VOLUME 62, NO 1 JANUARY/FEBRUARY 2012 · John Stossel brands government a job destroyer.Charles Baird looks at the latest outrage against free speech.And Tyler Watts, bombarded with

Features6 Tough on Immigration Is Tough on Economic Growth

by Scott A. Beaulier, Darrick C. Luke, and Daniel J. Smith

9 Going to Graceland by Andrew P. Morriss

15 Government Is No Friend of the Poor by Gary Chartier

19 Blowing Bubbles: Getting Ready for the Next Bust by Richard W. Fulmer

25 State-Mandated Thinking by Peter McAllister

31 The Euro:The Folly of Political Currency by Robert P. Murphy

34 Taxi Regulation and the Failures of Progressivism by Sam Staley

Columns2 Perspective ~ Destroying Value

4 Disaster Response Restores Confidence in Government? It Just Ain’t So!

by Tyler Watts

13 Thoughts on Freedom ~ Some Sins of Textbook Economics by Donald J. Boudreaux

23 Our Economic Past ~ Regime Uncertainty,Then and Now by Robert Higgs

29 Peripatetics ~ Occupying Wall Street by Sheldon Richman

38 Give Me a Break! ~ Government the Job Killer by John Stossel

47 The Pursuit of Happiness ~ Employer Speech and Freedom of Association

by Charles W. Baird

Book Reviews41 Libertarianism, from A to Z

by Jeffrey A. Miron Reviewed by Aeon J. Skoble

42 Freefall: America, Free Markets, and the Sinking of the World Economy

by Joseph E. Stiglitz Reviewed by Lawrence H.White

43 The Politically Incorrect Guide to Socialism

by Kevin D.Williamson Reviewed by George Leef

45 New Threats to Freedom: From Banning Ice Cream Trucks in Brooklyn to Abandoning

Democracy Around the World

edited by Adam Bellow Reviewed by Wendy McElroy

Page 41

Page 9

Page 4

VOLUME 62, NO 1 JANUARY/FEBRUARY 2012

In Cleveland and other American cities homes arebeing demolished because five years after the hous-ing bust there is nothing better to do with them.

Therein lies a lesson in Austrian business cycle theory.In a world of uncertainty, waste—the destruction of

value—is inevitable. Human action, which aims toreplace inferior circumstances with superior circum-stances, often involves laboring to transform scarceresources from a less useful form to a more useful form.For example, I transform money earned by my laborinto raw beef (by using time and gasoline to drive to thesupermarket and engaging in exchange), then I trans-form the raw beef into a medium-well hamburgerthrough the time-consuming process of cooking. If afterI eat the hamburger I wish I had done something elsewith the money and time (say, bought a chicken), I willregret my course of action and feel I’d wasted both.

We have all devoted time and resources to someproject that we later realized was the wrong project.That’s the price of imperfect knowledge, which plaguesall human beings. If we’re lucky some of the resourceswe used might be salvageable and put to other purposes,but the time, effort, and other resources are gone.

The same thing of course occurs in commercial pro-duction. An entrepreneur buys inputs and hires labor,thinking the finished product will bring a price thatcovers costs and yields a competitive return—only tofind that people don’t want the product, or not badlyenough to pay the anticipated price.The loss representsthe destruction of value: The value of the inputs beforethe transformation took place turned out to be greaterthan the value of the finished product.

As I say, this happens because our knowledge isimperfect. It’s too bad, but perhaps not a tragedy—just afact of life we learn to live with and minimize. Thetragedy occurs when government intervention distortsprice signals and induces people en masse unwittingly tomake value-destroying plans.That’s part of the story toldby the Austrian theory of the business cycle. In the pres-ent economic case the Federal Reserve’s low-interest-rate policy in the early 2000s and several federalagencies’ decade-long easy-housing policies inducedbuilders to produce too many houses relative to what the

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

Destroying ValuePerspective

Published byThe Foundation for Economic Education

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ColumnistsCharles Baird David R. Henderson

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James Bovard Tibor MachanThomas J. DiLorenzo Andrew P. MorrissBettina Bien Greaves James L. Payne

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3 J A N U A RY / F E B R U A RY 2 0 1 2

P E R S P E C T I V E : D e s t r o y i n g Va l u e

demand would have been without those unsustainablepolicies. The result was the infamous housing boom and inevitable bust. With housing prices apparently onan unstoppable upward trajectory, and government-backed Fannie Mae and Freddie Mac—not to mentiontoo-big-to-be-allowed-to-fail banks—willing to buylenders’ mortgages no matter how shaky, builders andbuyers were found in great abundance. Buying morehouse than one could afford seemed smart when onecould get a low teaser rate on an adjustable-rate mort-gage for a low-to-no-down-payment home and expectits price to rise significantly in six months. When thehigher rate kicked in, one could refinance or sell andwalk off with the equity.

But when interest rates rose, the bubble burst, anddemand plummeted, this smart scheme turned sour.Houses stood unsold, and many people couldn’t paytheir mortgages, refinance, or sell at a profit. Foreclo-sures skyrocketed and the multitude with underwaterhomes simply disappeared, leaving banks holding a slewof vacant houses that cost money in taxes, code viola-tions, and so on.

As a result, banks now would rather donate theproperties to government-created nonprofit land banksand pay for the demolition than hold them and hopefor future sales.This is happening in Cleveland, and theWashington Post reported that similar programs werebeing discussed elsewhere.

How does this relate to the waste identified by the Austrian business-cycle theory? To the extent thehomes were vacated and allowed to deteriorate becauseof the process described above, the demolitions repre-sent destruction of value attributable to government. Inthe absence of the unsustainable bubble-inflating poli-cies, some of those houses wouldn’t have been built.In the case of older homes, fewer newly built houseswould have competed with them in the real estate mar-ket.They would still be occupied and therefore wouldhave been maintained. (There would have been noGreat Recession and high unemployment.) Demolitionwould not have been an attractive alternative.

The tragedy is that because of government policy,demolition is the most attractive alternative.Think of theresources and labor—now seen to have been squan-dered—that went into making each house. Imaginewhat products might have been created instead. It’s

worse than that: Products always summon complemen-tary products. A housing boom stimulates the produc-tion of related shopping centers, office parks, andmyriad smaller facilities and products. The resourcesrequired to make those things also would have goneelsewhere. Now all those resources, along with muchlabor and time, are gone because people in governmentthought they knew how to plan the housing market.

* * *Georgia and Alabama have joined Arizona in enact-

ing a tough law directed at undocumented immigrants.As Scott Beaulier, Darrick Luke, and Daniel Smithdemonstrate, this is already damaging their economies.

Andrew Morriss has been to Graceland, where hefound that the lap of luxury in which its fabulouslywealthy late resident lived doesn’t look so luxurioustoday.

Conventional wisdom holds that without the wel-fare state, the poor would be in dire straits. But what if,as Gary Chartier suggests, government is responsible forthe poor’s condition in the first place?

If public policy created the housing bubble, the burst-ing of which has caused so much misery, can it really bea good idea to reinflate the bubble? Richard Fulmer saysthat according to political logic, the answer is yes.

The more government controls the curriculum, themore inimical schooling becomes to education. PeterMcAllister explains.

The eurozone is in trouble, leading Robert Murphyto explore the possibility that it was a colossal mistakein the first place.

Regulation at the national level gets the lion’s shareof attention from market advocates. But let’s not over-look the planning mentality more locally. Sam Staleysurveys the taxicab industry.

Here’s what our columnists have whipped up: Don-ald Boudreaux audits the economics textbook writers.Robert Higgs explains why there’s so little investment.John Stossel brands government a job destroyer. CharlesBaird looks at the latest outrage against free speech.AndTyler Watts, bombarded with claims that we couldn’tlive without FEMA, responds,“It Just Ain’t So!”

Books on libertarianism, the economy, socialism, andthe threat to freedom occupy our reviewers.

—Sheldon [email protected]

In a memorable episode of the cult-classic cartoonseries “The Tick,” the title character is seen in thelocal café regaling fellow superheroes with his

latest adventure, in which he single-handedly stoppedan alien plot that would have sucked the earth into ablack hole. Skeptical, one of the other heroesresponds, “Can you prove any of this?” Hesitating,The Tick simply exclaims, “We’re all still here,aren’t we?”

In like manner several com-mentators are singing the praisesof the federal government lately,claiming that in the wake ofrecent natural disasters, federalagencies like the Federal Emer-gency Management Administra-tion (FEMA) have done a fan-tastic job.

The Washington Post’s DanaMilbank is typical of the pro-government cheerleaders. “BigGovernment finally got oneright,” writes Milbank ofFEMA’s response to HurricaneIrene (tinyurl.com/4yl2f26).Arguing that “the federal gov-ernment can still do great things,” Milbank reckons thatFEMA’s response to Irene should help restore the pub-lic’s sagging confidence in government.Yet despite thisstellar government performance, wouldn’t you know,FEMA faces budget cuts at the behest of those scornfulTea Partiers in Congress.Thus instead of improving thefederal government’s image in the eyes of citizens,FEMA’s newfound brilliance is liable to go unnoticed.

I’ll concede that Hurricane Irene was FEMA’s bestshowing ever. (We’re all still here, aren’t we?) This sudden outbreak of governmental competencenotwithstanding, Milbank’s appraisal of FEMA as amodel of salubrious big government is flawed on eco-nomic grounds. Resting his newly buttressed faith inbig government on a sample size of n=1, Milbank pre-cludes some highly relevant comparisons. Perhaps

FEMA functioned well for once,but should we take this as the newnormal for FEMA, or the excep-tion to the rule? And even if wecan count on a better FEMA, isfederal government-centeredemergency response the best wecould possibly have?

It’s easy to say FEMA was bet-ter this time than in its dismalpast. The agency’s infamous blun-dering response to HurricaneKatrina (a truly epic category 5storm) would be comic if itweren’t so tragic. Bureaucraticineptitude led to a hesitantresponse, as federal officials actu-ally halted emergency supplies and

workers coming into New Orleans in the days after thestorm. FEMA arguably contributed directly to Katrina’sdeath toll of over 1,800 by blocking or overriding localevacuation efforts. FEMA’s top-heavy D.C. bureaucracywas roundly criticized as, well, a disaster.


Tyler Watts ([email protected]) is an assistant professor of economics at BallState University.

FEMA chief Craig Fugate doing what FEMA does best:giving a press conference.FEMA

B Y T Y L E R W AT T S

Disaster Response Restores Confidence in Government?It Just Ain’t So!


In stark contrast, a slew of nonfederal response ini-tiatives, from local government authorities to mega-corporations, brought in all manner of people andsupplies quickly and effectively, where they wereneeded most. As Freeman contributor Steven Horwitzhas amply documented (tinyurl.com/d4hhxm), compa-nies like Walmart were far more efficient and proactivethan the centralized FEMA bureaucracy in gettingrelief goods to the people in need.

Horwitz and others have noted that incentive struc-tures facing different organizations explain the differ-ence between successful and bungled relief efforts.Those in decentralized competitive situations, such asretailers like Walmart, have the localized knowledge ofwhat goods are needed and where, as well as profit-and-loss incentives motivating themto act on this knowledge. Folks incentralized bureaucracies, on the otherhand, naturally lack intricate knowl-edge of the local details and tend to bemotivated by political concerns in dis-tributing the resources they do have.

The divergent results after Katrinaare not surprising. While FEMAbureaucrats were halting relief convoys,misdirecting their own supplies, andhosting phony press conferences to pla-cate the media,Walmart, Home Depot,and others were tracking the storm andmassing supplies days in advance.They delegated author-ity to local store managers, some of whom took drasticsteps to get their stores open and supplies flowing imme-diately.

Politicians’ knee-jerk response to government failureis, naturally, to increase their own budgets. But withbureaucracies facing such systematically bad incentives,increasing their budgets is not guaranteed to improveresults. Nonetheless, Milbank frets about as-yet-unspec-ified potential cuts to FEMA’s budget.To put his wor-ries into perspective let’s look at FEMA’s spendingrecord over the last few years. In 2005—a year of atleast three major hurricane strikes in the UnitedStates—FEMA spent around $4.8 billion. By 2010, ayear with many hurricanes (but none making landfallin the United States), FEMA’s budget had been

pumped up to a whopping $10.4 billion, and it was onpace to meet or exceed that number last year.

So FEMA’s budget has doubled since Katrina, andonly now do we see basic competence, in relatively quietdisaster years? If FEMA faces another really harsh hurri-cane season—a repeat of 2005—and drops the ball again,does this mean its budget will again need to be doubled,to $20 billion? I can see the dollar signs in the bureau-crats’ eyes already. Indeed, as Public Choice economicspredicts, and former Obama White House chief of staffRahm Emmanuel conveniently admitted, big-spendingbureaucrats like those in FEMA have strong incentives to“never let a crisis go to waste.”They thrive on crises as aprimary rationale for larger budgets, even if they played abig hand in making such crises worse to begin with.

In light of this it’s not at all sur-prising that the number of “majordisaster” declarations has been risingover time, even in years when natureis relatively calm. FEMA had alreadydeclared 78 disasters by the fall of2011, 30 more than the mega-stormyear of 2005. Because disaster decla-rations are a prerequisite for unlock-ing federal disaster funds, it’s notsurprising that FEMA finds ways todefine disaster down, or that thenumber of declarations goes up forelection years and in politically sensi-

tive swing states (tinyurl.com/5usys7s).In reality FEMA’s seemingly fantastic response to

Irene is likely a product of media hype.The storm hadbasically fizzled out by the time it hit densely populatedareas. Recall that Irene had weakened to a mere tropi-cal storm by the time it reached the Jersey shore, andthe main effect on the mid-Atlantic and New Englandstates was torrential rain—not nearly as severe as themassive storm surge and catastrophic flooding fromKatrina. Yes, there were power outages and locallysevere flooding with Irene, but such are common in theUnited States. Private businesses and local authoritiesresponded well, as they always do. Milbank offers nocompelling reason to believe that a bloated FEMAbureaucracy is essential, or even beneficial, in helpingthese responses along.

D i s a s t e r R e s p o n s e R e s t o r e s C o n f i d e n c e i n G o v e r n m e n t ? I T J U S T A I N ’ T S O !

So FEMA’s budgethas doubled sinceKatrina, and onlynow do we see basiccompetence, inrelatively quietdisaster years?

Not to be outdone by Arizona’s tough immi-gration law of 2010, Alabama and Georgialegislators passed their own immigration bills

in 2011.The bills received a great deal of media atten-tion because they were widely touted as good forgrowth and job creation, and were harsher on illegalimmigrants than Arizona’s law. In a New York Times article, for example, Alabama State Rep. Micky Ham-mon, a coauthor of his state’s law, called it “a jobs-creation bill for Americans.” Georgia State Rep. MattRamsey said after his state’s billpassed: “It’s a great day for Georgia.We think we have done our job thatour constituents asked us to do toaddress the costs and the social conse-quences that have been visited uponour state by the federal government’sfailure to secure our nation’s borders.”

Georgia’s law requires private and government employers to use E-Verify, a federal program, to ensurethat workers are eligible to work inthe United States. The law also increased the penaltiesfor using fake documents to obtain jobs; offenders nowface up to 15 years in prison and $250,000 in fines.Moreover, the law makes it a criminal offense to inten-tionally transport or harbor illegal immigrants, author-izes local and state law enforcement officials to arrestillegal immigrants and house them in state and federaljails, and requires documentation verifying legal statusbefore people can apply for food stamps or governmenthousing.

Alabama’s law goes even further than Georgia’s. Itnot only clamps down on illegal immigration, it also

prevents illegal immigrants already in the state fromestablishing themselves.The law requires public schoolsto verify students’ residency status with birth certifi-cates, bans illegal immigrants from state colleges, andoutlaws transporting, harboring, employing, or rentingproperty to undocumented immigrants. The bill alsorequires law enforcement officers to detain and investi-gate anyone they reasonably suspect is an illegal.

Opposition to the new laws emerged immediatelyin both states. In Alabama, churches and charities

thought the wording so stringent thatthey worried about being implicatedsimply for ministering to illegalimmigrants. Episcopal, Methodist, andCatholic church officials in Alabamasued Governor Robert Bentley andAttorney General Luther Strange.TheAmerican Civil Liberties Union(ACLU) of Alabama and Georgia, aswell as other civil liberties advocacygroups, like the Southern PovertyLaw Center, also brought forward

lawsuits because the new law will likely result in racialprofiling.

While the specific methods of implementation forAlabama’s and Georgia’s immigration laws could bealtered in the hope of minimizing their social conse-quences by, for example, randomly checking people forcitizenship instead of profiling people who look differ-ent or out of place, the negative economic results can-

B Y S C O T T A . B E A U L I E R , D A R R I C K C . L U K E , A N D D A N I E L J . S M I T H

Tough on Immigration Is Tough on Economic Growth


Scott Beaulier ([email protected]) is director of the Johnson Center forPolitical Economy at Troy University. Darrick Luke ([email protected])is an MBA student at Troy and an Alabama farmer. Daniel Smith([email protected]) is an assistant professor of economics at Troy.

New businesspaperwork, lawenforcement, andincarceration willimpose steep costs.

not be avoided or minimized unless the laws areignored. New business paperwork, law enforcement,and incarceration will impose steep costs.All industrieswill suffer some negative effects, and the fortunes of anumber of industries, such as agriculture, restaurants,landscaping, catfish and poultry processing, and con-struction, will be seriously compromised. Jeffrey Passelestimated in a 2006 study that across the nation, illegalimmigrants make up 24 percent of the agriculturalworkforce, 17 percent of the cleaning industry work-force, 14 percent of the construction workforce,12 percent of the food preparation workforce, and 9 percent of the production workforce (tinyurl.com/2c37ku).

The effects of the new laws are already being feltthroughout the agricultural industry inboth states. Illegal immigrants are nowso afraid of imprisonment and deporta-tion that they have stopped supplyingtheir labor during harvest seasons. Andit’s not just illegals who are fleeing thestate. Green-card carrying immigrantsalso quit their jobs in protest and areleaving Alabama.

Wasted Crops

Alabama Live reports that centralAlabama farmers requested an

emergency suspension of the lawbecause millions of dollars of cropswere at risk of not being harvesteddue to labor shortages (tinyurl.com/7rrf35c). In theWall Street Journal, Alabama Deputy Commissioner forAgriculture and Industry Brett Hall was quoted saying:“We have a big problem on our hands. . . . [F]armersand business people could go under.” Economists saythe law will hurt Alabama’s economy, but politicianssuch as State Sen. Scott Beason (a Republican) calledtheir arguments “absolutely, positively wrong”(tinyurl.com/7dse64o). He also called the Alabama law“the biggest jobs program for Alabamians that has everbeen passed.”

Meanwhile Jay Bookman of the Atlanta Journal-Con-stitution reports that Georgia’s law has already caused asevere enough labor shortage that farmers are at risk of

leaving up to $300 million of crops rotting in theirfields (tinyurl.com/3pgzctn).

The construction industry, which has relied onimmigrants in recent years, is also being hit hard.Despite the remaining slack from the housing crisis,delays in Alabama and Georgia are common. Nowhereis the story more tragic than in Tuscaloosa, Alabama,where residents and businesses downtown were hit by atornado last April. Cheap, efficient labor was desper-ately needed.Yet reconstruction in Tuscaloosa has beenslow and has lagged behind Joplin, Missouri, which washit with a much more severe tornado a month later.While some of the delays in Tuscaloosa can be blamedon red tape, the harsh immigration law certainly hasnot helped matters.

Unambiguous Benefits

Despite politicians’ ill-informedrhetoric and pro-law rallies by Tea

Party groups, the economics of theissue remain unambiguous: Immigra-tion, whether legal or illegal, is a netgeneral benefit for the people of a stateor country. The argument is an easyextension of David Ricardo’s argumentfor free trade; blocking immigrationhampers the free operation of an econ-omy in much the same way that block-ing trade does. It prevents resources,including labor, from being reallocatedto those industries and locations where

consumers most urgently want them.The evidence shows that immigration does not take

away jobs or even decrease wages for native workers.Julian Simon in a 1995 study found that immigrationdoes not increase unemployment for U.S. citizens, evenamong minority and low-skilled workers (tinyurl.com/7bpdqkq). George Borjas and Lawrence Katz, in a studypublished in 2007, found that the only group adverselyaffected by immigration in the United States was highschool dropouts, who saw a long-run 4.8 percentreduction in wages.

Borjas and Katz assumed that immigrant and nativeworkforces do the same work, an assumption that doesnot bear out empirically. Even with that assumption,


To u g h o n I m m i g r a t i o n I s To u g h o n E c o n o m i c G r o w t h

The economics ofthe issue remainunambiguous:Immigration,whether legal orillegal, is a net generalbenefit for the peopleof a state or country.

however, Borjas in 2008 estimated the net economicgain to native workers from immigration to be around$22 billion annually (tinyurl.com/337qkon). WhenGianmarco I. P. Ottavanio and Giovanni Peri correctedfor this assumption in a 2006 study, they found immi-gration actually increased natives’ wages in the shortand long runs because immigrants complement thenative workforce (tinyurl.com/ctc37lc).

More Workers, More Prosperity

As coauthor Luke points out from his farm expe-rience, Americans usually don’t want the jobs that

immigrants are willing to take.The number of

jobs in an econ-omy is unlimitedbecause our wantsare unlimited. Themore people work-ing, the furtherdown our list ofwants we can get. Moreover, themore people work-ing, the morepotential customers—and hence busi-ness opportunities—we have. Immigrants buy or renthouses, purchase food and goods, and dine at restau-rants.This is why the United States did not suffer massunemployment as our population drastically increasedover the last few decades, and why there wasn’t a jumpin unemployment when women joined the labor force.(See graph.)

Another common argument for the Alabama andGeorgia laws is that immigrants will flood U.S. citiesbeyond capacity in search of higher living standards. Ifpeople migrated en masse to those areas with the highest

wage rates, one may wonder why all U.S. citizens don’tflood Malibu, California. The reason is that real estatevalues adjust upward to act as a natural brake on migra-tion. In addition, while there is much need for immi-grant labor in the United States, workers will come hereonly as long as the expected wage exceeds their domes-tic wages plus the costs of relocating. As more immi-grants resettle, the relevant wage will drop, decreasingtheir main incentive for coming in the first place.

The Welfare Argument

Athird justification for legal restrictions is to prevent immigrants from living off government

programs. Anyoneconcerned aboutthis should askwhy the Alabama,Arizona, and Geor-gia laws focusalmost all enforce-ment efforts onpreventing immi-grants from work-ing. Althoughimmigration lawshave providedstrong incentives

for immigrants not to work, Simon’s 1995 study calcu-lated that on net they paid more into government pro-grams than they took out.

The justifications for Alabama’s and Georgia’s lawsfail to pass the test of basic economics. Not only dothese laws not bode well for the economy, they also tarthe civil rights images of two states that historicallyhave suffered poor reputations in that department. In acountry founded on open immigration and the basicfreedom of human association and commerce, laws ofthis nature are a travesty.


S c o t t A . B e a u l i e r, D a r r i c k C . L u k e , a n d D a n i e l J . S m i t h

Arecent trip to Memphis took me to Elvis Pres-ley’s famed home, Graceland.Touring Presley’smansion and its grounds is fascinating for fans

of his music, and the Presley estate has done a mar-velous job in capturing his music and life. But visitingGraceland mostly interested me as an economist.Walking through the home of a very rich Americanman from the early1970s, I was struckby how much thequality of life foraverage people nowexceeds what wasavailable only towealthy Americans40 years ago. Let’scompare Elvis’sGraceland with howordinary Americanslive today.

Graceland beganlife in 1861 as a500-acre cattle farmon the outskirts ofMemphis, originallyowned by S. E.Toof,a printer, who named the farm for his daughter Grace.Toof ’s niece, Ruth Moore, and her husband eventuallyacquired the portion of the property where the housenow sits, as well as surrounding acreage, completing themansion in 1939.

It was planned as a showcase for their daughter’smusical talents, so acoustics were as important as aes-thetics. (Their daughter went on to play with the

Memphis Symphony Orchestra.) A 1940 article in theMemphis Commercial Appeal raved about the house’s“subtle beauty” and the architectural details, includingthe white marble in the fireplace. Even before Elvisacquired the property, the house had been recognizedas being at the upper end of Memphis society homes.

Being a significant home in Memphis meant some-thing beyond Ten-nessee. Memphisin the mid-twen-tieth century wasno backwater. Itwas home toimportant militaryfacilities, includ-ing the MemphisArmy Depot, theMillington NavalAir Station, and aWorld War II pris-oner of war camp.The first nationalmotel chain, Hol-iday Inn, wasfounded there in1952. The city

was a cultural center as well, home to Stax Records,Sam Phillips’s Memphis Recording Service, and thenation’s first African-American-format radio station,WDIA.The city had a serious side too:The Commercial

B Y A N D R E W P. M O R R I S S

Going to Graceland


Andrew Morriss ([email protected]) listens to Elvis’s music inTuscaloosa,Alabama, where he is the D. Paul Jones Jr. & Charlene A. JonesChairholder in Law and professor of business at the University of Alabama.

Appeal won a Pulitzer Prize for its 1920s coverage ofthe Ku Klux Klan.

When the Moores divorced they put the property(now reduced to 13.5 acres) on the market. Memphisrealtor Virginia Grant had met Elvis’s mother, Gladys,by simply marching up to her pink Cadillac and rap-ping on the window when Grant spotted it outside adepartment store. Elvis’s fame was beginning to causeproblems for the neighbors of the Presley house onAudubon Drive. Near-riots at his concerts and otherappearances were worrisome. At the famous GatorBowl “riot” in Jacksonville, Florida, in 1955, hundredsof screaming girls chased Elvis into his dressing roomand tore his clothes. They also scratched messages onhis car and wrote on it in lipstick. In 1957 the Presleyswere looking for a more private and secure location.(Besides the deluge of fan mail to Elvis, his parents weregetting over 500 letters a week accusing them of foster-ing juvenile delinquency.) AlthoughGrant initially thought the Presleyswanted a farm, she recommendedGraceland when she learned they justwanted a house on a large lot.

By the end of a day of shoppingthe Presleys had made an offer onGraceland, closing on the deal for$102,500—about $800,000 in today’sdollars. (Gladys died a year later.) Atthe time of purchase the house was 10,266 square feet;by Elvis’s death it had expanded to more than 17,000square feet. Elvis redecorated and remodeled it exten-sively, adding features for himself (a swimming pool anda custom eight-foot square bed) and his parents (achicken coop for his mother).

Presley lived at Graceland until his death there in1977. Until 1981 the family continued to live in thehouse, although the neighborhood deteriorated asscores of souvenir shops opened to sell memorabilia,including vials allegedly of Elvis’s sweat, to the touristswho came to see the home from the road. In 1981Elvis’s ex-wife, Priscilla (who became one of the execu-tors of Elvis’s estate after his father,Vernon, passed awayin 1979), hired a consultant to explore opening thehouse to the public as a way of generating the incomenecessary to maintain it. (Upkeep and taxes cost more

than half a million dollars per year in the late 1970s.)After studying other famous houses open to the public,Priscilla and her advisers crafted a business plan thatincluded purchasing the strip mall across the street tocontrol the environment and, like San Simeon in Cali-fornia, from which visitors would be bused to the prop-erty. Hundreds of thousands of people now visitannually.

Comparing Our Lives to Elvis’s

In many respects Elvis Presley’s life looks to have beenthat of a wealthy individual with access to resources

most of us lack. His two jets are parked across fromGraceland; of course the vast majority of Americanslack any sort of plane. Elvis owned dozens of expensivecars and motorcycles, far more than most Americans arelikely to own during their lives. But owning planes andcars is not the only measure of quality of life. If we

think about the services Elvis wasbuying when he purchased his air-planes and cars, many Americanstoday come closer to living like Elvisthan we might think.

Today firms such as NetJets makeit possible for many more people tohave access to travel by private plane.(NetJets offers shares as small as1/16th, or about 50 hours of flying,

according to the company’s website). For the rest of usair travel has become more convenient and cheapersince airline deregulation in 1978. One study in 1997found that even after adjusting for changes in ameni-ties, passengers were saving more than $19 billion peryear.Average roundtrip fares have fallen by more than athird in real terms.

Of course even flying business class on a major air-line is hardly the same thing as flying on Presley’s LisaMarie, a Convair 880 that Elvis bought for $250,000and spent $600,000 refurbishing, using the same designteam that decorated Air Force One. Elvis’s plane had abar, conference room, and bed (with seat belts); ourcommercial airliners do not. And undoubtedly if Elviswere alive today, he would have upgraded his plane toan even more luxurious model. But in terms of theability to get from one place to another quickly and


A n d r e w P. M o r r i s s

Many Americanstoday come closer toliving like Elvis thanwe might think.

conveniently, today’s commercial passenger comescloser to Elvis’s lifestyle than most thought possible in1977. Elvis might still need a private jet today to avoidthe fans, but he wouldn’t need it to get where hewanted to go or ship off a new recording master toRCA from Memphis, whose airport is a hub for bothDelta Airlines and Federal Express.

Cars

Similarly, Elvis’s many cars continue to set him apartfrom noncelebrities. But none of Elvis’s cars have a

stereo equal to the one in my 2011 Subaru Outback,which synchs automatically with my Bluetooth-enabled iPhone, giving me access to more music in mycar than Elvis had even back in the Jungle Room atGraceland. Moreover, my Subaru hastires, an engine, and safety features farbetter than were available even onElvis’s 1973 Stutz Blackhawk, 1971Mercedes, or 1975 Dino Ferrari.AndBluetooth isn’t the only technologyElvis could not have bought in the1970s for any amount of money. Mycar has multiple airbags, a continuousvariable transmission, and all-wheeldrive.

Of course, Elvis wouldn’t likely bedriving something as mundane as anOutback (unless his manager, Col.Tom Parker, had negotiated a con-tract for him to do so at a hefty fee),but even if Elvis were driving a top-of-the-line Mercedes today, the gap between his carand mine would be much smaller than the gap betweenhis Ferrari and my parents’ 1970s Toyota Corolla. Inpart that is because items like cars have improved inquality, but it is also because improvements in financehave made it possible for ordinary people to have accessto them. Elvis would still be able to turn up at a dealerand buy a car without a credit check; the difference isthat this past summer I was able to buy my Subaru viathe Internet without ever meeting the dealer and with-out the hours of paperwork and haggling that were aroutine part of the car-buying experience as recently asthe 1990s.

Everything from the selection of options to thefinancing was arranged by email, the web, or phone.The dealer had access to financing from investors viaasset securitization of its loans; it was able to check mycredit in seconds using online services; and I paid thedeposit with a credit card over the phone (racking upfrequent flier miles since I don’t have my own plane).Aside from a test drive, the only time a member of myfamily set foot on a dealer’s lot was when my daughterpicked up the car.

Elvis could buy a car with a similar lack of personaleffort in the 1970s because he had a staff to do thingslike wait in line at the bank to get a cashier’s check orcash, fill out forms, and negotiate details of the pur-chase. He was able to get excellent service because he

was a celebrity. Today all of us haveaccess to similar levels of service,thanks to entrepreneurs like Sam Wal-ton, whose Sam’s Club brokered mySubaru purchase.

Televisions

One of the best-known features ofGraceland is Elvis’s arrangement

of three televisions (there were onlythree networks) in several rooms.Inspired by Lyndon Johnson’s use ofthree TVs to monitor the three net-work news broadcasts simultaneously,Elvis had a more sensible reason—sohe could watch multiple footballgames. Here our lives really shine

compared to his. In the mid-1960s, console TVs costover $5,000 in today’s dollars.When Elvis was watchingfootball on his three color TVs, my parents had a singleblack-and-white television, whose screen could nothave been larger than 20 inches. My grandmother, wholived with us, splurged and bought herself a 24–inch-screen console color analog television (with a remotecontrol!), around which we gathered on Sundayevening to watch All in the Family on CBS.

Today my living room has a 60-inch digital flat-screen TV, capable of much higher resolution than any-thing Elvis (or my grandmother) owned but which costconsiderably less than just one of Elvis’s sets. Moreover,


G o i n g t o G r a c e l a n d

In terms of the abilityto get from one placeto another quicklyand conveniently,today’s commercialpassenger comes closerto Elvis’s lifestyle than most thoughtpossible in 1977.

it features technology like a “picture in picture” displaythat makes it unnecessary to have three side-by-sidetelevisions if I want to monitor more than one pro-gram. Elvis had to remodel his bedroom to have twoTVs positioned so he could see them from his bed. Istreamed video to my iPad while lying in bed the firstnight after I moved into my current home withouthaving to summon a contractor.

Stereos

Another feature of Graceland is the top-of-the-linestereo presented to Elvis by RCA Records in grat-

itude for the benefits it reaped fromhis efforts. My music system soundsbetter than Elvis’s expensive stereo(and can play from the TV as well).Some audiophiles might disagree,since the gold standard for many isstill a tube-based amplifier like Elvishad. But not only did I have a choiceof sound systems, even an audiophilesystem would be cheaper, better, andsmaller than anything in Graceland.Of course the rich still have bettersystems, yet the rest of us live betterthan they did in the 1970s. I triedunsuccessfully to find cost figures forElvis’s system but I have no doubtthat the combination of my iPhone, a networked harddrive, and a wireless music system provides me withmany times the quantity of music available to even anavid collector like Elvis—with far greater convenienceand at a fraction of the cost.

If we look at the more mundane parts of Graceland,the improvement in our lives is even more striking.Elvis was proud of the chandelier that hung in thefoyer; lighting fixtures (aside from government-man-dated CFL bulbs) are vastly superior in illumination,efficiency, and variety to what was available to him

when he decorated Graceland. In the kitchen sits amassive early microwave oven; these are now compactand virtually disposable. (In 1981 a Sears microwavecost almost $500—over $1,100 in today’s dollars—buttoday it is just $119.) A feature worthy of comment inthe original news accounts of Graceland was its marblefireplace. Granite countertops and similar features arenow present even in apartments marketed to collegestudents. If we dig into the support systems, the differ-ences are even more dramatic. Home Depot sells fur-naces more efficient and quieter than what Elvis had inthe 1970s; windows today are dramatically superior in

their construction and energy effi-ciency; and appliances such as washingmachines and dryers have optionsunimaginable to even the wealthiest inthe 1970s.

In his classic 1945 American EconomicReview article,“The Use of Knowledgein Society,” F. A. Hayek termed theprice system “a marvel” for its ability toimprove the quality of life without anycentral direction. That’s just the rightword. My family (along with yours)lives a quality of life most of us couldhardly imagine in 1957 or 1977. It is amarvel that we have come so far sofast. Contrary to Harvard professor

(and Massachusetts senate candidate) Elizabeth Warren’srecent claim that we owe a good deal of our success togovernment, the improvements are the results of inno-vations by engineers, business people, and others striv-ing to create their own success and to find the resourcesto achieve their own dreams.

Today most Americans live lives that approach andin some cases exceed the material well-being availableonly to rich celebrities just 40 years ago. Given howmuch Elvis Presley loved his fans, I think that’s some-thing he would be happy to know.


A n d r e w P. M o r r i s s

The dramaticimprovements in our lives over the last 30 years are the results ofindividuals—not thegovernment—striving to createtheir own success.

B Y D O N A L D J . B O U D R E A U X

Some Sins of Textbook Economics

Thoughts on Freedom

People who are ignorant of economics are suscep-tible to all sorts of misunderstandings. Fortu-nately knowledge of even just the basics of

sound economics is a powerful inoculant against manydangerous falsehoods and half-truths.

This fact, however, does not imply that exposure tomore economics is necessarily good. The sad reality isthat economists too often present their analyses of mar-kets in ways that confuse not only unsuspecting non-economists but also—and too often—economiststhemselves.

A frequently encountered instance of this confu-sion is economists’ discussion of competition. Whatintroductory economics textbooksdescribe as “perfect” (or “pure”) com-petition resembles nothing thatoccurs in the real world. In the worldof the textbooks, firms don’t differen-tiate their products from those oftheir rivals. Firms never try to winmore customers by improving thequality of their products. Also, firmsdon’t advertise. Indeed they don’teven cut prices because each “per-fectly competitive” firm is a “pricetaker”: It’s too small to affect the mar-ket price and so can sell as much as itwishes at whatever price prevails in the market.

These and other problems with the model of “per-fect competition” have been pointed out repeatedly,especially by economists steeped in the Austrian tradi-tion—see, for example, Hayek’s essay “The Meaning ofCompetition.”Yet the typical economist still clings tothe notion that “perfect competition” is perfect compe-tition.This typical economist, it must be admitted, doesunderstand that the conditions necessary for “perfectcompetition” to prevail in actual markets can neverexist. But the model remains the ideal against which

real-world markets are judged. The closer real-worldmarkets appear to be to textbook “perfectly competi-tive” markets, the more competitive real-world marketsare assumed to be.

And competition being a good thing, this typicaleconomist presumes that policies advertised as movingreal-world markets closer to the “perfectly competitive”ideal are desirable.

Assumed Conclusions

But such a presumption is unwarranted, in partbecause many of the conclusions of the analysis are

snuck into the model’s initial assumptions.Most important among this

model’s foundational assumptions isthat competitive forces play out onlyin the form of price cuts. Thereforeanything that prevents prices frombeing cut (down to levels that themodel specifies as appropriate) isregarded as an obstacle to competi-tion—indeed, as an element ofmonopoly that prevents the economyfrom operating more efficiently.

To this day, many mainstreameconomists describe any firm that canraise, even modestly, the price it

charges for its product without driving away all of itscustomers as possessing some monopoly power.

Note the confusion: A pest-control producer thataims to increase its sales by making a better mousetrapis regarded by this model as behaving monopolistically!Competing for customers by doing something otherthan simply cutting prices is, according to the model,not competitive.


Donald Boudreaux ([email protected]) is a professor of economics atGeorge Mason University, a former FEE president, and the author ofGlobalization.

What introductoryeconomics textbooksdescribe as “perfect”competitionresembles nothingthat occurs in the real world.

You can’t make this stuff up.Another example of how economists commonly

confuse themselves (and others) involves the issue of“market failure.” That same introductory economicstextbook that teaches the model of “perfect competi-tion” explains a few chapters later that markets per-form suboptimally whenever some groups of peopleact in ways that affect other groups of people withoutthe consent of these third parties. The textbook then explains that, happily, economists know how todesign taxes or regulations to fix the problem.

Externalities and Assumptions

Such situations—economists callthem “externalities”—are indeed

bad. If Smith pays Jones to hit me inthe head with a hammer without myconsent, I—the third party—amunquestionably made worse off. (Asimple, and best, solution in this case isto give me an enforceable propertyright in my person: No one can hitme and get away with it without myconsent.)

But the stories that economiststypically tell of externalities—and ofhow to “solve” them—too looselysneak in illegitimate assumptions.

Here’s an example: Smith paysJones for pork chops whose produc-tion at Jones’s pig farm next door to where I live fillsmy house with obnoxious odors. The economistleaps to the conclusion that I am wronged. Perhaps Iam. But suppose that I bought my house knowingthat it was next door to a pig farm. Am I stillwronged? No:The price I paid for my house was dis-counted because of its location within smelling dis-tance of the farm. Not only have I consented toendure swinish odors in my home, I’ve been com-

pensated for doing so (in the form of a lower pricethan that of a similar home located in a sweeter-smelling neighborhood).

Or suppose, alternatively, that the pig farm movesinto my neighborhood by surprise, after I buy myhouse. Now am I harmed? The answer is unclear. If thelocation of my house is such that homebuyers shouldreasonably expect the possibility that farms might setup shop nearby, then when I bought my house therewas an open question about whether or not home-owners have the right to odor-free air in the neighbor-hood.And because this question cannot be answered by

economics alone, it’s illegitimate foran economist to conclude that thefarm necessarily should be taxed orregulated for the purpose of cleansingthe neighborhood air of stinky odors.

The Largest Externalities

Economists are correct to pointout that externalities exist. But

economists are far too frivolous ingoing about labeling this or that effectan “externality”—and, what is evenworse, are far too glib in supposingthat government can be trusted to“internalize” externalities in ways thatimprove the allocation of resourcesrather than making it worse.

Don’t forget what too many econ-omists seem never to grasp: Collective decision-makingitself—from citizens voting to politicians spending tax-payers’ money—is infected with what are perhaps thelargest and most intractable externalities. Costs areimposed on third parties constantly.

Economics done properly would highlight the dan-gers of trying to cure externalities with a process thatitself is deeply infected with externalities. Unfortu-nately economics is too often done improperly.


D o n a l d J . B o u d r e a u x

Collective decision-making itself—fromcitizens voting topoliticians spendingtaxpayers’ money—is infected with perhaps the largestand most intractableexternalities.

You’ve heard it all too many times to count, Isuspect. Apologists for big government—theNew York Times’s Paul Krugman and Washington

Post’s Eugene Robinson being good recent examples—are convinced there’s just no good alternative to gov-ernment social services. Without the government,people will go hungry. They’ll diein the streets. We’ll lapse back intoan era of mass poverty. So anyonewho questions the need for theState’s antipoverty efforts is heart-less, clueless, or both.

I’m not convinced.To be sure, it’s easy to see why an

uncritical observer might think peo-ple like Krugman and Robinson areright.We can certainly look back oncenturies—millennia, even—duringwhich poor people have gotten theshort end of the stick, in whichpoverty has coexisted, heart-break-ingly, with great wealth.And perhapsthose memories make it temptingfor some people to buy the civics-class story that the only thing stand-ing between us and a world full ofDickensian nightmares is activist government.

But that would be a mistake.The poverty and exclu-sion evident throughout history, and still very much apart of today’s world, can frequently be traced preciselyto the unjust acts of government officials and theircronies. When people are denied ownership of landthey’ve homesteaded with their labor so feudal over-lords can turn them into serfs, the culprit isn’t freedom,

or the market—it’s government support for the wealthyand well-connected. Ditto for cases in which people aredenied the right to work by laws, like England’s oldActs of Settlement, that limit their ability to travel insearch of new opportunities.

More generally: There’s no reason to trust activistgovernment because the people incharge can be expected, time andagain, to back those with power andinfluence over those without. Beingpoor doesn’t make you a favoredobject of government attention—instead, it means you’re likely to beused and abused. Politicians willclaim to be defending your interestswhen they’re really promoting theirown.They’ll continue to enact rulesthat limit your ability to supportyourself and make it costly for youto provide decent shelter and cloth-ing for yourself and your family.And law enforcement agencies willsubject you to violence—whetherthey’re enforcing drug laws orimmigration restrictions, or ensur-ing that you conform to zoning

regulations and local codes designed to be easy formiddle-class people to follow while making your lifecostly and difficult.

Government action in contemporary society makesand keeps people poor. Licensing laws, zoning regula-

B Y G A R Y C H A R T I E R

Government Is No Friend of the Poor


Gary Chartier ([email protected]) is an associate professor of lawand business ethics at La Sierra University. His latest book is TheConscience of an Anarchist (Cobden Books, 2011).

The U.S. government’s holdings and seizures ofland are among the systemic causes of poverty.Sam Felder [flickr]

tions, and similar restrictions make it hard for poorpeople to enter particular job markets and to operatebusinesses out of their homes. Without these kinds ofgovernment regulations in place, people would be lesslikely to be poor.

Poverty is a systemic problem. It’s a product of lots ofdifferent, overlapping, mutually reinforcing factors.Getting rid of just one abuse or inequity here or theremight well leave many people poor. But systemicchange, change that addresses all the different factorsthat make poverty a persistent, ugly feature of our lives,can make a profound difference. And the kind of sys-temic change we need is change that eliminates State-secured privileges and State-imposedliabilities, not another State-createdbureaucracy designed to ameliorateproblems the State itself has created.

State Poverty

Government’s role in making andkeeping people poor is just one

of the factors that make povertyendemic and make it hard to survivewhile poor.

For instance: Governments don’ttreat recipients of the antipoverty aidthey disburse especially well. It’simportant to avoid comparing ideal-ized State practice with imaginaryworst-case practice in the govern-ment’s absence. If we focus on actual government prac-tice we find that poor people are not served particularlywell by the State, which routinely intrudes into thelives of recipients of assistance, violating their privacyand seeking to regulate their behavior. People pay ahigh price for aid from the State. Government aid pro-grams come with hidden price tags.

And governments increase the number of poor peo-ple in part precisely through some antipoverty pro-grams, which can create perverse incentives both forpeople to remain poor enough to qualify for govern-ment funds and for bureaucrats to keep people poor inorder to retain their own jobs.

Governments raise the cost of being poor. Buildingcodes and zoning regulations raise the cost of housing

and so make it harder for people to find inexpensivehomes. Some people are forced to live without perma-nent housing at all, while others must spend muchlarger fractions of their incomes on housing than theyotherwise would.As for food, that’s also more expensivethanks to agricultural tariffs and import quotas. In theabsence of government policies that make meetingtheir basic needs unnecessarily expensive, poor peoplewould have more disposable income and would bemore economically secure.

More than that, though, governments actively takemoney from poor people. Many poor people pay morein taxes than they get back in services under the State’s

rule. These people would have moreresources on net in the absence of the State’s demand for tax money. Inaddition many people are poor, orpoorer, today because the State hasactively stolen land and otherresources from them or their ances-tors or has sanctioned such theftscommitted by the wealthy and well-connected. (Think eminent domainamong other methods.) Historicallythe existence of a peasant class and ofa class of displaced urban workerswilling to accept employment on dis-mal terms is inexplicable without ref-erence to State violence or Statetolerance for or endorsement of vio-

lence by the wealthy and well-connected.The government raises the cost of obtaining key

goods and services. The State does a range of things(notably requiring professional licenses, hospital accred-itation, and prescriptions and enforcing drug and med-ical device patents, and other restraints on trade) tomake particular services such as health care especiallyexpensive.

All these different factors fit together, each one mak-ing people’s conditions worse than they’d otherwise beand making the effects of the other factors more severe.People often start out with less money because of large-scale past injustices.They have less money now becauseof government limitations on the kind of work theycan do and where they can do it.Their ability to pro-


G a r y C h a r t i e r

If we focus on actualgovernment practicewe find that poorpeople are not servedparticularly well bythe State, whichroutinely intrudesinto the lives ofrecipients of assistance.

vide decent lives for themselves and their families isfurther limited because the government raises the costof living, and government regulation of the economydrives down the overall level of productivity even fur-ther in ways that obviously hurt the poor the most.

In sum the government plays a crucial role in creat-ing and perpetuating poverty—and that’s really themost important thing to recognize. But of course thatdoesn’t mean that, absent the government’s abuses, peo-ple wouldn’t have accidents, confront disasters, andmake unwise choices. With costs of living reduced, asthey would be if the government completely left theeconomy alone, people would find it easier to deal withthese challenges. They’d still need one another’s help,but those who think there’d be no way to get this kindof help except through tax-funded government agen-cies are mistaken.

The existence of State antipovertyprograms crowds out alternatives andreduces the effectiveness of those thatremain. It’s easy to view these alterna-tives as essentially ineffectual and ane-mic. But a crucial reason they’re notmore vibrant is that State action com-mandeers money and attention thatmight otherwise be directed to thesealternatives, creating the illusion thatin the government’s absence, theycouldn’t be much more effective.

Support for poverty relief doesn’t just come from taxfunds now. People give money to charitable causes overand above their tax bills today, despite the huge sumsthe State claims.There’s no reason to think they wouldnot do so if the government absented itself from eco-nomic life. It is naive to suppose that the wealthy andpowerful are opposed to State funding for services tothe poor at present; the poor have far less clout than thewealthy and powerful, and yet the State provides mini-mal services for poor people.Why suppose that wealthyand well-connected people willing to see the Statespend their tax money to support services for the poorwould be dramatically less willing to contribute to thesupport of such services if the government weren’tinvolved? (Why do people give money to good causes,including voluntary programs that help the poor? Why

do wealthy and well-connected people endorse Statespending on programs that provide services to poorpeople? Presumably for a combination of reasons,including, in no particular order, compassion, socialnorms, the desire for good reputations, the desire toavoid bad reputations, and the desire to avoid social dis-order. All of these reasons would be operative in a freesociety.)

Mutual Aid

In addition, mutual-aid networks could provide manyof the services well-intentioned statists want the gov-

ernment to offer. Societies in which people pooled riskand provided pensions, health care, and other servicesfunctioned effectively before the rise of State socialservices, and there’s no reason they couldn’t do so again

in the government’s absence—and,indeed, wouldn’t function much bet-ter given that people would haveaccess to more resources and theState would not be regulating themout of existence.

Both charity and mutual aid aremore viable than government-runantipoverty programs, more able tohelp poor people, precisely becausethose programs have high administra-tive costs. (Thanks to Tom Woods forthis point.) Programs supported

freely by people in the government’s absence wouldnot feature such high costs. Because donors couldchoose among multiple programs, there would be per-sistent pressure for administrative costs to be reduced.

In addition, social norms could ensure predictable,consistent support of community-wide aid programswithout taxation. General acceptance of a social normentailing regular contributions to a community incomesupport fund, or leaving the edges of fields available (asin Leviticus) for gleaning, could ensure that poor peo-ple who needed it could rely on community assistance.

State-managed antipoverty programs draw on taxresources taken unwillingly from people. People workless energetically and enthusiastically when they knowthat some of what they produce will in effect be takenfrom them at gunpoint. Thus taking resources from


G o v e r n m e n t I s N o F r i e n d o f t h e P o o r

The existence of State antipovertyprograms crowds outalternatives and reducesthe effectiveness ofthose that remain.

people through taxation to fund antipoverty programscan function as a drag on the economy. By contrast,when people give willingly to support antipovertyefforts, their own objectives are not being thwarted; ifthey wish to support these efforts, they will be willingto work hard to do so.With the government out of theeconomy, people can work enthusiastically to earnwealth and foster overall economic productivity even asthey support significant antipoverty efforts.

Advocates of government antipoverty programssometimes worry that the absence of the State wouldmean a return to the misery and squalor typical of manypeople’s lives in the eighteenth and nineteenth centuries;they too often attribute these conditions to the absenceof State regulation and antipovertyprograms. But it’s important to empha-size that these conditions reflected themuch lower overall levels of societalwealth. People weren’t poor because ofthe absence of State regulations andantipoverty programs; they were poorin part because there was very littlewealth overall and thus less for thosewho wanted to help the poor. (Thanksto Tom Woods again on this score.)And of course the misery and squalorweren’t entirely natural or inevitable: Some resulted frompersistent—and remediable—injustice on the part ofelites and their political cronies.

Rectification

It’s also important to emphasize that getting the Stateout of the economy doesn’t—can’t—mean simply

stopping State intervention. It also has to mean provid-ing rectification for State-committed and State-sanc-tioned wrongdoing. Politically privileged elites havestolen land and resources from poor, working-class, andmiddle-class people—directly and by securing tax-funded subsidies and government contracts.There’s noway to understand the distribution of wealth and powerin contemporary society without acknowledging thishistory of theft and violence.To the extent that it’s pos-sible, past injustice ought to be remedied. For instance,

people ought to be able to homestead land engrossedby the State, especially land allocated arbitrarily to theState’s cronies. If land and other resources were madeavailable for homesteading or returned to those fromwhom they were taken, the poverty of the State’s vic-tims could be significantly reduced.

Structural changes would also make poverty lesslikely in the absence of government intervention.Rules that made it harder for absentee landlords to sit on undeveloped, uncultivated land could open up this land for homesteading by people with lim-ited resources and thus provide them an avenue togreater economic security. Eliminating subsidies and legal privileges for hierarchical corporations

would increase the likelihood thatpeople could enjoy the job secu-rity associated with working forthemselves (with less risk thanaccompanies being an independ-ent contractor in a less healthyeconomy) or in partnerships orcooperatives and that, when theydid work for others, they could bargain successfully for bettercompensation.

Libertarianism isn’t a philosophyof atomism. Libertarians have every reason to valueinterdependence and shared responsibility. Obviously,that’s true of the interdependence fostered by the mar-ket order. But it’s also true of the interdependence offriends and family members and strangers who worktogether to help one another meet life’s challenges.People working together don’t need the government’shelp to deal with poverty.The government often makesthe problem worse, and it’s definitely not needed toremedy deprivation and economic insecurity.

Poverty has multiple causes—but many of thosecauses interact with and reinforce one another. Manyare created by government action. If we get the gov-ernment out of the economy and see to it that pastinjustices committed or sanctioned by the governmentare remedied, we can effectively meet the challenge ofpoverty together.


G a r y C h a r t i e r

Libertarianism isn’t a philosophy ofatomism. Libertarianshave every reason tovalue interdependenceand shared responsibility.

Imagine you are a private in the army.Your sergeantorders you to dig a hole.When you finish, the ser-geant is horrified to find that you have dug a hole.

He dresses you down and then orders you to diganother hole. Insane? Welcome to today’s world ofAmerican banking.

Over the course of severaldecades politicians—both Demo-crat and Republican—encouragedbanks and mortgage companies toease lending standards in hopes ofmaking housing more affordablefor the poor. They also urged thegovernment-sponsored enterprises(GSEs) Freddie Mac and FannieMae (the Federal Home LoanMortgage Corporation and theFederal National Mortgage Associ-ation) to purchase the resultinglow-quality loans from lendinginstitutions. This freed up money,enabling banks to make more loansthan would have otherwise beenpossible. These actions, along withlow short-term interest rates set bythe Federal Reserve and tax advantages for home buy-ers, sparked a housing boom. Home prices soared andinvestors flocked to purchase mortgage-backed deriva-tives. Speculation became rampant, and houses werebought simply to resell, or “flip,” when prices rose.

Eventually, the bubble burst. Housing prices col-lapsed and thousands of home buyers defaulted on theirmortgages, sending derivative prices into a death spiraland sparking a Wall Street sell-off.The rest is history: a

history that the government is apparently anxious torepeat.The Fed is still pushing its easy-money policieswith a vengeance, down-payment subsidies for low-income home buyers are still available for the taking,and lenders are still being pressured to ease standards for

minorities and for low-incomehome buyers. The thinking appearsto be that if housing prices can bedriven back up to their pre-bustlevels, everything will be fine.Homeowners who are currently“underwater” (meaning they owemore on their homes than thehomes are now worth) and all thosebanking and investment houses thatsaw the value of their mortgage-based securities plummet will sup-posedly be back in the black.

There is only one problem withthis scenario: The pre-bust pricelevels are not sustainable. We havethe bust to prove it.

In the midst of the attempt toreinflate the bubble, politicians,needing to deflect blame for the

collapse, have settled on Wall Street and the mortgagelenders as the most plausible villains. (Which is not tosay they are blameless; the State-banking partnership isas old as the republic.) Last September the FederalHousing Finance Agency, which oversees Fannie andFreddie, announced it was suing the nation’s 17 largest

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

Blowing Bubbles:Getting Ready for the Next Bust


Richard Fulmer ([email protected]) is a freelance writer inHumble,Texas.This article first appeared at TheFreemanOnline.org.

A Federal Reserve official presents the newest policyresponse to the present economic malaise.scienceatlife [flickr]

banks—some of which the government had recentlybailed out—for selling risky mortgages to the twoGSEs.Yet just two months before, the Department ofJustice “requested” that a number of banks lower lend-ing standards for minorities with poor credit ratings,threatening them with discrimination charges if theyfailed to comply.

How did banks get into this damned-if-you-do-damned-if-you-don’t nightmare? It started in 1977with the Community Reinvestment Act (CRA). Theact requires “each appropriate Federal financial supervi-sory agency to use its authority when examining finan-cial institutions, to encourage such institutions to helpmeet the credit needs of the localcommunities in which they are char-tered consistent with the safe andsound operation of such institutions.”As Thomas Sowell wrote in his bookThe Housing Boom and Bust, the act,though seemingly innocuous, wasbased on the “implicit assumption thatgovernment officials are qualified totell lenders to whom they should lendmoney entrusted to them by deposi-tors or investors.” Sowell notes thatlawmakers never seriously questionedthis assumption.

The CRA Gets Teeth

At first the CRA had little impactbut it was given teeth by subse-

quent legislation.The main impetus for additional reg-ulation came from Federal Reserve studies run in theearly 1990s showing differing home loan approval ratesfor black and white applicants. Largely ignored werethe findings by these same studies of no racial differ-ences in default rates among approved borrowers. AsSowell explained in Economic Facts and Fallacies, hadminorities been unfairly denied loans, their default ratesshould have been significantly lower than the rate forwhites. Instead, the equal default rates indicate the var-ious groups were being held to the same standards.

Imagine a thoroughly racist loan officer looking forthe slightest excuse to deny a loan to a minority homebuyer. Minor flaws that he would ignore if the applicant

were white are eagerly used as justifications for reject-ing a mortgage to a minority applicant. Only black andHispanic borrowers with stellar credit ratings wouldhave their loans approved.The few loans the officer didmake to minority borrowers would have a far lowerdefault rate than those he made to whites. The data,however, showed no such differences.

Regardless, lending institutions were subjected to afirestorm of media abuse. Under pressure from bothCongress and the White House, federal regulatoryagencies loosened lending rules and imposed penaltieson lenders failing to meet politically dictated racialquotas.

In 1993 the Department of Hous-ing and Urban Development (HUD)began legal actions against mortgagebankers who declined “too many”minority loan applications. HUD alsopushed Freddie and Fannie toincrease their purchases of low- andmoderate-income (LMI) mortgages.In 1995 regulators required banks toprove they were making a mandatednumber of loans to LMI borrowers,directing them to use “innovative orflexible” lending practices to achievetheir quotas. Still other ways werefound to pressure banks into makingrisky loans. For example, when Con-gress repealed legislation prohibitingbanks from affiliating with securities

and insurance companies, it denied the restored free-dom to banks with CRA ratings below “satisfactory.”Similarly, regulatory permission for mergers and foropening branch offices was tied to banks’ CRA com-munity service activities, such as hiring minorities,making donations to approved nonprofit organizations,and earmarking loans for minority-owned businesses.

In 1999 the New York Times reported that FannieMae, under increasing pressure from the Clintonadministration to buy more LMI loans, encouragedbanks “to extend home mortgages to individuals whosecredit is generally not good enough to qualify for con-ventional loans.” Clinton’s successor, George W. Bush,contributed to the expanding bubble as well, signing


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

Under pressure fromboth Congress andthe White House,federal regulatoryagencies loosenedlending rules andimposed penalties onlenders failing tomeet politicallydictated racial quotas.

the American Dream Downpayment Act in 2003,which provided, and still provides, down-payment sub-sidies to low-income home buyers.

The drive to make homes more affordable actuallymade them less so. Prices soared as hundreds of thou-sands of first-time home buyers flooded into the mar-ket. Still, few people buy a home outright; most takeout a mortgage.As long as the monthly payments wereaffordable, home sales could continue apace. To drivemonthly payments down, politicians and lenders onlyneeded to get a bit more creative. With plenty ofreserves thanks to the Fed’s easy-money policies, bankswere more than eager to step up. No-down-payment loans became com-monplace, as did adjustable ratemortgages (ARMs) and even so-called “liar loans” for which borrow-ers were not even required to showthey could pay the money back. It didnot matter because, of course, housingprices would continue rising forever.If anyone defaulted on his mortgage,the lender would just foreclose on thehouse and resell it for a tidy profit.

According to Peter J.Wallison andEdward J. Pinto in Forbes (Feb. 16,2009), in late 2004:

[The chairmen of Freddie andFannie] were telling meetings ofmortgage originators that theGSEs were eager to purchase sub-prime and other nonprime loans.

This set off a frenzy of subprime and Alt-A[rated between subprime and prime] mortgageorigination, in which—as incredible as it seems—Fannie and Freddie were competing with WallStreet and one another for low-quality loans. Evenwhen they were not the purchasers, the GSEs wereWall Street’s biggest customers, often buying theAAA tranches of subprime and Alt-A pools thatWall Street put together. By 2007 they held $227billion (one in six loans) in these nonprime pools,and approximately $1.6 trillion in low-quality loansaltogether.

From 2005 through 2007, the GSEs purchasedover $1 trillion in subprime and Alt-A loans, drivingup the housing bubble and driving down mortgagequality.

Critics argue that only 6 percent of the subprimeloans made to low-income home buyers were providedby CRA-covered banks. However, CRA loans con-tributed disproportionately to the defaults. Accordingto Bank of America’s October 2008 quarterly report,CRA loans represented only 7 percent of its totalmortgage lending, yet these loans made up 29 percent

of its mortgage losses.

CRA Infection

The CRA’s largest impact, how-ever, was that it led to an overall

drop in lending standards. As ThomasE. Woods, Jr., reported in Meltdown,“The push for relaxed lending stan-dards for low- and middle-incomeborrowers was so pervasive and sys-tematic, persisting for a full decade,that it is no surprise that it shouldhave spilled over into the standardsfor higher-income borrowers as well.”Low standards did more than just“spill over,” however. HUD pressuredmortgage lenders not subject to theCRA to sign “Memoranda of Agree-ment” stating they would make moreloans to minority and low-incomeborrowers. Countrywide Financial

was the first lender to sign and, perhaps not coinciden-tally, the first lender to go bankrupt when the housingbubble burst. Once hailed as a leader, Countrywide isnow reviled as a “predatory lender.”

Speculators, availing themselves of zero-down-pay-ment loans and ARMs, purchased house after housewith no intention of actually living in any of them.Instead they resold them as prices continued climbing.In the end, a number of homes were built strictly asinvestment vehicles. “Flipping” homes in this mannercould be very lucrative—right up until the housingmarket crashed. Many speculators, caught between


B l o w i n g B u b b l e s : G e t t i n g R e a d y f o r t h e N e x t B u s t

HUD pressuredmortgage lenders notsubject to the CRA—like CountrywideFinancial—to sign“Memoranda ofAgreement” statingthey would makemore loans tominority and low-income borrowers.

sales, defaulted on their mortgages. Because they hadput little or nothing down, the losses were borne bywhichever institutions held the mortgages when themusic stopped—or the taxpayers.

Many homeowners, seeing the value of their housessoar during the boom years, cashed in by refinancingtheir homes at the higher market values and pocketingthe difference. When prices tumbled back down, theywere left owing more money on their homes than theywere now worth. Some, like the spec-ulators, simply walked away.

Still, critics point out that the dollarvalue of CRA loans paled in compari-son to the leveraged debt that WallStreet investors amassed. Imagine anupside-down pyramid of debt with thepyramid’s apex serving as its base.Thisapex was made up of home mort-gages. Piled on this relatively smallbase were trillions of dollars in lever-aged derivatives such as credit-defaultswaps (essentially insurance against bond or, in this case,loan failure) and other mortgage-based securities.

As top-heavy as this inverted pyramid was, the factremains that it could have survived had its base been

solid. Instead, its foundation was riddled with bad homeloans because the government had coerced banks andother lending institutions into handing out money topeople who could not afford to repay it. Further, Con-gress demanded that Freddie and Fannie buy hundredsof billions of dollars’ worth of these subprime loans,enabling lending institutions eagerly to make even moresuch loans with no incentive to vet borrowers. Investorswere blinded to the risks by triple-A ratings handed out

by a government-sanctioned cartel ofcredit rating agencies evaluating themortgage-based securities.

Three years after the housingbust, the Federal Reserve is still fol-lowing easy-credit policies. Last Sep-tember it doubled down with anannounced purchase of $400 billionin longer-term Treasury securitieshoping to lower long-term interestrates and thereby boost spending andinvestment. At the same time the

government is continuing to pressure banks to makerisky loans and sell them to Freddie and Fannie, whichwere taken over by the government after they wentbankrupt. (Last fall Freddie said it needed to borrow $6billion more from the Treasury after it lost $4.4 billionin the third quarter of the year.) The new twist is thatfederal regulators are now suing banks for doing whatthe government demanded, and is still demanding, thatthey do. This is not too surprising given Washington’sneed to pin the blame on someone, anyone, other thanWashington.The politicians and regulators also need tobe looking ahead, though, for the villains on whomthey can blame the new and bigger bust that they cur-rently have in the works. It is nothing short of breath-taking. But then, blowing bubbles always is.


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

Three years after thehousing bust, theFederal Reserve isstill following easy-credit policies.

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

Regime Uncertainty,Then and Now

Our Economic Past

In a 1997 article,“Regime Uncertainty:Why the GreatDepression Lasted So Long and Why ProsperityResumed After the War” (tinyurl.com/98l4e), I

advanced the idea of regime uncertainty in an attempt toimprove our understanding of the Great Depression’sextraordinary duration and of the highly successful postwartransition to a genuinely prosperous market-orientedeconomy. The idea is more definite than the hoary butvague idea of “business confidence,” though they’re related.

In my conception regime uncertainty pertains aboveall to a pervasive uncertainty aboutthe property-rights regime—aboutwhat private owners can reliablyexpect the government to do in itsactions that affect private owners’ abil-ity to control the use of their property,to reap the income it yields, and totransfer it to others on mutuallyacceptable terms.Will the governmentsimply take over private property?Will it leave titles in private hands butstrip the owners of real control andprofitable use of their properties? Inany event the security of private prop-erty rights rests not only on the letter of the law but alsoon the character of the government officials whoenforce—or threaten—presumptive rights.

Between 1935 and 1940 this matter attained primeimportance. So many businessmen and investors lostconfidence in their ability to forecast the future prop-erty-rights regime that few were willing to venturetheir money in long-term investments.They constantlysought clarification of the government’s designs, asPresident Franklin D. Roosevelt raged against “eco-nomic royalists” and blamed a “strike of capital” for theeconomy’s ongoing troubles, including the depressionof 1937–38, which undermined the general public’sconfidence in the New Deal.

Treasury Secretary Henry Morgenthau tried repeat-edly to persuade Roosevelt to make a public statementto reassure investors, but the President steadfastlyrejected this entreaty. Morgenthau ultimately becameso frustrated that in a 1937 cabinet meeting, he blurtedout to his boss: “What business wants to know is: Arewe headed toward Socialism or are we going to con-tinue on a capitalist basis?” Strange to say, Jim Farleyand even Henry Wallace backed Morgenthau’s insis-tence that the President spell out what kind of eco-

nomic system the administrationsought to foster.

In his plea Morgenthau encapsu-lated the wide-ranging uncertaintythat Lammont du Pont expressed inthe same year, when he said: “Uncer-tainty rules the tax situation, the laborsituation, the monetary situation, andpractically every legal condition underwhich industry must operate. Are taxes to go higher, lower or stay wherethey are? We don’t know. Is labor to beunion or non-union? . . . Are we tohave inflation or deflation, more gov-

ernment spending or less? . . . Are new restrictions to be placed on capital, new limits on profits? . . . It isimpossible to even guess at the answers.”

I doubt the regime uncertainty that a growing num-ber of commentators and analysts have perceived since2008 is as great as that of the latter 1930s. However, thegovernment’s frantic actions in the past few years havesurely shaken investors’ confidence about future prop-erty rights in the United States.The takeovers of Fan-nie Mae, Freddie Mac, AIG, GM, and Chrysler; themassive interventions in financial markets; the huge


Robert Higgs ([email protected]) is senior fellow at the IndependentInstitute, editor of The Independent Review, and author of Delusionsof Power (Independent Institute).

The government’sfrantic actions in thepast few years havesurely shakeninvestors’ confidenceabout future property rights in theUnited States.

bailouts of banks and other financial institutions, mixedwith letting Lehman Brothers go down while salvagingBear Stearns—all these actions and many others suggestthat a rational investor might well attach a huge riskpremium to any money he ventures even for the inter-mediate term, not to mention the long term.

Moreover, the upsurge of the federal government’ssize, scope, and power since the middle of 2008 hasscarcely calmed investors’ minds. New taxes and higherrates of old taxes; potentially large burdens of compliancewith new financial and energy regulations; unpredictablenew mandatory health care expenses; new, intrinsicallyarbitrary government oversight of so-called systemicrisks associated with any type of business—all theseunsettling prospects and others of sub-stantial significance must give pause toanyone considering a long-terminvestment, because any one of themhas the potential to turn a seeminglyprofitable investment into a big loss.

The Current Picture

In testing my hypothesis aboutregime uncertainty, I have marshaled

three distinct types of evidence: histor-ical documentation of governmentactions and public reactions; findings ofpublic-opinion surveys, especially sur-veys of businessmen; and financial-market data.

My most striking financial evidence for the NewDeal episode pertains to the yield curve for corporatebonds—that is, to the spreads between the effectiveyields on high-grade corporate bonds of various matu-rities. I found that this yield curve suddenly becamemuch steeper between the first quarter of 1934 and thefirst quarter of 1935 (when the New Deal lurched fromits first, or business-tolerant, phase to its second, orbusiness-hostile, phase) and remained very steep until itflattened between the first quarter of 1941 and the firstquarter of 1942 (when the New Deal handed the reins

to the military and the big businessmen who, alongwith the President, ran the war-command economy). Iinterpreted these extreme spreads from 1935 to 1941 asrisk premiums on longer-term investments caused byregime uncertainty.

Does the corporate-bond yield curve show the samekind of shift during the past few years that it displayed inthe face of the regime uncertainty that prevailed from1935 to 1941? To find out I examined a number ofseries of corporate-bond yields by term to maturity.

I found that in 2008, before the onset of the finan-cial panic in September, the corporate-bond yieldcurve was quite flat—that is, the yields increased onlyslightly with term to maturity. When the panic hit,

yields became extremely volatile,especially for the bonds with twoyears to maturity (the shortest term inthe data), and remained volatile foralmost a year. After mid-2009 thevolatility diminished. Once the dusthad settled, the yield curve for corpo-rate bonds had become substantiallysteeper.

Thus just as the steeper yieldcurve of the latter 1930s correspondsprecisely with the so-called SecondNew Deal, when Roosevelt and hisleading advisers went on the warpath

against investors as a class, the steeper yield curve sincemid-2009 corresponds with the bigger governmentleft in the wake of the financial-market volatility andfrenetic government action between September 2008and the middle of 2009 and with the subsequent rashof extraordinary government measures.

Given the current regime uncertainty, investors willprobably continue to remain for the most part on thesideline, protecting their wealth in cash hoards and low-risk, low-return, short-term investments and consumingwealth that might otherwise have been invested. Sloweconomic recovery, at best, will be the result.


R o b e r t H i g g s

The frenzy ofgovernment action in 2008 and 2009 has left behind asteeper yield curve,just as the SecondNew Deal did.

Is this statement true? “If SpongeBob SquarePants isthe mayor of Minneapolis, then Napoleon lost theBattle of Waterloo.”

It is. On the other hand, this is not: “If Napoleonlost the Battle of Waterloo, then SpongebobSquarepants is the Mayor of Minneapolis.”

Confused? Welcome to our government-school curricula.

In the July/August 2011 issue ofThe Freeman, Neal McClusky warnedof the efforts of the U.S. Departmentof Education to establish a nationalcurriculum in our schools (“ComingSoon: The Federal Department ofStandardized Minds,” tinyurl.com/3b3y6ub). As a teacher, I agree thiswould be a serious mistake. A mono-lithic school system would eliminatewhat little opportunity for innovationeducators still possess and would forcestudents into cookie-cutter courses,regardless of the students’ needs andabilities. It would lower our disgraceful levels of aca-demic performance even further and, most ominously,it could facilitate the establishment of a national systemof propaganda masquerading as education.

To understand why a national curriculum wouldlead to these consequences, we need only to look at theconsequences of curricula already established by stateand local governments.

The SpongeBob example is indicative. It illustrates atopic from the logic section of the high school mathe-matics curricula of several states, including New Yorkand California. It is based on Bertrand Russell’s formal-

logic convention known as material implication, theexplanation of which could easily run to the length ofa book and confuse most highly educated adults. If youexamine any series of high school mathematics text-books published in the United States within the last 30years, you are certain to find material implication alongwith abstruse aspects of number theory, non-Euclidian

geometries, and a host of other unre-lated, obscure topics. This constitutesthe knowledge of mathematics thatstate bureaucrats require our childrento learn.

Before becoming a teacher I spent26 years as an executive managingdepartments that specialized in the useof applied mathematics for a majorbank. In 1998 I established a unitresponsible for guiding the develop-ment of quantitative tools for a fran-chise that boasted 125 millioncustomers spread out over 102 coun-tries. Given the scope of the assign-

ment, I had carte blanche to employ the best analyticaltalent available. I hired half a dozen scientists and math-ematicians from the National Laboratory System, theNational Institutes of Health, and an Ivy League fac-ulty. One of my analysts was described by a Nobel lau-reate as the “best research scientist under 40 in theworld,” another as “the best thing to come out of LosAlamos since the bomb.” As much as I like braggingabout my unit, there is a reason I’m bringing this up:Not a single one of these exceptionally talented indi-

B Y P E T E R M C A L L I S T E R

State-Mandated Thinking


Peter McAllister ([email protected]) teaches mathematics and socialstudies at West Islip High School, Long Island, New York.

Bureaucrats working for a governmentmonopoly should not be deciding whatgoes in here.Digital Shotgun [Flickr]

viduals was an American citizen. With one exception,though, they all held doctorates from leading Americanuniversities.This absence of qualified American analystswas not a coincidence: Americans were systemati-cally underrepresented in the bank’s several other ana-lytical units, as well as in the analytical units of ourcompetitors.

Incoherent Curriculum

Ibegan teaching mathematics and social studies at thehigh school level in February 2003. By June of that

year I understood clearly why there were relatively fewqualified Americans in quantitative analytical positionsin banking. Our state curricula have rendered the sub-ject of mathematics both incomprehensible and largelyirrelevant. The blueprint for the lasthalf-century of U.S. instruction inquantitative skills was developed pri-marily by two groups: professors ofabstract mathematics and progressiveprofessors of education. A strikingcharacteristic of the mathematicianswas their limited knowledge of thepractical applications of their disci-pline. A striking characteristic of theeducators was their willingness toaccept any content from the mathe-maticians, regardless of how arcane it was. The resultwas “the new math,” a disintegrated hodgepodge thathas caused mathematics to become unfathomable toyoung minds.

The nature of the government school curriculumdevelopment process militates against the creation of anintegrated, hierarchical presentation of any subject mat-ter. State curricula are developed by large committeesof experts who often have their own pet themes andtopics they wish to insert into our schools. The resultinvariably becomes a laundry list of unconnected infor-mation. Once assessment criteria are established, the“knowledge by fiat” process is complete and these cur-ricula become impervious to revision, regardless ofwhether they are relevant to students’ future adult lives.

This process has generated curricula that make itextremely difficult for students to develop a coherentknowledge of mathematics. Teachers are required to

introduce topics seemingly at random, and in manyinstances it is impossible for teachers to tie these topicsto other information the student has encountered.Thequadratic formula, which is indispensable in the designof objects from flashlights to the Golden Gate Bridge,typically is introduced well before most students arecapable of understanding its derivation or even its pur-pose. Since students are required to know this formula,they often “learn” it by singing it to the tune of “PopGoes the Weasel.” In geometry we require adolescentsto learn excruciatingly complex definitions and termsin order to prove the simplest theorems. Euclid’s Ele-ments was devised about 300 BC and until the nine-teenth century was regarded as the standard ofgeometric proof. Only after the widespread acceptance

of non-Euclidian geometries didmathematicians realize Euclid’s sys-tem relied on more fundamentalaxioms than he stated. As mathemat-ics professor Morris Klein haspointed out, for 22 centuries mathe-maticians failed to detect Euclid’slack of rigor, yet today we expectadolescents not only to see this butalso to grasp the need for proof thatinvolves axioms that are more diffi-cult to understand than the theorems

they support. No justification or motivation is providedfor this approach to geometry.

What is the effect of these state curricula? Studentscome to view mathematics as a senseless game unre-lated to reality.They have to memorize procedures andthen spit them back so they can test well enough tomove on to memorize higher level, mind-numbingprocedures that they will spit back at some later date.Mathematics has enabled man to grasp everything fromthe nature of subatomic particles to the shape of theuniverse. It is now almost universally regarded byAmerican students simply as a series of “floatingabstractions,” with no ties to anything relevant or real,on the same metaphysical level as Santa Claus.

One of the most disconcerting phenomena I haveencountered since I have become a teacher is that by thetime they reach high school, large numbers of studentsdo not want to understand the basis of mathematics.


P e t e r M c A l l i s t e r

What is the effect ofthese state curricula?Students come toview mathematics asa senseless gameunrelated to reality.

They are actually resistant to any attempts to show howthe material we are covering comes from the real world.I have lost track of the number of times students havesaid, in effect, “Don’t explain this topic to me. Just giveme the formula and let me memorize it.” This shouldfrighten anyone involved in education. Our schools areproducing students who have reached the stage wherethey have given up any attempt to grasp the conceptualfoundation of mathematics. To them, learning mathe-matics is simply a matter of learning how to manipulatea series of strange little symbols whose meanings defycomprehension. Thanks to our state mathematics cur-ricula, young men and women are declaring nakedlythat they have the learning processes of parrots.

There are several improvements to our mathematicscurricula that could be made immediately if stateinvolvement were ended. The most obvious wouldinvolve a complete overhaul of con-tent and a careful ordering of topicsso that students can obtain a hierar-chical understanding of this subject.Additionally, to provide students withan appreciation of the practical neces-sity of mathematics, its instructionshould be coordinated carefully withinstruction in science. Basic mathe-matics is about measurement. Stu-dents need something to measure tomake this subject relevant and to motivate an awarenessof its enormous power. Coordinating it with sciencewould achieve both of these ends. Unfortunately thelockstep approach to knowledge transmission dictatedby state departments of education makes any of theseimprovements impossible.

The most disturbing consequences of governmentcontrol of curricula, however, occur within the socialsciences.These courses typically are developed by indi-viduals who either have no experience with free mar-kets or who are openly hostile to them. As a result thedistinction between education and indoctrination isoften ignored.These beliefs are rarely questioned.

A review of the various states’ performance stan-dards in the social sciences discloses little evidence ofanti-market bias. Instead the aversion comes primarilyfrom two sources: a tendency of people who are

attracted to employment in the government sector toembrace statist politics, combined with the acceptanceby many teachers of fallacies regarding the nature of afree society.

Anti-Market Proselytizing

There are strong incentives for government schoolemployees to favor the expansion of government,

and teachers’ unions don’t even pretend to be even-handed ideologically. The political orientation of mostteachers has been demonstrated recently by their reac-tion to our current economic malaise. Any attempts torein in government spending, especially on education,are met with harsh condemnations within the govern-ment school community. National Education Associa-tion president Dennis Van Roekel has described theattempts of various state governments to confront bal-

looning pension liabilities as “blister-ing attacks on working families” andhas characterized the actions of law-makers as “fitting for comic bookarch-villains.” American Federationof Teachers president Randi Wein-garten likewise has greeted anyefforts to improve school efficiencywith denunciations that border onallegations of child abuse. Every dis-cussion of the causes of the cutbacks

in education, within any government school forum, hasbeen overwhelmingly one-sided, with teachers blamingeveryone who favors limited government.

Anti-market proselytizing is the most dangerousconsequence of entrusting the education of our chil-dren to a government-run monopoly. If schools pre-sented the ethical and political justifications of a freesociety fairly, there would be no reason to fear theintroduction of any other viewpoints, regardless of howcogently they were argued.The problem is our systemis rigged against this. As Isabel Paterson pointed out inThe God of the Machine, “[E]very politically controllededucational system will inculcate the doctrine of statesupremacy sooner or later. . . . Once that doctrine hasbeen accepted, it becomes an almost superhuman taskto break the stranglehold of the political power over thelife of the citizen.”We have not yet reached this point,


S t a t e - M a n d a t e d T h i n k i n g

The distinctionbetween educationand indoctrination isoften ignored in socialscience curricula.

but it is clearly where we are headed. Avoiding it willrequire profound changes in the structure of ourschools. Contrary to the aspirations of the U.S. Depart-ment of Education, ending the State’s role in curricu-lum determination is an excellent place to start makingthese changes.

Ridiculous Fads

Educators have been remarkably unscathed by theconsequences of their teaching methodologies.

This has led to the adoption of ridiculous fads, prima-rily at the local level, that have generated significantcognitive damage. In The War Against Grammar, classicsprofessor David Mulroy describes how many schooldistricts effectively no longer require instruction in for-mal grammar. The “invented spelling” movement like-wise has resulted in the relaxation ofthe requirement that beginning read-ers learn to spell correctly. Instructionin handwriting may be on the chop-ping block presently. In reading, theabandonment of phonics in favor of“whole-word recognition” has led toa generation of nearly illiterate Amer-icans. This occurred despite over-whelming evidence of the inadequacyof the whole-word approach. None ofthese developments could have tran-spired if there had been a genuinemarketplace for ideas in instructional methods.

The latest fad, surely to be incorporated into any setof national standards, is the call for a “21st-CenturyCurriculum.” Although inchoate, it portends to be thenext step in the abdication of the responsibility to trainstudents’ conceptual faculties. It focuses on the devel-opment of skills in the use of multimedia, technology,and “collaborative problem solving,” but there is nomention of students’ glaring deficiencies in masteringthe rudiments of learning. It incorporates HowardGardner’s theory of multiple intelligences that,although not Professor Gardner’s fault, has given rise tothe romantic notion that every student can excel atsomething.This will likely lead to a distorted emphasisplaced on music, art, dance, and athletics despite thelimited career opportunities associated with these skills.

This curriculum will replace the vestiges of a rational,structured approach to education with less content, anemphasis on “life skills,” and the practice of plungingthe intellectually nascent into “real-world contexts”wherein they engage in “problem-based learning.” Our12-year-olds may no longer be able to read, but maybethey will finally resolve the Arab-Israeli conflict.

The only students who currently receive any bene-fits from improved curricula are high-achieving highschool students. The competition among AdvancedPlacement, International Baccalaureate, and college-extension courses provides the academically elite withseveral options to meet their requirements that are farbetter than their government school alternatives. Theinstitutions that provide these courses devote a greatdeal of time and resources to assuring they are appro-

priately structured, accuratelygraded, and competently taught.Unlike their state counterparts,these purveyors do not have acaptive market. They must striveconstantly to improve their qual-ity while minimizing expenses.This is what students of everycaliber in every grade desperatelyneed: expanded, high-qualitycurriculum choices. Sadly, in theabsence of the State releasing itsgrip on course contents, all we

can look forward to is the possibility of another level offederal interference.

Most of the attention of educational reformers hasfocused on teacher quality and parental choice.Although these concerns certainly are legitimate, theypale in comparison to the problems caused by govern-ment control of curricula. Incomprehensible coursestaught by skilled teachers in charter schools are stillincomprehensible. Moreover, it is dangerous to investany entity—government or private—with the soleauthority to determine the information to be taught toour children. We have unelected officials determiningwhat constitutes appropriate knowledge. This is tooclose to the State determining the Truth.

If we want genuine educational reform, we must getthe bureaucrat out of the classroom.


P e t e r M c A l l i s t e r

Sadly, in the absence of the State releasing its grip on course contents, all we can look forward to is more federal interference.

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

Occupying Wall Street

Peripatetics

The Occupy Wall Street agenda is vague, but theprotesters at least have the good sense to knowthat something is awry with the political-eco-

nomic system we labor under. Protesters carried a vari-ety of signs, one of which stated, “End corporatewelfare.”The Associated Press reported,“Demonstratorssaid Saturday they were protesting against bank bailoutsand the mortgage crisis.” One 21-year-old man told theAP, “The enemy is the big business leaders of WallStreet, the big oil company leaders, the coal companyleaders, the big military industrial leaders.”

Considering the housing and financial debacle thatbegan in 2008, the continuing hardship it unleashed,the fortunes made in the run-up tothe bust, and the tax-financed bailoutsthat followed, what’s wrong with feel-ing that “the system” has done a num-ber on most Americans? It’s perfectlyreasonable to think that some radicalchanges are needed. Our lives andwell-being are subject to the moves oflarge organizations over which wehave no control. But to know whatshould change, one has to understandwhat happened.

Note that in the young man’s statement above, oneword is glaringly absent: government. (He does use theword “military,” but many people across the politicalspectrum seem to think the Pentagon is not part of thegovernment.) Unfortunately, the protesters most likelyfail to appreciate that everything associated with theGreat Recession is a product of a longstanding anddeep-seated partnership between big influential busi-ness/financial interests and government—the corporatestate. Through most of American history, banks andother financial institutions have operated in league withgovernment, especially since the Federal Reserveopened its doors nearly a century ago, and this money-

manipulating cartel has facilitated war, cheap credit tofavored interests, and bailouts.

So why aren’t the protesters also outside the Fed, theTreasury, and the Capitol?

Most if not all of them likely favor a big expansionof government, but in light of our political-economichistory, that would be precisely the wrong way to gobecause it would further empower the same coercivebureaucracy that gave us this crisis. Putting new peoplein charge won’t alter that fact that the bureaucracywields powers that should not exist.

What the protesters miss is that corporate power isderived from government power—it’s the most dangerous

derivative (tinyurl.com/bllhqa6).With-out State power no bank (or collec-tion of them) could set the economyon a balsawood platform of inflatedcurrency and cheap credit, creatingthe conditions for recession and long-term unemployment, nor could itstick taxpayers with the cost of badinvestments. Such mischief requires acentral bank and congressional powerto compel the taxpayers. Washingtonand Wall Street need each other.They

don’t agree on everything, but their public feuds shouldnot mislead anyone into thinking they are adversaries.They are in cahoots, dependent on a system that con-strains regular people’s honest economic activities andbenefits an exploitative elite.

I will not rehearse here how corporate-state policiescreated the housing and financial bubble that burst and plunged the country into the Great Recession.Instead, I want to indicate that the corporate state is notnew in America. It has been more the rule than theexception.


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

Putting new peoplein charge won’t alterthat fact that thebureaucracy wieldspowers that should not exist.

There’s no better illustration than the New Deal,particularly the National Industrial Recovery Act(NRA), which cartelized business through industry-generated and -enforced codes that suppressed compe-tition, restricted production, and kept prices highduring the Great Depression. John T. Flynn, the muck-raking reporter who despised government-business col-lusion, bureaucratic control, and militarism, told thestory in “Whose Child Is the NRA?,” which appearedin Harper’s Magazine, September 1934.

Flynn notes that the NRA is commonly regarded asthe “Charter of Labor” or the product of PresidentRoosevelt’s Brain Trust, the collection of Progressiveacademics who informally advised FDR. In fact theNRA’s roots lie elsewhere:

The actual business of putting together the NRAbegan in March, 1933, after Roosevelt took office.But one must look far beyond the throb and potherof those feverish days to understand the swift succes-sion of moves and the cast of characters behindthem. . . . Regimentation of business means, in theminds of those who use the term, forming business-men into regiments, bringing business under regula-tion, controlling production, prices, trade practices,the rules of the game. For seventy years at least busi-ness men have been, in varying degrees, in favor ofthis. . . . Later on the Chamber of Commerce of theUnited States raised the slogan of “Self-Rule inIndustry.” This was not a struggle to shift the con-trol of industry from the government to industryitself. Industry wanted not freedom from regulationbut the right to enjoy regulation.

Self-rule meant the power to penalize code violatorswho wished to compete freely. (Without enforcement,cartels fall apart as members “cheat.”) As the Chamberand prominent businessmen such as General Electricpresident Gerard Swope, along with Wall Street lawyers,pushed for government-backed industry cartels, mem-bers of the House and Senate were advancing bills,which Roosevelt opposed, to set maximum hours for

workers. An alternative bill emerged from discussionsthat included Hugh S. Johnson, who had worked forBernard Baruch on Wall Street; John Dickinson, a WallStreet lawyer; and Chicago labor lawyer Donald Rich-berg.

“When, therefore, the NRA act was brought for-ward, it was to defeat the [Sen. Hugo] Black and [Rep.William] Connery bills, to turn the subject over toemployers and to give them, besides, something theyhad wanted for years but dared not now insist on—themodification of the antitrust laws and the privilege ofself-rule in industry,” Flynn wrote. (Note: The freedmarket was not among the alternatives.) He con-cluded that big business made out well with theNRA:

If now we keep all this in mind it will be easy tounderstand all that has happened since NRAbecame a law. I am reliably informed that [ChamberPresident H. I.] Harriman told his directors that itwas a complete victory for the Chamber.They got morethan they hoped—modification of the antitrust laws,self-rule in industry, defeat of the Black and Con-nery bills, the right to regulate hours and minimumwages transferred to the trade associations underNRA supervision instead of by statute. In short,with the exception of the collective bargaining pro-vision—which as we have seen was subsequentlyrobbed of much of its original strength—the NRAplan represented almost entirely the influence and idealof Big Business Men.The share of the Brain Trust inits paternity was microscopic; the share of theChamber of Commerce and other business interestswas predominant. [Emphasis added.]

This was no anomaly. Government power ultimatelywill be influenced and controlled by those whom theoccupiers despise. So, protesters, rail against Wall Street.But rail, too, against its indispensable partner—govern-ment, with its unique legal power to wield aggressiveforce—and realize that the genuine antipode of the sys-tem you oppose is the freed market.


S h e l d o n R i c h m a n

The financial markets continue to surge and col-lapse based on the latest news from Europe. Asof this writing, the big events are Slovakia’s

unwillingness to contribute to a bailout fund and thefailure of Dexia, a French-Belgian bank with assets ofalmost $700 billion. As the sovereign debt crisis hasintensified in the last few months, it is becoming a realpossibility that the euro itself will soon collapse.

Even if it managed to squeak through and survive—aided by massive taxpayer infusions along the way—theeuro’s vulnerability underscoresthe folly of a political currency.More so than any other cur-rency in history, the euro hasbeen a creation of technocratsworking for modern nation-states. That the euro may wellbe on its deathbed hardly adecade after its birth demon-strates the futility of centralplanning. A durable monetarysystem, free from recurringcrises, can only emerge spon-taneously from voluntaryexchanges in the marketplace.

The European Union andeuro were officially created by the Maastricht Treaty in1993. In addition to the political and cultural objec-tives, the EU and the single currency, which went intocirculation in 2002, were significant steps in the effortto turn Europe into a unified economic zone patternedafter the United States.

Before the introduction of the euro, a large businessbased in France that, say, had a factory paying workers

in Italy and which bought machine parts from Ger-many would be vulnerable to shifts in the exchangerate between the franc, lira, and mark. But with a singlecurrency the firm could focus on its customers andproduct lines, rather than worrying about the foreign-exchange market. This stability across the continentwould (supposedly) give European businesses the sameadvantages that U.S.-based firms enjoy, since Americansin all 50 states use the dollar.

Because a currency’s ability to facilitate transactionsonly increases as more peopleuse it, at first we might expectthat the nations adopting theeuro would want as many oftheir neighbors as possible tojoin.Yet in reality there were for-mal rules (called the Maastrichtcriteria, also the “convergencecriteria”) that new applicantsneeded to satisfy before adoptingthe euro. The rules set standardsfor countries’ inflation rates,budget deficits, governmentdebt, exchange rates, and long-term interest rates.

At first glance it seems oddthat the developers of a new currency would want torestrict its usage. To repeat, the whole point of a cur-rency union is to reduce transaction costs among theindividuals using it.Thus it would seem that these ben-efits would only increase as the group grew.

B Y R O B E R T P. M U R P H Y

The Euro:The Folly of Political Currency


Robert Murphy ([email protected]) is an adjunct scholar of theLudwig von Mises Institute and the author of The Politically IncorrectGuide to the Great Depression.

Maybe there’s a way for Greece to link its fiscal and monetarypolicies after all . . .TaxBrackets.org

Yet there are other factors at work, which thedesigners of the euro understood (if only imperfectly).In particular the euro is a fiat currency, meaning that theprinting press could be used to achieve political ends.This explains why governments already using the euroare reluctant to admit relatively spendthrift govern-ments into their club:There is a danger that the moreprofligate members will hijack monetary policydirectly, or that they will require a monetary bailout (aswe are seeing in practice).

Benefits of a Commodity Standard

Notice that these potential prob-lems would be nonexistent

under a fully backed commodity stan-dard. For example, suppose that thecreators of the euro, rather than read-ing the work of mainstream monetarytheorists such as Robert Mundell,instead had studied the proposals ofLudwig von Mises in The Theory ofMoney and Credit. In this alternate uni-verse the authorities in Brussels wouldstand prepared to issue new papereuros to any individual or institution(including governments and centralbanks) that handed them a fixedweight of gold.

Under this Misesian scheme themonetary authorities would maintain100 percent gold backing of the cur-rency; there would be the requiredweight of actual gold sitting in thevaults in Brussels backing up everypaper euro in existence. In this scenario the authoritiesin Brussels wouldn’t care about the creditworthiness orthe spending habits of the institutions applying for neweuros. So long as the applicants handed over the correctamount of physical gold, the authorities would behappy to print up the appropriate number of euros.

The reason for this nonchalance is that the varioususers of the euro—if it were backed 100 percent bygold—couldn’t affect the euro’s purchasing powerbecause they couldn’t affect future “monetary policy”regarding the currency. If the people in Region A used

the euro, they wouldn’t be affected by (say) a defaulton bond payments by some government in Region Bthat also used the euro.The euros in existence, as wellas the ones to be issued in the future, would have aconstant redemption rate in gold, regardless of the fis-cal solvency of a particular user of the euro.

In case the Misesian thought experiment is too fan-ciful, we have a much more pedestrian (if imperfect)example: U.S. state governments and their use of thedollar. If the California or Illinois state governmentsdefault on the billions of dollars in outstanding bonds

that they have issued, no one is wor-ried that this will lead to a collapse ofthe dollar itself, or that the relativelyfrugal states (such as Idaho) will electto leave the “dollarzone” and adopttheir own currency.

Thinking through the logic of thesituation, it becomes clear that the rea-son for the difference is that the FederalReserve (at least in the past) wouldn’tbail out insolvent state governments.Tobe clear, the people in Idaho might beaffected by a default on California statebonds, but not because both areas useddollars as their currency.

However, if the Fed did start bailingout insolvent state governments, thenthe various states in the “dollarzone”might sit up and take notice. People inIdaho would realize they were payinghigher prices because the Fed was cre-ating billions of new dollars out ofthin air to prop up the market for state

bonds. In this environment a coalition of frugal stategovernments might demand that their profligate peersadopt austerity measures or else the frugal states wouldindeed abandon use of the dollar.

As this thought experiment illustrates, we can imag-ine a situation analogous to the crisis in Europe righthere in the United States. All it would take is a FederalReserve willing to issue extra dollars because membergovernments ran irresponsible fiscal deficits. We don’tcurrently link state government finances and the fate ofthe dollar because the Fed thus far hasn’t altered its


R o b e r t P. M u r p h y

We can imagine asituation analogousto the crisis inEurope right here in the United States.All it would take is aFederal Reservewilling to issue extradollars becausemember govern-ments ran irre-sponsible fiscal deficits.

policies based on state spending. Under a fully backedcommodity standard, this independence of monetaryand fiscal policies would be more absolute and wouldhave prevented a crisis like the one now unfolding inEurope.

Those who have followed the mainstream econo-mists’ handling of these issues know that gold convert-ibility is hardly touted as a solution to the euro crisis. Infact Paul Krugman recently blamed the crisis on theattempts to foist a “nouveau gold-standard regime” onEuropean countries.

This is quite an extraordinary spin. How in theworld could Krugman take a fiat currency, explicitlydesigned from day one by technocrats and withouteven a historical connection to a commodity money,and denounce it as a modern-day gold standard?

The answer is that Krugman is relying on the main-stream theory of optimal currency area. This theorytries to outline the optimal jurisdictions for differentfiat currencies. In this approach the downside of havingtoo large a region using the same currency is that the“optimal” amount of inflation might differ within theregion, leading to unnecessary economic pain andhence political conflict.

In the present crisis Krugman and many othersthink the “obvious” solution would be for Greece todevalue its currency.This would make it easier to repayits debts and would make Greek exports more compet-itive, thus boosting economic growth.

Alas the problem (according to people like Krug-man) is that Greece is not the master of its own eco-nomic destiny. Since it adopted the euro it is nowpowerless to inflate its way out of trouble. Thus theGreeks are condemned to suffer from fiscal austerityand a painful deflation of wages and prices (also knownby the misleading term “internal devaluation”).

Now we can understand the (tepid) connection thatKrugman and others are drawing between the currentsituation in Europe and the classical gold standard.Under the latter, if one country printed too muchmoney its domestic prices would rise faster than thoseof its peers. The country would experience a tradedeficit as its own exports became relatively expensive.The outflow of gold from the country would forceofficials to tighten monetary policy until wages and

prices had fallen (if not in absolute terms, at least rela-tive to the levels of other nations) and internationalcompetitiveness had been restored. Under the classicalgold standard each nation’s currency was pegged at afixed exchange rate to gold, so that no country couldgain an advantage by devaluing its own currency. Alladjustments to ensure sustainable trading patterns hadto occur through changes in relative prices and wages,not through fluctuations in exchange rates.

Further Integration

The mainstream theory of optimal currency areasheds light on another (alleged) lesson being

drawn from the present crisis: the need for fiscal unionamong the eurozone states. For example, Mario Draghi,the incoming head of the European Central Bank,recently said Europe needs to “make a quantum step upin economic and political integration.” Mainstreamtheory shows that it is suboptimal to have a single cur-rency covering areas with governments enacting differ-ent fiscal policies, and hence the “obvious” conclusionis that the European governments must be broughtunder the control of a single agency.

As usual one intervention leads to another.After his-torically co-opting and then suppressing the market-chosen monies (gold and silver), the Europeangovernments in recent years upped the ante by creatinga new fiat currency. Even though the ostensible safe-guards failed miserably—Greece and several other par-ticipating governments have come nowhere nearobeying the Maastricht criteria—the alleged solution isthe creation of even more centralized power, with evenless control by the people being so ruled.

The people of Europe are being conned. They donot need to sacrifice even more political sovereignty toa group of international bureaucrats and bankers. Thedream of the euro—an integrated economic zone witha stable currency—can be achieved through the classi-cal-liberal tenets of free trade and sound money. Con-tinued experiments with fiat money regimes will leadus through a perpetual series of crises, until we are leftwith a single global fiat currency, the issuer of whichhas zero accountability to the hapless citizens forced touse it.According to many cynical observers, this after allmay be the ultimate plan.


T h e E u r o : T h e F o l l y o f P o l i t i c a l C u r r e n c y

As the American people head into another elec-tion year some will be puzzled by the rise andthe staying power of Progressive ideals—

according to which government manages the privateeconomy supposedly for the social welfare. But in truththey’ve been operating at the local level for more thana century.

Overestimating the power of Progressive ideaslocally is difficult. Many who eschew the heavy hand of the federal government—railingagainst corporate bailouts, Medicare,or government ownership of compa-nies—embrace even more extensivegovernment manipulation of privatemarket activity closer to home.

For example, taxicabs are almostall privately owned and operated inthe United States, yet municipal taxicommissions and boards regulate vir-tually every aspect of the business.The codes themselves can include adizzying array of regulations, fromspecific details about where cabcompanies can locate, to how many hours they canoperate, what price they can charge, and what equip-ment they can use to accept calls. My own survey oftaxi regulations in 15 cities uncovered 27 separatetypes of regulations.

Considered separately each regulation may seemreasonable, but the cumulative result has been to pro-tect exiting companies from competition, depresswages for drivers, discourage innovation, and limitservices to new customers and markets. Taxi regula-tions and codes fix prices by law, mandate the way fares

are collected (meters), dictate hours of operation (24-hour dispatch service), regulate financial opera-tions (by requiring financial reporting), promote publicsafety (vehicle inspections), set standards for languagefluency and driver competence (tests), and includedozens of other regulations.

Over time many of these ordinances have grown inscope.Where a code might have first been establishedto ensure a basic minimum level of safety, perhaps

requiring vehicle inspections forbrakes or lights, modern codes canstretch to dozens and hundreds ofpages involving complex and oftencomplicated procedures and stan-dards as the commission legislatesevery detail of running a taxi busi-ness. New York City has just com-pleted a public bidding process forselecting the kind of vehicle taxidrivers will be allowed to use.

This detailed approach to regula-tion of private business is consistentwith the Progressive mindset and

political philosophy. Progressives for the most partadopt what political scientists call a “public interest”view of government. Elected officials are said to repre-sent the will of the people, and civil servants thus duti-fully carry out their vision of the public will. Theproblem is that public officials and taxi boards don’talways pursue the public interest, lack sufficient infor-

B Y S A M S TA L E Y

Taxi Regulation and the Failures of Progressivism


Sam Staley ([email protected]) is associate director of the DeVoeMoore Center at Florida State University, where he teaches classes in urbaneconomics and planning. He is also a research fellow with the ReasonFoundation.

Many who eschewthe heavy hand of the federalgovernment embraceeven more extensivegovernment closer to home.

mation about the taxi market itself, and often rely oncumbersome, outdated decision-making to enforcetheir codes and rules.

For example, most taxicab codes assume that opera-tors are full-time employees. In fact most drivers arepart-time and choose to drive taxis for lifestyle reasonsas much as to maximize their income. My study of thetaxi market in Port Chester, New York, estimated thattwo-thirds of the drivers are part-time. In addition, faresand trips were not evenly distributed throughout theday:They peaked at specific times such as the morningand afternoon rush hours and lunch. Full-time driverstended to earn fares throughout the day. Part-timedrivers met excess demand. In addition, most revenuewas earned taking patrons outside the city (and thereach of the taxi commission).

Regulation vs. Diversity

Most taxi codes can’t accommo-date this kind of diversity

within the industry. The regulationsare one-size-fits-all, and almost alleither fail to address or acknowledgethe valuable role part-time driversplay in meeting customer demand.Part-time drivers, for example, oftenhandle calls through a cell phone andfocus their activity around fixed passenger pickupplaces such as taxi stands, the airport, or train stations.They often charge fixed prices for specific types oftrips, regardless of distance. Many drivers also develop asteady and stable client list through personal service.

Yet taxi regulations force the same requirements onevery car, driver, and company regardless of service pro-vided. Often part-time drivers are still required to havemeters that calculate fares based on distance (when flatfares can easily be negotiated), be officially attached to adispatch company, or meet requirements such as maxi-mum age limits on vehicles regardless of amount of use.Quite simply, the taxi codes can’t keep up with thedynamics of the service provided.

Some cities regulate taxis at even greater levels ofdetail. Many cities require companies to submit finan-cial reports to the local government so officials canevaluate their fiscal solvency when they renew dispatch

company licenses. Ordinances require dispatch compa-nies to lease office space regardless of the number ofcalls or the technology that enables them to handle callsin a home office. Many ordinances also require all com-panies, regardless of their market or client base, to for-mally affiliate with a dispatch company.

In a survey of taxicab regulations in Ohio, TaxicabRegulation in Ohio’s Largest Cities (1999), the BuckeyeInstitute found that cities regulated prices in a variety ofways. For example, two cities—Akron and Canton—didnot regulate taxi fares at all.They let individual companiesdecide what prices to charge. The state’s largest cities—Cincinnati, Cleveland, and Columbus—set maximumrates.Only Toledo and Youngstown set rates by ordinance.

In my survey no single regulation was found in amajority of cities. In fact, fewer than half the cities sur-

veyed required fares to be set by dis-tance-based meters. Only 40 percentregulated logos and taxi colors, ormandated radio dispatching. One-third capped the number of vehicles,required public hearings for licenses,or mandated service hours or physi-cian certificates. In terms of overallburden the most restrictive citiesrequired 13 separate regulations whileothers required just a handful.

Optimal Numbers

Perhaps the most illustrative example of the “govern-ment knows best” mindset is found in regulations

limiting the number of cabs, drivers, and companies.The theory is that there is an “optimal” number ofvehicles for a given market size and the commission’sstaff can figure out what that is. It is also presumed thatthe regulatory board will make decisions about whatrules to enforce based on objective criteria. A cottageindustry has even emerged of consulting firms that havedeveloped sophisticated statistical models to estimatethe number of taxicabs that should be allowed to oper-ate in a city.

In the real world, however, the demand for taxis isdynamic and markets are often separated by the typesand needs of diverse customer bases. In Dayton,Ohio, one company focused on airport services,


Ta x i R e g u l a t i o n a n d t h e F a i l u r e s o f P r o g r e s s i v i s m

Most taxi codes can’t accommodatethe kind of diversityoften seen in taxi markets.

another on spontaneous calls from the street (street“hails”), and a third on specialized services to thelocal transit agency.

Moreover, the boards and commissions themselvesare mostly run by citizens with little knowledge of thetaxi market and staff that have little background in thespecific workings of the industry.

Not surprisingly, inefficiencies reign. One indicatorof inefficiency is the black market for taxi medallions(government-granted licenses that allow someone tooperate a taxicab). Caps on the number of taxis as wellas other regulations increase the costs of entry into thebusiness, restricting supply well below demand. Com-mon sense (as well as basic econom-ics) suggests that if enough taxis areplying the streets of cities to meetdemand, illegal medallion marketswould not exist.

In fact medallions in the blackmarket can command staggeringsums. In New York City a cap ontaxicabs created an illegal market of“gypsy cabs” that may have reached30,000 in the 1990s. While the citygovernment is slowly increasing thenumber of medallions, the officialprice runs upwards of $600,000. Infact, two medallions recently sold for$1 million each in a private sale inOctober 2011. In Boston the goingrate for a black-market license is$400,000. In less restrictive cities licenses still can cost$25,000 or $30,000.

Pricing Out the Competition

While this price might not seem high for many mid-dle-income families, the typical annual wage for a

taxicab driver hovers around $30,000. In effect the highprices for a medallion make it virtually impossible fordrivers to save up enough money to buy their own cab orstart their own company. Increasingly severe restrictionsare a boon to existing medallion holders because thevalue of their licenses increase.Thus one of the more per-nicious effects of tightly regulating the taxi market and

preventing supply from fluctuating to meet demand isdramatically fewer entrepreneurial opportunities. Low-income and minority communities are hit the hardestwhen markets that should have easy access are closed.

Meanwhile existing cab companies, which oftenhave representatives on the boards and commissionsthat regulate their industries, typically use their influ-ence to prevent competition. Local taxicab ordi-nances often have “need and necessity” provisions fornew applicants that end up protecting a cartel ofexisting taxicab companies. Under such provisionsthe presumption is that the commission or board hasalready set the optimal number of cabs and level of

service for the city.A prospective cabcompany must present evidence thatit will serve a part of the market thatis not currently being served byexisting companies. Often applica-tions are denied simply becauseexisting companies showed theyhave the capacity to serve the marketif it existed. New applicants arecaught in a regulatory Catch-22.They have to prove that a marketexists for their service. But if thatmarket existed, established compa-nies argue, they would be serving it.Therefore the underserved marketdoesn’t exist. Application denied.

Unfortunately taxicab regulationdemonstrates yet another hard, cold

reality of politics: Once the regulatory authority isestablished in local ordinances, local politics make itdifficult to deregulate. The benefits of regulation areconcentrated in the hands of a few key players, usuallyexisting taxicab owners and medallion holders, whohave strong financial incentives to lock out new com-petition. They have access to the regulatory apparatusand relationships with regulators that put upstart com-panies and innovators at a distinct disadvantage. Entre-preneurs are not free to compete in the marketplace.Toenter the market they need the permission of regulatorsinfluenced by those with a stake in maintaining the status quo.


S a m S t a l e y

Existing cabcompanies, whichoften have represent-atives on the boardsand commissions that regulate theirindustries, typicallyuse their influence toprevent competition.

Laudable Beginnings

Progressives led municipal reform movementsacross the nation during the

1880s and 1890s in a laudableattempt to purge cronyism andpatronage from corrupt political sys-tems. They led efforts to create elec-toral transparency and fiscalaccountability, and recast politics in amore “professional” framework.Many of these municipal reforms ledto the professionalization of citymanagement. Even the institution ofcivil service was a step forward formost cities. Civil-service standardsand exams for police and firefightershelped professionalize services.Although the downstream effects ofpublic-sector unionization led tobloated budgets and inefficiency, fis-cal transparency and accountability were laudablereforms.

Progressivism, however, has a dark side few fullyappreciated at the time. Caught up in the emotional

appeal of “scientific management,” many thought gov-ernment could and should be run like a business. One

of the highest profile Progressives wasPresident Woodrow Wilson, a fatherof modern-day public administration,who wrote pioneering articles in thelate nineteenth century advocatingthe separation of administration frompolitics in government. The theoryput the trained expert—the bureau-crat—at the center of politicaladministration.

Few areas of urban policy reflectthe overly optimistic worldview ofProgressive thinking, and the negativeconsequences for consumers and sup-pliers, as much as taxicab regulation.The fatal flaw in the Progressive viewis the belief that administration couldin fact be separated from political

pressure. Unlike the private market, where greed, egos,and inefficiency would be punished by losses, legislativeelection cycles are poor mechanisms for providingaccountability.


Ta x i R e g u l a t i o n a n d t h e F a i l u r e s o f P r o g r e s s i v i s m

Few areas of urbanpolicy reflect theoverly optimisticworldview ofProgressive thinking,and the negativeconsequences forconsumers andsuppliers, as much astaxicab regulation.

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

Government the Job Killer

Give Me a Break!

“We’re the country that built the interconti-nental railroad,” Obama says. “So how can we now sitback and let China build the best railroads?”

I guess Obama doesn’t know that the transcontinen-tal railroad was a Solyndra-like Big Government scan-dal. The railroad didn’t make economic sense at thetime, so the government subsidized construction andgave the companies huge quantities of the best land onthe continent. As we should expect, without marketdiscipline—profit and loss—contractors ripped off thetaxpayers. After all, if you get paid by the amount oftrack you lay, you’ll lay more track than necessary.

Crédit Mobilier, the first rail construction company,made enormous profits by overcharging for its work.Tokeep the subsidies flowing it made big contributions tocongressmen.

Where have we heard that recently?The transcontinental railroad lost tons of money.The

government never covered its costs, and most rail linesthat used the tracks went bankrupt or continued to besubsidized by taxpayers.The Union Pacific and North-ern Pacific—all those rail lines we learned about in his-tory class—milked the taxpayer and then went broke.

One line worked. The Great Northern never wentbankrupt. It was the railroad that got no subsidies.

We need infrastructure, but the beauty of leavingmost of these things to the private sector—withoutsubsidies, bailouts, and other privileges—is that theywould have to be justified by the profit-and-loss test. Ina truly free market, when private companies make badchoices, investors lose their own money. This tends tomake them careful.

By contrast when government loses money, it justspends more and raises your taxes, or borrows more, orinflates. Building giant government projects is no wayto create jobs.When government spends on infrastruc-

ture, it takes money away from projects that consumersmight think are more important. When governmentisn’t killing jobs by sucking money out of the privatesector, it kills jobs by smothering the private sectorwith regulation. I talked to Peter Schiff about all this.Schiff is a good authority because he was one of thefew people to warn of the housing bust. Now he’s hada run-in with the federal government over job creation.

Schiff, who operates a brokerage firm with 150employees, recently complained to Congress that “reg-ulations are running up the cost of doing business, anda lot of companies never even get started because theycan’t overcome that regulatory hurdle.”

Schiff claims he would have hired a thousand morepeople but for regulations.

“I had a huge plan to expand. I wanted to open upa lot of offices. I had some capital to do it. I hadinvestors lined up. My business was doing really well.But unfortunately, because of the regulations in thesecurities industry, I was not able to hire.”

People don’t appreciate the number of regulationsentrepreneurs face. Schiff pays ten people just to try tofigure out if his company is obeying the rules.

“Even my brokers . . . find out that maybe 20 per-cent, 30 percent of their day is involved in compliance-related activity, activity that is inhibiting theirproductivity. . . . All around the country, people arecomplying with regulations instead of producing,instead of investing and growing the economy.They’retrying to survive the regulations,” he said.

This is no way to create jobs or wealth. Keynesianpundits and politicians can’t understand why businessessit on cash rather than invest and hire unemployed work-ers. It’s really no mystery. Government is in the way.


John Stossel hosts Stossel on Fox Business and is the author of Myths,Lies, and Downright Stupidity: Get Out the Shovel—WhyEverything You Know is Wrong. Copyright 2011 by JFS Productions,Inc. Distributed by Creators Syndicate, Inc.

President Obama says government will have tobuild the nation out of the economic trough.



Book Reviews

Libertarianism, from A to Zby Jeffrey A. MironBasic Books • 2010/2011 • 198 pages • $24.95 hardcover;$15.99 paperback

Reviewed by Aeon J. Skoble

Harvard University economistJeffrey Miron’s primer on

libertarian thought proceeds justas the title indicates: a collectionof alphabetically arranged shortessays on 105 topics.This is a moreeffective technique than onemight imagine: Since many peo-ple unfamiliar with libertarianismapproach it by way of specific

questions and challenges, Miron provides answers.Readers of The Freeman will be familiar with this

experience: How would libertarianism handle drunkdriving? (That’s under “D.”) What do libertarians thinkabout organ sales? (Under “O.”) What do you mean by“unintended consequences”? (Look under “U.”) Theentries are not at all superficial, though; they are wellthought out and carefully reasoned discussions of thetopics. Just as important, they are well written: SinceMiron’s intention here is to communicate the goodsense of these ideas, it really makes a difference that hecan write clear and effective prose. And he goesbeyond surface-level questions (such as minimumwage) to tackle more complicated issues like Paretoefficiency, fiat money, and abortion. Miron alsoincludes entries on how libertarianism differs fromconservatism and (modern American) liberalism, andhow consequentialist approaches differ from rights-based approaches.

Another asset of this book is the way Miron usessome of the basic concepts of economics in ways thatare not only accessible to the non-economist but alsoshow how the “economic way of thinking” applies to a variety of problems that the average reader might not think of as economic. For example, in the entry on

protection of endangered species, Miron appeals to theconcept of incentives. Although this solution is coun-terintuitive, assigning private property rights in endan-gered species or their habitats will create betterincentives for good stewardship.There are many exam-ples in Africa of the success of this approach, so Mironis able to supplement the theoretical explanation ofwhy this works with empirical evidence. He contraststhis effectively with statist approaches by showing howthese end up being counterproductive. Worse thanbeing ineffective, these policies can create incentives forbehavior that is the opposite of what is intended. It’simportant that Miron can show this. Since a book likethis has its chief value in outreach, it needs to provideanswers to these sorts of questions from people whomight not be predisposed to classical liberalism or theeconomic way of thinking. When he does appeal toprecise notions like externalities or moral hazard, thereader is directed to entries on those.

Another feature I found compelling is the wayMiron acknowledges the reality of moral disagreementwhere relevant, while nevertheless directing the readerto think in terms of policies that might make a positivechange. For example, consider capital punishment.Thisisn’t strictly speaking a definitional issue for libertarian-ism: It’s possible to be a libertarian and think either thatmurderers deserve death or that no one has the right totake a life. But Miron encourages the reader to thinkabout the issue differently. He frames the usual deathpenalty debate as “a distraction” and suggests that thereader approach the problem from the other side:“Society wastes substantial energy arguing about thedeath penalty rather than focusing on policies thatwould actually reduce crime, such as ending drug pro-hibition, legalizing prostitution, and improving educa-tional outcomes.” We could argue about what is thebest way to punish murderers, but perhaps it would bemore productive to create conditions in which therewould be fewer murders. The quoted sentence refersthe reader to the relevant entries in which Miron showswhat the causal links are.

Oddly, there are no entries for “rights” or “liberty.”This seeming lacuna is explained when one reads theentry “consequential versus philosophical libertarian-ism,” in which Miron contrasts the approach he favors,


Book Reviews

which he refers to as “consequentialist,” with the“philosophical,” or rights-based, approach. He arguesthat the latter approach is poorly supported and in anycase less useful when trying to get others to see thebenefits that libertarianism offers to a society. There issomething to be said for the latter point, but the formerpoint is belied by dozens of books by philosophers whoexplore the possible meanings of rights and liberty.Miron then says that the rights-based approach is con-sequentialist in that rights theorists claim that respect-ing rights has the best consequences. While a correctway to characterize John Stuart Mill, this doesn’t reallyencompass the point of rights for John Locke or forneo-Lockeans and neo-Aristotelians.

But to dwell on this intra-libertarian dispute wouldbe to diminish the overall quality of the book. Libertar-ianism from A to Z is accessible and readable, and makesits points clearly and concisely. Libertarians will want tohave it partly as a reference work.You may already havecome to accept libertarian principles but not rememberhow fiat money works. But it is also an excellent choiceto recommend (or give) to friends or relatives who donot agree with this approach but are open-mindedenough to want to inquire. Miron has thus done us agreat service.

Aeon Skoble ([email protected]) is a professor of philosophy andchairman of the philosophy department at Bridgewater State University inMassachusetts.

Freefall: America, Free Markets, and the Sinking ofthe World Economyby Joseph E. StiglitzW.W. Norton • 2010 • 361 pages • $27.95 hardcover;$16.95 paperback

Reviewed by Lawrence H.White

In 2001 Joseph Stiglitz was co-recipient of the Nobel Prize in

economics, a fact prominentlynoted on the dust jacket of Freefall,his book on the financial crisis. In2002 Stiglitz and two coauthorsproduced a report, commissionedand published by the government-

sponsored housing agency Fannie Mae, stating that therisk of a failure by Fannie Mae was “extremely small”;indeed, “under the assumptions they adopted, the riskto the government from a potential default on GSE[Fannie and Freddie] debt is effectively zero.” Thatreport is mentioned nowhere in Freefall.

In 2008 Fannie Mae (and its sibling, Freddie Mac)both failed. Their debts were assumed by the federalgovernment. The loss imposed on taxpayers wasrecently estimated by the Congressional Budget Officeat $325 billion through 2011, with additional losses to come.

In the above-mentioned report Stiglitz and hiscoauthors noted the view that there was an implicitgovernment guarantee that enabled Fannie and Freddieto borrow at below-market interest rates. Their esti-mates of taxpayer risk were based on the assumptionthat “the implicit government guarantee on GSE debtis equivalent to an explicit guarantee.” In Freefall, bycontrast, Stiglitz declares, “Fannie Mae began as a gov-ernment-sponsored enterprise but was privatized in1968. There was never a government guarantee for itsbonds; had there been, its bonds would have earned alower return, commensurate with U. S.Treasuries.”

That statement is seriously misleading. Fannie (andFreddie) had an all-but-explicit guarantee and receivedother favored treatment from the government.Reflecting the implicit guarantee, their bonds paidlower yields than those of other private financial insti-tutions. Their borrowing-cost advantage was worthbillions per year.

The misleading treatment of Fannie Mae and Fred-die Mac is just one example of a pervasive feature ofFreefall: It often traffics in ideological spin. Stiglitznotices the mote of ideological bias in the eye of “thosewho have done well by market fundamentalism,” butignores the beam in his own.

Free of false modesty Stiglitz describes himself as amember of “a small group of economists” who in theyears before 2008 “tried to explain why the day ofreckoning that we saw so clearly coming had not yetarrived.” He views himself as a courageous outsider, butit is difficult to share Stiglitz’s outsider picture of him-self in light of the well-placed insider roles he has occu-pied during his career: chairman of the President’s


Book Reviews

Council of Economic Advisers (1995–97) and chiefeconomist at the World Bank (1997–2000).

A major theme of Freefall is that incentive-distortinggovernment regulations had little to do with the finan-cial crisis.The plot line of his narrative is indicated bythe title of chapter six: “Avarice Triumphs over Pru-dence.”The crisis happened in a “deregulated market,”or a market characterized by “lax regulation,” and so “itwas something that Wall Street did to itself and to therest of society.” He writes of “the deregulatory frenzy ofthe 1980s, 1990s, and the early years of [the 2000s],”and “the current rush to deregulation,” events not evi-dent in the actual historical record.

Stiglitz makes his case for government interventionby holding free markets to the straw-man standard offrictionless efficiency. He touts his own academicresearch as showing that when the conditions for per-fectly frictionless efficiency are not satisfied,“there [are]always some government interventions that could makeeveryone better off.”

This is argument by existence proof: The brief forgovernment intervention is that we can imagine a casein which it improves things. It could make everyone bet-ter off—assuming an ideally omniscient and benev-olent intervener. Might not actual government inter-veners fail to meet the conditions for their own perfec-tion? Might they fail to know just where and how tointervene?

At least Stiglitz recognizes that government policiesplayed a crucial role in creating the housing bubble. Henotes that the Federal Reserve’s loose monetary poli-cies under Greenspan fueled the housing boom andacknowledges the role of the moral hazard fostered bytoo-big-to-fail policies. He points out the cronyisminvolved in bailouts to Wall Street, particularly from theFederal Reserve Bank of New York.

Stiglitz offers a straightforwardly Keynesian analysisof the Great Recession, blaming it on insufficientaggregate demand. Therefore the government should“attack with overwhelming force” in the form of mas-sive stimulus spending, an approach he suggests mightbe called “the Krugman-Stiglitz doctrine.”

Overall the book is a patchwork of nonscholarlyaccounts of historical events beside attempts to renderscholarly economic theories into plain language. In

many places the book disappointingly reads as thoughthe author lacked the time to state his case systemati-cally and coherently, to anticipate the strongest objec-tions to his arguments and state them fairly, thenaddress them carefully with evidence.

Lawrence White ([email protected]) is a professor of economics at GeorgeMason University.

The Politically Incorrect Guide to Socialismby Kevin D.WilliamsonRegnery • 2011 • 272 pages • $19.95

Reviewed by George Leef

What do the follow-ing have in common:

hungry Venezuelans, starvingNorth Koreans, ecologicaldevastation in the formerSoviet Union, and functionallyilliterate students in Washing-ton, D.C., high schools? Giveup? They are all consequencesof socialism.

In his book The Politically Incorrect Guide to Socialism,economics professor and National Review editor KevinWilliamson gives the reader an easily understood yethighly informative disquisition on the nature of social-ism, its inherent flaws, and the reasons it continues tospread. In connection with that last point, two ofWilliamson’s chapters cover the political infatuationwith “energy independence,” which he argues is social-ist in essence, and the push to saddle Americans withthe politicized medical care system known as Oba-macare.

Williamson’s arguments are sharp and his examplesilluminating. His book is like a wrecking ball going towork on the already feeble edifice of socialism.

“Hold on a minute,” some will say.“You can’t com-pare the bad things that happen in a totalitarian statelike North Korea with our well-intended and generallypopular public school system in America.” Williamsonshows, however, that the crucial element of socialism ispresent in both, namely governmental control over theprovision of goods and services that would otherwise


Book Reviews

be done by private enterprise. That invariably leads towaste and inefficiency—or even worse.

Williamson does a first-rate job of explaining whythose arrangements stifle productivity, depress quality,and hinder innovation. It is because government offi-cials (and the type of government is immaterial) do notknow what consumers want. That information onlycomes from the market’s price system, which socialismprevents from working. It is also because governmentofficials have no incentive to satisfy consumer wantssince their money is not given by buyers but taken fromtaxpayers. Starving peasants in Korea and illiterate stu-dents in the United States—the roots are the same.

The poverty of India has been compared to theremarkable wealth enjoyed by the people of HongKong and Singapore before, most famously by MiltonFriedman, but that is no reason not to emphasize itagain. Following World War II, Williamson observes,India was seemingly poised for great economic expan-sion, having suffered little from the war and benefitingfrom infrastructure built by the British. India’s econ-omy, however, remained stagnant due to the naivesocialism of Nehru, the first prime minister, whoadmired Soviet central planning. Grinding povertygripped most of the country.

Singapore and Hong Kong, in contrast, had sufferedconsiderable war damage. Nevertheless both enjoyedrapidly rising incomes for all income classes. The factthat prosperity was widespread is important in headingoff the common objection that capitalism only helps afew. Those two city-states were able to escape frompoverty by rejecting socialism and adopting laissez faire:prices were free, investors could seek profitable oppor-tunities without government interference and keeptheir earnings (or swallow their losses) and taxes andregulations were minimal.

Williamson also points out that in recent years Indiahas begun rapid economic development, but onlybecause new leaders have lightened the heavy yoke ofsocialism.

Defenders of socialism almost always point to Swe-den and say that its experience proves that socialism can work. Williamson’s chapter “Why Sweden Stinks”refutes that notion. Sweden seemed to have the best ofall possible worlds—a high standard of living combined

with an expansive “safety net” and generous govern-ment benefits.The trouble is that socialism is unsustain-able because it erodes the human qualities that built upthe wealth that the socialist state consumes.Williamsonwrites that Sweden “is rapidly transforming itself intothe sort of society that will not be able to support therelatively successful welfare-state arrangements thatcharacterized it throughout most of the twentieth cen-tury.”As Hayek observed, socialism changes the charac-ter of the people gradually, undermining habits ofwork, thrift, and self-reliance. We are seeing that inSweden.

Speaking of Hayek, another of his famous insightsregarding socialism was that under it, the worst peopleusually rise to the top. I wish that Williamson hadincluded a chapter on that point.We hear so often fromsocialism’s advocates that their system would workbeautifully if it were controlled by good people ratherthan murderous dictators like Stalin. It would have beenworth several pages to attack the idea that there is somemagic formula to keep vicious, power-mad peoplefrom scheming their way to the top of a system thatgives them what they crave.

Finally, although I applaud Williamson’s effort, hehas bundled together under the label “socialism” severalpolicies better labeled “corporatist” or “collectivist”since they don’t entail government ownership or aboli-tion of the market economy—only interventions thathamper it. Ethanol subsidies are bad, but we don’t havea federally owned energy sector and “public education”doesn’t prevent (though it surely hampers) home andprivate schooling. Such distinctions are important.

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


Book Reviews

New Threats to Freedom: From Banning Ice CreamTrucks in Brooklyn to Abandoning DemocracyAround the Worldedited by Adam BellowTempleton Press • 2010/2011 • 304 pages • $20.76hardcover; $11.96 paperback

Reviewed by Wendy McElroy

New Threats to Freedom,edited and introduced

by HarperCollins’s executive editor Adam Bellow, is an ambi-tious anthology. Its premise:The twentieth century facedunique threats to freedom, suchas communism and fascism, andthe 21st century equally con-fronts unique challenges to the

preservation of freedom.Thirty renowned authors examine 30 of those

“threats,” which include the emergence of sharia lawwithin western nations, the paradoxical uniformity that“politically correct” diversity has spawned, the aban-donment of democracy promotion abroad, the Stateregulation of daily life, the imposition of campus speechcodes, and the “threat” of cyber-anonymity.

At first glance the “new threats” seem like a grab-bag of issues that will rouse and rile a reader committedto individualism . . . and they do so in rapid secession.

The thought-provoking essay “The Isolation ofToday’s Classical Liberal,” by legal scholar Richard A.Epstein, appears directly before the socially conservativeessay,“Single Women as a Threat to Freedom,” in whichantifeminist Jessica Gavora dismisses a plausible lifestylechoice largely because “single women are pro-statist.”“The Rise of Antireligious Orthodoxy,” by conservativeMark Helprin, directly precedes an essay by the notori-ously antireligious left-radical Christopher Hitchens;the juxtaposition is not meant to provide balance, sinceHitchens deals with the issues of multiculturalism anddiversity.

Yet clearly this is a carefully constructed anthology.At a third or fourth glance, an integrating themeemerges. At its root New Threats is a socially conserva-tive collection on issues that this movement assesses as

threats; the anthology’s libertarian contributors indicatewhere these two movements intersect.

Consider the excellent essays by libertarians MaxBorders and Katherine Mangu-Ward.

In “The Urge to Regulate,” Borders recounts howbureaucratic regulation crushed his dream of starting asmall home-based business designed to sell products ata farmer’s market. He imagines a parallel world without“regulatory barriers,” in which hard work and reputa-tion are allowed to succeed. Then, poignantly, Bordersspeculates about “the possible worlds that governmentinterference destroys.”These are populated by workingpeople who long to provide for their families.

In “The War on Negative Liberty,” Mangu-Wardanalyzes the bizarre spectacle of Americans asking thegovernment to strip them of lifestyle choices likesmoking or consuming trans fats. Or at the very leastthey wish government to impose punitive taxes on suchchoices. She compares the Taliban’s prohibition ofwomen eating ice cream to the Brooklyn mom whoturns in an unlicensed vendor. The common denomi-nator: “[B]oth want the same thing—a targeted ban onice cream.”

Borders and Mangu-Ward address fundamentalquestions that mirror each other. Borders asks, “Whatmakes people want to control others?” Mangu-Wardasks, “[H]ow could people who cherish freedomclamor for the state to take away their choices?”

In opposing government regulation of business andits imposition of political correctness on food choices,the two essays exemplify issues on which libertarianismand social conservatism converge. Similarly, a few non-conservative authors like Hitchens touch on the rareareas of confluence between the right and other posi-tions. In areas of difference, however, it is the conserva-tive voice that is heard. As such New Threats is afascinating window into the psychology of social con-servatism and the issues that will be “burning” for themin the future.

What are some of the differences on issues? Perhapsthey are most pronounced in foreign policy. New Threatsauthors equate democracy with liberty and think thatAmericans should export it. In “The Abandonment ofDemocracy Promotion,”Tara McKelvey—a senior edi-tor at The American Prospect—claims such exportation


Book Reviews

“belongs high on the U.S. foreign-policy agenda andshould be supported by substantial resources.” FormerNew Republic contributing editor James Kirchick con-cludes in “Transnational Progressivism” that “any threatto American global predominance . . . is in and of itselfa threat to freedom, not only to our own, but especiallyto those people living in dark places.”

An aggressive foreign policy designed to export aspecific political system is a difference of opinion withlibertarians, indeed.

New Threats is, in rapid turn, provocative, annoying,and enlightening. It is also puzzling in its omission ofcertain issues and seemingly obvious points. For exam-ple, given the 21st-century focus, little discussion oftechnology occurs outside of a critique of cyber-

anonymity.Abstract “ingratitude” is included as a threatto freedom whereas concrete reproduction and popula-tion control in light of new technologies is not. In pre-senting sharia law as a threatening parallel legal system,it is not clear why sharia courts could not operate asHasidic ones currently do.

Nevertheless New Threats is fascinating andextremely well written. Social conservatives will bedelighted; libertarians will embrace fully half of it; Pro-gressives with high blood pressure had best be selective. . . or at least consult a doctor beforehand.

Wendy McElroy ([email protected]) is the author of several booksand editor of several more. She manages two websites: wendymcelroy.comand www.ifeminists.net.


Book Reviews

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

Employer Speech and Freedom of Association

The Pursuit of Happiness

Ihave argued that forcing a worker to submit to thewill of a majority of his colleagues on the questionof whether a union will represent him is a violation

of that worker’s freedom of association (tinyurl.com/cepz2s). Association with a union is rightly a matter ofindividual not collective choice. Here I want to con-sider attempts by unions further to diminish workerfreedom of association by trying to silence or at leastobstruct employer campaign speech in the run-up torepresentation elections.

Freedom of association in unionrepresentation elections requiresthat workers be able to cast aninformed vote. Workers must haveaccess to both pro- and anti-union-ization arguments.We can count onunion organizers vigorously to pres-ent pro-unionization arguments.They start doing so long before anyrepresentation election is scheduledbecause they must get 30 percent ofeligible workers to sign cardsrequesting unionization before theNational Labor Relations Board(NLRB) will order an election.

We usually can count on employ-ers vigorously to present anti-unionization arguments, but theyhave less time than union organizershave to make their case.They oftendon’t know about union organizing efforts until theunion has collected the requisite signatures. The timebetween the NLRB’s order to have an election and theactual election is crucial if workers are to be able tohear the employer’s side of the story and thus be able tomake an informed choice about how to vote.

In 1947 Congress amended Section 7 of theNational Labor Relations Act (NLRA) to make explicit

the right of workers to refrain from unionization. Togive effect to that right, Congress added Section 8(c),which affirmed the right of employers to engage in freespeech during election campaigns. Congress wantedworkers to hear both sides of the debate over whetherto unionize so that they could make informed decisions.

In 1948 the NLRB endorsed this intent of Congressby declaring, in General Shoe Corp., that its primaryduty under the new law was to support workers’ right

to “make a free and fair choice” onthe question of whether to union-ize. Absent force or fraud, electiondebate is, the Board asserted, thebest way to enable workers to do so.

In Linn v. United Plant GuardWorkers (1966) the Supreme Courtnoted approvingly that the NLRBdoes not “police or censor propa-ganda used in the elections it con-ducts, but rather leaves to the goodsense of the voters the appraisal ofsuch matters, and to opposing par-ties the task of correcting inaccurateand untruthful statements.” TheCourt went on to affirm that“debate . . . should be uninhibited,robust, and wide-open, and that itmay well include vehement, caustic,and sometimes unpleasantly sharpattacks.”

Notwithstanding the clear intent of the 1947 Con-gress, and the eager endorsement of that intent by the1948 NLRB, and the 1966 Supreme Court, the presentNLRB demurs. It takes its orders from unions, andunions seek to silence employer speech.


Charles Baird (www.charlesbaird.info) is a professor of economics emeritusat California State University at East Bay.

Employers who don’t follow union marching orderscan face public smear campaigns, including theappearance of “Scabby the Rat.”Schlomo Rabinowitz [flickr]

The failed card-check bill would have silencedemployer speech because it would have forced anemployer to recognize a union as the monopoly bar-gaining agent over his employees if it collected the sig-natures of at least 50 percent of them on cardsrequesting such recognition. There would be no elec-tion campaign during which employers could givetheir side of the debate.

Card Check by Fiat

Union cronies in Congress failed to deliver on cardcheck, but on August 26, 2011, the pro-union

NLRB troika—Mark G. Pearce, Craig Becker, andWilma B. Liebman—created a limited form of cardcheck by regulatory fiat. In its Lamons Gasket decisionthe troika overturned the Board’s 2007 decision inDana Corp.

The NLRA permits an employervoluntarily to recognize a union asthe monopoly bargaining agent over his employees if the union col-lects the signatures of at least 30 per-cent of them on cards that requestsuch recognition. In Dana Corp. theNLRB ruled that when an employerchooses to grant recognition to aunion without first letting theemployees vote on whether to besubjected to union rule, the affected employees couldimmediately demand an election to challenge theemployer’s voluntary recognition.

In Lamons Gasket the troika declared that theaffected employees would have to wait for at least sixmonths, and in some cases up to one year, before theycould hold a challenge election.This means that unionrule over workers, lasting at least six months, can beachieved by a 30-percent card check rule.

Why would an employer choose to turn his workersover to union rule without a secret ballot election?Because he fears a “corporate campaign.” FollowingSaul Alinsky’s Rules for Radicals, a union picks a target

enterprise to unionize and demands that the target notresist. If the target chooses to defend itself and its work-ers against unionization, the union forms coalitions withleftist community-activist groups to try to destroy thetarget’s standing in the community and its relationshipswith lenders, suppliers and customers.The union and itsallies smear the target and its officials as monsters whowant to take away their employees’ freedom of associa-tion.The union and its allies, often including benightedclergy, claim the moral high ground. But employers whochoose to resist really occupy the moral high ground.They promote their employees’ freedom of association.

Shortened Election Process

In another attack on employer campaign speech, inJune 2011 the NLRB troika decided to cut the rep-

resentation election process from its present median of38 days to ten days.With less time tospeak, employers will speak less.

There are several reasons for work-ers to choose to be union-free. Forexample, union-free enterprises offermore job security than their union-impaired counterparts because the lat-ter are too sclerotic to frequentlychanging global market conditions.Union-free firms can reward workerson the basis of productivity. In union-

impaired firms pay is based on job classifications andseniority. Union-free workers are free to excel, whileunion-impaired workers are chained to a contract.Unions promote an adversarial relationship betweenworkers and employers, while union-free employers arefree to enlist workers as partners in building durableand growing value.

The NLRA illegitimately forces workers into repre-sentation elections.To make matters worse, the currentNLRB seeks to obstruct the access of workers to argu-ments in favor of remaining union-free. Employers arethe most reliable conveyors of those arguments.Employers must be free to speak.


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

Union rule overworkers, lasting atleast six months, canbe achieved by a 30-percent cardcheck rule.

Documents

VOLUME 62, NO 1 JANUARY/FEBRUARY 2012 · John Stossel brands government a job destroyer.Charles Baird looks at the latest outrage against free speech.And Tyler Watts, bombarded with