Does anyone still think the “war on drugs” is a good idea?

That may strike some people as an odd question under the circumstances, so let’s take it from another direction. Have you seen the news stories about the violence on the border being perpetrated by the Mexican whiskey and cigarette cartels?

No? That’s probably because there was no such violence and are no such cartels.

So why are there violent cartels in marijuana, cocaine, and heroin but not in whiskey and cigarettes?

All together now: prohibition.

“Our” Fault?

Of course the politicians blame everything and everyone but themselves for this spreading violence. “Our insatiable demand for illegal drugs fuels the drug trade,” Secretary of State Hillary Clinton said. “Our demand”? Including hers? “Our inability to prevent weapons from being illegally smuggled across the border to arm these criminals causes the deaths of police officers, soldiers and civilians.” Her answer, in addition to sending the Mexican government taxpayer money, is to go after consumers of drugs and manufacturers and dealers of guns she doesn’t like.

Drug users and gun dealers are to blame for drug-cartel violence? That makes no sense. If it did, then drinkers and smokers would be creating violence, too. What’s missing?

Once again in unison: prohibition. Who brought us prohibition? Politicians. Every politician, bureaucrat, and agent who facilitates or enforces prohibition is an accomplice in the violence because he or she helps to create the conditions in which thugs have a comparative advantage in dealing drugs.

For years advocates of free trade in drugs—that is, basic rights to life, liberty, and property for drug consumers, producers, and merchants—have pointed out that prohibition, besides being an immoral invasion of liberty by the state, sets in motion a variety of concrete evils that harm innocent people. (No one has been more consistent and rigorous in this than Thomas Szasz). These evils include the corruption of law enforcement, violent crime, and the expansion of intrusive government. Besides these domestic evils, the U.S. government has alienated farmers in foreign lands by helping to destroy their crops and livelihoods. If that’s not terrorism, nothing is. Crop destruction has been a recruiting tool for guerilla organizations, while black-market profits finance them and others with malign intent.

Few listened to these Cassandras against the anti-drug crusade. Maybe people will listen now.

Government Impotence

While violent gangs that make their money selling drugs in the black market are murdering and kidnapping people, invading homes, and committing other atrocities, the politicians have nothing to say but the same bromides they’ve been repeating for years. Thinking we’re either simpletons or amnesiacs, they expect us to be comforted by their words. (Will they be right?) They promise to defeat the cartels, crack down on drug use, and disrupt the gun trade. It won’t work. It’s never worked. It can’t work. Black-market operators are always steps ahead of the plodding bureaucrats. Break up one gang and another emerges. The drugs keep flowing (there’s plenty of bribe money), and consumers will have what they want when they want it. The profits made possible by the black market are powerful incentives to keep the industry going. Government is impotent. (They can’t even keep drugs out of prisons!)

Yet the gangs could be put out of business overnight. How? By removing the criminal penalties for the production, trade, and consumption of all drugs; by bringing the black market into the open, so disagreements can be resolved through civil channels and a talent for violence is no longer an advantage; by dissolving the extraordinary profits that illegal industries always reap.

Yes, it is that easy.

People will recoil. We can’t do that! No? Then accept as normal the unspeakable violence that is starting to spread from city to city, because that is the alternative to the stubborn refusal to end the “war on drugs,” which is really a war on people. Even full police-state tactics will not be able to control it, though that won’t stop demagogic politicians from giving them a try.

The Drug War Finances Government Careers

I don’t expect the multitude of officials who depend on the drug war for their livelihoods and power to endorse an end to prohibition. They have shown themselves more than willing to accept the violence (against others) as the price of their ambition. The new threat to us is an opportunity for them to amass more power, bigger budgets, and higher salaries.

But the rest of us have no reason to support the complex of government and “private” tax-financed agencies that grow fat prosecuting this war. The worn-out rationalizations can’t stand examination. Prohibition keeps no one from getting any drug he wants at an affordable price. On the contrary, it encourages the creation of cheaper, more potent drugs, just as alcohol prohibition replaced wine and beer with hard liquor. (More bang in a more compact form.) Prohibition doesn’t keep our children safe. It makes drugs into enticing forbidden fruits and pushes the trade into less-visible channels. Drugs aren’t “dangerous,” though people are capable of doing harmful things with them—and many other things. (Jacob Sullum’s Saying Yes is an eye-opening book that I highly recommend.) Addiction is not a disease; it’s a choice.

Everything the drug warriors have said is wrong—and often a conscious lie.

Drugs are to our society what Eurasia and East Asia were to Oceania in Orwell’s 1984: a convenient conjured-up demon to justify expansion of power and the usurping of liberty—in the name of keeping us safe.

What will it take, if not the current violence from Mexico, to make people see through the scam?

Look around. It’s our self-proclaimed protectors from whom need we protection most.

This confession often brings harsh reactions. A typical response is, “What?! Don’t you think that people are capable of choosing wisely for themselves?” (The unstated subtext is that I am either an elitist or that I have sympathies for Robert Mugabe-like tyrants.) And my answer is always the same: “Of course I think that people are capable of choosing wisely for themselves—which is why I want to minimize the subjection of individuals to any outside force, including the majority.”

I trust my neighbor to know what size toilet tank is best for him and his family. I trust my neighbor to know whether or not he should smoke cigarettes (or pot); to wisely choose how much to save for his retirement; to decide if the car made in Korea is a better deal for him than is the car made in Detroit; to educate his children. For these and countless other decisions my neighbor does not need the forced “assistance” of me and others. My criticizing the use of democracy for the vast majority of issues to which it is today applied is a defense of personal ability and responsibility.

Another reason democracy leaves me uninspired is that it is aesthetically grotesque. The sights and sounds of candidates pandering to voters have all the appeal, to me at least, of watching washed-up celebrities on late-night television making obviously phony pitches for reverse mortgages and magical mattresses.

But there’s this difference: relatively few people—even those who fall for the pitches—regard the celebrities as anything more than paid mouthpieces. In politics, though, the Barack Obamas, Hillary Clintons, George Bushes, John McCains, and Ronald Reagans are too often treated as selfless divines, secular faith healers whose will and touch will cure incurable problems.

How else to explain the ever-present reaching out of hands by crowds of people who long for just a touch of the president? How else to explain the thunderous applause that typically erupts from audiences whenever a famous politician pronounces the most banal platitude? How else to understand the widespread desire for the president to appear personally at disaster scenes and to hug (for the cameras!) a handful of victims’ relatives?

Political Delusion

I recently got an unexpected glimpse into the abyss of political delirium after an article of mine was published in the May 24 edition of the Wall Street Journal. In that article, I pointed out what struck me as an obvious contradiction in Hillary Clinton’s campaign rhetoric—namely, I argued that Senator Clinton’s complaint that her bid for the Democratic nomination was thwarted by sexism is at odds with her insistence that she would be a stronger candidate than Barack Obama in the general election.

I expressed no preference for Senator Obama or for Senator Clinton; nor did I offer a plug for or against the GOP candidate, John McCain. My point was a logical one. It was political only insofar as exposing any candidate’s inconsistencies helps to reveal the true nature of politics.

But my oh my! Within 48 hours my e-mail inbox was filled with over 300 responses from strangers. All but one was negative. (I didn’t think that this outcome was statistically feasible, but, well, I was wrong.) What follows are just four of the responses—and only ones that are fit for inclusion in a family-friendly publication:

Your educational background is in economics. So I have to tell you, your opinions in this area should have never seen the light of day. You want to comment on this topic, have a sex change operation, and live in this world for 10 years. Then, and maybe then, I will listen to your opinion. In the mean time, please shut up.

One of the biggest tactics of sexists is to dismiss a woman’s point of view and that is just what you are trying to do. . . . You should look more deeply into yourself and ask yourself “what is so threatening to me about a woman in power that I have to try to diminish her and her concerns?” Be a real man and be honest with your fears of powerful women and maybe this world can move a little step closer to equity for all.

Sir, and I say “Sir” with great reservation as I believe the homeless person on the street deserves more respect than you. I can only wonder what the men in other countries think of the male attitude in this one. It’s attitudes like yours that contributes to battered women. I keep thinking it will change, but until we manage to elect a President like Hillary, it likely will not happen.

Rise Hillary Rise!!!!!!!!

Biases of Politics

I cannot read such things without experiencing profound sadness—for it is sad that many people avoid challenging an argument on its own merits and, instead, treat any perceived lack of enthusiasm for their favorite candidate as a sign of either intellectual failure or moral turpitude. It is sad that so many people believe that secular salvation is possible through the election of a particular man or woman to political office. It is sad that so many people still believe that collective interests exist for all persons who happen to share the same kinds of genitalia or who happen to share the same skin color—and that men have interests fundamentally opposed to those of women and that “whites” have interests fundamentally opposed to those of “blacks.”

It is sad—extraordinarily and searingly sad—that so very many people seek salvation through politics and refuse to understand that many individuals, myself included, want neither to be saved nor persecuted by the state. We just want to be left alone by busybodies so that we can be part of building a great spontaneous order of free and prosperous people.

In his April 11 New York Times column, economist Paul Krugman discusses the minor trouble then-presidential candidate Hillary Clinton got into when an anecdote she told about a woman who died because she didn’t have medical coverage was found to be inaccurate. Clinton had used the story in support of her proposal for mandatory medical insurance. Krugman argued that, true or not, the story makes “a valid point about the state of health care in this country.”

On April 14 Krugman conceded that the woman did indeed have insurance, but he maintained that since many people do die from lack of insurance, his earlier column was worthwhile anyway.

I agree that the merits of Krugman’s argument do not stand or fall with the veracity of the anecdote. But while Krugman’s attitude seems to be, “Even if the woman was not uninsured, it’s still true that we need universal care to avoid similar tragedies,” mine would be, “Even if Clinton’s anecdote were accurate, it wouldn’t demonstrate that the only way for society to avoid such tragedies is through coercive national health insurance.”

Part of the problem in discussing this issue is the tendency to conflate several distinct concepts: the ideas that 1) everyone should have access to health care, 2) everyone is entitled to equal levels of health care, and 3) a coercive federal mandate is the only way to accomplish either of those goals. The first is true, but does not imply the second. I doubt that the second is true, but even if it were, it wouldn’t imply the third.

People sometimes mean different things when they speak of access. It would be strikingly immoral for there to be a class of citizens who were forbidden to seek medical attention. Happily, we do not live in such a society. But there are other senses of the word.

Do I have access to a Mercedes? Well, in one sense, yes—if I could afford to buy one, no one would be legally empowered to stop me from doing so.

But I can imagine someone arguing that since, in fact, I cannot afford one, I don’t have “access.” So the argument is not that some people are legally locked out of access to medical care, but that they cannot afford it and in that sense lack access. The very poor are already eligible for government-subsidized medical care, so this argument seems to be directed at uninsured people who make too much money to qualify for Medicaid. But how would mandatory national health insurance fix that problem? Mandating that people buy something won’t suddenly make it affordable.

Why don’t some people have insurance? They may work for employers who do not offer it as a fringe benefit. But they could still enroll in an HMO or in a Blue Cross-type insurance plan. Why don’t they? One possible reason is that they cannot afford the premiums. This means they choose to spend their money in other ways. (Remember, we are not talking about the seriously poor, as they are already covered by government programs.) When I say, “I cannot afford a huge flat-screen TV,” what I mean is that I choose not to afford it; I am saving my money for something else—a new lawnmower, my kids’ college fund, retirement, or what have you. I have assigned a lower priority to a new TV than to several other things.

But wait, comes the rejoinder, flat-screen TVs are a luxury no one needs, but everyone needs health insurance. (Technically, that’s not true, but let’s assume it is.) Then the problem must be that people are arranging their financial priorities erroneously. Mandatory insurance would solve that problem. It would rescue them from their own folly.

This is the core premise of what Krugman calls Progressivism. People do not choose wisely; therefore, for their own good, they must have some choices mandated for them. This premise, of course, is profoundly antithetical to the classical-liberal tradition, in which people’s autonomy and liberty are to be accorded the highest priority unless their actions infringe the equal rights of others. To assume that people cannot be trusted to make wise choices about their welfare is bad enough; it’s worse to add the assumption that a policy wonk is better qualified.

Even if we grant that some people who choose to go uninsured are foolish and ought to be compelled, that wouldn’t address the problem of those who make this choice not out of foolishness, but because they really are so strapped for money that they “cannot afford it” in the ordinary sense of that expression. The mandate then would have the effect of making those people even more impoverished. But at least they wouldn’t die from lack of insurance.

That’s Progressivism? But, a Progressive might reply, isn’t saving lives an important part of the government’s responsibility? Citing the Urban Institute, Krugman says that lack of health insurance kills 27,000 people a year. That’s awful, but the important question is why this happens. More precisely, does government policy make it easier or harder for people to afford medical coverage?

Krugman and Clinton are aware of the affordability problem, but they think the way to address it is through tax-financed subsidies. Here’s a different idea: create market conditions under which lower-income people could receive the coverage and care they currently cannot afford. Contrary to what many think, we have no free market in medical care. Government is pervasive, and that’s the problem. Removing current restrictions would go a long way toward changing this. For example, many routine services could easily be provided by physician’s assistants, nurse-practitioners, or, as they were in the old days, pharmacists.

Imagine if Jiffy Lube had to employ factory-certified master mechanics at $80 an hour to do oil changes. You’d likely get fewer oil changes because they would cost a lot more. But without regular oil changes, your car would be at risk for more serious trouble. When a big problem occurred, people would lament that it could have been prevented with regular maintenance. Some would propose that the government should require people to get regular oil changes even if they can’t afford them. But another approach would be to allow a free market in oil changes, which, as we know, keeps prices low, and enables everyone to get regular care.

Government has many other policies that restrict supply and make medical care artificially expensive. Let’s get rid of them. Why resort to force? Freedom works.

If saving lives is as important a part of the government’s responsibility as Krugman suggests, Progressives would do well to rethink their impulse to regulate behavior. Phrases such as “unregulated markets in health care” evoke the specter of either skyrocketing costs or substandard care. But ironically, that’s the dilemma created by government regulation. Costs for simple preventive care are kept artificially high, so some don’t get it. But unlike the inconvenience of a broken car, this can result in death. Coercion won’t solve the problem.

People often suggest that our health-care system’s problems stem from the fact that we have a free market; hence, their solution is to move to socialized medicine, where everyone has a right to a certain level of health care. The problem with that assessment is that our health-care system is not a free-market system. Over 50 percent of health-care expenditures are made by government at various levels, and there is extensive government regulation and control. Most of the problems of health care can be directly connected to that fact.

But there is a much more important question, not given much discussion, that will be the focus of this article.

Do people possess a right to health care whether they can afford it or not? If you believe the 2008 presidential aspirants, the answer is yes. In a Wisconsin campaign speech Senator Hillary Clinton said, “I believe health care is a right, not a privilege. And I will not rest until every American is covered.” In a campaign speech in Iowa, Senator Barack Obama said, “I believe that every American has the right to affordable health care.” While Senator John McCain has not said health care is a right, he nonetheless proposes greater government involvement. Many Americans share the vision that health care is a right. Let us try to decide what is or is not a right.

Imagine that I meet an attractive young lady and ask her to date me. Suppose she refuses. Have my rights been violated? Or suppose I ask to live in your house, and you say no. Have you violated my rights to decent housing? Finally, suppose I knock on your door and tell you I am hungry and wish to share dinner with you and your family. If you refuse, have you violated my rights? I am sure that most Americans, including Senators Clinton, Obama, and McCain, would agree that I have no constitutional, human, or natural right to date someone, or to live in someone’s house, or dine with him. But why?

Rights and Obligations

True rights, such as those in our Constitution, or those considered to be natural or human rights, exist simultaneously among people. The exercise of a right by one person does not diminish those held by another. It imposes no obligations on another except those of non-interference. I have a right to ask a lady for a date, but I have no right to impose an obligation on her to actually date me. Similarly, I have a right to ask you to permit me to live in your house and dine with your family, but I have no right to impose such an obligation on you. Moreover, since I do not have these rights, I do not have a right to delegate authority to government to impose such obligations on another. In other words, from a moral point of view, one can delegate only those rights that one possesses.

To argue that people have a right that imposes obligations on another is absurd. This can be readily seen if we apply such an idea to my rights to speech or travel. Under that vision, my right to free speech would require government-imposed obligations on others to provide me with an auditorium, television studio, or radio station. My right to travel freely would require government-imposed obligations on others to provide me with airfare and hotel accommodations.

For government to guarantee a “right” to health care, or any other good or service, whether a person can afford it or not, it must diminish someone else’s rights, namely his rights to his earnings. The reason is that government has no resources of its own. Moreover, there is no Santa Claus or Tooth Fairy giving the government those resources. The fact that government has no resources of its own forces one to recognize that for government to give one American citizen a dollar, it must first, through intimidation, threats, and coercion, confiscate that dollar from some other American. In other words, if one person has a right to something he did not earn, it of necessity requires another person not to have a right to something that he did earn.

A better term for these new-fangled rights to health care, decent housing, and food is “wishes.” If we called them wishes, I would be in agreement with Clinton, Obama, McCain, and others. I also wish everyone had adequate health care, decent housing, and nutritious meals. However, if we called them wishes, there would be confusion and cognitive dissonance among people calling for socialized medicine. The average American would cringe at the thought of government punishing one person because he refused to make someone else’s wish come true.

For example, if I simply had a wish for a palatial house and a Rolls Royce in my driveway, and Congress told its agents at the IRS to take other people’s money to make my wish come true, I am sure the average American would be offended. Americans would find it easier to live with their consciences, and find congressional initiation of force against others more palatable, if it were alleged that I have a constitutional “right” to a palatial house and a Rolls Royce. After all the primary job of government is to protect rights.

We can evaluate the morality of rights versus wishes another way. Suppose someone initiated force to prevent another from exercising his speech rights and another stepped in to protect that person’s right to speak. Would the intervener be seen as a hero or villain? Most people would answer hero. Then suppose someone saw a homeless person in need of health care and did privately exactly what government does—initiate force to take someone else’s money to provide that homeless person with medical services. Would that person be seen as a hero or villain? Most people, at least I hope so, would see that person as a villain. That is, taking the rightful property of one person to give to another, to whom it does not belong, is considered theft, and it is theft even if the proceeds are used for selfless purposes. It is theft whether two people or 300 million people agree to taking another’s property.

Finally, charitable efforts to help one’s fellow man in need are noble. Reaching into one’s own pockets to help is praiseworthy and laudable. Reaching into someone else’s pockets to do so is despicable and worthy of condemnation.

In 1978 Michael Jensen and William Meckling, writing in the Financial Analysts Journal, offered an extraordinarily gloomy prediction for the future of capitalism: “The most spectacular period of economic growth in our history is over,” they wrote, because “government is destroying two vital instruments of that growth—the system of contract rights and the large corporation.”¹ Constitutional and electoral constraints on political plunder have proven ineffective, Jensen and Meckling wrote, as the courts, politicians, and regulators have revoked or attenuated property and contract rights and have attacked freedom of association as well, “especially in the civil rights arena.”²

With regard to the stock market, Jensen and Meckling forecast that because of the instability of property rights caused by government intervention, investors have become much less certain that any contract they enter into now will be subject to the same rules and regulations in the future. An early consequence of the erosion of property rights will be a reduction in the capitalized values of corporate securities, with many corporations able to remain in business only so long as they can finance their operations from internally generated cash flow or [government] subsidy.³

As of 1999 the Dow Jones Industrial Average was about 15 times higher than it was in 1978, when Jensen and Meckling issued their dire warnings. But this doesn’t mean that they were wrong about the effects of the American regulatory state on stock prices. The Dow Jones average might be even higher yet were it not for the large degree of governmental control of the means of production that is exercised through regulation. And the stock market is surely much more volatile because of the great uncertainties created by regulation. Overzealous regulators may even cause the market to crash. As discussed below, it was proposed regulation and taxation of corporate takeovers that likely precipitated the 1987 U.S. stock market crash.

Political Entrepreneurship

Although regulators are usually blamed for the economic and social harm inflicted by regulation, it is politicians who are ultimately responsible. The U.S. Department of Labor may enforce the minimum-wage law, for example, but it is Congress that passed it. Regulation is just another form of pork-barrel politics whereby politicians dispense regulatory favors to special-interest groups, at the expense of the rest of society. Corporations are particularly susceptible to attacks by politicians pandering to special-interest groups because corporate ownership is relatively invisible, widely dispersed, and politically incohesive, as a rule. Moreover, the stock market is so volatile and complex that the owners of corporations (shareholders) would find it difficult, if not impossible, to attribute declines in their asset values to specific government actions. In contrast, special-interest groups are, by definition, more focused and politically well organized.

Politicians are not merely passive bystanders who go on “listening tours” of their constituencies and then faithfully enact the kinds of laws that the public wants. They are “entrepreneurs” who are experts at either creating genuine economic and social crises or the perception of crises, and then offering their “services” in resolving the crises. The most obvious example of this phenomenon is war. War provides politicians with myriad rationales for controlling and regulating economic activity, and few of the controls are abandoned once the war is ended.⁴

Of course, politicians never admit that they are the source of the problems. They usually blame corporations in particular, or capitalism in general. Hence, we witness a constant recitation of “crises” manufactured by the state and blamed on capitalism. In the agricultural sector, for example, it has been government policy ever since the Hoover administration to simultaneously pay farmers to grow more (with price supports) and less (with acreage allotments), and to subsidize thousands of failing farm businesses with farm welfare in the form of low-interest loans and grants. The agriculture industry is thereby made weaker and more volatile, which of course is reflected in the prices of publicly traded corporations in agriculture and agriculture-related industries. Government intervention is the source of these problems, but the blame is always placed on “agricultural markets.”

The U.S. Department of Commerce publishes fraudulent poverty statistics to make poverty look worse than it actually is and to “justify” such economically destructive policies as increases in the minimum wage or tax increases for the ostensible purpose of redistributing income to the “poor.”

In the environmental arena, countless capitalistic bogeymen have been blamed for everything from cancer to the destruction of the planet. This list of phony environmental scares is so long that any rational, thinking person should routinely assume that everything the organized, political environmental organizations say is a lie.

The federal government has been forecasting an impending energy crisis ever since the dawn of the oil industry—roughly 1866. In that year the U.S. Revenue Commission warned that the nation may run out of oil at any moment. In 1885 the U.S. Geological Survey forecast no chance of oil’s being discovered in California; some ten billion barrels have been pumped from that state since then. By 1914 the U.S. Bureau of Mines was predicting that only 5.7 billion barrels of oil were left; more than 50 billion barrels have been pumped since then. In 1947 the U.S. Department of State warned that “sufficient oil cannot be found in the United States”; in 1948 more than 4 billion barrels were found—the largest discovery in history up to that point and twice the volume of U.S. consumption. In 1951 the U.S. Department of Interior forecast that oil reserves would last only until 1964.⁵

All of these gloomy (and false) forecasts were (and are) accompanied by proposals for more government control of the energy industry to “assure” a more adequate rate of development.

The fundamental effect of this regulatory-propaganda regime on stock markets is to convince more and more investors that the right of corporate managers to use the assets of corporations in the best interests of stockholders and creditors (that is, to maximize profits) is tenuous, if not abrogated completely. The politicization of corporate decision-making via regulation causes an overall decline in capital values as corporate decisions become more and more designed to pander to the whims of politicians and bureaucrats rather than satisfying consumers and earning income for shareholders.

Government regulation is often a form of legalized extortion. For example, federal regulators routinely show up at corporate headquarters and accuse a corporation of being out of compliance with regulations that no human could possibly be in compliance with. The EPA requires that corporations which handle “hazardous materials”—which even includes Windex, according to the EPA—must keep a written record of where each and every container is located at every moment. Former New York state environmental protection commissioner Thomas Jorling described this practice as “a kind of extortion.”⁶ EPA regulators will enter a corporate office and impose huge fines on corporations that could not possibly maintain the EPA’s huge paperwork burden even if they wanted to. Threatened criminal indictments assure payment of the fines.

In a 1997 book, Cornell University law professor Fred McChesney argues that blackmail and extortion are inherent features of the modern regulatory process. In short, political “entrepreneurs” threaten legislation and regulation that will either impose price controls or increase costs (both of which would reduce profit margins) unless the targeted companies and industries compensate the politicians with campaign contributions or other kinds of private payoffs (including speaking honoraria, jobs for relatives, and subsidized travel to luxurious vacation resorts).

Politicians call legislation that is intended to extort campaign contributions from a business or industry “milker bills” or “cash cows.” As explained by one California legislator, a politician “in need of campaign contributions, has a bill introduced which excites some constituency to urge [the legislator] to work hard for its defeat (easily achieved), pouring funds into his campaign coffers.”⁷

Another name politicians have given to such legislation is “juicer bill,” since they are designed to “squeeze” cash out of corporate coffers in return for not harming the corporation with proposed legislation and regulation. So-called “fetcher bills” are also said to be capable of “fetching” gobs of campaign cash.

Examples of Political Extortion

One recent example of a proposed regulation that seems to have been designed purely to fetch perpetual campaign contributions is the battle over reducing the legal blood-alcohol content (BAC) level from .10 to .08. The federal government’s Office of Substance Abuse Prevention has declared that its goal is to eventually have .04 as the legal limit, which can be attained by an adult male who consumes one or two beers. Congress failed to pass such a law in 1998; the law that it did pass, however, creates a slush fund of highway grant money that can be used to bribe states into passing laws that reduce the legal BAC level. The law is to be renewed every year, guaranteeing that the alcoholic beverage industry will be forced to make campaign contributions indefinitely to defeat this neo-prohibitionist legislation.

In 1992 Congress authorized the Federal Communications Commission to impose price controls on cable television. Ever since then, the cable industry has poured millions of dollars of campaign contributions into Washington annually in an apparently fruitless effort to eliminate the controls.

One of the more notorious examples of political blackmail in recent years involved the Clinton administration’s proposals to impose price controls on doctors, hospitals, and the pharmaceutical industry as part of its failed plan for socialized medicine. Once price controls were proposed, reported the New York Times, members of Congress and the president were “receiving vast campaign contributions from the medical industry, an amount apparently unprecedented for a non-election year. While it remains unclear who would benefit and who would suffer under whatever health plan is ultimately adopted, it is apparent that the early winners are members of Congress.”⁸

Representative Jim Cooper, who proposed legislation that was slightly less onerous than Clinton’s, received nearly $1 million in campaign contributions in the first four months of 1994; overall, campaign contributions in 1993 were about one-third higher than in the previous non-election year of 1991.⁹ It was also widely reported at the time that the handlers of Hillary Clinton’s not-so-blind trust were selling her pharmaceutical stocks short every time she made a highly publicized speech demonizing the pharmaceutical industry, which she did quite often. During the Clinton health plan fiasco of 1993-94 the value of pharmaceutical stocks dropped by over $40 billion, according to one account.¹⁰ After the industry poured millions of dollars into the coffers of Washington politicians the price-control plan was defeated.

In his book In Defense of the Corporation, Robert Hessen documents how Ralph Nader has long engaged in the same practice as the first lady—shorting the stocks of companies that his numerous think tanks and organizations routinely demonize with highly publicized “studies” alleging corporate wrongdoing.¹¹ The “tobacco settlement” reached by the state attorneys general, the federal government, and the companies might well be considered to be the Mother of All Political Shakedowns. In return for being allowed to stay in business, American tobacco companies are being forced to pay almost a quarter of a billion dollars to trial lawyers and federal, state, and local governments. The media have already begun reporting on how the initial installments are being spent on anything and everything by state and local governments, and not only “health-care costs,” as was promised.

Even this record may someday be broken, however, if the government succeeds in destroying the Microsoft Corporation. Just a few years ago the Washington Post was writing sneering articles about how naive Bill Gates was for believing he could focus his energies solely on producing better computer products without being a “player” in Washington, that is, caving in to the Washington establishment’s legalized extortion racket. Since then, Gates has hired dozens of Washington lobbyists and lawyers and has spent the required millions in campaign contributions.

Regulation is perhaps most effectively used as a tool of extortion when it threatens to sharply increase the costs of doing business, which it always does. Again, the game is for politicians to propose regulations that would drastically increase the costs (and subsequently reduce the profits) of successful companies with “deep pockets.” For example, the banking industry spent millions in campaign “contributions” to stop a 1982 requirement that they withhold taxes on interest and dividends—a paperwork nightmare for the banks. In 1983 and 1984 the life insurance industry spent more than $2 million to defeat legislation that would have banned the granting of gender-based rates and benefits.

Perhaps the most egregious example of regulatory blackmail is enforcement of the so-called Community Reinvestment Act (CRA). The CRA was enacted in 1978 under a patently false pretense—that banks made fewer loans to residents of low-income neighborhoods not because there were fewer creditworthy borrowers there, but because of allegedly pervasive “discrimination” against the primarily black residents of those neighborhoods. Banks do—and should—“discriminate” against less creditworthy borrowers, but in doing so they run the risk of regulatory extortion.

An entire industry of sometimes federally funded “community groups” has sprung up, with names like Center for Community Change and Association of Community Organizations for Reform Now (ACORN), which essentially extort money from banks with the following ruse: Whenever a bank proposes a merger, expansion, or building of a new branch, it is subject to regulation by the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. If anyone files a complaint with any of these agencies accusing the bank of making too few CRA loans, the merger or expansion is halted. So-called community groups frequently lodge such complaints and do not withdraw them until the banks give them or other groups they designate large sums of money, sometimes in the tens of millions of dollars. The Neighborhood Assistance Corporation of America (NACA), led by self-described “urban terrorist” Bruce Marks, has “won” loan commitments totaling $3.8 billion from Bank of America Corp., First Union Corp., Fleet Financial Group, and others. That money is lent to borrowers favored by Marks, and his organization usually gets a lump-sum fee or a percentage of each loan.¹² NACA plans to operate in all 50 states by 2001, when it expects its annual budget to be in the $80 million range.

Regulation and the Stock Market Crash of 1987

Economists Mark Mitchell and Jeffrey Netter have provided powerful evidence that regulatory sneak attacks precipitated the stock market crash on October 19, 1987, when the Dow Jones Industrial Average fell 508 points (22.6 percent).¹³ Their thesis is that proposed changes in the tax treatment of corporate takeover transactions, which would have made such transactions much more costly, triggered the crash.

It is important to recognize the importance to the economy of the market for corporate control, or the takeover market. This market is a keystone of any capitalist economy, for it is the very means by which capital is continually reallocated to those who will make the best use of it. A vital and free capital market, Ludwig von Mises wrote, is the keystone of capitalism and the one thing that most distinguishes a capitalist economy from a noncapitalist one. Unfortunately, that is also why politicians are forever proposing more and more regulatory control of it.

Laws and regulations that restrict corporate takeovers are protectionist. In a corporate takeover a group of investors has determined that a particular company is being mismanaged. They seek, through a proxy battle or other means, to take over control of the board of directors and, subsequently, of management. They may fire some or all of the poorly performing managers, replace them with better ones, and make more profit for themselves and the other shareholders.

No one has perfect foresight, so many takeovers do not work out. But nevertheless, the only way to learn who can make the best use of corporate resources is to allow the free market to tell us, including the free market for corporate control.

Laws and regulations that would restrict takeovers or make them prohibitively costly are invariably the result of lobbying efforts by incumbent managers who have bribed politicians into enacting the protectionist provisions, which only benefit the incumbent managers at the expense of their shareholders and customers.

In early October 1987 the Congress waged a full-scale assault on corporate takeovers by passing several important changes in the tax code.¹⁴ Mitchell and Netter calculated that these changes would have reduced the value of acquiring a company through a takeover by about 25 percent; that would in turn cause a decline in the stock price of the acquiring company. Typically, the stock price of an acquiring company increases 25 to 35 percent as the result of a takeover. Moreover, such a dramatic anti-takeover bill would have reduced stock prices overall by generally weakening the market for corporate control, a major source of efficiency in capital markets.

The Regulatory Attack on Microsoft

Microsoft’s critics claim to believe that what is bad for Microsoft (an antitrust prosecution) is good for the rest of the computer industry and vice versa because of Microsoft’s allegedly “exclusionary” practices. Microsoft is supposedly “a threat to everybody in the industry,” according to Alan Ashton, president of WordPerfect, which has lost almost all of its market share to Microsoft Word.

In a forthcoming article in the Journal of Financial Economics, Thomas Hazlett and George Bittlingmayer expose this as a myth.¹⁵ The authors surveyed all Wall Street Journal articles from 1991 through 1997 announcing the investigations and litigation and gauged the reaction of the stock markets to it. Categorizing all news stories about the regulatory assault on Microsoft as “positive,” “negative,” or “ambiguous,” they found that:

[W]hen Microsoft receives good news, its stockholders experience average market-adjusted returns of 2.4%. But the news is also good for the industry as a whole, which sees average returns of 1.2% over the same dates. (Both returns are significantly greater than zero at standard levels of statistical significance).

During negative events . . . Microsoft stockholders incur average returns of minus 1.2% per event, while the non-Microsoft computer portfolio declines 0.6%.¹⁶

The returns of a few companies, such as Netscape, which is leading the lobbying and public-relations attack on Microsoft, enjoy increased stock prices whenever the news is bad for Microsoft, which explains why it is instigating the political assault on its rival. It is merely attempting to achieve through politics what it has failed to achieve in the competitive marketplace.

The regulatory persecution of Microsoft is yet another example of regulatory extortion. The political establishment is busy extracting “protection money” from Microsoft in return for its promise to allow the company to exist.

The Tobaccoization of Industry?

The so-called tobacco industry “settlement” has ominous implications for all industries (and consumers). The model is for a government-funded attack on specific industries, complete with volumes of junk science and taxpayer-funded lobbyists who pressure for advertising bans and other regulations that make it difficult to sell the product, along with higher excise taxes.¹⁷ The industry’s management is demonized and portrayed as corporate outlaws. The notion of individual responsibility (for smoking, drinking, reckless driving, firearm use, and so on) is abandoned as “responsibility” is socialized. Once this is done and it is established that no one is responsible for his or her own irresponsible behavior, then it is relatively easy to plunder an industry at will through the vehicle of “taxation by litigation.”

Florida, Vermont, and Maryland actually rewrote the laws to strip the tobacco industry of long-standing common law defenses, guaranteeing that those states would win their lawsuits against the industry. There is no reason to believe that politicians will not do the same to other industries now that the precedent has been set. The state governments cleverly hired private trial lawyers to bring the cases and paid them enormous sums—in the tens of millions of dollars each in some states.

Tort lawyers are now touting plans to use the tobacco litigation/extortion model against the producers of firearms, lead paint, pharmaceuticals, beer, wine and liquor, chemical additives, fatty foods, sports utility vehicles, biotechnology, and myriad other products. These industries will be demonized, more and more severe regulatory restrictions and excise taxes will be imposed on them, and their stocks will tumble. No industry is safe from the greedy hand of regulatory extortion.

Notes

1. Michael C. Jensen and William H. Meckling, “Can the Corporation Survive?,” Financial Analysts Journal, Jan.-Feb. 1978, p. 31.
2. Ibid.
3. Ibid.
4. Robert Higgs, Crisis and Leviathan (New York: Oxford University Press, 1987).
5. Ibid., pp. 142-43.
6. Phillip K. Howard, The Death of Common Sense (New York: Time Warner, 1994), p. 33.
7. Fred McChesney, Money for Nothing (Cambridge, Mass.: Harvard University Press, 1997), pp. 29-30.
8. Ibid., p. 57.
9. Ibid.
10. “Requiem for Reform,” Wall Street Journal, October 14, 1994, p. A-10.
11. Robert Hessen, In Defense of the Corporation (Stanford, Calif.: Hoover Institution Press, 1979).
12. John Hechinger, “NACA Helps Low-Income Clients, But its Tough Methods Draw Flak,” Wall Street Journal, September 13, 1999.
13. Mark Mitchell and Jeffrey Netter, “Triggering the 1987 Stock Market Crash: Antitakeover Provisions in the Proposed House Ways and Means Tax Bill” Journal of Financial Economics, vol. 24, 1989, pp. 37-68.
14. Ibid., p. 39.
15. George Bittlingmayer and Thomas Hazlett, “DOS Kapital: Has Antitrust Action Against Microsoft Created Value in the Computer Industry?” Journal of Financial Economics, forthcoming.
16. Ibid.
17. See James T. Bennett and Thomas J. DiLorenzo, Cancer-Scam: Diversion of Federal Cancer Funds to Politics (New Brunswick, N.J.: Transaction Publishers, 1997).