Features8 What’s So Bad about Eco-Propaganda for Kids? by Andrew P. Morriss

11 How to Create the Illusion of Low Taxes by D.W. MacKenzie

15 Public Schools through the Public Choice Lens by Michael Bors

18 Is the Decline of Newspapers a Market Failure? by Edward J. López

23 The Rise and Fall of Glass-Steagall by Warren C. Gibson and Jeffrey Rogers Hummel

28 The Paradox of the Welfare State by Richard W. Fulmer

31 Police Misconduct and Public Accountability by Wendy McElroy

35 John Maynard Keynes, R.I.P. by Richard B. McKenzie

Columns4 Ideas and Consequences ~ Confessions of a Secret Marxist by Lawrence W. Reed

13 The Therapeutic State ~ The Medicalization of Suicide by Thomas Szasz

21 Peripatetics ~ Can America Afford an Empire? by Sheldon Richman

33 Our Economic Past ~ Teddy Roosevelt and the Progressive Vision of History by BurtonFolsom, Jr.

39 Give Me a Break! ~ Attacks on Freedom by John Stossel

47 The Pursuit of Happiness ~ Washington’s Lies by Walter E.Williams

Departments2 Perspective ~ The Function of The Freeman

6 Consumer Spending Drives the Economy? It Just Ain’t So! by Mark Skousen

Book Reviews

41 Getting Off Track: How Government Actions and Interventions Caused, Prolonged,

and Worsened the Financial Crisis

by John B.Taylor

The Housing Boom and Bust

by Thomas Sowell Reviewed by Gerald P. O’Driscoll, Jr.

42 Arthur Seldon: A Life for Liberty

by Colin Robinson Reviewed by Martin Morse Wooster

43 Antipsychiatry: Quackery Squared

by Thomas Szasz Reviewed by Ron Roberts

44 Weapons of Mass Instruction: A Schoolteacher’s Journey Through the Dark World of

Compulsory Schooling

by John Taylor Gatto Reviewed by George Leef

Page 42

Page 35

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VOLUME 60, NO 8 OCTOBER 2010

Editor’s Note: The Freeman began publication before itbecame part of the Foundation for Economic Education in1956. Its first issue was published in 1950, with HenryHazlitt, author of Economics in One Lesson, as an editorand FEE founder Leonard E. Read a member of the board ofdirectors.What follows was originally part of a first-anniver-sary (1951) editorial in which Hazlitt explained the role ofThe Freeman in the freedom movement. It is still relevanttoday.

In our first issue, on October 2, 1950, we publishedan editorial called “The Faith of the Freeman,” inwhich we outlined our fundamental economic,

political and moral philosophy. In the fifteen monthssince then our articles and editorials, we trust, havemade that basic philosophy and its practical applicationincreasingly clear.

Now, at the completion of our first full calendar yearof existence, we think it appropriate to say somethingabout our function. That function is in one respectobvious. It is to propagate our announced philosophy,and to apply it, as we have been doing, to current issuesas they arise. On the constructive and positive side, inother words, our function is to expound and apply theprinciples of traditional liberalism and individual free-dom. On the negative side, it is to expose the errors ofcollectivism of all shades—of statism, “planning,” con-trollism, socialism, fascism and communism. One of ourcentral aims is, on the one hand, to hearten andstrengthen those who already accept most of the phi-losophy of individual freedom and to help them toclarify their own thinking; and, on the other hand, toconvert open-minded collectivists to the philosophy offreedom.

The mere announcement of such an aim is likely tobe followed by immediate expressions of skepticism orincredulity. Some of our correspondents tell us, forexample, that a magazine like The Freeman is read onlyby those who already believe in its aims, and thereforewe are doing nothing more than “talking to ourselves.”But even if this were true, which we do not believe, we

2T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

The Function ofThe Freeman

Perspective

Published byThe Foundation for Economic Education

Irvington-on-Hudson, NY 10533Phone: (914) 591-7230; E-mail: freeman@fee.org

www.fee.org

President Lawrence W. ReedEditor Sheldon Richman

Managing Editor Michael NolanBook Review Editor George C. Leef

ColumnistsCharles Baird David R. Henderson

Donald J. Boudreaux Robert HiggsStephen Davies John Stossel

Burton W. Folsom, Jr. Thomas SzaszWalter E.Williams

Contributing EditorsPeter J. Boettke Dwight R. Lee

James Bovard Wendy McElroyThomas J. DiLorenzo Tibor Machan

Joseph S. Fulda Andrew P. MorrissBettina Bien Greaves James L. Payne

Steven Horwitz William H. PetersonJohn Hospers Jane S. Shaw

Raymond J. Keating Richard H.TimberlakeDaniel B. Klein Lawrence H.White

Foundation for Economic Education

Board of Trustees, 2009–2010Wayne Olson, Chairman

Harry Langenberg Peter J. BoettkeWilliam Dunn Frayda Levy

Jeff Giesea Kris MaurenEthelmae Humphreys Roger Ream

Edward M. Kopko Donald Smith

The Foundation for Economic Education (FEE) is anonpolitical, nonprofit educational champion ofindividual liberty, private property, the free market,

and constitutionally limited government.The Freeman is published monthly, except for combined

January-February and July-August issues. Views expressed by the authors do not necessarily reflect those of FEE’s officers and trustees. To receive a sample copy, or to have The Freemancome regularly to your door, call 800-960-4333, or e-mail mnolan@fee.org.

The Freeman is available electronically through products and serv-ices provided by ProQuest LLC, 789 East Eisenhower Parkway,PO Box 1346,Ann Arbor,Michigan 48106-1346.More informationcan be found at www.proquest.com or by calling 1-800-521-0600.

Copyright © 2010 Foundation for Economic Education, exceptfor graphics material licensed under Creative Commons Agree-ment. Permission granted to reprint any article from this issue,with appropriate credit, except “Attacks on Freedom.”

3 O C T O B E R 2 0 1 0

P E R S P E C T I V E : T h e F u n c t i o n o f T h e F r e e m a n

would still be performing a very important function. Itis imperative that those who already believe in a marketeconomy, limited government and individual freedomshould have the constant encouragement of knowingthat they do not stand alone, that there is high hope fortheir cause. It is imperative that all such people keepabreast of current developments and know their correctinterpretation, and that, through constant restatementand mutual criticism of each other’s ideas; they con-tinue to clarify, improve, and perfect their understand-ing. Only if they do this can they be counted upon toremain true to a libertarian philosophy, and be proofagainst collectivist fallacies. Only if those on “our side”do this can we even hope to hold our ranks togetherand cease constantly to lose converts, as in the past, tocollectivism.

But the function of a journal of opinion like TheFreeman only begins here; it does not stop here. It isnecessary for the believers in a free system to do farmore than hold their present thin ranks together. If theyhope to see their ideas triumph, it is imperative thatthey make converts themselves from the philosophy ofcollectivism,“security” and serfdom that dominates theworld today.

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

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

* * *

Children's books about the environment are so dulland devoid of active people that Andrew Morriss hopeskids are playing video games rather than reading thatstuff.

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

Government schooling has been subjected to allkinds of criticisms. Michael Bors shows that PublicChoice arguments shed further light on why theschools are bad and don’t improve.

This sounds like a bad dream, but people inside andoutside of government are actually proposing that thefailing newspaper business be bailed out by the taxpay-ers. Edward López shows why that’s a terrible idea.

The Glass-Steagall Act was the major banking regu-lation of the New Deal. In 1999 a key part wasrepealed. Was that repeal responsible for the recentfinancial debacle? Warren Gibson and Jeffrey RogersHummel have the skinny.

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

Police departments have ways to keep abusive offi-cers’ names out of the papers.Wendy McElroy says thatdenies citizens one of their greatest protections againstpolice misconduct.

Contrary to Lord Keynes’s maxim that in the longrun we’re all dead, his spirit is alive and well more than64 years after his death. Richard McKenzie looks intothis curiosity.

Our columnists have plenty to talk about: LawrenceReed reveals his sympathies for Marxism.Thomas Szaszscrutinizes the medicalization of suicide. Burton Fol-som has a few choice words about Theodore Roo-sevelt. John Stossel catalogues attacks on our freedom.Walter Williams exposes some Washington lies. AndMark Skousen, hearing for the nth time that consumerspending drives the economy, objects,“It Just Ain’t So!”

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

—Sheldon Richmansrichman@fee.org

B Y L AW R E N C E W. R E E D

Confessions of a Secret Marxist

Ideas and Consequences

A fter 33 years of writing articles and columnsabout capitalism and freedom for The Freeman,I’ve decided to confess. I’m a Marxist, and

have been from a very early age.I’m not the kind of Marxist that you normally think

of when that term is used. I have nothing in commonwith Karl. I am a Groucho Marxist. As the great funnyman himself might say, he and Karl were unrelated toeach other in many ways. While Karl left a legacy ofdeath and destruction (therewas nothing funny about himor his communist nonsense),Groucho still has millions ofadoring fans the world over, athird of a century after hepassed away.

Count me among thosemany fans of Julius Henry“Groucho” Marx, born 120years ago this very month,on October 2, 1890, on theupper east side of Manhattan.But don’t put me anywherenear Karl’s fan club.

The contrast between these two men with the samelast name led the American composer Irving Berlin topen this couplet many years ago:

The world wouldn’t beIn such a snarl

If Marx had been GrouchoInstead of Karl.

What an understatement! No other human beingever concocted a set of ideas that produced more may-hem than Karl Marx, and few were as reprehensible inthe way they lived their personal lives. In his book Intellectuals historian Paul Johnson devotes a revealing

chapter to the man who wrote Capital and The Com-munist Manifesto. Karl was an angry, hate-filled man—quarrelsome, neglectful of his family, lazy, and violent.He suffered from hideous carbuncles in part because healmost never bathed. Some of the most memorablephrases from his two books were lifted from otherswithout appropriate credit. He spent almost all his time at home or in libraries, and almost none where the workers he fumed about actually worked. He

mooched off of others all hislife, prompting his mother tosay that she wished Karl would“accumulate capital instead ofjust writing about it.”

But the worst thing aboutKarl Marx was not his person-ality or his hygiene. It was theevil web he spun with deceitfulbait that snared and doomedmillions. He called the workersof the world to revolution, but,as the Italian writer IgnazioSilone put it,“Revolutions, like

trees, must be judged by their fruit.” Without excep-tion, wherever Marxist ideology found root, it grewinto monstrous depravity. Some of Karl’s disciples haveattempted to explain this away with the old phrase,“Tomake an omelet, you have to break a few eggs.” Theproblem is, communists (and socialists and fascists, theirkissin’ cousins) only break eggs; they never, ever, makean omelet.

Groucho, on the other hand, did honor to his fam-ily’s name and to society at large. In contrast to theloafer Karl, he actually worked at real jobs, enduringmany exhausting days for 20 years performing in

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Lawrence Reed (lreed@fee.org) is the president of FEE. Portions of thiscolumn originally appeared in an op-ed by the author in the August 19,2002, issue of USA Today.

A lot more Groucho and a lot less Karl would have averted themassive tragedies of the twentieth century.

Vaudeville and in small towns. Early in his show busi-ness career, he picked up the nickname Groucho,though he privately chafed at its negative connotation.

After a big break on Broadway in 1924, the Marxbrothers team of Groucho, Chico, and Harpo did 13feature films—including Animal Crackers, Cocoanuts, andDuck Soup.A fourth brother, Zeppo, appeared in five ofthem. With his trademark cigar, greasepaint mustacheand eyebrows, chicken-like gait, zany one-liners, andclever put-downs, Groucho usually stole the show. Inlater years, he hosted a popular television program,“You Bet Your Life.” His performances are best remem-bered for pithy wisecracks like these:

• “Please accept my resignation. Idon’t want to belong to any clubthat would have me as a mem-ber.”

• “Those are my principles. If youdon’t like them, I have others.”

• “Last night I shot an elephant inmy pajamas. How he got in mypajamas I’ll never know.”

• “Either this man is dead or mywatch has stopped.”

• “I’ve had a perfectly wonderfulevening, but this wasn’t it.”

• “He’s honest—but you gotta watch him.”• “I was married by a judge. I should have asked for

a jury.”

Though Groucho in real life called himself a liberalDemocrat, he never harbored a blind faith in Statepower that characterized the warped thinking of Karl.In fact he once opined,“Politics is the art of looking fortrouble, finding it, diagnosing it incorrectly and thenapplying the wrong remedies.”That description of pol-itics was on full display in Duck Soup, regarded by many,including me, as the Marx Brothers’ best film.

Duck Soup, released in 1933, takes place in the fic-tional, bankrupt country of Freedonia (“Land of the

Spree, and the Home of the Knave”). On becoming itsleader, Groucho’s character, Rufus T. Firefly, literallysings what a lot of politicians do but never admit:“The last man nearly ruined this place. He didn’t knowwhat to do with it. If you think this country’s bad offnow, just wait ‘til I get through with it.” A mere trifleleads Freedonia and neighboring Sylvania to go to war,a clear spoof of the insanity of World War I. In Groucho:The Life and Times of Julius Henry Marx, Stefan Kanferwrites that the satirical depiction of Freedonia’s gov-ernment didn’t sit well with Benito Mussolini, whobanned the film in Italy.

Government was also the object of Groucho’s irrev-erence outside the movies. His son Arthur once pub-

lished an account of the time hisfather got in trouble with airport cus-toms by listing his occupation as“smuggler.”

Groucho once quipped that he hadworked himself up “from nothing to astate of extreme poverty.” But actually,his talent and hard work earned him avery good living. He accumulated thecapital that Karl only wrote about andleft behind a legacy of some of themost original and hilarious comedy

ever performed on the stage or silver screen.The very persona of Groucho Marx is still imitated

by comedians the world over.Almost nobody, however,deliberately imitates Karl outside of Pyongyang andHavana. And thankfully, a dwindling number of peopleremain devoted to his philosophy or what it wrought.In his introduction to The Black Book of Communism:Crimes, Terror, Repression, the definitive catalogue ofMarxist-inspired atrocities, editor Stéphane Courtoisrevealed that communism’s twentieth century death tollof 94 million people was far greater than that of anyother political movement.

Karl and Groucho. Two men named Marx. Bothbrought tears to the eyes of millions but for very, verydifferent reasons.

C o n f e s s i o n s o f a S e c r e t M a r x i s t

Groucho once said,“Politics is the art oflooking for trouble,finding it, diagnosingit incorrectly andthen applying thewrong remedies.”

5 O C T O B E R 2 0 1 0

Consumer spending makes up more than 70 percent ofthe economy, and it usually drives growth during eco-nomic recoveries.”

—“Consumers Give Boost to Economy,”New York Times, May 1

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

“What the consumer does is vital for economicgrowth.”

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

“Consumer spending accounts for 70 percent of theeconomy.”

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

The truth is that consumer spending is not themainstay of the U. S. economy. Investment is. Businessspending on capital goods, new technology, entrepre-neurship, and productivity is more significant than con-sumer spending in sustaining the economy and a higherstandard of living. In the business cycle, production andinvestment lead the economy into and out of a reces-sion; retail demand is the most stable component ofeconomic activity.

Granted, personal consumption expenditures repre-sent 70 percent of gross domestic product, but jour-nalists should know from Econ 101 that GDP onlymeasures the value of final output. It deliberately leavesout a big chunk of the economy—intermediate pro-duction or goods-in-process at the commodity, manu-facturing, and wholesale stages—to avoid double

counting. I calculated total spending (sales or receipts)in the economy at all stages to be more than doubleGDP (using gross business receipts compiled annuallyby the IRS). By this measure—which I have dubbedgross domestic expenditures, or GDE—consumptionrepresents only about 30 percent of the economy, whilebusiness investment (including intermediate output)represents over 50 percent.

Thus the truth is just the opposite: Consumerspending is the effect, not the cause, of a productivehealthy economy.

This truth prevails in the marketplace: It’s supply—not demand—that drives the economy. Savings, produc-tivity, and technological advances are the keys toeconomic growth. This principle was discovered anddeveloped by the brilliant French economist Jean-Baptiste Say in the early nineteenth century and isknown as Say’s Law. In fact, he invented the word “entre-preneur” to describe the primary catalyst of economicperformance.

Is retail sales a leading economic indicator? Eachmonth the Conference Board releases its Leading Eco-nomic Indicators for the United States and nine othercountries.The ten U.S. leading indicators are:

• manufacturers’ new orders• building permits• unemployment claims• average weekly manufacturing hours• real money supply• stock prices• the yield curve

Consumer Spending Drives the Economy?It Just Ain’t So!

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B Y M A R K S K O U S E N

Mark Skousen (editor@markskousen.com) is the editor of Forecasts &Strategies and author of The Making of Modern Economics, winnerof the Choice Book Award of 2009.

7 O C T O B E R 2 0 1 0

• new orders for nondefense capital goods• vendor performance• index of consumer expectations

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

What about the Consumer Confidence Index thatthe media highlights every month? It turns out that thetitle is misleading. The questions asked consumers aremore about business conditions than spending atti-tudes. Here are the questions consumers are asked todetermine their “expectations”:

1. Are current business conditions good, bad, ornormal?

2. Do you expect business conditions to be good,bad, or normal over the next six months?

3. Are jobs currently plentiful, not so plentiful, orhard to get?

4. Do you expect jobs to be more plentiful, not soplentiful, or hard to get over the next six months?

5. Do you plan to buy a new/used automobile/home/major appliance [note: these are all durable con-sumer goods, not unlike durable capital goods] withinthe next six months?

6. Are you planning a U.S. or foreign vacationwithin the next six months?

In other words, the much-touted “consumer” confi-dence index is more a forecast by consumers for busi-ness, employment, and durable goods than “retail sales”and consumer spending. It does not ask any questionsabout food, clothing, entertainment, and other short-term buying, because these expenditures seldomchange from month to month.

The reality is that business and investment spendingare the true leading indicators of the economy and thestock market. If you want to know where the stockmarket is headed, forget about consumer spending andretail sales figures. Look to manufacturing, capitalexpenditures, corporate profits, and productivity gains.

We hear so much about the consumer because themedia and political pundits still live under the spell ofKeynesian economics, which teaches that demand createssupply. Keynes’s law is just the opposite of Say’s law (sup-ply creates demand). According to Keynesians, consumer

spending drives the economy and saving is bad when theeconomy is in a short-term contraction.

In reality, increased savings can actually stimulate theeconomy, even if consumer spending is anemic. Arecent study by the St. Louis Fed concluded that in theshort run,“a higher saving rate in the current quarter isassociated with faster (not slower) economic growth inthe current and next few quarters” (Daniel L. Thorn-ton,“Personal Saving and Economic Growth,” EconomicSynopses, St. Louis Fed, December 17, 2009).

How is this possible? When people save more,interest rates fall and businesses can afford to replacetheir old equipment with new tools, spend more onresearch and development, or develop new productionprocesses. So while consumer spending may stay low,business spending can pick up the slack. Remember, ina dynamic economy the decision by businesses to spendmore investment funds and hire more workers is afunction of both current consumer demand and futureconsumer demand.And don’t forget, during a recessioncorporate profits often recover first, without an increasein customer demand, because companies can boostprofits by cutting costs and downsizing.

In the long run new business strategies and spendingpatterns increase productivity and lower prices to con-sumers, which in turn means the consumers’ purchasingpower increases. As the St. Louis Fed concludes,“A higher saving rate does mean less consumption [inthe short run], but it could also result in more capitalinvestment and, ultimately, a higher rate of economicgrowth. . . . [T]he growth rate of real GDP has beenhigher on average when the personal saving rate is ris-ing than when it is falling.”

Granted, the ultimate function of business activityand entrepreneurship is to fulfill the needs of con-sumers, and the most successful firms are those that sat-isfy their customers. But more important, whodiscovers the new, improved products that consumersdesire? Who is the catalyst that determines the quan-tity, quality, and variety of goods and services? Did theconsumer come up with the idea of personal comput-ers, SUVs, fax machines, cell phones, the Internet, andthe iPhone? No, these technological breakthroughscame from the genius of creative entrepreneurs and the savers/capitalists who funded their inventions.

C o n s u m e r S p e n d i n g D r i v e s t h e E c o n o m y ? I T J U S T A I N ’ T S O !

Although my own children have long outgrownpicture books, I still have nephews and niecesyoung enough to enjoy them. So I buy them

from time to time. I also buy books on energy. Perhapsit was that combination that prompted Amazon to rec-ommend What’s So Bad About Gasoline? by AnneRockwell, engagingly illustrated by Paul Meisel.

Curious about what is so bad about gasoline that itwas necessary to warn children, I bought it and foundmyself in an alternative universe of dreary ecologicaldisasters.This was a far cry from theworld of the classic picture books,such as what is undoubtedly todayconsidered the criminally pollutingtale of Mike Mulligan and His SteamShovel by Virginia Lee Burton. Nordid it resemble the brightly coloredand fantastic world in the books Iread to my kids in the early 1990s.Even more depressing, when I dugfurther it turned out that What’s SoBad About Gasoline? is part of a seriesof “science” books aimed at elemen-tary school kids that tell a tale of ecological catastrophe.These include Oil Spill! by Melvin Berger and WhereDoes the Garbage Go? by Paul Showers.

If these books are what kids grow up with today, weshould hope they spend their time on video gamesinstead of reading. The books are troubling because byignoring economics and by focusing on eco-politics,they get the solutions to environmental problems wrong.

Worse, in the world these books present things don’t get better.We must always do more to repent for our environmental sins. As economist Robert Nelson

observes, environmentalism in America has evolvedinto “environmental Calvinism.” Even worse, Nelsonnotes, it is “Calvinism without God,” as bleak a vision asone can imagine since we’re left only with an imper-sonal environment as the object of veneration. (Nel-son’s The New Holy Wars: Economic vs. EnvironmentalReligion is a great read.) Presenting consumption asecological sin without showing the vast improve-ments in people’s lives produced by growing wealthignores the great success of market economies and

entrepreneurs.Finally, the vision of the world

these books present lacks humanagency as anything other than moti-vating the mindless consumptionthat leads to ecological catastrophes.Not only is this a world missingentrepreneurs and inventors, there’salso no excitement to its vision ofthe future. Although I am still wait-ing for my personal jetpack, theworld of the The Jetsons promised afuture of excitement and fun rather

than a grim time in which we merely replace our carswith hybrids.The optimism that prompted Julian Simonto term humanity “the ultimate resource” is missingfrom this literature.

Oil Spill! was first published after the Exxon Valdezevent. It opens with a dramatic scene of the tanker hit-ting the reef in Prince William Sound. Missing from thestory are the broken sonar system that should have

B Y A N D R E W P. M O R R I S S

What’s So Bad about Eco-Propaganda for Kids?

8T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

Andrew Morriss (amorriss@law.ua.edu) is D. Paul Jones, Jr., Chair inLaw at the University of Alabama, where he still likes to read children’sbooks from time to time.

"Green" kids’ books ignore the individualdynamism that improves life and solves problems.

alerted the crew to the impending collision, the over-tired third mate in the wheelhouse because the union-protected captain was sleeping off a drinking binge, andthe lack of sufficient crew. The spill just happens.Indeed, humans are a minor presence in the book—appearing on just eight of 29 pages of illustrations, onlyas a cleanup crew hosing down a beach, a family on abeach, people using energy, and a child writing hercongressman. Oil Spill!’s solution to the devastation ofnature is political action.

Kids reading Oil Spill! aren’t likely to be ready for afact-heavy discussion of oil-transportation risks versusthe benefits of energy consumption, the natural under-water oil seeps that could be reduced by offshoredrilling, or whether using less electricity will reallyreduce oil spills, as the book suggests (oil-fueled sources account for under 2 percent of U.S. electricalgeneration).

Children do not learn that theprofit motive is what drives inventorsand manufacturers to improve prod-ucts to reduce energy consumption.The U.S. economy has steadilybecome more energy-efficient: Perdollar of real GDP, energy usedropped by more than a third fromthe late 1970s to 2000. Compared to1900 each unit of energy input in 2000 could providefour times as much useful heat, move a person 550times farther, provide 50 times more illumination, andproduce 12 times as much electricity. Moreover, oilspills like the Exxon Valdez or the BP disaster are excep-tions rather than the rule and are more likely due tofailures in regulatory schemes than to a lack of laws.

Where Does the Garbage Go? isn’t a new book, firstappearing in 1974. Comparing the 1974 and 1994 edi-tions reveals an interesting shift in environmental think-ing. Originally, Where Does the Garbage Go? centered ona girl who went through her own trash to see what herfamily threw away. She found worn sneakers, potatopeels, cans, bottles, and her old yoyo. She then visitedher uncle on a farm, discovering that food scraps couldbe fed to pigs. The book generalized to the collectionof garbage and its disposal in the ocean (showing chil-dren swimming in a polluted ocean), incinerators (chil-

dren grimacing and rubbing their eyes from thesmoke), and dumps (“a dirty place,” “a great big mess”with rats and “millions of flies”).After explaining recy-cling and showing crowds making more trash, the 1974book concluded with the child narrator asking whatthe reader thought “we should do” about trash as shetook her old yoyo from the trash and fixed it.

By 1994, however, the narrator was gone and thestory was now presented as a school lesson. Dumps andocean dumping were history. But, just as in 1974,“Waste never stops piling up.” Recycling and waste-to-energy plants could handle some of our trash, but “wemust do more.We must stop throwing so many thingsaway.” By the end children are depicted walking homefrom the grocery store holding string bags that “wenever throw away” and use “over and over again.”

Set aside whether or not recycling makes economicsense, particularly in the forms advo-cated in Where Does the Garbage Go?No second-grader wants to read acost-benefit analysis of curbside recy-cling programs. Let’s even forgetwhether there is a market for recy-cled products large enough to absorbour trash. The big problem in thisbook—and in the others as well—isthe focus on making people feel bad

about consuming goods because it creates “waste.”

Conspicuous Underconsumption

Consumption isn’t bad—it is how we are made bet-ter off by the goods and services we purchase.The

great success of market societies is precisely that theymake it possible for virtually everyone in them to con-sume at a rate greater than even kings and emperors didin even the recent past. It was Boris Yeltsin’s 1989 visitto a Houston supermarket, not a visit to a recyclingcenter, that convinced him of the superiority of freemarkets.

Moreover, the bounty of a market economy is a rel-atively recent discovery.There was little change in con-sumption of calories anywhere in the world until about1800 in western Europe. Only after the Industrial Rev-olution did the human condition experience a dramaticchange for the better.The world’s most pressing prob-

9 O C T O B E R 2 0 1 0

W h a t ’s S o B a d a b o u t E c o - P r o p a g a n d a f o r K i d s ?

Consumption isn’tbad—it’s how we aremade better off.

lem is that there is too little consumption not toomuch. People living in poverty in societies that lackbasic market institutions across the developing worldneed to increase their consumption not reduce it.

Simultaneously the worst and best thing aboutWhat’s So Bad About Gasoline? and its ilk is that theyare excruciatingly boring. Boring is bad becauseenergy isn’t a boring topic, and making it boring turnskids off to thinking about science and technology. Totheir credit the book’s author and illustrator try hard tomake it interesting.The pictures are lively: glaciers meltand houses tumble into the ocean. But they aren’tenough because the eco-catastrophist version ofenergy is one in which people are passive and eventsinevitable.

That’s not how the world actually works, of course.Energy isn’t boring even for elementary school kidsbecause it is crammed full of inter-esting discoveries, larger-than-lifecharacters, and exciting events. Thetransformation of gasoline from awaste product into a valuable com-modity is a series of exciting discover-ies made by entrepreneurs andscientists who raised our standards ofliving and health. In transforming oilinto gasoline, scientists repeatedlyaccomplished tasks no one believed they could—turn-ing crude oil into hundreds of different products. Bril-liant and interesting characters abound.

Unfortunately What’s So Bad About Gasoline? missesall this. There are no individuals in the story. A cast ofanonymous people from the Middle East to China tothe United States finds things to do with petroleumand gasoline, and then bad things happen because we’reusing too much carbon-based fuel.

Presumably HarperCollins publishes books likeWhere Does the Garbage Go?, Oil Spill!, and What’s SoBad About Gasoline? because earnest parents want theirkids to grow up with green values.They are just a smallpart of a large series from one publisher, and my searchfor these books soon had Amazon recommendingdozens of other similar titles. Worse, it is not just in

these books that a future of ecological gloom anddoom is being taught. Michael Sanera and Jane Shaw’sFacts Not Fear:A Parent’s Guide to Teaching Children Aboutthe Environment documented the extent of the problemof teaching children to fear the future environmentalcatastrophe. For kids between kindergarten and 12thgrade the dominant message in schools is: “The earth is badly polluted, the rain forest is about to disappear,and global warming will submerge New York City withfloods—to name a few of the imminent catastrophes,”all problems caused by their parents, who “have broughtthe earth to the edge of doom.” Scientists and engineersare not problem solvers who make life better but evilexploiters of the environment. Congressmen solveproblems.

How do people who believe humanity is indeed theultimate resource rescue the future? We’ve got two key

advantages over the prophets of doom.First, our stories are more interesting.Free societies have room for people to do things—to discover new ideasand invent new products. Children areengaged in a process of discoveryabout the world around them and thenarrative of discovery is more excitingthan one of catastrophes. Active beatspassive for almost everyone, and free

markets are active. Freedom and free enterprise are justmuch more interesting than the alternatives.

Second, “environmental Calvinism” is even less funthan the original Swiss version. Given a choice, kids’dreams are not going to be about sorting trash intorecycling bins but about personal jetpacks. Becausewe’ve got a more interesting story, we’ve got a chanceto capture young people’s attention. If you spot aneighbor’s or relative’s young kids glumly reading OilSpill!, slip them a life of Thomas Edison or a even Mike Mulligan and His Steam Shovel (still in print!) andmost will opt for the excitement of markets, invention,and action over the gloom of environmental pessimism.If parents read stories of action, invention, and excite-ment, they might even think twice about their owngloomy outlooks.

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A n d r e w P. M o r r i s s

Active beats passivefor almost everyone,and free markets areactive.

To the surprise of opponents of big government,the U.S. Bureau of Economic Analysis (BEA)estimates that taxes at all levels of government

take only 9.2 percent of our income, the lowest rate sinceHarry Truman was president. USA Today and variousnews-media personalities, like Chris Matthews ofMSNBC, have used this statistic to hammer those whocomplain about President Obama’s profligate fiscalpolicies.

If this all seems too amazing to be true, you are onthe right track. It’s obviously not the whole story. Infact, major taxes were simply left out of the account.

Most egregiously, Social Security “contributions”were treated as insurance payments not taxes. (This isimproper since the government doesnot think of Social Security as insur-ance; no citizen has contractual rightsin the matter.) BEA also left out statesales taxes. Inclusion of these additionaltaxes pushes the total tax burden toover 20 percent, which is quite a bitmore than 9.2 percent. Federal, state, and local taxreceipts added up to $3.3 trillion in 2009, 27.5 percentof personal income, as Kevin Drum of Mother Jonespoints out.

But that is not the largest problem with the BEAestimate.

Last year’s Recovery and Reinvestment Act (the“stimulus”) included tax credits that temporarilyreduced the amount of money Americans pay in taxes.However, spending increased by over $500 billion, andthis has been financed by record deficits.The deficit for2009 was $1.6 trillion, and the one for 2010 is pro-jected at $1.88 trillion. Deficits are deferred taxation.

Taxpayers will pay interest on the additional debt theObama administration has run up until we pay off theprincipal.The claim that the tax burden has fallen is, tosay the least, disingenuous. Increased governmentspending is being financed in a way that will make itstrue burden apparent only at some later date.

Further difficulties arise with the BEA estimate ofthe tax burden when you recognize that business taxesultimately get passed on to some group of consumers.

Real Resource Costs

Moreover, this account fails to include government’sreal resource costs. The true costs of the State

include not only money taxed and spent on resources, butthe effects of increased regulation. Ineconomic terms regulation is de factotaxation.There is no economic differ-ence between the State controllingresources through tax-financed spend-ing and its taking effective control ofresources by regulation. There was

already heavy regulation of American industry beforeBarack Obama entered office, and regulation hasincreased since then. (The cost of all regulation was esti-mated to have exceeded $600 billion in the 1990s.) TheOmnibus Land Management Act of 2009 added over twomillion acres to the National Wilderness PreservationSystem. The Fraud Enforcement and Recovery Act andthe Credit Card Accountability Act increased regulationover banking.We must also add in the takeover of GM bythe Treasury, leaving out the part that went to the UAW.

B Y D . W. M A C K E N Z I E

How to Create the Illusion of Low Taxes

11 O C T O B E R 2 0 1 0

D.W. MacKenzie (dmackenz_2000@yahoo.com) teaches economics at theCoast Guard Academy.This article first appeared at TheFreemanOnline.org.

In economic termsregulation is de facto taxation.

More to ComeObama’s policies will increase taxes even more in the

future. So-called health care reform will result in heavierexplicit and implicit taxes. High rates of taxation andregulation correlate with slower economic growth.Increased government borrowing deprives privateinvestors of capital for projects. Since government bor-rowing crowds out private investment, deficits amount toa tax on future economic growth in private industry. Ofcourse, Obama expects the Recovery and ReinvestmentAct to propel America’s economy forward but his expec-tations are wholly unwarranted. Government has anextremely poor track record of investing money produc-tively. One need only look at the record of countries likeSweden and West Germany after World War II to seehow taxes stunt economic growth. They grew rapidlywhen they had low effective tax rates.Then expansion ofthe tax burden in the 1960s and 1970s correspondedwith slower economic growth. The Swedes enjoyedimproved economic performance during the 1990s but

only after tax and welfare reform lessened the load.The BEA staff itself estimates that the tax burden was

30.2 percent of national income in 2009 (as opposed topersonal income). Taxes were 23.8 percent of nationalincome during Truman’s presidency. Summing up all theaforementioned figures on spending and regulation leadsto the conclusion that the real economic burden of gov-ernment in America is over 50 percent, and rising.

The BEA is playing statistical games. In real eco-nomic terms the costs of spending and regulation havegone up substantially since Obama entered office.Worse still, Americans can expect to bear even higherburdens in the future. Concern over rising taxes is jus-tified not merely because taxes are actually higher, butbecause higher taxes mean less prosperity and less free-dom. Increased federal spending and regulation consti-tute real and unnecessary burdens for the Americanpublic. These burdens can and should be reduced. Itmight first, however, be necessary to educate moreAmericans as to the true nature of taxation.

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D . W. M a c K e n z i e

B Y T H O M A S S Z A S Z

The Medicalization of Suicide

The Therapeutic State

Everyone now knows that suicide is a medicalproblem. Not long ago everyone knew that itwas a religious and criminal problem. Bereft of

the power of critical thinking and lacking historicalknowledge, the human mind is a sponge for absorbingand magnifying error. The great American humoristJosh Billings (Henry Wheeler Shaw, 1818–1885) said amouthful when he opined, “The trouble ain’t that people are ignorant: it’s that they know so much thatain’t so.”

In the medieval world SaintAugustine and Saint ThomasAquinas had declared that whoeverdeliberately took the life given tohim by his Creator showed disregardfor the will and authority of Godand was guilty of a mortal sin. In themodern world “self-slaughter” wasdeclared a crime. In Great Britainthe crime of suicide was repealed bythe Suicide Act of 1961; those whofailed in the attempt would nolonger be prosecuted.

After 1776 the United Statesadopted English criminal penaltiesagainst suicide, but American courtsnever enforced them. Nevertheless,as late as 1963 attempted suicide stillwas a felony in six states—Northand South Dakota, New Jersey, Nevada, Oklahoma, andWashington. Today, everyone “knows” that suicide is amental illness, proving the wisdom of Johann Wolfgangvon Goethe’s (1749–1832) observation, “In the news-papers and encyclopedias, in schools and universities,everywhere error rides high and basks in the con-sciousness of having the majority on its side.”

Because medicalization suffuses our thinking aboutall manner of human problems, we bracket the term

“suicide” with “prevention,” implying a claim forwhich there is no evidence—namely, that suicide is a“medical problem.” We prevent diseases but prohibitcrimes. Disease is said to be prevented, not prohibited,even when a State mandate is involved, as with vaccina-tion. Driving while intoxicated is a crime though thepurpose of the law is to prevent accidents committedby drunk drivers.

Suicide prevention ought to be called “suicide pro-hibition.” Why is this important?Because suicide is action-doing, notdisease-enduring, and because thebasic tool of the State is coercionnot therapy. Preventive measures areaimed at keeping undesirable eventsfrom happening, prohibitions atpreventing persons from engagingin behaviors defined as “dangerous”to themselves or others.The differ-ences between these two modes ofinfluencing/controlling the con-duct of others are illustrated by thedifferences between the “war oncancer” and the “war on drugs.”The former is fought with moneyand medical technology, the latterwith laws and prisons.

The psychiatric perspective onlife began to seep into the zeitgeist

of modern Western culture in the nineteenth centuryand was ripe when Freud arrived on the scene in the1880s. His influence lay mainly in his successful elabo-ration and popularization of the language of psy-chopathology and psychotherapy. By the time he died,in 1939, Wystan Auden was moved to offer this mar-

13 O C T O B E R 2 0 1 0

Thomas Szasz (tszasz@aol.com) is professor of psychiatry emeritus atSUNY Upstate Medical University in Syracuse. His latest book isAntipsychiatry: Quackery Squared.

Coercion stands behind State talk of suicideprevention.J.I. Bryant (flickr.com/jibryant)

velously perceptive memorial tribute to him: “. . . ifoften he was wrong and, at times, absurd, / to us he isno more a person / now but a whole climate of opin-ion / under whom we conduct our different lives.”

“Mental Illness” and the Loss of Credibility

People know but do not experience that our everyday language refracts social reality in accor-

dance with prevailing cultural beliefs. As long as a person remains unentangled in the State’s psychi-atric control system, he is not likely to understand itsactual functioning and its threat to basic human rights.Once he becomes a “mental health consumer,” he isconsidered credible only when he praises the system.When he criticizes it he is dismissed as lacking insightinto his illness. (Psychiatric critics who are not mentalhealth consumers are also likely to bedismissed.)

Today, suicide prohibition is a vast,bureaucratic legal-psychiatric enter-prise. From the lawyer’s and psychia-trist’s point of view, it is medicaltreatment. From the would-be sui-cide’s point of view, it is deprivation ofliberty.The following excerpt from anemail I received some time ago is atypical example of a “suicide preven-tion intervention” presented by andfrom the point of view of a “pre-vented” subject:

“I am a doctoral student in psy-chology. . . . I was depressed and, seeking support, hadcalled my parents and told them that I was suicidal.They promptly called the police, who arrived at myapartment, handcuffed me, and transported me to thelocal psychiatric center.” After many hours of waiting,the student—now called a “patient”—was “evaluated.”The psychiatrist “spoke to me for approximately 10minutes before she decided that it was in my ‘best inter-est’ for me to be committed to a psychiatric ward. Iprotested, of course, believing that wrenching me awayfrom life would cause far more harm than good. Sheexpressed no empathy, however. . . . I was finally releasedfrom the hospital five days after my arrival. I can cer-

tainly say that I received no benefit from my stay in thepsychiatric ward. I am more depressed than I wasbefore, having been traumatized by my experience withthe mental health care system.”

Educational authorities deny the real consequences ofsuicide prevention for college and university studentsand persist instead in restating their medicalized mendac-ities. Following three suicides within a period of a fewmonths, Cornell University President David J. Skortonbasks in his own platitudes:“On and off campus, there isan epidemic of suicide among young people. . . . As afather, teacher, physician and president of a universitywhere we have recently experienced the horror ofmultiple suicides, I have long been concerned aboutthis national public health crisis.”

Every death is a crisis for the affected family, butthree deaths, or 30 deaths, do notconstitute an “epidemic” or a“national public health crisis” in anation of 300 million people.

“What is the way ahead?” Skortonasks. His answer: “[W]e need moreresearch into the factors that lead tosuicide in this age group and how toidentify those at greatest risk. . . .[S]tudents must learn that it is smartto ask for help.”

This is a lie. The college studentwho trusts college mental health per-sonnel is misguided.The psychiatrist,psychologist, or social worker

employed by the college serves the interests of the col-lege not the student:The student who seeks such a pro-fessional’s “help” is more likely to be entrapped andharmed than empowered and helped.

So what can the parents of young-adult children,struggling with the hazards inherent to that period oflife, do to protect them? They can avoid defining themas “mentally ill,” enlighten them about the true func-tion of school mental health services, and thus shieldthem from their “care.”And they can continue to fulfilltheir responsibilities, as the parents of nearly grown-upchildren, to demonstrate their love by listening, advis-ing, and supporting them in their struggle.

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T h o m a s S z a s z

Today, suicideprohibition is a vast,bureaucratic legal-psychiatric enterprise.From the would-besuicide’s point ofview, it is deprivationof liberty.

Regarding the state of government (“public”)schooling in the United States today, twofacts stand out. The first is that the average

amount of money spent per pupil has dramaticallyincreased during the past 35 years and is now one ofthe highest in the world, and the second is that stu-dent achievement, by both historical and interna-tional standards, is among the lowest of industrializedcountries. In conjunction with the spending increase,the current situation is surprising.

Why is it that spending larger sums for public edu-cation does not lead to better results while a higherprice purchases a higher-quality serv-ice nearly everywhere in the privatesector? And why haven’t fundamentalchanges to the schools been madethrough the political system despitelong-falling student achievement?Public Choice theory and economicreasoning make it clear that, far frombeing contradictory, the current stateof affairs in American public schools isthe logical result of the processes by which they are runand funded, and that the continuance of the status quois the result of rational choices by voters within thecurrent democratic system.

Just how much is spent on schooling in the UnitedStates? In 2004–2005, the average expenditure perpupil was $9,266, the National Center for EducationStatistics says, while the average expenditures in 1984and 1994 were $6,219 and $7,504, respectively. Thisrepresents a 23.5 percent increase over ten years and a49 percent increase over 20. It’s also 52 percent morethan what 29 other countries spent in 2003, according

to the Organization for Economic Cooperation andDevelopment.

Yet despite the vast spending increases, the averagecombined SAT score dropped from 1060 in 1967 to990 in 1980, after which it rose modestly to around1028 in 2005. Fifteen-year-old U.S. students scored 483on the 2003 Program of International Student Assess-ment, 17 points below the average of all the countriesthat participated.Thus by the dual standard of cost andbenefit, the public school system is doing poorly.

One great difference between government-runoperations (such as the public schools) and all organi-

zations on a free market, whetherfor-profit or nonprofit, is that gov-ernment agencies are allocated fundsby political decisions, while free-market organizations must earn theirrevenue either through voluntarygifts or voluntary exchange.This dis-tinction has important implicationsfor the actions of these two groups.Free-market organizations strive to

maximize profit by increasing revenue and reducingcosts; these profits are then either distributed to ownersor shareholders or are used to further the goals of theorganization. Organizations in which costs exceed rev-enue earned close or go bankrupt.Thus they constantlystrive to become more efficient and productive, and theinefficient producers are driven out.

As Public Choice theory tells us, however, the peo-ple who run government agencies have no such incen-

B Y M I C H A E L B O R S

Public Schools through the Public Choice Lens

15 O C T O B E R 2 0 1 0

Michael Bors (mbors1@gmu.edu) is a student in the Class of 2013 atGeorge Mason University. He attended FEE’s History and Libertyseminar this year.

Why is it thatspending larger sumsfor public educationdoes not lead tobetter results?

tive to decrease costs and increase revenue because theyare not subject to market competition and do not standto benefit from any profits made. In fact, through a per-verse process exactly opposite to the market process,failing schools and districts are often given more moneyin the desperate hope that the problem will be solved.Public Choice theory also demonstrates that for anypublic school or school system it is rational to wasteresources because of the “use it or lose it” phenome-non. If a school were to have a budget surplus, itsbudget for the next period might be curtailed—some-thing its administrators would abhor. Thus the publiceducation system typically does not provide incentivesfor cost-cutting and quality-improving measures. Infact, it does the opposite.

Cost and Quality at Private Schools

Based on this reasoning, and other things equal, onewould expect to see, on average,

private schools providing better-qualityeducation at lower cost (per pupil) thanpublic schools. Indeed this is exactlywhat we find. Adam Schaeffer of theCato Institute, in his policy analysis,“They Spend WHAT? The Real Costof Public Schools,” found that in thefive metro areas studied, public schoolsspend nearly twice the amount ofmoney per pupil (93 percent more)than the estimated median privateschool does.That students were sent tothese tuition-charging schools instead of to “free public”schools is further evidence the private schools were pro-viding a higher-quality education even at lower totalcost.

Instead of competing for students and donations,public schools and school systems compete for alloca-tions from legislatures and bureaucracies. One factor inmaking these allocations is student performance onstandardized tests.This artificial substitute for competi-tion creates perverse incentives for all levels of the edu-cation apparatus. Individual teachers and schools, forexample, knowing that funding is dependent not ongeneral student knowledge and sharp critical thinkingskills, but rather on one test, are induced to teach stu-

dents only those skills which will be tested (a processknown as “teaching to the test”).When schools receivemoney according to how many students enroll inupper-level classes, they have an incentive to spur morestudents to take those classes, resulting in unqualifiedstudents falling behind and advanced students beingheld back. In addition, states have an incentive to make standardized tests easier rather than harder so thatmore students will pass. Thus the perverse results areseen at all levels: individual schools, districts, and stategovernments.

Rational Ignorance and Bundle Purchases

Public Choice also explains why voters don’t showup en masse on election day to vote for candidates

who will change the educational system. Althoughmany citizens agree that the schools could and shouldbe run better, few have a detailed plan of how that

could best be done, and therefore fewhave a standard by which to judge theeducation proposals of candidates.This is a result of rational ignorance.Tocast the smartest vote regarding edu-cation policy, a parent (for example)would have to devote an enormousamount of time to learning about thevarious issues related to education:the inner workings of the local schoolsystem, the broader laws of econom-ics, Public Choice theory, the struc-ture of the teachers’ unions, the fine

print of the No Child Left Behind Act, and more.Yetafter all this work, the parent would still only have onevote to cast. Thus the cost to the parent of learningabout this political issue far outweighs the potentialbenefit of one well-informed vote.

Even more, an informed parent might still not votefor the candidate with the better schooling planbecause political decisions, unlike market decisions, are“bundle purchases.” While one chooses any variety ofindividual goods and services on the market, one mustchoose a single politician with all of his policy posi-tions. Stuck with a choice of two candidates, each ofwhom has some agreeable and some disagreeableviews, voters are very often forced to choose the lesser

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M i c h a e l B o r s

Through a perverseprocess exactlyopposite to themarket process, failingschools and districtsare often given more money.

of two evils. Note that such language is rarely used todescribe market purchases.

Even if a parent voted for the politician who adver-tised the best plan for educational reform, the politi-cian might fail to live up to his campaign promises.Candidates compete for votes andhave an incentive to say or promisewhatever is necessary to be elected.But dishonest campaigning is notillegal—no politician ever went tojail for breaking a campaign promise.In addition, politicians generally can-not be ejected from office duringtheir terms; thus in the case of a lyingcandidate, the voter would be stuckwith a representative committed tothe status quo until the next election,at which time entirely new issues (apart from educa-tion) might take priority. This is the opposite of themarket, where many goods can be returned immedi-ately for full refunds, and where false advertising ispunished both by the law and by consumers whowithdraw their patronage. So widespread public dissat-

isfaction persists but the education system does notchange.

A few alternatives to the current public system havebeen proposed, including school vouchers and charterschools.While both options stimulate a limited sort of

competition on the supply side ofschooling, they too are fundamentallyflawed. First, the requirements andmandates that the government wouldimpose on all schools acceptingvouchers (in terms of curricula, stan-dardized tests, and hiring policies)could create even more State controlover education than already exists.Second, these proposed solutionswould do nothing to address theabnormally large quantity of educa-

tion that is demanded under a system of taxpayer-financed schooling.

In the final analysis, the only solution that solves allthese problems is the complete separation of state andschool. Only in this way can a high-quality, low-cost,diverse, and voluntary educational system be achieved.

17 O C T O B E R 2 0 1 0

P u b l i c S c h o o l s t h r o u g h t h e P u b l i c C h o i c e L e n s

The only solutionthat solves all theseproblems is thecomplete separationof state and school.

Over the past year there has been a flurry ofgovernment-related activity aimed at stop-ping the decline of the newspaper business.

The Federal Trade Commission (FTC) has held threeseries of workshops on the subject, drawing dozens oftop academics, national politicians, business leadersfrom companies like Google and News Corporation,and the FTC commissioners themselves. On June 7 the agency released a discussion paper titled“Potential Policy Rec-ommendations to Sup-port the Reinvention ofJournalism,” and a weeklater it held a workshopat the National PressClub,“How Will Journal-ism Survive?” to discussits proposals.

This activity hasfocused on the fact thattraditional news-produc-ing businesses aren’t mak-ing the money they usedto make because of competition from new kinds ofoutlets.

This, allegedly, is a market failure.Print journalism lost income to television, then the

Internet, and now from the expanding capabilities ofmobile handsets. In this new and still rapidly evolvingorder, print news media are increasingly discoveringthey are at a comparative disadvantage in attractingadvertising dollars. Like dial-up Internet access, thenewspaper is getting left behind.

But is this a market failure? The FTC argues thatjournalism is a public good, that the severe contractionof the industry proves that the market has failed, andthus that even tirelessly experimenting entrepreneurshave been unable to find new and sustainable streams ofrevenues for news organizations, especially for tradi-tional newspapers and their online extensions. As para-graphs 14 and 15 of the FTC paper argue:

14. There are reasonsfor concern that exper-imentation may not pro-duce a robust and sus-tainable business modelfor commercial journal-ism. History in theUnited States shows thatreaders of the news have never paid any-where close to the fullcost of providing thenews. Rather, journalismalways has been subsi-dized to a large extent

by, for example, the federal government, politicalparties, or advertising.

15. Economics provides insight into why this hasbeen the case. The news is a “public good” in eco-nomic terms. That is, it is non-rivalrous (one per-son’s consumption of the news does not precludeanother person’s consumption of the same news)

B Y E D W A R D J . L Ó P E Z

Is the Decline of Newspapers a Market Failure?

18T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

Edward López (edward.lopez@sjsu.edu) is an associate professor of lawand economics at San José State University.This article originally appearedat TheFreemanOnline.org.

The FTC thinks this is how news should be delivered.Adam Bowie (flickr.com/adambowie)

and non-excludable (once the news producer sup-plies anyone, it cannot exclude anyone). Because freeriding is usually easy in these circumstances, it isoften difficult to ensure that producers of publicgoods are appropriately compensated.

The policy recommendations, in turn, are intendedto raise revenues and decrease costs to news-producingorganizations, while making life more difficult foronline news aggregators and other new media “freeriders.”

Major New Programs

By my count the FTC report contains 30 potentialpolicy proposals, ranging from major new pro-

grams to tweaks of existing interven-tions. I have categorized most of theproposals into six broad areas:

• Raise revenues to news organizationsby: amending the Copyright Act toallow licensing of news content andexpand protections of “hot news”while also narrowing the scope offair use; and exempting news organi-zations from federal antitrust laws toencourage collusion in charging endusers and online news aggregators.

• Reduce costs to news organizationsby: granting free access to government computingcenters; expanding R&D subsidies to informationtechnologies that journalists use; and standardizingthe way governments issue electronic information asfodder for what journalists report.

• Increase current funding of journalism by: increasingsubsidies to the Corporation for Public Broadcasting;increasing postal subsidies for mailing of print media;and funding newly created domestic counterparts tointernational radio broadcasting like Voice of Americaand Radio Free Europe.

• Create new federally funded programs including: anew journalism division of AmeriCorps; a nationalfund for local news in “places the market has failed toserve”; and grants to universities for student-pro-duced investigative journalism.

• Offer tax preferences to news organizations includ-ing: credits for hiring journalists to “help pay thesalary of every journalist”; tax-exempt status for newsorganizations that convert from commercial to non-profit news organizations; and a newly created IRS status of news organizations as “for benefit” organiza-tions that are tax-exempt.

• Harvest new funding mechanisms for earmarkedspending on news organizations, including: a taxreturn checkbox for up to $200 to distribute to non-profit news organizations; new Federal Communica-tions Commission surcharges on new-media content;new taxes on spectrum use and spectrum auctions; anew 5 percent tax on consumer electronics; a new 2percent tax on online advertising; a new 3 percent tax

on wireless and Internet phone bills;and more.

This is what the best and the bright-est have been up to.

Now just to be clear, the FTCauthors are careful to state that theseare merely potential proposals thatare intended for discussion only.Yet after a year of workshops anddozens of studies, these are the ideason the table—a thoroughgoingcommitment to the coddling of adying business model coupled with

a seemingly wholesale disregard for freedom of speech.Since there isn’t enough space here to talk about

all the implications of the FTC report, I will focus onthe economic argument that lies at the core of theseproposals.

First, you might wonder what the FTC refers to in saying that journalism has always been subsi-dized by the federal government. Well, consider postal subsidies for shipping print news, first enacted in 1792. Then there are tax breaks to newspapers for costs incurred to increase circulation. Finally,there is direct funding of public radio and television.In light of these examples, it seems apparent that there is a long history of federal subsidies to print journalism.

But precedent does not a market failure make.

19 O C T O B E R 2 0 1 0

I s t h e D e c l i n e o f N e w s p a p e r s a M a r k e t F a i l u r e ?

The old businessmodel is dying.That doesn’t makejournalism a publicgood. It makes thetraditional businessmodel obsolete.

In fact, even if a good does have the properties ofbeing non-exclusive and non-rival, as the FTC charac-terizes journalism, this still does not make the declineof newspapers a market failure.Voluntary provision ofpublic goods tends to work when the supplier of agood can find indirect ways to charge users of a good,thus converting it from non-exclusive to exclusive.

Voluntary Provision of Public Goods

History shows us repeatedly that public goods areoften and perhaps even usually provided voluntar-

ily—without mandate or subsidy from government.Toll charges have been sufficientincentives to build roads and bridgesfor centuries. Beekeepers and orchardgrowers have found ways to contractand cooperate with each other toprovide more of two goods—honeyand flowers—that have classic poten-tial free-rider problems. Casino hotelsin Las Vegas provide free self-parkingand security. Even law enforcementitself is not a public good. Neighbor-hood police forces have survived on afee-for-service basis in San Francisco,of all places, for over 150 years.

The question of whether that classic public good,the lighthouse, was provided privately in England hasbeen a matter of some controversy. But of course, shipsdon’t rely on lighthouses any longer. When navigationtools enabled precise longitudinal calculations, thosetools began displacing lighthouses. More recently, GPShas made lighthouses obsolete.The lighthouse is now adead business model.That doesn’t make a lighthouse apublic good, though. It makes it no longer a good.

The same dynamics are true of journalism. Produc-ers of journalism charge consumers of journalism indi-

rectly through advertising. But the old business modelis dying.That doesn’t make journalism a public good. Itmakes the traditional business model obsolete.

Forgotten Consumer

But what about the losses to news producers? Thisis not pleasant to see unfold, but it is not a market

failure. A policy-relevant market failure is the experi-ence of real net losses in society as a result of purelyself-regulated voluntary action. When people stopusing lighthouses and newspapers, it’s because they’veturned to new and better substitutes. The lighthouse’s

loss has been society’s gain. Similarly,as news producers’ revenue streamshave dried up, this has created morethan offsetting opportunities fornew-media producers and consumersof information. It has also spurredinnovation in new forms of journal-ism. To its discredit, the FTC reportbarely mentions news consumers inits litany of industry-enhancing pro-posals. And it treats new-media com-petitors as the bad guys. As a society,we wouldn’t want to go back to

horse-drawn buggies unless we were fixing our focusentirely on the welfare of buggy-whip makers to theneglect of carmakers, consumers, and the rest of us.The authors of the FTC report do not seem to get thispoint.

Market-failure theory is of little help in understand-ing how markets really work and what is happening tojournalism. A better framework is creative destruction.Old journalism is failing not because it is a public good that government has not adequately funded. It’sfailing because it is being replaced with more innova-tive alternatives.

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E d w a r d J . L ó p e z

When people stopusing newspapers, it’sbecause they'veturned to new andbetter substitutes.That is not a market failure.

B Y S H E L D O N R I C H M A N

Can America Afford an Empire?

Peripatetics

Fiscally speaking, the U.S. government has beenrunning a disorderly house for some time. Thatmakes the fiscal crisis in Greece an uneasy por-

tent for Americans (as Steven Horwitz points out inour July/August issue, www.tinyurl.com/3yfqqlg).

Just contemplate some of the numbers. The totalfederal debt is nearly $13 trillion, $8.6 trillion of whichis held by the public, with the rest held by governmententities. (These are conservative estimates, since manygovernment obligations are not counted.) GDP issomething over $14 trillion.That ratio of debt to GDPisn’t pretty.“The CBO estimates that at the end of 2020publicly held debt will be a staggering $20.3 trillion—90 percent of GDP—with total debtbeing notably higher than that,” Hor-witz writes.

As for the budget deficit, the Con-gressional Budget Office projects it toexceed a trillion dollars this year andnext, bringing it into the neighbor-hood of 10 percent of GDP. Thiscomes on top of a 2009 deficit of$1.88 trillion—the government spenta buck-ninety for every dollar it col-lected. The deficit is projected to fall in the years fol-lowing 2011, before resuming its growth in 2015 andbeyond. By 2018 it will be back over $1 trillion, assum-ing these estimates are not wildly optimistic. Remem-ber, ObamaCare has not kicked in yet.

According to the CBO, the Obama administrationwill create $9.75 trillion in deficits over the nextdecade.

Compare this with Greece: Its accumulated debt is113 percent of GDP, and its budget deficit last year was12.7 percent of GDP. Greece needed to sell bonds toobtain the money to pay debts come due, but lenderswere too nervous to lend the money at rates the Greekgovernment can handle. So Greece needed a bailout in

the form of cheaper loans from the European Unionand International Monetary Fund (a.k.a. American taxpayers), conditioned on budget austerity (spendingcuts and tax increases), which in turn incited violentstreet demonstrations by government employees, whohave benefited from high deficit spending for years.

The Need for Cuts

If we want to avoid the Greek experience, whichcould spread to other EU countries in the future, the

U.S. fiscal house will have to be put in order. Contraryto what the policy elite is thinking, this does not meanraising taxes, which would impede economic activity

and make conditions worse.So if the deficit is to be eliminated

it will have to be through dramaticbudget cutting. In the current fiscalyear the federal government is plan-ning to spend $3.55 trillion. Amongthe largest categories of spending areSocial Security (19.63 percent);unemp loymen t/we l f a re/o the r“mandatory” spending (16.13 per-cent); Medicare (12.79 percent);

Medicaid and the State Children’s Health InsuranceProgram (8.19 percent); and interest on the nationaldebt (4.63 percent).

Of course I’ve left out a category, but deficit hawksoften ignore it: the Department of Defense. It comes inat 18.74 percent of the budget, or $663.7 billion. (Moreabout this number below.) For some context, the 2009Pentagon budget was almost as much as the rest of theworld’s military spending combined.

For fiscal 2011 President Obama has asked Congressto appropriate $719 billion for the Pentagon, a 4.5 per-

21 O C T O B E R 2 0 1 0

Sheldon Richman (srichman@fee.org) is the editor of The Freeman andTheFreemanOnline.org.

The Department ofDefense consumesnearly 19 percent ofthe budget.

cent increase over the current year. But as RobertHiggs points out,“few appreciate that the total amountof all defense-related spending greatly exceeds theamount budgeted for the Department of Defense.”

Writing about the 2009 Defense Departmentbudget of $636.5 billion, Higgs states: “Lodged else-where in the budget, however, other lines identifyfunding that serves defense purposes just as surely as—sometimes even more surely than—the money allo-cated to the Department of Defense. On occasion,commentators take note of some of these additionaldefense-related budget items, such as the Departmentof Energy’s nuclear-weapons pro-gram, but many such items, includingsome extremely large ones, remaingenerally unrecognized.”

Those other items include thedepartments of Homeland Securityand Veterans Affairs, and programswithin the Energy, Justice, and Statedepartments. Higgs also calculatedthe share of the interest on the debtattributable to past Pentagon spend-ing: “Adding this interest componentto the previous all-agency total, thegrand total comes to $1,027.8 bil-lion, which is 61.5 percent greaterthan the Pentagon’s outlays alone.”

The grand total will be well above a trillion dollarsin the current fiscal year also.

Guns and Gravy

Owing to the financial debacle and the ongoingrecession,” Higgs sums up, “millions are out of

work, millions are losing their homes, and private earn-ings remain well below their previous peak, but in themilitary-industrial complex, the gravy train speedsalong the track faster and faster.”

It’s no mystery why so much is spent on the military.The U.S. government maintains close to a thousandmilitary bases around the world and is engaging in twoforeign occupations, not to mention less formal cam-paigns in Pakistan and elsewhere, including covert

operations that never make the papers. Intervention hasgone on at least since World War II. This costs money.The Iraq and Afghan occupations consume over $12billion a month. USA Today reported recently that thePentagon had spent $620 billion on the Iraq invasionand occupation and more than $190 billion on theoperation in Afghanistan, America’s longest militaryadventure ever. Other estimates last summer werehigher, as much as $300 billion for Afghanistan, accord-ing to U.S. News and World Report. Last summer, morespending was approved in Congress. It's safe to say thecombined price tag is over $1 trillion.

The fiscal question is whether, inthe face of the huge national debt and multiyear trillion-dollar budgetdeficits, we can afford a “defense”establishment more befitting anempire than a republic. That’s not theonly question, however. We must alsoask if a society that claims to value freeenterprise can long endure the eco-nomic disfigurement that inevitablyaccompanies a large military-industrialcomplex, as President Eisenhowerwarned of as he left office.

Small-government men fromRichard Cobden to William GrahamSumner to Robert Taft would have

said no, as does their political heir, Ron Paul, today. Asfor whether slashing military spending would deny usneeded protection, one could as well ask whether weare safe today with policies that risk “blowback,” bank-ruptcy, and monetary disarray.

One cannot help but conclude that James Madisonhad it right:

“Of all the enemies to public liberty war is, perhaps,the most to be dreaded, because it comprises and devel-ops the germ of every other. War is the parent ofarmies; from these proceed debts and taxes; and armies,and debts, and taxes are the known instruments forbringing the many under the domination of the few.. . . No nation could preserve its freedom in the midstof continual warfare.”

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S h e l d o n R i c h m a n

The fiscal question iswhether, in the faceof the huge nationaldebt and trillion-dollar deficits, we canafford a “defense”establishment morebefitting an empirethan a republic.

“

The ongoing financial crisis has pundits, blog-gers, academics, and politicians scrambling forexplanations. Deregulation gets a major share

of their attention, specifically the 1999 repeal of theGlass-Steagall Act of 1933. Just what was Glass-Steagalland how did it come about?

Bank failures were among the most dramatic anddevastating aspects of the Great Depression. A wave offailures swept the country in 1930. A second andstronger wave followed in 1933. In all some 9,000banks failed, taking with them allor part of the savings of millions ofindividuals and businesses. Perhapsthe most significant response tothis crisis was the Glass-SteagallAct, officially known as the Bank-ing Act of 1933. (Glass-Steagalloriginally referred to a measureenacted in 1931 that was con-cerned mainly with powers of theFederal Reserve System, but thatname now generally refers to the1933 act.)

Glass-Steagall was a far-reaching measure that estab-lished federal deposit insurance (see The Freeman, June2010; www.tinyurl.com/2v5u9cf) as well as separationof investment banking from deposit, or commercial,banking. Although it is rightly classed as one of theNew Deal reforms, the bill had been debated beforeRoosevelt’s assumption of the presidency in March1933 and the bank holiday the same month. In fact,Senator Carter Glass had long made known his opposi-tion to “universal banking,” in which single firms couldconduct deposit banking, investment banking, and

other financial activities. Glass had been a sponsor ofthe Federal Reserve Act of 1913 and by 1933 was with-out doubt the most respected and powerful politicianon matters related to banking.

The Glass-Steagall separation of investment anddeposit banking was generally repealed by the Gramm-Leach-Bliley Act of 1999, during the administration ofBill Clinton. However, in response to the financial cri-sis of 2008, there has been much discussion of whetherrepeal was a mistake and whether some or all of its

restrictions should be reinstated.Wecan gain valuable perspective onthe current situation and calls forreform if we know a little aboutGlass-Steagall. What problems wasit supposed to solve? What politicalincentives were at work? What newproblems might it have caused?

Investment banking seems quitedifferent from commercial banking.We might even wonder why bothare called banking. Deposit banksaccept deposits and make loans.

They provide benefits to savers who couldn’t reasonablyfind and assess borrowers on their own, and to borrow-ers who would have a hard time finding lenders. Invest-ment banks underwrite securities, meaning they helpcompanies issue new equity (shares of stock) or debtsecurities (bonds). They perform similar services forstate and local governments that wish to issue bonds.

B Y W A R R E N C . G I B S O N A N D J E F F R E Y R O G E R S H U M M E L

The Rise and Fall of Glass-Steagall

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Warren Gibson (warren@gibson2.com) teaches engineering at Santa ClaraUniversity and economics at San Jose State University. Jeffrey RogersHummel (jeff@jrhummel.com) is an associate professor of economics at SanJose State University.

Roosevelt with, to his right and left, respectively,Glass and Steagall.

They set an offering price, line up buyers, and some-times guarantee to absorb the securities themselvesshould any remain unsold. Unless they keep some ofthe new securities on their books, their work is finishedonce the securities are sold.

Some of the skills and practices of investmentbankers are quite similar to those of bank-lending offi-cers. Lenders must investigate the creditworthiness ofprospective borrowers. Investment bankers must per-form the same sort of due diligence in decidingwhether to underwrite a proposed security offeringand if so, how to price it. Firms that combine commer-cial and investment banking under one roof thus tendto be more efficient, a situation that economists call“economies of scope.” If they successfully exploiteconomies of scope, combined firms provide lastingbenefits to their corporate clients andindirectly to consumers, as well ashigher profits to themselves—at leastuntil competing firms bid away thoseprofits.

Pecora Hearings

The main impetus for the separa-tion aspect of Glass-Steagall was

a series of congressional hearingsknown as the Pecora hearings, namedfor the chief counsel of the SenateCommittee on Banking and Currency. The hearingstook place in 1933 and 1934 and generated some11,000 pages of testimony. Ever since that time the Pec-ora hearings have been cited as firmly establishing theabuses that can and did arise when a single firm isallowed to engage in both deposit banking and invest-ment banking, and as justifying government interven-tion to curb those abuses. This belief, by nowsomething of an urban legend in financial and regula-tory circles, is summarized in the following congres-sional testimony given in 1986:

[The Pecora hearings] on the securities practices ofbanks disclosed that bank affiliates had underwrit-ten and sold unsound and speculative securities,published deliberately misleading prospectuses,manipulated the price of particular securities, misap-

propriated corporate opportunities to bank officers,engaged in insider lending practices and unsoundtransactions with affiliates. Evidence also pointed tocases where banks had made unsound loans to assisttheir affiliates and to protect the securities under-written by the affiliates. Confusion by the public asto whether they were dealing with a bank or itssecurities affiliate and loss of confidence were alsocited as adverse consequences of the securities affili-ate system.

Who said that? None other than Paul Volcker, for-mer chairman of the Federal Reserve System, who wasgiven credit (perhaps exaggerated) for stopping theinflation of the late 1970s and who has reentered pub-lic life as an adviser to President Obama. (More about

Volcker and the proposed VolckerRule below.)

For years Glass had been frustratedin his attempts to legislate separationof commercial and investment bank-ing. Revelations of supposed abusesby National City Bank (NCB) ofNew York and its president, disclosedin the Pecora hearings, provided thespark to ignite the issue and giveGlass his victory. Senator BurtonWheeler thundered,“The best way to

restore confidence in our banks, is to take thesecrooked presidents out of the banks and treat them thesame as they treated Al Capone when Capone avoidedpayment of his tax.”

The Witch Hunt

The press got on board to the point where the Lit-erary Digest reported that “Apologies, even resigna-

tions, do not satisfy listening editors.” Heywood Broun,a leading columnist and perhaps the Paul Krugman ofhis day, piled on with,“The only thing that some of ourgreat financial institutions overlooked during the yearsof boom was the installation of a roulette-wheel for theconvenience of depositors.” The hearings and theiraftermath, it is fair to say, had become a witch hunt.

NCB was a leading New York bank, restrained bylaw to operate only within the city. Its subsidiary,

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One senator said the governmentshould “treat [bankpresidents] the sameas they treated Al Capone.”

National City Company (NCC), had become thelargest and most prominent commercial-bank-relatedsecurities underwriter, with offices in many citiesbesides New York. National City and its president,Charles Mitchell, were charged with numerous mis-deeds. Mitchell allegedly arranged his affairs so as toavoid income tax. It was also alleged that the bank paidhigh salaries and bonuses and made special lendingfacilities available to executives.

These are scarcely criminal offenses. But among themore serious charges, executives allegedly profited fromthe firm’s own securities underwritings. For example,National City bought a large block of stock in the newBoeing Corporation. Rather than sell this stock to thepublic, Pecora charged that NCC “retained a largeblock for itself and allotted the remainder to Mr.Mitchell and a select list of officers,directors, key men, and specialfriends.” But an internal NCC mem-orandum concerning this stock says,“[O]n account of the fact this indus-try is still somewhat unseasoned, eventhough we regard this particular com-pany as sound and having a verybright future, we were not quite readyto make a general offering to our cus-tomers. It would have been next toimpossible to avoid taking ordersfrom the type of investor who should not buy thisstock. Therefore, our own family and certain officersand employees of the Boeing Co. and affiliations havetaken the entire issue.”

Not only does this not sound improper, but in fact itsounds like just the sort prudent regard for customers’best interests that was supposed be lacking in combinedfirms such as NCB/NCC.

The committee produced a Mr. Brown, a witnesswho claimed to have lost $100,000 as a result of anNCC salesman’s bad advice. Bankrupt and in ill health,Mr. Brown was an ideally sympathetic witness, but itturned out that he had been a successful businessmanand not a novice. NCB was forbidden to call rebuttalwitnesses.

In his 1990 book, The Separation of Investment andCommercial Banking, Professor George Bentson investi-

gated numerous other charges against NCB andshowed that none had any substantial basis in fact. Sim-ilar charges were brought against the Chase Bank, itspresident Alfred Wiggins, and the affiliated Chase Secu-rities Corporation. Bentson also showed that thesecharges were mostly unsubstantiated—and added athorough critique of the supposed theoretical problemsof universal banks such as conflicts of interest.

Caveat Emptor

But what about conflict of interest? It is certainlypossible that a banker in a combined firm might

steer customers into ill-suited investments or insur-ance products. This is a hazard we face whenever wedeal with professionals, such as physicians who advisetreatments and also provide them, or lawyers who

advise lawsuits and offer to file them.Such hazards are manageable:We canalways get a second opinion or con-sult a fee-based financial planner orsimply rely on the professional’sincentive to maintain a reputation forethical service.

Financial institutions have widenedtheir offerings considerably in recentyears without any apparent problems.At the website of Wells Fargo Bank,for example, one finds not only tradi-

tional deposit and savings accounts and loans of allsorts, but also stock brokerage, mutual funds, automo-bile insurance, homeowner’s insurance, and even petinsurance. (But the Wells Fargo branch in a nearbySafeway store didn’t catch on and was closed.) Similarly,Charles Schwab, which began as a discount broker, nowoffers a full range of investment products and advice aswell as banking services through its affiliated bank.Customers enjoy expanded services and lower prices asa result of the widening of competition among tradi-tionally distinct firms.There is no sign of significant orwidespread problems arising from conflicts of interestin such firms.

Combined firms are not assured success. Sears, Roe-buck, for example, once decided to get into financialservices. Sears as such couldn’t just start acceptingdeposits and making loans, nor could any commercial

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The press got onboard and thehearings ultimatelyleading to Glass-Steagall turned into a witch hunt.

bank start selling underwear. But it formed a holdingcompany, and the combination was effected. For a brieftime customers in a nearby Sears, clutching theirunderwear purchases, could wander across the aisle intoan alcove where smiling agents offered banking servicesthrough Allstate Savings and Loan, insurance policiesfrom Allstate Insurance, and securities from Dean Wit-ter—Sears subsidiaries all. Customers, not regulators,showed that no economies of scope were to be foundin the Sears approach: The alcoves were returned toretail use, and the subsidiaries were sold. By the timeSears recovered from this excursion,Walmart was ridinghigh and Sears was headed for the ropes.

Another failed expansion of scope was Citicorp’sacquisition of The Travelers, a major insurance firm thathad previously acquired the SmithBarney brokerage. The resultingcombination was christened Citi-group but the hoped-for synergiesnever appeared and Travelers wassold.This happened long before Citi-group was rescued by a federalbailout. Citigroup, incidentally, is thesuccessor of the National City Bankof Glass-Steagall fame.

The End-Around

Sears and Citigroup aside, somefirms achieved a substantial degree of financial inte-

gration in the 1980s and ’90s. Banks had figured outhow to dodge the Glass-Steagall prohibition on owner-ship of firms “engaged principally” in underwriting andsecurities dealings.They simply formed subsidiaries thatconducted a large enough volume of other businessthat they could legitimately claim they escaped the“engaged principally” clause.This avenue was not avail-able to smaller institutions that could not marshal therequired volume of business to employ this dodge.Thusby the 1990s Glass-Steagall was fast becoming a deadletter.The Gramm-Leach-Bliley Act of 1999 acknowl-edged the situation and provided a straightforward pathtoward financial integration as opposed to the varietyof side routes that had been taken.

Incidentally, no other developed country has everseen fit to separate commercial banking from invest-

ment banking. Banks in Germany and Switzerland havealways been free to engage in underwriting and securi-ties holding to no obvious harm. British banks areslightly more regulated: They are not allowed to sellinsurance.

Backed partly by the reputation and stature of PaulVolcker, the Dodd-Frank act is now law. A provisionthat at least echoes the Volcker rule prohibits “highrisk” proprietary trading by banks (trading for theirown account). However, the distinction between proprietary trading and similar but supposedly benignforms of trading is left to regulators. Thus the effectsof this and the act’s other loosely related provisionswon’t really be known until a passel of regulations arewritten and implemented. Very likely the full effects

of Dodd-Frank won’t be apparentuntil the next financial crisis. It is dis-turbing that the urban myths thatbacked Glass-Stegall have survivedlike a dormant virus in the person ofMr. Volcker, as his quoted testimonysuggests, and have re-emerged inDodd-Frank.

Glass-Steagall tore investmentbanks out of the arms of their com-mercial banking parents. After thatthey stood alone, first as partnershipsand then, starting with Merrill Lynch

in 1971, as corporations. More recently they began toconvert themselves into bank-holding companies. InSeptember 2008 the last two major stand-alone invest-ment banks, Goldman Sachs and Morgan Stanley, tookthe plunge. At a stroke these institutions gained certainadvantages such as borrowing privileges at the Fed’sDiscount Window, while subjecting themselves tostricter regulations on leverage and borrowing. Mostimportant, their explicit status as banks gives themgreater assurance of a future bailout should failure loom again.

Scapegoat

The timing of the repeal of Glass-Steagall makesthis deregulatory move a convenient scapegoat

for the financial crisis. But the crisis began with thehousing collapse, a result of government encourage-

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While the Volckerrule does not seem tobe a return to Glass-Steagall, it is disturbingthat Volcker hasbought the urbanmyth supporting it.

ment of unsound lending practices. Financial firmstook too much risk with mortgage-backed securities,in part because of moral hazard engendered by gov-ernment guarantees and partly because bond ratingfirms were not as independent as was once thought.The limited liability that the investment banks gainedwhen they became corporations may also have ampli-fied moral hazard. There is no good reason to believethat Glass-Steagall, had it remained in effect, wouldhave prevented any of these problems.

A panoply of myths grew up around the GreatDepression, many of which are only now beingdebunked. Sadly, the current Great Recession mayspawn a new set of myths, among them the supposedrole of Glass-Steagall’s repeal.We have seen how 1930scongressional hearings produced scapegoats that led toGlass-Steagall’s separation of investment banking from

commercial banking. Is history repeating? Last April theSecurities and Exchange Commission filed securitiesfraud charges against Goldman Sachs. The civil com-plaint, since settled for $550 million, contended that thefirm stacked the deck on billions of dollars worth ofmortgage securities in favor of insiders and at theexpense of outsiders. At this writing the ManhattanU.S. Attorney’s office is conducting an investigationthat could lead to criminal charges. And Goldmanexecutives were subject to some 11 hours of intensivequestioning in front of a Senate committee, duringwhich they largely stood their ground.

We do not know whether the charges against Gold-man Sachs have merit, but the parallels between thatfirm and the National City Bank of 1933 are eerie.Wemay well be seeing the manufacture of another scape-goat.

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T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g 28

Welfare states face an inescapable paradox:Thelevel of production needed to sustain a wel-fare state cannot be sustained by a welfare

state.This paradox is created by policies that encouragethe redistribution and consumption of wealth while dis-couraging its creation. In the face of such perverseincentives, living standards must fall even though, for atime, they may be maintained through borrowing. Theparadox is not unique to Greece or California, nor is ita function of who is in charge. It is, rather, inherent inthe internal contradictions of the wel-fare state itself.

The term “welfare state” is definedhere as a polity that assumes primaryresponsibility for the care of a goodnumber of its citizens, providing suchbenefits as public housing, health care,education, minimum wage rates,unemployment insurance, and finan-cial support for the poor, elderly,disabled, and politically favored insti-tutions, businesses, and industries.

The material well-being of any society’s people restson the quantity and quality of goods and services theyproduce. All goods and services consumed by theunproductive members of society must be taken from,or paid for by, the productive. Welfare state policiesensure that the ranks of the unproductive will grow andthose of the productive population will shrink, and thatthe productivity of the dwindling number of producerswill fall. As a result, the quantity and quality of goodsand services available will drop and poverty will rise.The mechanics of this decline are both straightforwardand predictable.

Welfare state policies discourage saving.When gov-ernment helps pay for its citizens’ big-ticket items, citi-zens have little need to save for the future. Banks willtherefore have less money to lend, leading to lower cap-ital investment and lower economic growth.

The taxes needed to pay for public benefits reducethe ability of, and incentives for, businesses to maintainand expand production facilities. To the extent thattaxes are paid by consumers, or passed on to themthrough higher prices, they will have less money to

save, further reducing private capital.

Loss of Productivity

Minimum wage laws, unemploy-ment insurance, employer

mandates, and regulations that make itdifficult to fire workers all drive upthe cost of employment, resulting inless of it. High corporate taxes willdrive some businesses out of thecountry and others into bankruptcy,further adding to unemployment

rolls. Demands for protectionist legislation will becomemore insistent as jobless rates rise. If these demands aremet, even more jobs will be lost as foreign commercecollapses amid escalating trade wars.

As benefits and benefit recipients multiply, and as thenumber of taxpayers declines, the latter will be less andless able to bear the ever-growing burden. Many of themost productive and adaptable will move to countriesthat allow them to keep more of their earnings.

B Y R I C H A R D W. F U L M E R

The Paradox of the Welfare State

Richard Fulmer (richard_w_fulmer@hotmail.com) is a freelance writer fromHumble,Texas.

The material well-being of any society’speople rests on thequantity and qualityof goods and servicesthey produce.

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T h e P a r a d o x o f t h e W e l f a r e S t a t e

While productivity increases can help offset fallingproduction due to a declining workforce, any suchincrease requires either capital investments or innova-tive process improvements. As previously explained,however, welfare states discourage capital formation bydiscouraging savings. Innovation is similarly discour-aged by taxes that reduce or eliminate any profits thatsuch innovation might generate.

Depleting the Ranks

As the population of unproductive citizens grows,either through job loss or through aging, govern-

ment bureaucracies will also grow to meet this risingneed. In addition, as more taxes are levied to pay for thebureaucracies and the programs they administer, gov-ernment tax collection agencies must expand as well.This further depletes the ranks of theproductive, channeling them awayfrom producing wealth to merelyredistributing it. Civil servants aretypically paid more than their private-sector counterparts and are generallyable to retire earlier and on more gen-erous pensions than employees in theprivate sector, further adding to theburdens of productive workers. More-over, the growing ranks of publicemployees form a powerful votingbloc strongly favoring increased gov-ernment spending and more govern-ment control over the economy.

Institutions will grow up around the welfare state,increasing the number of people with a stake in its con-tinuation and growth (and further decreasing the num-ber of productive workers). For example, advocacygroups and law firms will form to help people obtaingovernment benefits and to demand more of such ben-efits. Service providers, such as tax accountants, willspring up to help people deal with increasing bureau-cratic complexity.

Special interest groups like AARP will funnel cam-paign funds and votes to pliable politicians. These pri-vate institutions will combine with governmentagencies in symbiotic, mutually reinforcing alliances.Elected officials can garner votes by acting as advocates

for constituents forced to deal with unresponsive publicagencies. Government departments, wishing to expandtheir “customer base,” will work to make governmentsupport easier to obtain and available to more people.

Job loss, unpleasant in a free-market economy, issoftened by government-provided unemploymentinsurance in a welfare state. Some will find paid unem-ployment agreeable and will delay their return to work,perhaps indefinitely. As more parents become wards ofthe State, more and more children will come to see thisas normal, and generations of families living on welfarewill become commonplace.

Advocacy groups and government agencies chargedwith providing benefits will work to reduce the stigmaassociated with receiving public aid and to justify tak-ing from those who work to give to those who do not.

Poverty must, therefore, be portrayednot as a consequence of self-defeatingactions or poor choices—and cer-tainly not of government action—butas the result of bad luck or oppres-sion. Conversely, wealth must cometo be seen not as the outcome of hardwork and perseverance, but good luckor greed and exploitation. The veryconcept of virtue must be questionedand stood on its head as the TenthCommandment morphs from “Thoushalt not covet thy neighbor’s goods”to “Thou shalt not have goods thy

neighbors covet.”

Feedback Loops

Imagine how dangerous the world would be for aperson without the ability to feel pain (as happens

with certain forms of leprosy). Such a person couldhurt himself terribly by continuing to walk on a badlysprained ankle or putting his hand on a hot stove with-out knowing it. Government largess can create a sort ofmoral leprosy by weakening or even destroying feed-back loops linking cause and effect. As the conse-quences of self-destructive actions (such as droppingout of school, having children out of wedlock, or drugand alcohol abuse) are increasingly borne by others, theincidence of such behavior will rise. At the same time,

The TenthCommandmentmorphs from “Thoushalt not covet thyneighbor’s goods”to “Thou shalt nothave goods thyneighbors covet.”

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R i c h a r d W. F u l m e r

as the benefits of hard work, perseverance, and integrityfall, such virtues can be expected to fade.

The philosophy underlying the welfare state, “Fromeach according to his ability, to each according to hisneed,” leads people to display minimum ability andmaximum need. To the extent this philosophy is actu-ally followed—more often, wealth flows from the polit-ically weak to the politically strong—people will bandtogether along ethnic, gender, religious, and other linesto compete to be seen as the most needy and thereforethe most worthy of a larger share of an ever-shrinkingpie. This downward spiral of competitive self-destruc-tion may well create a permanentunderclass that carefully avoids successand embraces failure—that is, whichacts sensibly in the face of perverseincentives. This competition for taxdollars may create deep, irreparable fis-sures between recipient groups andbetween recipients and taxpayers.

As government grows it willincreasingly be seen as the answer toany and all difficulties, and people willdemand government solutions toincreasingly minor inconveniences.Legislatures will respond by enacting ever-more-strin-gent regulations on individuals and industry, furtherreducing adaptability, independent and entrepreneurialthought, risk-taking, and productivity. Centralized,bureaucratic rule will erode people’s self-reliance, ini-tiative, and sense of local community.

When government begins providing people withgoods and services they can provide for themselves, itlaunches a self-reinforcing trend that will eventuallybecome unsustainable. Once the practice of taking fromone citizen to give to another becomes established,politicians will be unable to resist the urge to bribe vot-ers with their own tax dollars.As legislators’ rewards for

spending other people’s money grow, spending willgrow.

The time it will take a country to spend itself intobankruptcy depends on its initial economic strengthand the strength of its culture. But whether it takes onegeneration or ten, unless the trends reverse, bankruptcymust come.Time can be gained by borrowing or print-ing money, but other countries will eventually stopaccepting the nation’s debt—whether it is in the formof government bonds or in the form of fiat currency.

In the case of the United States, the country is notyet bankrupt, but bankruptcy willsoon be in sight if current policies arenot changed. Social Security will gointo the red this year and Medicarewill shortly follow with even largerdeficits. Current estimates of U.S.debt are on the order of $13–14 tril-lion, an amount equal to the coun-try’s entire gross domestic product.Asmonumental as that number is, itpales in comparison to the presentvalue of the unfunded liabilities ofSocial Security and Medicare, which

total $107 trillion.Of all the changes wrought by the welfare state, a

degraded, dependent culture will have the deadliestimpact and will be the hardest to reverse.Yet the culturemust be changed. This can occur only if government-created incentives that encourage people to live at theexpense of others are replaced by market-createdincentives encouraging the production of goods andservices that people want. Creative marketplace compe-tition to produce more and better products must sup-plant political competition for an ever-dwindling poolof tax dollars extracted from an ever-dwindling pool ofproductive workers.

The competition fortax dollars may createdeep, irreparablefissures betweenrecipient groups andbetween recipientsand taxpayers.

Why is it difficult to prosecute police officersfor criminal misconduct even when theabuse is severe and unequivocal?

A February news item from WSVN-TV in Miami/Ft. Lauderdale points to one reason:

A homeless man’s attorney said surveillancevideo shows deputies used excessive force in hisarrest. Gerald McGovern, 58 [said he] did not attackthem, as charged. Instead, they attacked him. Thepublic defender’s office said thesurveillance video clears McGov-ern and implicates BSO [BrowardSheriff ’s Office]. . . . A witness,Roberto Aguilara, backed upMcGovern’s claim.

Note the omission. The newsreport names the alleged victim, thewitness and (elsewhere) the lawyer butnot the accused deputies. Nor do theirnames appear in subsequent storiesabout an official investigation into allegations that thedeputies used excessive force.

Few people outside law enforcement are familiarwith Police Disclosure Laws (PDLs), which in moststates, including Florida, block the release of informa-tion about an officer’s alleged misconduct until internalinvestigations are completed. Even then, the laws areoften broadly interpreted to block such release. Somestates do not make information public unless criminalcharges are filed or the officer is dismissed. Other statesleave the issue entirely to the police department’s discretion.

The declared purpose of restrictive PDLs is to pro-tect accused officers.With sympathetic courts ruling infavor of PDLs, police unions staunchly defend the prac-tice of granting officers more privacy than others whoare criminally accused. A news story from the NewOrleans Times-Picayune offers a glimpse into the vigorof their defense:

Police unions trying to block news organizations’access to internal police investigations of New

Orleans officers also are waging acampaign in the civil and criminalcourts to keep such records out of thehands of the city’s public defender’soffice. Steve Singer, general counselof the Orleans Public Defenders, saidhis office has filed public recordsrequests for the New Orleans PoliceDepartment’s Public Integrity Bureaufiles of arresting officers in the casesof more than 50 defendants. Theoffice also has sought subpoenas

through Criminal District Court to obtain some ofthese records.

Critics argue that PDLs obstruct justice. The lawsallow police officers to violate rights because they canavoid both transparency and accountability. The lawsdeny victims information that may be necessary to sueor otherwise press a legal case against officers. And byshielding important aspects of accusations—for exam-

B Y W E N D Y M C E L R O Y

Police Misconduct and Public Accountability

31 O C T O B E R 2 0 1 0

Contributing editor Wendy McElroy (wendy@wendymcelroy.com) is anauthor, the editor of ifeminists.com, and a research fellow for theIndependent Institute in Oakland, California.This article first appeared at TheFreemanOnline.org.

Nondisclosure lawsallow police officersto violate rights anddeny victimsinformation that maybe necessary to sue.

W e n d y M c E l r o y

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ple, whether the unnamed officer has been similarlyaccused in the past—the laws discourage the reportingof police abuse, especially by the media, for whom asignificant delay in obtaining information makes a storygrow cold. In turn, the lack of coverage encourages thepublic to believe misconduct is rare; thus those abusedby police are doubly victimized by having theiraccounts dismissed out of hand.

On what legal basis do police departments refusepublic access to information on misconduct by theirofficers?

Almost every state uses the federal Freedom of Infor-mation Act (FOIA) as a model for its own statutes onthe public disclosure of government records. FOIA wasintended to give the public a generalright of access to information held bygovernment agencies. Nevertheless,the nondisclosure about police mis-conduct is generally justified by refer-ence to two common exemptions: the“investigative record” and “privacyright” exemptions. The investigativerecord exemption can be invoked evenafter an investigation is completed.

Strong arguments can be madeagainst both exemptions.

The Investigative Records Exemption.The police units that investigate accu-sations of misconduct are called“internal affairs” or something similar. But are suchaccusations an internal, private matter rather than oneof compelling public interest? The question becomesmore urgent when the alleged misconduct is criminalor involves the violation of constitutional protectionssuch as the right to due process.

When anyone is given a gun and broad authority touse it in public, that same public needs to know if thegun and the authority are being misused. The publicalso needs to know the particulars of how abuse accu-sations are being investigated. For example, has a partic-ular police department established such a high burdenof proof that virtually no accusation against an officercan be sustained?

This compelling public interest is usually overrid-den by the argument that releasing information would

have a “chilling effect” on law enforcement. In theessay “The Public’s Right of Access to Police Miscon-duct Files,” attorney Lynne Wilson comments, “Anumber of federal courts have seriously questioned theempirical basis for a finding that public disclosure ofinternal disciplinary files causes a ‘chilling effect’ onlaw enforcement. One judge said that ‘if the fear ofdisclosure . . . does have some real effect on officers’candor, the stronger working hypothesis is that fear ofdisclosure is more likely to increase candor than tochill it.’”

The Privacy Right Exemption.The police are tax-sup-ported public servants with the authority to violateyour privacy rights. As such, officers should expect to

receive a public review of their per-formance while on duty. The intentof the privacy exemption in FOIA isthe preservation of “personal” pri-vacy, such as sexual preference, that isnot of legitimate concern to the pub-lic. But in its use by police depart-ments, the privacy exemption closesoff examination of the professionalbehavior of public servants.

“[I]t would be difficult to imaginea subject-matter of more legitimateconcern to the public than how itspolice departments are managed,”Wilson writes. “At least one state

court has held that police officers have no privacyrights in misconduct records because the records, bydefinition,‘involve events which occurred in the courseof public service . . . matters with which the public hasa right to concern itself.’”

In short, on-duty police conduct is not an internalor private matter but one of overriding public concern.

Everyone is vulnerable to police misconduct. Dri-vers can be arbitrarily pulled over; anyone can bestopped on the street and questioned. If you encounterthe police, being “within the law” will not protect youagainst an overzealous or hostile officer who does notlike your attitude. Making officers accountable for theiractions is your greatest protection. Police DisclosureLaws are part of what appears to be a continuingattempt by police to avoid accountability.

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When anyone isgiven a gun andbroad authority touse it in public, thatsame public needs toknow if the gun andthe authority arebeing misused.

Teddy Roosevelt and the Progressive Vision of History

Over a hundred years ago, on August 31, 1910,Teddy Roosevelt gave his famous “NewNationalism” speech in Osawatomie, Kansas.

In that speech the former president projected his visionfor how the federal government could regulate theAmerican economy. He defended the government’sexpansion during his presidency and suggested newways that it could promote “the triumph of a realdemocracy.”

Roosevelt’s quest for “a real democracy” and forcentralizing power was a clear break with the Americanfounders. James Madison, for example, distrusted bothdemocracy and human nature; hebelieved that separating power wasessential to good government. Heurged in Federalist No. 51 that “thosewho administer each department” ofgovernment be given “the necessaryconstitutional means and personalmotives to resist the encroachmentsof others. . . .Ambition must be madeto check ambition.” If power was dis-persed, Madison concluded, libertymight prevail and the republic mightendure.

Roosevelt argued in this speech that the recent riseof corporations gave businessmen too much economiccontrol. Madison’s constitutional restraints, therefore,allowed too much wealth to be concentrated in too fewhands. Redistribution of wealth by government, Roo-sevelt thought, would achieve “a more substantialequality of opportunity.”

The economic power of railroads triggered Roo-sevelt’s ire during his presidency. He was frustrated thatrailroads gave rebates to large customers. In effect, therailroads charged varying rates for carrying the sameproducts the same distance. Roosevelt thought ratesshould be roughly similar for large shippers and small

shippers, especially if the small shippers were far frommajor cities.

He posed the problem this way: “Combinations inindustry are the result of an imperative economic lawwhich cannot be repealed by political legislation. Theeffort at prohibiting all combination has substantiallyfailed. The way out lies, not in attempting to preventsuch combinations, but in completely controlling themin the interest of the public welfare.”

In practical terms,“completely controlling” railroadsin the public interest meant that the Interstate Com-merce Commission (ICC) would have power to set

rates so that larger shippers would notget such big discounts on their highvolume of business. James J. Hill, pres-ident of the Great Northern Railroad,argued that large shippers receivedhigher rebates because their massivebusiness created “economies of scale”for the railroads—that is, railroadscould reduce their costs best whenshipping large amounts of goods overthe rails. The bigger shippers con-tributed more to the reduced costs of

shipping, so they got larger rebates.To Roosevelt and to the smaller shippers, rebates for

the bigger shippers were “unfair money-getting” andhave “tended to create a small class of enormouslywealthy and economically powerful men, whose chiefobject is to hold and increase their power.” Thefounders may have provided a “right to life, liberty, andthe pursuit of happiness,” but Roosevelt believed thatthe pursuit of happiness and private property were notabsolute. “We grudge no man a fortune which repre-

Burton Folsom, Jr. (bfolsom@hillsdale.edu) is a professor of history atHillsdale College and author of New Deal or Raw Deal? He blogs atBurtFolsom.com.

Roosevelt’s quest for“a real democracy”and for centralizingpower was a clearbreak with theAmerican founders.

B Y B U R T O N F O L S O M , J R .

Our Economic Past

33 O C T O B E R 2 0 1 0

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sents his own power and sagacity,” Roosevelt said—butthen added, “when exercised with entire regard to thewelfare of his fellows.” If railroads were enrichingthemselves and larger shippers disproportionately to thesmaller shippers, then Roosevelt believed such powerto set rates needed to be limited: “The Hepburn Act,and the amendment [Mann-Elkins Act] to the act inthe shape in which it finally passed Congress at the lastsession [1910], represent a long step in advance, and wemust go further.”

The Hepburn Act gave the ICC the power toreduce railroad rates and placed the burden on railroadsto show their rates were reasonable. One interventionled to another.The railroads now hadto prove that the rates they set werefair, so Congress created a Bureau ofValuation, which was empoweredwith a huge staff to value railroadproperty. According to historian AriHoogenboom, the bureau’s “finalreport, issued after a twenty-yearstudy costing the public and the rail-roads hundreds of millions of dollars,disproved assumptions by Progressivesthat railroads were . . . making fabu-lous returns on their true investment.”

The lesson that Roosevelt learned from passing theHepburn Act was that federal power was needed tobreak up those businesses that engaged in price dis-crimination. “The citizens of the United States,” Roo-sevelt said, “must effectively control the mightycommercial forces which they have called into being.”

Once Roosevelt established that the federal govern-ment should regulate the prices railroads charged forshipping, the next step was to intervene in other indus-tries as well. “In particular,” Roosevelt argued in hisspeech, “there are strong reasons why . . . the UnitedStates Department of Agriculture and the agriculturalcolleges and experiment stations should extend theirwork to cover all phases of farm life. . . .” He added,“The man who wrongly holds that every human rightis secondary to his profit must now give way to theadvocate of human welfare, who rightly maintains that

every man holds his property subject to the generalright of the community to regulate its use to whateverdegree the public welfare may require it.”

The shift from the individual rights of the foundersto the community rights of the Progressives was awatershed transition in American thought in the early1900s. But Roosevelt needed a federal income tax tohelp him redistribute wealth in the national interest.The title “New Nationalism” reflected his view that heand other leaders could determine the national interestand redistribute wealth and power accordingly.

Of the income tax Roosevelt said, “The really bigfortune, the swollen fortune, by the mere fact of its size,

acquires qualities which differentiateit in kind as well as in degree fromwhat is possessed by men of relativelysmall means,Therefore, I believe in agraduated income tax on big for-tunes, and in another tax which is farmore easily collected and far moreeffective—a graduated inheritancetax on big fortunes, properly safe-guarded against evasion, and increas-ing rapidly in amount with the size ofthe estate.”

Three years after Roosevelt’sspeech, the Sixteenth Amendment, authorizing a fed-eral income tax without regard to source became law.Roosevelt had his wish—the 1913 tax was progressive:Most people paid no income tax, and the top rate was7 percent. Roosevelt probably envisioned rates notmuch higher than that, but once Congress establishedthe principle that some people could be taxed morethan others, there was no way to calculate or determinewhat the national interest was.

Within one-third of a century after Roosevelt’sspeech, the United States had a top marginal incometax rate of more than 90 percent.

When the individual liberty of the founders wastransformed into the national interest of Teddy Roo-sevelt and the Progressives, we were only one genera-tion away from a major threat to all our personalliberties.That threat still exists today.

The shift from theindividual rights ofthe founders to thecommunity rights ofthe Progressives was awatershed transition.

B u r t o n F o l s o m , J r.

O C T O B E R 2 0 1 035

The late revered British economist John May-nard Keynes, whose 1936 treatise, The GeneralTheory of Employment, Interest, and Money,

changed the way many economists think about reces-sions, once wrote that “in the long run we’re all dead.”Well, maybe so . . . for everyone but Keynes.

Keynes’s ghost has haunted the halls of the Bush IIand Obama administra-tions, where various “stim-ulus” packages were con-cocted. The Keynesianarguments undergirdingthe fiscal stimulus frothover the past two yearswent remarkably unrecog-nized in the media for theirone-sidedness. The basicstimulus argument goessomething like this: If the federal governmentengages in deficit spendingduring a recession, theadded government expen-ditures (unaccompanied bytax increases) will boost“aggregate demand.” Greater federal spending on aroad, for instance, will create jobs for constructionworkers, who can be expected to spend some if not allof their additional income on, say, bread. Bakers nowwill have more to spend on, say, cars and so on.

National income stimulated by the initial governmentroad project can grow by some multiple of the expendi-ture, the theory says. It can even be wasted on pork-bar-rel construction projects like bridges to nowhere,

according to Keynes. He even dared to advocate that thegovernment bury dollars in bottles. Entrepreneurs couldthen be expected to spend money digging up the bot-tles, unleashing the multiplier magic and reducingunemployment (in the same illusory way).

A stimulus package (and budget deficit) of, say, $1trillion would morph in short order, stimulus backers

have assured us, into a min-imum of $1.5 trillion inadditional national income—maybe even into $4 tril-lion or $10 trillion. Pickyour multiplier, because no one in Washington oracademe really knows what it is. Even the best of econometricians can’taccurately assess the multi-plier when the current cri-sis is “unprecedented,” aswidely claimed.

Fantastic, wouldn’t youagree? Keynesianism offersthe proverbial free lunchseveral times over.

But if it sounds too good to be true, it is. If suchincome growth were possible, the country and theworld would now be awash in prosperity, given that thefederal government increased the national debt by$1.88 trillion in fiscal 2009 and could run deficits of

B Y R I C H A R D B . M C K E N Z I E

John Maynard Keynes, R.I.P.

Richard McKenzie (mckenzie@uci.edu) is a professor in the MerageSchool of Business at the University of California, Irvine. He is authormost recently of Why Popcorn Costs So Much at the Movies, andOther Pricing Puzzles.

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R i c h a r d B . M c K e n z i e

$1.6 trillion and $1.3 trillion in fiscal 2010 and 2011,respectively. Between 2012 and 2015 it will add at leastanother $3 trillion to the national debt.Why not go foreven greater deficit spending, if Keynesian theoryworked so magically? Of course, many Keynesianenthusiasts have recommended stimulus packages twoand three times what the Bush and Obama administra-tions sought two and three years ago, with little to norecognition that an escalation in the size of the deficitcan, at least beyond some point, curb any multipliereffect (if there were the prospects of a positive one) asthe budget deficit rises and crowds out expenditures inprivate sectors of the economy.

In the 1960s Keynesianism was followed as fiscal reli-gion, but by the 1970s economists found it to be a snareand delusion for a simple reason:The political version ofKeynesianism is a one-sided theory, with almost totalemphasis on what the federal govern-ment spends. It pays virtually no atten-tion to the potential private-sectoroffsets to the greater deficit spendingby government or to how current fiscalpolicies could have negative long-runreal income effects that can feed thecurrent generation’s expectations of impaired futures.Keynesianism, in the form practiced in political circles,has no appreciation for how people’s expectations canaffect their current spending and investing plans.

The late great economist Milton Friedman fre-quently peppered Keynesian enthusiasts in the 1960sand 1970s with a remarkably simple question that needsto be remembered today: Where does the governmentget the money it spends on roads (or bridges tonowhere)? Friedman followed with an equally revealingobservation: When the government engages in deficitspending, it must borrow the extra funds from someonewho could have spent them on private-sector projects.An increase in government spending could be totallyoffset by a decrease in—or a “crowding out” of—pri-vate spending, as lendable funds are diverted from pri-vate to government uses.The net effect can be no netincrease in aggregate demand—and no multipliereffect. Indeed, with the inevitable waste in governmentstimulus projects, the multiplier effect could as easily benegative as positive.

Okay, in a down economy some of the funds the gov-ernment borrows to cover stimulus expenditures mighthave remained idle, which can mean that the increase ingovernment spending is not totally offset. But Friedmanstill has a point:The multiplier effect of greater govern-ment spending will be muted at least somewhat andmaybe in large measure. Commentators who tout theglories of stimulus packages and bemoan the difficultythat small and large businesses and consumers have beenhaving in finding credit never seem to make the causalconnection that government borrowing can dry up, andhas dried up, credit for nongovernmental purposes.Whyshould banks loan their available funds to people forrisky private projects when they can loan their funds atlittle risk to the government, with 300-million-plusAmericans it can tax to cover the debt?

The Piper Don’t Take Visa

Keynesian policy advocatesrightfully assume that if the

government hikes taxes along withexpenditures, the stimulus effects ofthe added government spending willbe seriously muted, maybe negated.

The problem is that American taxpayers aren’t thefools the Keynesian advocates would like to thinkthey are. With the potential of a doubling of thenational debt over the next ten years, many not-so-stupid Americans can anticipate that the fiscal piperwill have to be paid in the future—with higher taxrates on future incomes. The anticipation today ofthose higher future tax rates can dampen privatedemand, as people set aside savings for future highertax payments and as they refrain from making all theinvestments that can translate into higher futureincomes—which will be taxed at higher future rates.And higher tax rates imposed currently on the richcan affect many now poor Americans’ saving andinvestment plans because they expect to be not-so-poor, and maybe rich, in the future. In short, theanticipated future tax rates will be another offset totoday’s stimulus expenditures.

Then you have the threat of future inflation fromtoday’s fiscal profligacy.The anticipated higher inflationis seen as a wealth tax. If the government has little debt,

The political versionof Keynesianism is aone-sided theory.

37 O C T O B E R 2 0 1 0

it gains little by hiking the inflation rate to lower thereal value of its debt. However, when the debt grows toenormous levels, as already budgeted, the government’stemptation to inflate away its own debt—and thewealth of bond holders—grows concomitantly.And wemust not forget the lessons learned in the inflationary1970s: Inflation, and inflationary expectations, can havedebilitating effects on the real economy—in people’sreal income and real income expectations and, thus, oncurrent demand.

Of course, if debt holders begin to worry that the realvalue of their debt will depreciate due to any futureorchestrated government inflationary policy, all thoseforeign bondholders—most notably, the Chinese andBritish—might lose confidence in the internationalvalue of the dollar, which can cause them to dump theirdollar-denominated bonds on international money mar-kets, which in turn can lead to a dete-rioration in the international value ofthe dollar and to a reduction in the realincomes of Americans across theboard—and to contraction in privatedemand, yet another offset to govern-ment stimulus spending.

Perverse Politics

Even if Keynesianism had validity,we would still have to worry that the politics of the

day would pervert the goal of reviving the economy aspoliticians fall over themselves to pack “stimulus pack-ages” with pork, designed mainly to stimulate the pri-vate economies of their supporters and not the nationaleconomy. (Indeed, that is what happened). As econo-mists James Buchanan and Richard Wagner argued longago, Keynesian economics provides a grand excuse forpoliticians to do what they love to do: spend other peo-ple’s money without having to incur the current polit-ical costs of asking them to cover the expenditures withhigher taxes. Make no mistake about it, Keynesianismhas the potential of transforming the United States inthe not-too-distant future into a financial basket casemuch like Greece, Spain, and Ireland are today.

The Keynesian recovery prescription never gets sil-lier than when, as noted, advocates claim that the eco-nomic merit of the funded government projects is of

little consequence. What counts for them is morespending.That couldn’t possibly be true, given Keyne-sian insistence that private aggregate demand is inextri-cably tied to aggregate real income. If a bridge tonowhere is built, the bridge is obviously of no eco-nomic value, which means it adds nothing to nationalincome. Its construction must draw resources at leastsome (if not all) of which could have been used to pro-duce something of real value to people. Bridges tonowhere can only undermine any potential Keynesianmultiplier effect. If anything, bridges to nowhere musthave a negative multiplier effect through the effect ofthe impairment of long-term income growth over timethrough the depression of aggregate demand.

But Keynes and his followers failed to appreciatethe extent to which the long-run effects of short-runpolicies can affect people’s wealth and income expec-

tations, which in turn can underminetheir current buying decisions. Ifpeople’s expected future incomes andwealth holdings are reduced (fromwhat they would otherwise be), thensurely Keynesians would, for the sakeof consistency in argument, have toconclude that current private con-sumption and investment demandwould also be suppressed, which

would partially negate the so-called stimulus packages.Finally, when a national economy gets seriously out

of whack as happened over the last decade—with hous-ing prices rising to unsustainable levels because of anunsustainable credit binge, with the rising housingprices fueling the demand for big-ticket consumergoods as homeowners used their houses as ATMs—then the only route to recovery is a painful one, withfalling housing prices, lost jobs, and foreclosed homes.Ownership of houses, office buildings, and plants mustbe shifted from those who can no longer afford them tothose who can afford them and can use them produc-tively and profitably at the lower prices.

So much of what the government has done underthe guise of stimulating the economy has been directedat retarding the required adjustments—and thereforepreventing the recovery. The government has workedhard to prevent housing prices from falling as far as they

What counts forKeynesians is morespending, and never mind theeconomic merits.

J o h n M a y n a r d K e y n e s , R . I . P.

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must by offering tax credits to first-time homebuyersand slowing the pace of home foreclosures. The Cashfor Clunkers program has been a policy clunker initself, given that it caused a minor boom and bust inautomobile sales, just as the homebuyer tax credit dis-torted sales of houses over time. These are hardly thekinds of stabilizing forces the economy needs in timesof instability.

Then, of course, the federal government has chosento fight the devastating consequences of the privatecredit binge of the last decade with a credit binge of itsown (with nearly one out of every two recent budgetdollars financed with debt, or leverage). If the privatecredit binge gave rise to the moral hazard of excessiverisk-taking in the private sector (by banks, nonbanks,homeowners, and credit card holders),should anyone not expect the sameexcessive risk taking in the politicalsphere when the government heavilyleverages its current spending? Suchrisk-taking shows up in the govern-ment’s adopting the mantra of Keyne-sian stimulus economics even when ithas little promise of yielding theresults promised and carries the nontrivial risk of dam-aging the future growth path of the private economy.

Given all the Keynesian hype over the past two tothree years, one fact stands out:The recovery has beenweaker than what would have been expected from thepromises of Keynes’s devotees.

Nevertheless, a recovery (at this writing) appearsunderway, albeit more delayed than past recoveries. But,as argued here, everyone should harbor deep skepticismthat the current weak signs of recovery can be traced tothe stimulus packages of the last couple of years, espe-cially since the rate at which displaced workers havebeen finding new jobs has been the most sluggish of allrecessions since World War II. This is partially becausegovernment policies have gradually increased the long-term costs of firms hiring workers, with the mostrecent imposed burden being the effective nationaliza-tion of health care and health insurance.

Think the analysis here is pie-in-the-sky theory?Well, Harvard macroeconomist Robert Barro has esti-mated that the five-year effects of $600 billion in fiscalstimulus over the past two years will come at a cost of$900 billion in reduced private demand. That’s hardlythe free lunch the country has been promised.

The Obama administration has not been shy in itsfirst year about floating a variety of tax-hike proposals,supposedly for higher-income groups. And theexpected federal budget deficits harbor threats of majorfuture tax increases, as a growing list of researchers arefinding. For example, the Congressional Budget Officeprojects that under current law (with marginal incometax rates unchanged), the national debt will almost dou-ble, rising by more than $11 trillion, between 2009 and

2020. Researchers at the Tax PolicyCenter figure, optimistically, that ifthe annual deficits are reduced to 2percent of GDP between now and2020 and if all tax rates are raisedproportionately for all incomegroups, the lowest federal incomemarginal tax rate would have to risefrom 10 to 15 percent and the high-

est marginal rate would have to rise from 35 percent to52 percent. If the deficit were lowered only by raisingthe top two marginal tax rates, now 33 and 35 percent,those top rates would have to go 86 and 91 percent—which of course might actually worsen the deficits,given that the current “rich” and the “rich-wannabes”would have little incentive to work, save, and invest.

The country will learn anew an old lesson: Don’tcount on the federal government to wave away thecountry’s economic troubles with some refurbishedfiscal wand. The wand didn’t work in the 1960s and1970s (it only contributed to “stagflation”).The wandis an illusion that should have died with Keynes longago. We will also relearn the oft-repeated wisdom ofKeynes when he wrote, “Madmen in authority, whohear voices in the air, are distilling their frenzy fromsome academic scribbler of a few years back.”

How true, how true! Regrettably.

The recovery hasbeen weak, contraryto the promises ofKeynes’s devotees.

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B Y J O H N S T O S S E L

Attacks on Freedom

Give Me a Break!

Something’s happened to America, and it isn’tgood. It’s become easier to get into trouble.We’vebecome a nation of a million rules. Not the kind

of bottom-up rules that people generate through vol-untary associations. Those are fine. I mean imposed,top-down rules formed in the brains of meddlingbureaucrats who think they know better than we howto manage our lives.

Cross them, and we are in trouble.The National Marine Fishery Service (NMFS)

received an anonymous fax that a seafood shipment toAlabama from David McNab contained “undersizedlobster tails” and was improperlypacked in clear plastic bags, ratherthan the cardboard boxes allegedlyrequired under Honduran law. Whenthe $4 million shipment arrived,NMFS agents seized it. McNab servedeight years in prison, even though theHonduran government informed thecourt that the regulation requiringcardboard boxes had been repealed.

The Kids Are Alright—Or ElseHow about this one? Four kindergartners—yes, 5-

year-old boys—played cops and robbers at Wilson Ele-mentary in New Jersey. One yelled: “Boom! I have abazooka, and I want to shoot you.” He did not, ofcourse, have a bazooka. Nevertheless, all four boys weresuspended from school for three days for “makingthreats,” a violation of their school district’s zero-toler-ance policy. School Principal Georgia Baumann said,“We cannot take any of these statements in a lightmanner.” District Superintendent William Bauer said:“This is a no-tolerance policy. We’re very firm onweapons and threats.”

Give me a break.These are just some of the storiesfeatured in a new book, One Nation Under Arrest, whichI discussed on my show July 15 (www.tinyurl.com/2g9oxvx).

Here’s another: Ansche Hedgepeth, 12, committedthis heinous crime: She left school in Washington, D.C.,entered a Metrorail station to head home and ate aFrench fry. An undercover officer arrested her, confis-cating her jacket, backpack, and shoelaces. She washandcuffed and taken to the Juvenile Processing Cen-ter. Only after three hours in custody was the 12-year-

old released into her mother’scustody. The chief of Metro TransitPolice said: “We really do believe inzero-tolerance. Anyone taken intocustody has to be handcuffed for offi-cer safety.” She was sentenced tocommunity service and now carriesan arrest record. Washington’s Metrohas since rescinded its zero-tolerancepolicy.

Keith John Sampson, a student-employee at Indiana-Purdue Univer-

sity Indianapolis, had the temerity to read Notre DameVersus the Klan: How the Fighting Irish Defeated the KuKlux Klan during breaks on the job. One student com-plained because the book’s cover depicted the Klan.The university then found Sampson guilty of racialharassment! Thankfully, a great organization, the Foun-dation for Individual Rights in Education (FIRE),came to his defense and got his school record cleared.

John Stossel hosts Stossel on Fox Business Network and is the author ofMyths, Lies, and Downright Stupidity: Get Out the Shovel—WhyEverything You Know is Wrong. Copyright 2010 by JFS Productions,Inc. Distributed by Creators Syndicate, Inc.

We’ve become anation of a millionrules of the sortformed in the brains of meddlingbureaucrats.

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J o h n S t o s s e l

Palo Alto, California, ordered Kay Leibrand, a grand-mother, to lower her carefully trimmed hedges.Leibrand argued that no one’s visionwas obstructed and asked the codeofficer to take a look. He refused.Then the city dispatched two policeofficers.They arrested her, loaded herinto a patrol car in front of her neigh-bors, and hauled her down to the sta-tion.

In 2001, honor student LindsayBrown parked her car in the wrongspot at her high school. A countypolice officer looked inside and saw a kitchen knife—a butter knife with a rounded tip. Because Lindsay wason school property, she had violated the zero-tolerance

policy for knives. She was arrested, handcuffed, andhauled off to county jail, where she spent nine hours

on a felony weapons possessioncharge. School Principal Fred Bodetold a local paper, “A weapon is aweapon.”

Congress creates, on average, onenew crime every week. Federal agen-cies create thousands more—so many,in fact, that the CongressionalResearch Service itself said thatmerely counting them would beimpossible.

This is a bad trend.As Lao Tsu said,“The more lawsand order are made prominent, the more thieves androbbers there will be.”

Congress creates,on average, one new crime everyweek. Federalagencies createthousands more.

Start your weekday morning with

One click of the mouse … and FEE’s popular news e-commentary will come to your computer five days a week.

Subscribe online: www.thefreemanonline.org or e-mail: Inbrief@fee.org!

41 O C T O B E R 2 0 1 0

Book Reviews

Getting Off Track: How Government Actions andInterventions Caused, Prolonged, and Worsenedthe Financial Crisis

by John B.TaylorHoover Institution Press • 2009 •92 pages • $14.95

The Housing Boom and Bustby Thomas SowellBasic Books • 2009 • 192 pages • $24.95

Reviewed by Gerald P. O’Driscoll, Jr.

These two books are must-reads for anyone wanting to

have a working understanding ofthe economic and financial crisis.They complement each other andtogether form a civics lesson foran informed electorate.

Economists are prone to writeturgid prose and employ a jargon-filled style. Not these two gems.

Each author is a deservedly well-regarded economist,eminent in his field, but their books are written for thelayman. Both draw on detailed academic research, butneither requires the reader to wade through thickets ofcitations.

Taylor poses these questions: “What caused thefinancial crisis? What prolonged it? What worsened itdramatically more than a year after it began?” Hisanswer in each case is first and foremost “specific gov-ernment actions and interventions.” The heart of hisargument is a criticism of Fed monetary policy underAlan Greenspan in the aftermath of the collapse of thedot-com bubble.The Fed cut interest rates and contin-

ued cutting aggressively, taking the short-term interestrate under its control (the federal funds rate) down to 1percent. The rate stayed at 1 percent for a year. Othermarket interest rates fell as well.The artificially low costof borrowing fueled the housing boom.

Taylor uses a figure to compare housing starts asthey actually occurred in the boom with a counter-factual simulation—as they would have occurred hadthe Fed adhered to policies that began in the early1980s and continued into the 1990s. The result: “NoBoom, No Bust” in housing. Not everyone agreesthat monetary policy was so benign throughout theperiod dubbed the “Great Moderation.” But the Fed’scheap money policy after 2000–01 brought backvolatility in housing and the economy last seen in the1970s.

Taylor explains how the Fed exported its easymoney to other countries (especially the EuropeanUnion), drawing them into the crisis. He also examinesthe many other complications, including such issues asthe actions of Fannie Mae and Freddie Mac, and therole of securitization. His analysis of the many policymissteps in response to the crisis is masterful.These pol-icy errors prolonged the crisis.

While Taylor covers a broad array of issues, focus-ing particularly on monetary policy, Sowell focuses on the housing market itself, chronicling the “sky-rocketing rise” in home prices. From 2000 to 2005the median sales price of a single-family home rose 53percent, from $143,600 to $219,600. In the priciestmarkets, like New York City, Los Angeles, and SanDiego, prices escalated at an even more rapid rate (79,110, and 127 percent, respectively). How could homeprices have increased so much in such a short period,then fallen so fast?

Sowell also asks the commonsense questions.“Whenit comes to the home mortgage boom and bust, whowas to blame? The borrowers? The lenders? The gov-ernment? The financial markets?” He answers yes to allthe above and notes that “economics cannot explainsuch things.” Politics drove the housing boom, and heturns to the politics.

First, there is the wonderfully misnamed policy of“affordable housing.” Never precisely defined, it is a complex combination of misguided policies. They

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Book Reviews

include policies to lower borrowing costs, down pay-ments, lending standards, and, generally, costs of home-ownership. Instead they have together combined toincrease housing costs.As Sowell observes, it is preciselywhere government intervention in housing is thegreatest that housing costs are highest.

Government housing policies have been at war withthemselves. Sowell cites the case of housing in coastalCalifornia, now one of the highest-priced markets inthe country.As late as 1969, however, home prices therewere affordable by a number of measures and in linewith home prices in the rest of the nation. In the 1970sCalifornia began introducing land-use restrictions thatdrove up costs for lots and their development. Heexamines alternative explanations for the rapid escala-tion in prices and concludes it was the land-use policiesthat were responsible for astronomical housing costs incoastal California.

California’s land and housing policies wereextreme, but not unique. So we have longstandingpolicies restricting the supply of land and homesmeeting policies to stimulate demand.When demandis stimulated and supply restricted, prices will neces-sarily increase. Land-use restrictions, affordable hous-ing, and easy credit caused the housing boom andbust.

For the full story, I recommend these two estimablebooks to The Freeman’s readers.

Gerald P. O’Driscoll, Jr. (gpo@ix.netcom.com) is a senior fellow at theCato Institute and former a vice president at the Federal Reserve Bank ofDallas.With Mario Rizzo, he is coauthor of The Economics of Timeand Ignorance.

Arthur Seldon: A Life for Libertyby Colin Robinson Profile Books • 2009 • 256 pages • £20

Reviewed by Martin Morse Wooster

Historians who look at thinktanks usually write about

their presidents or scholars. ButColin Robinson’s life of ArthurSeldon (1916–2005) is one of thefew biographies that looks at athink-tank editor.Although Seldonwas a prolific author, whose col-lected works fill seven volumes, his

most important legacy was as cofounder and editorialdirector of Britain’s Institute of Economic Affairs (IEA)from 1957 to 1988.While with the IEA Seldon editedover 350 books, many of which significantly influencedMargaret Thatcher and her allies in Britain’s free-mar-ket reforms of the 1980s. Arthur Seldon:A Life for Libertysubstantially adds to our knowledge of this importantfigure.

This biography’s primary author is Colin Robinson,an emeritus professor at the University of Surrey andSeldon’s successor as IEA editorial director. But the firstchapter adapts an unpublished manuscript by ChrisTame, who was commissioned to write Seldon’s biog-raphy but died before finishing his manuscript. In addi-tion, Martin Anderson, Stuart Waterhouse, and BasilYamey, who knew Seldon at various periods of his life,supply reminiscences.

Arthur Seldon was born Abraham Margolis in Lon-don in 1916. After his parents died in 1918, he wasadopted by Eva and Mark Slaberdain and given thename Arthur Slaberdain. In 1939 he changed his nameto Arthur Seldon.

Robinson finds several influences on Seldon’s earlythinking. He grew up in a Jewish ghetto whose resi-dents believed in self-reliance and self-help organiza-tions as the way to climb out of poverty. A historyteacher in high school, E. J. Hayward, taught coursesthat strongly emphasized the importance of liberty inBritish history. In 1934 Seldon won a scholarship tothe London School of Economics, where his studieswith F. A. Hayek, Ronald Coase, Lionel Robbins, and

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Book Reviews

Arnold Plant enhanced his understanding of free-mar-ket economics.

After serving in the British army during the war,Seldon worked for a magazine about retail stores andfor the Brewers’ Society until he was recruited for theInstitute of Economic Affairs in 1956.The IEA was thefirst British free-market think tank. Seldon’s job asIEA’s principal editor, Robinson writes, was to producestudies “to be written primarily by academic econo-mists but carefully edited by him—with the specificpurpose of explaining, in language that could be under-stood by those not technically trained in economics,the practical benefits of voluntary action in competitivemarkets, the virtues of self-help and the disadvantagesof state intervention.”

Seldon was a masterful editor, able to turn denseeconomic treatises into pellucid prose. He inventedthe idea of a series of papers, between 10,000 and15,000 words each, which argued for a particularreform. Many economists, even those sympathetic toIEA’s free-market positions, chose to limit their con-clusions to what they considered “politically possible.”Seldon urged his authors to pursue their analyses totheir logical conclusions—even if those conclusionswere quite radical.

Seldon liked to use a military metaphor to explainIEA’s goal.The institute, he argued, would be like long-range artillery, launching shells into statist lines from agreat distance.The IEA, he argued,“would never be theinfantry, engaged in the short-term face-to-face grap-pling.” Rather than quickly generated policy analyses,Seldon believed that the IEA should produce thor-oughly researched, detailed studies to persuade a skepti-cal audience of the virtues of the market.

Over his career Seldon edited many great econo-mists, including Milton Friedman and Gordon Tullock.Most of the authors respected his skills as an editor.Hayek admired Seldon’s editorial work so much that heasked Seldon to complete his trilogy Law, Legislation,and Liberty if he passed away before he finished it(thankfully, that didn’t happen). Seldon’s influenceshows up in surprising places; according to MartinAnderson, Seldon’s assistant in the 1970s and 1980s, he“was an enthusiastic adviser” to Anthony Jay andJonathan Lynn when they wrote the scripts for “Yes,

Minister,” a television comedy that remains a veryfunny critique of government bureaucracy.

As for Seldon’s own writings, Robinson finds twoworks particularly significant. In 1968 Seldon nearlydied because of a botched blood transfusion followingan ulcer operation. Seldon’s response was The Price ofBlood, a controversial study that called for blood to bebought and sold.Another important book was The Rid-dle of the Voucher (1986), an exploration of why Britainfailed to adopt educational vouchers.

How significant was Seldon? In economics, Robin-son argues that Seldon was crucial both in introducingPublic Choice theory to Britain and in emphasizingthe importance of monetary economics, by publishingpapers by Milton Friedman and Sir Alan Walters.Robinson also believes that Seldon-edited papers pro-vided analyses used by the Thatcher administration inBritain’s deregulation of the 1980s.

Arthur Seldon:A Life in Liberty is an important biog-raphy of a major libertarian figure.

Martin Morse Wooster (mmwooster@yahoo.com) is a writer and editorliving in Silver Spring, Maryland.

Antipsychiatry: Quackery Squaredby Thomas SzaszSyracuse University Press • 2009 • 188 pages • $24.95

Reviewed by Ron Roberts

In this latest work, Freemancolumnist Thomas Szasz fires

another salvo in his continuing cri-tique of the disasters wrought bycontemporary psychiatry—specifi-cally its penchant for coercivepseudomedical interventions thatmasquerade as treatment whiledepriving people of their liberty.

Here, however, the focus is more specific, with Szaszproviding the definitive critique of what has erro-neously come to be known as the anti-psychiatrymovement.

As is customary with Szasz’s work, there is painstak-ing historical analysis, beginning with the term “anti-psychiatry movement.” That term originated not, as

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Book Reviews

might be thought, in the 1960s, when it became syn-onymous with the work of Scottish psychiatrist R.D.Laing and his colleague David Cooper, but in late nine-teenth-century Germany. Then as now the term wasemployed, Szasz writes, to “divert people’s attentionfrom the core moral-political problems of psychiatry,coercion and excuse making.” In short, it was a dismis-sive label to prevent serious criticism of psychiatry.

The “antipsychiatry movement” was largely ignoreduntil the late 1960s when Laing and his allies sought todraw attention to themselves by appropriating the labelfor their critique of conventional psychiatry. Szaszargues that despite some differences between mainlinepsychiatry and Laing and his followers, their actionswere in fact fully in accord with psychiatry’s centralprecepts. Laing and his allies held a core belief in theexistence of mental illness as a medical entity—to betreated with drugs if necessary—and a belief in theirown power to cure people of purported mental illness,with the use of force if required. As such, rather thanchallenging, as is usually thought, psychiatry’s custom-ary mores, Laing and his associates are described aspracticing an alternative form of it and thereby rein-forcing the myth of mental illness that Szasz has cor-rectly challenged for almost 50 years now.

Readers coming to the book with some knowledgeof Laing’s work will be disappointed and somewhatshocked to see his inconsistencies exposed. His employ-ment of forced “treatment” at Kingsley Hall (the anti-psychiatric “residence” in the East End of London ) isdissected in detail. Disconcerting though it may be, weare better and wiser for this knowledge. As is wellknown, Laing’s behavior, often fueled by alcohol, couldbe particularly unpleasant. Szasz highlights his inconsis-tencies: While he made lucid attacks on the barbaricnature of psychiatric treatment, he was ultimately inca-pable of rejecting the movement that gives rise tothem. Laing compromised and sacrificed the potentialstrength of his arguments in pursuit of establishmentrecognition and fame.

Szasz meticulously documents Laing’s desire towork both within and outside the established systemat the same time and depicts him as a “trickster”—willfully exposing psychiatric brutality at the start ofhis career, but subsequently endorsing the “standard

of care” of modern biological psychiatry as his swansong. Laing and Cooper emerge as sad and rather dis-turbing people, notwithstanding the effect they hadon others.

To describe Laing as a “bad person,” as Szasz does,seems somewhat harsh, but that probably reflects Szasz’sdisappointment in him. Laing had the potential to con-tribute greatly by exposing the medical myth-makingat the dark heart of psychiatry, but threw it away amidsta trinity of drink, abuse, and desire for celebrity.

In sum, Szasz makes a strong argument that the“antipsychiatrists” have presented only a very limitedvision of liberation for the psychiatric service user.Thechanges that are required in society to restore freedomand dignity to those said to be “mentally ill” need agreater vision than theirs.

This is an important book, and it deserves to be readclosely alongside Szasz’s other works. For those with anearnest desire to support human freedom, it providesmore food for thought about the damage wrought,under the guise of benevolence, by the relentless psy-chiatric machine.

Ron Roberts (R.A.Roberts@kingston.ac.uk) is senior lecturer inpsychology at Kingston University in London.

Weapons of Mass Instruction: A Schoolteacher’sJourney Through the Dark World of CompulsorySchooling by John Taylor GattoNew Society Publishers • 2010 • 240 pages •$24.95 hard cover; $16.95 paperback

Reviewed by George Leef

An annoying bumper sticker Ihave seen on occasion reads,“If

you think education is costly, tryignorance.” That trope is meant tobreak down resistance to the educa-tion establishment’s desire to shop-vac in as much taxpayer money aspossible. The trickery is subtle—

deceive people into equating schooling with education.What the education establishment does is the former. Itabsorbs prodigious amounts of money to keep children

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in a building called school.Whether the children actu-ally acquire any education is immaterial.

Most Americans are suckers for this hokum becausemany generations of us have been told that the alterna-tive to schooling as we know it (classrooms, teachers,textbooks, tests, grades, school days, semesters, and so on,organized and mandated by the government) is igno-rance.That idea is supported by an enormous and cease-less propaganda campaign. But what if the idea is false?What if officially approved schooling actually inhibits ayoung person’s education? What if it crowds out moreeffective forms of learning, much as government welfaretends to crowd out more effective voluntary charity?

That is precisely what John Taylor Gatto argues inthis incendiary book.

Gatto, who was the New York State Teacher of theYear decades ago, came to realize that the schooling hehelped provide was at best useless and often detrimen-tal to the children the state’s system was supposed toserve. Since leaving the teaching ranks, Gatto has madehimself the most non grata of persona by speaking hismind on the disconnect between the purported aims ofschooling and its true effects.

How much his message upsets the educrats isrevealed in one incident he recounts. Gatto had beeninvited to speak to the students at a high school in awealthy New York City suburb. (Later in the day, he wasgoing to address their parents.) He was proceedingalong with his polite, low-key discussion with the stu-dents when he was suddenly interrupted by police offi-cers storming into the assembly room. The officersbarked orders for everyone to remain calm (which theyhad been until then) and yelled that the assembly wasover and everyone must leave immediately. Gatto wasnaturally shaken and sought an explanation. Theschool’s superintendent had been monitoring theassembly and decided that Gatto’s ideas were too dan-gerous to expose his students to. Imagine the devasta-tion if any of them should take Gatto seriously! (Theplanned talk to parents was also called off, naturally.)

Fortunately, the education establishment can’t yetsuppress published books, and people are (still, for now)free to read contrarian ideas.

Part of the book is a look at our history. Early Amer-ica, Gatto observes, was wonderfully free of the school-

ing mania. There certainly were some schools, but noone had to attend. Overwhelmingly, people learned inthe home and by doing, Benjamin Franklin being agood example. Sources of knowledge and skills wereeverywhere. Schools were not treated as the place forlearning, and many brilliant, successful people didn’t goto school at all. Individuals were in charge of their owneducation rather than passively waiting for it to bepoured into them.

Here’s how Gatto puts it: “In 1790 it was still possi-ble to become educated in America because schooldidn’t preempt all the time of the young, nor did it actas a leech upon family life then; it didn’t impose servilehabits on the growing up time; it didn’t indoctrinateyoung minds with a burden of too many pre-thoughtthoughts.”

That began to change in the mid-1800s. Social elit-ists imbued with admiration for the order and efficiencyof Germany joined with industrialists who knew that alabor force composed of cookie-cutter workers wouldbe easier to manage than one composed of an assort-ment of free-thinking individuals. America’s traditional“open source” nonsystem of education was thereforereplaced by a system of schooling meant to homogenizeyoung people, who would all think the right things.

The consequences have been disastrous. Gattopoints to pathetically low educational levels (we nowfind college graduates who read less well than mostgrade schoolers used to) and the extended immaturityof many young Americans who remain in a state oftrance-like dependency long into their teens and twen-ties, an age when Americans of centuries past wereactive, energized, and independent adults, not to men-tion the problem of violence that periodically erupts inpublic schools when young people who don’t want tobe there just snap.

Is there any escape from the grip of our schoolingestablishment? Gatto suggests what he calls “TheBartleby Project,” named after the main character inHerman Melville’s story “Bartleby the Scrivener.” Aftermany years of obediently doing just what he was told,Bartleby starts to say, “I’d prefer not to.” That’s whatAmericans need to tell the schooling authoritarians.

George Leef (georgeleef@aol.com) is book review editor of The Freeman.

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Our Economic Past

47 O C T O B E R 2 0 1 0

B Y W A LT E R E . W I L L I A M S

Washington’s Lies

The Pursuit of Happiness

During his campaign President Obama and hiscongressional supporters estimated that over-hauling the nation’s health care system would

cost $50–$65 billion a year. On June 15 the Congres-sional Budget Office (CBO) reported that Obama’soverhaul would cost at least $1 trillion. It’s clear thatObama’s cost estimates are untrue, and over ten years,it’s likely the recent CBO’s numbers will turn out to beuntrue as well. Government estimates of what a spend-ing program will cost are always lies whether theycome from a Democratic or Repub-lican president or Congress.You say,“Williams, you don’t show muchtrust in the White House and Con-gress.” Let’s check out some of theirpast dishonesty.

At its start in 1966, Medicare cost$3 billion. The House Ways andMeans Committee, along with Presi-dent Johnson, estimated thatMedicare would cost an inflation-adjusted $12 billion by 1990; how-ever, by 1990 Medicare costs topped$107 billion.That’s nearly nine timesgreater than Congress’s prediction.Today’s Medicare tab comes to $420 billion with nosigns of leveling off. How much confidence should wehave in any cost estimates by the White House or Con-gress?

Another part of the Medicare lie is found in Section1801 of the 1965 Medicare Act, which reads:“Nothingin this title shall be construed to authorize any federalofficer or employee to exercise any supervision or con-trol over the practice of medicine, or the manner inwhich medical services are provided, or over the selec-tion, tenure, or compensation of any officer, oremployee, or any institution, agency or person provid-ing health care services.” Ask your doctor or hospital

whether this statement contains even one iota of the truth.

Washington’s lies and deception are by no meansrestricted to modern times. During the legislativedebate before ratification of the Sixteenth Amendment,President Howard Taft and congressional supporterssaid that only the rich would ever pay federal incometaxes. In 1916 only one half of 1 percent of incomeearners were affected.Those earning $250,000 a year intoday’s dollars paid 1 percent, and those earning $6 mil-

lion in today’s dollars paid 7 percent.The promise that only the rich wouldpay was simply a lie to exploit the pol-itics of envy and dupe Americans intoratifying the Sixteenth Amendment.

The Social Security Lie

Another big congressional lie isSocial Security. Here’s what a

1936 government Social Securitypamphlet said: “After the first 3 years—that is to say, beginning in 1940—you will pay, and your employer willpay, 1.5 cents for each dollar you earn,up to $3,000 a year. . . . [B]eginning in

1943, you will pay 2 cents, and so will your employer,for every dollar you earn for the next 3 years. . . . Andfinally, beginning in 1949, twelve years from now, youand your employer will each pay 3 cents on each dollaryou earn, up to $3,000 a year” (www.tinyurl.com/2c8d4p2).

Here’s Congress’s lying promise: “That is the mostyou will ever pay.” Let’s repeat that last sentence: “Thatis the most you will ever pay.”That was a maximum of$90 a year. Compare that to today’s reality, which is

Walter Williams is the John M. Olin Distinguished Professor of Economicsat George Mason University.

Governmentestimates of what aspending programwill cost are alwayslies whether theycome fromDemocrats orRepublicans.

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Wa l t e r E . W i l l i a m s

6.2 cents on each dollar that you earn up to nearly$107,000, which comes to $6,621.That’s $432 in infla-tion-adjusted 1936 dollars. And that does not includethe fictional so-called employer’s share.

The Social Security pamphlet adds another lie:“Beginning November 24, 1936, the United States gov-ernment will set up a Social Security account for you.. . .The checks will come to you as a right.You will getthem regardless of the amount of property or incomeyou may have.”That’s another lie. First, there’s no SocialSecurity account for you, but more important, in Helver-ing v. Davis (1937) the Supreme Court held that SocialSecurity was not an insurance program, saying, “Theproceeds of both (employee and employer) taxes are tobe paid into the Treasury like internal-revenue taxesgenerally, and are not earmarked in anyway.” In a later decision, Flemming v.Nestor (1960), the Court said, “Toengraft upon Social Security system aconcept of ‘accrued property rights’would deprive it of the flexibility andboldness in adjustment to ever-chang-ing conditions which it demands. . . .”That ruling established the principlethat entitlement to Social Securitybenefits is not a contractual right.“Flexibility and boldness” means Con-gress can constitutionally do anythingit wishes, including cutting benefits,raising retirement age, increasing SocialSecurity taxes, and ultimately eliminating payments forsome or all Americans.

The 1936 Social Security pamphlet closes with thispromise from the government: “You will always getmore back from this program than you pay into it, andyou will always get more with this program than youcould have possibly gotten on your own by saving andinvesting.”That’s a lie.According to a report by BostonUniversity Professor Laurence J. Kotlikoff, “PrivatizingSocial Security,” baby boomers will get a real rate ofreturn of less than 2 percent. Generation Xers will getless than 1 percent, and today’s newborns will get a rateof return close to zero (www.tinyurl.com/2brx2ss[PDF]). Almost any private retirement plan yieldshigher returns.

Coupled with Medicare, Social Security is a disasterwaiting in the wings. As the NCPA’s Pamela Villarrealwrites, “The 2009 Social Security and MedicareTrustees Reports show the combined unfunded liabil-ity of these two programs has reached nearly $107 tril-lion in today’s dollars! That is about seven times theU.S. economy and 10 times the national debt.Unfunded liability is the difference between the bene-fits that have been promised to current and futureretirees and what will be collected in dedicated taxesand Medicare premiums. . . . If no other reform isenacted, this funding gap can only be closed in futureyears by substantial tax increases, large benefit cuts,”increases in retirement age eligibility, or some combina-tion thereof.

Why We Believe

Here’s my question: Why are somany Americans taken in by

Washington’s lies? I think there areseveral likely answers. Man istempted by what looks like a freelunch. He is also tempted by gov-ernment’s promise to permit him tolive at the expense of someone else.Some people are totally ignorant ofthe effects of government programson the socioeconomic fabric of ourcountry. There are many Americanswho do understand the problem

but what do they care? The primary beneficiaries ofmassive government spending are senior citizens.When the economic calamity arrives, they and thepoliticians who created all of the spending programswill be dead. Any politician who endeavors to elimi-nate the massive spending programs, in an effort toforestall the calamity, will be run out of office by theprogram’s beneficiaries. That means the status quorules.

People might ask: What can be done to preserveAmerican exceptionalism and greatness? My answer tosuch a question is a question: How do Americans sys-tematically differ from citizens of past great nationswho supported political actions that ultimately drovetheir nations into the ground?

The Supreme Courtruled that SocialSecurity taxes wereto be treated like any other revenue,and that you don’thave any right to payments.