There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

In part she is right. Our economy is based on social cooperation under the division of labor. Our ability to become as wealthy as we have rests on this cooperation, where each of us specializes in the things we do best. The problem is the jump in logic taken from there. As Sheldon Richman points out, her argument is a non sequitur. The jump from working together to higher taxes, particularly for wealthy businesses, doesn’t necessarily follow. Further, the “social contract” she mentions was signed and agreed to by no one. In fact some of the only, if not only, historical examples of real social contracts can be found in medieval trading towns in Germany and on pirate ships, and certainly neither are applicable to our modern and complex society. Providing certain services does not imply complete ownership over us.

There is, however, more wrong with Warren’s words. In Philosophical Society: The Tale of the Slave, the obligation to “pay forward for the next kid who comes along,” she seems to be implying that businessmen, at least in part, should work for the good of others. Going into business requires you to work for others because others worked for you, making your profits possible. This is the Cliché of Socialism number 41, as Leonard Read pointed out.

Morally the libertarian should be outraged by such a notion. Nozick’s tale of the slave may even come to mind. But again, it is a non sequitur. Those things, which “we” have paid for, that benefit the factory owner and other businessmen are just that: beneficial! So much so, in fact, that most would be willing to pay for these services. There is little-to-no reason businesses should pay more in taxes so the State can provide these and many other “services.” They could be provided, at least for the businesses, privately.

Moving your goods to market is all part of the costs of doing business. It is in their own self-interest to make sure they have the roads necessary to get them to the customer (meaning they have a willingness to pay). Roads in fact were historically provided privately, and some still are today.

Employees have an incentive to educate themselves. When we go, or our parents send us, to school we are investing in our future. In other words, we are hoping education will result in higher wages in the future. And employers prefer this because it means a higher productivity. There is already an embedded incentive to educate.

And security. Many businesses don’t even rely on the police but instead hire their own private security. Making sure their goods are secure is another cost of doing business that firms have their own incentive to provide. Some of the safest places in the world are safe not because of public police but because of private security and commerce.

Businesses are willing or would be willing to pay for these things because it is in their own self-interest. And similarly other individuals and businesses would be willing to provide them. There is no need to rely on the coercive tools of the State or some notion of a mythical obligation towards a social duty to provide these goods. As Adam Smith put it,

He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. . . . By directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it.

By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

In other words, these selfish businessmen earning a profit are benefiting society. They are providing society with goods that it wants; it is making us better off. The larger the profits the more it has paid it forward.

The above is not necessarily an argument for anarchy in the broad sense. A case could be made for the need of a State, but that is an argument for another  time and place. What it shows, albeit in an overly simplistic form due to space constraints, is that these goods which make most businesses possible are in themselves the products of businesses. This could all be up for debate. After all a case can be made that these are public goods that would be underprovided by the market. But they certainly can be provided. Even if it is true that they cannot, businesses still pay it forward through the value they generate.

Warren’s argument seems unjustified; the State she envisions is much greater than it needs to be. Thus higher taxes are not necessary; a cut in government is. We are in debt because the State does too much. This type of collectivist thinking will only undermine the incentives that make social cooperation under the division of labor work.

Download Leonard E. Read’s Cliché of the Socialism Number 41 here.  

Read lists twelve different principles in which government should not interfere with individual’s lives (he could probably have thought of many more). If the person who asked you what you would cut from government disagrees with any of the principles, Read says, let them present their case for why he is against freedom in this specific manner. If, on the other hand, he approves of these principles then he “implicitly approves of the free market, private property, limited government way of life.”

From a libertarian or liberal (classical, of course) position Read is right. The problem is that most individuals will claim to be for freedom but still want to deny some (even many, in some instances) of these principles. Or they accept these principles except in certain instance where it is ‘necessary’ to take them away. In other words, they either want to completely redefine the term or simply pay it lip service.

The current financial crisis has seen many justifications for taking away some of our freedoms. Many who claim to be supporters of liberty are finding government intervention into our lives more and more. Now more than ever people need to be reminded of the principles of liberty. Thus, the question should not necessarily be what would you cut out of government but what principles of liberty do you believe in? What do you think of Read’s strategy?

Download the Clichés of  Socialism number 5 here.

The media spotlight on the late Sen. Edward Kennedy is the latest example. Admittedly, it’s an extreme case because of his family history. Nevertheless, when was the last time a cable news channel celebrated the life of a recently deceased entrepreneur or founder of a great company? It doesn’t happen, and that should offend our sense of justice. Producers make things they think we will value and offer them for a price they think we’ll be willing to pay. All they can do is proffer, persuade, and cajole. Free exchange is win-win. But we, individually, can say no. We can buy from a competitor or not buy at all. And guess what? Nothing happens to us. We don’t get threatening letters. We don’t find our wages garnished or our bank accounts frozen. We don’t get sent to prison. We’re left alone. This is only contradicted when companies are close to government. You don’t get to say no to helping to bail out Chrysler, GM, or too-big-to-fail financial companies.

Now contrast what happens in a market with what happens in the political sector. Politicians talk all the time about making us better off, but they are thwarted by an iron fact they prefer to ignore: Government provides no net benefits. What it gives away it has first taken from others under threat of punishment. It has to break windows in order to bestow benefits. Politicians simply move scarce resources around, defying consumers, who in a free market would direct them to uses that they believe would better serve their purposes. Government is the antonym for choice.

This means the politicians truly can do good only by doing what they abhor: giving up power. That happens only on rare occasions. To his credit, in the late 1970s Kennedy helped divest the government of the power to regulate the commercial airline and trucking industries. Except for those who lost State privileges, everyone has benefited from competition and lower prices. (Deregulation didn’t go nearly far enough, but it was a start.) That’s right: The “Reagan years” preceded Reagan. Ironically, today “deregulation” is a dirty word to most people who adore Kennedy.

Unfortunately, Kennedy never let himself see that the healthcare industry needs the same approach he applied to air travel and trucking.

So why do mere distributors of wealth — politicians — get so much more flattering attention in death (and life too) than producers of wealth?

I see several reasons, only a few of which I’ll mention. One is that for many people the market deals in material goods, while government is thought to be concerned with (social) justice. But this isn’t true. The market is built on justice: self-ownership, self-determination, social cooperation, and mutuality — all of which are undermined by the corporatist welfare state we labor under.

Ignorance of Economics

Another reason is that most people do not understand the marketplace. Bryan Caplan analyzes this ignorance in The Myth of the Rational Voter. The common view is that trade is zero-sum (a loser for every winner) and that profit is added to the price of goods rather than squeezed out of the costs. Such an attitude leads, at best, to a lack of appreciation for the efforts of entrepreneurs, who take risks to bring us new things in new ways. Besides this, many people take today’s vast array of accessible goods and services for granted, as though it’s a fact of nature rather than the product of ingenuity, foresight, and risk-taking. Another factor is that improvements in living standards tend to be incremental and undramatic. Even a big innovation, such as the personal computer or mobile phone, soon seems commonplace. (See Donald Boudreaux’s take on this.)

For most people an understanding of how markets work is not intuitive. It requires the grasp of such elusive ideas as unplanned order, entrepreneurial profit, and prices as capsules of (imperfect) information. These concepts can’t be conveyed in a television sound bite or editorial cartoon. In contrast, government “solutions” are simple. Total health insurance is too expensive? Pass a bill decreeing it to be universal and affordable. Next problem.

A politician who makes a career of proposing such “solutions” is likely to win admiration not only from the public but also from the news media, whose reporters and commentators know as little economics as their readers and viewers. The dynamic leader who gives impassioned speeches and sponsors legislation on behalf of social justice appears heroic in part because few people can find the logical flaws in the program. Observers see only his presumed motives. But motives divorced from understanding are worthless — even dangerous. In a more sensible world, proposing ends while being oblivious to means would be a sign of irresponsibility, the intellectual equivalent of drunk driving. Maturity lies in understanding that, as Steven Horwitz reminds us, ought implies can. That’s where economic logic enters the picture.

During the endless hours of television coverage of Kennedy’s death, someone mentioned that when he was stricken with brain cancer, he received the quality of medical care that “he wanted for everyone.” But such things don’t come from wishing, proposing, or decreeing.

There’s a moral side here also. Business is for profit. Government is not. At least that’s how it looks on the surface. Apart from ignorance of the economics of profit (see Horwitz on this), there is a moral prejudice against profit — that is, against the pursuit of self-interest. People who do things for profit do not get the respect of those who seem to act from other motives. This is a big subject that can only be touched on here. Suffice it to say that 1) if life is a value, then the pursuit of self-interest is praiseworthy; 2) as Adam Smith taught, given the right institutions general good grows out of its pursuit; and 3) politicians are as self-serving as anyone else. What makes them different is that because they have power their incentives are out of alignment with the public’s well-being.

Nevertheless, for most people government, despite its occasional scandal and atrocity, is generally trusted (despite what they say), while business, despite its routine creation of benefits, is generally distrusted. (I acknowledge that the unholy alliance of business and state — corporatism — justifies a good deal of mistrust, but it doesn’t account for all of it.)

Let us hope for the day when the passing of a politician gets little more than an inch or two in the obituary section of the newspapers.

These were the recently traded clunkers whose owners were “nudged” by federal policy to accept a handsome payment from the rest of us for ridding the nation of older, more heavily carbon-emitting vehicles and replacing them with shiny new machines that required a lot of energy to produce but would, on average, yield lower carbon exhaust and greater fuel efficiency.  The clunker statute gave consumers $3,500 vouchers if they purchased vehicles that yielded a four-to-nine mpg improvement in fuel economy, and $4,500 if the yield was ten or more mpg.

In all, according to Bloomberg, some $2.88 billion in tax money was provided to those who together purchased some 700,000 vehicles made up of the popular Ford Focus, Toyota Corolla, Camry, and Prius, along with some Hummers and Ford F-150 and F-250 trucks.  These and a wide variety of other cars and trucks moved quickly from dealer lots to the homes of the blessed. In fact, the speed of the transactions was more than government could handle.  The program was wildly popular.

Taken together the average fuel economy of vehicles traded in was 15.8 miles per gallon, while the average for the clunker replacements was 24.9 miles per gallon.  And according to Ford Motor Company, this kind of fuel-economy improvement translates to a reduction of five to ten million barrels of oil consumed over the next five years. (The nation currently consumes nine million barrels a day.)  This will be oil that some other people can enjoy.

President Obama cheerfully termed the program “successful beyond anybody’s imagination.”  Secretary of Transportation Ray LaHood, who administered the program, said the effort was “a lifeline to the automobile industry, jump starting a major sector of the economy and putting people back to work.”  LaHood quickly added that while all this happened, “[W]e’ve been able to take old, polluting cars off the road and help consumers purchase fuel-efficient vehicles.”  Economist John Lott surmised that “Only in Washington could a program that is spending money 13 times faster than was planned be labeled a ‘success.’”

In their sober assessment of the program, the Obama Council of Economic Advisers (CEA) found that the program will spur the economy for months as the auto industry gears up to replace inventories and meet growing demand.  Putting all this into numbers, the CEA estimates Cash for Clunkers will raise third-quarter GDP by 0.3 to 0.4 percentage points and lift total employment by 42,000 jobs by the end of 2009.

While the clunker program has been hugely successful in the eyes of Obama administration officials, the auto industry, and the consumers who received transfers from the rest of us, there is serious doubt that the program is all that successful when final costs are counted.  The doubt arises for at least three reasons.  First, the program was supported politically primarily for its much touted environmental benefits.  Carbon emissions would be reduced.  But the reduction costs are at least ten times higher than alternate ways of removing carbon.  Second, there is Bastiat’s parable of the broken window to consider. And third, there is a serious matter of eroding social norms for conserving wealth.  A crushed clunker with a frozen engine is lost capital.

Let’s consider each of these points briefly.

University of California-Berkley economist Christopher Knittel has developed a rigorous assessment of the implied cost of carbon emissions under the clunker program. (“The Implied Cost of Carbon Dioxide Under the Cash for Clunkers Program” [pdf], Center for the Study of Energy Markets, Berkeley, The University of California Energy Institute.) Knittel made plausible assumptions about the average life remaining in vehicles removed from the road, the average fuel economy associated with those vehicles, and the resulting levels of carbon emission that would have survived in the absence of clunkers.  Eventually, of course, the clunkers would have died a natural but less dramatic death.  Knittel then estimated the carbon reduction gained when the large fleet of clunkers was replaced by a new fuel-efficient fleet.  When he ran the numbers, Knittel found the cost per ton of carbon reduced could reach $500 under a set of normal values for critical variables.  The cost estimate was $237 per ton under best case conditions.   And what does this tell us?  The much celebrated Waxman-Markey cap-and-trade carbon-emission control legislation estimates the cost of reducing a ton of carbon to be $28 when done across U.S. industries.  Yes, we are getting carbon-emission reductions by way of clunker reduction, but we are paying a pretty penny for it.

Frédéric Bastiat’s brilliant parable of the broken window reminds us that a street hoodlum throwing a brick through a window generates a series of job-generating transactions that might raise GDP by a trivial amount, if it could be measured.  Indeed, the idea seems so compelling that people today often speak of the silver lining found in the clouds that create hurricanes.  Think of the roofers that become employed.  But Bastiat’s key lesson is that a window has been destroyed—and it had value.  Before touting the total benefits of clunkers, we must take account of the destroyed vehicles and engines that represented part of the wealth of the nation.  As Tony Liller, vice president for Goodwill, put it:  “They’re crushing these cars, and they’re perfectly good.  These are cars the poor need to buy.”

Finally, over the eons, human communities have contrived all kinds of devices to transmit critical survival skills and compatible behavioral norms.  One of these has to do with conservation of wealth.  “Waste not, want not,” we are told.  “A penny saved, is a penny earned,” we are reminded.  Using politics to pay people who destroy valuable vehicles, or to hold crops off the market, or to produce ethanol that may use more energy in production than it adds when burned, teaches a lesson of anti-matter and wealth destruction.  When all these considerations are made, Cash for Clunkers sounds like a sorry idea that should not be the model for future policy.

Let’s stop Cash for Refrigerators before the idea spreads further.

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.

Gridlock: The only cure for expansive government?

FEE Timely Classic
“Passing Laws: Is Government That Simple?” by Eric-Charles Banfield

How much government will it take to “root out” fraud?

FEE (Instant) Classic:
Regulation Will Stop Future Madoffs? It Just Ain’t So! by Chidem Kurdas