Although no serious discussion is occurring in the nation about the desirability of shifting economic power from individual decision-makers to the national government, that shift is a basic characteristic of virtually every policy proposal being debated in the Congress.

Take tax policy.  A 131-page document (pdf) issued by the Treasury goes way beyond recommending the extension of some of the expiring Bush administration tax cuts.  For example, the fine print contains over a dozen ways of discouraging American firms from doing business and investing overseas.  Supposedly minor technical changes also would have a severe impact.

For example, eliminating LIFO (last in-first out) inventory accounting will raise business taxes over $60 billion in one decade.  The Treasury also wants to revive four corporate environmental taxes that were eliminated in 1969.  These four arbitrary taxes have no relation between the tax burden imposed on a company and the pollution that it generates.  This bears an uneasy resemblance to Willie Sutton, who robbed banks because that was where the money was. Inevitably a variety of technical tax provisions will increase the paperwork burden on business.  The penalties for failing to file information returns (such as Form 1099) promptly and accurately are raised in a very complicated fashion involving three tiers of penalties.

On the expenditure side, the typical stimulus project increases the power of government in private business decision-making.  The bailout of the automobile industry is really an inefficient method of financing union pension and health plans.  The stockholders are zapped and the bondholders poorly treated.  The taxpayers are left holding the bag, especially considering the restrictions on General Motors importing the really fuel-efficient cars they produce overseas.  Apparently, the new General Motors factory for building compact cars was chosen on the basis of “carbon footprint” and “community impact.”

It is hard to keep a straight face when analyzing the new “cash for clunkers” program.  For example, owners of the biggest old clunkers get a $3,500 credit for trading in the old vehicles for a new one with an improvement of just one mile per gallon.  Surely, it would save energy if the Treasury just mailed the $3,500 checks directly to Detroit!

Of course, the Obama administration is making some reductions in federal spending.  It is reportedly imposing a 9 percent reduction in the budget for the division in the Labor Department that polices fraud and other illegalities on the part of labor unions.  As noted below, a simultaneous expansion of business-oriented antitrust enforcement is taking place.

Turning to regulation, one of Ralph Nader’s biggest disappointments during his heyday as a consumer advocate was the failure of his proposal for a new Consumer Protection Agency.  However, the administration’s financial regulatory plan creates a powerful new Consumer Financial Protection Agency (CFPA).

This new free-wheeling agency takes authority now divided between the Securities and Exchange Commission (SEC) and the Federal Reserve System.  In a change guaranteed to cause confusion, the CFPA will share authority with the Federal Trade Commission.  The new regulatory agency will also have a mandate to give consumers more economic education.  Educators find that especially scary.

Moreover, the agency will have its own money pot, independent of the normal congressional appropriations process.  It will be financed directly by fees assessed on “entities and transactions” across the financial sector.

The Treasury’s financial plan contains many other expansions of government power over business.  The Federal Reserve System is given new authority to oversee any large financial entity whose failure the Fed thinks could generate “systemic risk.”  The Treasury heads a new Financial Services Oversight Council to “resolve” the inevitable jurisdictional disputes among federal agencies.  A new Office of National Insurance is to be established in the Treasury to monitor “all aspects of the insurance industry,” a sector of the economy traditionally under the province of state governments.

The SEC will require the registration of all advisers to hedge funds and other private pools of capital with assets over a given threshold.  It also will have the power to inspect the books of the advisers and to ensure compliance by their clients.  In addition, the power of the SEC will be expanded by legislative proposals to give it a more active role in guiding the compensation committees of all public companies.

The Federal Deposit Insurance Corporation will have new authority to take over and shut down financial institutions (not just banks) whose failure is deemed to pose “systemic risk.”

Viewed in their totality, these technical financial changes would represent a historic expansion of government.  Sadly, there is little comfort in the Treasury’s warning in its 88 pages of detailed proposals:  “More can and should be done in the future.”  Comparisons with the New Deal of the 1930s are too timid.  Shades of Alexander Hamilton!

The complicated climate change bill that recently passed the House of Representatives is a dramatic example of expanding government power over the economy.  Again, the fine print deserves far more attention than it has received.  For example, buried in the 1,201 pages of detail is a provision authorizing the Department of Transportation to require automotive manufacturers to produce vehicles that can run on methanol (wood alcohol), a fuel not widely available.

Other provisions, as expected, have little to do with the subject of global warming.  For example, contractors on some energy projects must pay employees at least the locally “prevailing wage.”  It is well known that, in practice, that means paying higher union wage scales.

Many federal departments are trying to climb aboard the economic stimulus bandwagon.  The Department of Justice wants to help out by showing that antitrust should be a “frontline issue” in the response to the problems facing the economy.  Apparently, business is not getting sued often enough.  Incredibly, one new assistant attorney general views antitrust enforcers as “key members of the government’s economic recovery team.”

When we step back and try to add up all the tax, spending, and regulatory actions and proposals of the new Obama administration, the result is clear: a cumulative squeeze on private decision-making and a more slowly growing economy in the years ahead.

In the process, private businesses will be discouraged by a host of government policies from making major new investments, especially those of a long-term nature with payoffs far in the future.  Key negative factors are the likelihood of higher taxes and greater inflation resulting from the huge budget deficits that are likely to arise in the next several decades, abetted by lax monetary policies.

The American public is likely to have a long wait until the national unemployment rate gets back down to the 7.6 percent that was reported when President Obama took office in January 2009.

One fundamental point deserves to be stressed.  In the inevitable tension in public policymaking between economic prosperity and income redistribution, for the next several years the American people can expect that income equalization will get the government’s priority over improvements in people’s living standards.  The average American, at best, will receive a more equal slice of an income pie that will be far smaller than the public expects.

Leoni (1913-1967) was a professor of legal theory and a lawyer in Italy. He was also an eminent liberal scholar and champion of individual freedom, who served as president of the Mont Pelerin Society. Freedom and the Law has a provenance worth describing. In 1958 Leoni, F. A. Hayek, and Milton Friedman each gave a series of lectures at the Fifth Institute on Freedom and Competitive Enterprise at what is now Claremont McKenna College in California. To say this meeting was consequential would be a gross understatement. Hayek’s lecturers were incorporated into The Constitution of Liberty. Friedman’s grew into Capitalism and Freedom, and Leoni’s were collected as Freedom and the Law. (Readers of this column will know that I previously wrote about Leoni’s essay “Voting Versus the Market,” which appears in Freedom and the Law.)

Leoni’s work was critical in helping to launch the multidisciplinary movement known as Law and Economics, in which these two areas of knowledge are applied to each other in order to achieve an otherwise impossible depth of understanding of society.

His work is highly relevant to the Judiciary Committee’s hearing on Sotomayor. In speeches she has suggested that because of sex and ethnicity, judges either can’t or shouldn’t try to be impartial in their rulings. Moreover, President Obama said he wanted a Court nominee with empathy based on life experience, as well as knowledge of the law. However, under questioning by adversarial senators, Sotomayor seemed to back away from both approaches. At one point, she said, “They [judges] don’t determine the law. Congress makes the laws. The job of a judge is to apply the law. And so it’s not the heart that compels conclusions in cases. It’s the law. The judge applies the law to the facts before that judge…. I look at the law that’s being cited. I look at how precedent informs it. I try to determine what those principles are of precedent to apply to the facts in the case before me and then do that…. We apply law to facts. We don’t apply feelings to facts.”

This is clearly what the conservative senators wanted to hear, but observers of varying ideological stripes were disappointed that Sotomayor stooped to feeding the television audience such pablum. She more than implied that a judge’s job is mechanistic: The facts plus the law plus precedent equals a ruling.

Nothing in human affairs is that simple. Judgment and interpretation are required every step of the way. This is why, contrary to popular fable, the line between the rule of law and the rule of men and women is so fine as to be nonexistent. (See John Hasnas’s important papers The Myth of the Rule of Law and the Depoliticization of Law [pdf]). Laws, which are intended to be applied to an unlimited number of unforeseeable future circumstances, do not speak for themselves. Human beings must interpret them. This does not mean language is inherently impenetrable. (I could hardly write if I believed that.) However, there is a broad middle ground between impenetrability and perfect clarity. As libertarian legal scholar Randy Barnett noted,  “While I do not share [the] view of law as radically indeterminate, I sure think it is a whole lot more underdeterminate than Judge Sotomayor made it out to be in her testimony today.”

If the law is underdeterminate–if there is scope for interpretation and more than one competing interpretation can be reasonable–what is an advocate of liberty to do?

Enter Leoni

Leoni offers us hope. Let’s start at the beginning. Why do we care who is on the Supreme Court? We care because down the street from the Court is the legislation factory we call the U.S. Congress. It has virtually nothing to do but churn out bills. In fact, most “serious” pundits judge congresses by how many bills they churn out. All the incentives faced by members of Congress push in one direction: to legislate (that is, meddle in people’s affairs).

Furthermore, we know that much of this legislation, since it interferes with what people want to do, will spawn litigation. Eventually some of these cases will wind up before the Supreme Court, the rulings of which will become the law of the land. Hence the interest in Supreme Court nominees.

Thus it would matter far less who is on the Supreme Court if there were little or no legislation.

But we need legislation, don’t we?

Without legislation there would be no law, right?

Where did we get the idea that a group of mostly undistinguished men and women–absurdly claiming to be our representatives and sitting in what is surely the ultimate ivory tower–should make blanket rules for everyone (except perhaps for themselves), regardless of time, place, and circumstance? It certainly has not protected liberty. Why don’t more people realize how poorly this simpleminded procedure serves a complex society?

Law versus Legislation

Most of us are badly in need of reminding that what is admirable about the Western legal tradition–that which has made our progress and prosperity possible–is the product not of legislatures but of something rather different. This fact compels us to distinguish law from legislation. As Hayek wrote in the first volume of Law, Legislation, and Liberty,

Unlike law itself, which has never been “invented” in the same sense, the invention of legislation came relatively late in the history of mankind….  Law in the sense of enforced rules of conduct is undoubtedly coeval with society; only the observance of common rules makes the peaceful existence of individuals in society possible. Long before man had developed language to the point where it enabled him to issue general commands, an individual would be accepted as a member of a group only so long as he conformed to its rules…. To modern man … the belief that all law governing human action is the product of legislation appears so obvious that the contention that law is older than law-making has almost the character of a paradox. Yet there can be no doubt that law existed for ages before it occurred to man that he could  make or alter it.

Or as Leoni put it, “[F]ewer and fewer people now seem to realize that just as language and fashion are the products of the convergence of spontaneous actions and decisions on the part of a vast number of individuals, so the law too can, in theory, just as well be a product of a similar convergence in other fields.”

He goes on, “The paradoxical situation of our times is that we are governed by men, not, as the classical Aristotelian theory would contend, because we are not governed by laws [legislation], but because we are.”

The question for Leoni is not how can we get good legislation and avoid bad legislation. The matter is much deeper than that: “It is a question of deciding whether individual freedom is compatible in principle with the present system centered on and almost completely identified with legislation.”

He tells us that in order to imagine an alternative to governance by legislatures, we need not visit Utopia. Rather, we may study Roman and English history: “Both the Romans and the English shared the idea that the law is something to be discovered more than to be enacted and that nobody is so powerful in his society as to be in a position to identify his own will with the will of the land.” This was law that judges discerned when resolving specific disputes brought before them by specific individuals; it was law based on custom and the expectations it gave rise to. (See Hasnas’s “Toward a Theory of Empirical Natural Rights” [pdf].)

Leoni lists three differences between judges in the sense just described and legislators:

1. “[J]udges or lawyers or others in a similar position are to intervene only when they are asked to do so by the people concerned, and their decision is to be reached and become effective, at least in civil matters, only through a continuous collaboration of the parties themselves and within its limits.”

2. “[T]he decision of judges is to be effective mainly in regard to the parties to the dispute, only occasionally in regard to third persons, and practically never in regard to people who have no connection with the parties concerned.”

3. “[S]uch decisions on the part of judges and lawyers are very rarely to be reached without reference to the decisions of other judges and lawyers in similar cases and are therefore to be in indirect collaboration with all other parties concerned, both past and present.”

Thus, “the authors of these decisions have no real power over other citizens beyond what those citizens themselves are prepared to give them by virtue of requesting a decision in a particular case.”

Free Markets versus Central Planning

Leoni draws important parallels between judge-discovered law and the free market on the one hand and legislation and central planning on the other: “[A] legal system centered on legislation resembles … a centralized economy in which all the relevant decisions are made by a handful of directors, whose knowledge of the whole situation is fatally limited and whose respect, if any, for the people’s wishes is subject to that limitation.”

He exposes the posturing of self-styled “representatives” with a refreshing bluntness not often encountered today:

No solemn titles, no pompous ceremonies, no enthusiasm on the part of applauding masses can conceal the crude fact that both the legislators and the directors of a centralized economy are only particular individuals like you and me, ignorant of 99 percent of what is going on around them as far as the real transactions, agreements, attitudes, feelings, and convictions of people are concerned…. The mythology of our age is not religious, but political, and its chief myths seem to be “representation” of the people, on the one hand, and the charismatic pretension of political leaders to be in possession of the truth and to act accordingly, on the other.

Finally, to bring this back to Judge Sotomayor and the job she will assuredly be awarded, Leoni noted that judiciary law can become like legislation “whenever jurists or judges are entitled to decide ultimately a case.” But isn’t that what a Supreme Court is entitled to do when it makes law for everyone everywhere?

“In our time,” Leoni wrote, “the mechanism of the judiciary in certain countries where ‘supreme courts’ are established results in the imposition of the personal views of the members of these courts, or of a majority of them, on all the other people concerned whenever there is a great deal of disagreement between the opinion of the former and the convictions of the latter.”

Thus the assertion that the Supreme Court must not become a legislature is wishful thinking. It must and it will–no matter who sits on it.

So what’s an advocate of liberty to do? Leoni concluded that we must limit legislatures to as few matters as possible. That in itself is a tall order. But it is a start in the right direction.

Yet Catherine Rampell, economics editor for nytimes.com, reports there has been “no sea change in public opinion” about healthcare reform. She cites Nolan McCarty of Princeton University, who shows that public support for a government overhaul of the medical industry was higher in 1993, when the Clinton plan failed, than it is today.

Of course, we always have reason for suspicion about public opinion polls, since pollsters can get the results they want by how they frame the questions, especially the all-important preliminary questions. People aren’t laboratory rats, and some respondents may be as interested in impressing the pollster as in speaking their minds. Definitive proof of the case for suspicion was provided some years ago by an episode of the satirical BBC television program Yes, Prime Minister, the key scene of which is here.

So What?

But let’s not stop there. We may grant that “the public” want (as the British would say) the government to set up an insurance program to compete with private insurers and are even willing “to pay higher taxes so that all Americans have health insurance that they can’t lose no matter what.”

So what? By asking this question, I am not displaying naïveté. Politicians of course will use a favorable poll for cover when they do what they want to do anyway.

I mean something else: Why should the people get something through government–that is, at the point of a gun–simply because they want it? We make that assumption reflexively, but why? Fifty-seven percent may be willing to pay higher taxes for universal health insurance, but let’s not overlook what else they are willing to do: tax the 37 percent who aren’t willing to pay higher taxes. (Six percent don’t know if they are willing or not. Sigh.)

H. L. Mencken long ago defined democracy as the “the theory that the common people know what they want, and deserve to get it good and hard.” The problem is that those who don’t want it get it, too. When it comes to government programs, there’s no opt-out provision. Alas, what distinguishes “free” from unfree countries is the freedom to speak out, not to opt out. In the latter respect, all are unfree.

What about that 37 percent who would be ignored? If they don’t count, they needn’t have had their time wasted by the pollster. As Bruno Leoni wrote, “[I]n assuming that 51 voters out of 100 are ‘politically’ equal to 100 voters, and that the remaining 49 (contrary) voters are ‘politically’ equal to zero (which is exactly what happens when a group decision is made according to majority rule) we give much more ‘weight’ to each voter ranking on the side of the winning 51 than to each voter ranking on the side of the losing 49.” (See my article  “The Crazy Arithmetic of Voting.”)

Well, it might be said, in our system the majority rules. Standing alone, this principle sounds rather ominous, so the speaker usually hastens to add, “but the rights of the minority are protected.” But really now, which is it? Do the majority rule or are the rights of the minority protected? I really don’t see how you can have it both ways.

Misrepresentatives

Our “representatives”–more aptly, our “misrepresentatives”–are supposed to sort out all this complicated stuff, but don’t bet on their squaring the circle any time soon.

The upshot is that they will decide what kind of healthcare system we will have. To the extent they take into consideration what some of the people whom they “represent” want, it is only because they are looking to the next election.

All of which leads me to the question of why we even see these decision-makers as our representatives rather than as our rulers. Think about this: The average congressional district has a population of well over 600,000 people. In Montana, one congressman allegedly represents the state’s entire population of 967,440. The populations of the states range from about half a million (Wyoming) to 36.7 million (California).

Honestly now, who really believes that anyone can actually represent such large and diverse groups of people? (Credit the Antifederalists, or anti-Rats, with another legitimate concern about centralized power.) Are we playing games when we talk about representation under those circumstances?

The Fiction of Representative Government

What got me thinking about this the other day is an essay by the highly respected historian Edmund Morgan, emeritus professor of history at Yale University and prolific author of books on America’s colonial and revolutionary era. His latest book is a collection of previously published papers with the self-explanatory title American Heroes: Profiles of Men and Women Who Shaped Early America. (Hat tip: Jeffrey Rogers Hummel.) But Morgan departs from that theme in a couple of chapters, including Chapter 15, “The Founding Fathers’ Problem: Representation.”

Morgan begins by noting that all governments rest on consent; specifically, the governors are few and the governed are many and thus potentially more powerful than the governors. Therefore the governed must be persuaded to believe that obeying the government is the right thing to do. This is the role ideology plays: It constitutes “opinions to sustain their consent.”

“The few who govern take care to nourish those opinions, and that is no easy task, for the opinions needed to make the many submit to the few are often at variance with the facts,” Morgan writes. “The success of government thus requires the acceptance of fictions, requires the willing suspension of disbelief, requires us to believe that the emperor is clothed even though we can see that he is not.” (Emphasis added.)

In democratic countries such as the United States, those fictions include the idea of representation, as well as the idea that our “representatives” are mere members of the governed like the rest of us. It doesn’t take a lengthy visit to Washington, D.C., or even a state capital, to be disabused of that latter fiction.

Fictions endure only as long as they are useful, and the one regarding representation is quite useful. Morgan writes, “And just as the exaltation of the king could be a means of controlling him, so the exaltation of the people can be a means of controlling them. …In locating the source of authority in the people, they ["the men who first promoted popular government"] thought to locate its exercise in themselves. They intended to speak for a sovereign but silent people, as the king had hitherto spoken for a sovereign but silent God.”

Morgan is unequivocal: “Representation from the beginning was a fiction. If the representative consented [to the king's taxes or laws], his constituents had to make believe that they had done so.” The problem was not only that often a perfect stranger deigned to represent individuals he knew little about, but also that he had a conflicting mandate: to represent his district while also looking out for the welfare of the whole country. This second part was useful in making representative bodies into modern aristocracies. (We leave aside the further problem that for much of the history of representative government, many people were not allowed to vote.)

“The sovereignty of the people was an instrument by which representatives raised themselves to the maximum distance above the particular set of people who chose them,” Morgan adds. “In the name of the people they became all-powerful in government, shedding as much as possible the local, subject character that made them representatives.”

Morgan connects these considerations to the American Revolution, the Articles of Confederation, and the goals of the Constitutional Convention. But bear in mind that he is not a radical critic of the American political system. He’s no anti-Rat. Yet he concedes that centralization of power under the Constitution was intended to restore representation to its fictive status, since it had become more real in the small legislative districts within the states during the Confederation period. As he writes, “The fictions of popular sovereignty embodied in the federal Constitution may have strained credulity, but they did not break it.”

Alas, that topic must be left for another time. For now, as the Senate and House of “Representatives” deliberate whether to give even more control over your health care to bureaucrats, ask yourself what taxation with representation has wrought.