Imagine how upset the ruling elite will be when it can spend money on nothing but so-called entitlements and interest? That would leave nothing for the military-industrial complex, nothing for business and farm subsidies, nothing for all the ways that politicians buy off constituents so they can be reelected over and over. If they try to keep spending on everything, total government expenditures would have to rise to half or even three-quarters of GDP.

Thus the ruling elite’s concern and the various reform fantasies. But the elite has few good options. Default on the debt would mean no more borrowing. Inflation won’t work. Raising taxes won’t do it either. Revenues as a percentage of GDP have been virtually constant since World War II regardless of tax rates, indicating that people adjust to the tax environment. (Revenues are historically low now because of the recession.)

Why couldn’t the politicians dramatically cut spending? The political system doesn’t typically reward spending cutters. People say they want government to spend less—on the things they don’t depend on. Among the biggest-ticket items are Social Security and Medicare (with tens of trillions in unfunded promises). Elderly people, made dependent on the State, vote in high numbers, and they will vote defensively. The special interests that live off a trillion dollars in annual “defense/security” spending—another big item—won’t let go easily either.

Let us then acknowledge the debt of gratitude due every politician who put us in this predicament. Each spending vote dug the hole deeper and made it harder to get out.

But aren’t the voters ultimately to blame? In a way, yes, but there’s more to the story. People are left no choice but to pay taxes, so when virtually every politician promises “benefits” in return for those coerced payments, what will most people do? The political establishment has implicitly sold the system as a big mutual-aid society. Most people don’t realize that government’s forced transfers are as much acts of robbery as those that occur in dark alleys. Nor do they understand the harm done or the opportunities forgone when government distributes the money. The well-heeled, well-organized, and well-connected have no trouble securing their subsidies and tax preferences, while sundry “benefits” are bestowed on others in return for their acquiescence in the corrupt process.

Some now call for spending cuts—modest in the scheme of things—while others would rather see higher taxes on the rich coupled with even more modest spending reductions. In its own way, each side seeks to preserve the welfare-warfare state. Several objections leap forth regarding the case for higher taxes: It’s not the politicians’ money, so taking it is immoral; hiking tax rates won’t raise as much money as they think (people adjust); the politicians can’t be trusted with the money anyway; and leaving it in the private economy would yield general benefits.

It’s hard to be optimistic. Until there is a deep rethinking of government, the public will not accept the drastic near-term budget cutting required to head off a fiscal crisis, much less the longer-term structural steps needed to prevent a repetition of what we’ve been through. People will need to learn that while the wish for “social security” in an uncertain world is entirely reasonable, the route to it is not Medicare, Medicaid, and Social Security—which tether people to the political class—but freed markets and voluntary mutual aid.

The fiscal problems have more than a fiscal solution. People would be less attracted to government succor if the barriers that raise the cost of initiative and independence were removed and individuals were freed to live without having to kowtow to power and privilege.

* * *

Commodity prices are rising worldwide but the Federal Reserve chief claims he’s not responsible. Gerald O’Driscoll says Ben Bernanke shouldn’t be let off the hook.

Economic hardship engenders xenophobia, and the most popular target right now is China. Robert Murphy examines the charge that Americans are harmed by Chinese currency manipulation.

Patents and copyrights are often defended in terms of liberty, but they began as State privileges and have never been anything else. Stephan Kinsella explains.

Women have played key roles throughout the history of the struggle for liberty. Sarah and Angelina Grimké are prime examples. John Blundell tells their story.

A good deal of what the U.S. government does abroad these days comes under the rubric of “nation-building.” Is that something we should expect government to be good at? Steven Horwitz says no.

Whenever the government wants to do you a favor, watch out. The more it meddled with beef cattle and meatpacking, for instance, the more consolidated those industries became. Paul Schwennesen speaks from personal experience.

Jury nullification—the principle that lets jurors acquit defendants when they find the law unjust—has been a popular cause with libertarians. Wendy McElroy sees the appeal but she also sees some risks.

Here’s what our columnists have come up with: Lawrence Reed celebrates the power of ideas. Donald Boudreaux critiques the interventionists of all parties. Robert Higgs dissects the political economy of the Great Society. John Stossel says gun owners have a right to privacy, too. Charles Baird skewers crony unionism. And George Leef, seeing Paul Krugman’s call for “shared prosperity,” retorts, “It Just Ain’t So!”

Books coming under scrutiny focus on European social democracy, the drug war abroad, political illusions, and happiness research.

Capital Letters asks the question: Must formal law precede prosperity?

Proponents of the megastate like Krugman simply cannot acknowledge that the coercive, redistributive policies they love have adverse consequences. As we will see, his proposed “shared prosperity” will further undermine the prosperity we still have, reduce incentives for individual effort, and create new opportunities for political rent-seeking. If you would like to see America become more like Greece, Krugman’s ideas are a perfect recipe.

Let’s look first at what Krugman gets right, though.

One of the greatest conceits of modern liberalism is that more education (formal education, especially of the sort run and funded by government) is always good because it gives people “higher skills,” thus making the United States “more competitive.” To his credit Krugman joins a growing number of critics who argue that such education doesn’t necessarily produce good results. President Obama keeps saying the nation must make more “investments” in education to increase employment and keep up with other countries. Not so, says Krugman.

But why has Krugman broken ranks? In the last few months evidence has strengthened the contrarian case by showing that a large and increasing percentage of college degree holders end up having to take jobs that don’t call for any advanced academic preparation and that many college students coast through with little or no gain in human capital. Those are among the reasons why I long ago concluded that America has oversold higher education, principally by heavily subsidizing it.

Krugman, however, points to a different reason for his turn. He contends that technology and “globalization” are eliminating the middle-class jobs college-educated people used to take, thus “hollowing out” the middle class. As a result, he argues, we can’t rely on education for social mobility.

Exhibit A is Krugman’s discovery that technology is having an impact on the legal profession. Computers, he reports, are increasingly used in legal research, scanning cases and documents for possible relevance much faster than people can. He says that this shows how technology “is actually reducing the demand for highly educated workers.”

It’s perfectly true that technology is changing the legal profession. Decades ago, lawyers had to manually hunt for relevant cases and other documents, then read them. Beginning more than 20 years ago, that laborious work was made easier with the advent of computerized research engines that would almost instantly compile lists of cases. Now computers can apparently even do some of the preliminary analysis.

Krugman’s conclusion that this is reducing the demand for educated workers does not follow, however. Just because technology has made a part of lawyers’ work faster does not mean there will be fewer lawyers—any more than the technological improvements that have made writing and editing easier and faster than in the days of typewriters and erasers has reduced the number of writers and editors.

America already has a surplus of lawyers, but that isn’t because of technology. It is because government subsidizes students who want to go to law school, and some law schools practice deception with regard to the employment and earnings prospects for their graduates.

Technological improvements certainly can lead to the elimination of some jobs in the legal profession (and others), but they simultaneously open up new jobs for educated workers elsewhere.

Krugman’s other argument is that globalization is going to wipe out some middle-class jobs because it is now possible to offshore work formerly done by American workers. He gives no examples or evidence of the magnitude of this phenomenon, but let’s assume that he is correct. Do we need to worry and insist on government action?

No, we don’t. The number of middle-class jobs is not fixed, dictating that if some are done by robots or foreigners or computers, the number remaining must be lower. You might think an economics professor and international trade specialist with a Nobel Prize to his name would know that people have been wringing their hands over the supposed harms of free trade in goods and services for centuries, but despite the apocalyptic predictions, the dynamism of the economy always produces new jobs to replace those that are lost.

In sum there is very little support for Krugman’s claim that the middle class is being hollowed out, but that doesn’t keep him from leaping to the conclusion that we need more government intervention.

He first declares that labor needs more “bargaining power.” That’s vague language, but what Krugman undoubtedly means is that the government should enact pro-union legislation. Make that more pro-union legislation, since existing law (unchanged since 1959) is already highly pro-union. Bargaining power has not been taken from unions over the last 30 years. Rather, many old, unionized companies have had to face increasing competition. They have shed workers and some have gone out of existence. Simultaneously, many new firms have come into existence, and their workers have often shown so little interest in unionization that union organizers have given up.

Furthermore, can Krugman believe that unions automatically and costlessly raise worker earnings? They can’t. As economist W. H. Hutt showed in his book The Strike-Threat System, even if unions can temporarily exploit invested capital (as was the case in the auto industry), in the long run investors will put their money elsewhere.

Finally, Krugman writes that government must “guarantee the essentials, above all health care, to every citizen.” Even if it were true that technology and global competition were hollowing out the middle class, why should government assume this role? Back in the 1960s the federal government began a “War on Poverty” that entailed giving “the essentials” to the poor. Rather than conquering poverty, the policies exacerbated it, as recipients of government benefits reduced their own efforts at improving their circumstances and interest groups learned how to game the system. Krugman’s coercively shared prosperity ideas would give America more of that.

Instead of resorting to federal handouts and union threats to increase the middle class, I suggest we abolish the many governmental barriers to entrepreneurship and entry into occupations so that more Americans can succeed on their own.

Brooks does identify some real problems: for instance, that competition between the two major parties has become “fratricidal” and theatrical, and that it is creating massive budget deficits that, left unchecked, will prove catastrophic. But his diagnosis of the problem and his proposed solutions are fraught with fallacies.

He thinks that a revived patriotism will “lift people out of their partisan cliques,” yet the current partisan tribalism seems not to be lacking in patriotism. As is often the case, much hangs on how one understands the terms.

What makes a country great? One way to answer this involves claiming that there is something special about the ethnic makeup of the people who comprise it. For Mussolini there was something great, something special, about being Italian; his allies in Germany and Japan had similar theories about their respective nationalities. But that approach won’t quite work for America since it comprises people of many ethnicities.

Another way to understand national greatness is in terms of institutions and operating principles. But institutions and principles can change. What would make a country great on this model would be to have great institutions grounded in great principles. The Declaration of Independence is an example of this approach: Begin with a set of principles (moral equality of all persons, the natural right to live and be free, power only justified by consent) and then appeal to it when creating institutions (limited government of enumerated powers, republican structure with a democratic franchise, church-state separation, citizen militia, free trade). On this model America is great inasmuch as its institutions reflect its principles. A nation that claims to be dedicated to the principles outlined in the Declaration fails to be great when it invades foreign lands, abuses its citizens’ liberties, or forbids the free movement of people and goods.

Brooks’s exhortations reveal a lack of clarity about different senses of greatness, which comes out most clearly in his repeated use of false dichotomies. He asks, for example, “Do you really love your tax deduction more than America’s future greatness?” This alternative presupposes that it is only through higher taxes that a nation can become great. This in turn assumes that national greatness is only measured by things done by the government. What might these be? Scholarly, artistic, and technological greatness might well be better fostered by individuals having more money and freedom.

“Are you really unwilling,” he asks, “to sacrifice your Social Security cost-of-living adjustment at a time when soldiers and Marines are sacrificing their lives for their country in Afghanistan?” It’s not clear that solving other countries’ problems is how we measure our own greatness. In any event, this question also reveals a confusion: equating national greatness with government spending. Instead of asking whether Social Security payouts should rise with inflation, we might ask whether we would be better off as a nation of financially independent and responsible people who didn’t look to the political system for retirement income. Instead of wondering how high taxes have to be to fund overseas military campaigns, we might ask whether those campaigns need to be undertaken by the government (as opposed to either being undertaken by privateers or not at all). One way to measure American greatness might be the extent to which we exemplify peace and prosperity. The best way to achieve those ends would be to limit (or even better, eliminate) coercive interference with other people’s lives.

Lost Preeminence

Brooks laments a lost preeminence, but it isn’t clear what he means by that. He might be referring to a late-1940s preeminence, when America, having helped destroy the Nazis and their Japanese allies, led the way in rebuilding those nations and helping them become prosperous liberal democracies. But today’s “nation-building” looks very different. Unlike World War II, which actually ended, the current wars of nation-building seem perpetual, which suggests that a different course of action might have better results.

Or perhaps Brooks is referring to a time when American preeminence was measured in contrast to the privations of the old Soviet Union. In that case, let’s review the lessons of that contrast: Our former adversaries in the communist world were impoverished because tyranny doesn’t work as well as freedom. Besides the soul-crushing dehumanization of a system that doesn’t recognize fundamental liberties, the centrally planned socialist economic system turned out to be incapable of generating an abundance of goods and services. So if Brooks wants to see American preeminence regained, he might do better to promote liberalization of the world’s economic systems, which, again, is best done by example.

Brooks’s general rhetorical approach is to frame the debate between “liberals” and “conservatives” as a stubbornness game in which both sides must yield in order to bring about “a governing philosophy that believes in targeted federal efforts to arouse growth, social mobility and responsibility.” As it happens, the free-enterprise system does precisely these things, but most politicians can’t understand that this requires not action on their part, but inaction. They must stop interfering with people’s lives, not look for new ways to do it; protect liberty not abridge it. Brooks fallaciously conflates subsidies with tax reductions, but this implies that people are not the owners of their property. If the government takes money from Peter and gives it to Paul, that’s a subsidy to Paul. But if the government takes less money from Peter, that’s not a subsidy to Peter, since it’s Peter’s property to begin with. Brooks’s calls to end subsidies are correct, but the word doesn’t mean what he thinks it does.

In a way, then, Brooks is right: America has lost some of its greatness and needs to take steps to regain it.

But the problem isn’t people who want to bring the troops home or keep more of their money. Indeed, bringing the troops home would make it easier for people to keep more of their money. So would ending drug prohibition. So would allowing free trade and free human migration. National greatness, American-style, does not consist of the storied pomp of ancient lands, but rather of the opportunities illuminated by the lamp of liberty.

Is the governor’s proposal really an assault on human rights, as advocates of the Wisconsin state employees allege? (Their raucous protests at the state capitol were compared to rebellions in the Middle East.)

A few basics: In a freed market—meaning no privileges, no bailouts, no legal barriers to competition (domestic or foreign), no patents, no protected banking cartel, no regulatory impediments to self-employment, no vast tracts of government-held land—workers would be free to form voluntary associations called unions and business owners would be free to deal with them or not. If not, workers would be free to use nonviolent methods to gain recognition for their unions, including strike threats, boycotts, and sympathy strikes, as well as lesser measures. Violence by any party against any peaceful person would be illegitimate. Freedom of association would be complete, and coerced association would be beyond the pale.

Under such circumstances, everyone’s demands would be tempered by two powerful factors: freedom and competition. Pay workers too little, and they would be bid away by rivals or take up self-employment. Pay them too much, and rivals would attract customers with lower prices. Demand too high a wage, and risk losing out to someone else willing to work for less. Market rivalry would protect everyone from abuse, which is why competition—endless hosannas to it notwithstanding—is usually the target of government intervention.

Regarding government workers, it is a grave mistake to treat so-called public employment like other employment. Governments are monopolies that get their revenue by force, not through voluntary exchange. Thus they don’t face the market test of free competition, and they lack key price information with which to engage in economic calculation. The consequences of this difference are considerable.

As Freeman columnist Charles Baird notes, when government negotiates terms with employees, the parties are coconspirators in the looting of captive taxpayers. (Government employees aren’t taxpayers; they are tax-consumers.) Fundamentally they are not rivals but rather accomplices with a harmony of interests contrary to those of the taxpayers. This is aggravated by the fact that those unions are powerful political actors and rich sources of campaign contributions (the ultimate source of which is the taxpayers) and manpower. A politician negotiating with a government union whose election support he seeks is unlikely to have the taxpayers’ interest uppermost in mind.

Would the working conditions of state workers become intolerable if their unions were restricted? Not likely. But if they did, would it really be so bad if state governments had trouble finding employees?

So, does this mean that free-market advocates should side with the governor of Wisconsin? Actually, no.

State governments are in trouble because they spent profligately when revenues were rolling in and now can’t meet the pension and other obligations they’ve imposed on the taxpayers. As a result, they face a crisis of legitimacy. Some governors realize this and are trying to save the discredited system by trimming spending (for now) and making political hay by resisting the unions. The fiscal hawks even tout cutbacks as ways to produce more revenue in the future. Rarely do you hear a governor call for the shedding and demonopolization of functions like education. So this is largely a fight over how to preserve and divide the tax spoils.

* * *

What’s the Federal Reserve up to? The business news is abuzz with insider lingo like QE2, but what does it all mean? Ivan Pongracic, Jr., has been keeping close watch on what we like to call the Bureau of Counterfeiting.

Many people think the Fed is a private bank owned by the country’s bankers, who use it to profit off the American people. Hold on, Warren Gibson says. The Fed is bad enough without making up stories about it.

Imagine an honest child running a lemonade stand. Now imagine a bully who’s constantly proclaiming his good intentions as he puts the screws to the first child. Roger Koopman thinks this describes much of the U.S. economy.

Believing that government can manage an economy is like believing in leprechauns and unicorns, yet despite overwhelming evidence, people continue to do it. James Payne tries to figure out why.

Adam Smith is famous for his “invisible hand” metaphor, but he mentions it only once in each of his books—strangely, right about in the middle of each. Is there any significance to this? Mark Skousen thinks so.

Egyptians drove a dictator from power last winter, inspiring oppressed people throughout the Middle East and North Africa. What accounts for the sudden uprising after 30 years of subjugation? Nouh El Harmouzi traces its roots.

China is growing economically but not politically. The economy has been liberalized, but the country is still in the grip of a central government run by the Chinese Communist Party. James Dorn discusses China’s future in light of this contradiction.

When world trade revived after the fall of the Roman Empire, merchants from diverse cultures and countries needed a common legal system to peacefully resolve their contract disputes. What did they do? They generated their own—without government. Peter Leeson and Daniel Smith analyze the Law Merchant.

No one wants tainted food, but what’s the best way to prevent it: competition or government regulation? Speaking from experience, Paul Schwennesen makes the case for competition.

A lawsuit against Walmart could dramatically and unreasonably expand the number of class-action suits unless reversed by the U.S. Supreme Court. Wendy McElroy has the details.

Our columnists provide a cornucopia of keen insights. Lawrence Reed elaborates the benefits of competition. Donald Boudreaux debunks vulgar Keynesianism. Thomas Szasz undermines the psychiatric explanation for the attempted murder of a congresswoman. Burton Folsom, Jr., reviews the history of the income tax. John Stossel celebrates spontaneous order. Walter Williams scrutinizes poverty. And Aeon Skoble, reading the claim that war and taxes make America great, protests, “It Just Ain’t So!”

Our reviewers report on books covering the financial crisis, traffic jams, secular religions, and regulation.

—“Consumers Give Boost to Economy,”

New York Times, May 1

Every quarter, when the government releases its latest GDP figures, we hear the familiar refrain:

“What the consumer does is vital for economic growth.”

“If the consumer starts saving and stops spending, we’re in big trouble.”

“Consumer spending accounts for 70 percent of the economy.”

The latter “fact” crops up regularly in the news reports from the Associated Press, the Wall Street Journal, and the New York Times.

The truth is that consumer spending is not the mainstay of the U. S. economy. Investment is. Business spending on capital goods, new technology, entrepreneurship, and productivity is more significant than consumer spending in sustaining the economy and a higher standard of living. In the business cycle, production and investment lead the economy into and out of a recession; retail demand is the most stable component of economic activity.

Granted, personal consumption expenditures represent 70 percent of gross domestic product, but journalists should know from Econ 101 that GDP only measures the value of final output. It deliberately leaves out a big chunk of the economy—intermediate production or goods-in-process at the commodity, manufacturing, and wholesale stages—to avoid double counting. I calculated total spending (sales or receipts) in the economy at all stages to be more than double GDP (using gross business receipts compiled annually by the IRS). By this measure—which I have dubbed gross domestic expenditures, or GDE—consumption represents only about 30 percent of the economy, while business investment (including intermediate output) represents over 50 percent.

Thus the truth is just the opposite: Consumer spending is the effect, not the cause, of a productive healthy economy.

This truth prevails in the marketplace: It’s supply—not demand—that drives the economy. Savings, productivity, and technological advances are the keys to economic growth. This principle was discovered and developed by the brilliant French economist Jean-Baptiste Say in the early nineteenth century and is known as Say’s Law. In fact, he invented the word “entrepreneur” to describe the primary catalyst of economic performance.

Is retail sales a leading economic indicator? Each month the Conference Board releases its Leading Economic Indicators for the United States and nine other countries. The ten U.S. leading indicators are:

• manufacturers’ new orders
• building permits
• unemployment claims
• average weekly manufacturing hours
• real money supply
• stock prices
• the yield curve
• new orders for nondefense capital goods
• vendor performance
• index of consumer expectations

As you can see, almost all the indicators are linked to the early stages of production and business activity.

What about the Consumer Confidence Index that the media highlights every month? It turns out that the title is misleading. The questions asked consumers are more about business conditions than spending attitudes. Here are the questions consumers are asked to determine their “expectations”:

1. Are current business conditions good, bad, or normal?
2. Do you expect business conditions to be good, bad, or normal over the next six months?
3. Are jobs currently plentiful, not so plentiful, or hard to get?
4. Do you expect jobs to be more plentiful, not so plentiful, or hard to get over the next six months?
5. Do you plan to buy a new/used automobile/home/major appliance [note: these are all durable consumer goods, not unlike durable capital goods] within the next sixmonths?
6. Are you planning a U.S. or foreign vacation within the next six months?

In other words, the much-touted “consumer” confidence index is more a forecast by consumers for business, employment, and durable goods than “retail sales” and consumer spending. It does not ask any questions about food, clothing, entertainment, and other short-term buying, because these expenditures seldom change from month to month.

The reality is that business and investment spending are the true leading indicators of the economy and the stock market. If you want to know where the stock market is headed, forget about consumer spending and retail sales figures. Look to manufacturing, capital expenditures, corporate profits, and productivity gains.

We hear so much about the consumer because the media and political pundits still live under the spell of Keynesian economics, which teaches that demand creates supply. Keynes’s law is just the opposite of Say’s law (supply creates demand). According to Keynesians, consumer spending drives the economy and saving is bad when the economy is in a short-term contraction.

In reality, increased savings can actually stimulate the economy, even if consumer spending is anemic. A recent study by the St. Louis Fed concluded that in the short run, “a higher saving rate in the current quarter is associated with faster (not slower) economic growth in the current and next few quarters” (Daniel L. Thornton, “Personal Saving and Economic Growth,” Economic Synopses, St. Louis Fed, December 17, 2009).

How is this possible? When people save more, interest rates fall and businesses can afford to replace their old equipment with new tools, spend more on research and development, or develop new production processes. So while consumer spending may stay low, business spending can pick up the slack. Remember, in a dynamic economy the decision by businesses to spend more investment funds and hire more workers is a function of both current consumer demand and future consumer demand. And don’t forget, during a recession corporate profits often recover first, without an increase in customer demand, because companies can boost profits by cutting costs and downsizing.

In the long run new business strategies and spending patterns increase productivity and lower prices to consumers, which in turn means the consumers’ purchasing power increases. As the St. Louis Fed concludes, “A higher saving rate does mean less consumption [in the short run], but it could also result in more capital investment and, ultimately, a higher rate of economic growth. . . . [T]he growth rate of real GDP has been higher on average when the personal saving rate is rising than when it is falling.”

Granted, the ultimate function of business activity and entrepreneurship is to fulfill the needs of consumers, and the most successful firms are those that satisfy their customers. But more important, who discovers the new, improved products that consumers desire? Who is the catalyst that determines the quantity, quality, and variety of goods and services? Did the consumer come up with the idea of personal computers, SUVs, fax machines, cell phones, the Internet, and the iPhone? No, these technological breakthroughs came from the genius of creative entrepreneurs and the savers/capitalists who funded their inventions.

In our first issue, on October 2, 1950, we published an editorial called “The Faith of the Freeman,” in which we outlined our fundamental economic, political and moral philosophy. In the fifteen months since then our articles and editorials, we trust, have made that basic philosophy and its practical application increasingly clear.

Now, at the completion of our first full calendar year of existence, we think it appropriate to say something about our function. That function is in one respect obvious. It is to propagate our announced philosophy, and to apply it, as we have been doing, to current issues as they arise. On the constructive and positive side, in other words, our function is to expound and apply the principles of traditional liberalism and individual freedom. On the negative side, it is to expose the errors of collectivism of all shades—of statism, “planning,” controllism, socialism, fascism and communism. One of our central aims is, on the one hand, to hearten and strengthen those who already accept most of the philosophy of individual freedom and to help them to clarify their own thinking; and, on the other hand, to convert open-minded collectivists to the philosophy of freedom.

The mere announcement of such an aim is likely to be followed by immediate expressions of skepticism or incredulity. Some of our correspondents tell us, for example, that a magazine like The Freeman is read only by those who already believe in its aims, and therefore we are doing nothing more than “talking to ourselves.” But even if this were true, which we do not believe, we would still be performing a very important function. It is imperative that those who already believe in a market economy, limited government and individual freedom should have the constant encouragement of knowing that they do not stand alone, that there is high hope for their cause. It is imperative that all such people keep abreast of current developments and know their correct interpretation, and that, through constant restatement and mutual criticism of each other’s ideas; they continue to clarify, improve, and perfect their understanding. Only if they do this can they be counted upon to remain true to a libertarian philosophy, and be proof against collectivist fallacies. Only if those on “our side” do this can we even hope to hold our ranks together and cease constantly to lose converts, as in the past, to collectivism.

But the function of a journal of opinion like The Freeman only begins here; it does not stop here. It is necessary for the believers in a free system to do far more than hold their present thin ranks together. If they hope to see their ideas triumph, it is imperative that they make converts themselves from the philosophy of collectivism, “security” and serfdom that dominates the world today.

They can do this only if they themselves have a deeper understanding than the collectivists, and are able not only to recognize the collectivist errors, but to refute them in such a way that the more intelligent and well-meaning collectivists themselves will recognize, acknowledge and renounce them as errors. And those on “our side” cannot do this, cannot live up to their responsibilities, unless they have troubled to keep themselves informed to make their ideas clearer and their understanding deeper than those of the collectivists. For our side can hope to grow only if it attracts and keeps adherents who in turn will become, not blind or one-eyed partisans, but enlightened and able expositors, teachers, disseminators, proselytizers.

To make this possible, it is essential that there should exist a prospering periodical with the aims of The Freeman.

* * *

Children’s books about the environment are so dull and devoid of active people that Andrew Morriss hopes kids are playing video games rather than reading that stuff.

A report claiming that the tax burden is the lightest since the Truman administration gave Progressive talk-show hosts something to beat the tax-cutters over the head with—until the report was debunked. As D. W. MacKenzie points out, it’s easy to make the tax burden look small if you don’t count all the taxes.

Government schooling has been subjected to all kinds of criticisms. Michael Bors shows that Public Choice arguments shed further light on why the schools are bad and don’t improve.

This sounds like a bad dream, but people inside and outside of government are actually proposing that the failing newspaper business be bailed out by the taxpayers. Edward López shows why that’s a terrible idea.

The Glass-Steagall Act was the major banking regulation of the New Deal. In 1999 a key part was repealed. Was that repeal responsible for the recent financial debacle? Warren Gibson and Jeffrey Rogers Hummel have the skinny.

The welfare state isn’t just wasteful and larcenous. It’s morally corrupting. Richard Fulmer tells why.

Police departments have ways to keep abusive officers’ names out of the papers. Wendy McElroy says that denies citizens one of their greatest protections against police misconduct.

Contrary to Lord Keynes’s maxim that in the long run we’re all dead, his spirit is alive and well more than 64 years after his death. Richard McKenzie looks into this curiosity.

Our columnists have plenty to talk about: Lawrence Reed reveals his sympathies for Marxism. Thomas Szasz scrutinizes the medicalization of suicide. Burton Folsom has a few choice words about Theodore Roosevelt. John Stossel catalogues attacks on our freedom. Walter Williams exposes some Washington lies. And Mark Skousen, hearing for the nth time that consumer spending drives the economy, objects, “It Just Ain’t So!”

Our reviewers dissect books on the financial mess, British libertarian Arthur Seldon, antipsychiatry, and public schooling.

Brooks is certainly right that no “health care reform” proposal with any chance in mainstream partisan politics promises any fundamental change to the status quo. What we have had is a system where pervasive government regulation, subsidy, and mandated captive markets corral workers into an industry driven by sky-high costs, managed by bureaucratic pencil-pushing and corporate economizing (often at the expense of innocent people’s health or lives), and owned by a handful of uncompetitive, well-entrenched incumbent corporations. No mainstream “reform” proposal would have changed anything about that. The proposals mainly concerned themselves with introducing new government subsidies and new captive-market mandates to force yet more workers and money into the broken system.

But Brooks took all this as a sign that the health care debate was about fundamental “values.” I think it was a sign that conventional political debate was a superficial squabble over meaningless details. The real debate was about grammar.

Brooks sees “a debate about what kind of country we want America to be”: Although “many of us” thought “we” were in a regulatory sweet spot in which “we” could extend coverage to the uninsured but also lower costs, “we” were wrong; “we” cannot make gains without substantial costs. So “we” face a “brutal choice”—a tradeoff between economic “vitality” and “security.” “Vitality” for “America” means an “unforgiving nation” but also a more “vibrant” one; security means “a more decent society” but also one where “more of the nation’s wealth would be siphoned off from productive uses and shifted into a still wasteful health care system” (emphasis added). We are told that “we all” have to decide what “we” want—for “America.”

Remarkably, among Brooks’s 800 words, supposedly on a debate about deeply held convictions, the word “I” never shows up in the author’s own voice. (The single “I” appears in a quotation.) Lost in this thicket of plural pronouns, “nations,” and “societies” is any notion that I might settle on different preferences from you, or that you might have a right to decide for yourself which preference to pursue. There is only one path for all, and “we” are left only with the engineering decision of which output to optimize for: “vitality or security.”

Mind Your Me’s and You’s

For the individualist, half of human decency in political thinking is just learning to keep your personal pronouns straight. There is no right outcome in this debate except to reject the conventional political premise that “we all” need to decide on anything when it comes to health care. Life is full of tradeoffs. But the right question to ask is not which choice to take, but rather who should choose and who should bear the costs of the choice taken. And the answer is that each person should choose how much of her own resources she wants to devote to health care and to insuring against future disasters. These tradeoffs only become “brutal” when I am forced to take your risks or you are forced to fund my security.

Brooks might reply, “Ah, you claim to avoid the hard choice here with a free market. But really you are making a choice without admitting it. Free markets mean everyone is limited to her own resources to meet medical bills; but by definition poor people have no real resources to fall back on. So really you’re just advocating one option: a system that chooses vitality and growth over security and care for the vulnerable.” Indeed, Brooks insists that “The unregulated market wants to direct capital to the productive and the young” and confusedly suggests that this is more or less the kind of “vitality”-oriented system that America has had and will continue to have unless government forces taxpayers to chip in for more extensive government “welfare policies” in health care.

That might seem true if the corporate health care system we face emerged from “the unregulated market.” But it didn’t. Government licensure controls who practices medicine, and where and how they practice it. Government prohibitions restrict which drugs are produced and where to get them because government thinks it knows better than you what drugs you should take and because it is engaged in a deliberate effort to raise drug prices through a system of patents. Federal tax loopholes and regulatory micromanagement make most full-time workers dependent on their bosses for health insurance and force most other workers to deal with government health insurance or none at all. There is a “market” of a sort here, but it’s far from a free market: It’s a rigged market, shaped by government regulation, funded by government subsidy, and owned by government agencies and government-privileged corporations.

The Meaning of a Freed Market

Pervasive confusion of the existing government-supported anticompetitive corporate health care market with health care provided by a genuinely freed market leads to two related confusions about what a real market in medicine would mean.

First is the widespread but ultimately ridiculous notion that free markets would require individual workers to rely only on personal savings or expensive corporate health insurance to cover high medical costs. In fact in the late nineteenth and early twentieth centuries, freer medical markets actually offered many competitive, noncorporate means for working folks to get affordable, decent health care for themselves by pooling resources through free-market bargaining and free association. As the libertarian scholars David Beito and Roderick Long have discussed, “contract practice” agreements, organized by low-income workers and primarily negotiated through unions, mutual-aid societies, and fraternal lodges, provided reliable medical care for 20 to 50 percent of workers in English-speaking countries for about one day’s wages per year. These affordable arrangements were ultimately driven out, not by the ruthlessness of the free market, but rather by deliberate assaults by government and the government-privileged medical guilds.

Second, if we recognize the importance of freed markets to the prospect for a civilized solution to the health care crisis, it also quickly becomes obvious that there are many opportunities for “reform” that simply do not present the kind of tradeoff that Brooks wrings his hands over—specifically, “reforms” that get rid of the government interventions that cause costs to skyrocket in the first place.

There is a clash of fundamental values in the health care debate, but it’s not a clash within conventional electoral politics. The real debate is between
politics as a means of providing health care and a freer, more humane alternative: consensual social organization.

You must buy it. Who do these politicians think they are?

For those who wonder by what authority the government can make us buy insurance against our will, the Senate bill alluded to the Constitution’s Commerce Clause: “The individual responsibility requirement provided for in this section . . . is commercial and economic in nature, and substantially affects interstate commerce.”

How would an insurance requirement affect interstate commerce? The bill said that “The requirement is essential to creating effective health insurance markets in which improved health insurance products that are guaranteed issue and do not exclude coverage of pre-existing conditions can be sold.”

Fallacies abound. To begin, medical insurance isn’t really interstate commerce. One of the few sensible things proposed during the public discussion on medical care is the repeal of the federal ban on interstate purchase of coverage. Residents of California are not free to buy less-fancy, less-expensive policies offered in Arizona, but are stuck with policies made more expensive by California’s overbearing regulatory regime. Interstate sales would increase competition and lower prices, but the ruling party showed no interest in that idea.

The argument has more problems. The Commerce Clause has typically been invoked against barriers to interstate commerce, but the insurance mandate would represent the first time that individuals were compelled to buy a product or service in the name of making interstate commerce more effective. Even under the most expansive reading of the Commerce Clause, how does compelling the purchase of insurance qualify as regulating interstate commerce? We really have crossed a threshold.

The nub of the argument is that unless healthy people are forced to buy coverage, the insurance market won’t work properly because the new law compels insurance companies to cover sick people for no more than they charge the healthy. Obviously, that would not be good for the insurance market.

The individual insurance mandate, then, is a solution to a problem the bill itself would create.

Guaranteed issue is the culprit, and freedom is taking a back seat to a political objective, which is to disguise a welfare program as insurance and put us on the road to government-administered rationing.

The “reformers” are quick to point out that people without insurance go to emergency rooms for medical care and sometimes don’t pay their bills, shifting the costs to the rest of us. But Shikha Dalmia, writing in Forbes, notes that uncompensated care accounts for less than 3 percent of the country’s total medical bill.

One reason for uncompensated care is that emergency rooms are forbidden to turn away patients (even in non-emergencies) who have no means of payment. Who imposed that prohibition? The government, of course. That may sound humane, but one unintended consequence is a likely contraction of charitable care. Why set up facilities for the indigent if they can turn up at any emergency room?

Again we see Mises’s Law at work: Intervention begets intervention. Government action creates problems that politicians then use to justify more government action. Undoing the first intervention would help solve the problem, but politicians have little incentive to move in that direction.

Government has suppressed the free market in medical care on both the supply and demand sides. As a result, medical services and insurance are artificially expensive, pricing many people out of the market. Instead of removing the interventions and letting the free market—including mutual-aid associations and philanthropy—lower prices and create more widespread coverage, the politicians are piling on more market-suppressing measures. Freedom is the first casualty. But we can also anticipate an aggravation of the current system’s worst features.

Forcing individuals to buy insurance is an intolerable assault on our liberty—not to mention a massive subsidy to the insurance companies. (They’re mad the penalty is not greater.) How many more usurpations can we be expected to tolerate?

* * *

Speaking of health care “reform,” only willful blindness or abject ignorance could prompt someone to say that the free market has failed. Kevin Carson explains why.

The so-called debate over health care has fallen short in even the most basic ways, such as sticking to what is actually possible. Gene Callahan calls for some maturity.

Also lacking has been any inkling that in public policy, results can be rather different from objectives. So Steven Horwitz offers a primer on the Law of Unintended Consequences.

With the economy struggling and many people still without jobs, the Federal Reserve is getting a closer look than ever before. Gerald P. O’Driscoll, Jr., examines the Fed’s conduct since the bust and doesn’t like what he sees.

Theodore Roosevelt still gets good press, but the case can be made—and Jim Powell makes it—that TR never understood the American Revolution.

John Locke is a beloved figure among libertarians, but is there less to him than meets the eye? Can he really be proclaimed the father of limited government? Joseph Stromberg’s answer may surprise you.

Our columnists keep the hits coming. Lawrence Reed has some advice for President Obama about the role of government. Thomas Szasz returns to the horrific case of Alan Turing. Burton Folsom looks at what ended the Great Depression. John Stossel warns of the hazards of government mortgage insurance. Walter Williams wonders when the Supreme Court will again find some limits to government power. And Charles Johnson, reading the claim that the health care debate has been about fundamental values, protests, “It Just Ain’t So!”

Books about private coinage, climate change, Alexander Hamilton, and the New Deal’s business opponents come under scrutiny by our reviewers.

Finally, a reader questions Kevin Carson on intellectual property in Capital Letters, while James Ahiakpor and Steven Horwitz go toe-to-toe on savings.

—Sheldon Richman
srichman@fee.org

Still, even if it is unrealistic to expect individualism to get much respect from people who are deeply invested in electoral politics, it’s not too much to ask them not to try to score political points by totally distorting our position. In any case, if they do, it’s worth taking the time to set things straight.

For example, consider “The Social Animal” by neoconservative New York Times columnist David Brooks (September 12). He begins by quoting Barry Goldwater’s argument (from The Conscience of a Conservative) that “Every man for his individual good and for the good of his society, is responsible for his own development. The choices that govern his life are choices that he must make; they cannot be made by any other human being. . . . Conservatism’s first concern will always be: Are we maximizing freedom?”

Outmoded Notions?

Brooks says that Goldwater’s ideas seem to come from a vision of human life based on solitary, rugged individuals—“the stout pioneer crossing the West, the risk-taking entrepreneur with a vision, the stalwart hero fighting the collectivist foe.” Brooks protests that “a tide of research” in the human and social sciences has demonstrated that Goldwater’s old-fashioned individualist notions aren’t supported by the latest empirical evidence because, Brooks tells us, human beings are social creatures by nature, closely intertwined with each other in the fabric of a shared social life.

He then lays into a number of Republican policies that he considers too locked into the old Goldwater free-market framework—tax cuts, tax-funded education vouchers, and “federally funded individual choice” in health care. He suggests that individualistic free-market principles have kept modern conservatives from coming up with a convincing rationale for the federal government’s gigantic tax-funded bailouts for major investment firms and mortgage capitalists. (Apparently the failure to provide a convincing rationale for government bailouts of big business is supposed to be a problem for individualism, not a problem for the bailouts.) And he concludes that Goldwater’s legacy of unrealistic free-market individualism is now “the main impediment to Republican modernization,” which he believes has hobbled his fellow Republicans’ efforts to provide plausible responses to “the gravest current concerns,” which all trace back to the fact that “people lack a secure environment in which they can lead their lives.”

Maybe Brooks is right that Goldwater’s legacy is holding Republicans back politically. Individualistic ideas can be a tough sell, particularly since the obsessive focus on electoral politics as a panacea for every social ill ensures that genuinely individualistic ideas are almost never presented in the media or discussed in public forums. But whether he’s right or wrong about the best way for Republicans to “fully modernize,” I don’t care much about the Republican Party or its political prospects, or about Barry Goldwater’s reputation. I do care about the prospects for individualism and truly freed markets. And Brooks’s case against them commits a series of serious and misleading errors.

Brooks ultimately condemns free-market policies because they smack of individualism, and he condemns individualism because human beings are demonstrably social animals, who live interdependent lives and gain both utility and meaning through social networks, community, and shared projects. He points out that traditionalist conservative thinkers like Edmund Burke appreciated “the value of networks, institutions and invisible social bonds”—apparently believing that that sets them apart from individualist free marketeers. Of course human beings are social creatures, and networks, institutions, and invisible social bonds are all tremendously important to our shared lives and livelihoods. But to try to use that as an argument against individualism is nothing but a massive non sequitur. What individualist ever denied it?

Individualists, contrary to Brooks’s claims, don’t have any general objection to human sociality. We realize how much we all depend on one another in our everyday lives. That should be obvious enough from the fact that we believe in replacing government regimentation with freed markets and voluntary associations. But if it is not obvious enough, let’s make it as clear as we can.

A freed market is nothing more and nothing less than a form of spontaneous social collaboration. There are no markets without several people cooperating with each other to buy and sell, interdependent with others who work, invent, discover opportunities, and generally hustle to truck and barter. And there are myriad other ways for free people to choose individually to cooperate without cash exchanges, like family networks, charities, community organizations, fraternal lodges, or voluntary mutual-aid societies and workers’ unions.

Cooperation or Coercion

The debate between individualists and “modernized” collectivists has nothing really to do with whether or not human beings ought to live a social life; it has to do with the terms on which we associate to work and live together—whether our social combinations ought to be cooperative or coercive. Social combinations can only be truly cooperative if they are voluntary—if they are organized through persuasion and free agreement among everyone involved, rather than through force and coerced obedience by some to a few.

Apparently Brooks believes that we have only two options: Either we live as a mass of uncooperative but free solitary hermits and devil-take-the-hindmost “rugged individualists” or else we live as a network of cooperative but unfree “socially embedded creatures,” with government taxes and regulations shoving us down to make sure we stay good and embedded in the particular set of social arrangements that government favors—whether or not any of us would choose to make other arrangements with our fellows. But where does that leave the obvious third option—voluntary cooperation?

Individualism is not a philosophical rationale for antisocial attitudes or for indifference or hostility toward your fellow creatures. It is the collectivist, not the individualist, who sees human beings as naturally truculent creatures who don’t care enough about each other to get along peacefully and who need to have plans for collaboration forced on them from the top. Promising social harmony and security, collectivism delivers dissonance and violence.

Individualists believe in individualism precisely because we believe that human beings can and should be both social and civilized to each other at the same time—that community and social life don’t require shoving people around or bullying them into following one big plan. What Brooks fails to see is how—individually—we can peacefully, freely, and naturally form communities, institutions, and invisible social bonds as we make our way through the world.

An excellent example of this tunnel-vision punditry is E. J. Dionne Jr.’s New York Times column of July 11. Dionne argues that a variety of problems facing the economy in 2008 has led to “the collapse of assumptions that have dominated our economic debate for three decades.” The assumptions he refers to are that “Regulation is the problem and deregulation is the solution. The distribution of income and wealth doesn’t matter . . . [and] free trade produces well-distributed economic growth,” among others. In Dionne’s view, these ideas are “failing” and “even conservatives recognize that capitalism is ailing.”

Unfortunately for Dionne, it just ain’t so.

Dionne spends much of the column arguing that the current housing crisis and its spillover effects on the financial industry are the result of, in Rep. Barney Frank’s words, “excessive deregulation.” There has been some deregulation of the financial markets in the last couple of decades, and much of that deregulation has actually produced incredible benefits for the American public. Aside from the customer-service gains that have come from the legalization of interstate banking and the ability of banks to offer an array of products under one roof, the expanded range of investments that banks can take on enables them to diversify and lower their exposure to risk.
Yes, a number of banks have had problems in the last year (more below), but the number of bank failures since the 1999 deregulation has been exceptionally low.

Between 1999 and 2007 only 40 U.S. banks failed, which is substantially lower than the same nine-year periods starting in 1969, 1979, and 1989. Only two years since 1934 have had no bank failures: 2005 and 2006. If the 1999 overturning of the Depression-era Glass-Steagall regulations is such a problem, why were the eight years to follow among the healthiest in U.S. banking history? Assuming deregulation did not have a built-in time delay, this year’s banking problems must have some other source.

Those problems are almost all linked to the troubles in the housing market. Here too, blaming deregulation is at odds with some important facts. True, financial firms have developed many new tools during the last 25 years. Some of those, such as the adjustable-rate mortgages at the center of the difficulties, were necessitated by previous government intervention in markets—in this case, the Fed-generated inflation of the 1960s and ’70s.

More important, though, is the role played by institutions such as Freddie Mac and Fannie Mae, both of which are not the products of laissez-faire capitalism
or any sort of “deregulation.” Those government-sponsored enterprises have artificially supported elements of the housing market that might not have been economically justified. Other government regulations, such as the Community Reinvestment Act, which requires that banks make a certain proportion of loans to low-income customers in their communities, have forced banks to take on excessively risky investments in housing. Finally, meddling politicians can cause banks to fail by spreading unwarranted concern about their balance sheets, as some have argued Senator Charles Schumer did in the case of the now-failed IndyMac Bank.

In sum, nothing in the current housing and banking troubles indicates some sort of systematic failure of capitalism that can be laid at the feet of deregulation.

Problematic Claim

Dionne also makes a passing comment about the way in which “The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era.” This claim is problematic in three ways. First, the 1920s were hardly “laissez-faire,” especially in the financial markets. The United States had a government-run central bank along with a host of banking regulations, not to mention all the other economic regulations born out of the Progressive Era and World War I. Second, the Great Depression itself resulted not from the failures of capitalism, but the Fed’s monetary mismanagement in the 1920s and 1930s, and its length and depth were caused by the protectionism and interventionism of the Hoover and Roosevelt administrations. The New Deal and World War II did not get us out of trouble; only the explosive growth generated by the freer postwar economy did so. Third, many of the very regulations that emerged from the Great Depression, such as federal deposit insurance, enabled banks to do exactly what Dionne wrongly blames on the market: profiting when they lent well, but shifting losses to others when they messed up.

Finally, Dionne’s claim, echoed by Frank, that free trade and capitalism more generally have benefited the wealthy at the expense of the poor also does not hold up to scrutiny. Frank’s concern for the “most vulnerable people in the country” is admirable, but free trade, by making cheaper imports available to lower-income Americans and by creating jobs in export industries, has done more for “the most vulnerable” than any government program.

It is also ironic that a man of the left would focus only on the vulnerable in the United States and ignore the massive increase in well-being that free trade has produced for the most vulnerable people in the rest of the world. The billions of Chinese and Indians who have risen out of abject poverty in the last decade or so are a major accomplishment of free trade, and that increase in wealth has benefited American citizens as well. The living standards of poor Americans today, measured by what they are capable of consuming, exceeds that of the average American 35 years ago. If free trade is so awful for the poor, Dionne and Frank need to explain how an era of expanding free trade has also produced these increases in the well-being of poor Americans and billions of others across the world whom they seem to think do not matter.

Once again, the pundits grab onto any bit of bad news to declare the death of capitalism, all the while ignoring the ways in which our larger-than-ever government has intervened in the market, producing the very problems they try to blame on the free market. Their misguided analysis is matched only by their continued promulgation of the idea that American living standards are declining, despite abundant data to the contrary. Even with all the government intervention, the (hampered) market continues to improve the lives of everyone, especially the poor. Imagine if the politicians and pundits stopped trying to prevent it from doing so.