SEN. JOE PHIL CATO MANCHIN GRAMM JOURNAL Talks policy Keynotes conference Incentives issues at on government for virtue in Cato breakfast spending free markets PAGE 5 PAGE 14 PAGE 3

July/August 2011 Vol. XXXIII No. 4 Deficits, Debt, and Debasement BY SCOTT A. BEAULIER AND PETER J. BOETTKE “Those of us who manage the latest administration unwilling to tackle reach 18.2 percent of GDP and, assuming public’s dollars will be held to serious fiscal challenges. While bailouts tax collections remain at their long-term account, to spend wisely, reform and stimulus programs compounded the levels, will absorb all federal tax revenue col- bad habits, and do our business in problem, its source is the big three transfer lected by the government. In other words, the light of day, because only then programs—Social Security, Medicare, and no discretionary spending and no defense can we restore the vital trust between Medicaid. Together, these programs con- spending will be possible by 2052 unless a people and their government.” sume approximately 10 percent of U.S. tax revenue increases or the government gross domestic product. By 2052 they will Continued on page 6 —BARACK OBAMA Inaugural Address, January 20, 2009

n recent years policymakers have pushed the economy ever closer to the brink of fiscal catastrophe. Fed- eral spending rose substantially under President George W. Bush, with the Ideficit reaching $460 billion in his last full year. In President Barack Obama’s first two years in office, it soared to $1.4 trillion in 2009 and $1.29 trillion in 2010. Deficits are on track to remain at unprecedented levels in 2011, and President Obama’s promise to halve the deficit by 2012 turned out to be the same “politics as usual” that he denounced during his campaign. Even if he made good on that promise, deficits would still be twice as high as ever before. To be fair, the gloomy budgetary picture is not entirely Obama’s fault. His is just the

SCOTT A. BEAULIER is the Adams-Bibby Chair of Free Enterprise and executive director of the Manuel H. John- son Center for Political Economy at Troy University.

PETER J. BOETTKE is university professor of econom- At a Conference in April, SEN. MIKE LEE (R-UT) called for a balanced budget amendment to ics at George Mason University and BB&T Professor for address the burden of federal spending in Washington. Lee also attended a private breakfast held at Cato in the Study of Capitalism at the Mercatus Center. June, where he talked with Cato analysts about several policy issues. PAGE 14 Editorial This Is the Business You Have Chosen n , Part II, the gangster Hyman Roth back to Alaska.” That article too had been promi- recalls the killing of a colleague and says there’s no nently displayed in the Sunday paper but had not point in complaining about it because “This is the generated much online comment, and I asked at the I business we’ve chosen.” Murders are just part of time on the Cato blog: “Are we so jaded that a full- mob business. page investigation of self-dealing and corruption Government has its standard practices, too. involving affirmative action, small business, defense Government programs in a mixed-economy democ- contracting, and complicated financial maneuvers BY DAVID BOAZ racy are typically shaped by lobbying and marked by just doesn’t get our juices flowing?” But surely I was waste. wrong. Outrage ensued, right? Angry editorials, con- If you want One recent Sunday (May 15), the entire Washington gressional hearings? No, not so much. the federal Post seemed to remind readers of that fact. Leading Newspapers are full of stories about serious peo- “ the paper was a big investigative story titled “Million- ple and clowns running for president, about who’s government to Dollar Wasteland.” Reporters Debbie Cenziper and up and who’s down in political maneuvering, about tax and borrow Jonathan Mummolo wrote: Charlie Sheen and Lindsay Lohan. All fine topics indeed. But if journalists spent even 10 percent of The federal government’s largest housing and transfer their time digging into how the federal government construction program for the poor has squan- is spending $3,600,000,000,000 this year, who knows $3.6 trillion a dered hundreds of millions of dollars on how many stories of waste and deadweight loss we’d year, then you stalled or abandoned projects and routinely find? If one diligent reporter could find that much failed to crack down on derelict developers or have to accept fraud by one well-connected contractor, how much the local housing agencies that funded them could a hundred reporters find? that such pro- . . . .The result is a trail of failed developments I generally don’t think that “waste, fraud, and grams come in every corner of the country. Fields where abuse” is the key to cutting federal spending; you apartment complexes were promised are with incentive have to go after the big programs, like transfer pay- empty and neglected. Houses that were sup- ments and military spending. But as Everett Dirksen problems, posed to be renovated are boarded up and almost said, $500 million here, $500 million there, politicization, crumbling, eyesores in decaying neighbor- pretty soon you’re talking real money. hoods. . . .The Post found breakdowns at every corruption, There are reasons that government programs are level. and waste. often characterized by waste, fraud, and abuse. And on and on for three full pages. Politicians tend to respond to interest groups that Then, in the Metro section, columnist Robert stand to receive benefits from any particular pro- ” McCartney wrote about the D.C. Council hearings on gram rather than to the average citizen who will pay the hiring scandals in the administration of newly very little for each program. Policymakers have less elected mayor Vincent Gray: incentive to control costs and improve efficiency than do people in the private sector with their own The main thing learned in the hearings so money (or their boss’s money) at risk. As government far is that Gray showed bad judgment in allow- gets bigger, it becomes less and less possible to have ing [three close advisers] to guide so much of meaningful oversight and transparency—though we the hiring for patronage jobs just below the can hope that new technologies may help somewhat cabinet rank. Although all three advisers were on the transparency side. longtime personnel executives, they blundered Realistically, if you want the federal government to repeatedly by overpaying people, doing inade- tax and borrow and transfer $3.6 trillion a year, if you quate vetting and hiring children of officials want it to build housing for the poor and give special [including their own]. benefits to Alaska Natives, if you want it to supply And an article on Amtrak’s annual billion-dollar with health care and school lunches and deficits included this gem: “Critics in Congress also retirement security and local bike paths, then you have questioned Amtrak’s management, asking, for have to accept that such programs come with incen- example, how an employee with a $21,000 salary tive problems, politicization, corruption, and waste. earned $149,000 in overtime last fiscal year.” For those who like such expansive government: Those articles reminded me of another investiga- This is the business you have chosen. tive tour de force in the Post two months earlier, ban- nered as “A D.C. lawyer and her associates secured $500 million in federal contracts to benefit Alaska native corporations. Less than one percent made it

2 • Cato Policy Report July/August 2011 Safety, debt crises, and altruism in the Cato Journal The Virtues of Free Markets Cato News Notes PREBLE NAMED VICE PRESIDENT n the Spring/Summer 2011 issue of the Cato Journal, Mark Zupan, Christopher Preble has been named vice dean and professor of economics and public policy at the Univer- president for defense and foreign policy sity of Rochester, examines “The Virtues of Free Markets.” He studies at the Cato Institute, succeeding argues that entrepreneurs’ interest in maintaining long-run rela- I Ted Galen Carpenter effective July 1. tions with their customers gives them an incentive to cooperate and Carpenter will retire from management honor their word—or face the loss of business to those who are more and from Washington but will continue ethical. Private property, , and the rule of law—the writing and lecturing as a senior fellow. institutions upon which free markets rest—motivate individuals Carpenter, who joined Cato in 1985, to take account of the is the author of 8 and the editor of 10 impact of their current deci- books on international affairs, including Smart Power: Toward sions on future values, and a Prudent Foreign Policy for America, Bad Neighbor Policy: in so doing foster coopera- Washington’s Futile War on Drugs in Latin America, The Captive tion and integrity over time. Press: Foreign Policy Crises and the First Amendment, Beyond French social philosopher NATO: Staying Out of Europe’s Wars, and A Search for Enemies: Anthony de Jasay examines America’s Alliances after the Cold War. He is currently complet- several cases in which it ing two new books. He has written for all the major foreign appears that an individual policy journals and major newspapers. Carpenter received his sacrifices self-interest for the PhD in U.S. diplomatic history from the University of Texas good of the group. Upon and will move back to Austin. deeper reflection, and with Preble has been Cato’s director of foreign policy studies some realistic assumptions, since 2003. He is the author of three books including The Power Problem: How American Military Dominance Makes Us he finds that what initially Less Safe, Less Prosperous, and Less Free (Cornell University looks like “selfless” behavior Press, 2009), which documents the enormous costs of turns out to be “selflessly self- America’s military power and proposes a new grand strategy ish.” Thus, the self-interest to advance U.S. security. Preble is also the lead author of postulate behind rational Exiting Iraq: How the U.S. Must End the Occupation and Renew economic man (homo econom- the War against Al Qaeda, and he co-edited, with Jim Harper icus) can be broadly applied. and Benjamin Friedman, Terrorizing Ourselves: Why U.S. Economists Daniel Gropper, Robert Lawson, and Jere Thorne Jr. Counterterrorism Policy Is Failing and How to Fix It. His present evidence from more than 100 countries that economic free- resume also includes a Cato internship, four years as a dom and happiness go hand in hand. expands naval officer, and a PhD in history from Temple University. individual choices and increases real per capita income, making peo- Justin Logan, who has written studies on such topics as ple better off and happier. Carrie Kerekes of Florida Gulf Coast Uni- nation-building and grand strategy over the past seven years, versity, in a cross-country study, finds that when property rights in has been promoted to director of foreign policy studies. land and water are more secure, there is a positive impact on environ- mental quality. THE FIRST THING WE DO, LET’S READ Paul Rubin, professor of economics at Emory University, examines ABOUT THE LAWYERS the role of markets, tort law, and regulation in achieving safety. He Cato senior fellow Walter Olson has received significant media finds that free markets are often the most important mechanism to attention for his latest book, Schools for Misrule: Legal achieve safety and that tort law and regulation may “overreach”— Academia and an Overlawyered America. Law professor John O. doing more harm than good. McGinnis reviewed the book in , calling Other contributors include Jerome Stein on “The Diversity of Debt it “Excellent . . . A fine dissection of these strangely powerful institutions.” Other favorable reviews have appeared in the Crises in Europe,” Matthew Carr on “The Impact of Ohio’s EdChoice Weekly Standard, Yale Alumni Magazine, and the Washington on Traditional Public School Performance,” Dean Stansel on “Why Times. Olson has made eight law school appearances, and has Some Cities Are Growing and Others Shrinking,” Joseph Noko on spoken at the Heritage Foundation, the Manhattan Institute, “Dollarization: The Case of Zimbabwe,” and Jerry Tempelman on and the , as well as the Cato Institute. His “Why Do Federal Funds Trade at the FOMC’s Target Rate?” book was featured on C-SPAN2’s popular “BookTV,” and the All of these articles, as well as the five book reviews in this issue of Cato Journal, are episode can currently be found on the “BookTV” website. available online at www.cato.org.

July/August 2011 Cato Policy Report • 3 CATO EVENTS

n May, former Minnesota governor TIM PAWLENTY held a press conference outside the Cato Institute’s headquarters on Massachusetts Avenue after his address at a Cato Policy Forum, I during which he discussed his vision for reducing the size of the federal government. The occasion marked Pawlenty’s first appearance in Washington, D.C., after announcing his presi- dential bid two days earlier.

t a Capitol Hill Briefing in May, Cato legal policy analyst DAVID ato senior fellow JOHAN NORBERG RITTGERS (left) joined forces with ACLU senior policy counsel MIKE introduced his film Free or Equal: A Personal View at a private screening A GERMAN to reexamine the Patriot Act and its impending renewal. C in April. In the documentary, to be seen German focused on the “exceedingly broad” nature of the law, while Rittgers on PBS stations this summer, Norberg stressed the need for vigilance. “Terrorism, contrary to what we’ve been told, retraces ’s steps in his is not an existential threat to our ,” Rittgers said. “But our own coun- path-breaking Free to Choose and offers terterrorism efforts can be.” updated conclusions.

4 • Cato Policy Report July/August 2011 ANIEL GRISWOLD, director of the Cato Institute’s Herbert A. Stiefel D Center for Trade Policy Studies, spoke at the Carnegie Endowment for en. JOE MANCHIN (D-WV) visited the Cato Institute for a International Peace in May. He talked private breakfast in April. He touched on a wide range of about the lessons learned from protec- Sissues, including energy and the environment, health care, tionism during the Great Depression and foreign policy. In Cato’s 2010 “Fiscal Policy Report Card and how post-war trade institutions helped limit protectionism in the on America’s Governors,” Manchin received an A. recent crisis.

t a Cato Policy Forum in April, KELIANG ZHU, an attorney at Landesa, reviewed n April, Cato’s government affairs the development institute’s recent findings from their large-scale survey on Idepartment held a series of lectures A land rights in China. Zhu joined Roy Prosterman, Landesa’s founder, and for House freshmen. ROGER PILON, Xiaibi Zhang, senior research fellow at the International Food Policy Research vice president for legal affairs at the Institute, in exploring the conditions of Chinese farmers. Citing the importance of Cato Institute, discussed constitution- land documentation, Zhu highlighted advances in the protection of these rights. al issues at one session.

July/August 2011 Cato Policy Report • 5 Debasement Continued from page 1 “is the ‘pretend War II, for example, public debt increased to slashes benefits to these three programs. nearly 109 percent of GDP. Yet after the war, payment’ of debt the government made a concerted effort to BREAD AND CIRCUSES that occurs when pay down the debt, reducing it to 50 percent An inevitable crisis seems the almost cer- governments inflate of GDP by 1956 and 24 percent by 1974. tain outcome of America’s deficits and debts. The experience of the last 30 years, however, The massive increases in transfer spending, their currency by shows that deficit spending is no longer an coupled with steady growth in discretionary printing money. emergency response to catastrophe. In 1980, and defense spending, mean that large deficits America’s total national debt stood at $1 tril- will haunt America for the foreseeable future. lion. Over the next three decades, it grew 14- Deficits occur when government expendi- ” fold—without a major depression or world tures exceed tax revenues, leading to higher ultimately erode its purchasing power. Sim- war. Deficit spending has become business interest rates and crowding out private invest- ply put, they are using a slight variation of as usual, and we’re quickly approaching the ment. They generate unpredictability in pol- the same “juggling trick” to achieve their point where repayment is impossible. icy, as they herald rising taxes. Since deficits ends: by pushing the debt problem into the cannot be left unpaid, governments normal- future, they hide the full cost of repayment HOLDING A TIGER BY THE TAIL ly finance them by issuing bonds that prom- to the public. Politicians are unable to address our cur- ise to repay the principal (with interest) over As a result, the symptoms of debasement rent fiscal challenges in part because they a period of time. are not always easy to recognize. Yet several rely on flawed Keynesian arguments to justi- Most troubling, deficits add to our already recent indicators have been revealing. The fy their spending. Simplistic Keynesianism high federal debt. Publicly held debt cur- Federal Reserve’s balance sheet, for instance, argues for greater government spending rently stands near 60 percent of GDP and, has expanded from its long-established level when the economy softens, followed by spend- according to the Congressional Budget Office, of $8 trillion to $23 trillion. This expansion ing cuts when the economy returns to growth. will rise to 90 percent by 2021. As debt rises, in the money supply helped fuel a bond But this rests on the crucial assumption that interest rates rise, taxes on future genera- market rally that resulted in artificially low politicians act benevolently, in the interest tions rise, and politicians inflate the curren- Treasury yields. The Fed’s direct interven- of the overall economy. It assumes politi- cy to hide their profligate spending. To pay tions into the mortgage-backed security cians will exercise fiscal restraint. off this debt, the government must run sur- market have held mortgage rates at record The historical record since Lyndon B. pluses, which occur when tax revenues exceed lows as well. By purchasing toxic assets pri- Johnson’s “Great Society” suggests other- spending. If the government is unable to vate investors weren’t interested in, the Fed wise: politicians, regardless of party, do not generate surpluses, a third and far more artificially expanded the money supply. As follow Keynesian assumptions. Instead, they dangerous option can be employed to elimi- more money entered the system, prices rose spend during the bad times and during the nate long-term debt: debasing the currency. and each dollar lost some of its value. good times. There are, of course, good pub- Debasement is the “pretend payment” of Inflation is always and everywhere the lic choice reasons why politicians cling to debt that occurs when governments inflate result of monetary expansions, and its per- Keynes: he offers an economic justification their currency by printing money. It’s a nicious effects are becoming palpable. Com- for promising everyone everything! Politi- problem of nearly every government, from modity prices are all nearly twice as high as cians therefore achieve success through a the “bread and circuses” of ancient times they were in 2008. Prices for education and simple mantra: “Spend ’em if you got ’em, through today. In the 18th century, govern- health care continue to rise rapidly. Con- and spend ’em if you don’t.” ments debased their currencies by trimming sumer price increases, when food and ener- Government officials don’t want to lose metal coins and recirculating them. By mak- gy are included, are well above levels a cen- popularity by raising taxes and cutting spend- ing a coin worth less in real terms, govern- tral bank would normally be comfortable ing. Instead, they employ juggling tricks to ments throughout Europe were able to spend with. And prices for technologies like cell give the illusion of paying their bills. The beyond their means. “The honour of a state phones, personal computers, and televisions Treasury finances government expenditures is surely very poorly provided for,” Adam are not falling as rapidly as they should be. by floating bonds to the public, and the Fed- Smith wrote in 1776, “when in order to cov- The distortions in these prices indicate eral Reserve steps in as buyer whenever the er the disgrace of real bankruptcy, it has that debasement is already taking place— Treasury is unhappy with the market inter- recourse to a juggling trick of this kind.” and it stems from problems that econo- est rate. The process is referred to as moneti- Today, paper money limits governments’ mists have been warning about for decades. zation, but really it’s debasement, and it ability to physically trim the edges of metal Historically, the public accepted deficits stems in part from the fact that it is difficult coins. But by printing money to pay off and debts only in response to major wars to keep the Fed and the Treasury separate. debts, governments debase the currency and and huge economic crises. During World In fact, some have said that the idea of a

6 • Cato Policy Report July/August 2011 “‘The honour separate Fed and Treasury is utopian, that of a state is surely authorities are closely aligned. Other rules— the two offices within government will remain very poorly provided along the lines of antitrust restrictions—that forever entangled. The 1974 Nobel Prize limit Fed and Treasury interaction would winner in economics, F. A. Hayek, called the for,’ Adam Smith also be worth considering. monetary and fiscal policy dance an exercise wrote in 1776, ‘when Because it is difficult to imagine mem- in “holding a tiger by the tail.” In 1969, while bers of Congress taking actions that tie their discussing the broad, inflation-borne pros- in order to cover the own hands, these steps would ideally be aug- perity affecting Venezuela and much of the disgrace of real bank- mented with more radical fiscal reform. Western world, Hayek said: Reverse revenue sharing would get the feder- ruptcy, it has recourse al government out of the business of taxa- How long can this inflation continue? If tion and would instead allow for 50 different the tiger [of inflation] is freed, he will eat to a juggling trick experiments in optimal taxation across the us up; yet if he runs faster and faster while of this kind.’ different states. Unlike the Articles of Con- we desperately hold on, we are still fin- federation, which encouraged free-riding by ished! ” states, each state could be required to con- Hayek’s message was that inflation leads tribute a certain amount to the federal gov- to a misallocation of resources. During ly of politics that has threatened the viabili- ernment. But, rather than be hampered by inflationary periods, the structure of pro- ty of the current economic system.” one-size-fits all federal taxes, individuals duction gets distorted and higher-order, could choose from different tax regimes in capital-intensive goods like housing get TYING THE JUGGLER’S HANDS various states. Reverse revenue sharing reduces overproduced. At some point during the There are several ways we can constrain many of the problems of our current federal inflationary cycle, central bankers face a the juggler in an attempt to reverse our cur- system—special-interest groups become less choice of either inflating more or contract- rent course. The first involves tying the jug- relevant and centralization declines. ing the money supply. When the money gler’s hands. The federal government could supply is contracted, the capital-intensive adopt a balanced-budget amendment, for LIMITING THE JUGGLER’S TRICKS “boom” finally “busts.” According to Hayek, instance—one similar to those constraining We fully recognize that we’re a long way any attempt by policymakers to address many states. This would limit the govern- from a world where federal balanced budget the misallocation through deficit spend- ment’s fiscal authority through constitu- amendments and reverse revenue sharing ing—letting the tiger run faster—creates tional mechanisms, with the goal of confin- programs are the preferred policy options. further distortions and a greater misalloca- ing levels of taxation and balancing the But we firmly believe we are a long way down tion. By keeping prices and interest rates budget. Such an amendment would be quite the bankruptcy path, and any kind of turn- away from their natural levels, fiscal and popular with voters, though obviously less around requires far more drastic action than monetary interventions simply prolong so with elected officials, and it could choke typical policy measures. To ensure the jug- the inflationary cycle and prevent a return off the fuel needed for deficits, debts, and gler has fewer tricks at his disposal, goods to normal, long-run conditions. Two decades debasement. and services provided by government must after his death, Hayek’s “tiger by the tail” To provide a further safeguard against be shifted to the market and privatization critique of Keynesian policies remains as this cycle, legislative steps could be taken to must be embarked on. relevant as ever. separate the Fed from the Treasury. The two Our current entitlement programs, for In 1977 James Buchanan and Richard currently work as “partners,” but by any instance, are unsustainable. The plan to reform Wagner warned about the political legacy measure they are dangerous bedfellows. Medicare being advanced by Rep. Paul Ryan of Keynesian economics. “Sober assessment Reform that better defines the roles of the is an acknowledgement that we are on an suggests that, politically, Keynesianism may organizations could greatly reduce the threat unsustainable entitlement path, and his represent a substantial disease,” the two of debasement. One such step would be to commitment to rein in spending is com- wrote in Democracy in Deficit, “one that can, limit the kinds of bonds the Fed can pur- mendable. But these reforms still fall short over the long run prove fatal for a function- chase from the Treasury. For example, the because they leave power in the hands of the ing democracy.” If economic policies are second round of quantitative easing (QE2) juggler. What is really needed is reform that not somehow constrained by rules and super- would not have been possible had there been fully shifts medical coverage for the elderly majorities, deficits are the predictable out- a rule saying the Fed cannot buy long-term and the poor from the public sector to the come of democracy. “The bottom line: polit- bonds from the Treasury. A vast literature in market. Reforms that fall short of full pri- ical capitalism is not laissez faire capital- monetary economics has consistently found vatization still leave the juggler with tricks ism,” they write. “To continue down our that more independent central banks out- on hand. current path is to reinforce the perverse fol- perform ones where the fiscal and monetary Even more fundamental than privatizing

July/August 2011 Cato Policy Report • 7 We are currently entitlements would be to strip the govern- “faced with a problem Federal bankruptcy—whether it occurs ment of its control of the money supply of unprecedented through debt repudiation or a more orderly through a return to the gold standard, a process of restructuring—would serve as a monetary rule, or “free banking.” Reform- magnitude, one sobering wake-up call. The municipal bank- ing the Fed and chasing after the “separate that should justify ruptcies some cities and counties have faced Fed and Treasury” ghost has proven futile, in recent years, along with the state budget and it may be time to acknowledge that our giving unconven- crises afflicting most states, are grim por- central banking system has failed. While tional reforms a traits of what bankruptcy at the federal level there would certainly be transitional costs to would look like. People promised benefits work through and consider in the short- seat at the table. would see their expectations dashed. Taxes term with a move to free banking, a decen- across the board would rise. Interest rates on tralized monetary regime would help to future debt issuance would soar. The long- check and constrain any particular bank ” term consequences of reneging on our prom- aiming to overexpand the money supply. lick bankruptcy has been disguised under ises would be difficult to estimate in full. As the appearance of a pretend payment. . . . such, we are currently faced with a problem ENDING THE CYCLE When it becomes necessary for a state to of unprecedented magnitude, one that should Many of the policy recommendations we declare itself bankrupt, in the same man- justify giving unconventional reforms a seat are making ask politicians to fall on their ner as when it becomes necessary for an at the table. own swords for the sake of financial solven- individual to do so, a fair, open, and avowed After vowing “to spend wisely, reform cy. While these reforms are admittedly radi- bankruptcy is always the measure which is bad habits, and do . . . business in the light cal, the alternative is undoubtedly more both least dishonorable to the debtor and of day,” President Obama instead accelerat- extreme. To see why, it is worth expanding least hurtful to the creditor. The honour ed the country down the path of overspend- on Adam Smith’s juggling metaphor from of a state is surely very poorly provided for, ing, made unsustainable promises, and used earlier. In the final chapter of The Wealth of when in order to cover the disgrace of real the Fed to conceal the full cost of govern- Nations, Smith observed: bankruptcy, it has recourse to a juggling ment profligacy. Perhaps our best hope When national debts have once been accu- trick of this kind. . . . Almost all states, now is to consider measures that funda- mulated to a certain degree, there is scarce, however, ancient as well as modern, when mentally challenge the system, and finally I believe, a single instance of their having reduced to this necessity, have upon some break free from the cycle of deficits, debt, been fairly and completely paid. . . . Pub- occasions, played this very juggling trick. and debasement. How to stay in touch with Cato Cato Policy Report gives you Cato news bimonthly. 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8 • Cato Policy Report July/August 2011 POLICY FORUM The Case for Marriage Equality: Perry v. Schwarzenegger he 1967 Supreme Court case Loving v. Virginia ended state bans on inter- nent of liberty, privacy, association, the racial marriage in the 16 states that still had such laws. Now, 44 years right to identify oneself spiritually—and it is later, the courts are once again grappling with denial of equal marriage currently being denied to a large segment of T American society. rights. Two California couples have filed suit against Proposition 8, the 2008 ini- If you’re going to deny people that right, tiative that limited marriage to opposite-sex couples. The plaintiffs in Perry v. what justification exists? In fact, several Schwarzenegger won in federal district court, and the case is now on appeal. At a times during the case, the judge asked, Cato Policy Forum held in May, co-counsels Theodore B. Olson, former U.S. “What harm would it do to people of het- solicitor general, and David Boies, chairman of Boies, Schiller & Flexner, dis- erosexual orientation if homosexuals were cussed their progress with the case. As co-chairs of the American Foundation for married?” Our opponents didn’t want to Equal Rights advisory board, Robert A. Levy, chairman of the Cato Institute, and answer and tried to avoid the question, but John Podesta, president of the Center for American Progress, also spoke on how the judge insisted. And one of our oppo- nents, who is a very good lawyer, paused, the principle of equality transcends the left-right divide. looked at the judge, and said, “I don’t THEODORE B. OLSON: David Boies and I have know.” been involved in this case for two years, as of The institution of marriage and what it this month. We represent two couples: two means in this country isn’t simply a legal gay men who live in southern California thing. It is a social construct. The example I and a lesbian couple in Berkeley. They have like to use is citizenship: What if you were both been in long-term relationships, and told by your government that because you they have wanted to be married. We went to came from a certain country, you could be trial in January of 2010 and had closing all the things that a citizen could be—you arguments in June. In August, the judge could vote, travel, own property—but you rendered a decision—a 134-page explana- couldn’t call yourself a citizen? You would- tion of findings of fact and conclusions of n’t be a citizen, and if you can’t be married in law—that struck down Proposition 8. this country, you are being left out of a very When we tried the case, the judge decid- Theodore B. Olson important component of what our society ed that this was an important question reveres. We are telling people that they are affecting hundreds of thousands of different—that they are not entitled to the Californians and millions of Americans. It Fourteen times, same respect, the same dignity, the same was a constitutional challenge—going to the U.S. Supreme equality—and they are therefore second- the very core of what the Fourteenth “ class. That is a state-based license to dis- Amendment Due Process and Equal Court has announced criminate, and that is what the Proposition Protection Clauses mean. The trial itself that marriage is 8 case is all about. went 12 days, and it was a remarkable edu- cation. As many of you know, it was once a fundamental DAVID BOIES: What exactly is going on when against the law in many places to serve alco- right under the a state like California says that they will not holic beverages in public to a person who permit a certain group of citizens to marry? was gay—against the law. Both the server and Constitution. As a thought experiment, imagine that the the drinker could go to jail. President state simply got out of the marriage busi- Eisenhower once announced that someone ness entirely. You wouldn’t have the prob- who was gay could not hold a federal posi- reviewed our evidence and rendered” a deci- lems we are having, because issues of equal tion. In our arguments, we presented evi- sion that Proposition 8 denied individuals protection and due process only arise with dence on the history of marriage, and how the fundamental right to marry. Fourteen state action. race was once used as a basis to deny people times, the U.S. Supreme Court has In order to attack that state-sponsored the right to marry. announced that marriage is a fundamental discrimination, we wanted to establish three The district court very thoughtfully right under the Constitution. It is a compo- things. One, we wanted to establish that

July/August 2011 Cato Policy Report • 9 POLICY FORUM

marriage is a fundamental right. Both the gays and lesbians are able to get married. Californians had an established right to plaintiffs and the defendants agreed on this, Again, we brought in a wealth of evidence same-sex marriage that was then taken away. and they could hardly have said otherwise. that there was no harm—and again, on the They now have this crazy quilt: because they The U.S. Supreme Court has repeatedly cross examination, even the defendants’ could get married for a period of time, there affirmed that marriage is a fundamental own expert witnesses conceded that they are currently 18,000 gay and lesbian mar- right. In fact, marriage is so important to had no evidence of any harm. riages recognized by the state. So you have a human dignity—to the rights of privacy, Based on that record, the court wrote a couple that is legally married and, next door, association, and liberty—that even when a decision—which everyone should read a couple that wants to get married but can’t. significant interest exists, the state cannot because it talks about the development of Indeed, if the couple that is married gets a prohibit it. Marriage is much more than any equality in this country and the important divorce, they can’t remarry. They can’t even of its individual attributes. It has such sig- remarry each other. That strikes people nificance that you cannot even deprive peo- instinctively as not being rational. ple who are locked away for life from enter- The fundamental issue is one of civil ing into it. So the idea that marriage was a rights—of individual rights. That is why you fundamental right was taken, I think, by see people on this panel who don’t necessar- both sides as a given. ily agree on a range of other issues. We all The second thing we set out to prove was have an interest in protecting individual that depriving citizens of the right to marry rights against government discrimination. seriously harmed them and their children. Hundreds of thousands of children are JOHN PODESTA: Fifteen years ago, the being raised today by gay and lesbian cou- thought of same-sex couples being allowed ples. And we proved, with a wealth of statis- to legally marry was hard for most tical and analytical data, the harm that for- Americans to contemplate. You probably bidding marriage did. Our experts—child had to work at the Cato Institute to even psychologists, sociologists, anthropologists, wrap your head around that idea. No state statisticians, economists—proved this, and David Boies offered this right. Barely 30 percent of the we didn’t stop there. The other side identi- country thought that it should be offered— fied a number of expert witnesses, starting and 10 years before, that number was in the with eight, just like us. Six of those experts Our opponents low teens. Senators and representatives who were dropped after we took their deposi- “objected to our today are outright supporters of marriage tions because they admitted that depriva- equality voted for the Defense of Marriage tion of this right seriously harmed gay and playing some of the Act in 1996. And of course, the president lesbian couples and their children. In fact, in deposition tapes who signed it has not only changed his an interesting argument, our opponents views, but is now a vocal supporter of mar- objected to our playing some of the deposi- on the grounds riage equality. tion tapes on the grounds that their own that their own Yes, today the world looks very different. witnesses weren’t really experts. Our oppo- Just 15 years later, marriage equality for nents lost that argument. witnesses weren’t same-sex couples is becoming a fairly main- The third thing we set out to prove was really experts. stream idea—embraced by liberals, conser- that there was no benefit to preventing gays vatives, moderates, and not surprisingly, by and lesbians from marrying. The defense libertarians alike. Five states have legalized started out by saying that they don’t really ways in which marriage has changed” over same-sex marriages. Eight states offer civil need to marry—they’ve got civil unions. time. It talks about the fact that slaves were unions or domestic partnerships, and three They lost that argument. Then they fell back prohibited from marrying—and how once additional states recognize same-sex mar- on the idea that it will be dangerous—it will slavery was abolished, they immediately riages performed legally in other jurisdic- harm the institution of heterosexual mar- rushed to get married. This was part of what tions. riage. Think about that for a minute. I ask made their relationship dignified and National polls consistently show that a those of you who are considering marriage respectable. It gave them a sense of belong- small but growing majority of the country whether it would dissuade you if you ing—a sense of equality. When something is supports marriage rights—including two- learned that a gay or lesbian couple down that important to people, I think we have to thirds of Democrats, almost 60 percent of the street was able to get married. Or for ask ourselves, as a society, “What are we independents, and more than a third of those of you who are married, whether you doing in trying to prevent others from Republicans. Two-thirds of people under would decide to get divorced because now achieving this?” 40 now support marriage equality. The

10 • Cato Policy Report July/August 2011 change in public opinion is not only hap- involved at all in the marriage business? For Clause of the Fourteenth Amendment says pening, it’s happening quickly. In fact, most most of Western history, marriage was a that no state may “deny to any person of the spike in public support for marriage matter of private contract between two par- within its jurisdiction the equal protection equality has come in the past few years. In ties. Marriage today could follow that tradi- of the laws.” That provision is the relevant 2004, when marriage equality was a “game- tion, with little or no government interven- constitutional issue here, and that is where changing” issue at the ballot box, support tion. Some institutions would recognize conservatives and libertarians sometimes was only at 34 percent—not much higher gay marriages; others would not. Still oth- part company. I want to explore that part- than it was in 1996. Today, 53 percent of ers would call them “domestic partner- ing of company by looking at two topics: Americans support marriage for same-sex ships.” No one would have to join any and fundamental rights. couples. Despite recent high-profile attacks, group, and no group would have to adopt a With respect to federalism: Why don’t marriage equality clearly has a strong and we simply leave the same-sex marriage ques- growing momentum. tion up to each state? At the time of the Yet across the political spectrum, it’s clear framing, the Constitution only applied to that an appeal to discrimination has not the federal government. But we later completely lost its potency. We see a number learned that the states can be every bit as of candidates seeking their party’s presiden- tyrannical as the Feds, slavery being the case tial nomination attacking marriage equality. in point. After the Civil War, however, the But these appeals to divide America will ulti- Fourteenth Amendment effectively made mately be rejected. What has historically the Bill of Rights and other provisions of made America great is our promise of free- the Constitution applicable against the dom and equal opportunity to all of our cit- states. For the first time, the federal govern- izens. We have failed to live up to that prom- ment could intervene if the states violated ise in times past. But our country is con- our rights. That significantly altered the stantly evolving for the better, expanding the balance between the national and state gov- circle of opportunity, deepening the mean- ernments. Federalism surely allows some ing of freedom. We’re evolving because John Podesta states to recognize heterosexual and gay countless policymakers, activists, and marriages on an equal basis while other lawyers—including those in this room—keep states opt to privatize all marriages. Still working tirelessly to root out injustice and National polls others can call all marriages “domestic part- expand America’s promise to every citizen. consistently show nerships.” But the states may not discrimi- This is another step in our journey to “ nate between same-sex and opposite-sex form a more perfect union, and it is some- that a small but unions, without justification, and none has thing even the Center for American Progress growing majority been shown. and Cato can agree on. Our partnership Next, consider the issue of fundamen- shows that we can transcend political labels of the country tal rights. Since the New Deal, the courts to focus on basic rights and smart public supports marriage have rigorously reviewed government reg- policy—policy that is rooted in our most ulations only if they infringe on a funda- enduring founding principles of equality, rights. mental right—meaning one that is either fairness, and liberty. We both recognize that, implicit in the concept of ordered liberty, at its heart, marriage equality is about treat- or deeply rooted in our nation’s traditions ing our fellow citizens with dignity and definition that its members” found offen- and culture. How that right is defined— respect, whether they’re gay or straight. sive. The rights and responsibilities of the narrowly or broadly—makes all the differ- partners would be governed by personally ence, and can even dictate the outcome of ROBERT A. LEVY: Why do libertarians argue tailored contracts, like those that control a case. Some conservatives argue that the there ought to be a right to same-sex mar- most of the interactions among people in a right to same-sex marriage doesn’t meet riage? The purpose of government is to free society. the criteria for a fundamental right and secure individual rights and prevent some That’s the ideal. Regrettably, however, therefore the courts should defer to the persons from harming others. The thresh- government has interceded, enacting more legislature. old question, therefore, is this: Whose than a thousand federal laws dealing with Consider the case of Gonzales v. Raich. A rights are being violated when two gay peo- issues like taxes, child custody, and inheri- sick person with a doctor’s note claimed a ple get married? The answer, of course, is tance. Whenever government imposes obli- fundamental right to use medical marijua- nobody’s. gations or dispenses benefits, the Consti- na in California, where it is legal. The court In fact, why should government be tution is implicated. The Equal Protection of appeals characterized the right as “the

July/August 2011 Cato Policy Report • 11 use of narcotics for medical purposes.” by contrast, have a consistent, minimalist 44th anniversary of Loving v. Virginia, Ms. Raich lost because medical marijuana, view. We want government out of our wal- which struck down as unconstitutional said the court, is not required for ordered lets and out of our bedrooms. We view the Virginia’s law prohibiting interracial mar- liberty, nor is it deeply rooted in our riage. The Supreme Court decided it nation’s traditions. If the court had adopt- unanimously—but that case, if it had been ed Ms. Raich’s characterization of the decided the other way, would have pre- right—the liberty to pursue a less painful vented our president’s mother and father life without infringing on the rights of from getting married. These days, it’s anyone else—she would have won that inconceivable that such a law could exist case. Which characterization is correct? in the . Both of them are correct. The polling numbers confirm this: the Raich was indeed trying to live with less swing in public opinion has been 10 per- pain; she was also using medical marijuana. cent in most polls in favor of recognizing Similarly, Kristin Perry’s right in Perry v. the rights of individuals to marry, irrespec- Schwarzenegger could be characterized as tive of their sexual orientation. That’s in “the right to marry another woman,” which two years, since Perry v. Schwarzenegger was might not be considered deeply rooted in filed. That matters, because court decisions our traditions. Or it could be characterized Robert A. Levy are made in the atmosphere of public opin- as “choosing a spouse and forming a house- ion. When we win this case, if we do, we hold,” which would be deeply rooted. So want people to react and say, “It’s about sometimes courts can rule on the basis of From liberals, time.” how they describe the right, and that is the we sometimes get The American Foundation for Equal foolishness of bifurcating our rights. All “ Rights has supported us very strongly, and rights—enumerated, unenumerated, funda- too much govern- put us out there—this so-called odd couple, mental, nonfundamental—should be rigor- which we’ve heard a thousand times now ously protected by the courts. That’s the ment. From conser- (but at least no one’s said “strange bedfel- view of most libertarians. Too often, it is not vatives, we some- lows” here). It helps us attract attention so the view of many conservatives. that people will say, “How did you two get From liberals, with all due respect to Mr. times get too together?” It gives us a chance to talk to the Podesta, we sometimes get too much gov- few freedoms. American people—on radio, on television, ernment—an enlargement of state power. in newspapers. We’re finding that it res- From conservatives, with all due respect to onates. Little by little—actually it’s really Mr. Olson, we sometimes get too few free- powers of government very narrowly” and quite fast—the American public is chang- doms—protection of some, but not all, of the rights of individuals very broadly—and ing. So when this case comes out the way it our constitutionally secured rights. The left that was precisely the vision of the Framers. should, we believe the American people are and the right are selectively indignant about going to say, “Thank God that terrible ves- the proper role of government. Libertarians, THEODORE B. OLSON: Next month is the tige of discrimination is gone.”

I N C ELEBRATION OF C ONSTITUTION D AY 2011

THE CATO INSTITUTE’S CENTER FOR CONSTITUTIONAL STUDIES presents the 10th Annual Constitution Day Conference

THE SUPREME COURT: PAST AND PROLOGUE—A LOOK AT THE OCTOBER 2010 AND OCTOBER 2011 TERMS

Thursday, September 15 • 10:30 a.m.–7:00 p.m.

One of the premier programs we present each year, Cato’s Constitution Day Conference is a comprehensive critique of the Supreme Court’s just-concluded term, plus a look at the term ahead. For details, plus information on the Cato Supreme Court Review: 2010-2011, available after September 15, go to www.cato.org/constitutionday.

12 • Cato Policy Report July/August 2011 Scholar Profile Ted Galen Carpenter ed Galen Carpenter is a senior fellow in defense and foreign policy campaign, I decided to focus even more on studies at the Cato Institute. He is the author of 8 and the editor of 10 foreign policy issues. There was already an books on international affairs, including, most recently, Smart Power: impressive array of libertarian scholars and T pundits on most domestic policy issues, but Toward a Prudent Foreign Policy for America. with the exception of Earl Ravenal and one Carpenter is contributing editor to the National Interest and serves on the edi- or two others, the ranks of good libertarian torial boards of Mediterranean Quarterly and the Journal of Strategic Studies. He is foreign policy experts seemed rather thin. the author of more than 400 policy studies and articles, which have appeared in Since my three-year post-doctoral , , the Wall Street Journal, the Los Angeles research post with Lyndon Johnson’s Times, the Financial Times, Foreign Affairs, Foreign Policy, the National Interest, World national security adviser, Walt W. Rostow Policy Journal, and many other publications. He is a frequent guest on radio and (an interesting adventure), was coming to television programs in the United States, Latin America, Europe, East Asia, and an end, I approached the Cato Institute other regions. about future plans, including a grant to Carpenter joined Cato in 1985. He has just stepped down from his longtime write a book on how an interventionist for- position as vice president for defense and foreign policy studies at the Institute. eign policy erodes domestic liberty. It is somewhat ironic that although I’ve pub- My upbringing did not offer a hint that I One was the increasingly evident failure lished 18 books as a Cato scholar, I have yet would become a committed libertarian. My of the Vietnam War and the lies from mili- to write the book that I originally proposed. parents were staunch liberal Democrats tary and civilian leaders that accompanied It is a project to which I hope to return in who admired the socialist heritage of Mil- that debacle. The other was my expo- the next few years. waukee, where I grew up. My father believed sure to the writings of The bulk of my that the greatest U.S. president was not the founders, especial- work now focuses on George Washington or Abraham Lincoln, ly Washington and Jef- such topics as policy but Franklin Delano Roosevelt. It was an ferson, regarding for- toward Iran and North unpleasant shock to him that his youngest eign policy. I began to Korea, relations with child became an enthusiastic high school conclude that promis- China, and the dis- volunteer for ’s presidential cuous military inter- astrous consequences campaign. ventions were inher- of the international My political apostasy was not just a case ently destructive of war on drugs. My lat- of youthful rebellion, though. I had read limited government est book, which will Goldwater’s Conscience of a Conservative, and and individual liberty. appear in 2012, exam- it bothered me how large and intrusive gov- Those views were ines the alarming drug- ernment had become. But I was not a con- reinforced during the related violence next ventional conservative on every issue. It pursuit of my PhD in door in Mexico. seemed to me that conservatives were hyp- history at the Universi- My proudest achie- ocritical when they criticized oppressive ty of Texas during the vement during the 26 government but were enthusiastic advo- mid and late 1970s. As years that I’ve worked cates of censorship laws and statutes that I read the works of real- for Cato is building a prohibited drug use or certain types of sex- ist writers such as defense and foreign po- ual behavior. George Kennan and licy department that Meeting my future wife, Barbara, at the Walter Lippmann, and so-called isolationist achieves the highest standards for both University of Wisconsin–Milwaukee deci- figures such as William Henry Chamberlin quantity and quality of scholarship. Cato is sively shaped my ideological education. She and Charles Callan Tansill, it became appar- now a major and highly respected partici- introduced me to and the oth- ent to me that U.S. foreign policy was badly pant in the debate about America’s role in er writings of , which intensified off course. the world. Our Institute is also the bright- both my suspicion of government and my As I became more active in the libertari- est hope to create a foreign policy for the commitment to individual liberty. an movement at the end of the decade, 21st century that is consistent with a con- I started out as a foreign policy hawk, but including joining the Texas Libertarian Par- stitutional system based on limited govern- two developments transformed my outlook. ty and working on ’s presidential ment and individual liberty.

July/August 2011 Cato Policy Report • 13 CATO EVENTS

t a Cato Institute conference in April, “The Economic Impact of Government Spending,” PHIL GRAMM (left), former senator from Texas and author of Gramm-Rudman-Hollings, Awas part of a distinguished lineup of legislators and policy experts. Gramm predicted a stalemate on budget talks, citing the fact that neither party is willing to deal with the problem. Sen. BOB CORKER (R-TN) (center) joined Cato senior fellow DANIEL MITCHELL (right) in diag- nosing the looming fiscal crisis in more detail.

t a May 5 Cato Policy Forum ZAINAB ollowing the publication of Climate Coup: Global Warming’s AL-SUWAIJ, executive director of the Invasion of Our Government and Our Lives, Cato hosted a A American Islamic Congress, offered F forum moderated by PATRICK J. MICHAELS (left), senior fellow observations from her recent visit to the at the Institute and editor of the book. BOB RYAN (center), mete- Middle East in the wake of that region’s orologist for WJLA/ABC 7 News and former president of the uprisings. “The wall of fear has been bro- American Meteorological Society, and RICHARD LINDZEN (right), ken,” she said. “But the challenge is how professor of meteorology at MIT, examined how climate scien- to make sure it stays broken.” tists communicate with the public.

14 • Cato Policy Report July/August 2011 Cato Calendar CATO UNIVERSITY SUMMER SEMINAR Annapolis, Md.  Loews Hotel July 24–29, 2011 Speakers include Rob McDonald, Don Boudreaux, Robert Levy, Edward H. Crane, David Boaz, Tom G. Palmer, and Lynne Kiesling.

CONSTITUTION DAY Washington  Undercroft Theatre September 15, 2011 Speakers include Alex Kozinski, Gregory G. Garre, Tom Goldstein, Adam Liptak, David Post, Orin S. Kerr, and Roger Pilon.

CATO CLUB 200 RETREAT Newberg, Ore.  Allison Inn and Spa  September 22–25, 2011 MONETARY REFORM IN THE WAKE OF CRISIS 29th Annual Monetary Conference Washington  National Housing Center November 16, 2011 Speakers include Allan H. Meltzer, James Grant, John A. Allison, Lawrence H. White, Roger Garrison, Richard H. Timberlake, Judy Shelton, and Jeffrey Lacker. uring a three-day conference for students in April, elcato.org hosted more than 60 participants from 12 Latin American countries. Held in Buenos 24TH ANNUAL BENEFACTOR SUMMIT Palm Beach  The Breakers  February 23–26, 2012 D Aires, the event was co-organized with Argentina’s Fundación Libertad. Among the high-profile speakers were Peruvian scholar ALVARO VARGAS LLOSA MILTON FRIEDMAN PRIZE PRESENTATION (left); Cato adjunct scholar ALBERTO BENEGAS LYNCH, JR., from Argentina (above DINNER AND GRAND OPENING WEEKEND Washington  May 4, 2012 right); and El Salvador’s former finance minister MANUEL HINDS (below right).

APRIL 5: The War in Libya: What APRIL 21: The False Promise of MAY 10: America’s Allies and War: Is the Role of Congress? Green Energy Kosovo, Afghanistan, and Iraq APRIL 7: The Economic Impact APRIL 28: The Constitution of MAY 13: Why Are We at War of Government Spending Liberty: The Definitive Edition in Libya?

APRIL 8: Cato Institute Policy APRIL 29: The Future of MAY 16: Leashing the Surveillance Perspectives 2011 (New York) Chinese Land Rights State: How to Renew and Reform Patriot Act Surveillance Authorities APRIL 13: Cato Club Naples— APRIL 29: Free or Equal: A ObamaCare: What a Difference Personal View MAY 17: Peddling Protectionism:Smoot- a Year Makes Hawley and the Great Depression MAY 2: Rehabilitating Lochner: APRIL 14: ObamaCare: What a Defending Individual Rights MAY 18: The Case for Marriage Difference a Year Makes (Palm Beach) against Progressive Reform Equality: Perry v. Schwarzenegger

APRIL 15: America’s MAY 4: Climate Coup: Global MAY 20: Answering the Critics Transportation Future Warming’s Invasion of Our of Comprehensive Immigration Government and Our Lives Reform APRIL 18: Civil Resistance and Revolution in the Arab World MAY 5: The Arab Awakening MAY 25: Limiting Government: and Its Implications What Washington Can Learn Audio and video for all Cato events dating back to from Minnesota 1999, and many events before that, can be found on MAY 9: The Moral Implications the Cato Institute website at www.cato.org/events. You can also find write-ups of Cato events in Ed Crane’s of Deficits, Debt, and the MAY 25: Selfish Reasons to Have bimonthly memo for Cato Sponsors. Budget Battles Ahead More Kids

July/August 2011 Cato Policy Report • 15 CATO PUBLICATIONS

Robust debates on , corporations vs. the market, and more Online Magazine Cato Unbound Features Leading Scholars his spring the Pew Research Center with instantaneous delivery. released its eighth annual report on Cato Unbound is different. the state of American journalism. “In “We try to step back, take a T some ways, new media and old, slow- deep breath, and focus on the ly and sometimes grudgingly, are coming larger picture,” Jason Kuznicki, to resemble each other,” the study says. The the site’s editor, explains. traditional platforms of the Fourth Estate In the latest issue, “Targeted are changing, and last year, online news Killing and the Rule of Law,” consumption outstripped print media for the editors ask whether the the first time in terms of both advertising executive branch can lawfully revenue and readership. The tipping point kill. Lead essayist Ryan Alford, has arrived. The trend line is clear. And the assistant professor at the Ave Cato Institute, it seems, has been ahead of Maria School of Law, argues the curve. that it cannot. In fact, the “pres- Since 2005 Cato Unbound has given idential death warrant” is so readers access to a state-of-the-art virtual repugnant to our constitution- trading floor in the intellectual market- al tradition, he says, that the place. A unique online magazine, it reflects Founders didn’t even think it an appreciation of the way ideas are necessary to make an explicit exchanged in the digital age. Every month statement about the practice. one of the world’s leading thinkers presents At the time of the Revolution, an essay on a topical issue. A panel of dis- British kings hadn’t enjoyed tinguished experts responds, each offering such a power for centuries, and his case before challenging and refining the it was thought to be the very Since 2005 Cato Unbound has tackled a variety of issues, from arguments in an ongoing conversation. antithesis of the rule of law. The the policy implications of population, to the state of neoconser- Readers are then encouraged to join the dia- distinguished panel of legal and vatism, to the high cost of free parking. logue by offering their own thoughts historical experts responding to through websites, blogs, and letters to the Alford includes John C. Dehn of the U.S. dents include political analyst Matthew editor. These contributions are pulled Military Academy at West Point, Gregory Yglesias, economist Steven Horwitz, together into an easily accessible forum, cre- McNeal of Pepperdine University, and Carl- and economist Dean Baker. ating a media product that is virtually dis- ton Larson of the University of California tinct within the digital realm. at Davis. These monthly conversations have Yet Cato Unbound is also designed to Other past issues have included received attention from publications like avoid the pitfalls of its platform. For the New York Times, the Washington Post, and starters, the site revolves around the value • “The Digital Surveillance State”: The Economist. The site has featured a lineup of debate. All too often, the sheer availabili- After September 11, the growth of the of prominent contributors, including ty of personalized news today allows read- surveillance state was perhaps in- James M. Buchanan, the Nobel laureate and ers to give in to confirmation bias—to seek evitable. In his lead essay, though, founder of the school of polit- out only the information that reinforces lawyer and columnist Glenn Green- ical economy; Richard H. Thaler, professor their existing beliefs. The internet, by any wald argues that it has spiraled out of of economics and behavioral science at the measure, caters to the obstinate. At Cato control. Respondents include law pro- University of Chicago; James R. Flynn, a pio- Unbound, however, contributors are forced fessor John Eastman, Heritage visiting neer in the study of IQ; Clay Shirky, the to confront their critics, and the tendency fellow Paul Rosenzweig, and Cato renowned social media theorist; and Jorge to selectively ignore the opposition is miti- research fellow Julian Sanchez. Castañeda, former foreign minister of Mex- gated. • “When Corporations Hate Mar- ico. Over the years, this forum has shown a The site also hinges on the importance kets”: The idea that corporations and depth of exchange and an accessible format of perspective. The current news climate is markets are synonymous is a grave that few other outlets offer. subject to certain kinds of pressure: readers misconception. In his lead essay, An idea can be bound between covers, increasingly look for minute-by-minute philosopher Roderick Long examines bound by convention, or bound for the dust- updates. Many sites therefore suffer from a the often tangled relationship between bin of history. The ideas of Cato Unbound, lack of depth by becoming preoccupied business and government. Respon- we hope, are none of the above.

16 • Cato Policy Report July/August 2011 “He’s like Marx, only right.” Soros, Epstein, and Caldwell Debate the Meaning of Hayek n 1960, F. A. Hayek published an impor- tant book that acted I as the positive coun- terpart to his more famous The Road to Serf- dom. Whereas the latter fiercely critiqued the very idea of a centrally planned economy, the former pro- vided his view of what should take its place. This spring, a distinguished panel convened in the Cato Institute’s F. A. Hayek Auditorium to dis- cuss the new, definitive edition of that work, The Constitution of Liberty, edit- ed by . The panel included Bruce A Cato Book Forum on April 28 for the new and definitive edition of The Constitution of Liberty by F. A. Hayek featured spirited debate among financier GEORGE SOROS, legal scholar , and Hayek Collected Works editor BRUCE CALDWELL. The new Caldwell, Hayek’s intellec- edition, edited by Cato fellow Ronald Hamowy, is published by the University of Chicago Press. tual biographer; Richard Epstein, the brilliant legal scholar; and ideas were “incomplete.” Epstein argued ket fundamentalist that you’re describing. I George Soros, the hedge-fund billionaire furthermore that Hayek’s work points not think a pithy way of putting this is that and founder of the Open Society Founda- to unfettered markets but to a “presump- there’s definitely a difference . . . between tions. tion against regulation.” Chicago and Vienna.” Soros opened his talk with his own Giving voice to some of the raised eye- Continuing his earlier call for all sides to interpretation of the great economist. brows in the audience, Bruce Caldwell acknowledge that they only have half of the “Hayek is generally regarded as the apostle responded to Soros. “I think that George has truth, Soros made some concessions. “Maybe of a brand of economics which holds that a handle on some parts of Hayek, but mis- we can find common ground,” he said. “I the market will assure the optimal alloca- understands other parts,” he said. With a bet- Continued on page 19 tion of resources as long as the government ter grasp of the miss- doesn’t interfere,” Soros said. He went on ing pieces, Caldwell to describe what he considers the two main was convinced that pillars of this brand—the efficient market Soros “would identi- hypothesis and the theory of rational fy himself, I’ll say it expectations—which, he insisted, place provocatively, as a Hayek firmly in the dominant strain of Hayekian.” He then American economics. Most label this breed countered some of the Chicago School. “I refer to it as market the billionaire’s spe- fundamentalism,” Soros said. cific claims. Hayek Richard Epstein did not concur. “In actually rejected the some sense, I’m taking exactly the opposite usefulness of the so- side of George Soros,” he said. While Soros called twin pillars in praised Hayek’s warning “against the slav- “capturing the work- ish imitation of natural science” in the ings of the market social sciences, Epstein thought his ideas process,” Caldwell weren’t systematic enough. In acknowledg- told Soros, demon- At the Constitution of Liberty event Cato senior fellow RICHARD RAHN (right) ing that they were “enormously instruc- strating that “he’s talked with former Virginia governor JIM GILMORE, now president of the Free tive,” he ultimately concluded that those not the sort of mar- Congress Foundation.

July/August 2011 Cato Policy Report • 17 CATO STUDIES Immigration Reform: Answering the Objections he primary arguments whelming users of welfare programs.” Will vacy and security interests,” Cato research employed against comprehen- an amnesty program lead to more like it? fellow Julian Sanchez observes. In the years “Tsive immigration reform do Not at all, because legalization is not the since the USA Patriot Act was approved, not stand up to a review of same as amnesty. Will more immigrants the debate surrounding this tradeoff has recent history and predictable social and undermine the English language? No. been contentious to say the least. However, economic behavior,” writes Stuart Ander- Anderson notes that “91 percent of second- in “Leashing the Surveillance State: son in “Answering the Critics of Compre- generation children from Latino immigrant How to Reform Patriot Act Surveillance hensive Immigration Reform” (Trade families and 97 percent from the third gen- Authorities” (Policy Analysis no. 675), Briefing Paper no. 32). Still, “the best eration said they speak English very well or Sanchez argues that approach for supporters of comprehensive pretty well.” Finally, will increased immigra- these interests are immigration reform is to take seriously the tion hurt American workers? Anderson not inherently in arguments of critics, explain why these addresses this concern by pointing out that conflict. In fact, the arguments are incorrect and, if necessary, “an important reason why immigration is provisions of the adapt legislation to address the concerns beneficial is that it encourages a more pro- Patriot Act he con- raised.” Anderson, an adjunct scholar at the ductive use of human capital in the U.S. siders “impose heav- Cato Institute, executive director of the economy.” He argues that the status quo is ier burdens on core National Foundation for American Policy, not acceptable. Instead, “the best approach privacy, speech, and and the author of Immigration (2010), pres- is to harness the power of the market to association interests ents the five main arguments against liber- allow workers to fill jobs legally, rather than than is necessary to the protection of alizing immigration policy and shows that to rely on human smuggling operations for national security.” In a broad analysis, they simply don’t work. Will immigration workers to enter the United States.” Sanchez considers several parts of the act— reform harm taxpayers? No, Anderson namely, the roving wiretap authority, the writes. Instead, it will raise the wages of The Sun Never Sets “Section 215” orders, and the Lone Wolf once-illegal workers and, thus, tax receipts. on the Patriot Act provision—exploring their historical prece- Will it burden welfare rolls? Again, no. “The “It has become commonplace over the last dents and deviations therefrom. He argues data indicate that immigrants are not over- decade to speak of the need to balance pri- for relatively minor adjustments, from

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18 • Cato Policy Report July/August 2011 enforcing sunsets to pressing for addi- enues at little political cost,” O’Toole tion: How U.S. Antidumping Policy tional scrutiny. Most importantly, he calls writes. Often, this money is then funneled Subverts the National Export Initia- for the scope of National Security Letters into favored projects, which range from tive” (Trade Policy Analysis no. 46), to be narrowed. “There is no legitimate shopping malls to sports stadiums to the Ikenson identifies a glaring oversight in reason to indefinitely retain detailed latest fads in urban the centerpiece of this administration’s information about tens of thousands of planning. “No mat- trade agenda. The National Export Americans who are not suspected of ter how well-inten- Initiative (NEI), which seeks to double involvement in terror or espionage,” he tioned, city officials exports by 2014, fails to include sensible writes. Sanchez acknowledges the climate will always be tempt- reforms to the 90-year-old antidumping of fear and uncertainty that vindicated ed to use TIF as a law. This omission “erodes the competi- these expanded powers in the first place. vehicle for crony tiveness of U.S. firms.” By restricting access “Now, with the benefit of a decade’s expe- capitalism, provid- to imports, the law raises the cost of raw rience,” he concludes, “we have the oppor- ing subsidies to materials for many downstream compa- tunity to do better.” developers who in nies, thereby squeezing their profits and turn provide campaign funds to politi- elevating foreign competition. The admin- Development Tax Scams cians,” he writes. O’Toole examines the istration, in other words, is undermining Politicians often find creative ways to mechanisms of TIF, tracing the circum- its own initiative. “In countless ways, the finance their spending habits. In “Crony stances of its origin and the politics antidumping status quo subverts the Capitalism and Social Engineering: behind its abuse. Ultimately, he con- goals of the NEI and is an albatross The Case against Tax-Increment Fin- cludes, it is little more than an instrument around the neck of the U.S. economy,” he ancing” (Policy Analysis no. 676), Cato of collusion between market players and writes. Ikenson proposes several modest Institute senior fellow Randal O’Toole an increasingly powerful government— but meaningful reforms, which include details one increasingly popular method. one that should be repealed rather than granting legal standing for the consuming Tax-increment financing (TIF) is a mecha- reformed. industries, requiring a public-interest test, nism that uses taxes generated from new and applying a lesser-duty rule. In the end, developments to subsidize those same Dumping on Exports he raises the curtain on the antidumping developments. Yet, far from achieving its “The president exhorts U.S. exporters to regime, revealing how the idealized stated purpose of economic improve- ‘win’ a global race,” writes Daniel Ikenson, imagery surrounding the law conceals the ment, TIF is often employed to capture associate director of trade policy studies at real story. Antidumping is often miscon- scarce tax dollars otherwise intended for the Cato Institute, “yet he ignores the fact strued as a dispute between patriotic schools, libraries, fire departments, and that the government’s hodgepodge of American producers and predatory for- various urban services. Indeed, “most rules and regulations has tied their shoes eign traders. “The battle is better charac- cities can use TIF to increase their rev- together.” In “Economic Self-Flagella- terized as ‘we against us,’” he writes.

Continued from page 17 This is the same man, after all, who won life, Hayek became a distinguished senior think that we would all agree that govern- the Nobel Prize in Economics in 1974. fellow at the Institute. ment regulation is a necessary evil . . . so if you Years later, he met with President Reagan But even that doesn’t do him justice. “On can avoid regulations, you should.” Many at the White House. He also met with Mar- the biggest issue of all, the vitality of capital- observers picked up on Soros’s criticisms of garet Thatcher, who, in reference to The ism, he was vindicated to such an extent that the less-than-savory political and legislative Constitution of Liberty, declared: “This is it is hardly an exaggeration to refer to the processes that produced the recent health what we believe.” Hayek was described by 20th century as the Hayek century,” John care and financial-reform bills. In the end, the Milton Friedman as “the most important Cassidy once wrote in the New Yorker. Hayek, discussion was both provocative and civil. social thinker of the 20th century” and by however, was much more than an econo- The event mirrored a long-standing White House economic adviser Lawrence mist. He also published impressive works on debate over the great economist’s influ- H. Summers as the author of “the single political theory and psychology. He embod- ence. Last year, Kate Zernike wrote in the most important thing to learn from an eco- ied the type of intellect that influenced dis- New York Times that Tea Party activists were nomics course today.” He was the mind ciplines across the spectrum, remaining rel- resurrecting “long-dormant ideas [found behind The Road to Serfdom, a book that has evant long after his own lifetime. in] once-obscure texts by dead writers.” She never gone out of print and, in fact, sold As executive vice president David Boaz was referring, of course, to writers like over 100,000 copies last year alone. Cato is wrote on Cato@Liberty, “He’s like Marx, Hayek. But she may have sold him short. proud to note that, in the last years of his only right.”

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To Be Governed... “ EXCEPT MAYBE FOR THOSE SOCIAL THOSE WHO CAN’T, TEACH tives, they blundered repeatedly by over- ” Financial Literacy: The Federal Govern- paying people, doing inadequate vetting CONSERVATIVES WHO GOT A “D” ON ment’s Role in Empowering Americans and hiring children of officials. CATO’S FISCAL POLICY REPORT CARD to Make Sound Financial Choices —Robert McCartney, Washington Post, All social conservatives I know are also —GAO Report, April 12, 2011 May 15, 2011 fiscal conservatives. Not necessarily the other way around. ANOTHER BRIGHT IDEA HIS ROYAL HIGHNESS PRINCE CHARLES, —Gov. Mike Huckabee, , “The government has no business telling TO HIS FORMER SUBJECTS WHO ARE May 15, 2011 an individual what kind of light bulb to EATING TOO WELL buy,” [Rep. Michele] Bachmann said in a Nobody wants food prices to go up, but if DEATH BY DECORATOR statement last week. it is the case that the present low price of Florida is one of only three states that Consumers Union respectfully dis- intensively produced food in developed require commercial interior designers to agrees, a point we made formally today in countries is actually an illusion, only become licensed before they hang a sin- a letter to the U.S. Energy and Natural made possible by transferring the cost of gle painting in an office building, school Resources Committee. cleaning up pollution or dealing with or restaurant. A bill making its way —ConsumerReports.org, March 9, 2011 human health problems onto other agen- through the state legislature, however, cies, then could correcting these anom- would deregulate the occupation, along JUST ANOTHER DAY IN THE WASHINGTON alies result in a more beneficial arena?. . . with more than a dozen others, includ- NEWS Critically, such a new Washington ing yacht brokers and hair braiders. That possibility has the state’s Critics in Congress also have questioned consensus might embrace the willing- licensed interior designers ruffled. Amtrak’s management, asking, for ness of all aspects of society—the public, They’ve hired Ron Book, one of the example, how an employee with a private and NGO [nongovernmental state’s most influential lobbyists, to $21,000 salary earned $149,000 in over- organizations] sectors, large corpora- fight the bill. And they’ve stormed leg- time last fiscal year. tions and small organizations—to work islative hearings to warn of the mayhem —Washington Post, May 15, 2011 together to build an economic model built upon resilience and diversity. that would ensue if the measure passes. Among the scenarios they’ve con- The federal government’s largest hous- —Washington Post, May 10, 2011 ing construction program for the poor jured: flammable carpets sparking infer- has squandered hundreds of millions of POLITICIANS: YOU’VE GOT TO KEEP AN EYE nos; porous countertops spreading bac- dollars on stalled or abandoned projects ON THEM EVERY MINUTE teria; jail furnishings being turned into and routinely failed to crack down on Ohio has launched what appears to be weapons. derelict developers or the local housing the biggest intervention in the private —Wall Street Journal, April 15, 2011 agencies that funded them. economy by a state government since at —Washington Post, May 15, 2011 least the Great Depression, according to a USING TAXPAYERS’ MONEY TO LOBBY FOR USA TODAY review of historical data. MORE OF IT The main thing learned in the hearings The state is preparing new industrial National Public Radio (NPR) is paying so far is that [D.C. mayor Vincent] Gray parks and high-tech office buildings; the lobbying firm Bracy, Tucker, Brown showed bad judgment in allowing loaning money and giving grants to busi- & Valanzano to defend its taxpayer [three close aides] to guide so much of nesses; and subsidizing clean energy, web- funding stream in Congress, according the hiring for patronage jobs just below sites, nanotechnology and warehouses, to lobbying disclosure forms filed with the cabinet rank. Although all three among other things. the Secretary of the Senate. advisers were longtime personnel execu- —USA Today, April 26, 2011 —Daily Caller, May 5, 2011

A22 • Cato Policy Report January/February 2006