Yes, clothes hangers. Marie Sledge, co-owner of Rome (Georgia) Cleaners, states, “Hangers last year at this time were $28 a box, where now they are $56.” News reports indicate that cleaners in Springfield, Missouri; Birmingham, Alabama; and Harlem are also encountering doubling hanger prices. In response, many cleaners are posting signs in their shops encouraging customers to return used hangers.

Hangers can’t, even if combined with government subsidies, be converted into biofuels. So what is causing the rapid increase in hanger prices? Government, of course, though in this case it’s the trade bureaucrats at the Department of Commerce rather than the folks behind other debacles in the news these days.

In a March 19 news release the Department of Commerce “announced its affirmative preliminary determination in the antidumping duty investigation on imports of steel wire garment hangers from the People’s Republic of China.” Translation: The government will now impose tariffs on hangers imported from China. The tariffs vary by supplier, ranging from a lightly starched 33 percent to a truly stiff 221 percent. With hanger prices potentially tripling because of tariffs, it’s easy to understand the disruption facing dry cleaners.

Why would the Commerce Department impose such taxes on imported hangers? The key bit of bureaucratese is the press release’s “antidumping duty” clause. Prompted by a complaint from M&B Metal Products Company of Leeds, Alabama, the only domestic metal-hanger manufacturer, Commerce analyzed prices charged by Chinese hanger producers to determine if they were below “fair value.” Calling anything other than a price arrived at through voluntary exchange between the buyer and seller “fair value” is perverse. But the U.S. government, in its infinite wisdom, has defined “unfair value” as the price charged by foreign firms selling below their cost of production or below the price they charge in their domestic markets.

In any event, economist Russell Roberts, in The Choice, describes Commerce’s process as “arbitrary” (hardly surprising, given the slipperiness of “fair value”) and reports that between 1986 and 1992 Commerce found dumping in 97 percent of the 251 cases it investigated. In a 2002 paper, Cato Institute scholars Brink Lindsey and Dan Ikenson elaborated: “In a depressingly wide variety of circumstances, a foreign producer can charge prices in the United States that are identical to or even higher than its home-market prices and still be found guilty of dumping.” It therefore comes as no surprise that Commerce determined that Chinese producers have been dumping their hangers on the United States market.

The notion of dumping, even without arbitrariness by Commerce apparatchiks, is suspect. Since the raison d’être of firms is to make profits for their owners, there should be a strong presumption that firms will not sell below cost, regardless of the Commerce Department’s Byzantine calculations. And if, glory be, some foreign firm does choose to sell below its production cost, we should welcome the gift rather than ensnare the givers in a thicket of questionnaires, documents, and legal mumbo jumbo.

In the case at hand, it’s unlikely that the Chinese firms were selling below cost. M&B president Milton Magnus states, “The price [Chinese firms] pay for wire is about 30 percent less than what we pay, [and] [t]hey’re paying workers 83 cents per hour.” (M&B’s ire about competition from cheap foreign labor seems rather selective because, according to American Drycleaner, it operates a hanger-manufacturing plant in Piedras Negras, Mexico.) If true, the Chinese firms might well be able to charge a much lower price than M&B and still not be selling below their cost of production.

Although firms might rationally choose to sell an item at lower prices in foreign markets, there’s strong reason to doubt Chinese hanger manufacturers would do so. Transportation costs for weighty and bulky items like hangers are not trivial. Moreover, one might expect price-discriminating firms to charge lower prices in poor countries, but not in wealthier ones such as the United States (as is done with pharmaceuticals). But as I said about the Chinese selling at a loss, glory be if they are willing to price-discriminate to our benefit.

Of course, the fear is that the alleged dumping is a scheme to bankrupt domestic producers, shut them down, and leave U.S. consumers vulnerable to large price hikes that will recoup the losses incurred by selling below cost. Among the many conceptual problems with such a notion is that it would be easy for U.S. customers to find alternative international suppliers or for firms in the United States to restart their production when the predatory Chinese firms jacked up their prices. In the case of the Chinese hangers, the Department of Commerce indicates that there are more than a dozen Chinese hanger manufacturers, so it is hardly a given that, even if they desired to do so, they could sufficiently coordinate their activities to cartelize the international hanger market.

Overlooking the Unseen

The department defends antidumping duties as being necessary to protect American jobs. Indeed, news reports indicate that M&B has hired about 50 new workers and may double its workforce over the next two years. Alas, as is so often the case, such thinking ignores Henry Hazlitt’s admonition in Economics in One Lesson to “trac[e] the consequences of [a] policy not merely for one group but for all groups.” In the case of the great hanger crisis of 2008, other groups lose jobs in response to the protectionism that enriches M&B and its employees.

News reports indicate that higher hanger prices will cost cleaners $4,000 or more per year. Suppose that cleaners try to pass the increased cost of hangers along to their customers. Charging an extra, say, 10 cents per item will cause at least a few customers to reduce the number of items they send out for cleaning. If so, cleaners will need fewer employees, and M&B’s jobs will have come at the expense of cleaners’ employees. (Similar logic would apply if cleaners reduced their workers’ hours or wages in response to higher hanger prices.)

Even if customers grudgingly pay the extra dime without reducing their cleaning, they will have less to spend elsewhere. Although that may seem like a trivial amount, the cumulative impact of many consumers having perhaps a dollar per week less to spend on other goods and services may reduce employment in those occupations.

Another possible result of the hanger tariff is that cleaners will earn less profit rather than raise their prices or reduce workers’ hours or wages. Again, there would be unseen job losses since it is now the cleaners’ owners who would have less income available to spend on other goods and services. Of course, if the dry cleaners in an area do not pass along the higher costs, any marginally profitable firms will close, eliminating jobs for all their employees.

The Costs of Intervention

Brandon Fuller, writing May 21 on the Aplia Econ blog (http://tinyurl.com/6dk67x), provides a back-of-the-envelope calculation of the cost of the antidumping hanger tariff. Multiplying the $4,000 per-firm cost by the 30,000 dry-cleaning firms in the country yields a cost of $120 million. To put the $120 million figure in perspective, the tariff is expected to cost some $212,765 for each of the 564 jobs saved.

The lesson is that the misguided attempt to save jobs for domestic hanger manufacturers comes at the expense of other domestic employment. Failure to base policy on Hazlitt’s wisdom has led to the substitution of political competition and bureaucratic fiat for the market process. Not only has M&B enriched itself by using the political process to stifle competition from foreign firms, it has also taken advantage of the reduced competition by raising its price by more than 10 percent. (See Stan Diel, “Hanger Costs Belt Dry Cleaners,” Times-Picayune, April 15, 2008, http://tinyurl.com/63nhbs.)

Talk about being taken to the cleaners.

The Energy Independence and Security Act of 2007 mandated that oil companies increase the amount of ethanol mixed with gasoline. The argued benefits were that it would decrease our dependence on foreign oil and provide a more environmentally friendly fuel. Anyone with an ounce of brains would have realized that diverting crops from food to fuel would raise the prices of a host of corn-related foods, such as corn-fed meat and dairy products. A Purdue University study found that the ethanol program has cost U.S. consumers $15 billion in higher food costs in 2007, and it will be considerably higher in 2008. Higher food prices, as a result of the biofuels industry, have had international consequences as seen in the food riots that have broken out in Egypt, Haiti, Yemen, Bangladesh, Mexico, and other nations.

Anti-Terrorism Spending

The victims of benefits-oriented policies, such as those of the Energy Independence and Security Act of 2007, are visible, but for many other policies the victims and the costs are invisible. That is the case with anti-terrorism expenditures. Take Wyoming with its two major cities: Cheyenne (population 53,000) and Casper (50,000). Federal and state homeland security anti-terrorism expenditures there in 2007 totaled $6,673,910. The benefits of such expenditures are that they might prevent Wyoming from being attacked and if attacked, ameliorate some of the consequences.

There’s no precise way to determine Wyoming’s risk of a terrorist attack and its cost, but simple reasoning suggests that too little or too much can be spent. The costs of spending too little might result in a devastating terrorist attack that could have been prevented. The costs of spending too much are less obvious because the victims are invisible. For example, the price for dump trucks for snow and ice removal ranges between $140,000 and $160,000. How many Wyoming lives could have been saved had some of the anti-terrorism expenditures been spent on additional dump trucks to clear streets and roads of snow and ice? Those victims are invisible.

Environmentalism

Environmentalists have been very active and successful in California in getting huge tracts of land set aside as “open space,” on which nothing can be built, and enacting “smart growth” policies severely restricting residential and business construction. Open space and smart growth are seen as benefits. The cost is skyrocketing housing prices at some multiple of housing prices nationwide, whereas before the 1970s they were similar. Dr. Thomas Sowell wrote, “One of the ways of coping with high housing costs is with ‘creative’—and risky—financing. Roughly two-thirds of the home mortgages in the San Francisco Bay area are interest-only mortgages. Theoretically, you could make mortgage payments forever without acquiring a cent of equity in your home. . . . In reality, the interest-only mortgage payments apply for only a limited number of years—three to five years in most cases—after which the payments rise, so as to contribute something toward the payment of the principal. People who expect their incomes to rise significantly in a few years assume that they will be able to handle the higher payments then. Of course that assumption can turn out to be wrong and the house can be lost” (“Froth in Frisco?” Wall Street Journal, May 26, 2005). Such practices have contributed to the subprime crisis we now face.

There’s another cost. According to Census estimates, the number of black residents in San Francisco has shrunk from 13.4 percent of the population in 1970 to just 6.5 percent in 2005—the steepest decline in any major American city. Guess what. San Francisco Mayor Gavin Newsom appointed a task force to study how to reverse decades of policies that black leaders say have fueled the flight. He made no mention of environmentalist policies that have driven the cost of housing beyond the reach of many blacks.

FDA

The Food and Drug Administration’s (FDA) beneficent mission is to ensure the safety and effectiveness of pharmaceuticals. FDA officials can make two types of errors: approving a drug that has unanticipated dangerous side effects, or disapproving and delaying a drug that is both safe and effective. An FDA official has unequal incentives to avoid these two types of errors. Making the first error, erring on the side of under-caution, the victims are visible and he is directly accountable. Erring on the side of over-caution, the cost and the victims are invisible and there is no accountability. Victims die never knowing why.

In an article in Regulation magazine, Robert M. Goldberg examined some examples of the costs of FDA delay:

Beta Blockers: Beta blockers regulate hypertension and heart problems. The FDA held up approval of beta blockers for eight years because it believed they caused cancer. In the meantime, according to Dr. Louis Lasagna of the Tufts University Center for the Study of Drug Development, 119,000 people died who might have been helped by that medication.

Clozaril: First approved and used in 1970 in Europe, Clozaril’s ability to treat schizophrenics who did not respond to other medicines became known in 1979. Yet the drug was not approved in the United States until 1990 because companies believed the FDA would reject it on the grounds that 1 percent of all patients who take the drug contract a blood disease. As an article in the New England Journal of Medicine marveled . . . : “What is remarkable is that [Clozaril] has a beneficial effect on a substantial proportion [30 to 50 percent] of patients who have an inadequate response to other. . . drugs.” FDA delay therefore meant that nearly 250,000 people with schizophrenia suffered needlessly, when relief was at hand.

Mevacor: Mevacor is a cholesterol-lowering drug that has been linked to reduction in death due to heart attacks. It was available in Europe in 1989 but did not become available in the United States until 1992. Studies confirm what doctors saw to be the case: taking the drug reduced death due to heart disease by about 55 percent. During that three-year period as many as a thousand people a year died from heart disease because of the FDA delay.

The economist’s bottom-line message is that for the sake of human compassion and efficiency, any discussion of benefits from this or that public policy should entail an explicit acknowledgment of costs.

In the first article of this trilogy we explored some of the ambiguities and difficulties that surround the very idea of “economic advice” based on economic science. In the second article we set forth some of the basic foundations of economic science (with special reference to what the science can teach us about what we called the “benign” character of the spontaneous market process). We are now ready to draw together the various strands of our discussions and to set forth the scientific legitimacy of economic advice based on an accurate understanding of the nature and significance of the free-market process.

As was developed in the preceding article, economic science has explicated the nature of the forces that govern the market process. What we saw was that the market process is made up of powerful tendencies set into motion by “erroneous” market decisions. Such “erroneous” (that is, uncoordinated) market decisions are responsible for “imbalances,” in which over-optimistic expectations are frustrated and disappointed, while overpessimistic expectations are translated into overlooked opportunities for mutually beneficial exchanges. The market process consists partly of forces that tend to modify over-optimism, replacing erroneously hopeful decisions by more realistic market bids and offers (and more realistic production plans); and it consists, in addition, of “entrepreneurial” tendencies toward the discovery of hitherto overlooked opportunities. At any given time these coordinative tendencies are operating to eliminate the earlier errors—at the same time as “exogenous” changes in consumer preferences, resource availabilities, and technological possibilities are altering the very framework against which “error” is to be defined.

To the extent that production decisions are geared, not to the satisfaction of current consumer needs, but to the satisfaction of future needs, our above capsule description of the market process must be deepened. We must recognize that a production decision may be “over-optimistic” not only in overestimating the urgency of consumer demand for today’s fresh milk, but also in overestimating the future demand for a particular style of automobile. Such a production decision may be “over-pessimistic” not only in failing to realize that today’s market will express an unsatisfied demand for cheese products (which might have been even more profitable than the production of fresh milk), but also in failing to realize that (perhaps as a result of advances in medical research), in five years’ time the demand for fresh fish (and thus the profitability of now producing fishing trawlers) may increase substantially.

To recognize all this does not require us to change our basic understanding of the nature of the forces that make up the market process. It merely requires us to recognize that these forces operate along channels that permit us to apply our elementary understanding of the “law” of supply and demand to levels of intertemporal complexity not noticed previously. Ultimately, however, the intertemporal coordinating forces unleashed by the “law” of supply and demand operate in ways fundamentally similar to the operation of this “law” in the simplest of markets. Market decisions are continually modified to take more realistic account of future possibilities; entrepreneurs are continually alert to the possibilities of discovering hitherto unnoticed gainful opportunities (whether these opportunities are short-run or long-run in their nature).

Is the Market Process Really Benign?

Our discussion in the preceding section (and in parts of the preceding article) may suggest that each step of the market process is, at least in its tendency, socially beneficial. After all, this process tends to correct the erroneous expectations that individuals may have. It tends to discourage individuals whose over-optimism might otherwise inspire them to undertake projects doomed to failure. And it tends to inspire individuals to discover hitherto overlooked ways in which they can be useful to each other. To the extent that we would hope that such opportunities would be discovered, the market process, it would seem, is “benign” in its tendency. But what about the possibility that the successful achievement of mutually beneficial exchange between parties A and B is seen by party C as an undesirable development? (Economists term such situations “externalities.”) We may consider several different scenarios.

a) Suppose, as a result of newly discovered trade possibilities between A and B, C (who had previously enjoyed B’s spending as a customer in his store) now finds his income reduced. Of course he is dismayed by the newly discovered mutually gainful exchange opportunity between A and B. (C would be similarly dismayed if, as one who used to buy from A at a low price, he now finds himself forced to match the higher price that B is now paying A in their newly discovered mutually gainful exchange.) While C certainly feels himself to have been “hurt” by the discovery, does this compromise our earlier judgment that the latter discovery is socially beneficial? The basis for our earlier judgment was the implicit assumption that the trade between A and B benefits them both (which is certainly the case) without affecting anyone else negatively (which is not the case in our present scenario).

Without entering into any deep philosophical issues revolving around comparisons between the “harm” suffered by C and the gains enjoyed by A and B, let us carefully notice that C has not really been harmed at all. What has happened is merely that C, who had enjoyed income received by selling to B as a result of B’s earlier ignorance, is now no longer able to do so. (Or, in our alternative case, C, who had enjoyed being able to buy cheaply from A, as a result of A’s earlier ignorance, is now no longer able to do so.) C has not been harmed in the sense of having lost any of his physical assets. Nor, as we shall see, has he been harmed in the sense of having lost some of the established true value of his assets; his “harm” consists strictly in his having now to live with a more realistic assessment (by himself and others) of what his physical assets are worth, and have really been worth, to others. Up until now he has, as is presently apparent, been extracting an unrealistically and unjustifiedly higher value from others, in exchange for what was really a lower-value asset.

But what if the exchange between A and B does indeed physically harm C; suppose that what A sells to B is his service as a musician and that this music played by A is so loud and so repulsive to C that the latter feels as if physically assailed. Let us consider this as scenario b).¹

b) A sells live music to B; C’s life is totally disrupted by what he considers atrocious noise. Surely we cannot describe the discovery by A and B of this opportunity for mutually gainful exchange as constituting an unambiguously socially benign development. Surely the gain to A and to B has to be offset, at least in part, by the harm caused to C. Let us distinguish two cases: (i) one in which the law recognizes C’s right not to be disturbed by other people’s music and (ii) one in which the law does not restrain individuals from disturbing others with their noise. In case (i), C’s right not to be disturbed will certainly have to be taken into account by A and B. They will, if they wish to trade with each other, have to pay C to persuade him to permit them to do so. If C accepts such a payment, we would have a three-way trading arrangement in which everyone (at least in his own estimation) has been made better off. B gets to hear music at a total cost that he apparently believes to be worthwhile; A plays his music for a net price (after paying C) that he finds worth his while; C, while he must now sacrifice his peace and quiet (to which he is legally entitled), finds that the payment he receives from A and/or B is more than sufficient to make it worthwhile to do so. Everyone (to whom the trade between A and B is of relevant interest) has gained from trade.

In case (ii), in which the law does not recognize any right not to be disturbed by the noise of next-door music-lovers, C’s pain will be legitimately ignored by A and B (unless of course they choose to act altruistically to consider C’s suffering). But C has a way of making sure that his pain is taken into account by A and by B; he can offer them money to sign a contract undertaking not to play music during agreed-on periods. If they accept his money, C will consider himself to have gained (since he has purchased peace and quiet, to which he had not previously been legally entitled). If they do not agree to such a contract, C will indeed suffer from the music; but it is the legal system that is the source of this pain. The market process merely translates the legally recognized rights of A and B into corresponding realities. In both case (i) and case (ii) the market process benignly tends to reveal all relevant opportunities for mutually beneficial gain—within the given framework of legally recognized (and enforced) individual rights. We may approve or disapprove the morality of the legal system of rights, but given that system, whatever it may be, the market process benignly tends to inspire mutual discovery; it tends to bring about coordination among the decisions of all those who are considered relevant by society’s adopted system of law.

Has Economics Proven the Market Process to Be Morally Good?

We have seen that elementary economic reasoning shows that the market process tends to promote the discovery of hitherto overlooked possibilities for mutually beneficial exchanges. We have therefore described the process as “benign” in its tendency. Does this mean that the market process is morally “good”? Have we shown that, since the market process is economically good, we have scientifically demonstrated that public policies which promote the market process are morally good policies, while those which hinder the process are morally bad? Have we used science-based “is” statements to generate morally compelling “ought” statements? Careful examination of our reasoning will show that we have not demonstrated any necessary moral goodness in the market process—but that we have nonetheless succeeded in securing a valid basis for economic policy, properly understood.

What we have called the “benign” results that tend to flow from the spontaneous market process are benign in a very special, limited, sense. It seems a pity that Jones, who prefers a (which he does not have) to b (which he does), is somehow (let us say as a result of unnecessary ignorance—unnecessary in the sense that it could be eliminated with virtually zero cost) held back from trading with Smith, who prefers b (which he does not have) to a (which he does). A market process that tends to reveal to both Jones and Smith a way in which they can mutually benefit each other (without harming anyone else) seems to be an obviously “socially” beneficial process. But the beneficial character of this process is strictly relative to Jones’s and Smith’s given preferences. If these preferences are, in a moral sense, praiseworthy, the process that promotes their fulfillment can be seen as morally praiseworthy too. But suppose that the a which Jones prefers is a cholesterol-laden dessert that is likely to trigger a heart attack; suppose further that the b which Smith prefers is a hectic ride on a wildly unsafe motorcycle on a busy highway. Surely many observers would think the world a morally better place without the implied exchange. But—and this is the important point—the economist who applauds the market process is doing so not as a moralist; he is doing so strictly within the “instrumentalist” framework of his profession. He is pointing out that, from a purely economic point of view (that is, in terms of given preferences and given resources), free exchange is “beneficial” in its tendency, for all relevant parties.2

An educational psychologist who has been consulted on the best color that might be chosen for the walls of a classroom may recommend a bright color that will stimulate alertness and learning. But before pronouncing this color to be morally superior to other possible classroom-wall colors, we would want to be sure that the classroom is to be used for morally good teaching purposes. If the classroom is to be the arena in which students are indoctrinated into hateful ideologies, we would probably consider a color which slows down the learning process to be morally superior to the alertness-inducing color. “Goodness” is strictly relative to the professional focus of the expert. For the educational psychologist this focus is the promotion of alertness to new information—regardless of the moral status of that information. For the economist the professional focus is the fulfillment of mutually beneficial opportunities for exchange, based on given preferences and resources—regardless of the moral status of those preferences.

But if this is properly understood, it does not appear to be wrong to label a coordinative economic policy to be “good economic policy,” since it does promote mutual discovery among the Smiths and the Joneses. The economist who argues that one economic policy is economically better than another policy is doing so strictly within his professional framework.

What We Have Not Claimed

There are other claims that are not implied by our claim on behalf of the economic goodness of the market process. To show this does not, however, call for philosophical or moral insight; it simply requires rigorous economic reasoning.

For example, take the idea that free markets maximize national wealth. Now the great economists who were the founding fathers of the discipline—the “classical economists”—did indeed define their science as the “science of wealth.” It is well known that the (short) title of Adam Smith’s classic work is The Wealth of Nations. As we noted in the first article, Smith, followed by the other classical economists, took it for granted that the objective of good economic policy is to increase national wealth. Yet the very meaning of the term “aggregate national wealth” (especially if confined as it was in classical economics to material wealth) begins to crumble away, as a scientifically useful term, as soon as it is subjected to analysis.

Two bushels of wheat may certainly appear as more wealth than one bushel. But are they also more wealth than, say, a package of one bushel of wheat and one sack of potatoes? And even when we consider only wheat, are we sure that two bushels owned by a single wealthy person constitutes more wealth than one bushel that has been somehow distributed among several desperately poor large families? Simply drawing attention to the valuation problems of adding up apples and oranges, or to the complications introduced by the insights of subjectivist (and especially, Austrian) economics, explains why economists at the end of the nineteenth century sought to replace the criterion of aggregate national wealth by less-physical concepts. One such concept, which came to be associated particularly with the work of British economist A. C. Pigou, was that of the aggregate national “economic welfare.” What good economic policy seeks to maximize, according to this approach, is the aggregate economic well-being of the members of society.

But the idea of treating individual economic welfare as something that might in principle be added together with someone else’s individual economic welfare is one which could hardly be sustained. In particular Austrian economics, which had pioneered the subjectivist understanding of consumer utility, could never accept any such aggregate notion. Moreover, attempts to replace direct notions of aggregate welfare by less-direct formulations (that is, those implied in the notions of aggregate efficiency in the allocation by society of its economic resources) are easily seen to be doomed to failure.

Thus, it turns out, economic policy advice cannot meaningfully claim to be based on the idea that a particular policy should be described as economically “good” because it tends to promote aggregate wealth, or aggregate economic welfare, or a more efficient allocation of a society’s economic resources.³ We seem to be forced back to the more modest (but yet enormously important!) claims examined earlier—that certain economic policies may be shown to promote mutual discovery by potential market participants (and may therefore be considered to be “economically good” policies). Sometimes, as we have indicated, this is expressed by pointing out that such policies promote “coordination” among the decisions made in a society. They tend to alert relevant market participants about the possibilities available to them, tending thus to ensure that potentially beneficial opportunities for innovative production, and mutually gainful exchange, do not go unnoticed and unexploited. Implicit in the work of Ludwig von Mises, however, are insights into several additional criteria for judging economic policies to be good or bad.

Ludwig von Mises and the Goodness (or Badness) of Economic Policies

Mises never did fully explain the basis on which he felt able to pronounce an economic policy to be good or bad. He never (as far as I am aware) explicitly discussed the “coordination” criterion for good economic policy to which we have repeatedly referred. But there are grounds for believing our position in this article to be consistent with Mises’s philosophical and economic perspectives. In his explicit discussions Mises seems to have grounded his judgments (on the goodness or badness of economic policies) on one or more of three separate foundations:

Self-Frustrating Economic Policies: A policy that can be shown by economic science to bring about results that are emphatically not desired by the policymakers themselves is bad policy. A classic Misesian example of this was the policy of urban residential rent control. Whatever the merits might be of the results hoped for from a policy of rent control, it must be pronounced a bad policy. Economic analysis shows that it tends to generate housing shortages—which were not (one hopes!) the objective of the legislators.

Unsustainable Policies: A policy that can be shown to be inherently impossible to be successfully carried out is an obviously flawed policy. For Mises a policy of monetary inflation (to fuel a boom in the initiation of long-term capital-using ventures) is a bad policy because economics shows how extremely unlikely it is that any such sustainable boom will result. Such a boom can be sustained only through long-run consumer sacrifices, which the consumers are not in fact prepared to make. Such policies amount to attempts to run simultaneously in two opposite directions. Economics can show that a particular policy cannot expect to be successfully completed. Such a policy may be described as bad policy.

Violations of Consumer Sovereignty: Mises (like most economists) apparently supposed that most people believe it to be a “good thing” for members of society to fulfill their preferences. He therefore shared the conviction of most economists that a policy which structures a society’s allocation of resources in patterns clearly at odds with the dynamics of consumer preferences is an economically “bad” policy. A policy that creates a pattern of excise taxes tending to nudge consumer purchases away from goods and services the consumers prefer, toward goods and services legislators believe to be “better” for consumers—is a policy that Mises believed to be “bad,” because it violates consumer sovereignty.⁴

Science and Passion

We noted in the first article in this series that writers have been puzzled by the passion with which Mises denounced what he believed to be bad economic policies. Fritz Machlup, an eminent economist and devoted student of Mises, was one of these writers. Mises’s passion seems, at first glance, difficult to reconcile with his own insistence on the absolute necessity for scientific wertfreiheit—detached objectivity—in social science. When Mises denounced socialism as a disastrous economic system—one that tends to impoverish society, to bring misery on its members, and to threaten the very survival of Western civilization—he waxed passionate. He was firmly convinced that economic science shows all this to be true. (In particular he was convinced that economics demonstrates how the most benevolent of would-be national planners would not be able to plan [that is, to coordinate individual activities] at all! Thus a policy of socialism—that is, a system in which an integrated, single, national plan is sought to replace the “anarchy” of innumerable individual plans in a free-market society—is one that is simply impossible to carry out [just as would be a policy aiming to run in two opposite directions at the same time].)

But by now it should be clear that there is no inconsistency in Mises’s positions. Because Mises believed—on objective, scientific grounds—that socialism is a sure recipe for misery and worse, he believed it to be his moral duty to communicate his belief to society with whatever passion might be able to command attention and inspire political relief. Machlup may have seen this as a violation of wertfreiheit. Mises would have vehemently disagreed. His passion was—like the passion of someone earnestly preaching the health dangers of tobacco smoking—based on cold, objective science.

As we saw in the first article, the eminent economist George Stigler believed that any “preaching” by any economist for any particular economic policy is, on grounds of consumer sovereignty, out of order. Stigler believed that the public already knows full well what the likely results of any economic policy are likely to be. If the economist is preaching against a policy voluntarily adopted by the public through its political channels, he is simply attempting to promote what he believes to be better for society over what society believes to be better.

But economic science surely has, again and again, revealed how particular policies result in outcomes not foreseen by policymakers, or by those who elected or appointed them. Economics shows how imperfect knowledge may be responsible for enormously valuable (and completely overlooked) opportunities remaining unexploited. It is no violation of consumer sovereignty to demonstrate where such ignorance has been (or is likely to be) responsible for disastrous results. In fact, to demonstrate this is to promote consumer sovereignty. As long as the philosophical and moral detachment of economic science is well understood, this science can be used, in a wertfrei manner, to inform the public of what it does not yet know. Where the results of such ignorance are likely to be serious, the economist (in his capacity now of a citizen fully alive to society’s suffering) may consider it his moral obligation to bring the results of his objective scientific researches to the attention of the public. Such moral obligation may indeed be expressed with Misesian white-hot passion—but this is, in principle, in no way inconsistent with the cold objectivity with which those researches were conducted.

1. This scenario has been extensively explored in a literature pioneered by Nobel laureate Ronald H. Coase; see his celebrated paper, “The Problem of Social Cost,” Journal of Law and Economics, Vol. III (October 1960).
2. For the classic statement of these insights, see Lionel C. Robbins, An Essay on the Nature and Significance of Economic Science, 2d edition (London: Macmillan, 1935), especially Ch. VI.
3. See further my paper, “Welfare Economics: A Modern Austrian Perspective,” published as chapter 11 in Israel M. Kirzner, The Meaning of Market Process, Essays in the Development of Modern Austrian Economics (London: Routledge, 1992).
4. For a pioneering discussion of coordination, as introduced into normative economics by eminent Austrian economist Friedrich A. Hayek, see Gerald P. O’Driscoll, Economics as a Coordination Problem, The Contributions of Friedrich A. Hayek. See also my “Coordination as a Criterion for Economic ‘Goodness,’” published as chapter 7 in Israel M. Kirzner, The Driving Force of the Market, Essays in Austrian EconomicsLondon: Routledge, 2000). See also Israel M. Kirzner, Ludwig von Mises: The Man and His Economics (Wilmington, Del.: ISI Books, 2001), pp. 163–71London: Routledge, 2000). See also Israel M. Kirzner, (Wilmington, Del.: ISI Books, 2001), pp. 163–71

A casual reader could be forgiven for skimming through a front-page Los Angeles Times article from February 12 and thinking that the story was just another Times exposé of political corruption in some Third World backwater. The article is like so many others, offering a tale of a government without contested elections, the use of police powers against political insurgents, and leaders who enrich themselves and choose economic winners and losers within their domain.

On closer examination we learn that the story took place, not in some far-off nation, but in California, in the tiny industrial city of Vernon, located only a few miles south of that newspaper’s downtown offices.

“Twenty-five years after its elected officials last had a contested ballot, eight strangers took up residence,” the Times reported, noting that the newcomers had instantly filed papers to run for city council. “Within days, city utility trucks had turned off their power. The building they shared was slapped with red tags by inspectors who said the property was ‘unsafe and dangerous’ as a residence. Strobe lights flashed through their windows. They and some of their relatives were placed under surveillance. Shortly, city police and the officials drilled holes in the locks and evicted the would-be office-seekers. Having deprived the interlopers of city residence, Vernon officials on Jan. 27 disqualified them from the ballot.”

With the newcomers gone, the old guard could stay in power, eliminating yet another election and clinging to the benefits they receive for running this five-square-mile city of 93 people. Who says small towns can’t be plagued by big government?

Because Vernon is, in essence, an industrial park that is incorporated as a city, it is an oddity. But in reality, the city is just an extreme example of what’s happening in California and nationwide when it comes to municipal government.

City officials don’t see themselves as representatives of the “people” who busy themselves with protecting their rights and providing a few fundamental “services,” such as infrastructure, public safety, and the like. Instead, city staff and city councils view themselves as economic developers, charged with luring new businesses, keeping old ones from leaving, and micromanaging their micro economies.

Sometimes their goals sound high-minded (rejuvenating downtown), but basically it’s about the cash. Municipal governments are hell-bent on maximizing tax revenues at every turn, and they use their vast powers to achieve that end. It’s the corporate state at the local level, yet something that many observers and activists—even libertarians and conservatives—overlook as they fixate on state capitals and Washington, D.C.

Cities have carrots and sticks available to achieve the desired outcomes. In Vernon we see the stick in action. The city controls the entire housing market and used its regulatory powers to deny legal residence to newcomers. One cannot live in a non-approved industrial building, so the city sent code officials and police to drive the new residents out of town. I’ve never seen this before, but I routinely watch cities deny conditional-use permits (CUPs) to churches that want to locate in industrial parks. That’s because city planners know that by shifting a use from industry to religion, they lose some of their tax base.

I have repeatedly seen cities deny approvals for housing tracts for similar reasons—officials view such tracts as a drain on their budget. They much prefer that raw land be used for the construction of big-box stores, hotels, and auto malls, which offer lucrative sales-tax bounty.

The biggest economic-development stick is, of course, eminent domain. That process has gained much attention since last summer, when the U.S. Supreme Court ruled in Kelo v. the City of New London (Connecticut) that it’s okay for cities to use eminent domain to take nonblighted properties from their owners and give them to developers in order to improve economic development.

The public, understandably, has been outraged at the notion that their homes or small businesses are not safe from the greedy eyes of developers colluding with tax-hungry city officials, and the backlash is still unfolding in Congress and state legislatures. But most of the considerable nationwide focus, and all of the proposed legislative fixes, have been on the act of taking property from one owner and giving it to another owner. Yes, there is a broad understanding that cities do this to expand the tax base, but there has yet to be a wider understanding of the dangers of the entire economic-development process—the driving force behind the eminent-domain controversies.

Too often foes of the eminent-domain aspect of that process bend over backwards to assure officials that they agree with the concept of removing blight and boosting local economies. It’s just that cities shouldn’t rob one set of owners and benefit another set. Redevelopment is good, as long as eminent domain is left out of the picture, they say.

But it’s not just eminent domain that’s the problem. It’s the entire economic-planning regimen, spoon-fed to cities nationwide by groups such as the National League of Cities and the American Planning Association. It’s not just the stick that’s the problem, but the carrot, also.

Tools of the Trade

Governments have vast economic-planning tools at their disposal, which usually come with complicated names (Strategic Investment Programs, Tax Increment Financing, Industrial Development Bonds, Enterprise Zones, and more) designed to disguise what they truly are: corporate welfare. The two main categories are direct subsidies and tax breaks, or abatements, in which specific companies or businesses located in specific areas get reductions in their tax payments.

Libertarians are united in recognizing the evil of the first category. Government should not be in the business of robbing Peter and paying Paul. They have different views on the second category. Some argue that any tax break is good, in that it reduces government’s transfer of dollars from the private sector to the public sector. Others argue that giving a tax break to one targeted recipient increases the burden on all other taxpayers.

“One theory,” says Steve Frates, director of the Rose Institute for State and Local Government in Claremont, California, is “that because government is bloated and not efficient, a targeted tax break can be efficient. The government might tighten its belt, and anytime you cut taxes, it’s a good thing. The other argument is that targeted tax breaks allow government decision-makers to make value judgments. Very rarely are government officials good at making such judgments. When they make a decision about economic rewards, it’s not based on economic efficiency but on aesthetics, such as deciding they want a new boutique downtown.”

Sometimes, Frates argues, government planners succeed at doing things that benefit the city, from a government-finance point of view. Giving a tax break to a car dealership, for instance, might help a city’s tax base if the alternative is the dealership locating in a nearby city. But that doesn’t necessarily benefit local citizens or the region in general.

The basic question, according to Frates, is: “Does city staff make better decisions than the market?”

Not too tough to answer.

We can argue philosophically about whether a targeted tax break is ever acceptable. The broader point is that such breaks are part of a process whereby local officials pick winners and losers, and those companies that win typically are the ones most adept at political gamesmanship.

In addition to targeted tax breaks, cities offer industrial revenue bonds (IRBs), the interest on which is tax-exempt for investors. As the city of Albuquerque explains in promoting such bonds, “The city issues the bonds but is not making the loan. The investor buying the bond makes the loan. The company must find its own bond purchaser. It can also buy its own IRBs. The city technically owns title to the facility built with IRBs and leases it to the company for up to 20 years. At the end of the term, title is transferred to the company. . . . Because the city owns the title to the project, it’s exempt for up to 20 years from 95 percent of property taxes on land, buildings, and equipment. And a company may also receive gross receipts and compensating tax exemptions on initial purchases of equipment made with bond proceeds.”

Cities can offer direct loans to companies. I’ve seen cities give major companies valuable commercial real estate for some nominal fee, such as $1. Sometimes cities will float a bond and use that money to build something for the developer. In one California case, the city of Mission Viejo built a parking garage at a privately owned mall, defending its action as part of the city’s infrastructure mission.

Sometimes cities will kick back tax revenues to the business, or offer low-interest loans, subsidized by taxpayers. Pretty much any way you can think of to provide benefits to a favored company has been proposed or tried. These financial benefits are often mated with favorable land-use approvals. Usually, city officials defend these policies as net gains: the city supposedly gets more back in tax revenue than it loses from the transfer. How many times have we heard mayors boast about the latest “win-win” situation? It’s not much of a win for taxpayers, who see some of their dollars used to build infrastructure for the new project. Typically, tax dollars are diverted from traditional public services, such as police, fire, and libraries, to parking garages, roads, and other elements of the new redevelopment project.

The Grand Plan

Specific incentives, whether tax breaks or outright subsidies, aren’t offered in a vacuum. They are usually part of some grand redevelopment idea. If, for instance, a city wanted just to keep a business from leaving by reducing that business’s taxes, that’s fairly understandable, even if objectionable compared to an across-the-board tax cut. I’ve witnessed that in small rustbelt cities which were sure they couldn’t afford to lose a major employer.

Increasingly, though, cities are not content using incentives for the occasional hard case. The goal is to embrace an overall central-planning vision, in which local officials carefully control land use and manipulate the market to bring in the highest amount of tax revenues for the city.

There are slightly different rules and processes in each state, but it’s done basically the same way everywhere. In California the process is known simply as “redevelopment.” Everyone is in favor of redeveloping grimy areas, so the process has marched along its merry way with little criticism for many years.

“There is an unknown layer of government in California, which few understand,” explains the booklet “Redevelopment: The Unknown Government,” by Orange County supervisor Chris Norby. “This unknown government currently consumes 8 percent of all property taxes statewide. . . . It is supported by a powerful Sacramento lobby, backed by an army of lawyers, consultants, bond brokers and land developers. Unlike new counties, cities and school districts, it can be created without a vote of the citizens affected. Unlike other levels of government, it can incur bonded indebtedness without voter approval.”

This unknown government can lavish subsidies on companies and use eminent domain to take properties away from existing owners. Cities—the redevelopment agency is typically run by the city council and city staff—create project areas within their boundaries. Some cities have made their entire boundary a project area.

In California and some other states the agency must first discover “blight” before creating a project area. Almost anything passes for blight. For instance, municipalities can call areas blighted if they have excessive urbanization or too little urbanization, if the median property values are below the state median, or if officials find “piecemeal development” (most properties in an area owned by different owners) or even chipping paint on a few houses.

Blight is usually discussed in the context of eminent domain, because once an area is found to be blighted officials can use that power. But the discovery of blight is also the cornerstone for the creation of these often massive redevelopment areas that transfer decision-making from individual property owners to the government. Within those areas, government can do largely as it chooses, from taking properties to lavishing subsidies on specific developers.

The key financial mechanism that supports “redevelopment” is Tax Increment Financing, or TIF. It works this way: property-tax revenues from a project go to the city’s redevelopment agency, which must use those dollars to pay off bonds that were floated to finance the project. So instead of the tax dollars going to traditional government services, such as road building, schools, and the fire department, the money goes to the agency for development, which gives cities a huge incentive to create as many project areas as possible. It means money and power.

The theory is that the city deserves the new tax dollars because its efforts are improving the supposedly blighted area. But the reality is quite different. Cities don’t often use TIF to fix up blight, but to increase their tax base. Often they engage in what is called “growth capture”—city planners wait until a stable or depressed area is starting to bounce back on its own. They then brand the area “blighted” and use that as an excuse to capture the new values and transfer the gain from the old owners, who held onto the properties during the lean years, to new developers who savor the prospect of getting prime property for far-below-market rates.

Because those tax-increment dollars must be used to pay off debt, the cities engage in wild debt-spending sprees. One small city in California with 32,000 people (Brea) racked up more than $600 million in total indebtedness in part to bulldoze its old downtown and create a brand-new one from scratch, built by one developer.

The financial aspect of this is shaky. The redevelopers depend on a constant long-term stream of revenue (usually for the 30-year life of the bond) to pay off the debt used to fund the project. But central plans don’t always work as well as the central planners hope. I’ve witnessed quite a few failed projects, and have watched cities constantly ratchet up the redevelopment game to feed the beast.

Is the tax increment in the project area less than expected due to an economic downturn or competition from a neighboring city engaged in a similar retail project? If yes, then cities create new project areas that can bring in even more tax dollars to backfill the shortfall from the old project areas. Redevelopment debt gets constantly refinanced, and cash-hungry cities frantically look for new projects by luring businesses from neighboring cities.

In southern California, where one city runs into the next, the cross-town rivalry can become intense. It doesn’t often matter to, say, a car dealership whether it locates on one side of the 57 freeway in Placentia or the other side in Fullerton. So cities will bid up the subsidies, and current councils will let future councils clean up the mess if the promises don’t pan out.

Does It Work?

When these proposed projects are debated before the public (sometimes the projects are snuck through redevelopment agency meetings as quietly as possible to avoid public outrage), city-council members and staff talk about all the great economic benefits that will flood the community. The Favored Developer will stand before the council and show his architecturally lovely drawings of the new downtown, new industrial park, new neighborhood, or new retail center.

I’m reminded of journalist Henry Hazlitt’s story about the bridge in Economics in One Lesson: “When providing employment becomes the end, need becomes a subordinate consideration. ‘Projects’ have to be invented. Instead of thinking only of where bridges must be built the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? It soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries.”

While redevelopment is more about tax revenue than job creation, the same process is at work. Officials look for reasons to create a project. Then the whole economic well-being of the community rests on the shoulders of that project. Those who criticize the project are indeed deemed reactionaries who don’t care about the future of the community. Years later, no one examines whether the project actually did as promised, and by then a new council is on to another great idea.

Here’s Hazlitt’s bigger point:

The bridge exists. It is, let us suppose, a beautiful and not an ugly bridge. It has come into being through the magic of government spending. Where would it have been if the obstructionists and the reactionaries had had their way? There would have been no bridge. The country would have been just that much poorer. Here again the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes. They can see the bridge. But if they have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. They can see the unbuilt homes, the unmade cars and washing machines, the unmade dresses and coats, perhaps the ungrown and unsold foodstuffs.

Yes, redevelopment and corporate subsidies bring to fruition specific projects, some of which are pretty nice, create jobs, and offer valuable things. The issue is what we don’t see. Redevelopers act as if nothing would be built on the spot had they not built it. This is a ludicrous argument here in Orange County, where land often tops $1 million an acre. Something good, even better than the current project, would certainly have been built in most instances had the market been left to its own devices.

A Net Loser

Even on their own terms, however, these projects typically don’t pan out. In Garden Grove, California, officials were intent on capturing tourist dollars from the nearby Anaheim Disneyland resort area, so they “invested” heavily in hotel construction. As an Orange County Register editorial explained in 2004, officials in 2000 predicted $33 million in revenue to the city after seven years, but revenues ended up at a mere $13.6 million after three and a half years. Then after the loan and bond payments were subtracted, the gain totaled $2.7 million over that period. Activists argue that if the cost of the land and other costs are figured in, the city was a net loser in the process.

And because the dollars are far short of what was predicted, Garden Grove officials have been on a mission to develop an attraction (theme park or Indian casino) that will keep the underused hotels filled. That mission has driven them to consider using eminent domain against well-maintained neighborhoods and to shower even more subsidies on corporations. Here we see how central planning pushes officials to first abuse taxpayers and then abuse landowners.

“Does the tax abatement method meet with success?” asked Michael LaFaive of the Mackinac Center for Public Policy in a 1999 article. “Not as much as if local officials simply would keep taxes low in the first place. CRC [Citizens Research Council of Michigan] found that economic growth takes place in jurisdictions where taxes are low and which consequently grant fewer abatements.”

Even free-enterprise-oriented economic development ideas fall short. Remember “enterprise zones,” the brainchild of former congressman and Housing and Urban Development secretary Jack Kemp? Based on the sound idea that grimy areas could be fixed up by reducing regulations and taxes, the Reagan administration made this the basis of its urban policy. Yet because the zones ultimately became the creature of government rule-makers, the results have been less than stellar. A Los Angeles Times article from January found that such zones have produced few jobs for low-income people in California.

“Businesses in upscale areas such as the Long Beach waterfront and San Francisco’s fashionable South of Market district get tax breaks because zone boundaries are based on decades-old census data,” the newspaper reported. “Employees of such companies who live in town houses in and around parts of San Francisco’s exclusive Nob Hill neighborhood, beach lofts in Long Beach and vintage bungalows of Oakland’s upscale Rockridge district can qualify their employers for credits; dated maps show those neighborhoods as low-income. The state is subsidizing six-figure salaries in these zones.”

The obvious point: If fewer regulations and lower taxes cause an economic boom, why not simply reduce regulations and taxes across the board?

Local economic planning, especially the creation of redevelopment project areas, actually slows down neighborhood improvement. Once an area is deemed a redevelopment area, property owners stop investing in their properties because they are not sure that they will ultimately reap the benefit of the investment. They become subjects of the central planners who will make the main decisions that affect the economic vitality of the area.

The L.A. Times in 2000 did a computer analysis of North Hollywood, recipient of some of the most aggressive redevelopment activities in the region. “Two decades and $117 million in public money later, efforts by the city of Los Angeles to rescue suburban North Hollywood from creeping blight have largely struck out,” the newspaper concluded. “Of perhaps greater significance, North Hollywood’s recovery has lagged behind other depressed areas in Los Angeles that improved without any money from the city’s CRA [Community Redevelopment Agency], according to the Times analysis of census, property and employment data.”

Could it be that the marketplace works after all?

Problems with Incentives

Most city managers and economic-development officials that I’ve talked to fancy themselves as CEOs of companies, and they argue that what they are doing is no different from what private companies do: maximizing revenues. “Why wouldn’t a libertarian support what we’re doing given that you value private business and understand the importance of profit?” I’ve often been asked.

The answer is simple. Cities are not businesses. They take the tax dollars of residents and make decisions about land use that are backed by police powers. They do not operate in a market; they do not have voluntary stockholders. Despite the delusions of city managers, the city staff usually is not as sophisticated or as skilled as corporate staff, which means cities often get a poor deal when negotiating with rent-seeking corporations.

When cities insert themselves into the economic development game, either with carrots or sticks, they:
• Shift decision-making from individuals to governments;
• Take money from taxpayers and redistribute it to individuals and companies;
• Undermine property rights and other freedoms;
• Encourage a class of rent-seekers, who learn to lobby city officials for favors and special financial benefits;
• Put unfavored businesses at a competitive disadvantage with those who are favored; and
• Stifle political dissent, as companies that are dependent on the city for lucrative work become reluctant to speak their minds about any number of city issues.

Despite what city managers will tell you, the choice is not between economic development and letting a city rot. The choice is between central planning, empowering officials to decide which businesses are worthy of their help, and the good old free market, which lets free people decide which business should succeed or fail.

City officials like to be “proactive,” as they say, and help with economic development. There is something they can do. They can get out of the way, by lowering tax rates, deregulating, ending zoning restrictions, and eliminating exclusive contracts with utilities and developers. It’s not out of the question. The city of Anaheim is doing just that, with remarkable results.

Mackinac’s LaFaive puts it well in a 2003 article: “The best business climate is one in which government ‘sticks to its knitting’ and does its particular assignments well, at the lowest possible cost while creating a ‘fair field with no favors’ environment for private enterprise.”

Not a bad template. Sure beats a world of central planning, where city officials can choose who gets handouts and even who gets driven out of town.

Here, in a mere seven words, is the fallacy Frédéric Bastiat identified in the nineteenth century and Henry Hazlitt re-identified in the twentieth. It consists in neglecting “what is not seen” and is best illustrated by Bastiat’s broken-window fable. (See page 26 for its application to war.) Let’s see how USA Today and its news sources fell for it.

The report begins by focusing on one company: “The phone at Dale Yeager’s Pennsylvania firm has been ringing off the hook in recent weeks, thanks to a trio named Ivan, Frances and Charley.” Those, of course, were destructive hurricanes that hit the southeastern United States late last summer. Thanks to an angry Mother Nature, “Yeager’s expertise in corporate emergency preparedness analysis and training” was much in demand.

The newspaper notes that many other businesses were seeing similar boosts: “Although natural disasters spread destruction and economic pain to a wide variety of businesses, for some, it can mean a burst in activity and revenue.”

No surprise there. Devastation will surely be followed by recovery efforts. That’s what people do.

But the newspaper steps on shaky ground when it attempts to generalize, guided by sources it refers to as “economists.” “For that reason, economists tallying the numbers expect the hurricanes will be neutral in their effect on the U.S. economy, or may even give it a slight boost, particularly because of an expected reconstruction boom in the already red-hot construction industry.”

One of those economists is Steve Cochrane, an economic consultant in Pennsylvania. As he sees it: “It’s a perverse thing . . . there’s real pain. But from an economic point of view, it is a plus.” USA Today says Cochrane estimates that “in Florida, the state hit hardest by the storms, 20,000 jobs will be created that otherwise would not have been.” Most of those jobs will be in construction, with others created in insurance, business services, utilities, and retailing.

Another consulting economist predicted that the expected slight dip in GDP will be outweighed by the construction boom. USA Today then listed other examples of benefits from the storms: increased sales of bottled water, juices, and walkie-talkies; more work for locksmiths; and new clients for business planners.

The key phrase in the story is “tallying the numbers.” That refers to the visible economic activity in the wake of the hurricanes. The fallacy lies in ignoring what you can’t tally numbers on: the goods and services not bought, the investments not made, the projects not undertaken because people must repair the storm damage.

The bottom line is this: Before the storm season people possessed intact homes and businesses and their money; their insurance companies’ cash was invested in productive enterprises. After the storm season people possessed destroyed or damaged homes and businesses, which they had to spend their money to replace or fix. Their insurance companies had to liquidate investments to pay the claims. That money would have been spent or invested to produce additional things. Instead, it will be used simply to put things back the way they were the day before the storms.

How that can be good for society generally defies explanation.

* * *

The “Star Trek” television series and movies attracted huge followings for their stories of adventure and heroism in other worlds. Gardner Goldsmith suggests that you not learn your economics from them.

All around the country bicycle trails are being built on abandoned railroad beds. There’s only one problem: sometimes the landowners object. Kirk Teska has the details.

Productivity increases are apparent everywhere throughout the economy, except for one of the fastest growing parts: the licensed professions. Lewis Andrews investigates.

Ambrose Bierce is best known for the Devil’s Dictionary, his cynical redefinition of the English vocabulary. Less well known is Bierce’s demolition of socialism. Daniel Hager does his part to fix that.

As noted, Bastiat’s “broken window” fallacy is widely committed by those who see silver linings in storms and earthquakes. As Thomas Woods points out, looking for an economic stimulus from war is the same fallacy writ large.

Our columnists spent the last month searching for the most arresting topics: Richard Ebeling relives the Great Chinese Inflation. Lawrence Reed says beware democracy. Thomas Szasz dissects “therapeutic jurisprudence.” Stephen Davies celebrates the life of Richard Cobden. Russell Roberts suggests a reason why we don’t have more freedom. And, stumbling across the argument that taxing and regulating charities would bring social benefits, your editor bellows, “It Just Ain’t So!”

Books reviewed this issue scrutinize the creation of Iraq, the history of violence, and teachers unions.

—Sheldon Richman

As if on cue, in May the Washington Post published an article headlined “Across America, War Means Jobs.” Although it acknowledged that the matter wasn’t quite so simple, the article nevertheless quoted a great many people who asserted that war was a boon for the economy. “If it wasn’t for [Defense Department] contracting,” said Brian Smith of Columbia Sewing Company, “we would not be here, and 200 people would be out of a job.” Roanoke Mayor Betty Slay Ziglar was thrilled: “These people have grown up sewing in textile plants, and there are so few now. They were desperate to have jobs, and it’s going to expand again. I’m so grateful.” “The economy is always helped by war,” appliance salesman Gary Gayer told the Post. “That’s just a fact.”

It is clear enough that war stimulates certain sectors of the economy. But it is logically and economically unjustified to equate that stimulus with prosperity for the American people as a whole. Ludwig von Mises summed up the correct position when he observed, “War prosperity is like the prosperity that an earthquake or a plague brings.”

Frédéric Bastiat exposed the “broken window” fallacy in the mid-nineteenth century. A shop window broken by a man’s “incorrigible son” is said to benefit the economy, since the company that fixes the window enjoys a “stimulus,” which in turn is passed along to those with whom the window company does business. What this analysis overlooks is that the man with the broken window would have spent his money on other things if he had not needed to buy new glass. The “stimulus” that would have been bestowed on, say, the picture-frame store, where he could have spent his money, now never occurs because he had to replace his window. Had the window not been broken, the shopkeeper would have had a window and a frame. Now he has only a window.

The repair of the window is what is seen, and focusing on it leads poor logicians to conclude that the breakage was actually a boon. The lack of a picture frame is not seen, but is no less a consequence of the unfortunate incident.

The same kind of analysis can be fruitfully applied to war. The jobs created for the production of weapons and other military equipment, as well as the jobs in the armed forces, are paid for by taxing the private economy. Thus financing wartime activities diminishes private incomes—that is, the ability of Americans to buy the goods they need. And because people and capital goods are now producing war-related items and services, fewer are available to produce goods for consumer needs. In short, Americans have less money with which to buy fewer goods. How can this be anything other than economic retrogression?

There are countless other deleterious effects as well. In extreme cases, government rations certain crucial goods to ensure adequate supplies for the military. No definition of prosperity includes restricting the civilian population’s ability to acquire goods. But even when outright rationing is not undertaken, government purchases nevertheless distort the economy. For example, large purchases of steel will lead to price increases, making it more difficult for private businesses that use steel to meet their competition in a global market. If the higher prices attract new steel producers, this new production comes at the cost of abandoning other industries, thus further skewing the economy in favor of the government’s preferences over those of the consumer.

Some will object that military equipment is fundamentally different from other goods the government might buy, since it is necessary to protect the population against foreign enemies. But even if we assume this to be true, it is still the case that war itself does not create prosperity. Buried in the Post article was the amazing statistic that in real terms the cost of the Iraq war will surpass the American share of World War I. To put it mildly, that is a substantial drain on the private economy.

World War II and American Prosperity

Part of the reason that the prosperity-through-war myth persists is that most people have been taught that World War II lifted the United States out of the Great Depression and ushered in a period of unprecedented affluence. But the myth is no more valid for that conflict than for any other.

Historians make much of the substantial production and employment statistics compiled during World War II and triumphantly point to its great economic “stimulus.” But most of this increase was due to the construction of armaments and military equipment, and payments to military personnel. This production was not geared toward producing things that ordinary people needed. From a purely economic point of view, the war made consumers worse off by diverting capital and other resources away from civilian production and toward the production of goods that no consumer would wish to purchase. Between 1943 and 1945, some two-fifths of the people who could work—including members of the armed forces, civilian employees of the armed forces, people who worked in the military-supply industries, and the unemployed—were not producing consumer goods or capital goods geared toward the production of consumer goods. That was not all, of course: the tax money from the remaining three-fifths went to fund military production and activities. All of this amounted to a dramatic loss of material wealth.*

Unemployment did virtually disappear. But it did so primarily because 11 million people were added to the armed forces, mostly by conscription. As Robert Higgs explains, “During the war the government pulled the equivalent of 22 percent of the prewar labor force into the armed forces. Voilà, the unemployment rate dropped to a very low level. No one needs a macroeconomic model to understand this event.”

In the unhampered market, jobs are never in short supply. Since human wants are unlimited, more labor is always needed to produce more goods. The sick economy of the New Deal, however, could address the unemployment problem only by conscripting over a fifth of the labor force into the military.

Meanwhile, the average work week in manufacturing increased by seven hours between 1940 and 1944, and by a full 50 percent in bituminous coal mining. And because of the demands of wartime, people found it more difficult, and sometimes even impossible, to acquire the goods they needed. No one could buy a new car, house, or major appliance, since the government had forbidden their production entirely. A great many other goods were either unavailable or difficult to obtain, from chocolate bars and sugar to meat, gasoline, and rubber tires.

As economist George Reisman writes in Capitalism, “People believed they were prosperous in World War II because they were piling up large amounts of unspendable income—in the form of paper money and government bonds. They confused this accumulation of paper assets with real wealth. Incredibly, most economic statisticians and historians make the same error when they measure the standard of living of World War II by the largely unspendable ‘national income’ of the period.”

Common sense is right after all: death and destruction do not lead to prosperity. That should be obvious. But as George Orwell once said, “We have now sunk to a depth at which restatement of the obvious is the first duty of intelligent men.”

The fairy tale, or fable, is a literary device by which adults—who have learned many of life’s lessons the hard way—impart wisdom to the young. It is at once an exciting and captivating story and a lesson in moral imagination. It succeeds because it is simple and direct.

Across most cultures, there is a recurring fable: The fairy tale of the three wishes. The poor chap who is at once hero and fool of the story is given three wishes. The first wish is inevitably spent on something foolish and trivial, but the wish is fulfilled powerfully and right away, thereby emboldening the wisher. The next wish is much more serious, one that will thoroughly change the life of the wisher all at once. Inevitably, it brings disaster and ruination upon him. The third wish is humbler—to be rescued from the disasters of his earlier wishes, with everything in his world restored to normalcy. This wish also is granted, and the hero comes away a much sadder but much wiser man.

What is the moral of this story? It is not quite that we do not know our own minds and what we really want, because of course in some important senses we do. I think the teaching of the story is that we are not wise enough to get what we want all at once by merely wishing for it, for we cannot foresee the multitude of consequences that will undoubtedly ensue, many of which we would not want. Unlike when objects of our desire are earned slowly, there is no feedback about the wisdom and appropriateness of the goal, no turning back or perhaps merely turning aside—the wish is carried out by the genie exactly as it is expressed in words. There is thus no opportunity for re-evaluation, re-examination, and ultimately reconsideration, as there is when one embarks on a long path to a goal.

Furthermore, when working toward a goal, a person commits his whole self to it in that he must take action after action to achieve it, and he must do so over a prolonged period. When wishing, however, he does not have to put thought, care, or repeated and sustained effort into attaining his goal. Each action a man has to put toward a goal takes effort, and each such action is therefore a reason to abandon the goal if it is not worth—if it is no longer worth—the effort. The actions that men must take to achieve their dreams dampen their enthusiasm for them. Engineers call such dampening a “negative feedback loop,” and it is the hallmark of a stable system that it centers around such a loop. “Positive feedback loops” quickly go out of control and rock the system’s limits.

So what, then, is it fair to conclude about knowing one’s own mind? At every step of the way toward a goal, a person knows whether the next step is worth it in light of that small step’s consequences—small enough to be seen and felt—and the effort required. Whether the step after that will also be worth it is something he will not finally decide till it is ripe for decision. The saving grace is that even if a subsequent step is no longer worth the effort, often that does not mean the prior steps were in vain: Instead of turning back, the man may turn aside, and choose a path parallel rather than perpendicular to the original path.

Laws Are Wishes

The astute reader will already have divined the point we wish to make. The legislator is a wisher. Laws are wishes. And legislatures have not learned the teaching of the child’s simple but profound tale. Consider: Laws, like wishes, are effected at any speed—even all at once; with the exception of Prohibition and a few other less notable cases, they are rarely reconsidered. The legislatures of this land do not take incremental steps toward whatever end they desire and then re-evaluate both ends and means, always in light of the continued worthiness of the goal and the additional effort required. Laws are not like life’s goals. Many of them are foolish and trivial, like the first wish in the fairy tale. Many of them are much more serious and wreak havoc on everyone and everything in sight in countless unthought-of ways. But unlike the sadder but wiser fool who through his learning becomes the hero of the tale, the legislators do not learn simply to undo their wishes expressed as legal fiats. Rather, seeing the untoward consequences of their wishes, they remain, sometimes willfully, sometimes not, ignorant of the causes of the calamities their wishes have brought about. And they proceed to “repair” the damage with another, yet another, and yet still another wish, and the calamities multiply as the wishes are effected by the genies of government enforcers.

That, my friends, explains the current mess.

Three things are overlooked in most discussions critical of free trade: We’re not in the Garden of Eden; national boundaries, economically speaking, are unimportant; and the mixed economy creates problems that appear attributable to international trade.

Laments about job losses from foreign competition implicitly assume that we have all the goods and services we could possibly want and so there is no more work to do. The only question is who will do it. We might wish that were the case. Economists talk about the disutility of labor, meaning work is work. We do it because we want things. If those goods were superabundant and could be had without effort, we might spend our time other ways.

But those goods aren’t superabundant. They’re scarce. To get one thing we have to give up something else. We make shoes and swap them (indirectly) for hamburgers. This sheds a different light on the adjustments that occur with free trade. When something can be had cheaper from abroad, labor, capital, and resources are freed up for other things. What other things? More of what we already have and things that people, except for a few perceptive entrepreneurs, have never even dreamed of. Thanks to free trade, we can now afford those things.

Bastiat illustrated the point with his tale about Crusoe and the plank that washes ashore. Crusoe had intended to make a plank. Should he destroy the free one in order to protect the plank-making job he anticipated? Or should he welcome the good fortune because now the hours earmarked for plank-making are free for coconut-gathering, hammock-weaving, or leisure? The answer is obvious.

This is not to ignore that the changes ignited by free trade can be painful to particular individuals. Losing a job and having to train for a new one, perhaps at lower pay, are unpleasant experiences, financially and psychologically. Unfortunately, the alternative to change and adjustment is government-enforced stagnation for all. This understates the case. Import restrictions intended to protect jobs inevitably reduce foreigners’ export-buying power; that costs Americans well-paying jobs. The restrictions also tend to provoke protectionist retaliation, which harms still more Americans. Living standards just don’t stagnate; they drop.

The blasts against free trade mistake world economic activity for the Olympics, in which only one nation can win the gold medal in each contest. But economic activity is not like a sporting event. People enter into exchanges because each person anticipates a gain. Why should it matter if one stands north of a national boundary and one stands south, rather than on the same side?

As Murray Rothbard wrote in Power and Market: “Economists have devoted a great deal of attention to the ‘theory of international trade’—attention far beyond its analytic importance. For, on the free market, there would be no separate theory of ‘international trade’ at all. . . . ‘Nations’ may be important politically and culturally, but economically they appear only as a consequence of government intervention, either in the form of tariffs or other barriers to geographic trade, or as some form of monetary intervention.”

Rothbard employed the reductio ad absurdum against the opponents of free trade. He asked, Why stop at national boundaries? If Buy American is well advised, why not Buy Pennsylvanian? Or Buy Scranton? Or Buy Elm Street? Indeed, the logic ought to apply to each household or person. Anyone who refused to “import” goods and services from others would surely never find himself unemployed. And his trade account won’t be in deficit either. But he’ll have a dismal standard of living.

People who appreciate that America is rich in part because its large land mass is a free-trade zone should also see that pushing the boundaries of that zone ever outward can only be a good thing.

Self-Inflicted Wound

Trade benefits the parties to it. It is true that if an American buys a good from a Pakistani, he’s not buying that good from another American. But with the money he saves by paying less for the Pakistani good he can buy other American-made goods or invest in new production. Moreover, the Pakistani now has dollars with which to buy American-made goods or to invest in American enterprises. So even people who want to continue to think about trade in national terms should see that restrictions cannot help “America,” but rather only one group of Americans at the expense of all the rest.

The economist Paul Craig Roberts asserts that the case for free trade depends on immovable capital, which activates the law of comparative advantage, according to which more-efficient people profit from trading with less-efficient people. Since capital is highly mobile now, Roberts says, the conditions justifying free trade no longer apply. He fears that high-tech service jobs, such as computer programming and radiology, will be “outsourced” en masse to low-wage Asians at the expense of high-wage Americans.

Yet it’s hard to see why this would mean there will be no lucrative work for Americans. (We’re not in the Garden of Eden.) Foreigners will still find it in their interest to specialize in the things where they have a relative advantage and buy the rest elsewhere. In other words, the law of comparative advantage lives!

One thing is sure: they won’t sell to us if there’s nothing of value to buy from us. Nominal incomes in the United States may decline, but less-expensive products and services from abroad will make real incomes attractive. (I recall an old English political poster that said: “Incomes buy more under free trade.”)

Roberts may be right that political stability and increasing education in the developing world, as well as technological advances like the Internet, are producing new competition for high-paid Americans; but are those developments to be feared? What is apt to make us richer: a more elaborate division of labor using scarce capital more efficiently, or third-world chaos, repression, ignorance, and technological primitivism?

Finally, the doomsday scripts written by the free-trade skeptics confuse the effects of trade with those of pervasive government intervention in the economy. Yes, free trade requires people to make adjustments. Here’s how the government can help: cut spending, slash and repeal taxes, abolish regulations, and move to market-based money. There’s no better way to ease any harsh consequences from world trade.

I like to bike down to our neighborhood park. The wind sings along with the spinning bike wheels, an easy, five-minute downhill ride. On the way down, you coast like a hockey puck on buttered ice. Of course, going home is a chore that would daunt Sisyphus. As they say, there ain’t no free lunch.

But the destination is worthwhile because Willow Park boasts grass-bordered, tree-shaded bike paths as well as soccer and football fields, two baseball diamonds, and tennis courts.

Strangely enough, this bandbox of a park doesn’t attract many kids or customers of any age. Were it owned and operated by Walt Disney Enterprises, it would have closed decades ago. But the mayor, who manages my city without benefit of shareholders or owners, never fixates on the bottom line. He loves taxpayers with unzippered wallets who swoon with compassion every time he mentions “our kids.” And parks are for kids, aren’t they? Everybody says so.

So, even though bereft of youthful laughter, the city keeps Willow Park open, which is great if you’re one of the few users, like me. I love those free tennis courts and the green space to bike in. I commend and appreciate the generosity of my fellow municipal taxpayers who provide me this absolutely free entertainment complex. It’s almost my private domain.

It is small and natural. Sometimes, the spring beside the football field bubbles over and muddies its banks. Sometimes a tree falls over. It lies there for months reminding us that trees fall and new plants spring up around their splintered stumps. This is not Disneyland. Nobody is picking up trash except the blackbirds who confiscate shredded paper or small sticks—construction materials for their spring nest-building.

But there’s something eerie about Willow Park. Except for the blackbird chatter, it’s too quiet. No kids. No treble voices exulting over touchdowns or homers, or an ace on the tennis court. Soccer field, baseball diamonds, and a pond where you can snag a careless crawfish—but no young sportsmen? Where have all the children gone? Has some tax-crazed Pied Piper led them all into the Tennessee River? This park, built for the molding of young bodies and spirits, is childless. Barren as a pond without tadpoles.

The few kids I see are—like me—riding bikes. Probably on their way to visit a lucky friend with a wall-size TV lovingly provided by misguided parents. And you wouldn’t believe the headgear on the few young bikers. They are wearing helmets—like a fullback, like an infantryman, like an M-60 tank commander, like a construction worker beneath a scaffolding of hot rivets and steel girders. And the helmets are only plastic. A falling tree limb could still dent the youthful skull.

Now don’t get me wrong, I love kids and I would rain salty tears over a head-damaged child. But life is full of cautions, each bearing a price tag. Remember, that old chestnut “There’s no free lunch” applies to helmets as well as lunchrooms. A glass of beer at the Free Lunch Saloon (with spicy pastrami, roast beef, bologna, and pickles) costs a dime. Across the street at the saloon with no sandwich fixings, a schooner of their best was a nickel. Or maybe the bar with the free lunch was also a nickel, but it was only near beer (half tap water). One way or another, you are going to pay for that lunch.

Obviously, as we’ve learned since, the concept applies universally, even to bicycle helmets. So, consider the price of that plastic helmet:

• The chances of damage to the child’s frame on the trip to the helmet emporium is as real as the tumble off the bike. The longer the trip the better the odds you’ll be rammed by a large, smelly garbage truck. (Of course, you could leave him at home where he’d be perfectly safe—unless a mischievous ceiling came down on his head.)
• Even worse than the above is the wordless statement you make to the kid when you insist on the cranial armor and other defenses recommended by a safety-crazy culture. The world’s an abattoir, you implicitly say. You could get killed out there; better protect yourself. He or she growing up will face many trials of courage with you at his side spouting reassuring speeches dispelling fear. But the helmeted apple of your eye will forget your inspiring words and remember your fearfulness when you strapped that plastic hat on him. They do as you do, not as you say.
• Significant head injuries to nonprofessional, youthful bike riders are so rare that I never encountered such an injury among acquaintances, family, or friends. Yes, of course it happens, but I cannot recall one incident in many decades of observation. Unscientific, anecdotal, I know, but remember that’s the only kind of data that is totally unslanted. The well-meaning, but expansive CDC (the Centers for Disease Control, our government’s keeper of statistics on bike injuries) sometimes just can’t brake for large, but meaningless numbers. And don’t you wonder how bike injuries fall under the heading of “communicable diseases”?
• And let’s not forget the dollar cost: 40 to 120 bucks depending how insecure you feel at the moment of purchase. That kind of money will buy at least three annual subscriptions to personal safety and health magazines. A great crutch for the caring parent.

Wind Massage

But the best of the anti-helmet arguments is the wondrous feel of the wind massaging head and scalp, and the incentive it provides for hoisting the youthful rump off the couch and mounting up.

Our old friend, Fred Bastiat would say, Aha, the tangible positive “seen” is that protective helmet. The “unseen” price is (a) 120 American dollars, the world’s finest, (b) the joy of the wind tousling your hair, and (c) the sense of security necessary to a healthy child.

One more consideration on the scales of judgment. If you believe your child needs a helmet to pedal his bike at 10 mph in a neighborhood park, you ought to have nervous palpitations over any car trip longer than the length of your driveway. Just guess where most injuries occur? Maybe, better yet, you should be checking out the price of full body armor.

Critics of the pharmaceutical industry cite heavily promoted, expensive new drugs as the 800-pound gorilla in our nation’s costly health-care system. Lawmakers are debating ways to address this issue–including price controls and requiring more use of generics. As usual, government is part of the problem, and most of its attempts at a solution are almost sure to fail.

To begin with, it’s important to separate what media reports often confuse as one and the same: increases in total spending on drugs and increases in the prices of drugs. Drug spending rose 13.6 percent in 2000 while the average price of drugs went up by a rate comparable to price inflation, at 3.9 percent. There’s a big difference between 13.6 and 3.9.

Moreover, a core problem with America’s health-care costs afflicts drug prices like just about every other aspect of health care–third-party payments. Back during World War II, the U.S. government imposed wage controls. In an effort to compete for workers, employers began offering health-care benefits. Later, the IRS approved employer-provided health care and health insurance as deductible business expenses. Individuals, who previously took care of these things themselves, could not get a similar deduction when they purchased health insurance out of pocket. This bias in the tax code helped mightily to push America toward a third-party (employer-provided insurance) payment system. As a result, Americans spend more freely for health care without shopping around and asking tough questions.

“Nobody spends someone else’s money as carefully as he spends his own,” Nobel laureate Milton Friedman often says. That truism has been on brilliant display in our health-care system for half a century.

But now back to drugs specifically. A new body of research offers a compelling contradiction to the notion that we need a “cure” for high-priced drugs. It turns out that these “expensive” new drugs might just be the best weapon we have against rising health-care costs–food for thought for government programs and employers who help pay for our health insurance. Are we getting good value for our drug dollars? “Yes,” says researcher Frank Lichtenberg, an economics professor at Columbia University and author of a recent, incisive article in the journal Health Affairs.

Lichtenberg looked at newer drugs versus older drugs and found that people who are using newer ones may be paying more for their medicines, but they have lower overall health costs, due in part to reduced hospitalizations. In addition, they live longer and have fewer lost workdays. We’re spending more time at the pharmacy, but less time in the hospital or on the surgical table. That means we are managing our conditions better and spending less on more expensive types of care. That’s good news for consumers and patients, as well as employers and our health-care system as a whole.

A study by Lichtenberg for the National Bureau of Economic Research last fall demonstrated that replacing 1,000 old drug prescriptions with 1,000 newer and more expensive drug prescriptions would increase drug costs by $18,000 but would also cut hospitalization costs by $44,469.

Innovations in drugs are helping us treat many conditions with often dramatically better results than previous treatments. Stomach cancer used to be an ailment that was treated primarily by invasive surgery and long hospital stays but today, drugs are more commonly used. The newest drugs do the best job, and though they seem “expensive” up front, they’re doing more to save lives and reduce overall health-care costs than surgery.

What Is Unseen

This is the “bigger picture” that often gets lost in the rush to save a few bucks. As Lichtenberg writes, “Drug costs (and changes in drug costs) are visible to the naked eye; identification of drug benefits requires careful analysis of good data.” Sound policy requires that we take into account “the full range of effects, not just the costs, of newer drugs.”

For this reason, the case for generics (older drugs for which the patents have expired) is vastly overstated. And the advertising that pharmaceutical companies sponsor for new drugs, contrary to those who champion generics, serves a useful economic purpose of informing patients and encouraging them to ask about the newest innovations.

Meanwhile, a growing number of state governments are implementing sweeping prescription drug cost-control programs. In Michigan, for instance, a state-appointed panel now authorizes only certain discounted medications for the 1.6 million Michiganians who rely on state programs (like Medicaid). To the extent the program shifts people to older drugs, the state may end up in the long run spending more for health care while patients suffer through longer recoveries.

Profits aren’t the problem either. Throughout the industry, they’ve been steady over time and comparable to the profits in other industrial sectors. Moreover, a study by Harvard economist F.M. Scherer proved there is a close correlation between pharmaceutical profits and research and development (R&D). The more companies make, the more they pour into finding the next cure or treatment for what’s ailing us. Profits encourage innovations, while regulations of dubious benefit add millions to the cost and long lag times before a drug can be marketed.

Furthermore, making a profit on drugs is not easy or automatic. Pharmaceuticals have the same patent life as other innovations (20 years), but because of the need for early filing, pharmaceuticals have about 11 years on average to recoup R&D costs and make a profit. Only 30 percent of drugs that reach the marketplace ever earn enough to cover average R&D costs. Government efforts to reduce profits in the industry can only increase the risk, reduce the investment, and ultimately yield fewer new drugs–all of which spells higher prices and a less healthy people.

American pharmaceutical companies have produced a constant stream of new pharmaceuticals for your doctor’s toolbox when you get sick. Common sense dictates that we consider all costs and all benefits, long-term as well as short-run, lest we be penny-wise and pound-foolish.