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Federal Student Aid and the Law of Unintended Consequences

RICHARD VEDDER is the Edwin and Ruth Kennedy Distinguished Professor of Economics at Ohio University and director of the Center for College Affordability and Productivity. He received his B.A. from Northwestern University and his M.A. and Ph.D. in economics from the University of Illinois. He has written for the Wall Street Journal, National Review, and Investor’s Business Daily, and is the author of several books, including The American Economy in Historical Perspective and Going Broke by Degree: Why College Costs Too Much.

The following is adapted from a speech delivered on May 10, 2012, at Hillsdale College’s Allan P. Kirby, Jr. Center for Constitutional Studies and Citizenship in Washington, D.C.



FEDERAL STUDENT financial assistance programs are costly, inefficient, byzantine, and fail to serve their desired objectives. In a word, they are dysfunctional, among the worst of many bad federal programs.

These programs are commonly rationalized on three grounds: on the grounds that assuring more young people a higher education has positive spillover effects for the country; on the grounds that higher education promotes equal economic opportunity (or, as the politicians say, that it is “a ticket to achieving the American Dream”); or on the grounds that too few students would go to college in the absence of federal loan programs, since private markets for loans to college students are defective.

All three of these arguments are dubious at best. The alleged positive spillover effects of sending more and more Americans to college are very difficult to measure. And as the late Milton Friedman suggested to me shortly before his death, they may be more than offset by negative spillover effects. Consider, for instance, the relationship between spending by state governments on higher education and their rate of economic growth. Controlling for other factors important in growth determination, the relationship between education spending and economic growth is negative or, at best, non-existent.

What about higher education being a vehicle for equal economic opportunity or income equality? Over the last four decades, a period in which the proportion of adults with four-year college degrees tripled, income equality has declined. (As a side note, I do not know the socially optimal level of economic inequality, and the tacit assumption that more such equality is always desirable is suspect; my point here is simply that, in reality, higher education today does not promote income equality.)

Finally, in regards to the argument that capital markets for student loans are defective, if financial institutions can lend to college students on credit cards and make car loans to college students in large numbers—which they do—there is no reason why they can’t also make student educational loans.

Despite the fact that the rationales for federal student financial assistance programs are very weak, these programs are growing rapidly. The Pell Grant program did much more than double in size between 2007 and 2010. Although it was designed to help poor people, it is now becoming a middle class entitlement. Student loans have been growing eight to ten percent a year for at least two decades, and, as is well publicized, now aggregate to one trillion dollars of debt outstanding—roughly $25,000 on average for the 40,000,000 holders of the debt. Astoundingly, student loan debt now exceeds credit card debt.

Nor is it correct to assume that most of this debt is held by young people in their twenties and early thirties. The median age of those with loan obligations today is around 33, and approximately 40 percent of the debt is held by people 40 years of age or older. So when politicians talk about maintaining low interest loans to help kids in college, more often than not the help is going to middle-aged individuals long gone from the halls of academia.

With this as an introduction, let me outline eight problems with federal student grant and loan programs. The list is not exclusive.

(1) Student loan interest rates are not set by the forces of supply and demand, but by the political process. Normally, interest rates are a price used to allocate scarce resources; but when that price is manipulated by politicians, it leads to distortions in the use of resources. Since student loan interest rates are always set at below-market rates, too much money is borrowed for college. Currently those interest rates are extremely low, with a key rate of 3.4 percent—which, after adjusting for inflation, is approximately zero. Moreover, both the president and Governor Romney say they want to continue that low interest rate after July 1, when it is supposed to double. This aggravates an already bad situation, and provides a perfect example of the fundamental problem facing our nation today: politicians pushing programs whose benefits are visible and immediate (even if illusory, as suggested above), while their extraordinarily high costs are less visible and more distant in time.

(2) In the real world, interest rates vary with the prospects that the borrower will repay the loan. In the surreal world of student loans, the brilliant student completing an electrical engineering degree at M.I.T. pays the same interest rate as the student majoring in ethnic studies at a state university who has a GPA below 2.0. The former student will almost certainly graduate and get a job paying $50,000 a year or more, whereas the odds are high the latter student will fail to graduate and will be lucky to make $30,000 a year.

Related to this problem, colleges themselves have no “skin in the game.” They are responsible for allowing loan commitments to occur, but they face no penalties or negative consequences when defaults are extremely high, imposing costs on taxpayers.

(3) Perhaps most importantly, federal student grant and loan programs have contributed to the tuition price explosion. When third parties pay a large part of the bill, at least temporarily, the customer’s demand for the service rises and he is not as sensitive to price as he would be if he were paying himself. Colleges and universities take advantage of that and raise their prices to capture the funds that ostensibly are designed to help students. This is what happened previously in health care, and is what is currently happening in higher education.

(4) The federal government now has a monopoly in providing student loans. Until recently, at least it farmed out the servicing of loans to a variety of private financial service firms, adding an element of competition in terms of quality of service, if not price. But the Obama administration, with its strong hostility to private enterprise, moved to establish a complete monopoly. One would think the example of the U.S. Postal Service today, losing taxpayer money hand over fist and incapable of making even the most obviously needed reforms, would be enough proof against the prudence of such a move. And remember: because of highly irresponsible fiscal policies, the federal government borrows 30 or 40 percent of the money it currently spends, much of that from overseas. Thus we are incurring long-term obligations to foreigners to finance loans to largely middle class Americans to go to college. This is not an appropriate use of public funds at a time of dangerously high federal budget deficits.

(5) Those applying for student loans or Pell Grants are compelled to complete the FAFSA form, which is extremely complex, involves more than 100 questions, and is used by colleges to administer scholarships (or, more accurately, tuition discounts). Thus colleges are given all sorts of highly personal and private information on incomes, wealth, debts, child support, and so forth. A car dealer who demanded such information so that he could see how badly he could gouge you would either be out of business or in jail within days or weeks. But it is commonplace in higher education because of federal student financial assistance programs.

(6) As federal programs have increased the number of students who enroll in college, the number of new college graduates now far exceeds the number of new managerial, technical and professional jobs—positions that college graduates have traditionally taken. A survey by Northeastern University estimates that 54 percent of recent college graduates are underemployed or unemployed. Thus we currently have 107,000 janitors and 16,000 parking lot attendants with bachelor’s degrees, not to mention bartenders, hair dressers, mail carriers, and so on. And many of those in these limited-income occupations are struggling to pay off student loan obligations.

Connected to this is the fact that more and more kids are going to college who lack the cognitive skills, the discipline, the academic preparation, or the ambition to succeed academically. They simply cannot or do not master well much of the rather complex materials that college students are expected to learn. As a result, many students either do not graduate or fail to graduate on time. I have estimated that only 40 percent or less of Pell Grant recipients get degrees within six years—an extremely high dropout or failure rate. No one has seriously questioned that statistic—a number, by the way, that the federal government does not publish, no doubt because it is embarrassingly low.

Also related is the fact that, in an attempt to minimize this problem, colleges have lowered standards, expecting students to read and write less while giving higher grades for lesser amounts of work. Surveys show that students spend on average less than 30 hours per week on academic work—less than they spend on recreation. As Richard Arum and Josipa Roksa show in their book Academically Adrift: Limited Learning on College Campuses, critical thinking skills among college seniors on average are little more than among freshmen.

(7) As suggested to me a couple of days ago by a North Carolina judge, based on a case in his courtroom, with so many funds so readily available there is a temptation and opportunity for persons to acquire low interest student loans with the intention of dropping out of school quickly to use the proceeds for other purposes. (In the North Carolina student loan fraud case, it was to start up a t-shirt business.)

(8) Lazy or mediocre students can get greater subsidies than hard-working and industrious ones. Take Pell Grants. A student who works extra hard and graduates with top grades after three years will receive only half as much money as a student who flunks several courses and takes six years to finish or doesn’t obtain a degree at all. In other words, for recipients of federal aid there are disincentives to excel.

* * *

If the Law of Unintended Consequences ever applied, it is in federal student financial assistance. Programs created with the noblest of intentions have failed to serve either their customers or the nation well. In the 1950s and 1960s, before these programs were large, American higher education enjoyed a Golden Age. Enrollments were rising, lower-income student access was growing, and American leadership in higher education was becoming well established. In other words, the system flourished without these programs. Subsequently, massive growth in federal spending and involvement in higher education has proved counterproductive.

With the ratio of debt to GDP rising nationally, and the federal government continuing to spend more and more taxpayer money on higher education at an unsustainable long-term pace, a re-thinking of federal student financial aid policies is a good place to start in meeting America’s economic crisis.


Reprinted by permission from Imprimis, a publication of Hillsdale College.
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Reasserting Federalism in Defense of Liberty

by
Ken Cuccinelli


KEN CUCCINELLI
was elected the Attorney General of Virginia in November 2009. From 2002-2009 he was a member of the Virginia State Senate. Prior to that he was a partner in the law firm of Cuccinelli and Day, where he specialized in business law. A graduate of the University of Virginia, he has an M.A. in international relations from George Mason University and a J.D. from the George Mason University School of Law and Economics.


The following is adapted from a speech delivered on April 1, 2011, in the “First Principles on First Fridays” lecture series sponsored by Hillsdale College’s Kirby Center for Constitutional Studies and Citizenship in Washington, D.C.


SOME FAVORITE VIRGINIANS OF MINE who inspired and crafted our federal Constitution—Mason, Madison, Jefferson, and Henry—also drafted the Constitution of Virginia. And in the latter, they included a critical statement that said, “No free government, nor the blessings of liberty, can be preserved . . . but by frequent recurrence to fundamental principles.”

Our founders well understood that our liberty could not be preserved without frequently referring back to first principles. But while they pledged their lives, their fortunes, and their sacred honor to defend those principles, we have often taken them for granted, as we have become complacent in thinking that government will take care of every problem.

We have asked government to do more for us, and all the government asks for in return is a little bit more of our liberty. Over the decades, we kept asking. And because the courts and the politicians were all too happy to oblige, regardless of what the Constitution said, we no longer have a federal government of limited powers. We have an overreaching central government—a government that seeks to plan and control virtually every aspect of our lives and our economy, from health care, to energy, to automobile manufacturing, to banking and insurance.

Thankfully, though, in the last several years, people have woken up and are pushing back. With this pushback, we are seeing the idea of federalism reemerge. People want to return to a government of limited, enumerated powers, and an arrangement in which states serve as a check when the federal government oversteps its constitutional bounds.

In the current lawsuits brought by the states over health care and against the EPA, state governments are pushing back and reasserting federalism as the Founders intended them to do. Indeed, I am not aware of a time in history when this many states have sued the federal government to rein in its power: Today, more than half are parties to lawsuits against the new health care act and its individual health insurance mandate.

Virginia was the first state to argue in federal court that the new health care law is unconstitutional. When we brought the suit in March 2010, most media outlets and many legal experts said we stood no chance. One law professor said our argument about constitutionality was, if not frivolous, close to it. Another legal expert said our case relied on a “controversial reading of the Constitution.” Apparently, it is controversial to apply the Constitution as it was written.

But back in December, when a federal judge ruled in Virginia’s favor that the mandate is unconstitutional, assertions that we did not stand a chance faded fast.

Shades of King George III

Let me explain a bit about our lawsuit. Our first legal argument is that the government’s attempt to use the Commerce Clause of the Constitution to mandate the purchase of a private product—in this case, health insurance—goes beyond Congress’s power. The reason there has never been a mandate like this in all of American history is because, up until now, everyone knew Congress lacked the power to impose one.

I often give the example of the colonial period, when the colonists were boycotting British goods while demanding that King George III and Parliament repeal the Stamp Act and the Intolerable Acts. I am sure it was to the king’s dismay, but his own lawyer—the solicitor general—told Parliament that the boycott was legal under British law. In other words, the colonists could not be forced to buy British goods.

Yet in 2010, we had a president and a Congress who believed they could compel Americans to buy a private product even when the king of England, whom we rebelled against, knew he did not have that power. And back then, we were merely subjects!

The federal government has argued in court that not buying health insurance is as much of an economic activity as buying it, and therefore that it can regulate a citizen’s decision not to buy government-approved health insurance under the Commerce Clause. Nonactivity is the same as activity in the governmentÕs argument. Clearly, someone in Washington needs a dictionary.

That same reasoning could be used to force us to buy cars, vegetables, or gym memberships. If Virginia loses this suit and the federal government is allowed to cross this line, Congress will be granted a virtually unlimited power to order us to buy or do anything. It would be the end of federalism—not to mention individual rights—as we have known it for more than 220 years.

There is also a secondary argument made by defenders of the health care act. The Obama administration’s fallback position if it loses its Commerce Clause argument is to say that the fine for not buying government-approved health insurance is not a penalty, but a tax. The administration is asserting this because a tax to pay for a health care scheme would be constitutional under Congress’s taxing authority. We argue in response that the government cannot all of a sudden start calling a penalty a tax to try to make the law legal. In fact, every court that has heard the government’s tax argument has rejected it.

When Congress and President Obama debated the health care law, for political reasons, they repeatedly said that the fine for not buying health insurance was a penalty, not a tax. And indeed, under the law they passed, they structured it as a penalty. So now the administration is both flip-flopping and misrepresenting facts.

We will soon see which arguments the appeals court agrees with, because we will be arguing the case in the U.S. Fourth Circuit Court of Appeals on May 10th. Whatever that ruling, the case will end up in front of the U.S. Supreme Court. That is why we are also running a second track and asking the Supreme Court to skip the Fourth Circuit and take the case directly. We have asked the court for this expedited review because states are already spending huge sums to implement their portions of the health care act, businesses are already making decisions about whether to cut or keep employee health plans, and real health care reform is on hold until the Supreme Court rules. If we do not get this suit resolved as quickly as possible, we impose crippling uncertainty on the states, businesses, individuals, and our entire economy.

Liberty as an Environmental Principle

As bad as the federal health care law is, the economic consequences of what the EPA has in store for us will be equally damaging to our freedom and our economy. Thus the EPA is another front in Virginia’s federalism fight.

In December 2009, the EPA declared that carbon dioxide and other greenhouse gases are pollutants dangerous to public health because they are alleged to cause global warming. This finding gave the agency the immense power to regulate CO2 emissions—and remember, this dangerous pollutant, carbon dioxide, is what we exhale from our bodies every second of every day.

For the ruling, the EPA relied primarily on data from a United Nations global warming report. Emails leaked in 2009 in the Climategate scandal showed that some of the world’s prominent climatologists manipulated data to overstate the effects of carbon dioxide on the environment. Much of the U.N. report relied on that questionable data, and the EPA relied on that report. Since the revelations from the leaked emails became public, some scientists involved in the report have had to back off some of their positions and research. Renowned climate researcher Judith Curry of Georgia Tech, a long-time proponent of the global warming theory, admitted recently that there is no question that data in the U.N. report was misleading, and that “it is obvious that there has been deletion of adverse data” that would work against the theory of rapid global warming in the last century.

Pursuant to this, in February 2010, my office petitioned the EPA to reopen its hearings on greenhouse gases and review new evidence. Instead it ignored our request—in fact, it ignored the law. So we filed a federal lawsuit to force the hearings to be reopened, and we are still awaiting our day in court.

If the EPA is allowed to move forward with its regulation of carbon dioxide, costs to every American household are projected to increase by $3,000 a year due to higher prices for energy, food, clothing, and any other goods that require energy to manufacture or transport. Talk about taxing the poor!

In a document the EPA published on regulating greenhouse gas emissions in cars and light trucks, it admits that its new rules would add about $950 to the price of each new vehicle. And buried deep in the report, the EPA’s own models show that over the next 90 years these regulations would only reduce temperature increases by less than 0.03 degrees Fahrenheit. Lisa Jackson, head of the EPA, in testimony before Congress, called this amount of temperature difference “immeasurable.” But that has not stopped the agency from trying to move the new auto regulations forward.

Greenhouse gas regulations will also cost businesses hundreds of millions of dollars in increased energy costs, and could price several industries out of business or force them overseas, resulting in permanent job losses.

These are serious consequences of decisions made by unelected bureaucrats. All we are asking the EPA to do is to look at all the data, not just the data that supports the pre-conceived views of the people in charge.

For my challenges to these rules and to the federal government, I am accused of being a flat-earther and an enemy of science. Nothing could be further from the truth. I am not only an attorney; I was also an engineer. As a former engineer, I have a certain trust in science: the math, the scientific method, the certainties of the laws of physics, and the objective quest for new answers. But when science gets tainted by politics and money, and facts are set aside in the name of advancing a political agenda, it is no longer science.

And contrary to the image some in the media have created, I do not have a battle with environmental protection. In fact, my office works in close coordination with our Virginia regulatory agencies to enforce environmental laws. I also have seven children who will be on this earth for the better part of this century, and I have a vested interest in seeing that they have clean air, water, and land.

But I also have a vested interest in seeing that my children have the opportunity to get good jobs and achieve at least the same standard of living we have today. That means we have to balance care for our environment with care for our economy.

We also have to recognize that economic growth underwrites environmental protection. Wealthy countries pay for environmental improvement, and healthy economies are critical to it. The only places on earth that have strived for a clean environment share two key characteristics: free people and free markets. Economic success will help deliver environmental improvement far more effectively than any number of forcibly-applied regulations. Yet we are gradually suffocating our free market economy with command-and-control regulations from our federal government.

Freedom in the Balance

With the EPA’s attempts to regulate our lives by regulating the by-products of practically everything we buy and everything we do, and with the federal government’s attempt to assume the power to command us to buy its chosen health insurance, we face some of the most significant and unprecedented erosions of liberty in our lifetimes. And federalism—that tension between state sovereigns and the federal government—was designed for the very purpose of helping to preserve that liberty.

While we can derive some satisfaction from last November’s election results as a backlash against the centralization and growth of raw federal power, we cannot repeat the mistakes of the past where conservative victories were followed by liberal policies. We must ensure that the newly elected officeholders have learned from past mistakes. We must hold the representatives we put into office accountable to first principles, and then demand from them concrete action. For the failure of conservative principles has not been due to the principles themselves, but to the failure to fight for them.

At a time such as this, when principled conservatives do not control the reins of power in Washington, state attorneys general become the first line of defense against federal government overreach. When I ran for Attorney General of Virginia, I said that if the federal government crossed certain lines, I would challenge it. Unfortunately, we have a federal government that is giving us more opportunities to challenge it than I would like. But we are keeping our promise. With fellow Virginians and the American people, we have planted our flag and we are taking a stand. And if we are successful, future generations of Americans will have a chance to enjoy the liberty that has made America the envy of the world.

Success in this fight for federalism is critical, for as Ronald Reagan warned us:

Freedom is never more than one generation away from extinction. We did not pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same, or one day we will spend our sunset years telling our children and our children’s children what it was once like in the United States where men were free.

Reprinted by permission from Imprimis, a publication of Hillsdale College.” SUBSCRIPTION FREE UPON REQUEST.

 
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Whatever Happened to Free Enterprise?

by Ronald Reagan, Governor of California

Hillsdale College Celebrates
Ronald Reagan's 100th Birthday!

NOTE:  On November 10, 1977, Ronald Reagan gave a speech on Hillsdale College’s campus entitled “What Ever Happened to Free Enterprise.” It was given in a time of national crisis not unlike our own. Reagan traced the cause of that crisis back to a twentieth century innovation in the American system, “a fourth branch of government added to the traditional three of executive, legislative and judicial: a vast federal bureaucracy.” Then, as now, recovery is achieved by understanding the virtues of America and returning to its heritage of self-government.
Governor Reagan delivered this address as part of the Ludwig von Mises Lectures Series.


Most recently known for his bid for the 1976 Republican presidential nomination, Ronald Reagan is distinguished for his successful careers in motion pictures, broadcasting, and politics. Mr. Reagan was a player and production supervisor of television's "General Electric Theater" for eight years and hosted and acted in the "Death Valley Days" television series. For many years he owned and operated a horse breeding and cattle ranch.  Elected California's 33rd governor in 1966, he was re-elected in 1970. After leaving office in early 1975, Governor Reagan began a daily radio commentary program, nationally syndicated, and a weekly newspaper column in which he is still involved.



During the presidential campaign last year, there was a great deal of talk about the seeming inability of our economic system to solve the problems of unemployment and inflation. Issues such as taxes and government power and costs were discussed, but always these things were discussed in the context of what government intended to do about it. May I suggest for your consideration that government has already done too much about it? That indeed, government, by going outside its proper province, has caused many if not most of the problems that vex us.

How much are we to blame for what has happened? Beginning with the traumatic experience of the Great Depression, we the people have turned more and more to government for answers that government has neither the right nor the capacity to provide. Unfortunately, government as an institution always tends to increase in size and power, and so government attempted to provide the answers.

The result is a fourth branch of government added to the traditional three of executive, legislative and judicial: a vast federal bureaucracy that's now being imitated in too many states and too many cities, a bureaucracy of enormous power which determines policy to a greater extent than any of us realize, very possibly to a greater extent than our own elected representatives. And it can't be removed from office by our votes.

To give you an illustration of how bureaucracy works in another country, England in 1803 created a new civil service position. It called for a man to stand on the cliffs of Dover with a spy glass and ring a bell if he saw Napoleon coming. They didn't eliminate that job until 1945. In our own country, there are only two government programs that have been abolished. The government stopped making rum on the Virgin Islands, and we've stopped breeding horses for the cavalry.

We bear a greater tax burden to support that permanent bureaucratic structure than any of us would have believed possible just a few decades ago. When I was in college, governments federal, state and local, were taking a dime out of every dollar earned and less than a third of that paid for the federal establishment. Today, governments, federal, state, and local, are taking 44 cents out of every dollar earned, and two-thirds of that supports Washington. It is the fastest growing item in the average family budget, and yet it is not one of the factors used in computing the cost of living index. It is the biggest single cost item in the family budget, bigger than food, shelter and clothing all put together.

When government tells us that in the last year the people in America have increased their earnings 9 percent, and since the inflation is 6 percent, we're still 3 percentage points better off, or richer than we were the year before, government is being deceitful. That was before taxes. After taxes, the people of America are 3 percentage points worse off, poorer than they were before they got the 9 percent raise. Government profits by inflation.

At the economic conference in London several months ago, one of our American representatives there was talking to the press. He said you have to recognize that inflation doesn't have any single cause and therefore has no single answer. Well, if he believed that, he had no business being at an economic conference. Inflation is caused by one thing, and it has one answer. It's caused by government spending more than government takes in, and it will go away when government stops doing that, and not before.

Government has been trying to make all of us believe that somehow inflation is like a plague, or the drought, or the locusts coming, trying to make us believe that no one has any control over it and we just have to bear it when it comes along and hope it will go away. No, it's simpler than that. From 1933 until the present, our country has doubled the amount of goods and services that are available for purchase. In that same period we have multiplied the money supply by 23 times. So $11.50 is chasing what one dollar used to chase. And that's all that inflation is: a depreciation of the value of money.

Ludwig von Mises once said, "Government is the only agency that can take a perfectly useful commodity like paper, smear it with some ink, and render it absolutely useless."

There are 73 million of us working and earning by means of private enterprise to support ourselves and our dependents. We support, in addition, 81 million other Americans totally dependent on tax dollars for their year-round living. Now it's true that 15 million of those are public employees and they also pay taxes, but their taxes are simply a return to government of dollars that first had to be taken from the 73 million. I say this to emphasize that the people working and earning in private business and industry are the only resource that government has.


In Defense of Free Enterprise

More than anything else, a new political economic mythology, widely believed by too many people, has increased government's ability to interfere as it does in the marketplace. Profit is a dirty word, blamed for most of our social ills. In the interest of something called consumerism, free enterprise is becoming far less free. Property rights are being reduced, and even eliminated, in the name of environmental protection. It is time that a voice be raised on behalf of the 73 million independent wage earners in this country, pointing out that profit, property rights and freedom are inseparable, and you cannot have the third unless you continue to be entitled to the first two.

Even many of us who believe in free enterprise have fallen into the habit of saying when something goes wrong: "There ought to be a law." Sometimes I think there ought to be a law against saying: "There ought to be a law." The German statesman Bismark said, "If you like sausages and laws you should never watch either one of them being made." It is difficult to understand the ever-increasing number of intellectuals in the groves of academe, present company excepted, who contend that our system could be improved by the adoption of some of the features of socialism.

In any comparison between the free market system and socialism, nowhere is the miracle of capitalism more evident than in the production and distribution of food. We eat better, for a lower percentage of earnings, than any other people on earth. We spend about 17 percent of the average family's after-tax income for food. The American farmer is producing two and one-half times as much as he did 60 years ago with one-third of the man-hours on one-half of the land. If his counterparts worldwide could reach his level of skill we could feed the entire world population on one-tenth of the land that is now being farmed worldwide.

The biggest example comes, I think, when you compare the two superpowers. I'm sure that most of you are aware that some years ago the Soviet Union had such a morale problem with the workers on the collective farms that they finally gave each worker a little plot of ground and told him he could farm it for himself and sell in the open market what he raised. Today, less than 4 percent of Russia's agricultural land is privately farmed in that way, and on that 4 percent is raised 40 percent of all of Russia's vegetables, and 60 percent of all its meat.

Some of our scholars did some research on comparative food prices. They had to take the prices in the Russian stores and our own stores and translate them into minutes and hours of labor at the average income of each country. With one exception they found that the Russians have to work two to ten times as long to buy the various food items than do their counterparts here in America. The one exception was potatoes. There the price on their potato bins equalled less work time for them than it did for us. There was one hitch though—they didn't have any potatoes.

In spite of all the evidence that points to the free market as the most efficient system, we continue down a road that is bearing out the prophecy of De Tocqueville, a Frenchman who came here 130 years ago. He was attracted by the miracle that was America. Think of it: our country was only 70 years old and already we had achieved such a miraculous living standard, such productivity and prosperity, that the rest of the world was amazed. So he came here and he looked at everything he could see in our country trying to find the secret of our success, and then went back and wrote a book about it. Even then, 130 years ago, he saw signs prompting him to warn us that if we weren't constantly on guard, we would find ourselves covered by a network of regulations controlling every activity. He said if that came to pass we would one day find ourselves a nation of timid animals with government the shepherd.

Was De Tocqueville right? Well, today we are covered by tens of thousands of regulations to which we add about 25,000 new ones each year.


The Cost of Government Regulation

A study of 700 of the largest corporations has found that if we could eliminate unnecessary regulation of business and industry, we would instantly reduce the inflation rate by half. Other economists have found that over-regulation of business and industry amounts to a hidden five-cent sales tax for every consumer. The misdirection of capital investment costs us a quarter of a million jobs. That's half as many as the president wants to create by spending $32 billion over the next two years. And with all of this comes the burden of government-required paperwork.

It affects education—all of you here are aware of the problems of financing education, particularly at the private educational institutions. I had the president of a university tell me the other day that government-required paperwork on his campus alone has raised the administrative costs from $65,000 to $600,000. That would underwrite a pretty good faculty chair. Now the president of the Eli Lilly drug company says his firm spends more man-hours on government-required paperwork than they do today on heart and cancer research combined. He told of submitting one ton of paper, 120,000 pages of scientific data most of which he said were absolutely worthless for FDA's purposes, in triplicate, in order to get a license to market an arthritis medicine. So, the United States is no longer first in the development of new health-giving drugs and medicines. We're producing 60 percent fewer than we were 15 years ago.

And it's not just the drug industry which is over-regulated. How about the independent men and women of this country who spend $50 billion a year sending 10 billion pieces of paper to Washington where it costs $20 billion each year in tax money to shuffle and store that paper away. We're so used to talking billions—does anyone realize how much a single billion is? A billion minutes ago Christ was walking on this earth. A billion hours ago our ancestors lived in caves, and it is questionable as to whether they'd discovered the use of fire. A billion dollars ago was 19 hours in Washington, D.C. And it will be another billion in the next 19 hours, and every 19 hours until they adopt a new budget at which time it'll be almost a billion and a half.

It all comes down to this basic premise: if you lose your economic freedom, you lose your political freedom and in fact all freedom. Freedom is something that cannot be passed on genetically. It is never more than one generation away from extinction. Every generation has to learn how to protect and defend it. Once freedom is gone, it's gone for a long, long time. Already, too many of us, particularly those in business and industry, have chosen to switch rather than fight.

We should take inventory and see how many things we can do ourselves that we've come to believe only government can do. Let me take one that I'm sure everyone thinks is a government monopoly and properly so. Do you know that in Scottsdale, Ariz., there is no city fire department? There, the per capita cost for fire protection and the per capita fire loss are both one-third of what they are in cities of similar size. And the insurance rates reflect this. Scottsdale employs a private, profit-making, firefighting company, which now has about a dozen clients out in the western states.

Sometimes I worry if the great corporations have abdicated their responsibility to preserve the freedom of the marketplace out of a fear of retaliation or a reluctance to rock the boat. If they have, they are feeding the crocodile hoping he'll eat them last. You can fight city hall, and you don't have to be a giant to do it. In New Mexico there's a little company owned by a husband and wife. The other day two OSHA inspectors arrived at the door. They demanded to come in in order to go on a hunting expedition to see if there were any violations of their safety rules. The wife, who happens to be company president, said "Where's your warrant?" They said, "We don't need one." She said, "You do to come in here," and shut the door. Well, they went out and got a warrant, and they came back, but this time she had her lawyer with her. He looked at the warrant and said it does not show probable cause. A federal court has since upheld her right to refuse OSHA entrance.

Why don't more of us challenge what Cicero called the arrogance of officialdom? Why don't we set up communications between organizations and trade associations? To rally others to come to the aid of an individual like that, or to an industry or profession when they're threatened by the barons of bureaucracy, who have forgotten that we are their employers. Government by the people works when the people work at it. We can begin by turning the spotlight of truth on the widespread political and economic mythology that I mentioned.

A recent poll of college and university students (they must have skipped this campus) found that the students estimated that business profits in America average 45 percent. That is nine times the average of business profits in this country. It was understandable that the kids made that mistake, because the professors in the same poll guessed that the profits were even higher.

Then there is the fairy tale born of political demagoguery that the tax structure imposes unfairly on the low earner with loopholes designed for the more affluent. The truth is that at $23,000 of earnings you become one of that exclusive band of 10 percent of the wage-earners in America paying 50 percent of the income tax but only taking 5 percent of all the deductions. The other 95 percent of the deductions are taken by the 90 percent of the wage-earners below $23,000 who pay the other half of the tax.

The most dangerous myth is that business can be made to pay a larger share of taxes, thus relieving the individual. Politicians preaching this are either deliberately dishonest, or economically illiterate, and either one should scare us. Business doesn't pay taxes, and who better than business could make this message known? Only people pay taxes, and people pay as consumers every tax that is assessed against a business. Passing along their tax costs is the only way businesses can make a profit and stay in operation.

The federal government has used its taxing power to redistribute earnings to achieve a variety of social reforms. Politicians love those indirect business taxes, because it hides the cost of government. During the New Deal days, an under-secretary of the treasury wrote a book in which he said that taxes can serve a higher purpose than just raising revenue. He said they could be an instrument of social and economic control to redistribute the wealth and income and to penalize particular industries and economic groups.

We need to put an end to that kind of thinking. We need a simplification of the tax structure. We need an indexing of the surtax brackets, a halt to government's illicit profiteering through inflation. It's as simple as this: every time the cost-of-living index goes up one percent, the government's revenue goes up one and one-half percent. Above all we need an overall cut in the cost of government. Government spending isn't a stimulant to the economy; it's a drag on the economy. Only a decade ago, about 15 percent of corporate gross income was required to pay the interest on corporate debt; now it's 40 percent. Individuals and families once spent about 8 percent of their disposable income on interest on consumer debt, installment buying, mortgages, and so forth. Today, it's almost one-fourth of their total earnings. State and local government in the last 15 years has gone from $70 billion to $220 billion. The total private and public debt is growing four times as fast as the output of goods and services.

Again, there is something we can do. Congressman Jack Kemp (R-N.Y.) has a bill before the Congress designed to increase productivity and to create jobs for people. Over a three-year period, it calls for reducing the income tax for all of us by a full one-third. And also it would reduce the corporate tax from 48 to 45 percent. The base income tax would no longer be 20 percent but 14 percent, and the ceiling would be 50 percent instead of 70 percent. Finally, it would double the exemption for smaller businesses before they get into the surtax bracket. It would do all of the things that we need to provide investment capital, increase productivity, and create jobs.

We can say this with assurance, because it has been done twice before: in the '20's under Harding and Coolidge and again in the '60's under John F. Kennedy. In the '60's the stimulant to the economy was so immediate that even government's revenues increased because of the broadening base of the economy. Kemp's bill is gaining support but unfortunately the majority in Congress is concerned with further restrictions on our freedom.

To win this battle against Big Government, we must communicate with each other. We must support the doctor in his fight against socialized medicine, the oil industry in its fight against crippling controls and repressive taxes, and the farmer, who hurts more than most because of government harassment and rule-changing in the middle of the game. All of these issues concern each one of us, regardless of what our trade or profession may be. Corporate America must begin to realize that it has allies in the independent business men and women, the shopkeepers, the craftsmen, the farmers, and the professions. All these men and women are organized in a great variety of ways, but right now we only talk in our own organizations about our own problems. What we need is a liaison between these organizations to realize how much strength we as a people still have if we'll use that strength.

In regard to the oil industry, is there anyone who isn't concerned with the energy problem? Government caused that problem while we all stood by unaware that we were involved. Unnecessary regulations and prices and imposed price limits back in the '50's are the direct cause of today's crisis. Our crisis isn't because of a shortage of fuel; it's a surplus of government. Now we have a new agency of enormous power, with 20,000 employees and a $10.5 billion budget. That's more than the gross earnings of the top seven oil companies in the United States. The creation of the Department of Energy is nothing more than a first step towards nationalization of the oil industry.

While I believe no one should waste a natural resource, the conservationists act as if we have found all the oil and gas there is to be found in this continent, if not the world. Do you know that 57 years ago our government told us we only had enough for 15 years? Nineteen years went by and they told us we only had enough left for 13 more years, and we've done a lot of driving since then and we'll do a lot more if government will do one simple thing: get out of the way and let the incentives of the marketplace urge the industry out to find the sources of energy this country needs.

We've had enough of sideline kibitzers telling us the system they themselves have disrupted with their social tinkering can be improved or saved if we'll only have more of that tinkering or even government planning and management. They play fast and loose with a system that for 200 years made us the light of the world. The refuge for people all over the world who just yearn to breathe free. It's time we recognized that the system, no matter what our problems are, has never failed us once. Every time we have failed the system, usually by lacking faith in it, usually by saying we have to change and do something else. A Supreme Court Justice has said the time has come, is indeed long overdue, for the wisdom, ingenuity, and resources of American business to be marshalled against those who would destroy it.

What specifically should be done? The first essential for the businessman is to confront the problem as a primary responsibility of corporate management. It has been said that history is the patter of silken slippers descending the stairs and the thunder of hobnail boots coming up. Back through the years we have seen people fleeing the thunder of those boots to seek refuge in this land. Now too many of them have seen the signs, signs that were ignored in their homeland before the end came, appearing here. They wonder if they'll have to flee again, but they know there is no place to run to. Will we, before it is too late, use the vitality and the magic of the marketplace to save this way of life, or will we one day face our children, and our children's children when they ask us where we were and what we were doing on the day that freedom was lost?

Reprinted by permission from Imprimis, a publication of Hillsdale College.
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Health Care in a Free Society

PAUL RYAN is in his sixth term as a member of Congress, representing Wisconsin's First Congressional District. He is the ranking member of the House Budget Committee and a senior member of the House Ways and Means Committee. A graduate of Miami University in Ohio, he and his wife Janna have three children and live in Janesville, Wisconsin.  The following is adapted from a speech delivered by Congressman Ryan on January 13, 2010, in Washington, D.C., at an event sponsored by Hillsdale College's Allan P. Kirby, Jr. Center for Constitutional Studies and Citizenship.


SOMEONE once said that before there was the New Deal, there was the Wisconsin Deal. In my home state, the University of Wisconsin was an early hotbed of progressivism, whose goal was to reorder society along lines other than those of the Constitution. The best known Wisconsin progressive in American politics was Robert LaFollette. “Fighting Bob,” as he was called, was a Republican—as was Theodore Roosevelt, another early progressive. Today we tend to associate progressivism mostly with Democrats, and trace it back to Woodrow Wilson. But it had its roots in both parties.

The social and political programs of the progressives came in on two great waves: the New Deal of the 1930s and the Great Society of the 1960s. Today, President Obama often invokes progressivism and hopes to generate its third great wave of public policy. In thinking about what this would mean, we need look no farther than the health care reform program he is promoting along with the leadership in Congress.

Let me say here at the beginning that even though survey after survey shows that 75 percent or more of Americans are satisfied with the quality of their health care, no one I know in Congress denies that health care reform is needed. Everyone understands that health care in our country has grown needlessly expensive, and that some who want coverage cannot afford it. The ongoing debate over health care, then, is not about whether there should be reform; it is about what the principle of that reform ought to be.

Under the terms of our Constitution, every individual has a right to care for their health, just as they have a right to eat. These rights are integral to our natural right to life—and it is government's chief purpose to secure our natural rights. But the right to care for one's health does not imply that government must provide health care, any more than our right to eat, in order to live, requires government to own the farms and raise the crops.

Government's constitutional obligations in regard to protecting such rights are normally met by establishing the conditions for free markets—markets which historically provide an abundance of goods and services, at an affordable cost, for the largest number. When free markets seem to be failing to meet this goal—and I would argue that the delivery of health care today is an example of where this is the case—government, rather than seeking to supply the need itself, should look to see if its own interventions are the root of the problem, and should make adjustments to unleash competition and choice.

With good reason, the Constitution left the administration of public health—like that of most public goods—decentralized. If there is any doubt that control of health care services should not have been placed in the federal government, we need only look at the history of Medicare and Medicaid—a history in which fraud has proliferated despite all efforts to stop it and failure to control costs has become a national nightmare. In 1966 the cost of Medicare to the taxpayers was about $3 billion. The House Ways and Means Committee estimated that it would cost $12 billion (adjusted for inflation) by 1990. The actual cost in 1990 was nearly nine times that—$107 billion. By 2009 Medicare costs reached $427 billion, with Medicaid boosting that by an additional $255 billion. And this doesn't take into account the Medicaid expansion in last year's “stimulus.”

The health care reform bills that emerged from the House and the Senate late last year would only exacerbate this crisis. The federal takeover of health care that those bills represent would subsume approximately one-sixth of our national economy. Combined with spending at all levels, government would then control about 50 percent of total national production.

The good news is that we have a choice. There are three basic models for health care delivery that are available to us: (1) today's business-government partnership or “crony capitalism” model, in which bureaucratized insurance companies monopolize the field in most states; (2) the progressive model promoted by the Obama administration and congressional leaders, in which federal bureaucrats tell us which services they will allow; and (3) the model consistent with our Constitution, in which health care providers compete in a free and transparent market, and in which individual consumers are in control.

We are urged today—out of compassion—to support the progressive model; but placing control of health care in the hands of government bureaucrats is not compassionate. Bureaucrats don't make decisions about health care according to personal need or preference; they ration resources according to a dollar-driven social calculus. Dr. Ezekiel Emanuel, one of the administration's point people on health care, advocates what he calls a “whole life system”—a system in which government makes treatment decisions for individuals using a statistical formula based on average life expectancy and “social usefulness.” In keeping with this, the plans that recently emerged from Congress have a Medicare board of unelected specialists whose job it would be to determine the program's treatment protocols as a method of limiting costs.

President Obama said in December: “If we don't pass [this health care reform legislation]...the federal government will go bankrupt, because Medicare and Medicaid are on a trajectory that are [sic] unsustainable....” On first hearing, this argument appears ludicrous: We must stop the nation from going broke by enacting a program costing $800 billion or more in its first decade alone? On the other hand, if the President means what he says, there is only one way to achieve his stated goal under the new program: through deep and comprehensive government rationing of health care.

The idea that the government should make decisions about how long people should live and who should be denied care is something that Americans find repugnant. As is true of the supply of every service or product, the supply of health care is finite. But it is a mistake to conclude that government should ration it, rather than allowing individuals to order their needs and allocate their resources among competing options. Those who are sick, special needs patients, and seniors are the ones who will be most at risk when the government involves itself in these difficult choices—as government must, once it takes upon itself management of American health care.

The very idea of government-run health care conflicts with the American idea of a free society and the constitutional principles underlying it—the principles of individual rights and free markets. And from a practical perspective it makes no sense, given that our current health care system is the best in the world—even drawing patients from other advanced countries that have suffered by adopting the government-run model.

But if one begins with the idea that health care reform to reduce costs should be guided by the principles of economic and political liberty, what would such reform look like? Four changes to the current system come immediately to mind.

One, we should equalize the tax treatment of people paying for health care by ending the current discrimination against those who don't get health insurance from their jobs—in other words, everyone paying for health care should receive the same tax benefits.

Two, we need high-risk insurance pools in the states so that those with pre-existing conditions can obtain coverage that is not prohibitively expensive, and so that costs in non-high-risk pools are stabilized. To see the value of this, consider a pool of 200 people in which six have pre-existing heart disease or cancer. Rates for everyone will be through the roof. But if the six are placed in a high-risk pool and ensured coverage at an affordable rate, the risk profile of the larger pool is stabilized and coverage for the remaining 194 people is driven down.

Three, we need to unlock existing health care monopolies by letting people purchase health insurance across state lines—just as they do car insurance and other goods and services. This is a simple and obvious way to reduce costs.

Four, we need to establish transparency in terms of costs and quality of health care. In Milwaukee, an MRI can cost between $400 and $4,000, and a bypass surgery between $4,700 and $100,000. Unless the consumer is able to compare prices and quality of services—and unless he has an incentive to base choices on that information, as he does in purchasing other goods and services—there is not really a free market. It would go a long way to solve our health care problems to recreate one.

These four measures would empower consumers and force providers—insurers, doctors, and hospitals—to compete against each other for business. This works in other sectors of our economy, and it will work with health care.

So why can't we agree on them? The answer is that the current health care debate is not really about how we can most effectively bring down costs. It is a debate less about policy than about ideology. It is a debate over whether we should reform health care in a way compatible with our Constitution and our free society, or whether we should abandon our free market economic model for a full-fledged European-style social welfare state. This, I believe, is the true goal of those promoting government-run health care.

If we go down this path, creating entitlement after entitlement and promising benefits that can never be delivered, America will become like the European Union: a welfare state where most people pay few or no taxes while becoming dependent on government benefits; where tax reduction is impossible because more people have a stake in welfare than in producing wealth; where high unemployment is a way of life and the spirit of risk-taking is smothered by webs of regulation.

America today is not as far from this tipping point as we might think. While exact and precise measures cannot be made, there are estimates that in 2004, 20 percent of households in the U.S. were receiving about 75 percent of their income from the federal government, and that another 20 percent were receiving nearly 40 percent of their income from federal programs. All in all, about 60 percent of U.S. households were receiving more government benefits and services, measured in dollars, than they were paying back in taxes. It has also been estimated that President Obama's first budget alone raises this level of “net dependency” to 70 percent.

Looked at in this way, I see health care reform of the kind promoted by the Obama administration and congressional leaders as part of a crusade against the American idea. This is a dramatic charge, but the only alternative is that they are ignorant of the consequences of their proposed programs. The national health care exchange created by their legislation, together with its massive subsidies for middle-income earners, would represent the greatest expansion of the welfare state in our country in a generation—and possibly in history. According to recent analysis, the plan would provide subsidies that average a little less than 20 percent of the income of people earning up to 400 percent of the Federal Poverty Level. In other words, as many as 110 million Americans could claim this new entitlement within a few years of its implementation. In addition to the immediate massive increase in dependency this would bring on, the structure of the subsidies—whereby they fade out as income rises—would impose a marginal tax penalty that would act as a disincentive to work, increasing dependency even more.

And before I conclude, allow me to clear up a misperception about insurance exchanges: it makes absolutely no difference whether we have 50 state exchanges rather than a federal exchange, as long as the federal government is where the subsidies for consumers will be located. In other words, despite what some seem to believe, both the House and the Senate versions of health care reform set up a system in which, if you are eligible and you want a break on your insurance premium, it is the federal government that will provide it while telling you what kind of insurance you have to buy. In this sense, the idea of state exchanges instead of a federal exchange is a distinction without a difference.


Americans take pride in self-government, which entails providing for their own well-being and the well-being of their families in a free society. In exchange for this, the promoters of government-run health care would make them passive subjects, dependent on handouts and far more concerned about security than liberty. At the heart of the conflict over heath care reform, as I said at the beginning, are two incompatible understandings of America: one is based on the principles of progressivism, and would place more and more aspects of our lives under the administration of unelected “experts” in federal bureaucracies; the other sees America as a society of free individuals under a Constitution that severely limits what the federal government can rightfully do.

We have seen many times over the past 100 years that the American people tend to be resistant to the progressive view of how we should reform our system of government—and I believe we are seeing this again today. Americans retain the Founders' view that a government that seeks to go beyond its high but limited constitutional role of securing equal rights and establishing free markets is not progressive at all in the literal sense of that word—rather it is reactionary. Such a government seeks to privilege some Americans at the expense of others—which is precisely what the American Revolution was fought to prevent.

Americans understand that the problems facing our health care system today, real as they are, can be addressed without nationalizing one-sixth of the American economy and moving us past the tipping point toward a European-style social welfare state. They know that we can solve these problems while at the same time remaining a free society and acting consistently with the principles that have made us the greatest and most prosperous nation on earth. It is our duty now as their representatives to come together and do so.

Reprinted by permission from Imprimis, a publication of Hillsdale College.

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Future Prospects for Economic Liberty

WALTER WILLIAMS is the John M. Olin distinguished professor of economics at George Mason University. He holds a B.A. from California State University at Los Angeles and an M.A. and a Ph.D. in economics from UCLA. He has received numerous fellowships and awards, including a Hoover Institution National Fellowship and the Valley Forge Freedoms Foundation George Washington Medal of Honor. A nationally syndicated columnist, his articles and essays have appeared in publications such as Economic Inquiry, American Economic Review, National Review, Reader’s Digest, Policy Review and Newsweek. Dr. Williams has authored six books, including The State Against Blacks (later made into a PBS documentary entitled Good Intentions) and Liberty Versus the Tyranny of Socialism.

The following is adapted from a lecture delivered on August 2, 2009, during a Hillsdale College cruise from Venice to Athens aboard the Crystal Serenity.



One of the justifications for the massive growth of government in the 20th and now the 21st centuries, far beyond the narrow limits envisioned by the founders of our nation, is the need to promote what the government defines as fair and just. But this begs the prior and more fundamental question: What is the legitimate role of government in a free society? To understand how America’s Founders answered this question, we have only to look at the rule book they gave us—the Constitution. Most of what they understood as legitimate powers of the federal government are enumerated in Article 1, Section 8. Congress is authorized there to do 21 things, and as much as three-quarters of what Congress taxes us and spends our money for today is nowhere to be found on that list. To cite just a few examples, there is no constitutional authority for Congress to subsidize farms, bail out banks, or manage car companies. In this sense, I think we can safely say that America has departed from the constitutional principle of limited government that made us great and prosperous.

On the other side of the coin from limited government is individual liberty. The Founders understood private property as the bulwark of freedom for all Americans, rich and poor alike. But following a series of successful attacks on private property and free enterprise—beginning in the early 20th century and picking up steam during the New Deal, the Great Society, and then again recently—the government designed by our Founders and outlined in the Constitution has all but disappeared. Thomas Jefferson anticipated this when he said, “The natural progress of things is for liberty to yield and government to gain ground.”

To see the extent to which liberty is yielding and government is gaining ground, one need simply look at what has happened to taxes and spending. A tax, of course, represents a government claim on private property. Every tax confiscates private property that could otherwise be freely spent or freely invested. At the same time, every additional dollar of government spending demands another tax dollar, whether now or in the future. With this in mind, consider that the average American now works from January 1 until May 5 to pay the federal, state, and local taxes required for current government spending levels. Thus the fruits of more than one third of our labor are used in ways decided upon by others. The Founders favored the free market because it maximizes the freedom of all citizens and teaches respect for the rights of others. Expansive government, by contrast, contracts individual freedom and teaches disrespect for the rights of others. Thus clearly we are on what Friedrich Hayek called the road to serfdom, or what I prefer to call the road to tyranny.

As I said, the Constitution restricts the federal government to certain functions. What are they? The most fundamental one is the protection of citizens’ lives. Therefore, the first legitimate function of the government is to provide for national defense against foreign enemies and for protection against criminals here at home. These and other legitimate public goods (as we economists call them) obviously require that each citizen pay his share in taxes. But along with people’s lives, it is a vital function of the government to protect people’s liberty as well—including economic liberty or property rights. So while I am not saying that we should pay no taxes, I am saying that they should be much lower—as they would be, if the government abided by the Constitution and allowed the free market system to flourish.

And it is important to remember what makes the free market work. Is it a desire we all have to do good for others? Do people in New York enjoy fresh steak for dinner at their favorite restaurant because cattle ranchers in Texas love to make New Yorkers happy? Of course not. It is in the interest of Texas ranchers to provide the steak. They benefit themselves and their families by doing so. This is the kind of enlightened self-interest discussed by Adam Smith in his Wealth of Nations, in which he argues that the social good is best served by pursuing private interests. The same principle explains why I take better care of my property than the government would. It explains as well why a large transfer or estate tax weakens the incentive a property owner has to care for his property and pass it along to his children in the best possible condition. It explains, in general, why free enterprise leads to prosperity.

Ironically, the free market system is threatened today not because of its failure, but because of its success. Capitalism has done so well in eliminating the traditional problems of mankind—disease, pestilence, gross hunger, and poverty—that other human problems seem to us unacceptable. So in the name of equalizing income, achieving sex and race balance, guaranteeing housing and medical care, protecting consumers, and conserving energy—just to name a few prominent causes of liberal government these days—individual liberty has become of secondary or tertiary concern.

Imagine what would happen if I wrote a letter to Congress and informed its members that, because I am fully capable of taking care of my own retirement needs, I respectfully request that they stop taking money out of my paycheck for Social Security. Such a letter would be greeted with contempt. But is there any difference between being forced to save for retirement and being forced to save for housing or for my child’s education or for any other perceived good? None whatsoever. Yet for government to force us to do such things is to treat us as children rather than as rational citizens in possession of equal and inalienable natural rights.

We do not yet live under a tyranny, of course. Nor is one imminent. But a series of steps, whether small or large, tending toward a certain destination will eventually take us there. The philosopher David Hume observed that liberty is seldom lost all at once, but rather bit by bit. Or as my late colleague Leonard Read used to put it, taking liberty from Americans is like cooking a frog: It can’t be done quickly because the frog will feel the heat and escape. But put a frog in cold water and heat it slowly, and by the time the frog grasps the danger, it’s too late.

Again, the primary justification for increasing the size and scale of government at the expense of liberty is that government can achieve what it perceives as good. But government has no resources of its own with which to do so. Congressmen and senators don’t reach into their own pockets to pay for a government program. They reach into yours and mine. Absent Santa Claus or the tooth fairy, the only way government can give one American a dollar in the name of this or that good thing is by taking it from some other American by force. If a private person did the same thing, no matter how admirable the motive, he would be arrested and tried as a thief. That is why I like to call what Congress does, more often than not, “legal theft.” The question we have to ask ourselves is whether there is a moral basis for forcibly taking the rightful property of one person and giving it to another to whom it does not belong. I cannot think of one. Charity is noble and good when it involves reaching into your own pocket. But reaching into someone else’s pocket is wrong.

In a free society, we want the great majority, if not all, of our relationships to be voluntary. I like to explain a voluntary exchange as a kind of non-amorous seduction. Both parties to the exchange feel good in an economic sense. Economists call this a positive sum gain. For example, if I offer my local grocer three dollars for a gallon of milk, implicit in the offer is that we will both be winners. The grocer is better off because he values the three dollars more than the milk, and I am better off because I value the milk more than the three dollars. That is a positive sum gain. Involuntary exchange, by contrast, means that one party gains and the other loses. If I use a gun to steal a gallon of milk, I win and the grocer loses. Economists call this a zero sum gain. And we are like that grocer in most of what Congress does these days.

Some will respond that big government is what the majority of voters want, and that in a democracy the majority rules. But America’s Founders didn’t found a democracy, they founded a republic. The authors of The Federalist Papers, arguing for ratification of the Constitution, showed how pure democracy has led historically to tyranny. Instead, they set up a limited government, with checks and balances, to help ensure that the reason of the people, rather than the selfish passions of a majority, would hold sway. Unaware of the distinction between a democracy and a republic, many today believe that a majority consensus establishes morality. Nothing could be further from the truth.

Another common argument is that we need big government to protect the little guy from corporate giants. But a corporation can’t pick a consumer’s pocket. The consumer must voluntarily pay money for the corporation’s product. It is big government, not corporations, that have the power to take our money by force. I should also point out that private business can force us to pay them by employing government. To see this happening, just look at the automobile industry or at most corporate farmers today. If General Motors or a corporate farm is having trouble, they can ask me for help, and I may or may not choose to help. But if they ask government to help and an IRS agent shows up at my door demanding money, I have no choice but to hand it over. It is big government that the little guy needs protection against, not big business. And the only protection available is in the Constitution and the ballot box.

Speaking of the ballot box, we can blame politicians to some extent for the trampling of our liberty. But the bulk of the blame lies with us voters, because politicians are often doing what we elect them to do. The sad truth is that we elect them for the specific purpose of taking the property of other Americans and giving it to us. Many manufacturers think that the government owes them a protective tariff to keep out foreign goods, resulting in artificially higher prices for consumers. Many farmers think the government owes them a crop subsidy, which raises the price of food. Organized labor thinks government should protect their jobs from non-union competition. And so on. We could even consider many college professors, who love to secure government grants to study poverty and then meet at hotels in Miami during the winter to talk about poor people. All of these—and hundreds of other similar demands on government that I could cite—represent involuntary exchanges and diminish our freedom.

This reminds me of a lunch I had a number of years ago with my friend Jesse Helms, the late Senator from North Carolina. He knew that I was critical of farm subsidies, and he said he agreed with me 100 percent. But he wondered how a Senator from North Carolina could possibly vote against them. If he did so, his fellow North Carolinians would dump him and elect somebody worse in his place. And I remember wondering at the time if it is reasonable to ask a politician to commit political suicide for the sake of principle. The fact is that it’s unreasonable of us to expect even principled politicians to vote against things like crop subsidies and stand up for the Constitution. This presents us with a challenge. It’s up to us to ensure that it’s in our representatives’ interest to stand up for constitutional government.

Americans have never done the wrong thing for a long time, but if we’re not going to go down the tubes as a great nation, we must get about changing things while we still have the liberty to do so.


Reprinted by permission from Imprimis, a publication of Hillsdale College.
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