Enterprise Under Attack 46 STOCKS, BONDS, AND RULE BY FOOLS

The economic acumen of Establishment politicians, economists, and the financial press, never very high at best, has plunged to new lows in recent years. The state of confusion, self-contradiction, and general feather-brainedness has never been so rampant. Almost any event can now be ascribed to any cause, or to the contradiction of the very cause assigned the previous week.

If the Fed raises short-term interest rates, the same analyst can say at one point that this is sure to raise long-term rates very soon, while stating at another point that it is bound to lower long-term rates: each contradictory pronouncement being made with the same air of certitude and absolute authority. It is a wonder that the public doesn’t dismiss the entire guild of economists and financial experts (let alone the politicians) as a bunch of fools and charlatans.

In the past year and a half, the usual geyser of pseudo-economic humbug has accelerated into virtual gibberish by the fervent desire of the largely Clintonian Establishment to put a happy face on every possible morsel of economic news. Is unemployment up? But that’s good, you see, because it means that inflation will be less of a menace, which means that interest rates will fall, which means that unemployment will soon be falling. And besides, we don’t call layoffs “unemployment” any more, we call it “downsizing,” and that means the economy will get more productive, soon decreasing unemployment.

In pre-Clinton economics, moreover, it was always considered—by all schools of economic thought—BAD to increase taxes during a recession. But Clinton’s huge tax increase during a recession was an economic masterstroke, you see, because this will lower deficits, which in turn will lower interest rates, which in turn will bring us out of the recession.

What, you say that interest rates have gone up, despite the Clintonian budget staking much of its forecasts on the assurance that interest rates will go down? But that’s okay; because, you see, higher interest rates will check inflation, bringing interest rates down, so we were right all along! And so down means up, up means down, and round and round she goes, and where she stops nobody knows.

Any sane assessment of the current economic situation is made still more problematic by the National Bureau of Economic Research’s self-proclaimed “scientific” methodology of dating business cycles, which has been treated as Holy Writ by the economics profession for the past half-century. In this schema, there is exclusive concentration on finding the allegedly precise monthly date of the peak or trough of the business cycle, to the neglect of what is actually happening between these dates. Once a “trough” was officially proclaimed for some month in 1992, for example, every period since has to be an era of “recovery” by definition, even though the supposed recovery may be only one centimeter less feeble than the previous “recession.” In any common sense view, however, the fact that we might be slightly better off now than at the depth of the recession scarcely makes the current period a “recovery.”

Let us now try to dispel two of the most common—and most egregious—economic fallacies of our current epoch. First is the Low Interest Rate Fetish. It all reminds me of the Cargo Cult that took root in areas of the South Pacific during World War II. The primitive natives there saw big iron birds come down from the sky and emit U.S. soldiers replete with food, clothing, radios, and other goodies.

After the war, the U.S. Army left the area, and the old flow of abundant goodies disappeared. Whereupon the natives, using high-tech methods of empirical correlation, concluded that if these giant birds could be induced to return, the eagerly-sought goodies would come back with them. The natives then constructed papier-mache replicas of birds that would flap their wings and try to “attract” the large iron birds back to their villages.

In the same way, the British, the French and other countries saw, in the seventeenth century, that the Dutch were by far the most prosperous country in Europe. In casting around for the alleged cause of Dutch prosperity, the English concluded that the reason must be the lower interest rates that the Dutch enjoyed. Yet, many more plausible causal theories for Dutch prosperity could have been offered: fewer controls, freer markets, and lower taxes.

Low interest rates were merely a symptom of that prosperity, not the cause. But many English theorists, enchanted to have found the alleged causal chain called for creating prosperity by forcing down the rate of interest by government action: either by pushing down the interest rate below the “natural” or free market rate, determined by the rate of time preference. But bringing down the interest rate by government coercion lowers it below the true, “time preference” rate, thereby causing vast dislocations and distortions on the market.

The other point that should be made is the total amnesia of the financial press. In the old days, before World War II, one hallmark of a “recession” was the fact that prices were falling, as well as production and employment. And yet, in every recession since World War II, prices, especially consumer goods prices, have been rising.

In short, in the permanent post-World War II inflation attendant on the shift from a gold standard to fiat paper money, we have suffered through several “inflationary recessions,” where we get hit by both inflation and recession at the same time, suffering the worst of both worlds. And yet, while consumer prices, or the “cost of living,” has not fallen for a half-century, the overriding fact of inflationary recession has been poured down the Orwellian “memory hole,” and everyone duly heaves a sigh of relief when inflation accelerates because “at least we won’t have a recession,” or when unemployment increases that “at least there is no threat of inflation.” And in the meanwhile inflation has become permanent.

And yet everyone still acts as if the Keynesian hokum of the “inflation-unemployment tradeoff” (the so-called “Phillips curve”) is a valid and self-evident insight. When will people realize that this “tradeoff” is about as correct as the forecast that the Soviet Union and the United States would have the same gross national product and standard of living by 1984. If we look, for example, at the benighted countries that suffer from the ravages of hyper-inflation (Russia, Brazil, Poland) they, at the same, time suffer from loss of production and unemployment; while, on the other hand, countries with almost zero inflation, such as Switzerland, also enjoy close to zero unemployment.

Finally, to sum up our current macroeconomic situation: During the 1980s, the Federal Reserve embarked on a decade of inflationary bank credit expansion, an expansion fueled by credit inflation of the Savings & Loans. The fact that prices only rose moderately was just as irrelevant as a similar situation during the inflationary boom of the 1920s. At the end of the 1980s, as at the end of the 1920s, the American—and the world—economy paid a heavy price in a lengthy recession that burst the “bubble” of the inflationary boom, that liquidated unsound investments, lowered industrial commodity prices, and, in particular, ravaged the real estate market that had been the major focus of the boom in the United States.

To try to get out of this recession, the Fed inflated bank reserves and pushed down short-term interest rates still further: with resulting bank credit expanding not so much the real industrial economy, which stayed pretty much depressed, but generating instead an artificial boom in the stock and bond markets. The stock and bond price boom of the last year or two has clearly been so out of line with current earnings that one of two things had to happen: either a spectacular recovery in the real world of industry to warrant the higher stock prices; or a collapse of the swollen financial markets.

For those of us skeptical about any magical economic recovery in the near future, and critical, too, of the feasibility of any permanent lowering by government manipulation of the rate of interest below the time-preference rate, a sharp stock and bond price decline was, and continues to be, in the cards.

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First published in June 1994.

47

THE SALOMON BROTHERS SCANDAL

Financial scandals are juicy, dramatic, and fun, especially when they bring down such arrogant and aggressive social lions as Salomon Brothers’ head, John Gutfreund and his crew. And even more so when they elevate, as the rugged Nebraskan in the white hat riding in to Wall Street to try to save the day, Mr. Integrity, billionaire Warren Buffett (coincidentally, the son of my old friend, the staunch libertarian and pro-gold Congressman, the late Howard Buffett). But when we have stopped exhilarating in Mr. Gutfreund’s grievous fall, we might ponder the matter a bit more deeply.

In the first place, what did Salomon Brothers do that merits all the firings and the stripping of epaulets from the shoulders of the top Salomon executives? That they finagled a bit to get around rules on maximum share of government bond issues, doesn’t seem to merit all this hysteria. Why should Salomon have cleaved solemnly to rules that make no sense whatever? But Salomon might have cornered the market temporarily on some new Treasury issues? So what? Why shouldn’t they make some money at the expense of competitors?

The only thing clearly beyond the pale done by Salomon Brothers was to sign its customers’ names to bond orders without their knowledge or consent. That, surely, was fraud and merits censure; but, again, it needs to be pointed out that such chicanery would not even have been considered were it not to evade the silly maximum purchase regulations imposed by the Treasury.

If much too much is being made of Salomon’s bit of hanky-panky, does this mean that nothing is wrong on the government bond market? Quite the contrary. This fuss was made possible by a much more deeply-rooted scandal which no one has denounced: the fact that the U.S. Treasury has, for decades, conferred special privilege upon a handful of government bond dealers, whom it has picked out of the pack and designated as “primary dealers.” Then, instead of selling its new bond issues at auction in the open market, the Treasury sells the great bulk of them to these primary dealers, who in turn resell them to the rest of the market.

In the meanwhile, there is cozy and continuing conferring by the Treasury with these privileged big bond-dealers, who are grouped together in an influential lobbying cartel called the Public Securities Association (once named the Primary Dealers Association).

The Treasury, of course, claims that it is more efficient to deal with these designated primary dealers, and it can thus finance its bond issues more cheaply. But surely the cozy closed partnership and the conflicts of interest it conjures up, more than makes up for the alleged benefit by bathing the entire proceedings in what looks very much like cartel privilege. The small group of large dealers benefits at the expense of their smaller competitors.

Moreover, the problem in the government bond market is even deeper. Once a small and relatively insignificant part of the capital market, the Treasury bond market now looms massively, casting its blight on all credit and capital. The total U.S. public debt now amounts to $3.61 trillion, of which no less than $117 billion of securities changes hands every day. But a flourishing government bond market means a market starved for private capital and credit; it means that increasingly, private savings are being siphoned away from productive investments and into the rathole of wasteful and counter-productive government expenditures.

It is doubtful, therefore, whether we really want a smoothly running and efficient government bond market. On the contrary, a government bond market in difficulty is a market where less of our savings is poured down a rathole, and more is channeled into productive investment that will raise our living standards.

We need, in fact, to do some long, hard thinking about the blight of government debt on our capital markets. Wouldn’t it be better if such debt were to disappear altogether? One beneficial reform would be to return to the route of Britain in the nineteenth century, where much government debt was due not in six months, or five years, or 20 years, but was permanent debt, or “consols,” that never came due at all.

The permanent consol paid perpetual interest, and was never contracted to pay its principal. If the British government wanted to reduce the public debt, it could use its fiscal surplus to buy back and cancel some of the consols. Replacing our current debt with consols would mean that the government would not have to keep coming back to the bond market, redeem principal, and refloat the debt; the crowding out of private credit and investment would be far smaller. Of course, the government would then have to pay higher interest since the principal would never be redeemed; but that would be a small price to pay for lifting so much of the debt burden from the capital markets.

Alternatively, and more radically, we could even ponder the old drastic Jeffersonian solution: simply repudiating the debt, and writing it off the books. Undoubtedly, repudiation would be a severe blow to American bondholders; on the other hand, think of the burden that would be lifted from U.S. taxpayers! Think of the spur to savings and productive investment! It might be replied, however, that, upon such a stark declaration of bad faith and bankruptcy, no one would lend money to the Treasury for a long time thereafter. But wouldn’t this be a blessing? Surely a world where people refuse, for one reason or another, to trust or invest in the operations of government, would be a world happily inoculated against the temptations of statism.

Congress, in its wisdom, is trying to decide whether the Salomon Brothers scandal merits more severe regulation of the bond market. It should look first, however, to removing government privilege, from that market, such as the primary dealers’ cartel and the vast scope of the government bond market. As in other parts of the economy, and as in the Communist countries seeking freedom, the best course for government, far from coining new plans and regulations, would be to get itself out of the way, as quickly as possible. Once again, the best way for government to benefit the economy is to disappear.

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First published in November 1991.

48

NINE MYTHS ABOUT THE CRASH

Ever since Black, or Meltdown, Monday October 19, 1987, the public has been deluged with irrelevant and contradictory explanations and advice from politicians, economists, financiers, and assorted pundits. Let’s try to sort out and rebut some of the nonsense about the nature, causes, and remedies for the crash.

Myth 1:It was not a crash, but a “correction.”

Rubbish. The market was in a virtual crash state since it started turning down sharply from its all-time peak at the end of August. Meltdown Monday simply put the seal on a contraction process that had gone on since early September.

Myth 2:The crash occurred because stock prices had been “overvalued,” and now the overvaluation has been cured.

This adds a philosophical fallacy to Myth 1. To say that stock prices fell because they had been overvalued is equivalent to the age-old fallacy of “explaining” why opium puts people to sleep by saying that it “has dormitive power.” A definition has been magically transmuted into a “cause.” By definition, if stock prices fall, this means that they had been previously overvalued. So what? This “explanation” tells you nothing about why they were overvalued or whether or not they are “over” or “under” valued now, or what in the world is going to happen next.

Myth 3:The crash came about because of computer trading, which in association with stock index futures, has made the stock market more volatile. Therefore either computer trading or stock index futures or both, should be restricted/outlawed.

This is a variant of the scapegoat term “computer error” employed to get “people errors” off the hook. It is also a variant of the old Luddite fallacy of blaming modern technology for human error and taking a crowbar to wreck the new machines. People trade, and people program computers. Empirically, moreover, the “tape” was hours behind the action on Black Monday, and so computers played a minimal role. Stock index futures are an excellent new way for investors to hedge against stock price changes, and should be welcomed instead of fastened on—by its competitors in the old-line exchanges—to be tagged as the fall guy for the crash. Blaming futures or computer trading is like shooting the messenger—the markets that brings bad financial news. The acme of this reaction was the threat—and sometimes the reality—of forcibly shutting down the exchanges in a pitiful and futile attempt to hold back the news by destroying it. The Hong Kong exchange closed down for a week to try to stem the crash and, when it reopened, found that the ensuing crash was far worse as a result.

Myth 4:A major cause of the crash was the big trade deficit in the U.S.

Nonsense. There is nothing wrong with a trade deficit. In fact, there is no payment deficit at all. If U.S. imports are greater than exports, they must be paid for somehow, and the way they are paid is that foreigners invest in dollars, so that there is a capital inflow into the U.S. In that way, a big trade deficit results in a zero payment deficit.

Foreigners had been investing heavily in dollars—in Treasury deficits, in real estate, factories, etc.—for several years, and that’s a good thing, since it enables Americans to enjoy a higher-valued dollar (and consequently cheaper imports) than would otherwise be the case.

But, say the advocates of Myth 4, the terrible thing is that the U.S. has, in recent years, become a debtor instead of a creditor nation. So what’s wrong with that? The United States was in the same way a debtor nation from the beginning of the republic until World War I, and this was accompanied by the largest rate of economic and industrial growth and of rising living standards, in the history of mankind.

Myth 5:The budget deficit is a major cause of the crash, and we must work hard to reduce that deficit, either by cutting government spending or by raising taxes or both.

The budget deficit is most unfortunate, and causes economic problems, but the stock market crash was not one of them. Just because something is bad policy doesn’t mean that all economic ills are caused by it. Basically, the budget deficit is as irrelevant to the crash, as the even larger deficit was irrelevant to the pre-September 1987 stock market boom. Raising taxes is now the favorite crash remedy of both liberal and conservative Keynesians. Here, one of the few good points in the original, or “classical,” Keynesian view has been curiously forgotten. How in the world can one cure a crash (or the coming recession), by raising taxes?

Raising taxes will clearly level a damaging blow to an economy already reeling from the crash. Increasing taxes to cure a crash was one of the major policies of the unlamented program of Herbert Hoover. Are we longing for a replay? The idea that a tax increase would “reassure” the market is straight out of Cloud Cuckoo-land.

Myth 6:The budget should be cut, but not by much, because much lower government spending would precipitate a recession.

Unfortunately, the way things are, we don’t have to worry about a big cut in government spending. Such a cut would be marvelous, not only for its own sake, but because a slash in the budget would reduce the unproductive boondoggles of government spending, and therefore tip the social proportion of saving to consumption toward more saving and investment.

More saving and investment in relation to consumption is an Austrian remedy for easing a recession, and reducing the amount of corrective liquidation that the recession has to perform, in order to correct the malinvestments of the boom caused by the inflationary expansion of bank credit.

Myth 7:What we need to offset the crash and stave off a recession is lots of monetary inflation (called by the euphemistic term “liquidity”) and lower interest rates. Fed chairman Alan Greenspan did exactly the right thing by pumping in reserves right after the crash, and announcing that the Fed would assure plenty of liquidity for banks and for the entire market and the whole economy. (A position taken by every single variant of the conventional economic wisdom, from Keynesians to “free marketeers.”)

In this way, Greenspan and the federal government have proposed to cure the disease—the crash and future recession—by pouring into the economy more of the very virus (inflationary credit expansion) that caused the disease in the first place. Only in Cloud Cuckoo-land, to repeat, is the cure for inflation, more inflation. To put it simply: the reason for the crash was the credit boom generated by the double-digit monetary expansion engineered by the Fed in the last several years. For a few years, as always happens in Phase I of an inflation, prices went up less than the monetary inflation. This, the typical euphoric phase of inflation, was the “Reagan miracle” of cheap and abundant money, accompanied by moderate price increases.

By 1986, the main factors that had offset the monetary inflation and kept prices relatively low (the unusually high dollar and the OPEC collapse) had worked their way through the price system and disappeared. The next inevitable step was the return and acceleration of price inflation; inflation rose from about 1 percent in 1986 to about 5 percent in 1987.

As a result, with the market sensitive to and expecting eventual reacceleration of inflation, interest rates began to rise sharply in 1987. Once interest rates rose (which had little or nothing to do with the budget deficit), a stock market crash was inevitable. The previous stock market boom had been built on the shaky foundation of the low interest rates from 1982 on.

Myth 8:The crash was precipitated by the Fed’s unwise tight money policy from April 1987 onward, after which the money supply was flat until the crash.

There is a point here, but a totally distorted one. A flat money supply for six months probably made a coming recession inevitable, and added to the stock market crash. But that tight money was a good thing nevertheless. No other school of economic thought but the Austrian understands that once an inflationary bank credit boom has been launched, a corrective recession is inevitable, and that the sooner it comes, the better.

The sooner a recession comes, the fewer the unsound investments that the recession has to liquidate, and the sooner the recession will be over. The important point about a recession is for the government not to interfere, not to inflate, not to regulate, and to allow the recession to work its curative way as quickly as possible. Interfering with the recession, either by inflating or regulating, can only prolong the recession and make it worse, as in the 1930s. And yet the pundits, the economists of all schools, the politicians of both parties, rush heedless into the agreed-upon policies of: Inflate and Regulate.

Myth 9:Before the crash, the main danger was inflation, and the Fed was right to tighten credit. But since the crash, we have to shift gears, because recession is the major enemy, and therefore the Fed has to inflate, at least until price inflation accelerates rapidly.

This entire analysis, permeating the media and the Establishment, assumes that the great fact and the great lesson of the 1970s, and of the last two big recessions, never happened: i.e., inflationary recession. The 1970s have gone down the Orwellian memory hole, and the Establishment is back, once again, spouting the Keynesian Phillips Curve, perhaps the greatest single and most absurd error in modern economics.

The Phillips Curve assumes that the choice is always either more recession and unemployment, or more inflation. In reality, the Phillips Curve, if one wishes to speak in those terms, is in reverse: the choice is either more inflation and bigger recession, or none of either. The looming danger is another inflationary recession, and the Greenspan reaction indicates that it will be a whopper.

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First published in January 1988.

49

MICHAEL R. MILKEN VS. THE POWER ELITE

Quick: what do the following world-famous men have in common: John Kenneth Galbraith, Donald J. Trump, and David Rockefeller? What values could possibly be shared by the socialist economist who got rich by writing best-selling volumes denouncing affluence; the billionaire wheeler-dealer; and the fabulous head of the financially and politically powerful Rockefeller World Empire?

Would you believe: hatred of making money and of “capitalist greed?” Yes, at least when it comes to making money by one particular man, the Wall Street bond specialist Michael R. Milken. In an article in which the August New York Times was moved to drop its cherished veil of objectivity and shout in its headline, “Wages Even Wall St. Can’t Stomach” (April 3, 1989), these three gentlemen each weighed in against the $550 million earned by Mr. Milken in 1987. Galbraith, of course, was Galbraith, denouncing the “process of financial aberration” under modern American capitalism.

More interesting were billionaires Trump and Rockefeller. Speaking from his own lofty financial perch, Donald Trump unctuously declared of Milken’s salary, “you can be happy on a lot less money,” going on to express his “amazement” that his former employers, the Wall Street firm of Drexel Burnham Lambert “would allow someone to benefit that greatly.” Well, it should be easy enough to clear up Mr. Trump’s alleged befuddlement. We would use economic jargon and say that the payment was justified by Mr. Milken’s “marginal value product” to the firm, or simply say that Milken was clearly worth it, otherwise Drexel Burnham would not have happily continued the arrangement from 1975 until this year.

In fact, Mr. Milken was worth it because he has been an extraordinarily creative financial innovator. During the 1960s, the existing corporate power elite, often running their corporations inefficiently—an elite virtually headed by David Rockefeller—saw their positions threatened by takeover bids, in which outside financial interests bid for stockholder support against their own inept managerial elites.

The exiting corporate elites turned—as usual—for aid and bailout to the federal government, which obligingly passed the Williams Act (named for the New Jersey Senator who was later sent to jail in the Abscam affair) in 1967. Before the Williams Act, takeover bids could occur quickly and silently, with little hassle. The 1967 Act, however, gravely crippled takeover bids by decreeing that if a financial group amassed more than 5 percent of the stock of a corporation, it would have to stop, publicly announce its intent to arrange a takeover bid, and then wait for a certain time period before it could proceed on its plans. What Milken did was to resurrect and make flourish the takeover bid concept through the issue of high-yield bonds (the “leveraged buy-out”).

The new takeover process enraged the Rockefeller-type corporate elite, and enriched both Mr. Milken and his employers, who had the sound business sense to hire Milken on commission, and to keep the commission going despite the wrath of the Establishment. In the process Drexel Burnham grew from a small, third-tier investment firm to one of the giants of Wall Street.

The Establishment was bitter for many reasons. The big banks who were tied in with the existing, inefficient corporate elites, found that the upstart takeover groups could make an end run around the banks by floating high-yield bonds on the open market. The competition also proved inconvenient for firms who issue and trade in blue-chip, but low-yield, bonds; these firms soon persuaded their allies in the Establishment media to sneeringly refer to their high-yield competition as “junk” bonds.

People like Michael Milken perform a vitally important economic function for the economy and for consumers, in addition to profiting themselves. One would think that economists and writers allegedly in favor of the free market would readily grasp this fact. In this case, such entrepreneurs aid the process of shifting the ownership and control of capital from inefficient to more efficient and productive hands—a process which is great for everyone, except, of course, for the inefficient Old Guard elites whose proclaimed devotion to the free markets does not stop them from using the coercion of the federal government to try to resist or crush their efficient competitors.

We should also examine the evident hypocrisy of left-liberals like Galbraith, who, ever since the 1932 book by Adolf Berle and Gardiner Means, The Modern Corporation and Private Property, have been weeping crocodile tears over the plight of the poor stockholders, who have been deprived of control of their corporation by a powerful managerial elite, responsible neither to consumers nor stockholders. These liberals have long maintained that if only this stockholder-controlled capitalism could be restored, they would no longer favor socialism or stringent government control of business and the economy.

The Berle-Means thesis was always absurdly overwrought, but to the extent it was correct, one would think that left-liberals would have welcomed takeover bids, leveraged buyouts, and Michael Milken with cheers and huzzahs. For here, at last, was an easy way for stockholders to take the control of their corporations into their own hands, and kick out inefficient or corrupt management that reduced their profits. Did liberals in fact welcome the new financial system ushered in by Milken and others? As we all know, quite the contrary; they furiously denounced these upstarts as exemplars of terrible “capitalist greed.”

David Rockefeller’s quotation about Milken is remarkably revealing: “Such an extraordinary income inevitably raises questions as to whether there isn’t something unbalanced in the way our financial system is working.” How does Rockefeller have the brass to denounce high incomes? Ludwig von Mises solved the question years ago by pointing out that men of great inherited wealth, men who get their income from capital or capital gains, have favored the progressive income tax, because they don’t want new competitors rising up who make their money on personal wage or salary incomes. People like Rockefeller or Trump are not appalled, quite obviously, at high incomes per se; what appalls them is making money the old-fashioned way, i.e., by high personal wages or salaries. In other words, through labor income.

And yes, Mr. Rockefeller, this whole Milken affair, in fact, the entire reign of terror that the Department of Justice and the Securities and Exchange Commission have been conducting for the last several years in Wall Street, raises a lot of questions about the workings of our political as well as our financial system. It raises grave questions about the imbalance of political power enjoyed by our existing financial and corporate elites, power that can persuade the coercive arm of the federal government to repress, cripple, and even jail people whose only “crime” is to make money by facilitating the transfer of capital from less to more efficient hands. When creative and productive businessmen are harassed and jailed while rapists, muggers, and murderers go free, there is something very wrong indeed.

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First published in June 1989.

50

PANIC ON WALL STREET

There is a veritable Reign of Terror rampant in the United States—and everyone’s cheering. “They should lock those guys up and throw away the key. Nothing is bad enough for them,” says the man-in-the-street.

Distinguished men are literally being dragged from their plush offices in manacles. Indictments are being handed down en masse, and punishments, including jail terms, are severe. The most notorious of these men (a) was forced to wire up and inform on his colleagues; (b) was fined $100 million; (c) was barred from his occupation for life; and (d) faces a possibility of five years in prison. The press, almost to a man, deplored the excessive lightness of this treatment.

Who are these vicious criminals? Mass murderers? Rapists? Soviet spies? Terrorists bombing restaurants or kidnaping innocent people? No, far worse than these, apparently. These dangerous, sinister men have committed the high crime of “insider trading.” As one knowledgeable lawyer explained to the New York Times: “Put yourself in the role of a young investment banker who sees one of your mentors led away by Federal marshals. It will have a very powerful effect on you and perhaps make you realize that insider trading is just as serious as armed robbery as far as the government is concerned.”

This attorney’s statement is grotesque enough, but it actually understates the case. Armed robbers are usually coddled by our judicial system. Columnists and social workers worry about their deprived backgrounds as youths, the friction between their parents, their lack of supervised playgrounds as children, and all the rest. And they are let off with a few months’ probation to rob or mug again. But no one worries about the broken homes that may have spawned investment bankers and inside traders, and no social workers are there to hold their hands. They receive the full might of the law, and are sent straight to jail without stopping at “Go.”

A major difference between the “crime” of insider trading and the other crimes is that insider trading is a “crime” with no victims. What is this dread inside trading? Very simply, it is using superior knowledge to make profits on stock (or other) markets. A terrible thing? But this, after all, is what entrepreneurship and the free-enterprise system is all about.

We live in a world of risk and uncertainty, and in that world, the more able and knowledgeable entrepreneurs make profits, while ignorant entrepreneurs suffer losses and eventually get out of business altogether.

This is what happens, not only in the financial markets, but in business in general. The assumption of risk by businessmen, seeking profits and hoping to avoid losses, is a voluntary assumption by businessmen themselves. Not only is this process the essence of the free market, but the market, by rewarding able and farsighted men and “punishing” the ignorant and short-sighted, places capital resources into the hands of the most knowledgeable and efficient, and thereby improves the workings of the entire economic system.

And yet there are no victims of inside trading as there are in robbery or murder. Suppose that A holds 1,000 shares of XYZ Co. stock, and wants to sell those shares. B has “inside knowledge” that XYZ will soon merge with Arbus Corp., with expected increase in value per share. B steps in and buys the 1,000 shares for $50 apiece; B, let us say, is right, the merger is soon announced, and the XYZ shares rise to $75 apiece. B sells and makes $25 per share, or $25,000 profit. B has profited from his inside knowledge. But has A been victimized? Certainly not, because if there had been no inside knowledge at all, A would still have sold his shares for $50.

The only difference is that someone else, say C, would have bought the shares, and made the $25,000 profit. The difference, of course, is that B would have made the profits as a knowledgeable investor, whereas C would have been simply lucky. But isn’t it better for the economy to have capital resources owned by the knowledgeable and far-sighted rather than merely by the lucky? And, further, the point is that A hasn’t been deprived of a dime by B’s inside knowledge.

There is, in short, nothing wrong and everything right with inside trading. If anything, inside traders should be hailed as heroes of the free market instead of being apprehended in chains.

But, you say, it is “unfair” for some men to know more than others, and actually to profit by that knowledge. But what kind of a world-view dubs it “unfair” for some men to know more than others? It is the world-view of the egalitarian, who believes that any kind of superiority of one person over another—in ability, or knowledge, or income, or wealth—is somehow “unfair.” But men are not ants or bees or robots; each individual is unique and different from others, and ability, talent, and wealth will therefore differ. That is the glory of the human race, to be admired and protected rather than destroyed, for in such destruction will perish human freedom and civilization itself.

There is another critical aspect to the current Reign of Terror over Wall Street. Freedom of speech, and the right of privacy, particularly cherished possessions of man, have disappeared. Wall Streeters are literally afraid to talk to one another, because muttering over a martini that “Hey, Jim, it looks like XYZ will merge,” or even, “Arbus is coming out soon with a hot new product,” might well mean indictment, heavy fines, and jail terms. And where are the intrepid guardians of the First Amendment in all this?

But of course, it is literally impossible to stamp out insider trading, or Wall Streeters talking to another, just as even the Soviet Union, with all its awesome powers of enforcement, has been unable to stamp out dissent or “black (free) market” currency trading. But what the outlawry of insider trading (or of “currency smuggling,” the latest investment banker offense to be indicted) does is to give the federal government a hunting license to go after any person or firm who may be out of power in the financial-political struggles among our power elites. (Just as outlawing food would give a hunting license to get after people out of power who are caught eating.) It is surely no accident that the indictments have been centered in groups of investment bankers who are now out of power.

Specifically, the realities are that, since last November, firms such as Drexel Burnham Lambert; Kidder Peabody; and Goldman Sachs; have been under savage assault by the federal government. It is no accident that these are precisely the firms who have been financing takeover bids, which have benefited stockholders at the expense of inefficient, old-line corporate managerial elites. The federal crackdown on these and allied firms is the old-line corporate way of striking back. And looking on, the American public, blinded by envy of the intelligent and the wealthy, and by destructive egalitarian notions of “fairness,” cheer to the rafters.

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First published in June 1987.

51

GOVERNMENT-BUSINESS “PARTNERSHIPS”

The “partnership of government and business” is a new term for an old, old condition. We often fail to realize that the point of much of Big Government is precisely to set up such “partnerships,” for the benefit of both government and business, or rather, of certain business firms and groups that happen to be in political favor.

We all know, for example, that “mercantilism,” the economic system of Western Europe from the sixteenth through the eighteenth centuries, was a system of Big Government, of high taxes, large bureaucracy, and massive controls of trade and industry. But what we tend to ignore is that the point of many of these controls was to tax and restrict consumers and most merchants and manufacturers in order to grant monopolies, cartels, and subsidies to favored groups.

The king of England, for example, might confer upon John Jones a monopoly of the production of sale of all playing cards, or of salt, in the kingdom. This would mean that anyone else trying to produce cards or salt in competition with Jones would be an outlaw, that is, in effect, would be shot in order to preserve Jones’s monopoly.

Jones either received this grant of monopoly because he was a particular favorite or, say, a cousin, of the king, or because he paid for a certain number of years for the monopoly grant by giving the king what was in effect the discounted sum of expected future returns from that privilege. Kings in that early modern period, as in the case of all governments in any and all times, were chronically short of money, and the sale of monopoly privilege was a favorite form of raising funds.

A common form of sale of privilege, especially hated by the public, was “tax farming.” Here, the king would, in effect, “privatize” the collection of taxes by selling, “farming out,” the right to collect taxes in the kingdom for a given number of years. Think about it: how would we like it if, for example, the federal government abandoned the IRS, and sold, or farmed out, the right to collect income taxes for a certain number of years to, say, IBM or General Dynamics? Do we want taxes to be collected with the efficiency of private enterprise?

Considering that IBM or General Dynamics would have paid handsomely in advance for the privilege, these firms would have the economic incentive to be ruthless in collecting taxes. Can you imagine how much we would hate these corporations? We then have an idea of how much the general public hated the tax farmers, who did not even enjoy the mystique of sovereignty or kingship in the minds of the masses.

In our enthusiasms for privatization, by the way, we should stop and think whether we would want certain government functions to be privatized, and conducted efficiently. Would it really have been better, for example, if the Nazis had farmed out Auschwitz or Belsen to Krupp or I.G. Farben?

The United States began as a far freer country than any in Europe; for we began in rebellion against the controls, monopoly privileges, and taxes of mercantilist Britain. Unfortunately, we started catching up to Europe during the Civil War. During that terrible fratricidal conflict, the Lincoln administration, seeing that the Democratic party in Congress was decimated by the secession of the Southern states, seized the opportunity to push the program of statism and Big Government that the Republican Party, and its predecessor, the Whigs, had long cherished.

For we must realize that the Democratic party, throughout the nineteenth century, was the party of laissez-faire, the party of separation of the government, and especially the federal government, from the economy and from virtually everything else. The Whig-Republican party was the party of the “American System,” of the partnership of government and business.

Under cover of the Civil War, then, the Lincoln administration pushed through the following radical economic changes: a high protective tariff on imports; high federal excise taxes on liquor and tobacco (which they regarded as “sin taxes”); massive subsidies to newly established transcontinental railroads, in money per mile of construction and in enormous grants of land—all this fueled by a system of naked corruption; federal income tax; the abolition of the gold standard and the issue of irredeemable fiat money (“greenbacks”) to pay for the war effort; and a quasi-nationalization of the previous relatively free banking system, in the form of the National Banking System established in acts of 1863 and 1864.

In this way, the system of minimal government, free trade, no excise taxes, a gold standard, and more or less free banking of the 1840s and 1850s was replaced by its opposite. And these changes were largely permanent. The tariffs and excise taxes remained; the orgy of subsidies to uneconomic and overbuilt transcontinental railroads was ended only with their collapse in the Panic of 1873, but the effects lingered on in the secular decline of the railroads during the twentieth century. It took a Supreme Court decision to declare the income tax unconstitutional (later reversed by the 16th Amendment); it took fourteen years after the end of the war to return to the gold standard.

And we were never able to shed the National Banking System, in which a few “national banks” chartered by the federal government were the only banks permitted to issue notes. All the private, state-chartered banks, had to keep deposits with the national banks permitting them to pyramid inflationary credit on top of those national banks. The national banks kept their reserves in government bonds, which they inflated on top of.

The chief architect of this system was Jay Cooke, long-time financial patron of the corrupt career of Republican Ohio politician Salmon P. Chase. When Chase became Secretary of the Treasury under Lincoln, he promptly appointed his patron Cooke monopoly underwriter of all government bonds issued during the war. Cooke, who became a multimillionaire investment banker from this monopoly grant and became dubbed “the Tycoon,” added greatly to his boodle by lobbying for the National Banking Act, which provided a built-in market for his bonds, since the national banks could inflate credit by multiple amounts on top of the bonds.

The National Banking Act, by design, was a halfway house to central banking, and by the time of the Progressive Era after the turn of the twentieth century, the failings of the system enabled the Establishment to push through the Federal Reserve System as part of the general system of neomercantilism, cartelization, and partnership of government and industry, imposed in that period. The Progressive Era, from 1900 through World War I, reimposed the income tax, federal, state, and local government regulations and cartels, central banking, and finally a totally collectivist “partnership” economy during the war. The stage was set for the statist system we know all too well.

The Bush administration carried on the old Republican tradition: still raising taxes, inflating, pushing a system of fiat paper money, expanding controls over and through the Federal Reserve System, and maneuvering to extend inflationary and regulatory controls still further over international currencies and goods.

The northeastern Republican Establishment is still cartelizing, controlling, regulating, handing out contracts to business favorites, and bailing out beloved crooks and losers. It is still playing the old “partnership” game—and still, of course, at our expense.

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First published in September 1990.

52

AIRPORT CONGESTION:
A CASE OF MARKET FAILURE?

The press touted it as yet another chapter in the unending success story of “government-business cooperation.” The traditional tale is that a glaring problem arises, caused by the unchecked and selfish actions of capitalist greed. And that then a wise and far-sighted government agency, seeing deeply and having only the public interest at heart, steps in and corrects the failure, its sage regulations gently but firmly bending private actions to the common good.

The latest chapter began in the summer of 1984, when it came to light that the public was suffering under a 73 percent increase in the number of delayed flights compared to the previous year. To the Federal Aviation Agency (FAA) and other agencies of government, the villain of the piece was clear. Its own imposed quotas on the number of flights at the nation’s airports had been lifted at the beginning of the year, and, in response to this deregulation, the short-sighted airlines, each pursuing its own profits, over-scheduled their flights in the highly remunerative peak hours of the day. The congestion and delays occurred at these hours, largely at the biggest and most used airports. The FAA soon made it clear that it was prepared to impose detailed, minute-by-minute maximum limits on takeoffs and landings at each airport, and threatened to do so if the airlines themselves did not come up with an acceptable plan. Under this bludgeoning, the airlines came up with a “voluntary” plan that was duly approved at the end of October, a plan that imposed maximum quotas of flights at the peak hours. Government-business cooperation had supposedly triumphed once more.

The real saga, however, is considerably less cheering. From the beginning of the airline industry until 1978, the Civil Aeronautics Board (CAB) imposed a coerced cartelization on the industry, parcelling out routes to favored airlines, and severely limiting competition, and keeping fares far above the free-market price. Largely due to the efforts of CAB chairman and economist Alfred E. Kahn, the Airline Deregulation Act was passed in 1978, deregulating routes, flights, and prices, and abolishing the CAB at the end of 1984.

What has really happened is that the FAA, previously limited to safety regulation and the nationalization of air traffic control services, has since then moved in to take up the torch of cartelization lost by the CAB. When President Reagan fired the air-traffic controllers during the PATCO strike in 1981, a little-heralded consequence was that the FAA stepped in to impose coerced maximum flights at the various airports, all in the name of rationing scarce air-traffic control services. An end of the PATCO crisis led the FAA to remove the controls in early 1984, but now here they are more than back again as a result of the congestion.

Furthermore, the quotas are now in force at the six top airports. Leading the parade in calling for the controls was Eastern Airlines, whose services using Kennedy and LaGuardia airports have, in recent years, been outcompeted by scrappy new People’s Express, whose operations have vaulted Newark Airport from a virtual ghost airport to one of the top six (along with LaGuardia, Kennedy, Denver, Atlanta, and O’Hare at Chicago). In imposing the “voluntary” quotas, it does not seem accidental that the peak hour flights at Newark Airport were drastically reduced (from 100 to 68), while the LaGuardia and Kennedy peak hour flights were actually increased.

But, in any case, was the peak hour congestion a case of market failure? Whenever economists see a shortage, they are trained to look immediately for the maximum price control below the free-market price. And sure enough, this is what has happened. We must realize that all commercial airports in this country are government-owned and operated—all by local governments except Dulles and National which are owned by the federal government. And governments are not interested, as is private enterprise, in rational pricing, that is, in a pricing that achieves the greatest profits. Other political considerations invariably take over. And so every airport charges fees for its “slots” (landing and takeoff spots on its runways) far below the market-clearing price that would be achieved under private ownership. Hence congestion occurs at valuable peak hours, with private corporate jets taking up space from which they would obviously be out-competed by the large commercial airliners.

The only genuine solution to airport congestion is to allow market-clearing pricing, with far higher slot fees at peak than at non-peak hours. And this would accomplish the task while encouraging rather than crippling competition by the compulsory rationing of underpriced slots imposed by the FAA. But such rational pricing will only be achieved when airports are privatized—taken out of the inefficient and political control of government.

There is also another important area to be privatized. Air-traffic control services are a compulsory monopoly of the federal government, under the aegis of the FAA. Even though the FAA promised to be back to pre-strike air-traffic control capacity by 1983, it still employs 19 percent fewer air-traffic controllers than before the strike, all trying to handle 6 percent greater traffic.

Once again, the genuine solution is to privatize air-traffic control. There is no real reason why pilots, aircraft companies, and all other aspects of the airline industry can be private, but that somehow air control must always remain a nationalized service. Upon the privatization of air control, it will be possible to send the FAA to join the CAB in the forgotten scrap heap of history.

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First published in January 1985.

53

THE SPECTER OF AIRLINE RE-REGULATION

Empiricism without theory is a shaky reed on which to build a case for freedom. If a regulated airline system did not “work,” and a deregulated system seemed for a time to work well, what happens when the winds of data happen to blow the other way? In recent months, crowding, delays, a few dramatic accidents, and a spate of bankruptcies and mergers among the airlines have given heart to the statists and vested interests who were never reconciled to deregulation. And so the hue and cry for re-regulation of airlines has spread like wildfire.

Airline deregulation began during the Carter regime and was completed under Reagan, so much so that the governing Civil Aeronautics Board (CAB) was not simply cut back, or restricted, but actually and flatly abolished. The CAB, from its inception, had cartelized the airline industry by fixing rates far above the free-market level and rationed supply by gravely restricting entry into the field and by allocating choice routes to one or two favored companies. A few airlines were privileged by government, fares were raised artificially, and competitors either were prevented from entering the industry or literally put out of business by the CAB’s refusal to allow them to continue in operation.

One fascinating aspect of deregulation was the failure of experts to predict the actual operations of the free market. No transportation economist predicted the swift rise of the hub-and-spoke system. But the general workings of the market conformed to the insights of free-market economics: competition intensified, fares declined, the number of customers increased, and a variety of almost bewildering discounts and deals pervaded the airline market. Almost weekly, new airlines entered the field, old and inefficient lines went bankrupt, and mergers occurred as the airline market moved swiftly toward efficient service of consumer needs after decades of stultifying government cartelization

So why, then, the wave of agitation for re-regulation? (Setting aside the desire of former or would-be cartelists to rejoin the world of special privilege.) In the first place, many people forgot that while competition is marvelous for consumers and for efficiency, it provides no rose garden for the bureaucratic and the inefficient. After decades of cartelization, it was inevitable that inefficient airlines, or those who could not adapt successfully to the winds of competition, would have to go under, and a good thing, too.

The shakeout and the mergers have also revived an ancient fallacy carefully cultivated by would-be cartelists. There is already a mounting hysteria that the number of airlines is now declining, and that we are therefore “returning” to the “monopoly” or quasi-monopoly days of the CAB. Is not a new CAB needed to “enforce competition”? But this ignores the crucial difference between monopoly or large-scale firms created and bolstered by government privilege, as against such firms that have earned their position and are able to maintain it under free competition. The government-maintained firms are necessarily inefficient and a burden on progress; freely-competitive “monopoly” firms exist by virtue of being more efficient, providing better service at lower rates, than their existing or potential competitors. Even if the absurd fantasy transpired that only one U.S., presumably not worldwide airline, emerged from free competition, it would still be vital to avoid any governmental interference with such a free-market firm.

Note, in short, what the pro-cartelists are saying: they are saying that it is vital for the government to impose a coercive, inefficient monopoly now to avoid the shadowy possibility of an efficient, freely-competitive monopoly at some future date. Looked at this way, we can see that the call for re-regulation and cartelization makes no sense whatever except from the viewpoint of the cartelists.

Quite the contrary; it is now important to extend deregulation to the European sphere and end the international cartel of IATA, which has crippled intra-European travel and kept airline fares outrageously high.

What of the other unwelcome consequences of deregulation: crowded planes, delays, accidents? In the first place, as is typical, competition has led to lower fares and therefore brought airline travel into the mass market far more than before. So this means that those of us who used to fly on planes half or quarter-filled with business travelers now have to face flights on totally filled planes stocked with students, ethnics carrying all their possessions in paper bags, and squalling babies. But if deregulation has ended the gracious days of yore by making air travel more affordable, those of us who wish to restore that epoch will simply have to pay for the gracious amenities by traveling first class or chartering our own planes.

Delays, accidents, and near-accidents are another story completely. They are only “caused” by deregulation in the sense that air travel has been stimulated by free competition. The increased activity has run up against bottlenecks caused not by freedom but by government, and these unfortunate remnants of government have been causing and intensifying the problems.

There are two major difficulties. One is the fact that there are no privately-owned and operated commercial airports in this country; all such airports are owned by municipal governments (except the worst run, Dulles and National, owned and run by the federal government). Government runs airports in the same way it runs everything else—badly. Specifically, there is no incentive for government to price its services rationally. In consequence, government airports price their major service, landing on and taking off of runways, way below the market price.

The result is overcrowding, shortages of runway space at prime time, and a rationing policy by the airports to provide a first-come first-served policy which virtually insures circling and aggravating delays. A privately owned airport would price runways rationally in order to maximize its income by raising prices, especially at peak hours, and allowing airlines to purchase guaranteed time slots and push the far less revenue-productive private planes out of the runways in prime time. But government airports have failed to do so, and continue subsidizing runway prices, in deference to the politically powerful lobby of private plane owners.

The second big obstacle to the smooth use of the airways is the fact that the important service of air-traffic control has been nationalized by the federal government in its FAA (Federal Aviation Administration). As usual, government provision of a labor service is far less efficient and sensitive to consumer needs than private firms would be. President Reagan’s feat in deunionizing the air-traffic controllers early in his administration has made people overlook the far more important fact that this vital service has remained in government hands, and poses, therefore, a growing threat to the safety of every air traveller.

As in every other case of government control and regulation, therefore, the cure for freedom is still more freedom. Halfway measures of deregulation are never enough. We must have the insight and the courage to go the whole way: in the airline case, to privatize commercial airports and the occupation of air traffic control.

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First published in November 1987.

54

COMPETITION AT WORK: XEROX AT 25

Little over 25 years ago a revolutionary event occurred in the world of business and in American society generally. It was a revolution accomplished without bloodshed and without anyone being executed. The Xerox 914, the world’s first fully-automated plain-paper copier, was exhibited to the press in New York City.

Before then copiers existed, but they were clumsy and complex, they took a long time, and the final product was a fuzzy mess imprinted on special, unattractive pink paper. The advent of Xerox ushered in the photocopying age, and was successful to such an extent that within a decade the word “xerox” was in danger of slipping out of trademark and becoming a generic term in the public domain.

Many people, and even some economists, believe that large, highly capitalized firms can always outcompete small ones. Nothing could be further from the truth. In the pre-Xerox age, the photography industry was dominated, at least in the United States, by one giant, Eastman Kodak. And yet it was not Kodak or any other giant business or massive research facility that invented or even developed the Xerox process. It was invented, instead, by one man, Chester Carlson, a New York City patent attorney, who did the initial experiments in the kitchen of his apartment home in 1938. Carlson then looked around for a firm that would develop a commercial product from his invention. He first thought of Eastman Kodak, but Kodak told him it would never work, that it was too complex, would be too costly to develop, and, most remarkably of all, would have only a small potential market! The same answer was given to Carlson by 21 other large firms such as IBM. They were the “experts”; how could they all be wrong?

Finally, one small firm in Rochester took a gamble on the Xerox project. Haloid Co., a photographic paper manufacturer with annual sales of less than $7 million, bought the rights to the process from Carlson in 1947, and spent $20 million and 12 years before the mighty Xerox 914 came on the market in the fateful fall of 1959. Horace Becket, who was chief engineer on the Xerox 914, explains that “technically, it did not look like a winner. . . . That which we did, a big company could not have afforded to do. We really shot the dice, because it didn’t make any difference.” Small business can outcompete, and outinnovate, the giants.

Haloid Co., then Haloid Xerox Co., and finally Xerox, became one of the great business and stock-market success stories of the 1960s. By the early 1970s, it had captured almost all of the new, huge photocopier market, and its 1983 revenues totaled $8.5 billion. But by the mid 1970s, Xerox, too, was getting big, bureaucratic, and sluggish, and Japan invaded the photocopy market with the successful Savin copier. As competition by new originally small firms accelerated, Xerox’s share of the market fell to 75 percent in 1975, 47 percent in 1980, and less than 40 percent in 1982. As one investment analyst commented, “They had an aging product line. They were caught off guard.”

In the world of business, no firm, even the giants, can stand still for long. In trouble, Xerox fought back with its new and improved 10 Series of “Marathon” copiers, and in 1983 the company increased its share of the photocopy market for the first time since 1970; and its record considerably improved in 1984.

So, Happy Birthday Xerox! The Xerox success story is a monument to what a brilliant and determined lone inventor can accomplish. It is a living testimony of how a small firm can innovate and outcompete giant firms, and of how a small firm, become a giant, can rethink and retool in order to keep up with a host of new competitors. But above all, the Xerox story is a tribute to what free competition and free enterprise can accomplish, in short, what people can do if they are allowed to think and work and invest and employ their energies in freedom. Human progress and human freedom go hand in hand.

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First published in February 1985.

55

THE WAR ON THE CAR

One of the fascinating features of the current political scene is its bitter, and nearly unprecedented, polarization. On the one hand, there has been welling up in recent months a palpable, intense, and very extensive popular grass-roots movement of deep-seated loathing for President Clinton the man, for his ideology and for his politics, for all those associated with Clinton, and for the Leviathan government in Washington.

This movement is remarkably broad-based, stretching from rural citizens to customarily moderate intellectuals and professors. The movement is reflected in all indicators, from personal conversations to grass-roots activity, to public opinion polls.

The bizarre new element is that usually, in response to such an intense popular movement, the other side, in this case, the Clinton administration, would pull in its horns and tack to the wind. Instead, they are barreling ahead, heedlessly, and thereby helping to create, more and more, a virtual social crisis and what the Marxists would call a “revolutionary situation.”

Response of the Clinton administration has been to try to suppress, literally, the freedom of speech of its opponents. Two prominent recent examples: the Clinton bill to expand the definition of lobbying (which would mean coerced registration and other onerous regulations) to include virtually all grass-roots political activity. Fortunately, this “lobbying reform” bill was killed by “obstructionists” in the Senate after passing the House.

Second, was the federal Housing and Urban Development’s systematic legal action to crack down on the freedom of political speech and assembly of those opposing public housing developments for the “homeless” in their neighborhoods. It turns out that this elemental political activity of free men and women was “discriminatory,” and therefore “illegal,” and HUD legal harassment of these citizens was only pulled back under the glare of severe public criticism. And even then, HUD never admitted that it was wrong.

The latest Clintonian march toward totalitarianism has not yet been unleashed. It seems that the White House has established an advisory panel known as the “White House Car Talks” committee, slated to submit its recommendations for action in September. The need for “car talks” is supposed to be the menace of the automobile as polluter.

The fact that the demonized chemical element, lead, has already been eliminated from gasoline, or that federal mandates have repeatedly made auto engines more “fuel efficient” at the expense of car safety, cuts no ice with these people. It is impossible to appease an aggressive movement bent on full-scale collectivism: gains or concessions simply encourage them and whet their appetite for escalating their demands. And so to the car talkers, automobile pollution remains as severe a menace as ever.

The Car Talks panel consists of the usual suspects: Clintonian officials, environmentalists, sympathetic economists, and a few stooges from the automobile industry. Some of the innovative ideas under discussion, in addition to higher taxes on “gas-guzzling” cars and trucks (query: does any car ever sip daintily instead of “guzzle?”):

• establishing a higher minimum age for drivers’ licenses;

• forcing drivers over a maximum age to give up their licenses;

• placing maximum limits on how many cars any family will be allowed to own;

• enforcing alternative driving days for car commuters.

In short, the coercive rationing of automobiles, by forcing some groups to stop driving altogether, and by forcing others to stop using the cars they are still graciously allowed to possess.

If that isn’t totalitarianism, what exactly would qualify? If the American public is enraged about “gun-grabbers,” and they indeed are, wait until they realize that Leviathan is coming to grab their cars!

Now, of course, the White House aide who discussed these ideas with the press admitted that some of the “wilder ideas” will get killed in committee. Is that all we can rely on to preserve our liberty?

Meanwhile, as usual, the only public criticism of these ruminations has come from the Left, griping that the Car Talkers are not acting fast enough. Dan Becker, of the Sierra Club, complains that “each second this yammering goes on in the White house,” hundreds of gallons of pollution are being sent into the air. Who knows? Maybe Dr. David Kessler, apparently the permanent head of the Food and Drug Administration, can issue a finding that the fuel emissions are “toxic,” and the administration can then ban all cars overnight.

We should realize that the war against the car did not begin with the discovery of pollution. Hatred of the private automobile has been endemic among left-liberals for decades. It first surfaced in the disproportionate hysteria over what seemed to be a minor esthetic complaint: tailfins on Cadillacs in the 1950s. The amount of ink and energy expended on attacking the horrors of tailfins was prodigious.

But it soon emerged that the left-liberal complaint against automobiles had little to do either with tailfins or pollution. What they hate, with a purple passion, is the private car as a deeply individualistic, comfortable, and even luxurious mode of transportation.

In contrast to the railroad, the automobile liberated Americans from the collectivist tyranny of mass transit: of being forced to rub elbows with a “cross-section of democracy” on bus or train, of being dominated by fixed timetables and fixed terminals. Instead, the private automobile made each individual “King of the Road”; he could ride wherever and whenever he wanted, with no compulsion to clear it with his neighbors or his “community.”

And furthermore, the driver and car-owner could perform all these miracles in comfort and luxury, in an ambiance far more pleasurable than in jostling his fellow “democrats” for hours at a time.

And so the systemic war on private automobiles began and moved into high gear. If they couldn’t get our cars straight away, they could, in the name of “fuel efficiency . . . pollution,” the joys of physical exercise, or even esthetics, persuade and coerce us into using cars that were costlier, smaller, lighter, and therefore less safe, and less luxurious and even less comfortable.

If they grudgingly and temporarily allowed us to keep our cars, they could punish us by making the ride more difficult. But now, the Clintonians, in a multi-faceted drive toward collectivism from health to gun-grabbing to assaults on free speech, and on the rights of smokers have demonstrated that they never give up.

Unlike previous administrations, they are tireless, implacable, and overlook nothing. Yesterday, the slogan: “If you let them come for our cigarettes or for our guns, next they will come for our cars,” would have seemed like absurd hyperbole. Now, that prospect is becoming all too much a sober portrayal of political reality.

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First published in December 1994.