Their description of the fiscal nightmare known as Social Security is a must-read for both academics and interested laymen. It’s a credit to Kotlikoff and Burns that they can produce a page-turner for both groups, despite some technical sections on general equilibrium, intergenerational accounting, and actuarial science.

The picture they paint isn’t pretty. Social Security is in crisis because it’s organized as an intergenerational wealth-transferring scheme in which the assets of workers are turned over to current retirees. It’s a welfare program, pure and simple, but a unique one in that it gets its own special tax—a tax on labor.

It is also unique because since the late 1960s Social Security expenditures—though not its revenues—have been off-budget, an accounting rule that would never be tolerated in the private sector where investors would punish such deceit. But it is one that serves the government’s needs because it understates budget deficits year to year. For decades Social Security has allowed the feds to appear less fiscally irresponsible than they really are.

The authors note that at Social Security’s creation, 16 workers supported each retiree. That ratio was achieved because the labor force was so young and because oldtimers just didn’t get that old. (The late John Attarian pointed out that the New Dealers’ purpose in Social Security was no higher-minded than to get older workers to leave the workforce. Their presence was blamed for the failure of New Deal programs to reduce unemployment.) Those were Social Security’s glory days.

But life expectancy has been rising and the worker-to-retiree ratio has been falling. Result: The ratio now stands at 3:1, and over the next 30 years, the figure is expected to fall to 2:1. The longer reforms are put off, the greater the burden placed on future generations to pay for current spending, and it is here that Kotlikoff and Burns make their most compelling case. We have long been told that the national debt represents spending to be paid for by future generations, but we are rarely told that the special accounting rules applied to Social Security (and Medicare/Medicaid) mask the debt’s actual size. In truth, the fiscal gap—defined as the present value difference between the government’s expected expenditures and receipts—is $45.5 trillion. This is six times higher than the official national debt figure.

Kotlikoff and Burns note that this is the government’s number—well-hidden in the fine print of Treasury documents—and that it’s probably a low-ball estimate. What’s more, it was computed before passage of the new Medicare drug benefit. That massive expansion promises to increase the fiscal gap to over $51 trillion. Each year that these programs or the tax system that funds them are not reformed, the fiscal gap grows by $1 trillion.

The book’s chief shortcomings are two. The first is in Kotlikoff and Burns’s personal saving system. While their approach improves on the various proposals currently being discussed in Washington, it still maintains the form of a compulsory saving program with the inherent assumption that individuals are incapable of planning for their own retirement.

Why not simply abolish Social Security outright, cut everyone’s taxes, slash spending, and allow the market to work? There would be more jobs available for workers in short order, resulting in increased wealth creation and greater self-sufficiency across society. (Provision for current retirees does not require continuation of this failed system.)

A second problem with the authors’ approach is that their description of the future and proposed solution assume that the size and continuing growth of the state won’t change. But it seems likely that as Social Security inflicts more costs on the economy, some of the burden of big government will become harder to hide from the masses. The result will be a crisis for politicians, who will find it harder to redistribute wealth. For the majority of Americans, who are net taxpayers (as opposed to net tax consumers), the crisis may actually be an opportunity to highlight the bankruptcy of the state, in both theory and in real life.

While their book is flawed, Kotlikoff and Burns should be applauded for calling attention to Social Security’s moral and financial bankruptcy.

Mix together surging gasoline prices, a conflict in the Middle East, and a presidential election year, and what do you get? Given the sorry state of economic education among our political elites, you are likely to find bad energy – policy proposals and an increased willingness to intervene in the very market forces that are necessary to promote trade, peace, and wealth creation.

This likelihood is exemplified in the recent calls for raising the Corporate Average Fuel Economy (CAFE) standards. These 1970sera regulations require the average car produced by an automobile manufacturer to meet a prescribed fuel-efficiency target in terms of miles per gallon.

They have always been popular with the left. Presidential candidate John F. Kerry’s web site calls for increasing “our fuel economy standards to 36 miles per gallon by 2 0 1 5 . ” An Episcopal Church Public Policy Network “White Paper” argues that the “biggest single step we can take to save oil and curb global warming is to raise [CAFE] standards for both cars and light trucks.” Newspapers from the Seattle Times to the Birmingham News have editorialized this year in favor of raising CAFE standards.

This knee-jerk proposal becomes popular every time gas prices spike at the pump, and we couldn’t disagree more. Not only would raising CAFE requirements restrict individual choice and weaken the property rights of manufacturers, but the costs to drivers almost certainly outweigh the benefits, on average. This means that the cure would be worse than the disease.

CAFE standards were raised significantly from 1975 to 1984, a period when we experienced much higher gasoline prices, in real terms, than we are experiencing now. In 1980, for example, the price of gasoline hit $ 1 . 5 0 per gallon in Blacksburg, Virginia. Adjusted for transportation-related inflation from February 1980 to February 2 0 0 4 , the current price per gallon of that gasoline would be approximately $2.98. People responded to that dramatic price increase by changing their behavior in ways that reduced the overall cost of driving: they carpooled more; they planned their shopping more carefully to reduce the number of driving trips taken; and they bought more fuelefficient cars. Oh, and by the way, the federal government raised CAFE requirements.

The high price of gasoline not only motivated changes in driver behavior, which led to decreased demand for gasoline; it also stimulated substantial new oil exploration and development of new reserves. The combination of reduced demand and increased supply had a predictable, if not inevitable, effect on gasoline prices. Starting in the mid-1980s, gasoline prices started coming down. . . and down . . . and down. Just three years ago, we were paying well under a dollar per gallon in many parts of the country.

Much more than CAFE regulations caused such a welcome fall in prices. In fact, the regulations themselves can have the unintended effect of increasing gasoline demand if they encourage drivers to spend additional time on the road in more fuel-efficient cars than they would in less fuel-efficient cars. If this effect results in no net change in gasoline consumption, then CAFE is inherently selfdefeating in its stated purpose.

Despite this possibility, the price of gasoline tumbled in the 1990s because of market forces, not because of CAFE standards (which, after all, have been set at 2 7 .5 miles per gallon for the new passenger car fleet since 1 9 9 0 ) . This result is hardly surprising. Price signals dispersed among millions of independent economic actors play a much more significant role in affecting gasoline prices than commands from a few bureaucrats holed up in Washington, D.C.

Such economic history suggests that gas prices have both risen and fallen in spite of CAFE standards. Indeed, there are compelling reasons to believe that such standards only intensify the recent increase in the real cost of driving for motorists. Technologically, automobile manufacturers can meet higher standards in two principal ways. They can improve engine processing of the fuel and reduce the weight of vehicles (since a gallon of gasoline can push a lighter vehicle farther than a heavier vehicle). Automobile firms, which have paid over a half a billion dollars since 1983 in CAFE related civil fines, have a strong incentive to implement some combination of these solutions. Historically, they did so by lightening the vehicles, replacing steel with aluminum. Because steel construction offers more protection, lightening the vehicles dramatically increased the safety risk and financial costs of being in an accident. (A 2 0 0 1 study done by the Transportation Research Board, an “independent adviser to the federal government,” concluded that lighter and smaller cars were likely responsible for 1 , 3 0 0 – 2 , 6 00 additional highway deaths in 1 9 9 3 . 1)

Air Bags Required

In response to this unintended consequence of government intervention in the market, air bags were required in the newcar fleet, another costly result of CAFE because federal safety rules do not allow for air bags to be reused. “Add the cost of labor, more than $ 1 , 0 0 0 for each air bag, and even more for the sensors, and the result is a totaled car,” writes Eric Evarts in the Christian Science Monitor.2 Insurance-premium inflation, anyone?

Two points should be remembered the next time we read about traffic deaths on our highways. First, the lighter and less safe fleet of cars, thanks to CAFE, distorts the automobile market by causing some individuals to keep older and heavier cars longer than they otherwise would, and by increasing the demand for sports-utility vehicles, which escape such regulations. In the absence of more stringent mileage standards, at least some of these individuals would gladly pay more for gasoline (per year) in order to drive less fuel-efficient, but safer cars. There simply is no defensible reason to deny those people the opportunity to make the relevant implicit tradeoffs themselves, rather than trusting that the supposed savings in gasoline prices would, in fact, exceed the benefit from safer vehicles.

Second, CAFE standards inevitably lead to significantly higher vehicle costs and higher risk costs with little evidence that they are responsible, by themselves, for lowering gasoline prices. This implies that the social costs of raising CAFE standards substantially exceed the social benefits. As the saying goes, the road to hell is paved with good intentions. We’d like to see lower gasoline prices. Thanks to the laws of supply and demand, the existence of higher than – average prices virtually guarantees that prices will come down. Raising CAFE standards hinders this process and puts us on a road we don’t want to be driving.

1. “Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards.” See Finding 2 at http://books.nap.edu/books/0309076013/html/3.html#pagetop.
2. “New Cars Are Getting Too Expensive to Fix,” Christian Science Monitor, April 19, 2004.

Cash for Clunkers, of course, was the popular term for the Car Allowance Rebate System, which funded down payments of up to $4,500 for new cars if older-model cars were traded in and destroyed. The program was temporarily discontinued and then officially ended after barely a month of operation. Around 700,000 vehicles were purchased as a result of the program, according to government and industry statistics. It wound up costing $3 billion.

Talk Show Guy was right, I thought, careful not to cut myself. When you offer $3 billion in free money to people, why was anyone shocked that they went for it? And if you offer free health care to a supposedly narrow segment of the population that cannot now access it, why do economic planners create budget projections that assume healthcare demand will remain static?

But that wasn’t what caused me to move the razor from my face. That had to do with all of the talk about Cash for Clunkers being such a good program. It clearly wasn’t, or at least it shouldn’t have appeared so to anyone who remembers the basics of college economics. From this perspective, there is so much wrong that it’s hard to know where to start.

Cleaning Up Inventories, Not the Environment

First, let’s dispense with the notion that this bill had anything to do with improving the environment. Getting people into cars that get better mileage often leads them to drive more, negating any benefit from the switch. What’s more, scrapping hundreds of thousands of “clunkers” en masse while encouraging production of new cars to replace them isn’t exactly an environmental blessing either.

The real purpose of the program was to help car dealers sell off the excess supply of 2009 vehicles that consumers weren’t buying at the prices dealers preferred to charge. Giving people free money to put toward a down payment was a way for Congress to pay back a powerful lobby that produced an unsustainable level of output during the Fed-fueled boom. It’s reminiscent of those New Deal programs—like the Agricultural Adjustment Act—that also tried to thwart falling prices by destroying perfectly good and usable products that otherwise would have lowered prices. In the 1930s people rioted when the government forced farmers to pour perfectly good milk down sewer drains. No one’s rioting today because now the government is more richly compensating those who own the property being destroyed. (For a fascinating, contemporary account of the Agricultural Adjustment Act and other New Deal programs, see journalist John T. Flynn’s The Roosevelt Myth. For a more recent account, see Amity Shlaes’s The Forgotten Man: A New History of the Great Depression.)

Bootleggers and Baptists, Dealers and Greens

What we have is a situation described by Clemson University economist Bruce Yandle’s “Bootleggers and Baptists” theory for the growth of government. According to Yandle, government often grows because two otherwise opposite groups are able to join forces to pass legislation that neither would have been able to get passed individually. His example applied to groups that supported alcohol prohibition: The bootleggers benefited from the outlawing of their “legitimate” competition, and religious groups opposed liquor sales as a matter of morals. When both groups joined forces, legislation became far more likely to pass.

Applying Yandle’s theory to the clunker program, the bootleggers were car dealers who faced low consumer demand and sales revenues at current prices, while the Baptists were environmentalists who believed that older-model cars insult mother earth. The prospect of an old-car trade-in program unites both groups.

Cash for Clunkers certainly had its share of winners and losers. Car dealers who experienced summer profits surely won, as did those individuals who otherwise would have gone without cars. And let’s not forget the banks and finance companies that now have loan assets on their books. You can be sure the members of Congress who voted for this bill will remind dealers of their generosity in directing other people’s money their way in this old-fashioned shell game.

And it is a shell game, because the losers here are the poor and the lower middle class—the very groups in the most precarious economic shape 18-plus months into the Great Recession. They suffer in two ways. First, as primary consumers in the used-car market, they will see supply shrivel. Many cars that qualified for Cash for Clunkers still had long lives ahead of them.

The poor will also pay in the form of higher prices resulting from the inflation that will be required to finance the program. The government is broke, with tax revenues falling while spending soars at levels even higher than those associated with the profligate Bush administration. In terms of cost, Cash for Clunkers is at least twice as expensive as its New Deal inspiration, the Agriculture Adjustment Act. This program will be paid for, at some time, with monetary inflation furnished by our not-so-independent central bank, and we will pay for it in the form of higher prices. This is why inflation is a tax, and a regressive one at that.

Indeed, when I first read about Cash for Clunkers, I thought it should have been named the “I Hate the Poor” Act of 2009 because—you can be sure—this program sticks it to those members of society least able to manage in hard times. In the end they will find maintaining economic autonomy all the harder, making it more likely they will become dependent on government in the future. The cynic in me wonders if this might be the actual intent.

Nonetheless, Talk Show Guy thought this was a good program. He liked it! I bet he got a good deal on a new car, too. Hope he enjoys his ride.

This article first appeared at www.fee.org.

It was not always this way, and how we got here is the focus of Bill Kauffman’s Ain’t My America. The book is a pithy romp through American history, focusing on antiwar and antistate advocates from eighteenth century Antifederalists to the brave, post-9/11 minority who still dare to say no to an overweening federal government. The result is a remarkable effort that connects John Randolph to Freda Payne, George Washington to George McGovern, William Cullen Bryan to Bob Dylan, and a host of noble and colorful iconoclasts in between.

Kauffman identifies a long-running American strain of individualist thought crucial to a free society, one with two notable characteristics. The first is a recognition of the devastating effects of war on the natural order. Here Kauffman connects the popular dissent to the War of 1812, the Mexican and Spanish-American wars, the twentieth century’s world wars, the Cold War, and Vietnam. Common threads include the beliefs that war is unnecessary, that it serves vested interests over the general interest, that essential freedoms will be compromised in carrying it out, that the common man will pay with treasure and blood, and that it will lead to a permanently expanded state.

The second philosophical characteristic of a free society important to Kauffman is that of localism. Here the idea of maintaining roots and revering the local over the international—the anchored over the unanchored—is important for constraining the nation-state. Indeed, for a nation-state to grow, it needs dependents willing to abandon the ties of hearth, home, and family, if only because this helps when sending soldiers off to one of the 100-plus countries where the U.S. government has military bases. Kauffman emphasizes the important contributions of Allan Carlson of the Howard Center on the full costs of nationalism and militarization on families and communities. Kauffman concludes: “Divorce, dispersal, disruption of courtship patterns; ye shall know the warfare state by its rotten fruits.”

Kauffman introduces his readers to people like John Randolph, who opposed the War of 1812 by asking, “Who would suffer [by war]? The people. It is their blood, their taxes, that must flow to support it.” Noting the loss in freedoms war brings, Randolph added, “The Government of the United States was not calculated to wage offensive foreign war—it was instituted for the common defence and general welfare; and whosoever should embark it on a war of offence, would put it to a test which it was by no means calculated to endure.”

Another outspoken critic Kauffman introduces is George S. Boutwell, who had been Grant’s treasury secretary and later broke with President McKinley in opposition to the war with Spain and the (virtually unknown today) slaughter of Filipinos following their “liberation.” Asked Boutwell: “Is it wise and just for us, as a nation, to make war for the seizure and government of distant lands, occupied by millions of inhabitants, who are alien to us in every aspect of life, except that we are together members of the same human family?”

Such anti-imperialists of the nineteenth century would pass the baton to the Veterans of Future Wars and America Firsters of the twentieth, a time when criticizing the government’s wars could land you in jail. Kauffman describes a South Dakota farmer who served a year and a day in prison for saying, “If I were of conscription age and had no dependents and were drafted, I would refuse to serve. They could shoot me, but they could not make me fight.” Kauffman also describes the efforts to pass the Ludlow Amendment in the late 1930s to counter the New Dealers’ well-known penchant for warfare. This amendment would have required all declarations of war to be approved by national referendum, but it failed in a close House procedural vote.

Lastly, Kauffman chronicles the rise of the New Right following World War II, led by a cadre of ex-communists to promote the militarization of society in order to defeat “the god that failed them, the Soviet Union and world communism.” The great individualists who bemoaned the costs of that campaign included Howard Buffet, Harold R. Gross, Murray Rothbard, Robert Taft, Felix Morley, and others, many of whom wrote for The Freeman.

Ain’t My America is not your high school civics text. In our era of centralized education with No Child Left Behind, that may be its strongest attribute.

Those were my glory days of e-mail. I miss them. Nowadays, it seems that for every ten e-mails I receive, eight are unsolicited sales pitches, also known as spam. and of those eight, half offer samples of crude and dehumanizing porn. As a result, I never check my e-mail when my children are nearby.

Though I once wrote in praise of e-mail, I now consider it a mixed bag. A couple of my friends have forsworn it entirely, having decided that the costs outweigh the benefits, and it is hard not to agree that they have a point. There have always been the good and the bad aspects of e-mail, but it seems that lately, based on my own inbox and my ever-growing list of filtered terms, the bad aspects seem to be trumping the good.

My experience reflects the national trend. According to the Wall Street Journal, the amount of spam as a proportion of all e-mail on the Internet increased by 350 percent between the summer of 2001 and the summer of 2002. It is now approaching 50 percent of all e-mail traffic. Spam makes up 70 to 80 percent of all incoming e-mail to America Online’s servers and 40 percent to Earthlink’s network.

The economics of spam explain its pervasiveness. Once a spamming system is set up, the marginal cost of sending an unsolicited e-mail is virtually zero. As a result, the smallest of response rates can make the process profitable. The rule of thumb is that while old-fashioned junk mail sent via the post office requires a response rate of 1 in 100 to be profitable, spam mail requires a response rate of 1 in 100,000. This greatly increases its appeal as a marketing tool.

For instance, a recent story in the Fort Worth Star-Telegram reported on an Internet marketer who mailed ten million e-mails a day offering eavesdropping software for $40. His annoying efforts result in 50 orders a day, allowing him to earn $700,000 a year. Not bad for a response rate of only 0.000005 percent. Following the law of supply, his success only signals other spammers to enter the industry, which is an extremely easy process. Anyone with a computer and an e-mail account can enter.

The result is a reduction in the appeal of an otherwise remarkable medium. After all, how many people would watch TV if the networks only showed commercials? The disgust is growing, and the politicians are listening, as evidenced by a recent “Spam Forum” conducted by the Federal Trade Commission and several bills working their way through both houses of Congress. This is a bad combination of events.

It is bad because solutions to problems such as these are ineffective, cannot be legislated, and will result in enriching offshore enterprises. In the aftermath of 9/11, the government has made clear its desire to regulate many forms of communication, particularly e-mail. The spam explosion provides a useful foil to justify such regulation on the basis that spam is simply another variant of market failure requiring state oversight.

Besides being incompatible with a free society, these responses are also incompatible with market theory that teaches us that the world in which we live is dynamic, not static, and that it takes time for resources to respond to problems that may hinder society. The market does not fail when the price of gasoline spikes, causing us to reallocate our gasoline usage until entrepreneurs respond to the change in price by redirecting resources to gasoline production. Indeed, it is the government that fails when it intervenes in this process, frequently causing the problems to persist needlessly.

For the same reason, we needn’t assume that the current spam scourge must necessarily be the norm, thus overruling whatever advantages we otherwise might have from e-mail and justifying government intervention. In fact, there is no way anyone can know how the nature of e-mail will change over the next five years. But the assumption that today’s bad conditions will persist indefinitely certainly does not square with practical experience in most every sphere of life. Although the modern state depends on such assumptions, they go beyond naiveté to enter the realm of the nonsensical.

Problems Create Solutions

Indeed, the problems themselves create the necessary conditions for entrepreneurs to offer various solutions. One can envision the problems resulting in the creation of private intranets, in which spammers pay for the right to solicit their wares. In fact, their payment could result in zero-price e-mail and web access for the non-marketers who use the system, thus funding it much like broadcast television networks. The provider of such intranets could regulate who spams and how much. Such a solution is technologically feasible now, although not yet practical. But if the costs continue to increase, market conditions could easily change to allow such a system to come about.

There are also many unique and clever ways that markets are responding to spam problems today. One company, SpamArrest (http://spamarrest.com), intercepts all e-mail that is sent to its subscribers, requiring senders to visit a web page and click a box allowing the e-mail to be sent to its final destination. The genius of this process is that it requires senders to follow through on their e-mails by doing something only humans can do. Such efforts would place a serious crimp in the work of the e-mail marketer mentioned above.

Other companies offer free services such as SpamGourmet’s (www.spamgourmet.com). They allow subscribers to submit faux e-mail addresses to companies that are likely to try to sell them to e-mail marketers. The users specify how many e-mails they wish to receive in response, after which they are “eaten.” Since the firms never see users’ real e-mail addresses, they never make it on e-mail marketing lists.

There are a myriad of other approaches too numerous to list here. The fact that no one will use e-mail if current trends continue is enough to guarantee that some solutions will be found. Just as markets provide sufficient regulation to maximize transactions, so will they provide tools necessary for e-mail services to maximize satisfied customers. As long as the state does not intervene in this corrective process, the glory days of e-mail will return. It will be as safe, effective, and beneficial as it was in years past.

Now excuse me while I clear out my inbox.

One list in particular makes the news every year where I live, and it receives more press than the college football rankings. This list compares the net “donors” and the net “winners” of the transfer game.

This game has become a trillion-plus dollar operation over the years, and it behooves us to know as much about it as possible, because we are all forced to play it. It is morally justified by an egalitarian ideal that is contrary to human nature, and thus requires force to impose it.

This is how it works: The Feds take money from us, keep a portion for themselves, and then give back the remainder in the form of spending projects. States that get more back than they give are called the winner states. States that get less than they give are called donors, thus giving the scheme a charitable aura. (In truth, calling them losers might result in their losing interest in playing.) A Washington, D.C.-area think tank called the Northeast-Midwest Institute www.nemw.org has been compiling lists of the top winner and donor states for several years. They result from studies of each state’s contribution in federal taxes and its take in fiscal spending. This is the transfer system, and it amounts to a zero-sum game: winner states can only win to the extent that the donor states lose. In 1999, my own state of Alabama was ranked tenth among the top ten winners. (See tables below.)

Invariably, the press reports these findings as good news for the winner states. For instance, in Alabama the press bias is that while local culture may be congenitally opposed to a large federal government, the state sure benefits from the system. However, it’s far from clear whether findings such as these are accurate depictions of a state’s fiscal health or its distribution of benefits.

Nobel laureate Milton Friedman once argued that increases in the money supply are distributed in the economy through what he termed “the helicopter effect.” If the Federal Reserve increased the money supply by $1 billion, Friedman said, the increase in money would be spread equally through the country, as though it were dropped from a helicopter at a high altitude.

As any undergraduate money and banking student knows, however, that is not true, and Friedman himself has backed away from this analysis. The newly created money isn’t evenly distributed among the population. Rather, the groups that benefit from the new money are those that receive it first. Usually, by the time the money is spread out across the entire economy, its benefits have been lost because of inflation.

Uneven Distribution

The same is true for fiscal spending as well. Federal spending in the states does not benefit each resident equally. Otherwise, if the results from these studies were to be taken seriously, federal spending in Alabama would be equivalent to each resident receiving a 50 percent federal tax refund. In fact, those individuals who directly receive the money are the actual beneficiaries.

In Alabama, as in most of the winner states, the lion’s share of this surplus goes to the military, benefiting areas of the state that house bases, arms depots, and training and testing facilities. But even in these areas, the economic benefits are not evenly distributed. Rather, they are limited to local firms that directly and indirectly serve these facilities.

Furthermore, if you live in another part of the state that is not affected by military spending, you may not benefit at all—and yet the state rankings imply that you do.

Alabama is likely to move up to a higher ranking next year if only because of the December 2000 storms that devastated the south. Millions of FEMA (Federal Emergency Management Agency) dollars will be added to the regular federal outlays earmarked for the state. If the 1995 Hurricane Opal disaster relief is any guide, the funds will go to construction firms that are politically well connected, not to those in the counties where the destruction actually took place or to organizations on the scene that are best situated to deal with crises at hand. Not only does this practice slow the rebuilding process, it also brings with it hidden costs, such as the squelching of private relief efforts that otherwise would have sprung up and promoted a quicker rebuilding effort.

This is not the type of spending that suggests an improvement in the quality of life, as is implied by these rankings. It only reflects the kind of growth that results from the destruction of capital. This amounts to forced spending that restores the status quo. Unfortunately, these are costs not easily measured by analyses of fiscal spending or easily included in the identification of winners and donors.

Cost of Capital Transfers

Another cost not conducive to measurement is the cost of transferring capital from private uses to those deemed necessary by the federal government. Taxation is simply forced capital spending, or the diversion of money from private uses to those determined by the transfer state. Alabama may receive some benefit from these capital flows, albeit unevenly distributed, but at a cost to donor states such as Connecticut, New Jersey, and Nevada. Individuals have less disposable income in these states to spend on things they deem important, and the money is transferred to support those causes deemed important by the political class. The larger this transfer system gets, the more force is required to maintain it. Certainly, this is a cost that does not make it into the analyses of the efficacy of fiscal spending.

Besides, it is far from clear that being among the nation’s leaders in net federal spending should be a game any state wants to win in the first place. No state ever became rich by depending on federal wealth transfers. Policies that create and attract wealth are no secret. A state becomes wealthy by protecting private property, maintaining a stable system of low taxes, decentralizing its infrastructure, and minimizing intervention in private capital flows. Such policies, from generation to generation, encourage good work habits, higher time preferences, and increased capital from other states where wealth is less secure.

Unfortunately, these are policies that will be pursued by the political classes that inhabit our state capitals only to the extent that they promote the mobilization of voting blocs that ensure the maintenance of power. As a result, economic and political incentives can be at odds with each other. Policies that reward the existing political class in the short run can hinder a state’s ability to develop a legal and economic infrastructure that promotes long-term capital creation and that encourages capital mobility and investment.

Federal spending can become an enemy of such outcomes. Increasing federal funding to the poor states enables them to avoid these reforms, while at the same time it penalizes rich states for implementing them. Why should a state correct for poor policy prescriptions if the federal government compensates for the resulting shortcomings? The long-run consequence of maintaining such a system is a skewing of incentives and a diminution of the ethos of wealth creation that allows states to become wealthy places in the first place.