After all, we’ve been enacting plans to control spending and balance the budget for generations. One of the first efforts was the 1974 Budget and Impoundment Control Act passed in the Nixon administration.  Then we had the Gramm-Rudman-Hollings Act, signed into law by President Reagan in 1985. A few years later, in 1994, feisty Republicans took over both houses of Congress and provoked a government shutdown in the crusade for fiscal responsibility.

The lesson of history, then, is that you can’t cut spending by trying to cut spending. It’s a hard point for budget makers to digest, because it seems to defy the rules of arithmetic. Well, when it comes to national budgeting, these rules don’t apply. What matters are the rules of political perception.

Most Americans perceive that government is an effective provider of valuable services. They see it as a super store that supplies education, medical care, retirement income, housing, assistance to the needy, safe drugs, safe foods, scientific research, and so forth. That’s why spending cuts can never be more than temporarily effective. As soon as the specifics of the cutting become apparent, the public will be reminded how very much it likes government programs. As people learn about the autistic child who will be left unassisted, the hospital that will close, and the food inspectors who will be laid off,  the public clamors to fund these functions, and the campaign to cut spending falters. We’ve been through this cycle many times.

The lesson is clear: The real cause of red ink is the widespread belief that government programs are effective responses to national needs.  If you don’t counter this belief, you can never really cut government spending.

Faith in Government

Where does this confidence in government come from?  One possible answer is that it is based on reality and that we have numerous careful, unbiased, scientific studies that prove government is a cost-effective provider of services.

There are several difficulties with this position. The first problem is there are no such studies. There are studies that purport to evaluate government programs, but they never include all the overhead costs. By my count, there are 14 overhead costs in the typical government transfer program, seven involving taxation and seven involving disbursement. Such cost-benefit studies as have been done include, at best, only three or four of these costs. The reason why evaluations of government action are shallow and incomplete is the bias of the researchers. Before they attempt their study they already believe government action is beneficial. In other words, the cart—the belief that government is effective—comes before the horse—the evidence that it is.

Historically, too, confidence in government has preceded the evidence that might justify such confidence. The modern faith in government as a problem-solving machine emerged in the late nineteenth century, decades before any interventionist policies had been attempted. For example, in 1888 Edward Bellamy published a hugely successful utopian novella, Looking Backward, which posited a federal government in charge of everything, and solving all problems of poverty, unemployment, old-age assistance, and so on. Bellamy and the thousands who formed “Bellamy Clubs” all around the nation had no way of knowing if government programs in these spheres would be cost-effective solutions. They took it on faith.

The belief in government efficacy is not empirically based. It is the product of illusions. When they first notice government, children tend to see it as a super-parent, an authority figure that has many virtues — including great wealth, foresight, objectivity, and maturity — and is without ugly vices such as selfishness, irresponsibility, callousness, and a tendency to violence. This benign impression forms the basis of the popular view of government. Over time, as the result of actual experience with government, people begin to overcome this naïve faith, but in most cases they do not move far beyond the child’s view. They continue to see government as a machine that can fix everything — if only the right people are put in charge. Telling a public with this naïve confidence that spending should be cut is like trying to tell a child that a birthday cake should not be eaten: It has no understanding of, or sympathy for, the recommendation.

Toward a Solution

To restrain spending, therefore, one needs techniques that counteract the mistaken, illusion-based view of government. These measures will not resemble traditional spending reforms. They will not be laws that address the amount of spending. Instead, they will address the perceptions underlying spending, since once those attitudes are corrected, the pressure for spending will abate. To illustrate this approach, consider the simple idea of reminding people where government money comes from.

One misunderstanding that gives the public a false view of government is the philanthropic illusion. This is the idea that government has money, that it is like a wealthy philanthropist with extra cash to give to needy people and worthy causes. In fact government has no money of its own. The money that it spends has to be first taken away from taxpayers, and if you do the arithmetic carefully, tracing out all the indirect and shifted burdens of taxation, you will discover that everyone is a taxpayer. Therefore, to get money for its spending programs, government inflicts privation on everyone, including low-wage workers, college students, the homeless, and so on, and it drains resources from vital activities like technological innovation, medical care, job creation, and so forth.

Declaration of Gratitude

Under the spell of the philanthropic illusion, politicians and the public downplay or forget the harm and injury of taxation. A simple device that will help counteract this myopia is the “Declaration of Gratitude.” Everyone who receives government money would be required to sign this statement:

I realize that the funds I am about to receive come from the nation’s taxpayers, and I am grateful for the sacrifices they are making on my behalf.

Its administration is simple. When you fill out the paperwork for any government grant, subsidy, or payment, you also must sign the statement, whatever the benefit: food stamps, cotton subsidy, small business loan, government paycheck, research grant.

In monetary terms, signing this statement doesn’t change anything: Everyone gets whatever government dollars he was going to get. No one can be accused of starving grandma. What it does do is change the psychological climate. It destroys the assumption that government spending harms no one. This frank reality is covered up today. Take the Earned Income Tax Credit. This is a $50 billion welfare program, yet the people receiving this benefit call it a “tax refund” when they get their check. Most of them have no idea that this is a subsidy paid for by taxpayers. Well, if they had to sign the Declaration of Gratitude, they would know.

There is likely to be a lot of resistance to the Declaration of Gratitude idea. Most Americans seem to feel themselves “entitled” to whatever government funds they get, and are loathe to recognize their dependent status. This entitlement mentality produces the bizarre contradiction of a country with a national debt of $15,000,000,000,000 whose citizens believe they are paying their own way.

But resistance or no, reforms that change the perceptual climate are essential for national economic health.  Sound fiscal policy will not be achieved until the public attains a disillusioned view of government.

Here’s what the growth in federal spending would look like with and without the ten-year $1.2 trillion “cut” to be trigged by the supercommittee’s failure.

HT: Nick Gillespie

First, something that is right.

With one major exception (discussed below), the typical economist, when doing economics (and regardless of political bent), doggedly avoids ad hominem explanations. That is, economists don’t explain observed reality as resulting from specific human personalities or personality traits. Instead, economists (try to) identify the constraints and opportunities that confront decision-makers and then explain patterns of human activities as being predictable outcomes of the ways that individuals—any individuals—respond to identified constraints and opportunities.

This avoidance of ad hominem explanations is the source of one of the most important lessons that economists teach: greed explains nothing. Because greed—or, more accurately, “self-interestedness”—is largely unchanging across time, no observed changes in the economy can be explained by it.

Greed can’t explain rising fuel prices, for example, given that fuel sellers (and also fuel buyers) are just as greedy when prices are lower as they are when prices are higher. Likewise with booms and busts. Because people’s greed remains constant something else must explain booms and busts. And so too for any other economic phenomena you care to name—everything from the fact that Americans are richer than Armenians to the fact that, say, big-box retailers’ market shares are growing while those of mom-’n’-pop retailers are shrinking.

Of course the particular constraints and opportunities identified by economist Doe as being most relevant for explaining some phenomenon often differ from those identified by economist Jones for explaining the same phenomenon. Doe, for example, might identify an increase in the rate of growth of the money supply as the most crucial factor for explaining an observed boom and bust, while Jones identifies an easing in government regulation of banks as the crucial factor. But neither Doe nor Jones explains the boom and bust as caused by the likes of greed or ignorance.

Economists’ refusal to use always-popular (and often half-baked) romantic notions about human behavior to explain economic phenomena goes a long way toward making economics a genuine science, and it accounts for much of whatever good economists have managed to bestow on society.

What’s Wrong

Turning now to something that is wrong with economics, much of the harm that economists inflict on society is a direct result of the one area in which economists too often embrace such ad hominem explanations: analyzing government involvement in the economy.

Despite a long-established tradition in economics of studying the “public” sector using the same analytical tools that we use to study the private sector—and despite two founders of this Public Choice tradition being awarded Nobel Prizes (George Stigler in 1982 and James Buchanan in 1986)—far too many economists persist in sloppy, unanalytical ad hominem thinking about government.

For too many economists government is assumed to be able to escape many of the constraints that unavoidably bind and trip up people in the private sector. Asymmetric information, moral hazard, and adverse selection, as well as confirmation bias and the legions of other alleged “irrationalities” identified by behavioral economists, are just some of the “imperfections” economists find in markets and then too frequently simply assume can be dealt with effectively by government.

Overlook here the fact that many of the problems alleged to be unavoidable in the private sector are in fact handled quite well by human beings acting without government who exhibit far more ingenuity than the typical economist believes is possible in private-sector settings. (It’s notable that Elinor Ostrom, the first woman to win the Nobel Prize in economics, isn’t a professor of economics but instead of political science. She won the prize in 2009 for her work showing how creative people in private settings often overcome obstacles—such as free-rider problems—that most economists naively assume can be overcome only by government.)

Unanalytical Assumptions

Focus instead on economists’ bizarre stumble into an unanalytical assessment of government. That stumble goes like this: “Omigosh! There’s an imperfection in this private-sector market! My textbooks and the many refereed journal articles I’ve read and written make quite clear—with lots of difficult mathematics—that this market will therefore fail. My textbooks and journal articles also imply, and in many cases explicitly state, the conclusion that the government—and only the government—can solve the problem. Models prove this conclusion.”

Such stumbling is common. From today’s insistence that America needs more stimulus spending, through the support that many economists express for the new Consumer Financial Protection Bureau, to economists’ overwhelming belief that countries need central banks, too many economists unscientifically reach their conclusions about the alleged efficacy of government intervention without first asking how the information available to government officials, and how the incentives these officials face, will affect government decision-making.

In short, economists mysteriously conclude that desirable public-sector outcomes follow from the praiseworthy intentions that economists assume motivate most public officials.

Nowhere does this mystery run more deeply than in fiscal policy. Even if it were true that increased government spending can hasten an economy’s escape from a recession, the large number of economists who today endorse such spending is discouraging. Seldom do these economists inquire into the incentives facing government officials in charge of spending. The assumption is that these officials will spend the money in ways sure to promote the public interest. Also, seldom do these economists inquire into the information asymmetries and other constraints that might hamper even well-meaning officials’ efforts to carry out fiscal policy effectively.

Save for the relatively few economists steeped in Public Choice economics, the typical economist today remains a political naif—and a dangerous one at that. He is bloated with unjustified confidence in models which show that if government officials behave in the public interest and if these officials are immune to the same decision-making quirks and knowledge limitations that afflict decision-makers in private markets, then government can perform all manner of marvels. This economist then uses his authority to support interventions that are utterly unjustified by genuine scientific standards.

It’s shameful.

Suddenly people were calling for significant cuts in government spending in the face of a rapidly growing national debt.

As often happens, calls for cuts in government spending were met by competing calls for higher taxes, especially on higher-income earners and businesses. They can afford to pay the extra taxes, we were told. And what’s more, higher taxes could actually help the economy.

In making this case, proponents of raising taxes pointed to the tax increases that came out of Washington under President Clinton in 1993. The U.S. economy, as measured by GDP growth, was strong in the years after those tax hikes while unemployment and inflation were relatively low. The argument now is that the 1993 tax increases did not inhibit the economic boom the country enjoyed in the last six or seven years of the twentieth century.

In April New York Times columnist Nicholas Kristof made this very argument. He wrote that while it’s true higher taxes in general “tend to reduce incentives,” this apparently “weak effect” is often overwhelmed by other factors. “Were Americans really lazier in the 1950s, when marginal tax rates peaked at more than 90 percent?” Kristof asked. “Are people in high-tax states like Massachusetts more lackadaisical than folks in a state like Florida that has no personal income tax at all?”

Like other observers, Kristof also contrasted the “golden period of high growth” after the Clinton tax hike with the “anemic economy” that followed George W. Bush’s tax cuts.

But do higher taxes really spur (or at least not inhibit) prosperity? Looking at the data from the 1990s, one might believe so. After all, the 1993 tax hikes were followed by years of strong economic performance. Post hoc ergo propter hoc (after this, therefore because of this), many might believe.

But not everyone agrees the data are quite so clear. The Heritage Foundation’s J. D. Foster, for example, believes the data show that the U.S. economy was already expanding when the Clinton tax increases took effect. If anything, he believes, those tax hikes slowed overall growth for several years until 1997, when the Republican-led Congress passed a series of tax cuts, including a reduction in the capital gains tax rate from 28 to 20 percent.

The “real acceleration in the economy began in 1997, when economic growth should have cooled,” Foster wrote. “This acceleration in growth coincided with a powerful pro-growth tax cut.”

Foster also authored a 2008 Heritage Foundation summary of several scholarly studies showing tax hikes corresponding with slower or negative economic growth. In theory higher taxes could encourage greater levels of private investment through lower borrowing costs—if government used the money to retire debt and reduced its competition for lendable funds. But this potential “silver lining” is overshadowed by the negative effects of higher taxes, he stated. However plausible theoretically, in practice the argument runs into trouble, not least from the fact that governments seldom save any of their revenue, Foster notes.

Still, the idea that the 1993 tax increases spurred economic growth will not die easily. For instance, some people argue that those tax hikes provided much needed confidence in the U.S. economy. As Kristof put it: “Tax increases can also send a message of prudence that stimulates economic growth.”

With this much disagreement it’s hard to know what is really the truth. And this is always the case when looking at the effects of any single economic policy in a vast and complex system. Indeed, so much is happening at any given time in a modern economy—central-bank policy, trade policy, military spending, technological innovation, war or peace, and more—it’s impossible to draw hard and fast conclusions from macroeconomic data alone.

The Austrian economist Ludwig von Mises made this point in his classic treatise, Human Action, in 1949. In discussing the role of historical data in economics, he wrote: “The champions of logically incompatible theories claim the same events as the proof that their point of view has been tested by experience. The truth is that the experience of a complex phenomenon—and there is no other experience in the realm of human action—can always be interpreted on the ground of various antithetic theories. . . . History cannot teach us any general rule, principle, or law.”

Stepping back, therefore, it may be worthwhile to consider fairly uncontroversial economic propositions, such as the law of demand or the law of marginal utility, when trying to determine the likely effects of a tax increase.

Basically, taxes alter relative prices. A tax on gasoline makes gasoline more expensive. A tax on whiskey makes whiskey more expensive. By the same token, a tax on income affects the “price” of leisure; that is, an income tax reduces the reward or “price” one receives for forgoing leisure in order to work. If you are willing to work for $10 an hour, you’re essentially “selling” your leisure time for that price. You might not be willing to sell that leisure time for a lower price. Thus an income tax can be expected, on the margin, to reduce the willingness of some people to work.

While all this is important, it’s probably more important to consider what happens to taxes after the government collects them. How government officials spend tax revenue can damage the economy as much as the tax itself can. That’s because taxes are used for any number of things that distort markets and waste resources, such as providing subsidies to favored industries or strengthening bureaucracies.

As a newspaper reporter I have frequent opportunities to witness government decisions to spend taxpayer dollars. Often an argument in favor of a particular spending program is that it will only add a few dollars to any single individual’s tax burden. Once a government program is in place, however, it’s extremely difficult to reverse it because government spending benefits particular individuals and they are quite motivated to maintain it. When budget cuts are proposed, government officials have effective ways of fighting back. For example, a proposed cut in education spending is nearly always said to be taking teachers out of classrooms, and a proposed cut in police spending is nearly always said to be taking neighborhood cops off the streets. The “fat” in education and law-enforcement spending may be elsewhere. But those are the items placed on the public chopping block by clever bureaucrats and politicians.

So the real problem with taxes and tax increases may be that they simply feed the beast—the political and less-efficient government sector—while shrinking the voluntary, more-efficient private sector. For anyone concerned about liberty this is reason enough to oppose higher taxes.

As described in William J. Bernstein’s book The Birth of Plenty: How the Prosperity of the Modern World Was Created, France’s minister of finances under Louis XIV from 1665 to 1683, Jean-Baptiste Colbert, worked tirelessly to expand commerce by improving his country’s roads and canals. Unfortunately, trade was hindered by more than potholes—a complex system of internal tariffs was throttling commerce. Colbert tried to dismantle the tariffs but was only partially successful. After his death, “all fiscal restraint was lost. By the end of Louis XIV’s reign three decades later, the State had doubled the tolls on the roads and rivers it controlled, and the nation that had once been Europe’s breadbasket . . . was bled white. . . .” Bad regulations trumped good roads.

During the Great Depression Franklin Roosevelt initiated massive public-works programs to improve the nation’s infrastructure in hopes of putting people back to work and jump-starting the economy. The construction efforts were staggering. According to Conrad Black:

The government hired about 60 percent of the unemployed in public-works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York City’s Lincoln Tunnel and Triborough Bridge, the Tennessee Valley Authority, and the heroic aircraft carriers Enterprise and Yorktown. They also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields.

Yet these extraordinary accomplishments were not enough to pull the nation out of the Depression. Neither were the millions of jobs generated by this monumental work.

At the same time as he was directing resources away from the private sector, Roosevelt also unleashed upon it a regulatory blizzard that significantly increased the risk of doing business. Higher personal, corporate, excise, and estate taxes; wage and price controls; production restrictions; antitrust lawsuits; and constant experimentation provided few incentives for companies to expand. As in Louis XIV’s France, an improved infrastructure could not revive commerce in the face of stifling government regulations.

Enough Roads; Too Many Roadblocks

Today President Barack Obama is touting high-speed rail and other infrastructure improvements as keys to economic renewal. But if massive infrastructure investments were not enough to turn the economy around in the 1930s, they are far less likely to do so today. Because Roosevelt was starting from a lower base his improvements would have had a far greater impact on the economy of his day than would similar work done now. Also, the lighter regulatory burden in the 1930s meant there were projects then that truly were “shovel-ready.” Today environmental impact studies, possible archeological finds, and nuisance lawsuits may stall construction for years or halt it completely.

The real roadblock to economic growth is the burgeoning regulatory burden that President Obama, like Roosevelt before him, has placed on business. According to a study by James Gattuso and Diane Katz, “[T]he Obama Administration imposed 75 new major regulations from January 2009 to mid-FY 2011, with annual costs of $38 billion.” Hundreds of additional regulations will pour forth from Obamacare, Dodd-Frank, and proposed EPA greenhouse gas restrictions. All this on top of an already monumental regulatory burden imposed by government. A Small Business Administration report estimates the cost of regulatory compliance at over $1.75 trillion in 2008 alone.

Briefly, our current economic woes were triggered by the collapse of a housing bubble, produced by loose monetary policy together with federal pressure on mortgage companies to lend to bad credit risks. When the bubble burst, housing prices fell, causing many homeowners to default on their mortgages. Investment vehicles based on those mortgages lost much of their value, leading to huge investor losses and the failure of some major financial institutions.

Lost in Transition

Absent government interference industry would retool, shifting capital and labor out of home construction and into other areas. Because neither capital nor labor is homogeneous, this shift takes time. Equipment that can be put to other uses may have to be sold or physically moved. Other equipment may have to be modified or scrapped altogether. Workers may need to increase their market value by relocating or by gaining new knowledge and skills. In a recession consumers typically reduce spending and increase savings, thus freeing up the resources needed to complete the shift.

Keynesian economists, however, see both labor and capital as homogeneous, aggregated lumps. Where Austrians see capital in transition Keynesians see “idle capital.” Keynesian programs to put that capital back to work only hinder or halt the needed transition, either leaving capital in its malinvested state or forcing it into the very idleness they seek to remedy. For example, expanding credit may re-inflate the collapsed bubble for a time, leading industry to continue producing unneeded goods. Stimulus spending—whether for infrastructure or other things on the government’s wish list—transfers scarce resources from industry to government, further impeding the transition. New laws, enacted to prevent future recessions, make businesses reluctant to invest until the associated regulatory structures are defined—a process that can take years. Once in place the regulations may inhibit capital flow, locking inefficiencies and malinvestment in place and propping up companies that should be allowed to fail. Unemployment insurance and other such programs eliminate or at least reduce workers’ incentives to move or reeducate themselves.

The country’s problems are not the fault of inadequate highways. They are the result of government intervention: loose monetary policies, programs that encourage unsustainable debt, explicit and implicit guarantees to financial institutions, massive spending that crowds out private investment, oppressive regulations, higher taxes with constant threats of more to come, and political payoffs to “friendly” companies and unions. Building high-speed railroads will not stop the malign effects of these policies; the solution is to stop the policies.

Goods, people, and information will not flow freely across a nation, regardless of the quality and extent of its infrastructure, if taxes and regulations block their flow. Trade perished in France as Colbert’s improved roads and canals were made all but useless by high internal tariffs. Hundreds of thousands of miles of new and rebuilt roads were not enough to move commerce past the regulatory roadblocks that Roosevelt erected. President Obama’s proposed high-speed trains—indeed, his latest nearly half-trillion-dollar jobs program—will not pull the country over the mountain of regulations that has been created in the decades since the Great Depression and that Obama has raised to new heights.

My family’s number was TI3-8597. The letters were meant to honor a man I never knew of or appreciated until long after the switch to all digits—Samuel J. Tilden. He deserves to be much better remembered as something other than part of a defunct phone number. A strong case can be made that he was, as the subtitle of a recent book by screenwriter Nikki Oldaker suggests, “The Real 19th President.”

Tilden was born nearly two centuries ago on February 9, 1814, in New Lebanon, New York. After studies at Yale and New York University, he became a successful lawyer, a shrewd investor, a wealthy man, and a promising politician in the Democratic Party. A crusader against the corruption of the infamous Tammany Hall political machine in New York City, Tilden was catapulted from the New York state assembly to the governorship in 1874. From that perch he quickly earned a national following and gained the Democratic Party’s nomination for president in 1876.

No Democrat had occupied the White House since James Buchanan passed the office to Abraham Lincoln in 1861. Fifteen years later the country was ready for a change. Tilden comfortably beat Ohio Republican Rutherford B. Hayes in the popular vote, 51 to 47.9 percent, but a nasty political battle resulted in a dubious deal. Behind closed doors Hayes was awarded enough disputed votes in the Electoral College to edge Tilden there by one vote. In exchange the Republicans agreed to withdraw federal troops from the South and end Reconstruction. Tilden remains one of only four presidential candidates in U.S. history to win the popular vote but lose the Electoral tally—the others being Andrew Jackson (1824), Grover Cleveland (1888), and Al Gore (2000).

Tilden was known for assessing policy options according to right and wrong versus the typical political (and Machiavellian) rule of what can get you elected and reelected. “Successful wrong never appears so triumphant as on the very eve of its fall,” he once said. “We must believe in the right and in the future. A great and noble nation will not sever its political from its moral life.”

Hayes turned out to be a clean and decent one-term president, but Tilden just might have shined as one of our best. I’ve come to admire him because he was rigorously committed to all the right things: limited government, sound money, free trade, and low taxes—which is to say that he’d have a hard time getting to first base today, particularly within his own party. Most 21st-century libertarians would be very comfortable with the 1876 Democratic Party platform on which Tilden ran.

Money. The big money questions of the 1870s were 1) what to do with the hundreds of millions of paper dollars (“greenbacks”) issued during the Civil War; and 2) whether to subsidize and re-monetize silver as a means of inflating the currency. Tilden and the Democrats were the country’s leading advocates of fulfilling the original promise to redeem greenbacks in gold and in opposing subsidies for silver. As advocates of sound money they had no interest in monetary expansion to goose the economy and help debtors because they believed it was fundamentally dishonest.

“Reform is necessary,” asserted the Tilden platform, “to establish a sound currency, restore the public credit, and maintain the national honor. We denounce the failure for all these eleven years of peace to make good the promise of the legal tender notes (the greenbacks), which are a changing standard of value in the hands of the people, and the non-payment of which is a disregard of the plighted faith of the nation.” Taking direct aim at the Republicans, it went on to declare: “We denounce the financial imbecility and immorality of that party which . . . has made no advance towards resumption—no preparation for resumption—but instead has obstructed resumption by wasting our resources and exhausting all our surplus income.”

Tariffs: Taxes on imported goods were the primary source of federal revenue for most of the nineteenth century. Since Lincoln, the Republican Party stood for high tariffs not just for the revenue but also for the “protection” of domestic industries. The free-trade Democrats saw protectionism for what it really is: an attack on consumers for the benefit of producers with political connections. The Tilden platform’s critique of it is as relevant today as it was in 1876:

We denounce the present tariff, levied upon nearly four thousand articles, as a masterpiece of injustice, inequality, and false pretence. It yields a dwindling, not a yearly rising, revenue. It has impoverished many industries to subsidize a few. It prohibits imports that might purchase the products of American labor. It has degraded American commerce from the first to an inferior rank on the high seas. It has cut down the sales of American manufactures at home and abroad, and depleted the returns of American agriculture—an industry followed by half our people. It costs the people five times more than it produces to the treasury, obstructs the processes of production, and wastes the fruits of labor. It promotes fraud, fosters smuggling, enriches dishonest officials, and bankrupts honest merchants. We demand that all custom-house taxation shall be only for revenue.

Government spending: Virtual one-party (Republican) dominance since 1865 had produced huge increases in federal expenditures, largely for pork-barrel projects. Tilden denounced the spending explosion, and his people inserted strong language against it in the 1876 platform: “Since the peace, the people have paid to their tax-gatherers more than thrice the sum of the national debt, and more than twice that sum for the federal government alone. We demand a rigorous frugality in every department, and from every officer of the government.” The Tilden Democrats were squarely in the tradition of their Jefferson-Jackson forebears and light-years apart from their Democratic descendants of today. It was a tradition that would continue through the last great Democratic president, Grover Cleveland, only to be thoroughly forsaken by the next (and arguably the worst) Democratic president, Woodrow Wilson.

On many other vital issues of the day Tilden and the Democrats staked out the moral high ground. They opposed an imperialistic foreign policy and favored Civil Service reform to minimize political patronage and corruption. Because they respected the rights and sovereignty of free individuals, they fought against sumptuary laws to regulate personal behavior. They denounced the use of government power to advantage one group over another. And they pushed to treat the southern states once again as equal partners in the Union.

Today dozens of streets, townships, libraries, and schools from Wichita Falls, Texas, to Washington, D.C., bear the Tilden name. A statue of him and his home, both in New York City, still stand. But otherwise, sadly, the memory of this man who stood for liberty and should have been president is fading as surely as my old phone number.

TV hosts of course are not authorities on economics, so when they judge Keynesianism as the only truly scientific economics, they mean two things: That is what a Keynesian taught them in school and that is what all their Keynesian friend-guests assure them is the case. Since they never invite a non-Keynesian economist on their shows, they insulate themselves against informed dissent from their faith. Who’s antiscience?

I know many people who (like me) reject Keynesian economics and embrace science (while realizing that scientists are prone like the rest of us to confirmation bias and career ambitions.) But Matthews & Co. say there are no such people.

This explains their intolerance to those who refuse to agree that in a recession government spending is indispensable to raising aggregate demand and restoring economic growth.

If you point out that every dollar government spends, whether taxed or borrowed, is a dollar removed from the private sector, the Keynesian pundit might agree but point out that business is not investing (true) and consumers are not spending (false)—so what’s lost?

The pundits’ blinders keep them from a broader perspective. Since all they know is the most vulgar rendition of Keynesian economics, they have no idea that two distinct factors now prevent economic growth. First, the boom (without which there’s no bust) was created by monetary, housing, and financial policies that to a great extent still exist. Government officials are trying to resurrect the housing industry, indicating that the ruling elite still does not realize that the industry’s pre-bust condition was the artificial result of misguided interventions. Widespread malinvestments—investments unjustified by real underlying conditions—have to be liquidated before economic growth can resume. Liquidation requires the costly but necessary adaptation and transfer of resources and labor to purposes for which there is genuine demand. This correction cannot take place if political responses to the recession get in the way by, say, discouraging saving.

Second, the government has created significant new regulatory uncertainties that chill the investment climate. With so many yet-to-be-written rules coming down the pike, why would anyone risk money now? A government regulatory regime is bad enough; one that can change at any moment is far worse.

Finally, the pundits are blind to the fact that government can’t create real jobs by design. It’s not that government can’t pay people to do things. But in economic terms, a job is not merely exertion in return for a paycheck. It’s activity that transforms resources from a less valued form to a more valued form in the eyes of consumers.

Keynesian pundits insist that a stimulus program to pay workers billions of dollars to repair schools, roads, and bridges would qualify as productive because people value those things. What’s missed is that we live in a world of scarcity and tradeoffs, and that we always make choices at the margin. Repairing a school may sound good in a vacuum (Which school? How elaborate a repair?), but not so good when something more valuable must be given up in exchange.

We all make similar tradeoffs in the marketplace, and we can do so intelligently because goods and services have prices. But government-produced goods and services are not priced and sold in the market. Instead, government collects its revenues by threat of force, and politicians and bureaucrats dispose of them ostensibly in the interest of the people but more likely in the career interest of those same politicians and bureaucrats. Without prices and free exchange—without entrepreneurship—we cannot know if what government produces is worth the alternative goods and services forgone. Putting the infrastructure into the freed market would correct this defect.

The Keynesian pundits, then, are wrong. The government need not be the spender of last resort because 1) producers and consumers would spend just fine if it would get out of their way, and 2) the government can’t be relied on to create, rather than destroy, value in its use of scarce resources.

* * *

In a move reminiscent of medieval times, the government of Atlanta has told independent street vendors they now owe tribute to a new monopoly contractor. Bob Ewing describes this outrage against economic freedom.

“Infrastructure” is the magic word for those who want the government to spend ever-more amounts of the taxpayers’ money. Richard Fulmer reminds them that this is no substitute for a free economy.

The American people continue to be plagued by unemployment. What is it exactly, and where does it come from? Warren Gibson starts a two-part series this month.

People favoring a tax-hike strategy for reducing the federal deficit point to the booming Clinton years for support. Arthur Foulkes takes a closer look at those years.

Russell Conwell was well known in the late nineteenth century for his inspirational speeches about entrepreneurship and self-help. Today he’s forgotten, but Harold Jones, Jr., is trying to change that.

Fed Chairman Ben Bernanke promises to continue his near-zero-interest-rate policy for another two years. But Christopher Lingle says that would be a disaster.

Failure can be painful, but not as painful as what results from a public policy aimed at preventing failure. Jack Knych and Steven Horwitz explain.

Communitarian sociologist Amatai Etzioni has been railing against libertarianism for at least 30 years but refuses to respond to rebuttals. Aeon Skoble gives him one more chance.

Our columnists have had fun coming up with topics for their sharp observations. Lawrence Reed remembers Samuel Tilden. Donald Boudreaux finds fault with economists. Stephen Davies uses debt and taxes to gauge political failure. John Stossel looks at some historical myths. David Henderson traces the causes of the 1967 Detroit riot. And Tyler Watts, reading Paul Krugman’s appeal for more government spending because it will create jobs, responds, “It Just Ain’t So!”

Our book reviewers have been absorbed in works about the financial crisis, a champion of the freedom philosophy, libertarianism, and capitalism.

That’s right: Despite record federal spending and unprecedented Federal Reserve intervention, the economy remains depressed. Beyond stating the obvious about the nonrecovery Krugman frets about the long-term implications of the stubbornly sour labor market. He also notes that consumers are “still burdened by the debt that they ran up during the housing bubble,” which, to my Hayek-schooled mind, sounds an awful lot like the drawn-out bust phase of a credit-fueled business cycle.

Rather than concluding that deficit spending and printing money are the wrong cures for what ails us, Krugman complains that government is not doing enough. Citing the tea-party Republicans’ “deficit obsession,” Krugman complains that government has been “pulling back [rather than] supporting the economy in its time of need.” He also cites lassitude at the Fed, claiming it’s been “intimidated by the Ron Paul types” into overreacting against potential inflation. Krugman argues the federal government should be doing much more, and its top priority should be creating jobs, not reducing the deficit.

While Krugman avoids the specifics of what such grandiose federal jobs programs would entail, he’s on the record supporting massive New Deal-style public-works spending, which would employ “armies of government workers.” Krugman also favors more monetary stimulus by the Fed to boost spending throughout the economy. In brief Krugman is saying we have not yet begun to fight the Keynesian battle of stimulus on either the monetary or fiscal fronts.

Let’s review the figures. Since September 2008 the Fed has more than tripled its balance sheet, printing roughly $2 trillion in new bank reserves, monetizing around $900 billion of U.S. government debt, and lending over $3 trillion to U.S. and foreign banks. As for federal spending—the real growth engine, in Krugman’s mind—it increased by 40 percent (29 percent in real terms) from 2007 to 2011 to a record $3.8 trillion, with half that increase coming in the recession year 2009 alone. “Stimulus” spending by itself has amounted to $666 billion so far, and federal bailouts have racked up at least $150 billion in taxpayer costs. Since 2007 gross public debt has increased from 64 to 103 percent of GDP.

And Krugman’s argument again? Government is not printing and spending enough. This fetish for unlimited spending juxtaposes strangely against a backdrop of perhaps the most fiscally profligate decade of American history, but I’ll give Krugman credit for boldness. However, the figures themselves, shocking as they are, mask the real question: Can more government spending actually encourage productive employment that promotes overall economic welfare?

Stimulus enthusiasts like Krugman are sure it can. And their first big task for the new labor armies is to go forth and fix America’s broken infrastructure. Haven’t you heard? America’s roads, bridges, sewers, airports, and more are in total disrepair—so says the infrastructure lobby. But these folks—an assortment of large construction, manufacturing, and transport companies, and their unions—have been carping about infrastructure being underfunded for the last 30 years. No surprise here: like any special-interest group, they want a continued and enlarged flow of federal funding. Hence my Public Choice nerves twitch at every mention of “crumbling infrastructure.”

But let’s concede that they’re right: that our infrastructure is in a sad state and more federal spending would be a wise investment. Using the infrastructure lobby’s figure of 18,000 new jobs for every $1 billion in government spending, doubling federal infrastructure spending would reduce the unemployment rate to 8.3 percent. And this ignores the matter of timing, as infrastructure projects require years of planning and regulatory hurdle-jumping before they’re “shovel-ready.” Nonetheless, even the most unrealistically generous assumptions about infrastructure spending indicate that if you want to get the economy back to full employment, it’s going to take a lot more than just public works.

But stepping back from labor army fantasies, there’s something absurd about using infrastructure “investment” as a jobs program. To the extent that federal funding of infrastructure is economically advisable, “good government” would require minimum expenditure (read: minimum employment), lest said public works turn into a black hole of rent-seeking—public spending to enrich private interests.

Infrastructure spending is not immune to the institutional inefficiencies that beset all government programs. But questioning the value and efficiency of public works is only half the matter. Call me a conservative stick in the mud, but the little question of how the government is going to pay for all this largess strikes me as relevant these days.

Krugman of course sees no problem here. He is on record favoring larger deficits, seeing historically low interest rates as a go-ahead for even more federal borrowing. Oddly enough, others in the economy, such as Standard & Poor’s, see a quite large problem with continuing government debt growth. It’s called insolvency: If you have too much debt and you can never pay it off, bad consequences ensue. (I wonder if Krugman would advise a family with $325,000 in credit card debt on an income of $50,000 a year to go ahead and open up a new credit card account simply because it came with a 0 percent teaser rate?) While Krugman, with his stale brand of vulgar Keynesianism, appears increasingly oblivious to it, other recent events have revealed in stark fashion what our real economic problem is—excessive government debt, a direct consequence of excessive government spending.

The fixation on ever-bigger government stimulus programs to “fix the economy” reveals the basic fallacy with Krugman and the Keynesians. They view “the economy” and “the government” as distinct entities—as if poor little Johnny Economy would be just fine if only rich, stingy old Uncle Sam would open up his wallet and give Johnny a job! The reality is that the economy is us—the government exists within the U.S. economy, not apart from it. To “support” the economy the government must take resources from the very same economy. This can only confer a net increase in productive activity if government bureaucrats and politicians a) are truly benevolent, suppressing their representation of private interests in favor of “the general welfare” and b) know better than individual entrepreneurs throughout the country how to wisely invest scarce resources.

Since the days of Hume and Smith, economists have rightfully heaped skepticism on such assumptions. Politicians and bureaucrats are neither angelic nor omniscient; simply increasing their ability to print and spend is not a formula for prosperity. The fact that the United States is currently suffering the lingering effects of a complex recession and government debt crisis does not change these lessons, but confirms them. To adapt a phrase from a president who understood this (even if he couldn’t quite enact it): In our present crisis government spending is not the solution to the problem; government spending is the problem.

If you spend any time on a social network, you’re bound to come across this video of Elizabeth Warren, who’s running for the U.S. Senate in Massachusetts. In her remarks she says:

There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

Just goes to show, you can start with a valid premise and end up with an invalid conclusion.

She’s right: When you live in a society you benefit in countless ways, material and otherwise. The language you speak and think in is a social institution and would be impossible without the presence of others. So is custom, which regulates our interpersonal conduct far more than the edicts (mistakenly called “laws”) of legislatures. And the few valid ideas among those edicts had their origin in bottom-up custom. (See my “The Rule of Lore.”) How about money itself? It is also an organic social institution. Of course today money is fiat paper controlled by government, but even that system has a foundation in the institution described by Carl Menger and Ludwig von Mises.

Social Animals

So we need not deny Warren’s premise. Human beings are social animals. We should revel in that fact. Frédéric Bastiat did in Economic Harmonies:

Let us take a man belonging to a modest class in society, a village cabinetmaker, for example, and let us observe the services he renders to society and receives in return. This man spends his day planing boards, making tables and cabinets; he complains of his status in society, and yet what, in fact, does he receive from this society in exchange for his labor? The disproportion between the two is tremendous.

Every day, when he gets up, he dresses; and he has not himself made any of the numerous articles he puts on. Now, for all these articles of clothing, simple as they are, to be available to him, an enormous amount of labor, industry, transportation, and ingenious invention has been necessary. . .

Next, he breakfasts. For his bread to arrive every morning, farm lands have had to be cleared, fenced in, ploughed, fertilized, planted; the crops have had to be protected from theft; a certain degree of law and order has had to reign over a vast multitude of people; wheat has had to be harvested, ground, kneaded, and prepared; iron, steel, wood, stone have had to be converted by industry into tools of production . . . — all things of which each one by itself alone presupposes an incalculable output of labor not only in space, but in time as well. . .

It is impossible not to be struck by the disproportion, truly incommensurable, that exists between the satisfactions this man derives from society and the satisfactions that he could provide for himself if he were reduced to his own resources. I make bold to say that in one day he consumes more things than he could produce himself in ten centuries.

What’s New?

Elizabeth Warren, then, has said nothing startling. This has been the (classical) liberal view of the market social order from time immemorial. But she places what should be a mundane observation in the service of a bad cause: higher taxes. That’s a non sequitur.

Let’s stipulate something before examining Warren’s mission. In today’s society, as in Bastiat’s, great wealth can be made by what Franz Oppenheimer, echoed later by Albert Jay Nock (pdf), called “the political means.” That is, many business people (preaching the gospel of “the free market”) make fortunes from government interventions that directly or indirectly, intentionally or unintentionally, obstruct entry into their industries or limit self-employment opportunities, allowing them to earn oligopolistic rents at the expense of consumers and workers. That’s a traditional classical liberal complaint about government and its connivance with business.

But that is not what Warren means. In the video she says nothing about corporate-state privilege or the long years of intervention that amount to the “subsidy of history.” She mentions only tax-financed roads, schools, and police — three of the worst “services” precisely because they are tax-financed government monopolies. (Roads do entail a subsidy to long-distance shippers, but she seems oblivious to that.) There’s an easy remedy for State-granted privileges: repeal. But like a good corporate-liberal, she prefers regulation to repeal. And as we know, George Stigler’s theory of regulatory capture tells us that the rules will tend to be written with the regulated industries in mind, if not with their active participation. (Not that other-minded regulators would know what to do.)

“[Y]ou built a factory and it turned into something terrific, or a great idea? . . . Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along,” she says.

Produce the Contract

Has anyone seen this social contract that obligates you to surrender a “hunk” of what you produce under penalty of violence? Sorry, I don’t trust unwritten open-ended so-called “contracts” into which any advocate of government power may read conditions ex post. (The idea of social contract can be construed more sensibly. See this.) Moreover, why aren’t honest production and exchange of valuable goods counted as payment forward? Just as our living standard is the fruit of previous generations’ production, so today’s producers are helping to raise the living standard of the next generations.

Boiled down, then, Warren’s argument is that since everyone has paid taxes to provide services without which wealthy people couldn’t have made their money, they should pay more. How does that follow? She’d first have to show that they are paying too little now. She only assumes this. (See Steven Horwitz’s discussion of this matter.) That’s not good enough. And maybe the services are inferior and cost too much — wouldn’t we expect that from a protected monopoly?

She might respond that the presence of the deficit shows that not enough money is collected in taxes and therefore the wealthiest should pay more. Still not good enough. As she herself intimates, the George W. Bush years were marked by unfunded spending. That sounds like a problem of overspending, not undertaxation. Solution: Cut spending.

A friend of mine served on our city’s legislative council for eight years. During that time he often heard—in defense of tax-funded business incentives—“If we don’t do something, nothing will happen.” The same belief holds sway at the national level. Many of our most educated people believe that unless government provides direction and pays the fare, the national train will stop or even slide backward.

That view undergirds a June op-ed piece by Washington Post opinion page editor Fred Hiatt. Discussing U.S. fiscal policy, Hiatt wrote: The “doctrinaire Republican insistence on ever-shrinking government would sap the country’s ability to invest in the research, education [and] infrastructure . . . that a great power needs” (“What’s Happened to America’s Leadership Role?” June 26).

In other words, without government spending, there will be a serious lack of critical investment. So serious, in fact, that America would cease to be a “great power” and force for good around the globe.

Is that so?

In the first place, if massive government spending were required for a nation to emerge as a “great power,” one wonders how America became the wealthiest nation on earth in the late 1800s, after a century of having a small and sharply limited national government.

That aside, let’s look at Hiatt’s assertions one at a time.

First, he apparently embraces the argument that scientific research is a “public good”—something anyone can enjoy whether he helped pay for it or not. This is the so-called free-rider problem. If basic research is a public good, the standard argument goes, government must pay for it.

But Professor Terence Kealey, an author, lecturer, and clinical biochemist at the University of Buckingham in the United Kingdom, has shown that scientific research is not a public good. Indeed, he has found that the most profitable companies do fund pure science, often quite generously and with important wealth-creating results. That’s a sign they don’t fear free riders.

Writing for the Cato Institute in 1997 Kealey pointed to research showing that while the benefits of pure science are often “captured” by rival firms, those firms still must employ excellent (and highly paid) scientists to take advantage of new developments. In other words, there is no free ride in R&D.

Furthermore, government-funded research pales in comparison to private research in terms of commercially useful industrial technology, which is what makes us richer. Government-funded research, meanwhile, is largely unproductive. Kealey also noted that in countries with low tax burdens, companies use their own funds to pay for basic science. But in countries with high tax burdens, companies seek government grants, meaning “pure science” becomes purely political.

Kealey concluded: “Scientists may love government money and politicians may love the power its expenditure confers upon them, but society is impoverished by the transaction.”

“Education” and Government

Hiatt also believes quality education requires government funding. But this is mistaken as well.

In the first place, public schools have never been about “education” per se. They were created, and continue, to be institutions designed to “mold” children into “good citizens.” They are not selling a good or service on the open market. They are peddling a State-endorsed frame of reference.

Recently in my home state of Indiana, government school teachers had a public confrontation with the governor, Mitch Daniels, over tax-funded charter schools and a tax-funded voucher system. The lockstep protest among teachers (at least those speaking for their fellow teachers at the statehouse) hardly showed any real independence of thought. It did show, however, that education policy has fully entered the realm of interest-group politics.

The idea that only government can provide schooling is demolished by the work of James Tooley, a professor of education policy at the University of Newcastle. He found that in the poorest slums of Africa, private schools are operating successfully, providing real education at affordable prices or without charge for the poorest kids. (See Tooley’s May 2006 Freeman article, “Backing the Wrong Horse: How Private Schools Are Good for the Poor.”)

Unfortunately, the United Nations entered this picture and pushed a system of universal “free” (tax-funded) schools in those same areas. This cost some private schools enrollment, at least until many parents found the government schools lacking and returned their children to the private schools. As in America, Tooley also found private schools in Africa educate children far below the cost of government schools.

Infrastructure

Finally, Hiatt also names infrastructure spending as an area in need of more, not less, government funding. Yet as Peter Van Doren and Chris Edwards of the Cato Institute pointed out in 2008, countries on every continent have been busy selling off inefficient State-owned assets, including airports, seaports, and even highways, to private concerns. Greece, now on the brink of bankruptcy, may provide the best example of a state that followed the road of more and more government spending on what might otherwise be private infrastructure. The result has been exceptional waste, inefficiency, and a populist and trade union stranglehold on the nation. As Greek economist John Sfakianakis wrote recently in the Financial Times, “The Greek political landscape is ingrained with vested interests, endemic kleptocracy and bribery. Since the days of Andreas Papendreou, an economist and father of the current prime minister, our politics has been predicated on the expansion of the public sector, patronage and borrowing.”

In his classic book, Our Enemy, the State, Albert Jay Nock wrote in 1935: Whatever “the state has accomplished outside its own field has been done poorly and expensively. . . . No complaint is more common, and none better founded, than the complaint against officialism’s inefficiency and extravagance.”

Many people believe only a large and growing State can ensure America’s greatness. But they misunderstand greatness. A growing government sector necessarily weakens civil society, where individuals make (and pay for) their own choices and market forces guide the use of capital to its most productive uses.

Far from being the key to national greatness, an ever-expanding government sector will only push more economic decisions into the political realm. It will also undermine the commitment to the individual freedom and personal responsibility that made America unique, prosperous, and great in the first place.