Chapter 5 of 61 · Making Economic Sense by Murray N. Rothbard
The Socialism of Welfare 13 ECONOMIC INCENTIVES AND WELFARE
Most people disagree with economists, who point out the important impact that monetary incentives can have on even seemingly “non-economic” behavior. When, for example, coffee prices rise due to a killing frost of the coffee crop in Brazil, or when New York subway fares go up, most people believe that the quantity purchased will not be affected, since people are “addicted” to coffee, and people “have to get to work” by subway.
What they don’t realize, and what economists are particularly equipped to point out, is that individual consumers vary in their behavior. Some, indeed, are hard core, and will only cut their purchases a little bit should the cost of a product or service rise. But others are “marginal” buyers, who will cut their coffee purchases, or shift to tea or cocoa. And subway rides consist, not only of “getting to work,” but also short, “marginal” rides which can and will be cut down. Thus, subway fares are now 25 times what they were in World War II, and as a result, the number of annual subway rides have fallen by more than half.
People are shocked, too, when economists assert that monetary incentives can affect even such seemingly totally non-economic activity as producing babies. Economists are accused of being mechanistic and soulless, devoid of humanity, for even mentioning such a connection. And yet, while some people may have babies with little or no regard to economic incentive, I am willing to bet that if the government, for example, should offer a bounty of $100,000 for each new baby, considerably more babies would be produced.
Liberals are particularly shocked that economists, or anyone else, could believe that a close connection exists between the level of welfare payments, and the number of welfare mothers with children. Babymaking, they declare, is solely the result of “love” (if that’s the correct word), and not of any crass monetary considerations. And yet, if welfare payments are far higher than any sum that a single teenager can make on the market, who can deny the powerful extra tug from the prospects of tax-subsidized moolah without any need to work?
The conservative organization Change-NY has recently issued a study of the economic incentives for going on, and staying on, welfare in New York. The “typical” welfare recipient is a single mother with two children. This typical welfare “client” receives, in city, state, and federal benefits, the whopping annual sum of $32,500, which includes approximately $3,000 in cash, $14,000 in Medicaid, $10,000 in housing assistance, and $5,000 in food assistance. Since these benefits are non-taxable, this sum is equivalent to a $45,000 annual salary before taxes.
Furthermore, this incredibly high figure for welfare aid is “extremely conservative,” says Change-NY, because it excludes the value of other benefits, including Head Start (also known as pre-school day care), job training (often consisting of such hard-nosed subjects as “conversational skills”), child care, and the Special Supplemental Food program for Women, Infants, and Children (or WIC). Surely, including all this would push up the annual benefit close to $50,000. This also presumes that the mother is not cheating by getting more welfare than she is entitled to, which is often the case.
Not only is this far above any job available to our hypothetical teenaged single mother, it is even far higher than a typical entry level job in the New York City government. Thus, the New York Post, (Aug. 2) noted the following starting salaries at various municipal jobs: $18,000 for an office aid; $23,000 for a sanitation worker; $27,000 for a teacher; $27,000 for a police officer or firefighter; $18,000 for a word processor—all of these with far more work skills than possessed by your typical welfare client. And all of these salaries, of course, are fully taxable.
Given this enormous disparity in benefits, is it any wonder that 1.3 million mothers and children in New York are on welfare, and that welfare dependence is happily passed on from one generation of girls to the next? As Change-NY puts it, “why accept a job that requires 40 hours of work a week when you can remain at home and make the equivalent” of $45,000 a year?
Economists, then, are particularly alert to the fact that, the more any product, service, or condition is subsidized, the more of it we are going to get. We can have as many people on welfare as we are willing to pay for. If the state of being a single mother with kids is the fastest route to getting on welfare, that social condition is going to multiply.
Not, of course, that every woman will fall for the blandishments of welfare, but the more intense those subsidies and the greater the benefit compared to working, the more women and illegitimate children on welfare we are going to be stuck with.
Moreover, the longer this system remains in place, the worse will be the erosion in society of the work ethic and of the reluctance to be on the dole that used to be dominant in the United States. Once that ethical shift takes place, the welfare system will only snowball.
Change-NY wryly points out that it would be cheaper for the taxpayer to send welfare recipients to Harvard than to maintain the current system. In view of the decline of educational standards generally and Harvard’s Political Correctness in particular, Harvard would probably be happy to enroll them.
First published in October 1994.
14
WELFARE AS WE DON’T KNOW IT
The welfare system has become an open scandal, and has given rise to justified indignation throughout the middle and working classes. Unfortunately, as too often happens when the public has no articulate leadership, the focus of its wrath against welfare has become misplaced.
The public’s rage focuses on having to pay taxes to keep welfare receivers in idleness; but what people should zero in on is their having to pay these people taxes, period. The concentration on idleness vs. the “work ethic,” however, has given the trickster Bill Clinton the loophole he always covets: seeming to pursue conservative goals while actually doing just the opposite. Unfortunately, the welfare “reform” scam seems to be working.
The President’s pledge to end “welfare as we know it,” therefore, turns out not to be dumping welfare parasites off the backs of the taxpayers. On the contrary, the plan is to load even more taxpayer subsidies and privileges into their eager pockets. The welfarees will become even more parasitic and just as unproductive as before, but at least they will not be “idle.” Big deal.
The outline of the Clintonian plan is as follows: Welfarees will be given two years to “find a job.” Since nothing prevents them from “finding a job” now except their own lack of interest, there is no reason for expecting much from job-finding. At that point, “reform” kicks in. The federal government will either pay private employers to hire these people or, if no employers can be found, will itself “employ” the welfarees in various “community service” jobs. The latter, of course, are unproductive boondoggles, jobs which no one will pay for in the private sector, what used to be called “leaf-raking” in the Federal Works Progress Administration of the 1930s New Deal.
Welfarees will now be paid at minimum wage scale by taxpayers to shuffle papers from one desk to another or to engage in some other unproductive or counter-productive activity. As for subsidizing private jobs, the employers’ businesses will be hampered by unproductive or surly or incompetent workers. In the private jobs, furthermore, the taxpayers will wholly subsidize wages not only at minimum wage scale (which we can expect to keep rising), but also at whatever pay may be set between employer and government. The taxpayer picks up the full tab.
But this is scarcely all. In addition to the actual job subsidies, Clinton proposes that the federal government also pay the following to the welfare parasites: free medical care for all (courtesy the Clinton health “reform”); plenty of food stamps for free food; free child care for the myriad of welfare children; free public housing; free transportation to and from their jobs; free child “nutrition” programs; and lavish “training programs” to train these people for productive labor.
If these training programs are anything like current models, they will be lengthy and worthless, including “training” in “conversational skills.” If a free and lavishly funded public school system can’t seem to manage teaching these characters to read, why should anyone think government qualified to “train” them in any other skills? In addition to the huge cost of direct payments to the welfarees, an expensive government bureaucracy will have to be developed to supervise the training, job finding, and job supervision. In addition, welfare mothers with young children will be exempt from the workfare requirements altogether.
Even the supporters of the Clinton welfare plan concede that the plan will greatly increase the welfare cost to the taxpayers. The Clintonians of course, as usual with government, try to underestimate the cost to get a foot in the door, but even moderate observers estimate the annual extra cost to be no less than $20 billion. And that’s probably a gross underestimate. And while the White House claims that only 600,000 people will need the workfare, internal Health and Human Services memoranda estimate the number at no less than 2.3 million, and that’s from Clintonian sources.
Of course, the Clintonian claim is that these huge increases are “only in the short-run”; in the long run, the alleged improvement in the moral climate is supposed to lower costs to the taxpayers. Sure.
Forcing taxpayers to subsidize employers or to provide busywork for unproductive “jobs” is worse than keeping welfare recipients idle. There is no point to activity or work unless it is productive, and enacting a taxpayer subsidy is a sure way to keep the welfarees unproductive. Subsidizing the idle is immoral and counterproductive; paying people to work and creating jobs for them is also crazy, as well as being more expensive.
But paying people to work is worse than that. For it removes low-income recipients of subsidy from the status of an exotic, marginal, and generally despised group, and brings the subsidized into the mainstream of the workforce. The change from welfare to workfare thereby accelerates the malignant socialist and egalitarian goal of coerced redistribution of income. It is, in other words, simply another part of the twentieth century’s Long March toward socialism.
First published in April 1994.
15
THE INFANT MORTALITY “CRISIS”
I first heard of the Infant Mortality Question last summer, when I had the misfortune to spend an evening with an obnoxious leftist who claimed that, despite any other considerations, U.S. capitalism had failed and the Soviet Union had succeeded, because of the high “infant mortality” rate here. She must have been ahead of the left-wing learning curve, for since then the press has been filled with articles proclaiming the selfsame doctrine.
First, on the Soviet Union, I learned from Soviet economist Dr. Yuri Maltsev that the Soviets had achieved low infant mortality rates by a simple but effective device, one that is considerably easier than medical advances, nutritional improvement, or behavioral reform for pregnant women. Namely: by holding up the statistical reporting of a death until the mortality is beyond “infant” status. No one, apparently, pays much attention to the death rate of post-infants.
But what of the U.S. infant mortality record? Well, in 1915, 100 infants died for every 1,000 live births in the U.S. Since then, the mortality rate has fallen spectacularly: to 47 for every 1,000 in 1940, 20 by 1970, and down to 10 per 1,000 by 1988. A 90 percent drop in the infant mortality rate since 1915 does not seem to be a record calculated to induce an orgy of breast-beating and collective guilt among the American people.
So why should Dr. Louis W. Sullivan, our official scourge as Secretary of Health and Human Services, denounce the U.S. record as “shameful and unconscionable?” And why should a proposal by President Bush for an additional federal prenatal care program of $171 million be denounced by some Congressmen as amounting only to a net increase of $121 million, since $50 million would be deducted from existing programs? Why is it assumed on all sides that more federal spending is necessary?
The problem seems to be that many countries have lowered their infant mortality rates even faster, so that the U.S. now ranks 22nd in infant mortality; rates in Japan and in Scandinavia are less than half that in the U.S.
As in economic statistics, it helps our understanding to disaggregate; and we then find that black infant mortality has long been far higher than white; specifically, the 1988 U.S. rate was 17.6 for blacks and 8.5 for whites.
Apparently, the key to infant mortality is low birth-weight, and low birth-weight rates in the U.S. have long been far greater for black than for white infants. The white rate has remained at about 7 percent of live births since 1950, while the black rate has hovered around 10 to 14 percent of births. Starting at 14 percent in 1969—the first year black birthrate figures were kept separately—black low-weight births fell after abortion was legalized, only to go back up since the mid-1980s to over 13 percent.
So central is the birth-weight problem that Christine Layton of the Children’s Defense Fund, a left-liberal “health advocacy group” (is anyone opposed to health?) in Washington, welcomed the recent news that infant mortality rates fell to 9.1 deaths per 1,000 live births in 1990 only grudgingly. She pointed out that this decline since 1988 is due only to new medical advances in drugs for treating lungs of premature babies; apparently this decline doesn’t really count, since it will not “have the kind of lasting effect we need to see on the problems of being born too soon or too small.”
But how come the low birthrate problem among blacks has persisted for decades even though, with its usual energy in spending taxpayer money, the federal government has been tackling the problem since 1972 by its immensely popular WIC (Special Supplemental Food Program for Women, Infants, and Children) program? WIC costs the federal government $2.5 billion a year, in addition to federal subsidies to states administering the program.
In the left liberal worldview, every social problem can be cured by federal spending, and so the government assumed that low birth-weight among black babies was due to malnutrition, which was in turn due to poverty. WIC, therefore, has been providing poor American women with vast amounts of milk, cheese, eggs, cereal, and peanut butter. WIC has been supplying all this food to half of the eight million pregnant women, infants, mothers, and children eligible—family incomes must be below 185 percent of the official poverty line and the family must be officially judged to be at “nutritional risk.”
So why is it that impoverished black mothers, despite the intake of all this federally sponsored nutrition, have not seen the low birth-weight or the mortality problem reduced over these two decades? Why has the only accomplishment of WIC been to provide massive subsidies to dairy and peanut farmers? (We set aside the rising obesity and cholesterol rates among poor blacks.)
The answer is that, remarkably enough, nutrition, and therefore low incomes, is not the problem. It turns out, according to an article by prominent nutritionist and pediatrician Dr. George Graham of Johns Hopkins Medical School (Wall Street Journal, April 2, 1991), that the key cause of low birth-weight, and especially of very low birth-weight, in the U.S. is premature birth, and that malnutrition plays virtually no role in causing premature birth. In Third World countries, on the contrary, low birth-weight is caused by malnutrition and poverty, but premature birth in those countries is not a particular problem.
Unlike Third World countries, low birth-weight, and therefore high mortality rates, in the U.S. are a problem of prematurity and not malnutrition. In fact, the infant mortality rate on the island of Jamaica, almost all of whose population is poor and black, is substantially lower than in Washington, D.C., whose blacks enjoy a far higher income than in Jamaica, and two-thirds of whom were beneficiaries of the WIC program.
The cause of premature births, in fact, is not nutritional but behavioral, that is the behavior of the pregnant mother. In particular tobacco smoking, ingestion of cocaine and crack, previous abortions, and infections of the genital tract and of the membranes surrounding the fetus, which often are the consequence of sexual promiscuity. And there we have it.
These are not facts that left-liberalism likes to hear, and obviously no federal mulcting of taxpayers is going to improve the situation. Left-liberals might try to evade the truth by charging that this is the old conservative tack of “blaming the victim.” They’re wrong. No one is blaming the babies.
First published in June 1991.
16
THE HOMELESS AND THE HUNGRY
Winter is here, and for the last few years this seasonal event has meant the sudden discovery of a brand-new category of the pitiable: the “homeless.”
A vast propaganda effort has discovered the homeless and adjured us to do something about it—inevitably to pour millions of tax-dollars into the problem. There is now even a union of homeless lobbying for federal aid. Not so long ago there was another, apparently entirely different category: the “hungry,” for whom rock stars were making records and we were all clasping hands across America. And what has now happened to the Hungry? Have they all become well fed, and so rest content, while the Homeless are held up for our titillation? Or have they too organized a union of the Hungry?
And what of next year? Are we to be confronted with a new category, the “unclothed,” or perhaps the “ill-shod”? And how about the “thirsty”? Or the candy-deprived? How many more millions are standing in line, waiting to be trotted out for consideration?
Do the Establishment liberals engaged in this operation really believe, by the way, that these are all ironclad separate categories? Do they envision, for example, a mass of hungry living in plush houses, or a legion of the homeless who are living it up every night at Lutece?
Surely not; surely there are not a half-dozen or so different sets of the ill-served. Doesn’t the Establishment realize that all these seemingly unconnected problems: housing, food, clothing, transportation, etc. are all wrapped up in One Big Problem: lack of money? If this were recognized, the problem would be simplified, the causal connections would be far clearer, and the number of afflicted millions greatly reduced: to poverty, period.
Why aren’t these connections recognized, as even Franklin Roosevelt did in the famous passage of his second inaugural where he saw “one-third of a nation ill-housed, ill-clad, and ill-nourished?” Presumably, FDR saw considerable overlap between these three deprivations. I think the Establishment treats these problems separately for several reasons, none of them admirable. For one reason, it magnifies the hardship, making it appear like many sets of people suffering from grave economic ailments. Which means that more taxpayer money is supposed to be funneled into a far greater number of liberal social workers.
But there is more. By stressing particular, specific problems, the inference comes that the taxpayer must quickly provide each of a number of goodies: food, housing, clothing, counseling, et al. in turn. And this means far greater subsidies to different sets of bureaucrats and special economic interests: e.g., construction companies, building trade unions, farmers, food distributors, clothing firms, etc. Food stamps, housing vouchers, public housing follow with seemingly crystal-clear logic.
It is also far easier to sentimentalize the issues and get the public’s juices worked up by sobbing about the homeless, the foodless, etc. and calling for specific provision of these wants—far easier than talking about the “moneyless” and calling upon the public merely to supply do-re-mi to the poor. Money does not have nearly the sentimental value of home and hearth and Christmas dinner.
Not only that: but focusing on money is likely to lead the public to begin asking embarrassing questions. Such as: WHY are these people without money? And isn’t there a danger that taxing A to supply B with money will greatly reduce the incentive for both A and B to continue working hard in order to acquire it ? Doesn’t parasitism gravely weaken the incentives to work among both the producer and the parasite class?
Further, if the poor are without money because they don’t feel like working, won’t automatic taxpayer provision of a permanent supply of funds weaken their willingness to work all the more, and create an ever greater supply of the idle looking for handouts? Or, if the poor are without money because they are disabled, won’t a permanent dole reduce their incentive to invest in their own vocational rehabilitation and training, so that they will once again be productive members of society? And, in general, isn’t it far better for all concerned (except, of course, the social workers) to have limited private funds for charity instead of imposing an unlimited burden on the hapless taxpayer?
Focusing on money, instead of searching for an ever-greater variety of people to be pitied and cosseted, would itself tend to clear the air and the mind and go a long way toward a solution of the problem.
First published in February 1987.
17
RIOTING FOR RAGE, FUN, AND PROFIT
The little word “but” is the great weasel word of our time, enabling one to subscribe to standard pieties while getting one’s real contrary message across. “Of course, I deplore communism, but . . .”; “Of course, I approve of the free market, but . . .” have been all too familiar refrains in recent decades. The standard reaction of our pundits, and across the entire respectable political spectrum, to the great Los Angeles et al. riots of April 29–May 2 went: “Of course, I can’t condone violence, but . . . .” In every instance, the first clause is slid over rapidly and ritualistically, to get to the real diametrically opposed message after the “but” is disposed of.
The point, of course, is precisely to condone violence, by rushing to get to the alleged “real structural causes” of riots and the violence. While the “causes” of any human action are imprecise and complex, none of that is attended to, for everyone knows what the “solution” is supposed to be: to tax the American people, including the victims of the massive looting, burning, beating, killing rampage, to “assuage the rage of the inner cities” by paying off the rampaging “community” so handsomely that they supposedly won’t do it again.
Before we rush past the riots themselves, the whole point of government, of an institution with a monopoly, or preponderance, of violence, is to use it to defend persons and property against violent assault. That role is not as obvious as it may seem, since the Los Angeles, state, and federal forces most conspicuously did not perform that function. Sending in police and troops late and depriving them of bullets, cannot do the job.
There is only one way to fulfill the vital police function, the only way that works: the public announcement—backed by willingness to enforce it—made by the late Mayor Richard Daley in the Chicago riots of the 1960s—ordering the police to shoot to kill any looters, rioters, arsonists, or muggers they might find. That very announcement was enough to induce the rioters to pocket their “rage” and go back to their peaceful pursuits.
Who knows the hearts of men? Who knows all the causes, the motivations, of action? But one thing is clear: regardless of the murky “causes,” would-be looters and muggers would get such a message loud and clear.
But the federal government, and most state and local governments, decided to deal with the great riots of Watts and other inner cities of the 1960s in a very different way: the now accepted practice of a massive buyout, a vast system of bribes in the form of welfare, setasides, affirmative action, etc. The amount spent on such purposes by federal, state, and local governments since the Great Society of the 1960s totals the staggering sum of $7 trillion.
And what is the result? The plight of the inner cities is clearly worse than ever: more welfare, more crime, more dysfunction, more fatherless families, fewer kids being “educated” in any sense, more despair and degradation. And now, bigger riots than ever before. It should be clear, in the starkest terms, that throwing taxpayer money and privileges at the inner cities is starkly counterproductive. And yet: this is the only “solution” that liberals can ever come up with, and without any argument—as if this “solution” were self-evident. How long is this nonsense supposed to go on?
If that is the absurd liberal solution, conservatives are not much better. Even liberals are praising—always a bad sign—Jack Kemp for being a “good” conservative who cares, and who is coming up with innovative solutions trumpeted by Kemp himself and his neoconservative fuglemen. These are supposed to be “non-welfare” solutions, but welfare is precisely what they are: “public housing “owned” by tenants, but only under massive subsidy and strict regulation—with no diminution of the public housing stock; “enterprise zones” which are not free enterprise zones at all, but simply zones for more welfare subsidy and privileges to the inner city.
Various left-libertarians focus on removal of minimum wage laws and licensing requirements as the cure for the disaster of the inner cities. Well, repeal of minimum wages would certainly be helpful, but they are largely irrelevant to the riots: after all, minimum wage laws exist all across the country, in areas just as poor as the inner cities—such as Appalachia. How come there are no riots in Appalachia? The abolition of licensing laws would also be welcome, but just as irrelevant.
Some claim the underlying cause is racial discrimination. And yet, the problem seems worse, rather than better, after three decades of aggressive civil rights measures. Moreover, the Koreans are undoubtedly at least equal victims of racial discrimination—and they also have the problem of English being their second, and often a distant second, language. So how is it that Korean-Americans never riot, indeed that they were the major single group of victims of the Los Angeles riot?
The Moynihan thesis of the cause of the problem is closer to the mark: the famous insight of three decades ago that the black family was increasingly fatherless, and that therefore such values as respect for person and property were in danger of disappearing. Three decades later, the black family is in far worse shape, and the white family isn’t doing too well, either. But even if the Moynihan thesis is part of the problem, what can be done about it? Families cannot be forced together.
A greater part of the cause of the rot is the moral and esthetic nihilism created by many decades of cultural liberalism. But what can be done about it? Surely, at best it would take many decades to take back the culture from liberalism and to instill sound doctrine, if it can be done at all. The rot cannot be stopped, or even slowed down, by such excruciatingly slow and problematic measures.
Before we can set about curing a disease we must have some idea of what that disease is. Are we really sure that “rage” is the operative problem? For the most part, the young rioters caught on television mostly did not look angry at all. One memorable exchange took place as the TV camera caught a happy, grinning young lad hauling off a TV set from a looted store and putting it in his car. Asked the dimwit reporter: “Why are you taking that TV set?” The memorable answer: “Because it’s free!” It is no accident, too, that the arsonists took care to loot thoroughly the 10,000 stores before they burned them to the ground.
The crucial point is that whether the motivation or the goal is rage, kicks, or loot, the rioters, with a devotion to present gratification as against future concerns, engaged in the joys of beating, robbing, and burning, and of massive theft, because they saw they could get away with it. Devotion to the sanctity of person and property is not part of their value-system. That’s why, in the short term, all we can do is shoot the looters and incarcerate the rioters.
First published in July 1992.
18
THE SOCIAL SECURITY SWINDLE
Senator Daniel P. Moynihan (D-NY) has performed a signal service for all Americans by calling into question, for the first time since the early 1980s, the soundness of the nation’s beloved Social Security System. A decade ago, the public was beginning to learn of the imminent bankruptcy of Social Security, only to be sent back into their half-century slumber in 1983 by the bipartisan Greenspan commission, which “saved” Social Security by installing a whopping and ever-rising set of increases in the Social Security tax. Any government program, of course, can be bailed out by levying more taxes to pay the tab.
Since the beginning of the Reagan administration, the much heralded “cuts” in the officially dubbed “income-tax” segment of our payroll taxes have been more than offset by the rise in the “Social-Security” portion. But since the public has been conditioned into thinking that the Social Security tax is somehow not a tax, the Reagan-Bush administrations have been able to get away with their pose as heroic champions of tax cuts and resisters against the tax raising inclinations of the evil Democrats.
For the Social Security System is the biggest single racket in the entire panoply of welfare-state measures that have been fastened upon us by the New Deal and its successors. The American public has been conned into thinking that the Social Security tax is not a tax at all, but a benevolent national “insurance” scheme into which everyone pays premiums from the beginning of their working lives, finally “collecting” benefits when they get to be 65. The system is held to be analogous to a private insurance firm, which collects premiums over the years, invests them in productive ways that yield interest, and then later pays old-age annuities to the lucky beneficiaries.
So much for the facade. The reality, however, is the exact opposite. The federal government taxes the youth and adult working population, takes the money, and spends it on the boondoggles that make up the annual federal budget. Then, when the long-taxed person gets to be 65, the government taxes someone else—that is, the still-working population, to pay the so-called benefits.
Be assured, the executives of any private insurance company that tried this stunt would be spending the rest of their lives in much-merited retirement in the local hoosegow. The whole system is a vast Ponzi scheme, with the difference that Ponzi’s notorious swindle at least rested solely on his ability to con his victims, whereas the government swindlers, of course, rely also on a vast apparatus of tax-coercion.
But this covers only one dimension of the Social Security racket. The “benefits,” of course, are puny compared to a genuine private annuity, which makes productive investments. The purchasers of a private annuity receive, at the age, say of 65, a principal sum which they can obtain and which can also earn them further interest. The person on Social Security gets only the annual benefits, void of any capital sum. How could he, when the Social Security “fund” doesn’t exist?
The notion that a fund really exists rests on a “creative” accounting fiction; yes, the fund does exist on paper, but the Social Security System actually grabs the money as it comes in and purchases bonds from the Treasury, which spends the money on its usual boondoggles.
But that’s not all. The Social Security System is a “welfare” program that levies high and continually increasing taxes (a) only on wages, and on no other investment or interest income; and (b) is steeply regressive, hitting lower wage earners far more heavily than people in the upper brackets. Thus, income earners up to $51,300 per year are forced to pay, at this moment, 7.65 percent of their income to Social Security; but there the tax stops, so that, for example a person who earns $200,000 a year pays the same absolute amount ($3,924), which works out as only 2 percent of income. That’s a welfare state!?
Over the years, the government has vastly increased the tax bite in two ways: by increasing the percentage, and by raising the maximum income level at which the tax ceases. As a result, since the start of the Reagan administration, the rate has gone up from 5.80 percent to 7.65 percent, and the maximum tax from $1,502 to $3,924 per year. And that’s only the beginning.
The final aspect of the swindle was contributed by Reagan-Greenspan & Co. in 1983. Observing the high and mounting federal deficits, our bipartisan rulers decided to raise taxes and pile up a huge “surplus” in the non-existent Social Security fund, thereby “lowering” the embarrassing deficit on paper, while continuing the same stratospheric deficit in reality. Thus, the projected federal deficit for fiscal 1990 is $206 billion; but the estimated $65 billion “surplus” in the Social Security account officially reduces the deficit to $141 billion, thereby appeasing the ghosts of Gramm-Rudman. But of course there is no surplus; the $65 billion are promptly spent on Treasury bonds, and the Treasury adds that to the stream of general expenditures on $20,000 coffeemakers, bailouts for S&L crooks, and the rest of its worthy causes.
But Senator Moynihan, one of the authors of the current swindle as part of the Greenspan Commission, has blown at least part of the lid off the scam. At which point, the Republicans happily took up the traditional Democratic count that their opposition has set out, cruelly and heartlessly, to throw the nation’s much revered elderly into the gutter.
Senator Moynihan’s proposal for a small rollback of the Social Security tax to 6.55 percent at least opens the entire matter for public debate. Moynihan’s motives have been called into question, but after we recover from our shock at a politician possibly acting for political motives, we must realize that we owe him a considerable debt. The problem is that, while many writers and journalists understand the truth and tell it in print, they generally do so in subdued and decorous tones, drenching the reader in reams of statistics.
The public will never be roused to rise up and get rid of this monstrous system until they are told the truth in no uncertain terms: in other words, until a swindle is called a swindle.
First published in April 1990.
19
ROOTS OF THE INSURANCE CRISIS
The latest large-scale assault upon property rights and the free market comes from the insurance industry and its associated incurrers of liability: particularly groups of manufacturers and the organized medical profession. They charge that runaway juries have been awarding skyrocketing increases in liability payments, thereby threatening to bankrupt the insurance industry as well as impose higher costs upon, or deprive of liability insurance, those industries and occupations that juries have adjudged to be guilty.
In response, the insurance and allied industries have demanded legal caps, or maxima, on jury awards, as well as maximum limits on or even elimination of, legal fees, especially contingency fees paid to lawyers by plaintiffs out of their awarded damages.
Before analyzing these measures, it must be pointed out that there may well be no crisis. Critics of the insurance industry have pointed out that insurance companies have refused to reveal the figures on verdicts and settlements from year to year, or to break them down by industry or occupation. Instead, the insurance industry has relied solely on colorful anecdotes about bizarre individual awards—something they would scarcely do in running their own business.
Also, the critics have demonstrated that average insurance payments have not advanced, in the last 25 years, much beyond the rate of inflation. So there may well be no insurance crisis at all, and the entire hysteria may be trumped-up to gain benefits for the insurance industry at the expense of victims of injury to person or property who are entitled to just compensation.
But let us assume for the sake of argument that the insurance crisis is every bit as dramatic as the industry says it is. Why are the rest of us supposed to bail them out? Insurance companies, like other business firms, are entrepreneurial. As entrepreneurs, they take risks; when they do well and forecast correctly, they properly make profits; when they forecast badly, they make losses. That is the way it should be. They should be honored when they make profits, and suffer the consequences when they make losses. In the case of insurance, companies charge premiums so as to cover, with a profit, the liabilities they expect to pay. If they suffer losses because their entrepreneurship is poor, and payments are higher than premiums, they should expect no sympathy, let alone bailout, from the long-suffering consuming and taxpaying public.
It is particularly outrageous that the insurance companies are trying to place maximum limits on jury awards and on legal fees. It is everyone’s right as a free person to hire lawyers for whatever fee they both agree upon, and it is no one’s right to interfere with private property and the freedom to make such contracts. Lawyers, after all, are our shield and buckler against unjust laws and torts committed against us, and we must not be deprived of the right to hire them.
Furthermore, the much abused contingency fee is actually a marvelous instrument which enables the poorest among us to hire able lawyers. And the fact that the attorney depends for his fee on his “investment” in the case, gives him the incentive to fight all the harder on behalf of his clients. Outlawing contingency fees would leave attorneys only in service to the rich, and would deprive the average person of his day in court. Is that what the insurance industry really wants?
As for jury awards, do the insurance industry and organized medicine really wish to destroy the Anglo-American jury system, which for all its faults and inefficiencies, has long been a bulwark of our liberties against the State? And if they wish to destroy it, what would they replace it with—rule by government? As long as we keep the jury system as the arbitrator of civil and criminal cases, we must not hobble its dispensing of justice—especially by senseless quantitative caps that simply proclaim that justice may only be dispensed in small, but not adequate, amounts.
None of this means that tort law itself is in no need of reform. The problem is not really quantitative but qualitative: who should be liable for what damages? In particular, we must put an end to the theory of “vicarious liability,” i.e., that people or groups are liable, not because their actions incurred damages, but simply because they happened to be nearby and are conveniently wealthy, i.e., in the apt if inelegant legal phrase, they happily possess “deep pockets.”
Thus, if we bought a product from a retailer and the product is defective, it is the retailer that should be liable and not the manufacturer, since we did not make a contract with the manufacturer (unless he placed an explicit warranty upon the product). It is the retailer’s business to sue the wholesaler, the latter the manufacturer, etc., provided the latter really did break his contract by providing a defective product.
Similarly, if a corporate manager committed a wrong and damaged the person or property of others, there is no reason but “deep pockets” to make the stockholders pay, provided that the latter were innocent and did not order the manager to engage in these tortious actions.
To the extent, then, that cries about an insurance crisis reflect an increased propensity by juries to sock it to “soul-less corporations,” i.e., to the stockholders, then the remedy is to take that right away from them by changing tort law to make liable only those actually committing wrongful acts.
Let liability, in short, be full and complete; but let it rest only upon those at fault, i.e., those actually damaging the persons and property of others.
Previously unpublished.
20
GOVERNMENT MEDICAL “INSURANCE”
One of Ludwig von Mises’s keenest insights was on the cumulative tendency of government intervention. The government, in its wisdom, perceives a problem (and Lord knows, there are always problems!). The government then intervenes to “solve” that problem. But lo and behold! instead of solving the initial problem, the intervention creates two or three further problems, which the government feels it must intervene to heal, and so on toward socialism.
No industry provides a more dramatic illustration of this malignant process than medical care. We stand at the seemingly inexorable brink of fully socialized medicine, or what is euphemistically called “national health insurance.” Physician and hospital prices are high and are always rising rapidly, far beyond general inflation. As a result, the medically uninsured can scarcely pay at all, so that those who are not certifiable claimants for charity or Medicaid are bereft. Hence, the call for national health insurance.
But why are rates high and increasing rapidly? The answer is the very existence of health care insurance, which was established or subsidized or promoted by the government to help ease the previous burden of medical care. Medicare, Blue Cross, etc., are also very peculiar forms of “insurance.”
If your house burns down and you have fire insurance, you receive (if you can pry the money loose from your friendly insurance company) a compensating fixed money benefit. For this privilege, you pay in advance a fixed annual premium. Only in our system of medical insurance, does the government or Blue Cross pay, not a fixed sum, but whatever the doctor or hospital chooses to charge.
In economic terms, this means that the demand curve for physicians and hospitals can rise without limit. In short, in a form grotesquely different from Say’s Law, the suppliers can literally create their own demand through unlimited third-party payments to pick up the tab. If demand curves rise virtually without limit, so too do the prices of the service.
In order to stanch the flow of taxes or subsidies, in recent years the government and other third party insurers have felt obliged to restrict somewhat the flow of goodies: by increasing deductibles, or by putting caps on Medicare payments. All this has been met by howls of anguish from medical customers who have come to think of unlimited third-party payments as some sort of divine right, and from physicians and hospitals who charge the government with “socialistic price controls”—for trying to stem its own largesse to the health-care industry!
In addition to artificial raising of the demand curve, there is another deep flaw in the medical insurance concept. Theft is theft, and fire is fire, so that fire or theft insurance is fairly clear-cut the only problem being the “moral hazard” of insurees succumbing to the temptation of burning down their own unprofitable store or apartment house, or staging a fake theft, in order to collect the insurance.
“Medical care,” however, is a vague and slippery concept. There is no way by which it can be measured or gauged or even defined. A “visit to a physician” can range all the way from a careful and lengthy investigation and discussion, and thoughtful advice, to a two-minute run-through with the doctor doing not much else than advising two aspirin and having the nurse write out the bill.
Moreover, there is no way to prevent a galloping moral hazard, as customers—their medical bills reduced to near-zero—decide to go to the doctor every week to have their blood pressure checked or their temperature taken. Hence, it is impossible, under third-party insurance, to prevent a gross decline in the quality of medical care, along with a severe shortage of the supply of such care in relation to the swelling demand. Everyone old enough to remember the good-old-days of family physicians making house calls, spending a great deal of time with and getting to know the patient, and charging low fees to boot, is deeply and properly resentful of the current assembly-line care. But all too few understand the role of the much-beloved medical insurance itself in bringing about this sorry decline in quality, as well as the astronomical rise in prices.
But the roots of the current medical crisis go back much further than the 1950s and medical insurance. Government intervention into medicine began much earlier, with a watershed in 1910 when the much celebrated Flexner Report changed the face of American medicine.
Abraham Flexner, an unemployed former owner of a prep school in Kentucky, and sporting neither a medical degree nor any other advanced degree, was commissioned by the Carnegie Foundation to write a study of American medical education. Flexner’s only qualification for this job was to be the brother of the powerful Dr. Simon Flexner, indeed a physician and head of the Rockefeller Institute for Medical Research. Flexner’s report was virtually written in advance by high officials of the American Medical Association, and its advice was quickly taken by every state in the Union.
The result: every medical school and hospital was subjected to licensing by the state, which would turn the power to appoint licensing boards over to the state AMA. The state was supposed to, and did, put out of business all medical schools that were proprietary and profit-making, that admitted blacks and women, and that did not specialize in orthodox, “allopathic” medicine: particularly homeopaths, who were then a substantial part of the medical profession, and a respectable alternative to orthodox allopathy.
Thus through the Flexner Report, the AMA was able to use government to cartelize the medical profession: to push the supply curve drastically to the left (literally half the medical schools in the country were put out of business by post-Flexner state governments), and thereby to raise medical and hospital prices and doctors’ incomes.
In all cases of cartels, the producers are able to replace consumers in their seats of power, and accordingly the medical establishment was now able to put competing therapies (e.g., homeopathy) out of business; to remove disliked competing groups from the supply of physicians (blacks, women, Jews); and to replace proprietary medical schools financed by student fees with university-based schools run by the faculty, and subsidized by foundations and wealthy donors.
When managers such as trustees take over from owners financed by customers (students of patients), the managers become governed by the perks they can achieve rather than by service of consumers. Hence: a skewing of the entire medical profession away from patient care toward high-tech, high-capital investment in rare and glamorous diseases, which rebound far more to the prestige of the hospital and its medical staff than is actually useful for the patient-consumers.
And so, our very real medical crisis has been the product of massive government intervention, state and federal, throughout the century; in particular, an artificial boosting of demand coupled with an artificial restriction of supply. The result has been accelerating high prices and deterioration of patient care. And next, socialized medicine could easily bring us to the vaunted medical status of the Soviet Union: everyone has the right to free medical care, but there is, in effect, no medicine and no care.
First published in August 1990.
21
THE NEOCON WELFARE STATE
Ever since its inception in the 1930s, the welfare state has proceeded in the following way. First, liberals discover social and economic problems. Not a difficult task: the human race has always had such problems and will continue to, short of the Garden of Eden. Liberals, however, usually need scores of millions in foundation grants and taxpayer-financed commissions to come up with the startling revelations of disease, poverty, ignorance, homelessness, et al.
Having identified “problems” to the accompaniment of much coordinated fanfare, the liberals proceed to invoke “solutions,” to be supplied, of course, by the federal government, which we all know and love as the Great Problem-Solving Machine.
Whatever the problem or its complexity, we all know that the Solution is always the same: a huge amount of taxpayer money to be trundled out by local, state, and especially the federal government, and spent on building up an ever-growing giant bureaucracy swarming with bureaucrats dedicated to spending their lives combatting the particular problem in view. The money is supplied, of course, by the taxpayer, and by a burgeoning debt to be financed either by inflation or by future taxpayers.
From the beginning, each new creative Leap Forward in the welfare state is launched by liberals in the Democratic Party. That, since the 1930s, has been the Democrats’ historical function. The Republicans’ function, on the other hand, has been to complain about the welfare state and then, when in power, to fasten their yoke upon the public by not only retaining the Democratic “advances” but also by expanding them.
The best that we have been able to hope for under Republican administrations is a slight slowing down of the rate of expansion of the welfare state, and a relative absence of new, “innovative” proposals.
The result of each of the Great Leaps Forward of the welfare state (The New Deal-Fair Deal of the ’30s and ’40s, and the Great Society of the ’60s), has clearly not been to “solve” the problems the welfare state has addressed. On the contrary, each of these problems is demonstrably far worse two or three decades after the innovation and expansion. At the same time, the government Problem Solving Machine: taxes, deficits, spending, regulations, and bureaucracy, has gotten far bigger, stronger, and hungrier for taxpayer loot.
Now, in the Nineties, we are at another crossroads. The results are now in on the Great Society and its Nixonian codicils. A massive and expensive attempt to stamp out poverty, inner-city problems, racism, and disease, has only resulted in all of these problems being far worse, along with a far-greater machinery for federal control, spending, and bureaucracy.
Liberal Democrats, who now call themselves “moderates” because of the perceived failures of liberalism, have come up with the usual “solutions”: redoubled and massive federal spending to “help” the inner cities, “rebuilding” the decaying infrastructure, helping to make declining industries “competitive,” et al. But whereas Republican administrations in the 1950s and 1970s were in the hands of avowed “moderates” or “liberals,” the Republican administration is now run, or at least guided by, conservatives.
What is the “conservative” (read: neoconservative) Republican response to the welfare state and to the Democratic proposals for yet another great Leap Forward?
The good news is that the neoconservative alternative is not just another “me-too” proposal for slightly less of what the Democratic liberals are proposing. The bad news, however, is that the proposed “conservative welfare state”—in the words of neocon godfather Irving Kristol—is a lot worse. For once, under the aegis of the neocons, the Republicans are coming up with genuinely innovative proposals.
But that’s the trouble: the result is far more power and more resources to the Leviathan State in Washington, all camouflaged in pseudoconservative rhetoric. Since the conservative public always tends to put more emphasis on rhetoric than on substance, this makes the looming Alternative Welfare State of the Republicans all the more dangerous.
The dimensions of the Neocon Welfare State in embryo may be seen in the Bush-endorsed proposals of Education Secretary Lamar Alexander, aided and guided by neocon educationists Chester Finn and Diane Ravitch. The education disaster in this country has been largely created by the massive federal funds and controls that have already fastened a gigantic educational bureaucracy on the American people, and have gone a long way toward taking control of our children out of the hands of parents and putting it into the maw of the State.
The Neocon Welfare State would finish the job: expanding budgets, nationalizing teachers and curricula, and seizing total control of children on behalf of the State’s malignant educational bureaucracy.
The housing and urban dimensions of the Alternative Welfare State have been worked out by the neocon’s favorite politician, HUD secretary Jack Kemp. While Kemp’s vision was kept at arm’s length by the Bush administration, the L.A. riots have brought it a virtual Republican endorsement, in the wake of President Bush’s deficiency in the “vision thing,” and of the liberals’ chorus of adulation for Jack Kemp’s “caring and compassion” for the inner cities.
As Jeff Tucker has pointed out in the Free Market, Kemp’s proposed “enterprise zones” and “empowerment” turn out to be still more of the welfare state. The “enterprise zone” concept, originally meant to be islands of genuine free enterprise in a statist morass, have been cunningly turned into yet more welfare, and affirmative-action-type subsidies. The Thatcherite idea of selling public housing to tenants has merely turned into another method of expanding public housing, of subsidizing inner cities, and of keeping the tenants dependent on the federal bureaucracy and on Big Massa in the White House.
How would the greater Neocon Welfare State be financed? Neocons are the most enthusiastic fans of the federal deficit since the Left-Keynesians of the 1930s. We can expect, then, much bigger deficits, accompanied by a large and innovative battery of excuses. Statistics will be dredged up to the effect that the deficit and the debt “really aren’t so bad,” compared, say, with some year during World War II, or, that on deep and murky philosophic grounds, they really don’t exist.
On taxes, we can probably trust neocons to keep marginal income tax rates on upper brackets down, as well as to cut capital gains taxes, but the sky’s the limit on everything else. We can look forward to a lot more of the “loophole closing” that helped send the real estate market into a long and continuing tailspin after the Tax Reform Act of 1986. We can also look forward to increases in excise taxes, and perhaps a national sales or value-added tax.
Harry Hopkins is supposed to have outlined the basic New Deal Strategy: “We shall tax and tax, spend and spend, elect and elect.” He might have added: control and control. Over the decades, the outer forms, the glittering trappings, have changed in order to entice new generations of suckers. But the essence of the ever-expanding Leviathan has remained the same.
First published in September 1992.
22
BY THEIR FRUITS...
One of the most horrifying features of the New Deal was its agricultural policy: in the name of “curing the depression,” the federal government organized a giant cartel of America’s farmers. In the middle of the worst depression in American history, the federal government forced farmers to plow under every third acre of wheat and to kill one-third of their little pigs, all to drive up food prices by forcing the supply of each product downward. Leftists blamed “American capitalism” for the government’s forcing deep cuts in farm supply while urban Americans were starving; but the problem was not “capitalism,” it was organized pressure groups—in this case agribusiness—using the federal government as the organizer and mighty enforcer of farm cartel policy. And all this in the name of helping the “one-third of a nation” that Franklin D. Roosevelt saw “ill-nourished” as well as “ill-clad” and “ill-housed.”
Since 1933, New Deal farm policy has continued and expanded, pursuing its grisly logic at the expense of the nation’s consumers, year in and year out, in Democrat or Republican regimes, in good times and in bad. But there is something about government brutally destroying food during recessions that rightfully raises one’s hackles—if the media bother to deal with it at all. The latest outrage is now occurring in the central valleys of California, a state in deep recession.
The particular problem is fruit, slightly “undersized” peaches and nectarines grown in California. Since the 1930s, the Secretary of Agriculture has been setting minimum size standards for peaches and nectarines. Any fruit even microscopically below the minimum size and weight set by the government is illegal and must be destroyed by the farmer, under pain of severe penalties.
It’s not that these slightly smaller peaches and nectarines are unsaleable to the consumer. On the contrary: most people, including trained fruit pickers, can’t tell the difference visually, so they are forced to use expensive weighing and sorting machines. It is estimated that, during the 1992 growing season in California, fruit growers will be forced to destroy no less than 500 million pounds of this undersized fruit.
Thus, Gerawan Farming, the largest peach, nectarine, and plum grower in the world, has been accused of violating federal law because, instead of destroying all of its small fruit, it dared to sell some to a wholesaler in Los Angeles, who in turn resold it to mom-and-pop grocery stores who catered to poorer consumers eager to buy the cheaper, if smaller fruit.
The cheapness, of course, is the key. The Secretary of Agriculture does not dream up these vicious regulations out of his own noodle. By law, these minimum sizes are determined by farmers’ committees growing the particular product. The farmers are permitted to use the government to enforce cartels, in which larger and more expensive fruit is protected from smaller and cheaper competition. It’s as if Cadillacs and Lincoln Town Cars were able to enforce minimum size car standards that would outlaw every smaller-size car on the market.
Perhaps the most repellent aspect of this system is the rationale by the farm committee leaders that they are doing all of this in pursuit of the welfare of consumers. Thus, Tad Kozuki, member of the eight-man Nectarines Administrative Committee, opines that “smaller fruit isn’t as appealing to the eye, so the committees tried to please the consumer, thinking the demand for our fruit would rise.”
To top this whopper about “pleasing the consumer,” John Tos, chairman of the ten-man Peach Commodity Committee, solemnly states that “we eliminate those small sizes because of what the focus groups tell us,” adding that these two committees are now spending $50,000 on a more detailed study into consumer fruit preferences.
Save your money, fellas. I can predict the result every time: consumers will always prefer larger peaches to smaller ones, just as given the choice, they would prefer a Cadillac to a Geo. Given the choice of receiving a gift, that is, without having to pay for the difference. And price, of course, is the point of the whole deal. Smaller peaches will be cheaper, just as Geos will be cheaper, and consumers should be able to choose among these various grades, sizes, and prices.
Eric Forman, deputy director of the Fruit and Vegetable Division of the Agricultural Marketing Service of the U.S. Department of Agriculture, was a little more candid than the cartelist farmers. “Consumers are prepared to spend more money for larger fruit than smaller fruit,” said Forman, “so why undermine the higher-profit item for the grower?” That is, why allow growers to “undermine” the high profit items by what is also called “competition,” apparently a Concept that Dare Not Speak Its Name in agricultural circles.
Sound on the fruit question are consumer groups and the beleaguered Gerawan Farming. Scott Pattison, executive director of Consumer Alert, correctly declared that the whole policy is “outrageous.” “Why are bureaucrats and growers telling us there’s no market?” asked Pattison. “If consumers really won’t buy the small fruit, then the growers will give up trying to ship them. But I think low-income mothers would welcome a smaller fruit that they could afford to buy and put in their kids’ lunches.” And Dan Gerawan, head of Gerawan Farming, held up a nectarine, and declared sardonically: “This is evil, illegal fruit.” Gerawan added that the government “is sanctioning the destruction of fruit meant for the poor.”
Here is the essence of the “welfare state” in action: The government cartelizing and restricting competition, cutting production, raising prices, and particularly injuring low-income consumers, all with the aid of mendacious disinformation provided by technocrats hired by the government to administer the welfare state, all meanwhile bleating hypocritically about how the policy is all done for the sake of the consumers.
First published in October 1992.
23
THE POLITICS OF FAMINE
The media focuses primarily on the horrifying shots of starving children, and secondarily on the charges and countercharges about which governments—the Western, the Ethiopian, or whatever—are responsible for relief not getting to the starving thousands on time. In the midst of the media blitz, the important and basic questions get lost in the shuffle. For example, why does Nature seem to frown only on socialist countries? If the problem is drought, why do the rains only elude countries that are socialist or heavily statist? Why does the United States never suffer from poor climates, which threaten famine?
The root of famine lies not in the gods or in the stars but in the actions of man. Climate is not the reason that Russia before Communism was a heavy exporter of grain, while now the Soviet Union is a grain importer. Nature is not responsible for the fact that, of all the countries of East Africa, the Marxist-Leninist nations of Ethiopia and Mozambique are now the major sufferers from mass famine and starvation. Given causes yield given effects, and it is an ineluctable law of nature and of man that if agriculture is systematically crippled and exploited, food production will collapse, and famine will be the result.
The root of the problem is the Third World, where (a) agriculture is overwhelmingly the most important industry, and (b) the people are not affluent enough, in any crisis, to purchase foods from abroad. Hence, to Third World people, agriculture is the most precious activity, and it becomes particularly important that it not be hobbled or discouraged in any way. Yet, wherever there is production, there are also parasitic classes living off the producers. The Third World in our century has been the favorite arena for applied Marxism, for revolutions, coups, or domination by Marxist intellectuals. Whenever such new ruling classes have taken over, and have imposed statist or full socialist rule, the class most looted, exploited, and oppressed have been the major productive class: the farmers or peasantry. Literally tens of millions of the most productive farmers were slaughtered by the Russian and Chinese Communist regimes, and the remainder were forced off their private lands and onto cooperative or state farms, where their productivity plummeted, and foods production gravely declined.
And even in those countries where land was not directly nationalized, the new burgeoning State apparatus flourished on the backs of the peasantry, by levying heavy taxes and by forcing peasants to sell grain to the State at far below market price. The artificially cheap food was then used to subsidize food supplies for the urban population which formed the major base of support for the new bureaucratic class.
The standard paradigm in African and in Asian countries has been as follows: British, French, Portuguese, or whatever imperialism carved out artificial boundaries of what they dubbed “colonies” and established capital cities to administer and rule over the mass of peasantry. Then the new class of higher and lower bureaucrats lived off the peasants by taxing them and forcing them to sell their produce artificially cheaply to the State. When the imperial powers pulled out, they turned over these new nations to the tender mercies of Marxist intellectuals, generally trained in London, Paris, or Lisbon, who imposed socialism or far greater statism, thereby aggravating the problem enormously.
Furthermore, a vicious spiral was set up, similar to the one that brought the Roman Empire to its knees. The oppressed and exploited peasantry, tired of being looted for the sake of the urban sector, decided to leave the farm and go sign up in the welfare state provided in the capital city. This makes the farmer’s lot still worse, and hence more of them leave the farm, despite brutal measures trying to prevent them from leaving. The result of this spiral is famine.
Thus, most African governments force farmers to sell all their crops to the State at only a half or even a third of market value. Ethiopia, as a Marxist-Leninist government, also forced the farmers onto highly inefficient state farms, and tried to keep them working there by brutal oppression.
The answer to famine in Ethiopia or elsewhere is not international food relief. Since relief is invariably under the control of the recipient government, the food generally gets diverted from the farms to line the pockets of government officials to subsidize the already well-fed urban population. The answer to famine is to liberate the peasantry of the Third World from the brutality and exploitation of the State ruling class. The answers to famine are private property and free markets.
First published in April 1985.
24
GOVERNMENT VS. NATURAL RESOURCES
It is a common myth that the near-disappearance of the whale and of various species of fish was caused by “capitalist greed,” which, in a shortsighted grab for profits, despoiled the natural resources—the geese that laid the golden eggs—from which those profits used to flow. Hence, the call for government to step in and either seize the ownership of these resources, or at least to regulate strictly their use and development.
It is private enterprise, however, not government, that we can rely on to take the long and not the short view. For example, if a private investor or business firm owns a natural resource, say a forest, it knows that every tree cut down and sold for short-run profits will have to be balanced by a decline in the capital value of the forest remaining. Every firm, then, must balance short-run returns as against the loss of capital assets. Therefore, private owners have every economic incentive to be farsighted, to replant trees for every tree cut down, to increase the productivity and to maintain the resource, etc. It is precisely government—or firms allowed to rent resources from government but not own them—whose every incentive is to be short-run. Since government bureaucrats control but do not own the resource “owned” by government, they have no incentive to maximize or even consider the long-run value of the resource. Their every incentive is to loot the resource as quickly as possible.
And, so, it should not be surprising that every instance of “overuse” and destruction of a natural resource has been caused, not by private property rights in natural resources, but by government. Destruction of the grass cover in the West in the late nineteenth-century was caused by the Federal government’s failure to recognize homesteading of land in large-enough technological units to be feasible. The 160-acre legal maximum for private homesteading imposed during the Civil War made sense for the wet agriculture of the East; but it made no sense in the dry area of the West, where no farm of less than one or two thousand acres was feasible.
As a result, grassland and cattle ranches became land owned by the federal government but used by or leased to private firms. The private firms had no incentive to develop the land resource, since it could be invaded by other firms or revert to the government. In fact, their incentive was to use up the land resource quickly to destroy the grass cover, because they were prevented from owning it.
Water, rivers, parts of oceans, have been in far worse shape than land, since private individuals and firms have been almost universally prevented from owning parts of that water, from owning schools of fish, etc. In short, since homesteading private property rights has generally not been permitted in parts of the ocean, the oceans and other water resources have remained in a primitive state, much as land had been in the days before private property in land was permitted and recognized. Then, land was only in a hunting-and-gathering stage, where people were permitted to own or transform the land itself. Only private ownership in the land itself can permit the emergence of agriculture—the transformation and cultivation of the land itself—bringing about an enormous growth in productivity and increase in everyone’s standard of living.
The world has accepted private agriculture, and the marvelous fruits of such ownership and cultivation. It is high time to expand the dominion of man to one of the last frontiers on earth: aquaculture. Already, private property rights are being developed in water and ocean resources, and we are just beginning to glimpse the wonders in store. More and more, in oceans and rivers, fish are being “farmed” instead of relying on random supply by nature. Whereas only 3 percent of all seafood produced in the United States in 1975 came from fish-farms, this proportion quadrupled to 12 percent by 1984.
In Buhl, Idaho, the Clear Spring Trout Company, a fish-farm, has become the single largest trout producer in the world, expanding its trout production from 10 million pounds per year in 1981 to 14 million pounds this year. Furthermore, Clear Springs is not content to follow nature blindly; as all farmers try to do, it improves on nature by breeding better and more productive trout. Thus, two years ago Clear Springs trout converted two pounds of food into one pound of edible flesh; Clear Springs scientists have developed trout that will convert only 1.3 pounds of food into one pound of flesh. And Clear Springs researchers are in the process of developing that long-desired paradise for consumers: a boneless trout.
At this point, indeed, all rainbow trout sold commercially in the United States are produced in farms, as well as 40 percent of the nation’s oysters, and 95 percent of commercial catfish.
Aquaculture, the wave of the future, is already here to stay, not only in fishery but also in such activities as off-shore oil drilling and the mining of manganese nodules on the ocean floor. What aquaculture needs above all is the expansion of private property rights and ownership to all useful parts of the oceans and other water resources.
Fortunately, the Reagan administration rejected the Law of the Sea Treaty, which would have permanently subjected the world’s ocean resources to ownership and control by a world-government body under the aegis of the United Nations. With that threat over, it is high time to seize the opportunity to allow the expansion of private property in one of its last frontiers.
First published in December 1986.
25
ENVIRONMENTALISTS CLOBBER TEXAS
We all know how the environmentalists, seemingly determined at all costs to save the spotted owl, delivered a crippling blow to the logging industry in the Northwest. But this slap at the economy may be trivial compared to what might happen to the lovely city of San Antonio, Texas, endangered by the deadly and despotic combination of the environmentalist movement and the federal judiciary.
The sole source of water for the 900,000-resident city, as well as the large surrounding area, is the giant Edwards Aquifer, an underground river or lake (the question is controversial) that spans five counties. Competing for the water, along with San Antonio and the farms and ranches of the area, are two springs, the Comal and the Aquarena on the San Marcos River, which are becoming tourist attractions. In May 1991, the Sierra Club, along with the Guadalupe-Blanco River Authority which controls the two springs, filed a suit in federal court, invoking the Endangered Species Act. It seems that, in case of a drought, any cessation of water flow to the two springs would endanger four obscure species of vegetables or animals fed by the springs: the Texas blind salamander; Texas wild rice; and two tiny brands of fish: the fountain darter, and the San Marcos gambusia.
On February 1, 1993, federal district judge Lucius Bunton, in Midland, Texas, handed down his ruling in favor of the Sierra Club; in case of drought, no matter the shortage of water hitting San Antonio, there will have to be enough water flowing from the aquifer to the two springs to preserve these four species. Judge Bunton admitted that, in a drought, San Antonio, to obey the ruling, might have to have its water pumped from the aquifer cut by as much as 60 percent. This would clobber both the citizens of San Antonio, and the farmers and ranchers of the area; man would have to suffer, because human beings are always last in line in the environmentalist universe, certainly far below wild rice and the fountain darter.
San Antonio Mayor Nelson Wolff was properly incensed at the judge’s ruling. “Think about a world where you are only allowed to take a bath twice a week,” exclaimed the mayor. “Think about a world where you have to get a judge’s permission to irrigate your crops.” John W. Jones, president of the Texas and Southwestern Cattle Raisers Association, graphically complained that the judge’s decision “puts the protection of Texas bugs before Texas babies.”
How did the federal courts horn into the act anyway?
Apparently, if the Edwards Aquifer were ruled a “river,” then it would come under the jurisdiction of the Texas Water Commission rather than of the federal courts. But last year, a federal judge in Austin ruled that the aquifer is a “lake,” bringing it under federal control.
Environmentalists oppose production and use of natural resources. Federal judges seek to expand federal power. And there is another outfit whose interest in the proceedings needs scrutinizing: the governmental Guadalupe-Blanco River Authority. In addition to the tourist income it wishes to sustain, there is another, hidden and more abundant source of revenue that may be animating the Authority.
This point was raised by Cliff Morton, chairman of the San Antonio Water System. Morton said that he believed that the Authority would, during a drought, direct the increased spring flow into a reservoir, and then sell to beleaguered San Antonio at a high price the water the city would have gotten far more cheaply from the aquifer. Is the Authority capable of such Machiavellian maneuvering? Mr. Morton thinks so. “That’s what this is all about,” he warned bitterly. “It’s not about fountain darters.”
Wolff, Jones, and other protesters are calling upon Congress to relax the Draconian provisions of the Endangered Species Act, but there seems to be little chance of that in a Clinton-Gore administration.
A longer-run solution, of course, is to privatize the entire system of water and water rights in this country. All resources, indeed all goods and services, are scarce, and they are all subject to competition for their use. That’s why there is a system of private property and free market exchange. If all resources are privatized, they will be allocated to the most important uses by means of a free-price system, as the bidders able to satisfy the consumer demands in the most efficient ways are able to out-compete less able bidders for these resources.
Since rivers, aquifers, and water in general, have been largely socialized in this country, the result is a tangled and terribly inefficient web of irrational pricing, massive subsidies, overuse in some areas and underuse in others, and widespread controls and rationing. The entire water system is a mess, and only privatization and free markets can cure it.
In the meanwhile, it would be nice to see the Endangered Species Act modified or even—horrors!—repealed. If the Sierra Club or other environmentalists are anxious to preserve critters of various shapes or sizes, vegetable, animal, or mineral, let them use their own funds and those of their bedazzled donors to buy some land or streams and preserve them.
New York City has recently decided to abolish the good old word “zoo” and substitute the Politically Correct euphemism: Wildlife Preservation Park. Let the Sierra Club and kindred outfits preserve the species in these parks, instead of spending their funds to control the lives of the American people.
First published in April 1993.
26
GOVERNMENT AND HURRICANE HUGO: A DEADLY COMBINATION
Natural disasters, such as hurricanes, tornadoes, and volcanic eruptions, occur from time to time, and many victims of such disasters have an unfortunate tendency to seek out someone to blame. Or rather, to pay for their aid and rehabilitation. These days, Papa Government (a stand-in for the hapless taxpayer) is called on loudly to shell out. The latest incident followed the ravages of Hurricane Hugo, when many South Carolinians turned their wrath from the mischievous hurricane to the federal government and its FEMA (Federal Emergency Management Agency) for not sending far more aid more quickly.
But why must taxpayers A and B be forced to pay for natural disasters that strike C? Why can’t C—and his private insurance carriers—foot the bill? What is the ethical principle that insists that South Carolinians, whether insured or non-insured, poor or wealthy, must be subsidized at the expense of those of us, wealthy or poor, who don’t live on the southern Atlantic Coast, a notorious hurricane spot in the autumn? Indeed, the witty actor who regularly impersonates President Bush on Saturday Night Live was perhaps more correct than he realized when he pontificated: “Hurricane Hugo—not my fault.” But in that case, of course, the federal government should get out of the disaster aid business, and FEMA should be abolished forthwith.
If the federal government is not the culprit as portrayed, however, other government forces have actually weighed in on Hugo’s side, and have escalated the devastation that Hugo has wreaked. Consider the approach taken by local government. When Hurricane Hugo arrived, government imposed compulsory evacuation upon many of the coastal areas of South Carolina. Then, for nearly a week after Hugo struck the coast, the mayor of one of the hardest-hit towns in South Carolina, the Isle of Palms near Charleston, used force to prevent residents from returning to their homes to assess and try to repair the damage.
How dare the mayor prevent people from returning to their own homes? When she finally relented, six days after Hugo, she continued to impose a 7:00 p.m. curfew in the town. The theory behind this outrage is that the local officials were “fearful for the homeowners’ safety and worried that there would be looting.” But the oppressed residents of the Isle of Palms had a different reaction. Most of them were angered; typical was Mrs. Pauline Bennett, who lamented that “if we could have gotten here sooner, we could have saved more.”
But this was scarcely the only case of a “welfare state” intervening and making matters worse for the victims of Hugo. As a result of the devastation, the city of Charleston was of course short of many commodities. Responding to this sudden scarcity, the market acted quickly to clear supply and demand by raising prices accordingly: providing smooth, voluntary, and effective rationing of the suddenly scarce goods. The Charleston government, however, swiftly leaped in to prevent “gouging”—grotesquely passing emergency legislation making the charging of higher prices post-Hugo than pre-Hugo a crime, punishable by a maximum fine of $200 and 30 days in jail.
Unerringly, the Charleston welfare state converted higher prices into a crippling shortage of scarce goods. Resources were distorted and misallocated, long lines developed as in Eastern Europe, all so that the people of Charleston could have the warm glow of knowing that if they could ever find the goods in short supply, they could pay for them at pre-Hugo bargain rates.
Thus, the local authorities did the work of Hurricane Hugo—intensifying its destruction by preventing people from staying at or returning to their homes, and aggravating the shortages by rushing to impose maximum price controls. But that was not all. Perhaps the worst blow to the coastal residents was the intervention of those professional foes of humanity—the environmentalists.
Last year, reacting to environmentalist complaints about development of beach property and worry about “beach erosion” (do beaches have “rights”, too?), South Carolina passed a law severely restricting any new construction on the beachfront, or any replacement of damaged buildings. Enter Hurricane Hugo, which apparently provided a heaven-sent opportunity for the South Carolina Coastal Council to sweep the beach-fronts clear of any human beings. Geology professor Michael Katuna, a Coastal Council consultant, saw only poetic justice, smugly declaring that “Homes just shouldn’t be right on the beach where Mother Nature wants to bring a storm ashore.” And if Mother Nature wanted us to fly, She would have supplied us with wings?
Other environmentalists went so far as to praise Hurricane Hugo. Professor Orrin H. Pilkey, geologist at Duke who is one of the main theoreticians of the beach-suppression movement, had attacked development on Pawleys Island, northeast of Charleston, and its rebuilding after destruction by Hurricane Hazel in 1954. “The area is an example of a high-risk zone that should never have been developed, and certainly not redeveloped after the storm.” Pilkey now calls Hugo “a very timely hurricane,” demonstrating that beachfronts must return to Nature.
Gered Lennon, geologist with the Coastal Council, put it succinctly: “However disastrous the hurricane was, it may have had one healthy result. It hopefully will rein in some of the unwise development we have had along the coast.”
The Olympian attitude of the environmentalist rulers contrasted sharply with the views of the blown-out residents themselves. Mrs. Bennett expressed the views of the residents of the Isle of Palms. Determined to rebuild on the spot, she pointed out: “We have no choice. This is all we have. We have to stay here. Who is going to buy it?” Certainly not the South Carolina environmental elite. Tom Browne, of Folly Beach, S.C., found his house destroyed by Hurricane Hugo. “I don’t know whether I’ll be able to rebuild it or if the state would even let me,” complained Browne. The law, he pointed out, is taking a property without compensation. “It’s got to be unconstitutional.”
Precisely. Just before Hugo hit, David Lucas, a property owner on the Isle of Palms, was awarded $1.2 million in a South Carolina court after he sued the state over the law. The court ruled that the state could not deprive him of his right to build on the land he owned without due compensation. And the South Carolina environmentalists are not going to be able to force the state’s taxpayers to pay the enormous compensation for not being allowed to rebuild all of the destruction wrought by Hurricane Hugo.
Skip Johnson, an environmental consultant in South Carolina, worries that “it’s just going to be a real nightmare. People are going to want to rebuild and get on with their lives.” The Coastal Council and its staff, Johnson lamented, “are going to have their hands full.” Let’s hope so.
First published in December 1989.
27
THE WATER ISNOT RUNNING
Most people agree that government is generally less efficient than private enterprise, but it is little realized that the difference goes far beyond efficiency. For one thing, there is a crucial difference in attitude toward the consumer. Private business firms are constantly courting the consumer, always eager to increase the sales of their products. So insistent is that courtship that business advertising is often criticized by liberal aesthetes and intellectuals as strident and unmannerly.
But government, unlike private enterprise, is not in the business of seeking profits or trying to avoid losses. Far from eager to court the consumer, government officials invariably regard consumers as an annoying intrusion and as “wasteful” users of “their” (government’s) scarce resources. Governments are invariably at war with their consumers.
This contempt and hostility toward consumers reaches its apogee in socialist states, where government’s power is at its maximum. But a similar attitude appears in areas of government activity in all countries. Until a few decades ago, for example, water supplies to consumers in the United States were furnished by private companies. These were almost all socialized over time, so that government has come to monopolize water services.
In New York City, which shifted to a monopoly of government water several decades ago, there was never, in previous decades, any wailing about a “water shortage.” But, recently, in a climate that is not conspicuously dry, a water shortage has reappeared every few years. In July 1985 water levels in the reservoirs supplying New York City were down to an unprecedented 55 percent of capacity, in contrast to the normal 94 percent. But surely, nature is not solely to blame, since neighboring New Jersey’s water levels are still at a respectable 80 percent. It seems that the New York water bureaucrats must have carefully sought our nearby spots that particularly suffer from chronic drought. It also turns out that the New York pipelines were constructed too narrowly to increase water flow from wetter regions.
More important is New York’s typical bureaucratic response to this, as well as to other periodic water crises. Water, as usual with government, is priced in an economically irrational manner. Apartment buildings, for example, pay a fixed water fee per apartment to the government. Since tenants pay nothing for water, they have no incentive to use it economically; and since landlords pay a fixed fee, regardless of use, they too couldn’t care less.
Whereas private firms try to price their goods or services to achieve the highest profit—i.e, to supply consumer needs most fully and at least cost—government has no incentive to price for highest profit or to keep down costs. Quite the contrary. Government’s incentive is to subsidize favored pressure groups or voting blocs; for government is pressured by its basic situation to price politically rather than economically.
Since government services are almost never priced so as to clear the market, i.e., equate supply and demand, it tends to price far below the market, and therefore bring about an artificial “shortage.” Since the shortage is manifest in people not being able to find the product, government’s natural despotic bent leads it invariably to treat the shortage by turning to coercive restraints and rationing.
Morally, government can then have its cake and eat it too: have the fun of pushing people around, while wrapping itself in the cloak of solidarity and universal “sacrifice” in the face of the great new emergency. In short, when the supply of water drops, governments almost never respond the way a business firm would: raise the price in order to clear the market. Instead, the price stays low, and restraints are then placed on watering one’s lawn, washing one’s car, and even taking showers. In this way, everyone is exhorted to sacrifice, except that priorities of sacrifice are worked out and imposed by the government, which happily decides how much lawn watering, or showering, may be permitted on what days in the face of the great crisis.
Several years ago, California water officials were loudly complaining about a water shortage and imposing local rationing, when suddenly an embarrassing event occurred: torrential rains all over the drought areas of the state. After lamely insisting that no one should be misled by the seeming end of the drought, the authorities finally had to end that line of attack, and then the title of the Emergency Office of Water Shortage was hastily changed to the Office of Flood Control.
In New York, this summer, Mayor Edward Koch has already levied strict controls on water use, including a ban on washing cars, and imposition of a minimum of 78 degrees for air conditioners in commercial buildings, plus the turning off of the conditioners for two hours during each working day (virtually all of these air conditioners are water-cooled). This 78-degree rule is, of course, tantamount to no air-conditioning at all, and will wreak great hardship on office workers, as well as patrons of movies and restaurants.
Air-conditioning has always been a favorite target for puritanical government officials; during the trumped-up “energy shortage” of the late 1970s, President Carter’s executive order putting a floor of 78 degrees on every commercial air conditioner was enthusiastically enforced, even though the “energy saving” was negligible. As long as misery can be imposed on the consumer, why worry about the rationale? (What is now a time-honored custom in New York of reluctance to serve water to restaurant patrons originated in a long-forgotten water “shortage” of decades ago.)
There is no need for any of these totalitarian controls. If the government wants to conserve water and lessen its use, all it need do is raise the price. It doesn’t have to order an end to this or that use, set priorities, or decide who should be allowed to drink more than three glasses a day. All it has to do is clear the market, and let people conserve each in his own way and at his own pace.
In the longer run, what the government should do is privatize the water supply, and let water be supplied, like oil or Pepsi-Cola, by private firms trying to make a profit and to satisfy and court consumers, and not to gain power by making them suffer.
First published in September 1985.
Making Economic Sense
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