In a world of uncertainty, waste—the destruction of value—is inevitable. Human action, which aims to replace inferior circumstances with superior circumstances, often involves laboring to transform scarce resources from a less useful form to a more useful form. For example, I transform money earned by my labor into raw beef (by using time and gasoline to drive to the supermarket and engaging in exchange), then I transform the raw beef into a medium-well hamburger through the time-consuming process of cooking. If after I eat the hamburger I wish I had done something else with the money and time (say, bought a chicken), I will regret my course of action and feel I’d wasted both.

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

The same thing of course occurs in commercial production. An entrepreneur buys inputs and hires labor, thinking the finished product will bring a price that covers costs and yields a competitive return—only to find that people don’t want the product, or not badly enough to pay the anticipated price. The loss represents the destruction of value: The value of the inputs before the transformation took place turned out to be greater than the value of the finished product.

As I say, this happens because our knowledge is imperfect. It’s too bad, but perhaps not a tragedy—just a fact of life we learn to live with and minimize. The tragedy occurs when government intervention distorts price signals and induces people en masse unwittingly to make value-destroying plans. That’s part of the story told by the Austrian theory of the business cycle. In the present economic case the Federal Reserve’s low-interest-rate policy in the early 2000s and several federal agencies’ decade-long easy-housing policies induced builders to produce too many houses relative to what the demand would have been without those unsustainable policies. The result was the infamous housing boom and inevitable bust. With housing prices apparently on an unstoppable upward trajectory, and government-backed Fannie Mae and Freddie Mac—not to mention too-big-to-be-allowed-to-fail banks—willing to buy lenders’ mortgages no matter how shaky, builders and buyers were found in great abundance. Buying more house than one could afford seemed smart when one could get a low teaser rate on an adjustable-rate mortgage for a low-to-no-down-payment home and expect its price to rise significantly in six months. When the higher rate kicked in, one could refinance or sell and walk off with the equity.

But when interest rates rose, the bubble burst, and demand plummeted, this smart scheme turned sour. Houses stood unsold, and many people couldn’t pay their mortgages, refinance, or sell at a profit. Foreclosures skyrocketed and the multitude with underwater homes simply disappeared, leaving banks holding a slew of vacant houses that cost money in taxes, code violations, and so on.

As a result, banks now would rather donate the properties to government-created nonprofit land banks and pay for the demolition than hold them and hope for future sales. This is happening in Cleveland, and the Washington Post reported that similar programs were being discussed elsewhere.

How does this relate to the waste identified by the Austrian business-cycle theory? To the extent the homes were vacated and allowed to deteriorate because of the process described above, the demolitions represent destruction of value attributable to government. In the absence of the unsustainable bubble-inflating policies, some of those houses wouldn’t have been built.

In the case of older homes, fewer newly built houses would have competed with them in the real estate market. They would still be occupied and therefore would have been maintained. (There would have been no Great Recession and high unemployment.) Demolition would not have been an attractive alternative.

The tragedy is that because of government policy, demolition is the most attractive alternative. Think of the resources and labor—now seen to have been squandered—that went into making each house. Imagine what products might have been created instead. It’s worse than that: Products always summon complementary products. A housing boom stimulates the production of related shopping centers, office parks, and myriad smaller facilities and products. The resources required to make those things also would have gone elsewhere. Now all those resources, along with much labor and time, are gone because people in government thought they knew how to plan the housing market.

* * *

Georgia and Alabama have joined Arizona in enacting a tough law directed at undocumented immigrants. As Scott Beaulier, Darrick Luke, and Daniel Smith demonstrate, this is already damaging their economies.

Andrew Morriss has been to Graceland, where he found that the lap of luxury in which its fabulously wealthy late resident lived doesn’t look so luxurious today.

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

If public policy created the housing bubble, the bursting of which has caused so much misery, can it really be a good idea to reinflate the bubble? Richard Fulmer says that according to political logic, the answer is yes.

The more government controls the curriculum, the more inimical schooling becomes to education. Peter McAllister explains.

The eurozone is in trouble, leading Robert Murphy to explore the possibility that it was a colossal mistake in the first place.

Regulation at the national level gets the lion’s share of attention from market advocates. But let’s not overlook the planning mentality more locally. Sam Staley surveys the taxicab industry.

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

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

—Sheldon Richman

srichman@fee.org

“Let me try a green one,” he says. We’re still tolerant. The new wand is waved. Afterward dear George is decidedly worse.

“Let me think,” the healer says. “Maybe it should be a purple wand and a different chant.”

For 98 years the federal government has been attempting to prevent asset bubbles, recessions, and spasms of unemployment. In 1913 Congress and Woodrow Wilson created the Federal Reserve System, the President telling the country this new institution would be “a safeguard against business depressions.” In 1929, after 15 years of Fed operations, the United States plunged into a deep depression.

Okay, so maybe red wands don’t work, and we should try green. Politicians of the 1930s created more bodies designed to stabilize the economy and build investor confidence: the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, the Securities and Exchange Commission, and the National Credit Union Administration. The Depression deepened, becoming by far the longest and deepest economic downturn in the history of the United States.

This is the national pattern in economic policy: In the face of failure, we keep looking to government. Since the Great Depression, we’ve added more units designed to curb inappropriate behavior and ward off recession, including the Commodity Futures Trading Commission (1974), the Federal Financial Institutions Examination Council (1979), the Working Group on Financial Markets (1988), and the Office of Thrift Supervision (1989). Yet in 2008 we fell into another economic downturn.

The 2008 recession was triggered by the boom and bust in the housing market. Was housing an unregulated market where government had failed to intervene? Sorry: There were seven agencies supposedly nurturing this industry:

1. Federal Housing Administration (1934)
2. Federal National Mortgage Association (Fannie Mae) (1938)
3. Government National Mortgage Association (Ginnie Mae) (1968)
4. Federal Home Loan Mortgage Corporation (Freddie Mac) (1970)
5. Neighborhood Reinvestment Corporation (1978)
6. Federal Housing Finance Board (1989)
7. Office of Federal Housing Enterprise Oversight (1992)

In sum, at the onset of the 2008 recession there were 16 units of the federal government that were supposed to manage economic life and keep us from harm, yet harm befell us. No wand-waving faith healer has ever failed so conspicuously.

Alas, economic policy is not a drug trial; it is politics, and politics is ruled by illusions. In June 2009 we found President Barack Obama urging the creation of yet more government units to manage the economy, promising that his reforms would “make sure that these problems are dealt with so that we’re preventing crises in the future.”

We can’t be too critical of Obama, because many others share this confidence in government regulation. “Without intervention by the government,” say economists George Akerlof and Robert Shiller in their 2009 book Animal Spirits, “the economy will suffer massive swings in employment. And financial markets will, from time to time, fall into chaos.” It’s astounding to assert that government can prevent crises, recessions, and “swings in unemployment” while being fully aware that for 98 years it has been trying and failing.

Not Learning from Experience

A powerful subconscious bias is obviously at work here, a mental distortion that prevents normal, intelligent people from being able to learn from experience. I call it the watchful-eye illusion: the idea that government has greater knowledge and wisdom than the public. In extreme form this illusion treats government as God, a superior being who surveys the scene from His Olympian position, controlling error and wrongdoing. Once this illusion is locked into your thinking, you remain convinced, despite any amount of failure, that government has the ability to do things right next time.

It appears that this fallacy begins in childhood. Youngsters see that their lives are guided by people who are more thoughtful and mature than they are: their parents. If they challenge the parents—asking, in effect, what gives you the right to make rules over me?—the parents say they know more. When children first learn about government, they see it as a super authority ten times more powerful than parents. Naturally, they assume it must have ten times their parents’ wisdom and foresight.

Many do not outgrow this perspective; they carry into adulthood the idea that government is a superparent. Economists Akerlof and Shiller accept this view, declaring that it forms the core of Keynesian economics:

The proper role of the parent is to set the limits so that the child does not overindulge her animal spirits. But those limits should also allow the child independence to learn and to be creative. The role of the parent is to create a happy home, which gives the child freedom but also protects him from his animal spirits.

This happy home corresponds exactly to Keynes’ position (and also our own) regarding the proper role of government.

Ordinary Beings

There are two fallacies in the Keynesian view that government can be a “parent” watchfully guarding over the national economy. First, the politicians who run government don’t have superior wisdom and maturity. Government officials are ordinary, fallible human beings. They can be careless, inattentive, and shallow. They can be swayed by emotion. And sometimes they can be dishonest and corrupt.

The second fallacy is that the public is an ignorant child. The economy’s millions of individual businessmen and investors have, collectively, vast wisdom about economic possibilities and trends. These individuals pour their knowledge into their market behavior, thereby setting the prices of assets, goods, and services. Left free to suffer the consequences of their decisions, investors and entrepreneurs will develop systems for managing risk and for evaluating the validity of investments. These systems won’t be perfect, of course: There will be errors, bubbles, and frauds. But from these errors, the community learns to improve decisions in the future.

This system of social learning is short-circuited by government intervention, with its subsidies, bailouts, changing rules, and false promises to protect everyone. In truth, the greatest long-run threat to the health of the economy is the chaotic meddling of eager politicians whose intellectual powers have been so naively overrated by academic economists.

This massive money injection is supposed to work as follows: buying up Treasury bonds will make their prices rise, and their yields—hence long term interest rates in general—fall. (Recall that previous monetary stimulus has already pushed short-term rates close to zero.) Lower interest rates mean investment capital will be even cheaper than it already is, pushing idle investment money “off the sidelines” and into productive, labor-demanding business activity. And because all the fresh money starts its life as bank reserves, banks will be in a position to extend new loans six ways from Sunday.

Keynesians insist that this kind of massive stimulus is the only weapon the monetary authorities have left in their struggle to cure unemployment. This is a short-term fix, mind you; all economists realize that printing money does not call new goods or services into existence, and not even Keynes himself would tell you that straight-up money printing is a recipe for long-term prosperity. But can printing money induce entrepreneurs to expand output? Can it make unemployed resources suddenly employable? The answer depends on why those resources became unemployed—“underutilized” in Fedspeak—in the first place. This is precisely the question that Austrian economists are asking: What exactly went wrong in the economy such that so many resources are now not being utilized? By addressing this crucial question, only the Austrian perspective can adequately dissect the very concept of “underutilization” and offer a coherent critique of this mad-hatter monetary stimulus.

Let’s deconstruct this notion of resource “underutilization.” Resources are only resources to the extent that they have value, or usefulness, to somebody. Resources, properly speaking, are components of a broader plan of entrepreneurial action that brings more and better goods into existence, which people can use to improve their lives. Not all things are resources—things that can’t be used to enhance life aren’t resources, just objects; things that used to be resources but are now worn out, obsolete, or otherwise have lost their usefulness aren’t resources. They’re just junk.

Context matters when we’re talking about resources. The mere fact that a good was produced at some point and sold for some price does not mean it is still as valuable as originally anticipated. For example, if I took the trouble to fatten 100 steers in hopes of selling 50 tons of beef, only to later discover that everyone has become a vegetarian in the meantime, the beef I produced, economically speaking, would not be a resource. Nor would the beef-producing equipment, tools, and knowledge I invested in have the same value to me once I found out the true state of people’s dietary preferences. While some cattle-raising equipment could be converted to other uses, much of it—like the squeeze chute used for medicating and branding cattle—was highly specific to beef production and would be worth no more than its scrap-metal value in a world where nobody wanted to consume beef. My plan to be a cattleman turned out a big mistake entailing a loss on investment. Losing investments mean economic waste has occurred—to some degree, resources have been turned into junk.

This example may be ridiculous, but is it really that far-fetched? It is highly unlikely that people’s preferences would change so drastically or that entrepreneurs would be so clueless at forecasting market trends. But a strong enough outside influence might induce enough entrepreneurs into misreading the true state of the market such that they become overoptimistic and invest too much. If, for instance, politicians were dedicated to stimulating the beef industry and promoting beef consumption, and built policy on policy to that purpose over the decades—a labyrinthine mixture of subsidies, tax breaks, and cheap credit—they just might generate an investment boom in beef production. The boom, however, would be destined to end as soon as the policy changed or, more likely, the oversaturation of the market became evident.

At this point, with declining beef prices and (now-apparent) excess capacity in beef production, market forces would oust marginal producers from the industry and induce even the large, established operators to scale back production. As for the now “underutilized” resources, it would take some time and a lot of extra work to melt down those excess squeeze chutes, to convert cattle pasture into other crops, and for the reluctant surplus cowboys to eventually accept city jobs mopping floors, answering phones, ringing up sales, and so on.

The value of capital—both capital equipment, or physical capital, and people’s knowledge, experience, and training, or human capital—is critically dependent on how well it can fit into the structure of actual consumer demands and the structure of existing complementary capital (both physical and human). It is precisely this kind of interconnectedness among different kinds of resources that mainstream economists tend to disregard. Yet the extent of economic losses revealed by the recent financial crisis and recession is making the malinvestment (waste) of resources hard to ignore. Even at the Fed, some people show signs of understanding the relevance of the structure of capital resources, as opposed to sheer quantities or supposed dollar values. As Naranya Kocherlakota, president of the Minneapolis Fed, recently stated: “[T]he Fed does not have a means to transform construction workers into manufacturing workers. . . . Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy.”

In other words, no amount of money-printing will change the real relationship of any particular object to its economic context. But the term “mismatch” implies mistakes have been made—entrepreneurial error—and raises the question: What went wrong to cause such massive mistakes in the first place? Again, Austrian capital theory provides the answer: The Fed itself, with its cheap money, along with a host of government “affordable housing” policies, severely overstimulated the housing construction market in the years of the boom.

Entrepreneurs always have many options for how to employ their time, labor, and capital. During the housing boom the amazing increase in home prices relative to construction costs made projects like new home construction and even flipping condos seem an obvious profit opportunity. Following the price signals, people expanded their investments appropriately: Young entrepreneurs learned about real estate and construction management, and new workers learned construction trades; building companies were started and existing companies expanded, purchasing more new equipment like nail guns, Skilsaws, and pickup trucks; upstream suppliers similarly expanded investment in things like cement plants, timber plantations, sawmills, and the like.

Regardless of whether these workers and entrepreneurs were cognizant of the temporary, cheap credit- and subsidy-induced nature of the boom, the lure of high prices and high profits proved irresistible. In retrospect it is easy to see how the Fed’s cheap money policy, along with a host of government subsidies to homebuyers and lenders, set the stage for an unsustainable boom—a boom that did not match well the actual, long-term consumer demand and for which the credit that financed it was not fully funded by actual savings. (For an excellent explanation of the government’s role in the housing boom and bust, see Peter Boettke and Steven Horwitz’s FEE publication “The House That Uncle Sam Built” [PDF]). Nonetheless, the slew of political interventions into the housing market led these entrepreneurs on for years before the inevitable market correction occurred. The net result was that too much investment capital went into home building, and not enough into other economic activities—a mistake of grand proportions.

The housing bust revealed that many of the capital investments of the boom period—from concrete trucks on up to skilled construction tradesmen—were actually malinvestments whose value turned out to be less (in some cases much less) than anticipated. The capital resources created to build houses are, to varying degrees, ill-suited to other tasks. They will necessarily be underutilized relative to the boom era, precisely because they have lost value (usefulness) in light of the new economic reality. Indeed, economic reality in the bust indicates that many of these resources will have to find other ways to be productive, as attested by the overbuilt housing market. (According to National Association of Realtors figures, there were between 1.02 and 1.77 million “excess” homes as of September. Supply was converted into excess units on the basis of six-to-eight months’ supply representing “normal” conditions.)

But this adjustment takes time, and the more specialized the resource, the longer the wait. Some excess concrete trucks can be sent overseas or converted to other industrial uses, but many will simply sit, awaiting the next boom or the scrap heap. Indeed, in some cases, when a particular resource loses its usefulness, leaving it idle can be its optimal “use.” Likewise, the surplus low-skilled construction laborers can perhaps get jobs washing dishes, but skilled tradesmen, engineers, and jobsite managers must retrain to find different jobs that match their boom-era earnings. Not surprisingly, some choose to wait (and take unemployment benefits) rather than risk retraining. For those who have thrown in the towel on a construction career, retraining and reemployment can take years. No amount of money-printing can change this reality.

Political efforts to “stimulate” economic activity will necessarily alter the capital structure of the economy. Government-based stimulus for industry Z necessarily detracts from what the market would have provided industries A through Y. Even a nonspecific stimulus, if such a thing is possible, will only stimulate the investment fad du jour; there is no such thing as neutral government policy. The key policy implication of Austrian capital theory is that any attempt to stimulate the economy will, by spurring malinvestment, doom some resources to superfluousness. From a statistical standpoint this may look like underutilization; from an economic standpoint, however, it’s simply the waste that results from too many investment plans gone bad. Attempting to undo the waste by further stimulus will only exacerbate the problem: more stimulus, more malinvestment, more wasted resources.

So what should the wise and munificent monetary central planners do? Ironically, the optimal monetary policy is not to have one, but to let the competitive market process function for money and credit the way it does for countless other goods. If we must have central banking, the ideal policy is simply this: First do no harm.

Imagine that.

Democrats agreed to support the bill after Republicans agreed to strengthen provisions of the anti-redlining Community Reinvestment Act…

G-L-B,  the last significant bank deregulation that occurred in the U.S., repealed the part of the New Deal’s Glass-Steagall Act that forbade a single institution from engaging in both commercial and investment banking. G-L-B was passed by the Republican-controlled Congress in 1999 and signed by Democratic President Clinton. His treasury secretary at the time was Larry Summers, now President Obama’s top economic adviser. It’s important to remember this when people say that banking deregulation during the Bush years created the economic mess. The Bush administration didn’t deregulate anything of importance. G-L-B in no way contributed to the financial turmoil.What’s important about the quote is that it shows that the Republicans acquiesced in the strengthening of the Community Reinvestment Act, which is partially at fault for the mortgage meltdown. This is the law that compelled banks to increase their mortgage lending to people with low incomes and poor credit histories.As we’ve long noted, both parties are guilty of creating the house of cards that has fallen.

Economic Facts and Fallacies exposes an array of widely held beliefs to careful logical scrutiny and evidence—evidence that is usually ignored by those who favor interventionist government policies. Time and again, readers are shown that support for expanding government control arises from mistaken reasoning and interpretation of data.

First is Sowell’s discussion of four core fallacies we frequently encounter in public-policy discussions: the zero-sum fallacy (ignoring that voluntary economic arrangements are positive-sum); the fallacy of composition (particularly that robbing Peter to pay Paul benefits society simply because it benefits Paul); the chess-piece fallacy (assuming that some authority can achieve desired results as though he were moving chessmen on a board, ignoring people’s desires and incentives); and the open-ended fallacy (that commitments to ever-more health care, safety, open space, and so on, are sensible in a world of scarcity).

Even if people read only that section, they would greatly benefit from Sowell’s logic.

The bulk of the book consists of six chapters dealing with subjects where economic misunderstanding abounds: the urban economy, male-female comparisons, academia, income, race, and the Third World. In each of those sections Sowell rebuts a group of beliefs that are widely accepted despite their fallaciousness and incompatibility with the evidence.

While the whole of the book is enlightening, Sowell’s discussions of affordable housing and income comparisons are particularly powerful. I’ll concentrate on them.

Most Americans believe that government intervention is necessary to ensure that there will be enough “affordable” housing. Sowell challenges that notion with a barrage of contrary evidence, including that 1) people paid smaller percentages of their income for housing before the era of government intervention; 2) housing prices rose sharply when more pervasive government regulation began; 3) housing prices in areas with more government intervention rose more rapidly than in areas with less; and 4) growing population and income did not result in far higher housing prices where builders were allowed to construct more housing.

In short, government intervention in the housing market is the problem, not the solution. Sowell writes, “It is precisely government intervention in housing markets which has made previously affordable housing unaffordable.” The next time you hear someone claiming that there is a shortage of affordable housing due to a failure of the free market, you can haul out the book and show that the failure does not lie with the free market.

Sowell similarly devastates income comparisons that twist the data to get whatever conclusion is desired to justify political redistribution. He points out many ways that those who want to create the impression that the United States faces an income distribution “crisis” rely on misleading statistics. For example, there are substantial differences between real income growth per household and per capita (from 1969 to 1996, the former rose only 6 percent in America, while the latter rose 51 percent). By emphasizing only the first statistic, it is possible to create the impression that income growth has been fairly stagnant.

Another way of misleading people is to focus only on income data and ignore consumption—consumption by people in the poorest quintile is actually twice their income, but that fact is usually ignored. Moreover, the idea that there is an income crisis is greatly undermined if, instead of looking at “snapshot” data, you consider the high degree of income mobility. The latter data tend to be ignored. With this section, Sowell shows that it’s unwise to jump to conclusions based on highly selective facts.

Economic Facts and Fallacies highlights many instances where questionable if not downright foolish policy choices were made. So why don’t we change them? Sowell writes, “Many beliefs which collapse under scrutiny may nevertheless persist indefinitely when they are not scrutinized, and especially when skilled advocates are able to perpetuate those beliefs by forestalling scrutiny through appeals to emotions or interests.” This book makes it harder for such advocates to keep pulling the wool over our eyes.

They were created—intentionally—to distort the housing and mortgage markets. That is, government planners were not content to let voluntary exchange and spontaneous market forces configure those industries unmolested. So—holding the taxpayers hostage—they intervened.

Make no mistake: The collapse of Fannie and Freddie is government social engineering predictably gone bad.

In a free society supply and demand would govern markets. The demand for houses would be determined by people’s preferences and the wealth and income at their disposal. Supply would be determined by relative profit expectations, which is to say, by the demand for housing and the competing demand for the required inputs.

A distortion occurs when government planners and rent-seeking corporate allies, under cover of humanitarian social policy, engineer a deviation from natural market outcomes. (Rent-seeking here refers to the quest for politically derived as opposed to market-derived profits.) Dressed up as promotion of the American Dream through homeownership, the planners used the political means—ultimately, the threat to imprison uncooperative taxpayers—to channel wealth to the construction, real-estate, and financial industries. The primary instruments of this social engineering were Fannie Mae, created as a government agency during the New Deal and—cough—“privatized” in 1968 to get it off-budget, and Freddie Mac, created as a “private” GSE in 1970.

The GSEs don’t make mortgage loans. Rather, using borrowed money, they buy mortgages from original lenders, encouraging banks to make more loans and immediately pass them on to others. Pooling lots of mortgages together, the GSEs create mortgage-backed securities (MBS) and either sell them or (more frequently) keep them, assuming the risk of default. In fact Freddie and Fannie created the secondary mortgage market that has come in for criticism since the subprime problem developed.

Freddie’s and Fannie’s activities were designed to channel money to mortgage lenders so that they could loan widely, especially to people who might have been priced out of a fully private mortgage market. The system inevitably lowered lending standards and interest rates. If these activities had been performed not by GSEs but by real private companies, they would have been subject to market checks. But they were not. They’re not called government-sponsored enterprises for nothing. As such they have special advantages over real private companies, permitting them to do things on a scale larger than would have occurred in a free market. The advantages include tax exemption, government loans, an implicit bailout promise, and lower capital requirements.

The result was a far more concentrated lending market and hence greater vulnerability to changing conditions. Fan and Fred hold or insure $5.4 trillion in mortgage debt—half the national total—making the taxpayers ultimately responsible now that the GSEs are under federal conservatorship. Three-quarters of new mortgages are GSE-backed. So the government has just become the country’s major mortgagee.

The GSEs have lost well over $10 billion since the mortgage meltdown occurred, and they were getting close to being unable to borrow enough money to roll over their debt. This and fear of a more general economic meltdown are what prompted the government to step in, exposing the taxpayers dramatically. The bailout will begin with a billion-dollar infusion. Then the government will start buying shaky Freddie- or Fannie-backed mortgage securities in the marketplace. A $5 billion purchase will get things going, but up to $200 billion has been promised. It will no doubt be more.

Where will this money come from: taxation, borrowing, or the printing press? What will that do to our economic well-being?

The New York Times is wrong. This is not “an extraordinary federal intervention in private enterprise.” It is the state bailing out statism. Let’s hear no more about the “laissez-faire” Republicans. That myth serves only to protect advocates of state intervention regardless of party.

It is with deep sadness that I note the death in October of our long-time contributing editor Norman Barry after a long illness. Over the years Norman kept Freeman readers informed about free-market and statist developments in Europe and elsewhere, always with optimism about the future of liberty. He was a professor of social and political theory at the University in Buckingham, which, he proudly noted, is the United Kingdom’s only private university. Among his many Freeman articles, my favorite is “Freedom and Morality in the Plays of Tom Stoppard” (August 1999, http://tinyurl.com/6h9s5s). He was a gentleman, a prolific scholar, and a pure pleasure to work with.

A standard argument for the patent system is that without it innovation would shrivel. But what if it’s patents, not their absence, that impede innovation? Michele Boldrin, David Levine, and Alessandro Nuvolari tell the story of the steam engine that couldn’t . . . until the patents expired.

The right to earn a living in one’s own way is increasingly under assault by special interests successfully lobbying for licensing and other protectionist restrictions. Bob Ewing says people are fighting back.

Centralization of power always threatens liberty. So Pierre Bessard is justifiably nervous about the tax “harmonization” taking place in the European Union.

The poet E.E. Cummings alienated himself from his left-wing friends when he wrote a book in 1931 on how the Soviet Union crushed individuality. Bruce Walker has the details.

Our hard-working columnists have delivered once again. Lawrence Reed teaches the politicians about Adam Smith. Thomas Szasz sees the therapeutic state as an escape from and threat to self-responsibility. Burton Folsom examines the record of Andrew Mellon. John Stossel wonders if we need all those stop signs. Walter Williams picks through fuzzy thinking. And Steven Horwitz, encountering the claim that the free market has failed, replies, “It Just Ain’t So!”
Books coming under review this issue are about the welfare state, Milton Friedman, abundance, and three influential economists.

Since it’s December, the issue concludes with the year-end index, prepared by Managing Editor Beth Hoffman.

Callahan, the research director at a New York City public-policy organization called Demos, proclaimed that the prosperity of the 1990s left him “financially battered and psychically troubled.” His biggest complaint is the rising cost of rental housing in New York City, which he blames on prosperity. He revels in the prospect of an impending recession that will presumably moderate the rise in housing costs.

It’s true that New York City has experienced sharp increases in the price of rental housing, but the cause of those increases is government regulation, not prosperity. No city in America has used rent-control laws as widely and has had them in place as long. With over 1.1 million rent-controlled apartments, New York City is a showcase for the policy’s destructive effects: housing shortages that get worse and worse every year; deteriorating housing quality; middle-class families trapped in apartments that are too small for their needs, while affluent retirees pay a pittance for large three- and four-bedroom apartments they have lived in for decades; and virtually no new construction. Callahan mentions all of these problems, but incorrectly blames them on “prosperity.”

Because rent control makes rental apartment housing less profitable (or unprofitable altogether), the number of rental units built each year has dropped precipitously from 35,000 in 1969, the year in which rent control was expanded to hundreds of thousands of additional housing units, to a mere 8,000 units a year over the past decade, despite a burgeoning population in the city.

On top of that, zoning, environmental, and building-code regulations make it even more costly to develop apartment units in the city (and elsewhere). Regulation also stipulates that the residents of apartments have a “right” to reside in the apartments as long as they wish and can even veto a landlord’s decision to renovate the building or turn it into co-ops or condominiums. This additional abolition of property rights makes it even more unlikely that anyone would want to build apartments in New York City. In fact, it is a virtual miracle that anyone does.

Regulation has made being a landlord in New York City so unprofitable that hundreds, if not thousands, of landlords have simply abandoned their properties. The city government has taken over some 40,000 abandoned apartments.

In short, 50 years of housing-market socialism, not free-market capitalism, is the source of Mr. Callahan’s financial “battering.” There is no quick fix to the destructive effects of a half-century of interventionism in housing markets, but the elimination of New York City’s rent controls would be a necessary first step. It would go a long way to restoring the profitability of rental housing, increase its supply, improve its quality, and moderate housing prices in the city.

Mr. Callahan also complains about rising housing costs in other places, such as Silicon Valley. But that part of northern California is famous for its decades-long “growth control” policies, which have also restricted the supply of housing and escalated its costs. Some parts of nearby Marin County even imposed 100-acre-minimum-lot zoning regulations in the 1970s, which drove housing and land prices through the roof. And the same kind of environmentalist extremism that has caused the California energy crisis is also partly responsible for a housing crisis in some parts of the state because of regulatory restrictions on development.

Health-Care Costs

Mr. Callahan’s second complaint is that middle-class people are also supposedly being “wiped out” by the rising costs of health care. Well, there is arguably no other industry in America that has experienced a larger increase in the degree of government control over the past 50 years than health care. As Milton Friedman documented in a 1992 Hoover Institution study titled “Input and Output in Medical Care,” as the hospital industry was transformed from one that was primarily proprietary in the 1920s to today’s system in which most hospitals are either government-run or government-subsidized “nonprofit” hospitals, more and more spending has led to less and less quantity and quality of health care, all other things equal. The increased governmental role in health care has led to a massive bureaucratization, which, coupled with government-induced stimulation of demand through Medicare and Medicaid, has caused health-care costs to explode.

Callahan’s third complaint is that “materialistic values” supposedly “came to pervade our culture” in the 1990s. This is an unprovable assertion, although socialists of all stripes, from Marx to Mussolini to John Kenneth Galbraith, have been bemoaning increasing “materialism” for centuries. One wonders if Mr. Callahan is aware, moreover, that charitable giving in the United States was at an all-time high during the past decade when rampant materialism supposedly blossomed.

What he seems utterly unaware of is the basic economic fact that the only way to become wealthy in any capitalistic economy is to provide goods or services to very large numbers of people. If more and more people become “materialistic” and motivated primarily by the prospect of earning large amounts of money, there will inevitably be more and more entrepreneurs who become successful at providing us with more and better goods and services at lower prices. That’s the only true route to great wealth, but in his confusion Mr. Callahan cries that he is “psychically troubled” by all of this.

His “solution” to these problems is more socialism: “[U]ntil we find a way to share the country’s wealth more equitably . . . it’s hard to get too excited about surges in national prosperity,” he writes. So he celebrates the coming recession: “As I see it, the good times are coming, not going.”

How a recession, which would cause thousands of New Yorkers to lose their jobs, would help the middle class that Mr. Callahan professes to be so concerned about is not explained.