to tell the government,“Mind your own busi- requires resources not consumed but saved. Ludwig von ness,” is seen as a quaint throwback to the eighteenth Mises said it best: “The confiscation of business profits century. But is not the principle a fundamental part of does not benefit the masses. It prevents the efficient privacy and liberty? entrepreneur from expanding his efforts to supply the The enjoyment of financial and personal privacy is consumers in a better and cheaper way, and it shelters the essence of a free and civilized society. Freedom the less efficient against the competition of more effi- means the right to spend your own money as you like cient newcomers. It substitutes rigidity and immutabil- and to talk to your lawyer or banker without fear he is ity for progress and continuous improvement.” a government agent. Inhibiting, through punitive taxation, the production Government power is increased. The tax laws of most of wealth in order to create the impression of equality is countries are voluminous, so much so that even tax not humanitarianism but simply stupidity because it lawyers and accountants have trouble interpreting them. makes everyone less well-off—especially the poor. Everyone breaks them inadvertently.The more laws, the Tax policy is “harmonized,” that is, “cartelized.” Tax greater is the power of government, and proportionately harmonization is the equivalent of tax bullying. The the freedom of the individual is dimin- hypocrisy of governments’ bullying ished. John Mitchell, the attorney gen- tax havens is appalling. If the OECD eral under President Nixon, is alleged If the ability to avoid tax systems were mild, most people to have said to his boss, “Let me know taxes were impossible, who now use tax havens wouldn’t who you wish to be arrested, and I will bother. find a law he has broken.” He likely a tyrannical regime The belief that tax harmonization wouldn’t have to look further than the could squeeze the is sound public policy has its genesis tax code. For anyone. in the mistaken belief that govern- The sorry and tragic history of taxpayer orange until ment spending is good and private government power is that it is likely to the pips squeaked. spending is bad. This is the private be abused, and the likelihood, or even affluence/public squalor argument the certainty, of abuse grows along sanctified by the 1958 publication of with that power.This point was made early on after the The Affluent Society by the late John Kenneth Gal- creation of the income tax, when Richard E. Byrd, braith—patron saint of political big spenders. However, speaker of the Virginia House of Delegates, predicted, history tells us that when you leave people alone and “[A] hand from Washington will be stretched out and keep taxes low, economies flourish and people prosper. placed upon every man’s business. ...Heavy fines If the ability to avoid taxes were impossible, a tyrannical imposed by distant and unfamiliar tribunals will con- regime could squeeze the taxpayer orange until the pips stantly menace the taxpayer. An army of Federal offi- squeaked. cials, spies and detectives will descend upon the state.” The income tax changed the relationship between Guilt by Lack of Association the taxpayer and government.Taxpayers are allowed to ne of the latest stunts of the OECD is to com- retain a portion of their earnings as pocket money Opel offshore financial centers to sign tax infor- while the government filches the rest. Freedom to mation exchange agreements (TIEA), under which spend hard-earned wages is at the discretion of the tax authorities in these centers can be forced to provide authorities. information. Failure to sign a sufficient number of Capital investment is reduced. One of the fundamental TIEAs can place a jurisdiction on a blacklist.This is a and settled propositions of sound economics is that the bully-boy tactic.

21 JUNE 2010 Robert Stewart

Appearing on the blacklist means that there is a state,“If there must be a blacklist, then America should strong suspicion that monkey business is going on, and have its place on it.” that the low-tax jurisdiction is using improper secrecy Tax competition compels governments to think more to shelter potential money launderers, terrorists, tax carefully before spending the public’s money and frees evaders, and other assorted financial riffraff. However, entrepreneurs for greater access to investment funds. the pristine reputation of the United States has been Contrary to common belief, low-tax jurisdictions do not undermined lately by research con- siphon off capital from high-tax areas, ducted by Jason Sharman of Griffith Tax competition but allow a better and more effective University on Australia’s Gold Coast. means of making investment decisions. Sharman tested the difficulty in set- compels governments The Bible established a tax rate of ting up anonymous bank accounts in 10 percent, known as the tithe. That various places around the world, to think more should be enough for governments. including tax havens. The highest carefully before There is little hope for optimism on standards of probity were small island that score. tax havens, while the lowest standards spending the Low-tax countries are an affront to arose in Somalia and the United public’s money. high-tax countries that believe they States, where service providers were have a right to tell the rest of the prepared to set up anonymous bank world how to live. So high-tax coun- accounts without proper identification. This led Jean- tries try to force their tax regimes on everyone else. Claude Juncker, prime minister of Luxembourg, to That is financial imperialism.

THE FREEMAN: www.thefreemanonline.org 22 Producing Jobs: Thoughts on Obama’s Plan for Small Businesses

BY BRUCE YANDLE

he ears of small business America must have “These tax credits are simple and straightforward, perked up when President Obama spoke about and will support small businesses to generate the jobs Tthat critically important sector in his State of Americans so desperately need. And they’ll start doing the Union address. Mine certainly did. Here’s when it it now.” really got interesting: “I’m . . . proposing a new small My response must have come from a stored-up love business tax credit—one that will go to over one mil- for small businesses that goes back more than 40 years. lion small businesses who hire new workers or raise But after settling back in my chair, I had other thoughts wages. While we’re at it, let’s also eliminate all capital on the matter. Let me explain. gains taxes on small business investment, and provide a For some 15 years, starting when I was still a college tax incentive for all large businesses and all small busi- student in 1952, I was a part-owner of a small business nesses to invest in new plants and equipment.” enterprise, which in 1967 had about 50 employees. As Later the President explained there corny as it may sound, I still remem- would be a $5,000 tax credit for ber what it takes to make a payroll on employing an additional worker, for- America’s small Friday night. I understand how hard giveness of the employer’s 6.2 percent it is to generate enough additional portion of Social Security payroll taxes businesses employ dependable business to add just one for newly added salaries and other close to half the more employee. And I know how salary increases, an end to capital gains great it feels to bring one on and to on investment, and continuation of workers in the introduce the new employee to the rapid write-offs for new capital invest- economy. team members he or she will join. I ment, all to be targeted to businesses also know how much it hurts every- with 50 or fewer workers. one in the firm to cut back, to have Mr. Obama was right to be concerned about small to fire a good worker because business has fallen off. businesses. According to ADP’s latest report, firms with Because of the pain that goes with layoffs, I know how fewer than 50 workers employed some 48 million peo- careful one will be before hiring another worker. In the ple in December 2009; those with more than 50 had 60 case of small business, that person is likely to be a million on the payroll. So America’s small businesses friend, former colleague, or family member. Also, if the employ close to half the workers in the economy. But firm employs ten people, which is common, adding one their hiring plans have been decidedly bleak. more amounts to a 10 percent increase in personnel. On first hearing the President’s message, and cap- tured by the moment, I shouted out, “Right on! Now Bruce Yandle ([email protected]) is Alumni Distinguished Professor of we are getting somewhere.”According to press reports, Economics Emeritus, Clemson University; Distinguished Adjunct Professor of Economics, Mercatus Center, George Mason University; and Senior I was not alone in my enthusiastic reaction. John Arens- Scholar, PERC. A version of this article originally appeared at meyer, CEO of Small Business Majority, happily said, TheFreemanOnline.org

23 JUNE 2010 Bruce Yandle

And that ain’t hay, especially in a recession when you Clunkers. Cash for Appliances. First-Time Homebuyer are not sure if the next month will be your last. tax credits. Health care revision. Copenhagen. Cap and I hope that some of Mr. Obama’s close advisers trade. Jobs programs. Financial reform. Each announced know these things as well as, if not better than, I do. I in short succession. The effects of some of these pro- am betting they do. grams are so large that they are readily seen in GDP No one in his right mind wants to bring on a new and construction data. By some counts, about half of employee only to face the plight of having to pass out 2009’s fourth quarter 5.7 percent GDP growth is more pink slips. Before hiring that one person I would explained by Cash for Clunkers, a program that came want to see a lot of black ink on the operating state- on like gangbusters and then faded into oblivion. ment, not just one or two profitable months. Because of Imagine yourself as owner of a small business with this, I don’t think a $5,000 tax credit will get the job 20 employees who’s trying to decide if you should done.What we need is some certainty. build up inventories again, hire one or two people, and This seemed to be a base concern when Susan Eck- lease another pickup truck.Would you make your deci- erly, senior vice president, federal public policy, of the sion on the basis of the fourth-quarter GDP numbers? National Federation of Independent Would you base your plans on the Business, was asked about the Obama explosion of existing home sales that tax credit. She indicated that small Adding just one new followed the First-Time Homebuyer businesses wouldn’t start hiring until full-time hire when stimulus? Most likely not. I’ll bet you earnings improved. “An employer is would wait so that you could get a unlikely to hire someone just to get a your toes can barely better fix on the real economy. $5,000 credit,” she said. When I read touch the bottom in Perhaps we need six months of Eckerly’s comments I was reminded of political silence. a wise guy’s response to tax incentives a recession’s deep end When I think about the situation that allowed a firm to “to take it off is risky business. and Mr. Obama’s proposal, I wonder your income tax.”The response:“First if it might be better to expand the off, I’ve got to have income.” noble elements of his idea to all busi- Obama wants to see one million new employees nesses, small and large, and do so permanently. Instead added to the ranks of America’s small businesses. I do as of having a complicated jobs-based tax system, why not well. But adding just one new full-time hire when your just cut the marginal tax rate? And instead of allowing a toes can barely touch the bottom in a recession’s deep temporary moratorium on capital gains taxes for small end is risky business, and for one major reason. At this businesses, why not just abolish capital gains taxes for all point there is no way to know what really lies ahead; businesses? Doing this would put an end to trying to there is no way to distinguish between stimulus and the determine what is stimulus and what is real and what real economy. Too many policy boulders are being may change at the end of the year. dropped in the water. One can hardly determine the There is a supply side to the economy that wants to effects of one before another one is thrown in the pool. spring forward.A growing economy will produce more There was stimulus one. Then stimulus two. And jobs. This is the time to give a nudge and then stand now talk of stimulus three. There was TARP. Cash for back and let the real economy recover.

THE FREEMAN: www.thefreemanonline.org 24 Our Economic Past Comparing the Great Depression to the Great Recession

BY BURTON W. FOLSOM, JR.

resident Obama has often remarked that the President Roosevelt became Hoover on steroids. Great Recession (2008–10) is the greatest eco- FDR and his advisers, despite some early moves to cut Pnomic crisis since the Great Depression. It’s spending and control the deficit that Hoover left interesting to study the many parallels between the behind, decided that ever-larger federal spending would Great Recession and the Great Depression. trigger economic expansion and pull the country out Causation. The main causes of both crises lie in of its economic slump.Thus Roosevelt began the Agri- actions of the federal government. In the case of the cultural Adjustment Act (AAA), which paid farmers not Great Depression, the Federal Reserve, after keeping to produce, and then expanded Hoover’s Reconstruc- interest rates artificially low in the 1920s, raised interest tion Finance Corporation, which provided bailout rates in 1929 to halt the resulting boom. That helped money to large banks and corporations. He also choke off investment. Also, President Hoover signed expanded spending on public works and targeted large into law the sky-high Smoot-Hawley Tariff, which sti- subsidies to various special interests. fled trade and damaged American exports throughout President Obama, who often cites FDR, followed the 1930s. Finally, the President signed a large tax his example of targeting spending to interest groups. increase into law in 1932, which He signed into law a $787 billion halted entrepreneurship. stimulus package that sent tax dollars The seeds of the Great Recession President Roosevelt to various cities and voting groups were planted when the government in across the nation. He later supported the 1990s began pushing homeown- became Hoover an expensive “jobs bill” that would ership, even for uncreditworthy peo- on steroids. send money into key congressional ple, with a vengeance. Mortgage- districts. The President also cam- backed securities built on dubious paigned for a cap-and-trade bill and mortgage loans became “toxic” when the housing mar- universal health coverage, both of which promised to ket took a downturn, and many American banks verged increase the federal debt substantially. In fact, the on collapse.The government’s urgent desire to bail out increase in federal debt under Obama and Roosevelt is various banks and corporations created uncertainty and similar.The national debt more than doubled in Roo- instability, and this may have widened the recession. sevelt’s first two terms, and it is projected to double Massive federal spending. Presidents Roosevelt and again in eight to ten years. Obama responded similarly to the crises. They talked Spending fails. After the large increases in federal about balancing the federal budget, but instead spending under Roosevelt and Obama, unemployment resorted to massive spending. Earlier presidents, like remained high. In the 1930s unemployment fluctuated, Cleveland and Harding, cut spending when the nation but recovery never occurred. In April 1939, toward the was threatened with economic hardship. Hoover was end of Roosevelt’s second term, unemployment was the transition president, running deficits with record almost 21 percent. Treasury Secretary Henry Morgen- spending on public works, the first federal welfare thau complained,“We are spending more than we have program, and the first large-scale federal farm pro- gram. The results were budget deficits and 25 percent Burton Folsom, Jr., is a professor of history at Hillsdale College and author unemployment. of New Deal or Raw Deal? He blogs at BurtFolsom.com.

25 JUNE 2010 Burton W. Folsom, Jr.

ever spent before and it does not work.” Nonetheless, showed, tax hikes eventually follow large spending almost all of FDR’s programs continued—usually with increases. annual budget increases. Scapegoats. The sequence of massive federal spend- When Obama took office unemployment was at 8 ing followed by a lack of recovery plus tax hikes is percent, and in the next year it steadily increased to poison for a politician. Therefore Roosevelt sought over 10 percent before falling back just under that scapegoats to explain his failure. Wall Street bankers mark. He and his advisers were puzzled that large were his favorites. He called them “economic royal- spending increases did not slash unemployment, and he ists” and blamed them for causing the Great Depres- argued that his spending was saving jobs that would sion. He also blamed America’s top businessmen for otherwise have been lost. instigating a “capital strike”—they were refusing to Critics of Roosevelt and Obama insisted that it was invest in order to make him look bad. FDR then impossible to spend our way out of a recession. During launched IRS investigations of key Republicans and the New Deal, economics writer Henry Hazlitt used the newspapers to encourage hostility toward observed that public-works spending destroyed as many these targets. jobs as it created.“Every dollar of government spending Obama has followed FDR’s playbook of attacking must be raised through a dollar of taxation,” Hazlitt Wall Street bankers and various corporate leaders. He emphasized. If the Works Progress Administration condemns the raises these bankers sometimes receive builds a $10 million bridge, for exam- and the profits earned by some large ple,“the bridge has to be paid for out oil companies and health insurance of taxes. . . .Therefore for every public companies. job created by the bridge project a Obama has followed Such emphasis on “class warfare” private job has been destroyed some- FDR’s playbook. may be an inevitable part of redistrib- where else.” uting wealth from one group to Tax rates raised. During the Great another. Perhaps Roosevelt and Depression Roosevelt raised both Obama believed that by increasing income and excise taxes. In 1935, with FDR’s push, envy and resentment toward some Americans, they the top marginal tax rate hit 79 percent. Few paid that could capture the votes of larger groups of Americans rate, but thousands of Americans were in the 50-per- and thereby win reelection (in FDR’s case there is evi- cent bracket. Entrepreneurs had to hand over more dence of this). True, this strategy guarantees that many than half of any income above a certain level. Facing wealthy Americans will attack any president who uses disincentives to make capital investments, many entre- class warfare, but the campaign for redistribution will preneurs used their wealth cautiously—investing in always supply large amounts of money to subsidize tax-exempt bonds, art collections, and foreign banks. favored groups. Little wealth went into creating jobs, so high unem- When Roosevelt was reelected in 1936 Senator ployment persisted. During World War II FDR raised Carter Glass, Virginia Democrat, admitted, “The 1936 taxes further, to 94 percent on all income over elections would have been much closer had my party $200,000. not had a 4 billion 800 million dollar relief bill as cam- Most of the tax hikes under Obama are planned for paign fodder.” the future.Thus far we have seen proposed tax hikes on Obama may be hoping his “stimulus” package and products such as cigarettes, liquor, plane tickets, and soft his health insurance bill will generate similarly large drinks. He wants the tax cuts enacted under President support among Americans receiving federal benefits Bush to expire. That will mean a spike in the capital and that these voters will go to the polls to overwhelm gains tax, the income tax, and the estate tax. As FDR those who are paying the bills.

THE FREEMAN: www.thefreemanonline.org 26 Are Welfare State Orphans in Good Hands?

BY JAMES L. PAYNE

n February 22, a court in suburban Washing- The next link in the tragedy concerns Bowman’s ton, D.C., passed judgment in one of the motivation for adopting the children. If she did not love Omost horrendous cases of child abuse in mod- children, if she saw them as a burden, why had she ern times. Renee Bowman, the adopting parent of bothered with the expense and effort of adopting three girls, had for years starved, neglected, and beaten them? The answer is money. In 1980 Congress them, while keeping them locked night and day in approved a subsidy program to provide payments to their bedroom. She choked two of the girls to death, parents who adopt children from foster care. I’m sure put their bodies in plastic bags, and stored them in lawmakers thought it was a useful idea. If the federal the freezer. The third girl escaped by jumping from government can buy tanks and bombs, after all, why a window. can’t it buy adoptions? At first glance, these child murders Well, it does buy adoptions, but may seem an inexplicable, isolated not high-quality ones.Worthy parents tragedy; a closer look reveals that this Worthy parents adopt adopt out of love, conviction, enthusi- outrage was constructed, piece by asm, and dedication. They are willing thoughtless piece, by the modern out of love, con- to make real sacrifices for their chil- welfare state. dren. Putting money on the table viction, enthusiasm, changes the mix of motivations. Yes, In It for the Money and dedication. loving parents will still appear, but he first error came with the insensitive people who view children Tselection of Bowman as the Putting money on as an economic commodity also come adoptive parent. She was obviously a the table changes the forth. Renee Bowman was one of negligent and seriously deranged these insensitive, grasping types. She person who never should have mix of motivations. was being paid $2,400 a month by the been approved for adoption. Well, federal government to be listed as the who approved her? The adoption mother of these three girls; altogether had been supervised from start to finish by a govern- she collected $152,000. “This woman was in it for the ment agency, the District of Columbia’s Child and money,” said the prosecutor at the trial.“And by killing Family Services. In theory, it was supposed to estab- the children, keeping them literally on ice, the money lish that Renee Bowman was a suitable parent. In continued to flow.” practice it didn’t even notice, or care, that she had a criminal record—she threatened a 72-year-old Contributing editor James Payne ([email protected]) has taught political with bodily harm—a rather glaring instance of science at Yale,Wesleyan, Johns Hopkins, and Texas A&M. His latest book is A History of Force: Exploring the Worldwide Trend Against “government failure” by this notoriously incompe- Habits of Coercion, Bloodshed, and Mayhem. This article first tent agency. appeared at TheFreemanOnline.org.

27 JUNE 2010 James L. Payne

Keeping Adoptions Low, Abuse High charged or suspected in the homicides. And those are fficials point out that without adoption subsidies just the murder cases—that we know about. Given Oto attract parents, children would languish in the the number of children in Washington, D. C.’s adoption state foster care systems.There’s some truth to this, but subsidy program, it’s fair to wonder if neglect and abuse it exposes another flaw in the state system of handling short of murder are far more widespread than anyone orphans. A survey by the National Center for Health would like to imagine Statistics found there were nearly 600,000 women This brings us to the most shocking failure in this seeking to adopt children, a figure over four times the sorry episode. After the deadly consequences of the total of 129,000 children in foster care available for misguided adoption subsidy became screaming head- adoption.The oversupply of willing parents holds for all lines, officials did nothing! They didn’t close down the categories of children, including older children, black program.They didn’t fire, fine, or imprison employees children, and children with disabilities. But under gov- responsible for the miscues. They didn’t resign in ernment management, adoption from foster care has shame and embarrassment. Jobs and careers depend on become a tortuous, burdensome process demeaning to this program: It’s in officials’ economic self-interest to prospective parents. The government downplay its problems. The same is agencies are so focused on trying to true of the pressure groups that rep- apply a host of bureaucratic regula- resent parents taking the subsidy. tions that they repel many, especially Even after the Their attitude was captured by a independent-minded individuals criti- murders were Washington Post reporter:“Even with cal of silly red tape and micromanage- limited oversight, most children end ment. The result is that children revealed, officials up in safe and supportive families, remain stuck in foster care. Even so, did nothing. advocates said.” hundreds of thousands of people In the old days, before we got would like to adopt them. hardened to welfare-state abuses, we The severity of government impediments to adop- would have said that a system that tion was documented by a study undertaken in 2005 by resulted in even one murdered child was unacceptable. Listening to Parents, a nonprofit research group. It fol- Today, the self-interested participants of the welfare lowed 1,000 prospective parents who called a public state are content with a program where “most” of the child-welfare agency seeking to adopt. Out of this ini- children aren’t slain. tial group, only 36 adoptions occurred. The solution to the travesties being committed by Having inadvertently contrived a deplorably low government child welfare agencies lies right before us: adoption rate, government sought to correct the prob- Move away from the welfare state as fast as we can. lem by applying government’s inevitable fix-all: throw- Turn the problems of orphans, foster care, and adop- ing more money at the problem, in the form of tion back to private charitable and commercial enti- adoption subsidies. They created a situation of moral ties, unsubsidized by tax money and largely hazard where a person like Renee Bowman might unregulated. adopt children primarily for the money, and, lacking Will errors occur in this voluntary system? love and a sense of responsibility, might neglect and Undoubtedly they will, but they wouldn’t be met with abuse them. institutional shrugs of the shoulders.The voluntary sys- Bowman’s was not an isolated case. Washington Post tem would have this advantage: If a private agency was columnist Courtland Milloy reported in February 2009 implicated in a tragic malfunction, donors and cus- that in the previous eight months at least seven adopted tomers would be free to turn away from it and the children in D. C. had been killed, their adoptive parents agency would disappear.

THE FREEMAN: www.thefreemanonline.org 28 Peripatetics

Jefferson’s Economist

BY SHELDON RICHMAN

n 1817 the Frenchman Destutt de Tracy (1754–1836) tion in which the two contracting parties both gain. published his Treatise on the Will and Its Effects. Whenever I make an exchange freely, and without IThomas Jefferson was so enthusiastic about Tracy’s constraint, it is because I desire the thing I receive book that he had it translated, then edited and revised more than that I give; and, on the contrary, he with the translation himself. He renamed it A Treatise on whom I bargain desires what I offer more than that Political Economy. which he renders me. Why was Jefferson so excited about the work? It contains a clear appreciation of the free society that Thus, contra Smith, Tracy understood that people would have excited anyone with Jefferson’s philosophi- exchange unequal things on the basis of differing assess- cal and political proclivities. Let’s have a look at some of ments of their utility, or usefulness. what Tracy had to say. And like a good proto-Austrian who understands We should first note that Tracy anticipated (though that the future is uncertain,Tracy hastens to add: imperfectly) key insights of the Austrian school of economics, which would come into In truth it is possible that, in an being a little more than half a cen- exchange, one of the contractors, or tury later at the University of Vienna even both, may have been wrong to under Carl Menger. The classical Destutt de Tracy’s desire the bargain which they con- school of economics associated with treatise contains a clude. It is possible they may give a Adam Smith’s The Wealth of Nations thing, which they will soon regret, for (1776) leaned on an objective theory clear appreciation of a thing which they will soon cease to of value; the value of goods was said the free society. value. It is possible, also, that one of the to be determined by the amount of two may not have obtained for that labor embodied in them. Exchange which he sacrifices as much as he for Smith consists of the trading of might have asked, so that he will suffer equivalents (measured in labor time). But here’s Tracy, a relative loss while the other makes an exaggerated four decades later, stating something very close to the gain. But these are particular cases which do not belong subjective utility theory of value that would mark the to the nature of the transaction. Austrian school’s revolutionary approach to economics: As a result of his insights,Tracy has a distinctive way In general we may say that whatever is capable of of describing society: procuring any advantage, even a frivolous pleasure, is useful. ...[T]he measure of the utility of a thing, real Society is purely and solely a continual series of or supposed, is the vivacity with which it is generally exchanges. It is never anything else, in any epoch of desired. ...Now,how are we to fix the degrees of a its duration, from its commencement the most thing so inappreciable as the vivacity of our desires? unformed, to its greatest perfection. And this is the We have, however, a very sure manner of arriving at it. It is to observe the sacrifices to which these Sheldon Richman ([email protected]) is the editor of The Freeman and desires determine us. ...[A]n exchange is a transac- TheFreemanOnline.org.

29 JUNE 2010 Sheldon Richman

greatest eulogy we can give to it, for exchange is an who have nothing in advance, or who have too lit- admirable transaction, in which the two contracting tle, can do no otherwise than put themselves in the parties always both gain; consequently society is an pay of those who have a sufficiency.They offer their uninterrupted succession of advantages, unceasingly labour every where, it falls in price. renewed for all its members. . . . It is this innumerable crowd of small particular Curiously, Tracy does not acknowledge that land advantages, unceasingly arising, which composes the may become unavailable not because of population general good, and which produces at length the density but because the government has seized it and wonders of perfected society. given it to the nobles or cronies. In fact, this happened repeatedly in England. State-sponsored “land monop- Those are some of the fundamentals of Tracy’s posi- oly” and the exploitation it made possible were deep tive economics. From there he moves on to normative concerns of libertarians from the early nineteenth cen- economics, or political economy. Given what he has tury into the twentieth century. said already, we should not be surprised that he Tracy understood that through government inter- embraces freedom and property: vention class conflict emerges, as own- “[S]ociety should have for its basis, ers of land and capital seek advantage the free disposition of the faculties of Tracy points out over those who labor for them: the individual, and the guarantee of that land is a key whatever he may acquire by their After the free disposition of his means; then every one exerts himself. source of income labour, the greatest interest of the One possesses himself of a field by that in a free society poor man is that this labour should be cultivating it, another builds a house, dearly paid. Against this I hear violent a third invents some useful process, competes with outcries. All the superior classes of another manufactures, another trans- employers for labor, society—and in this view I even com- ports; all make exchanges; the most prehend the smallest chief of a work- skilful gain, the most economical maximizing workers’ shop—desire that the wages should be amass.” very low, in order that they may pro- Tracy points out that land is a key bargaining power. cure more labour for the same sum of source of income that in a free soci- money; and they desire it with so ety competes with employers for labor, maximizing much fury, that when they can, and the laws permit workers’ bargaining power by providing an alternative them, they employ even violence to attain this end,—and to wage employment. they prefer the labour of slaves, or serfs, because it is still at a lower rate.These men do not fail to say, and [S]o long as society has not occupied all the space persuade, that what they think is their interest, is the of which it may dispose, all still prosper with care; general interest; and that the low price of wages is for those who have nothing but their hands, and absolutely necessary to the development of industry, who do not find a sufficiently advantageous employ- to the extension of manufactures and commerce,— ment for their labour, can go and possess themselves in a word, to the property of the state. [Emphasis of some of those lands which have no owners, and added.] derive from them a profit so much the more consid- erable, as they are not obliged to lease or buy them. Thus the State is implicated in class conflict, a Accordingly care is general in new and industrious theme that originated not with Marx but with early nations. But when once all the country is filled, libertarians. when there no longer remains a field, which belongs In future columns, I’ll examine Tracy’s views on to nobody,it is then that pression begins.Then those government spending and borrowing.

THE FREEMAN: www.thefreemanonline.org 30 Orient Express to Hell

BY JAMES BOVARD

n 1986 and 1987 I slipped behind the Iron Curtain mountain terrain, low-hanging fog, and military guards a few times to study economic perversity and polit- with German shepherds circling the train time and Iical slavery.In November 1987 I flew into Hungary again sufficed. before heading on to the most repressive regime in My cabin was searched four times, with each team Europe. outdoing its predecessors. The mattresses on the bunk The train from Budapest to Bucharest, Romania, beds were jostled, and practically every cubic inch of was called the Orient Express. The original Orient space was poked or prodded. Express began in the 1880s and connected Paris to The final inspection was supervised by a cute (by Constantinople. The menu on the socialist standards) military officer. train’s first run included oysters, Perhaps the authorities thought I turbot with green sauce, chicken “à would confess my perfidy to the la chasseur,” fillet of beef with opposite sex. Nope: I was just “château” potatoes, and a buffet of another tourist heading to the “Paris desserts. In the communist rendi- of East Europe,” as Bucharest tion of the Orient Express, there preened in pre-communist times. was no food on the train in Roma- Except that there were almost zero nia, though a few morsels may have tourists in a land renamed “the been available in Hungary. Ethiopia of Europe.” (I entered the I had a cabin to myself as the country illegally—relying on an eas- train rolled southeast from ily acquired tourist visa, instead of Budapest. I had been told that if enduring the hassles and delays for a border guards found a map of journalist visa.) Romania or any other dubious After the final search, guards papers, I could be arrested or bolted my cabin shut from the out- denied entry. So late at night, near- Ceaus¸escu, the World Bank’s darling, had to flee side. The pseudo-luxury train had ing the Romanian border, I studied his former subjects by helicopter when his officially been converted into a government broke down. the documents one more time, Denoel Paris traveling jail. But at least the intel- drilling into my head the things that lectual-political virus was quaran- I should be looking for.Then I tore everything up and tined. My American passport had earned me special threw it out the train window, piece by piece. treatment. I just leaned back and counted my bless Shortly after midnight the train lumbered to a stop in Transylvania, at the Hungary-Romania border. Contributing editor James Bovard ([email protected]) is the author of The scene had all the ambience of the original 1932 Attention Deficit Democracy,Terrorism and Tyranny, Lost Rights, Dracula movie. I didn’t hear wolves howling, but the and other books.

31 JUNE 2010 James Bovard

ings: In Western Europe they charged double for a Starved Into Submission private cabin. he workers were likely no fans of Nicolae The Orient Express was no longer an express after it TCeaus¸escu, the communist dictator who made entered Romania, taking 13 hours to go roughly 400 Romania the most barbaric and repressive regime in miles and running far behind schedule. Europe. Though Romania had been a breadbasket of Everywhere were signs of a government increas- Europe before World War I, food had become as rare as ingly fearful of its people. Throughout Transylvania honest economic statistics. The communists destroyed radio towers were surrounded by military guards and hundreds of square miles of prime farmland to erect barbed wire. The train stopped at Brasov, a medieval factories and open-pit mines. The government city renamed Stalin City in 1950. A dozen years later, responded to food shortages with a publicity campaign as friction rose with Moscow, Brasov regained its on the danger of overeating. The government also old name. Shortly before I passed through, thousands revved up advertising in western nations touting of workers responded to wage cuts by ransacking Romania’s “world famous” weight-loss clinics. communist party offices and killing two government Ceaus¸escu seemed determined to starve the people militia men. into submission. Romanians were forbidden to receive Romania looked double-damned by government food shipments from foreigners. Visitors were stopped planning and political meddling. at the Romanian border and denied There were horse-drawn wagons entry if they attempted to bring in a next to spewing factories and huge chocolate cake or bubble gum. apartment complexes. Many people Everywhere were The government put almost all had abandoned their slipshod cars signs of a government investments into heavy industry—the after government sporadically banned ultimate source of bragging rights for the sale of gasoline for private increasingly fearful of communist leaders. But roughly half vehicles. its people. of Romanian factory output was so Around nine the next morning, shoddy it was ready for the junk heap there was a rapping on my cabin as soon as it left the gate. door—like someone sending a secret Romanian industry was also message. I heard someone struggling with the bolted extremely inefficient, consuming up to five times as lock. The door popped open, and half a dozen ragtag much energy per unit of output as western factories. Romanian workers poured in. They had heard there The government compensated by cutting off electricity was a foreigner—perhaps an American—confined on to people’s homes for up to six hours during the win- the train. They obviously knew how to overturn the ter and permitting only one 25-watt light bulb bolt that sealed the door.The workers stared at me like per room. I was E.T.,and it probably wasn’t just because of the old The health system was collapsing, and the infant- canvas hat I was wearing.Two of them leaned over and mortality rate was so high the government refused to pawed/stroked my leather boots—eyes wide in amaze- “register” children as being born until they survived ment. Leather boots had apparently become the same their first month. The government also routinely cut type of luxury there that full-length mink coats were in off power to hospitals, which had caused a thousand America. Yet, in the pre-communist era, leather boots deaths the previous winter. were probably routine for factory and farm workers.We communicated with simple gestures since I did not The Darling of the World Bank speak Romanian and they spoke no English. They et some western experts thought Ceaus¸escu was seemed full of goodwill, but vanished after a few min- Ythe greatest thing since sliced bread.A 1979 World utes—perhaps fearful of being caught talking to a Bank report, the “Importance of Centralized Economic foreigner. Control,” praised the Romanian regime for pursuing

THE FREEMAN: www.thefreemanonline.org 32 Orient Express to Hell

“policies to make better use of the population as a “Where is the old part of the city?” I asked, know- factor of production [by] stimulating an increase in ing that most of it had been razed to make room for birth rates.” the ugliest “socialist realism” monoliths outside of And how did the benevolent ruler do this? By pro- North Korea. hibiting distribution of contraceptives and banning The concierge scowled and muttered something— abortions. These policies turned Romania into the perhaps the Romanian slur for vexatious foreigners. My world capital of abandoned babies. hunch was this guy didn’t make a living from tips. Finally arriving in Bucharest, I learned that the On the street many people darted their eyes away— Hotel Intercontinental was the only place westerners as if looking at foreigners might cause leprosy. I had were allowed to stay.After I checked in, a beefy thirty- heard that it was a crime for Romanians to talk to ish woman came up and asked in a gravely three-pack- strangers. But a few people summoned up a hodge- a-day voice:“Would you like to have some company?” podge of broken English, pleading for a pack of I said no, and got away from her quick.The Roman- Kent cigarettes to bribe doctors to treat their sick ian government was famous for using its intelligence children. The Romanian currency was practically agents as prostitutes. The woman had the hotel staked worthless. The only things with value were western out, hoping to gather information from visitors or to goods, like those Kents, which circulated as a black- entice them into behavior that could be videotaped and market currency. used to betray them. I stepped into the largest depart- I checked into my room, which ment store in Bucharest; it was dark, looked like it was custom-designed The only things with dank, and miserable. Sales clerks for surveillance. I flipped on the lounged on piles of new clothing TV set and saw choruses of peasants value were western heaped on the floor. One of the main and workers in overalls listlessly goods, such as packs attractions in the store: incredibly waving flags and singing the praises rickety baby carriages—the kind to of Ceaus¸escu, the self-proclaimed of Kent cigarettes. use when you want to kill your kid “Genius of the Carpathians,” as the and sue the pants off somebody. camera zoomed in for close-ups of Except that this government never the great man’s face. had any liability to its victims, no matter how many Fascinating stuff, but the plot line was a bit flat, so I perished from its products or policies. sought entertainment elsewhere. I passed by the boarded-up front door of an ancient When I visit a new city I love to spend hours walk- church, standing naked amidst construction projects ing around—getting a feel for the turf. I stopped at the that had razed its surroundings. Many Romanians fret- concierge desk at the Hilton and asked for a street map fully crossed themselves as they passed the church. of downtown Bucharest. I figured it might have a walk- The U.S. embassy was surrounded by Romanian ing guide to the Greatest Triumphs of Ceaus¸escu-ism troops with machine guns to prevent Romanians from within an eight-block radius of Communist Party entering and asking for asylum. headquarters. Like other communist regimes, Romania was an The guy grimaced and eyed me like I had asked for economic theocracy. The government used its iron a detonator for a bomb strapped underneath my over- fist to make sure everything happened according to coat. the Plan. For instance, the 1986-90 five-year plan “For what do you need a map?” decreed that Romanian scientists would make 4,015 “Because I want to see the city’s landmarks.” discoveries, of which 2,423 would result in new prod- “We have no maps. If there is some place you want ucts by Romanian businesses. It’s not surprising that to go, you tell me what it is and I will tell you how to the regime “planned” creativity, since it considered get there.” itself omniscient.

33 JUNE 2010 James Bovard

Romania was one of the World Bank’s favorite bells. Instead, I jotted down notes on the palm of my regimes, receiving more than $2 billion between 1974 hand. Such behavior was likely to be seen as merely and 1982. It predicted in 1979 that Romania would weird not menacing. Single words served me as pegs to “continue to enjoy one of the highest growth rates later pull up a strand of facts and thoughts. among developing countries over the next decade . . . Late the next afternoon I arrived at Bucharest’s main and become an industrialized economy by 1990.” But airport to fly to Frankfurt. I noticed that most of the much of Romania’s apparent economic growth was the businessmen ahead of me were openly giving a pack of result of World Bank aid.The more handouts it gives a Kents to each guard or other dreg at the four different country,the easier it becomes to portray the nation as a security checkpoints. success story. Then-World Bank president Robert I had bought a couple cartons of Kents before going McNamara cited Romania to tout his own “faith in the to Romania, and I was soon passing out cigarette packs financial morality of socialist countries.” to airport guards like an old widow tossing candy to kids on Halloween. Human Resources I saw one or two German businessmen yanked aside he World Bank also praised the Romanian regime for more invasive searches. As I passed the last check- Tfor its ability to “mobilize the point, I thanked my lucky stars that I resources” required to boost eco- had avoided such depredations. nomic growth. In reality this merely That Lufthansa jet on the tarmac was meant that the government could Romania was one of the prettiest thing I had seen since the brutalize its subjects to squeeze out the World Bank’s Orient Express crossed the Romanian “surpluses” to lavish funds on World border. Bank-approved industrial enter- favorite regimes. There was one graying soldier stand- prises. Ceaus¸escu was doing the ing about 20 yards from the plane. I same thing Stalin did in the 1930s, held up my passport, and he waved when he starved up to ten million peasants to squeeze me on. farmers to generate surpluses to build new I had almost reached the gangway when I heard: factories. HALT! The Romanian regime also “mobilized resources” I turned and saw the guard running toward me, his by pawning its ethnic German and Jewish inhabitants. submachine gun bouncing off his ample belly. (West Germany would pay money for each ethnic Ger- Puffing a bit, he caught up to me, grabbed my left man released from Romania). International agreements arm, yanked it back, and pointing at my palm, banned slave trading in the nineteenth century,but sell- demanded to know: ing human beings in the twentieth century was okay if “WHAT IS THIS?!!!?” the receipts went for progressive purposes. I looked at my hand, then I looked at the guard. The World Bank never cut Ceaus¸escu off; instead, he “It’s ink.” ceased borrowing after he became convinced that west- He paused, squinted, nodded his head knowingly, ern debt was a curse on his country. and then waved me on to the plane. As I knocked around Bucharest I assumed I was Two years later, 5,000 Romanians were killed dur- being followed. Roughly one in 15 Romanians was ing an uprising that overthrew the government. When working as a government informant. Ceaus¸escu and his wife were summarily executed on From my experience elsewhere in the East Bloc, I December 25, 1989, it was probably the best Christmas knew that pulling out a notebook set off the alarm present Romanians ever received.

THE FREEMAN: www.thefreemanonline.org 34 R.C. Hoiles and Public Schooling

BY WENDY MCELROY

n a letter dated May 23, 1946, the libertarian pub- half a million.The California Press Association honored lisher R.C. Hoiles wrote to Leonard E. Read, who him posthumously as a “Great Crusader for Individual Iwould establish the Foundation for Economic Edu- Freedom” who was respected for “his conservatism.” cation later that same year. Hoiles advised Read on Hoiles is often mischaracterized as conservative.At a what he believed was the underlying cause of America’s quick glance the confusion is understandable. For one alarming shift from individual liberty toward socialism: thing, Orange County, California, became a center of conservatism in the decades following World War II.As I am inclined to think that the the county’s foremost newspaper, grass roots of our trouble is our the Register often ran conservative tax-supported school system. It is columnists and letters to the editor. teaching by example that might But it was Hoiles’s libertarian voice makes right; that the end justifies that dominated through editorials. the means; that there is no law Hoiles insisted the editorial page superior to the will of the major- was “a daily school room made ity. How can we expect the youth available to its subscribers.” In that of the land, when the public gen- schoolroom Hoiles taught what he erally believes in tax-supported called “voluntaryism.” A November schools, to believe in freedom, the 1953 editorial, “Articles of Faith,” American way, or a definite lim- distilled its essence:“[A] government ited government? is a good government that only does what each and every individual has In place of a tax-funded and com- the moral and ethical and just right pulsory school monopoly, Hoiles to do.”If it was not right for an indi- argued passionately for a voluntary, vidual to take money by force, then private system. It was an argument he R. C. Hoiles it was not right for a government to sustained throughout his long, Photo courtesy Orange County Register do so in the name of “taxation.” remarkable life. Another of the “Articles” stated, “I have faith that our Raymond Cyrus Hoiles (1878–1970) epitomizes the government would better protect every person’s American dream. Born into comfortable but modest inalienable rights if it was supported on a voluntary circumstances, he rose through hard work and merit.At basis rather than by taxes.” his death at the age of 91, his corporation, Freedom Newspapers, Inc., owned 16 daily newspapers, includ- Contributing editor Wendy McElroy ([email protected]) is an ing the influential Orange County Register (originally the author, the editor of ifeminists.com, and a research fellow for the Santa Ana Register), with a collective circulation of over Independent Institute in Oakland, California.

35 JUNE 2010 W endy McElroy

Perhaps no single issue better captures the libertar- One of nature’s fundamental laws was “the superiority ian spirit of Hoiles than his feisty stand on education. of voluntary, competitive human endeavor over com- The “Articles” declared, “I have faith that we will be pulsory activity.” Freedom of association, including a better educated by voluntary, competitive schools than free market, fueled the goodwill that civil society by government schools.”This statement must have star- depended on; forced association destroyed it. tled conservatives who viewed the public schools as a Hoiles based his morality largely on the Ten Com- success story. Indeed, a then-favored conservative strat- mandments and insisted on “a single standard”: Every- egy was to enter school board races. By contrast, Hoiles one without exception should act according to the insisted he had no more right to vote for a school offi- same moral code. What was wrong for a private indi- cial than he did to vote for a trustee within a govern- vidual was equally wrong for a government official. In a ment-owned brothel. (Perhaps for shock value, Hoiles later policy statement, Hoiles offered the essence of this repeatedly compared public schooling to prostitution; universal code: the Ten Commandments, the Golden he once declared,“A house of prostitution is voluntary, Rule, and the Declaration of Independence. grade school is not.”) His theory of human nature stressed the perfectibil- Opposition to tax-supported schools became a ity of man through effort and the exercise of moral dominant theme in Hoiles’s writing; character. He believed this per- his last editorial in the Register dealt fectibility resided in each human with “something-for-nothing schools Hoiles repeatedly being, which seemed to make him that have had a great influence in con- compared public somewhat blind to differences of ditioning pupils to believe in some- race, gender, and social status. Former thing for nothing.” On occasion, schooling to employees often commented on how Hoiles even found it necessary to prostitution; he once he would engage a janitor in intellec- defend the considerable amount of tual discussion as quickly as he would space school issues occupied in his declared,“A house a writer. paper. On October 15, 1945, he Hoiles’s evolution on education wrote,“The amount of space the Reg- of prostitution is began in a “little red schoolhouse” ister is devoting to the junior college voluntary, grade across from his family’s large farm- bond issue might cause some to think house in Alliance, Ohio, where, he we are overestimating the importance school is not.” later explained, he learned “that the of the issue. There is nothing more State, or a majority of citizens, had important than the principles back of the issue.” the right to use taxation to support the public school system.” His school texts exposed the political “error” An Integrated System of Belief of the divine right of kings but “they never explained he “principles back of the issue” involved an inte- the error in the divine right of the majority. It simply Tgrated system of beliefs about government, society, substituted the divine right of the majority for the morality, and human nature. divine right of kings.”Nor did his school books explain Hoiles rooted his theory of government in the Dec- “the basic principle that governments derive their just laration of Independence—a document he quoted fre- powers from the consent of the individual; that the quently—namely, that government derives its just government had no right to do anything that each and power from the consent of the people and ultimately every individual did not have the right to do. Instead, from the consent of the individual himself, who pos- they had to teach that the government or the local sesses inalienable rights. school district, if the majority so willed, had a right to “Articles of Faith” expressed this theory of society: force a Catholic parent, or a childless person, or an old “[G]aining understanding of nature’s laws is the best maid, or an old bachelor to help pay for government way to be useful to one’s self and to his fellow man.” schools. . . .”

THE FREEMAN: www.thefreemanonline.org 36 R.C. Hoiles and Public Schooling

At the same time as they legitimized taxation, how- A September 3, 1946, editorial in the Register titled ever, Hoiles’s teachers spoke of the Ten Command- “Most Sacred of All Popular Idols, Government Educa- ments, including “Thou shalt not steal” and “Thou shalt tion,” typifies both Hoiles’s style and content in not covet.” He observed wryly, “[T]he government approaching the issue.The editorial is clearly answering school I attended made no attempt to be consistent and critics who argued that public education is a necessary teach me to recognize contradictions.”The contradic- good because it leads to a literate population. tions did not surprise Hoiles, who explained, “They Hoiles opened by quoting an anonymous “lover of cannot teach the single standard of rightness because freedom” (Leonard Read) who defined the proper role they are practicing a double standard.”They could not of government as a “restraining force rather than a force teach moral values “any more than a robber can teach to compel people to do good.” Considering govern- honesty.” ment education from this angle, the “lover of freedom” Hoiles’s higher education must have also imbued concluded “it has all the characteristics of other forms him with skepticism about government education.The of socialism.” knowledge he valued most had been self-taught and Some people, Hoiles continued, may see little differ- came from experience. While studying electrical engi- ence between the earliest “red schoolhouses” that were neering at the Methodist Mt. Union College voluntarily supported and the subsequent tax-funded (Alliance), Hoiles worked part time at his brother ones. “True,” he stated, “the socialism incident to the Frank’s daily paper, the Alliance Review, and discovered ‘little red school’ was only a slight departure from the what became a lifelong passion for the procedure of a few neighbors pool- newspaper business. Hoiles must have ing their resources, voluntarily, to wondered if his college education had Modern teachers employ a teacher to instruct their been wasted. Later in life he com- children. But once the socialistic plained of the common perception need only to satisfy principle is admitted, once the idea is that “going through the public schools the government, their sanctioned of using government’s and colleges is education.” powers of coercion to take the fruits In 1932 Hoiles temporarily left the source of income. of the individual’s labor for the ‘col- newspaper business and began to read lective good,’there is no logical stop- insatiably. Even though he had shown ping point.” little interest in philosophy to date, he acquired the Hoiles went on to quote Isabel Paterson’s The God of background to sprinkle future writing with quotations the Machine: “There can be no greater stretch of arbi- from an amazing range of authors: from Frédéric Bastiat trary power than is required to seize children from their to Ayn Rand, from John Locke to Spinoza. parents, teach them whatever the authorities decree The most influential was Bastiat. In a 1955 editorial they shall be taught, and expropriate from the parents Hoiles wrote,“He was the first man who awakened me the funds to pay for the procedure.” Thus, continu- to the errors, taught in government schools and more ing the quote, “[n]eighborly, small-scale socialism in Protestant colleges, that the state doing things that were education has expanded and developed until today immoral if done by an individual made these acts we are faced with the disaster of national socialism in become moral. In other words, he was the first man that education.” pointed out that there was only one standard of right The “disaster” was partly economic. Hoiles cited sta- and wrong.” tistics showing how the costs of educating one individ- In 1935, at 56, Hoiles arrived in Orange County, ual had increased more than ten times from 1880 to where he had purchased an established newspaper.With 1940, with no corresponding increase in quality. him, Hoiles brought not only his family but also an Indeed, quality had declined—partly due to increased evolved philosophy of freedom, which he aggressively bureaucratization, partly to the severing of connection applied, especially to public education. between a teacher’s wages and his or her need to satisfy

37 JUNE 2010 W endy McElroy customers (the parents and children). Modern teachers the classical curricula that aimed at rigorous educa- needed only to satisfy the government, their new tion—such as familiarity with Latin, a stress on his- source of income. tory—were replaced by programs aimed at creating “Government educators are becoming less and less “good citizens.” servants of those from whom revenues are extracted or Hoiles was outraged by his children’s curriculum. from whom their pupil raw material is conscripted,” In a 1961 editorial he reminisced about an incident Hoiles wrote. “More and more they are becoming involving his daughter Jane. After reviewing one of her vested interests, concerned with their own employment school textbooks, he appeared before the directors of and tenure. More and more they are allying themselves the Santa Ana Chamber of Commerce to protest as a pressure group with other bureaucratic interests. against school books that “set forth the principles of More and more they are using their strategic position Karl Marx.” Hoiles’s purpose was not to ban or censor to turn the minds of the young towards statism and but to assert a parent’s right to guide his children’s edu- interventionism.” cation. Nevertheless, the book was pulled. Attacking on yet another front, Hoiles explained the Why, then, did Hoiles’s children attend public terrible impact that government teachers have on the school? He told a Newsweek reporter, “There was no character development of children. “I place else to send them.” take the stand against tax-supported “I believe that the A particularly provocative strategy education because I believe . . . that the of his was spelled out in the May 23 advantage of being able to read and advantage of being letter to Read. Hoiles explained, “I write is far outweighed by the destruc- able to read and write have repeatedly offered a member of tion of individual initiative, enterprise the Board of Education in Santa Ana, and responsibility brought about by is far outweighed by who is a preacher, $100 if he would government education’s poison of sta- publicly attempt to harmonize tax- tist psychology. Practically every youth the destruction of supported schools with quotations in the land is a socialist at heart. How individual initiative from Jesus. He will not undertake it. I can he help but be unless he comes also made the offer to the superin- from a family that is steeped in the ...brought about by tendent of schools. He will not belief in true liberty and the dignity of government undertake it.” Hoiles wondered if he man and recognizes that multiplying a should up the ante to $500 and con- robbery does not make it right?” education.” struct the discussion as a debate, per- It is not possible to understand the haps with Isabel Paterson, Rose passion with which Hoiles and other advocates of indi- Wilder Lane, or Read himself. Hoiles considered the vidual freedom addressed public education without offer a fail-proof maneuver. If the preacher accepted, establishing the context. In the early twentieth century, the flaws in his argument would be exposed. If he education in America underwent a political revolution, refused, then the refusal would “cause the people of the becoming the lynchpin of the Progressive Era—a community to wonder . . . whether tax-supported period of social reform, from the 1880s to the 1920s.A schools are doing what they think they are doing.” central tenet was that government needed to play a R.C. Hoiles died on October 30, 1970, at 91.Within larger role in solving social problems and in promoting his lifetime he made no lasting impact on public the “social good.” “Popular,” or public, education was schooling. But times change. Current discontent with viewed as a prerequisite and the key to reconstructing government education is so deep and widespread that society by molding generations to come. In his water- homeschooling has become a phenomenon and others shed book, Democracy and Education (1916), John Dewey grasp at any route out. I can only imagine Hoiles’s advocated using popular education as a conscious tool response to a revival of his moral crusade against public to remove social evil and promote social good. Slowly, schooling.

THE FREEMAN: www.thefreemanonline.org 38 Give Me a Break!

The Right to Work

BY JOHN STOSSEL

he people of Louisiana must sleep soundly arbitrary than saying who can and who cannot sell knowing that their state protects them from . . . flowers?” IJ President Chip Mellor says. Tunlicensed florists. Other states have their own sets of ridiculous That’s right. In Louisiana, you can’t sell flower licensing rules. In Virginia, you need a license to be a arrangements unless you have permission from the gov- yoga instructor. Florida threatened an interior designer ernment. How do you get permission? You must pass a with a $25,000 fine if she didn’t do a six-year appren- test graded by a board of florists who already have ticeship and pass a test, at a cost of several thousand licenses. To prepare for the test, you might have to dollars. Fortunately, the Institute for Justice got that spend $2,000 on a special course. law overturned. The test requires knowledge of techniques that I’m rooting for IJ because licensing interferes with florists rarely use anymore. One question asks the name the freedom to make a living, harms consumers by lim- of the state’s agriculture commissioner—as though you iting competition, and protects established firms. It’s an can’t be a good florist without knowing that piece of old story. Established businesses have always used gov- vital information. ernment to handcuff The licensing board competition. Years ago, defends its test, claiming small grocers tried to it protects consumers ban supermarkets. A&P from florists who might was going to “destroy sell them unhealthy Main Street,” the gro- flowers. I understand the cers cried. Minnesota established florists’ wish legislators responded to to protect their profes- their lobbying by pass- sion’s reputation, but in ing a law that forbade practice such licensing supermarkets to hold laws mainly serve to sales. Consumers were Hey buddy, you got a license for those begonias? limit competition. Mak- plantasyflores [flickr.com] hurt. ing it harder for new- comers to open florist shops lets established florists hog What about Doctors and Lawyers? the business. kay, while licensing of florists, interior designers, Other states are considering adopting Louisiana’s Oand yoga teachers is ridiculous, what about more licensing law,but before any do, I hope that the law will important professions, like law? Surely people need be stricken. The Institute for Justice, a public-interest protection from people who would practice law with- law firm, has challenged the licensing in court, saying out a license. Again, I say no. The lawyers’ monopoly it violates liberty and equal protection, and so is uncon- on helping people with wills, bankruptcies, and stitutional. “One of the most fundamental tenets of the Ameri- John Stossel hosts Stossel on Fox Business Network and is the author of Myths, Lies, and Downright Stupidity: Get Out the Shovel—Why can dream is the right to earn an honest living without Everything You Know is Wrong. Copyright 2010 by JFS Productions, arbitrary government interference.What could be more Inc. Distributed by Creators Syndicate, Inc.

39 JUNE 2010 John Stossel

divorces is just another expensive or colleagues to recommend doc- restraint of trade. tors, dentists, and mechanics even David Price recently spent six Competition is better though those jobs are licensed? Of months in a Kansas jail because he than government at course. Because you know that even wrote a letter on behalf of a man who with licensing laws, there is a wide was wrongly accused of practicing protecting consumers range of quality and outright quack- architecture without a license. When from shoddy work. ery in every occupation. You know Price refused to promise never to that licensing doesn’t really protect “practice law” again, a judge sent him Furthermore, you. to jail. A free competitive market for All he did was write a letter. Price licensing creates a reputation protects consumers much didn’t misrepresent his credentials. false sense of security. more effectively than government However, he did save a man from pay- can. Today, online services like ing $3,000 to a lawyer. Perhaps that Angie’s List (www.angieslist.com) was his real offense. make it even easier for consumers to Competition is better than government at protect- get better information about businesses than govern- ing consumers from shoddy work. Furthermore, licens- ment licensing boards will ever provide. We do need ing creates a false sense of security.Consider this:When protection from shoddy businesses. But it’s freedom and you move to a new community, do you ask neighbors competition that produce the best protection.

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THE FREEMAN: www.thefreemanonline.org 40 41 JUNE 2010 Book Reviews

kets (which are unpredictable due to competition and Book Reviews consumer sovereignty) and likes regulations to suppress competition and guarantee profits.The key point of the book is that big business doesn’t lobby for free markets; Obamanomics: How Barack Obama Is Bankrupting it lobbies for government favors. You and Enriching His Wall Street Friends, Carney produces a mountain of evidence to support Corporate Lobbyists, and Union Bosses his case. To begin with, campaign contributions from by Timothy P.Carney big businessmen (and of course other moneyed groups, Regnery • 2009 • 256 pages • $18.45 including lawyers and unions) flooded into Obama’s 2008 campaign far more freely than into the campaign Reviewed by George Leef of the ostensibly pro-business candidate, John McCain. n his previous book, The Big People associated with Goldman Sachs were major IRipoff (reviewed in the June campaign contributors, with their money flowing into 2007 Freeman), author Timothy the Obama treasury at a ratio of four to one over Carney launched an attack on two McCain.That was not an anomaly. Contributions from of America’s preeminent political many industries went lopsidedly to the supposedly myths—that the Democrats are “anti-business” candidate. “the party of the little guy” and the The standard line from the media about this, when Republicans are “the party of free it was noted at all, was that these commercial giants enterprise.” Both notions are useful were just buying “access” with the probable winner to to candidates in the endless quest for votes, but both are ensure that they wouldn’t be treated too harshly in the overwhelmingly false. Yes, some Democrats deeply coming administration. Carney refutes that notion by believe that all they do is helpful to Americans strug- pointing out that Obama had long been cozy with cer- gling to get by, and some Republicans really want to tain corporate interests (such as ethanol) and that even move towards laissez faire. Party leaders, however, are in their inchoate stages, Obama’s policy initiatives remarkably similar in their embrace of a corporative promised steady, predictable revenues for certain busi- philosophy (or perhaps we should say, strategy) that nesses and industries. They weren’t just buying access. trades favors to well-established institutions in They were eagerly supporting the candidate most exchange for campaign support. inclined to their corporatist desires. With Obamanomics, Carney narrows the focus of his After his election Obama’s policies suited many microscope to explain, as the book’s subtitle says,“how industries just fine. The prodigious “stimulus” package Barack Obama is bankrupting you and enriching his was manna from heaven for those whose lobbyists Wall Street friends, corporate lobbyists, and union knew how to direct the flow of federal dollars. “With bosses.” Under Carney’s high magnification, Obama’s more than 800 lobbyists working on it,”Carney writes, campaign rhetoric that he would kick out the special- “the stimulus particularly benefited the tech industry interest lobbyists and only listen to the voice of the and its representatives.” As one corporate insider he people is exposed as a fantastic prevarication. Not only quotes said, green lobbyists went into a “feeding have the lobbyists not been kicked out, they have been frenzy.” welcomed in like long-lost children. Instead of resources flowing into businesses to pro- Many Americans will instinctively recoil from Car- duce goods and services that consumers wanted, ney’s argument. They believe something like this: resources were directed into politically connected firms “Obama is for more government economic control and to produce things that appeal to politicians (or perhaps businesses want less control because they favor free produce; some of the “stimulus” projects have since markets.” Carney blows that idea to smithereens, show- been shown to be fraudulent). The impact of Obama- ing that big business generally does not want free mar- nomics, Carney concludes, is to shift economic power

THE FREEMAN: www.thefreemanonline.org 42 Book Reviews

“from consumers, workers, and investors to politicians nothing but rigid ideology, which must now make way and bureaucrats.” for “pragmatic solutions.”Of course, such “pragmatism” Readers will find their blood pressure rising as Car- has long been a cover for removing all restraints on ney takes us through the vast corporate welfare tucked government power and trusting that those who wield it into ObamaCare, the environmental crusade’s “cap and will do the right thing. To prove my point, Madrick trade” legislation, Obama’s favoritism toward the favorably cites Alexander Hamilton’s view that laissez United Auto Workers and the car companies it has faire “was to be respected but to be violated when nec- done so much to ruin, the administration’s fondness for essary.”Translation: It is to be routinely violated. regulations that help big business stifle competition The book is divided into three parts.The first recaps from smaller rivals, and, perhaps most disgustingly of all, how well “pragmatic” government has served us in the the Wall Street bailout. “Conservatives like to think of past (according to Madrick anyway); the second avers Wall Street as a bastion of capitalism, but that image that change is inevitable and sees more government ignores the ways in which our financial sector depends power as the only way to deal with it; the finale lays out on government protection,” Carney observes. the specific policies the author believes will cure our We are mired in recession, and mountains of gov- ills. Naturally, all call for further expansions of govern- ernment debt will soon hit us like an avalanche. Will ment power to tax and control us. Americans fall for the deception that returning to pros- What passes for analysis in this book is an embar- perity depends on still more of the statism that has rassment. Inconsistencies abound. For instance, the brought us to this dire situation? If they’ve read Obama- author correctly asserts that flexible labor markets are nomics, they won’t. indispensable for economic growth, yet two pages later he endorses a higher minimum wage and the George Leef ([email protected]) is book review editor of The Freeman. reinvigoration of labor laws to facilitate the spread of unions into new industries. He also demonstrates dif- ficulty distinguishing free-market rhetoric from free- The Case for Big Government market policies. He correctly points out that the by Jeff Madrick Reagan and Bush administrations practiced Keynes- Princeton University Press • 2008 • 224 pages • $22.95 ianism, yet blames their nominally laissez faire policies for our recent stagnation. Since Keynesian policies are Reviewed by Robert Batemarco the antithesis of laissez faire, one cannot logically ould it be that our already blame problems originating from those policies on Cimmense government is still laissez faire. too small? That’s what some people, Madrick invariably fails to appreciate the implica- including economic journalist Jeff tions of the things he does get right. For instance, he Madrick, would have us believe. admits that the post-World War II demobilization The first sentence of The Case for spurred a recovery rather than the relapse into depres- Big Government reads, “It is conven- sion unanimously expected by those who relied on tional wisdom in America today that Keynesian analysis, yet he doesn’t acknowledge that high levels of taxes and government this is strong evidence of just how mistaken that analy- spending diminish America’s prosperity.”While this is, sis is. He also admits that governments err and that the indeed, wisdom, it is hardly conventional, at least in our programs they create tend to live forever, but he gives national and state capitals, and that wisdom has not had them a pass since businesses too make errors and are as a meaningful role in policy for over 80 years. hard to shut down. Not only is that last statement fac- From that sentence on it’s all downhill. The book’s tually inaccurate—faltering businesses are much easier theme is that principled calls to limit government’s to shut down than wealth-draining government pro- power to benefit the few at the expense of the many are grams (56 percent of new businesses fail within four

43 JUNE 2010 Book Reviews years; the number of government programs that have Race & Liberty in America: The Essential Reader ever been terminated is miniscule)—but the examples edited by Jonathan Bean he gives, such as Chrysler, are still in business only University Press of Kentucky/ because of government bailouts.The attempt to equate Independent Institute • 2009 • 352 pages • $42.50 hardcover; business fallibility with government blundering is $21.20 paperback absurd. In setting forth his wish list in part 3, Madrick asserts that giving the federal government control over an additional 5 percent of our GDP will do no harm—in other words, it has no opportunity cost. He offers no theoretical basis for that assertion. Much of Dred Scott’s Revenge: A Legal History of Race and the evidence he cites in support of particular pro- Freedom in America grams is provided by some of the likely beneficiaries. by Judge Andrew Napolitano Madrick sees only the nice hoped-for results and Thomas Nelson • 2009 • 320 pages • $25.99 never realizes that politically connected big business Reviewed by Roger Clegg and big labor groups will gain the most from mush- rooming government. wo recent books criticize racial Wor st of all, however, Madrick is blind to the fact Tdiscrimination from a classical- that expansion of government means contraction of liberal perspective. liberty. The big-government policies he advocates The first, Race & Liberty in America, won’t just waste resources; they will also further whittle is an anthology edited by Jonathan away at our freedom. Look at the authoritarian details Bean, a professor of history at Southern of the recent “health care reform” legislation, such as Illinois University.It includes dozens of the mandate for individuals to purchase insurance selections, from 1776 to today, arguing whether or not they want it, and you see that big gov- eloquently for colorblind equality before the law and ernment is not a kindly uncle. against slavery, Jim Crow, and racial preferences (affir- I could go on, but that should suffice.The underly- mative action). Fittingly, Bean also includes much from ing problem not only of this book, but also of would- the immigration context. (Bean earlier authored be central planners of every stripe, is the denial of the another important book in this area, Big Government and primordial fact of scarcity. Madrick’s frequent denunci- Affirmative Action: The Scandalous History of the Small ations of “the age of limits” can mean nothing else. Business Administration.) Since scarcity and the human actions to deal with it are In his introduction,“Civil Rights and Classical Lib- the ultimate foundations of economics, the case for big eralism,” Bean notes that, given the domination today government is based not on economics but rather on of “the politically correct view that left-wing liberals or special pleading devoid of principle and logic. radicals completely dominated the struggle for racial freedom,” it is no surprise that “classical liberals are the Robert Batemarco ([email protected]) is senior director of business insights at a marketing research consultancy in New York City. invisible men and women of the long civil rights move- ment.” Bean illuminates their role in the fight against government discrimination. Some of the names and selections in the book are unsurprising. There are several pieces by Frederick Douglass, for example, and the “I Have a Dream” speech by Martin Luther King, Jr. But there are also some surprises, like the excerpts from Warren Harding, Calvin Coolidge, and Herbert Hoover. Most of the

THE FREEMAN: www.thefreemanonline.org 44 Book Reviews

pieces pertain to the oppression of blacks, but there are ment of judicial activism. His historical arguments con- several excellent ones regarding government discrimi- flate the failure of federal government intervention nation against Asians, especially the Chinese.The point with active discrimination. And sometimes Napolitano is unmistakable:Those who hold a principled belief in tries to get by with assertion where proof is called for. liberty oppose all government oppression. So the cost-conscious libertarian (is there any other Especially useful are the selections Bean includes kind?) should purchase Bean’s book rather than that show how the business community, so often Napolitano’s. To be fair, no matter how persuasive accused of being in favor of racial discrimination, Napolitano’s opinions were, they would not be as valu- often opposed it. A series of letters regarding imposed able as the treasury of original sources that Bean has segregation in trolley cars, for example, proved to be an compiled. Napolitano himself—as well as Shelby Steele, eye-opener. Richard Epstein, Linda Chavez, Stephan Thernstrom, Bean balances readable and relatively short excerpts and Ward Connerly, among many others—favorably with intelligent commentary in the introductions. The blurbs Bean’s book, calling it “a history buff’s dream,” big message of the book is that many of our great and he’s right. thinkers shared the vision that equality and progress Roger Clegg ([email protected]) is president and general counsel of the will result from freedom, not the heavy and coercive Center for Equal Opportunity in Falls Church,Virginia. hand of the State. That’s also the thrust of Dred Scott’s Revenge:A Legal History of Race and Freedom in America by Andrew Financial Fiasco: How America’s Infatuation with Napolitano, a former New Jersey state judge and fre- Homeownership and Easy Money Created the quent commentator on the Fox News Channel. Economic Crisis Napolitano claims in his introduction,“The real culprit by Johan Norberg throughout our racial history has been the govern- Cato Institute • 2009 • 186 pages • $21.95 ment,” and his book accordingly documents and con- Reviewed by Waldemar Ingdahl demns a variety of bad government policies and actions from the colonial era to today. ree-market greed stands accused Freeman readers will not be surprised to hear that Fof undermining the world governments, rather than the private sector, have been financial system, but that is a mis- the most systematic and powerful purveyors of racism taken analysis, writes Johan Nor- and discrimination. (This theme is both explicit and berg. The Swedish author made implicit in Bean’s book as well.) Conversely, slavery, famous by his book In Defence of Jim Crow regulations, and our current mania for racial Global Capitalism is back to provide preferences would have been much more difficult or an explanation for the current impossible under a system that limited government financial crisis. power to its proper defensive functions and maximized Many factors led to the global financial fiasco, individual freedom. Norberg writes, including a naive policy that priva- In other ways, too, there is considerable overlap in tized profits and socialized losses, risk-taking based on the two books. Both Napolitano and Bean abhor racial blind faith in computer models’ ability to predict the discrimination as not only unconstitutional but deeply market, and a false sense of security bred by govern- immoral as well. ment assurances that the taxpayers would back up bad Despite the fact that I’m sympathetic to Napoli- loans. This brought an unsustainable growth of assets tano’s instincts, I cannot recommend his book for a and liabilities. number of reasons. He believes courts should ignore The title of the Swedish original (which I read) is A the Constitution if it is inconsistent with the judge’s Perfect Storm, an expression describing an event where a view of what natural law requires, which is an endorse- rare combination of circumstances drastically aggravates

45 JUNE 2010 Book Reviews a bad situation. That certainly describes the financial gopoly due to regulations. Such regulations break down implosion that began in 2007. Norberg explains the the barriers between the government and the market. events leading to the credit crunch through one chill- The problem was not too little regulation. Rather, it ing example after the other. The conscious actions of was faulty regulation upheld by a multitude of national financial, political, and bureaucratic decision-makers and international agencies. Tough international bank and consumers might not have been too dangerous in regulations punished traditional banking, while pushing themselves, but in combination they proved utterly bad loans into a shadow banking system to avoid trans- disastrous. parency. According to Norberg, after the dot-com bubble Financial Fiasco ends on a pessimistic note, predicting and 9/11, Federal Reserve Chairman Alan Greenspan that we will see extensive, long-term government acted to avoid a recession by stimulating the economy involvement in the financial sector for years to come. with record-low interest rates in a sort of “pre-emptive “Create a crisis, and people will give you more power Keynesianism.” But the Fed misjudged the state of the to fight it,” Norberg writes. He points to the risk that economy and kept the interest rates down far too long. politically well-connected corporations and interest Effective interest rates actually turned negative, building groups will not only further distort competition (as in the momentum for another bubble. the case of TARP), but also cause new losses and The low rates encouraged even greater risk-taking, crashes. Politicians in many European countries have not to mention a mountain of debt passed on to the already subtly begun to require that banks concentrate future. Instead of going into a recession, the global lending in their national economies. A growing finan- economy saw an artificial, temporary rise in prosperity. cial protectionism would throw more gravel in the China’s policy of keeping its currency undervalued to financial machinery.We might also see a new wave of stimulate its exports while pumping its surplus of capi- trade protectionism. tal into U.S. bonds supported the process and hid the The book’s most important lesson is that the prob- imbalances created by the Fed. lem isn’t the current recession, but the previous boom. Predictably, artificially low interest rates inflated the It was during the boom that poor investments were real estate market. No sector of the economy is more made based on hidden inflation and far too optimistic sensitive to interest rates than real estate, and American forecasts. The recession is the cure, when labor and politicians put massive pressure on two government- capital are reallocated to better uses and produc- sponsored enterprises, Fannie Mae and Freddie Mac, to tivity improves. lower their standards to enable vast numbers of In its brevity, the book provides an interesting, unsound mortgages. The resulting foreclosures will accessible explanation of the reasons for and conse- leave a terrible mark in the minds and on the credit quences of the financial crisis. It would have bene- reports of millions. fited, however, from specific recommendations on Norberg is no less critical of the actions of the Wall how to get to a freer economy.What must we do—or Street capitalists. Weak oversight of money placed in undo—to prevent politicians from repeating the investment and pension funds, coupled with huge boom and bust cycle? There is a dire need for a sound bonus systems, encouraged shortsighted gambling with policy, but unfortunately hasty and simplistic “solu- other people’s money. Lurking behind all that was the tions” based on populist slogans have prevailed. Nor- assumption that there was little risk because the mort- berg says that people must realize that government has gage-backed securities were implicitly guaranteed by its limitations, but he doesn’t tell us just where we the federal government. should draw the line. In the public debate following the credit crunch, Waldemar Ingdahl ([email protected]) is president of Eudoxa, many argued as if the financial markets were ruled by a think tank in Stockholm, Sweden. laissez faire, but the credit-rating agencies had an oli-

THE FREEMAN: www.thefreemanonline.org 46 The Pursuit of Happiness

Drugs, Economics, and Liberty

BY WALTER E. WILLIAMS

nly a few people would dispute that narcotics When what are seen as vices are legally prohibited, can harm people, whether that harm is in the supply responses change people’s behavior. Imagine Oform of damage to the body, mental and there’s a supplier of illegal marijuana. Government steps physical dependency, or threats to social relationships. up its efforts to stop its supply by increasing interdic- However, there is not nearly as much consensus as to tion efforts, along with stiffer fines and prison sen- what the correct public response to narcotics use and tences. Which is easier to conceal and transport—a sales is. Ideas range from decriminalization to the cur- million dollars’ worth of marijuana or a million dollars’ rent outright prohibition. worth of cocaine? Obviously, it’s cocaine because there Let’s start by acknowledging that there is no ques- is far less bulk per dollar of value. Thus one effect of tion whatsoever that the sale and use of narcotics in our prohibition is the tendency toward increased sales and country could be virtually eliminated. It could be use of more-concentrated forms of drugs that can accomplished at a monetary cost far less than the hun- include products such as crack cocaine, ice, and meth. dreds of billions spent so far in the Another impact of prohibition is nation’s “war on drugs.” We could on prices. To supply the addiction suspend habeas corpus and constitu- Prohibition increases needs of those who are not able to tional guarantees against unreasonable pay the prohibition-induced higher searches to more easily gather evidence sales and use of prices of cocaine, producers will seek on people who use or sell drugs. We more concentrated to find cheaper substitutes such as could make those arrested bear the crack. This is borne out by the fact burden of proof of innocence and on forms of drugs. that crack is far more popular among conviction summarily execute them. poorer addicts than wealthier ones. Countries with far less wealth and far fewer police resources than ours have used that strategy Invitation to Make a Killing to reduce drug use, and so could we.Thankfully,I think llegality, high prices, and high profits, coupled with most Americans would, and should, recoil in disgust at Igreater government drug-interdiction efforts, also that kind of drug-war strategy. So we have to examine encourage entry by suppliers who are more ruthless less draconian measures. A few thoughts on the eco- and innovative, and who have a lower regard for civil- nomics of drug trade might give us guidance. ity and the law. Panty-waisted, petty, and otherwise There’s no mystery why people use mind-altering law-abiding practitioners are ousted. In addition, drugs: It makes them feel good, at least temporarily. since the courts are unavailable to enforce agree- That’s not only true of cocaine, heroin, and marijuana; ments made among traders, as in the case of legal it’s also true of mind-altering products like cigarettes, transactions, disputes are more likely to be settled cigars, coffee, tea, wine, and whiskey.There’s consider- through violence. able evidence that many people prefer their vices in a Yet another supply response to prohibition, largely diluted form. Hence the popularity of filtered ciga- ignored in the drug debate, is the inevitable tendency rettes, light beer, wine coolers, and mixed drinks. The same seems to be true, at least to some extent, about Walter Williams is the John M.Olin Distinguished Professor of Economics illicit drugs. at George Mason University.

47 JUNE 2010 Walter E. Williams toward corruption of public officials.Today’s drug trade, include “gluttony, drunkenness, prostitution, gambling, like the Prohibition liquor trade, could not flourish prize-fighting, tobacco-chewing, smoking and snuffing, without official corruption. It’s not difficult to see how opium-eating, corset-wearing, idleness, waste of prop- police officers, customs inspectors, and other law- erty, avarice, hypocrisy, etc., etc.” Spooner added that if enforcement officers earning $50,000, $60,000, or practitioners of these and other vices cannot be $70,000 a year could succumb to the temptation of reformed voluntarily, if they go on to what other men $5,000 or $10,000 bribes to look the other way. No call destruction, then they must be permitted to do so. doubt there are elected officials who are also tempted He reminds us that the maxim of law is there can be no by bribes. Even otherwise law-abiding nondrug-using crime without criminal intent to invade the property parents are quieted by money and expensive gifts from or person of another. their children who are involved in the drug trade. People practice vices for what they perceive as their The war on drugs restricts supply and raises prices. own happiness—not to violate the rights of another. In When one drug operation is busted up, another one a free society people have the right to destroy their own emerges virtually overnight to take its place.When the lives but not those of others. When government coer- DEA, FBI, and local police make a big drug bust, law- cion is used to promote virtue, there cannot be liberty. abiding citizens should not be jubilant. Instead, they However, there is conduct that people might engage in should expect higher prices, leading under the influence of narcotics, such to more ruthlessness among drug as impaired driving, robbery and bur- users and buyers, more crime and The war on drugs has glary to fund their habit, and other corruption, and greater social costs. acts that threaten the rights of others. given respectability Such acts are already criminal and Sanctioning Civil Rights Abuses to the violation of should be punished. nother very dangerous cost of We Americans have to ask our- Athe war on drugs is that it has our constitutional selves if there is a better way to deal given respectability to the violation of guarantees. with the drug problem. I think there our constitutional guarantees. Civil- is. We need to focus more on the forfeiture laws have been enacted, in demand side of the drug problem. clear violation of the Fifth Amendment, under which After all, most people don’t use marijuana, cocaine, and property can be confiscated without due process.A par- heroin.The reason they don’t has nothing to do with its ent can have his automobile or house confiscated if, price or the fact it’s illegal. Their decision has much even when unbeknown to the parent, his offspring uses more to do with their values and common sense. it in connection with drug use or sales. Anti-money- Rather than near-exclusive reliance on the law and laundering laws violate our rights to privacy in our government, I believe greater and longer-lasting gains transactions. Murderers and rapists have been freed can be made through civil society,where we can cajole, from crowded prisons to make room for nonviolent admonish, and teach people about the destructive drug users. effects of narcotics—and ostracize them if necessary. From the demand, or personal use, side of the drug It is foolhardy to have a public policy that forces issue, what should we do? Lysander Spooner people hell-bent on destroying their own lives to (1808–1887), one of the great American thinkers of the become violent criminals and destroy the lives of nineteenth century, suggested that while vices may be innocents in the process. It is also foolhardy for society self-destructive or offensive, like all peaceful, voluntary to create circumstances in which official integrity is activities they should remain outside the province of compromised and our constitutional guarantees are law and government. The vices Spooner referred to violated.

THE FREEMAN: www.thefreemanonline.org 48