The Road to Freedom Read online

  Figure 6.1. Should the government intervene in the private market?

  All together, these justifications set a high bar for government involvement in the private economy. Figure 6.1 shows the conditions that have to be met before government should act.

  The point of Figure 6.1 is that a great deal of what the government does sounds sensible, but it is not. In providing a minimum safety net or addressing market failures, the government wastes resources or tries to do things it cannot achieve cost effectively.

  Even worse, much government activity doesn’t even try to solve market failures or provide a safety net. In the modern adlibocracy, what passes for governing philosophy is little more than a bromide such as, “The government should do nice things for people.” Today, the government’s spending binge is largely directed toward rewarding political friends (like public-sector unions), social engineering (see ObamaCare’s mandates or the housing policies that led to the current crisis), and good old-fashioned pork (look almost anywhere in the economic stimulus spending).

  In the end, much of government that purports to enhance people’s lives actually makes things worse for citizens and keeps them sliding toward a system they don’t want. And ultimately, it helps explain why eight in ten are dissatisfied with the democratically elected government.

  IF THE GOVERNMENT does its job—which is to say, refrains from acting in most cases—many market failures will go unsolved by the public sector. Principled politicians will have to tell citizens that they know things aren’t perfect, but it isn’t prudent for the government to step in, because it can’t solve the problem—at least not in a way that uses tax dollars cost effectively.

  This does not mean people can’t promote other solutions, though. A dangerous progressive fallacy is that if the government doesn’t solve a market failure, it will always remain unsolved. Without publicly funded trains, for instance, transportation will be inadequate. Without stringent laws, honest people will become criminals. Without money for public broadcasting, people will have no access to high-quality radio, and so on. This is ridiculous.

  To resolve many actual market failures, people don’t need the government at all. They need well-functioning markets, of course. But they also need voluntary action and a healthy culture in which people do things for each other without being forced or bribed by the state. People need what scholars call “social capital,” which is the trust and social cohesiveness that promote voluntary activity to meet challenges in civil society.

  Trust and cohesion in healthy neighborhoods and communities make life easier, more pleasant, less bureaucratic, and more efficient.23 In high-trust societies, it is easier to conduct business and requires fewer resources in policing and the adjudication of disputes. There is less cheating, corruption, and crime. And where there are a lot of civic institutions, people help each other for mutual benefit.

  More specifically, where social capital is plentiful, people are more likely to refrain from making excess noise or letting their property deteriorate (circumventing externalities). Many minor business deals between friends require nothing but a handshake, and people don’t take advantage of each other (avoiding an information asymmetry problem). If a person sees something suspicious at a neighbor’s house, he goes to check on it (a public good). In all these cases, individuals are better suited than governments to solve the market failure at hand, but they require a climate of trust and voluntary action.24

  Social capital is what encourages someone to refrain from exploiting an information asymmetry by giving back the change if a cashier gives her too much. It induces her to give to charities that provide public goods for people she won’t ever meet. It holds her back from creating externalities in traffic with obnoxious driving. Every day, social capital solves small and large market failures that government can’t and shouldn’t address.

  It is easy to see how important social capital is to people’s lives. Yet strangely, until recently there were few good measures of this important quality of life issue. In response to this, researchers at several universities and foundations around the United States undertook in 2000 to measure social capital with a survey. They asked tens of thousands of citizens about their levels of trust, charity, and community involvement. Dozens of American communities were represented, from rural areas to big cities.

  The results were fairly predictable: In small communities where people know their neighbors, social capital is high. In big, anonymous cities, social capital is low. For example, on an index of social trust, big cities like Chicago, Boston, and Los Angeles are near the bottom with a score of 81. The two top communities are Bismarck, North Dakota (131) and rural South Dakota (150).25

  How do people experience these differences in everyday life today? Try driving in Chicago after a few weeks in North Dakota, and compare how others treat you. Where are you more likely to get mugged—Irene, South Dakota, or downtown Los Angeles? And if you move into a new home in downtown Boston, your neighbors might not welcome you with a fresh-baked pie. In modern America, big cities are great if you want a good restaurant or to see the opera. They’re lousy for social capital.26

  IN THE 1830S, what impressed Alexis de Tocqueville most about America was the astonishingly high levels of social capital. Probably the most famous passage in Tocqueville’s classic Democracy in America addresses this point:

  Americans of all ages, all conditions, and all dispositions constantly form associations. . . . The Americans make associations to give entertainments, to found seminaries, to build inns, to construct churches, to diffuse books, to send missionaries to the antipodes; in this manner they found hospitals, prisons, and schools. If it is proposed to inculcate some truth or to foster some feeling by the encouragement of a great example, they form a society. Wherever at the head of some new undertaking you see the government in France, or a man of rank in England, in the United States you will be sure to find an association.27

  This was, in Tocqueville’s mind, the secret to American success. In the eyes of a twenty-first-century social scientist, Tocqueville was simply observing the fact that social capital solved market failures that government couldn’t address, given America’s sparse population and ungovernable frontier. It would have been impossible to tax the population sufficiently to fund government hospitals and schools in, say, 1830s rural Nebraska. America was successful because a new nation of social entrepreneurs took these tasks upon themselves. In the process, they built strong communities of trust, reliant on themselves and not on the government. This is the legacy of freedom and limited government that Americans still say they love.

  The links between social capital and America’s success have been evident to social scientists for many years. In one study in the 1950s, the American political scientist Edward Banfield spent a year in a small, poor town in southern Italy.28 His vivid observations formed the basis for his book The Moral Basis of a Backward Society, in which he laid out the evidence that the town was impoverished because the people did not recognize or reward meritorious behavior, had little sense of fair play, and no sense of charity toward one another.29 He noted, for instance, that the local orphanage in the town was run by nuns in a crumbling medieval monastery. No one in the town gave a lira for its support, and not even unemployed stone masons volunteered to help in its upkeep—even though all the orphans came from the town itself.

  Banfield forcefully made his point by comparing the Italian town with a comparably sized—but prosperous—little town in Utah. On one random day, the local newspaper in the Utah town contained mentions of dozens of voluntary charitable projects and activities. The local church had just raised $1,393.11 in pennies for a children’s hospital 350 miles away; there was a Red Cross membership drive going on; a circus was being held to raise money for a new dormitory at the local junior college; there were meetings all over town of the Parent Teacher Association (PTA).

  There are many market failures that social capital cannot solve—either that the government can and sh
ould address (for example, the public good of military power) or that may simply go unsolved (such as externalities from differences in religious practices). But social capital is an important component of a healthy nation.

  Unfortunately, some experts believe social capital is generally in decline in America. Harvard political scientist Robert Putnam wrote a bestselling book in 2000 entitled Bowling Alone, in which he argued that people’s trust in each other and tendency to participate voluntarily in their communities has plummeted in recent decades. Not all experts agree, but clearly Putnam’s claim resonates with millions of Americans who have seen evidence around them of eroding social networks and falling trust in their communities.

  Quite reasonably, Putnam laid the blame for falling social capital on phenomena such as television and urbanization. But there is more to it. The rise of statism described in the last chapter is also a key reason for the slide away from the self-governing ideals that Tocqueville found so striking. The voluntary sector falls as the public sector grows and takes over more functions in people’s lives. More of life is identified as a competency of the government, and thus not the responsibility of individuals.

  This is not just conjecture, but demonstrable truth. In dozens of studies, economists have shown that government funding “crowds out” voluntary contributions of both money and time to charities.30 This stands to reason. If the government is supporting something, people don’t “need” to. Furthermore, people will be less likely to ask for help: One major research finding is that nonprofits quickly conform to government support and spend less time and effort fund-raising.31

  This pattern is not innocuous when it comes to a flourishing nation. Government insinuates itself into more and more corners of people’s lives, alienating them from each other and their communities. It obviates what philosopher Edmund Burke called the “little platoons” of ordinary life, which create meaning in a way the government never can or will. That is the conclusion of a great deal of research.32 It is also the essence of an entire philosophical and religious principle called subsidiarity, which teaches that in order to help people thrive, matters ought to be handled by the smallest, lowest, or least centralized authority.33 If the family can solve the problem, don’t call on the city. If the city can solve it, don’t call on the state. And so on.

  In other words, if people are to flourish, they need incentives and the ability to help each other voluntarily. In many cases, this amounts to keeping the government out, even if things aren’t perfect.

  I AM CLEARLY MAKING A CASE for government that is far more circumscribed than the government in America today. A state that restricts itself to minimum basic standards for the poor, and sorting out market failures cost effectively, is in stark contrast to today’s exploding public sector. The sculpture is much smaller than the block that currently contains it.

  In this chapter, I have tried to explain what I believe the government should and shouldn’t do. And we already know the why: to allow free enterprise’s moral promises to help the greatest number of people flourish. Still, we need to get down to specifics and identify the actual policies Americans care most about and the ways in which we can make them into an expression of our values. That is our task for the next chapter.

  7

  WINNING THE MORAL DEBATE ON THE POLICY ISSUES THAT MATTER MOST TO AMERICANS

  One recent afternoon, a congressman friend of mine called with an unusual request. He knew I was writing a book about how to win the fight for free enterprise. He knew all my arguments about earned success, meritocratic fairness, and lifting up the poor. However, he wanted advice on something more specific: how to make the best possible moral argument for a particular tax policy that was about to come before Congress.

  As the president of a think tank, I’m used to giving answers to specific policy questions. What is the right income exclusion so that a flat tax is not regressive? What is the economic multiplier on military spending? What leads to better growth in an economy—cutting government spending or raising taxes? But I have rarely had a policymaker ask me how to construct the moral argument for a specific policy. That’s a very different challenge from making the moral argument for free enterprise as a whole. A huge philosophical exegesis about the morality of freedom won’t have the right effect. It would be like reciting Paradise Lost at a limerick competition.

  To argue specific policies, free enterprise advocates need to be fluent in the moral case and make it in just a few sentences. We need to follow it with the relevant facts and data, and offer practical principles for good governance. And we need to have the specific policy proposals that are consistent with the moral case. In this chapter, I will demonstrate this process and make the argument in the case of five domestic economic policy issues Americans are most concerned about today.

  What are these issues? If you listen to the pundits, you might think that most Americans are fixated on “wedge” issues like illegal immigration and gay marriage. There are shrill proponents on both sides of these issues that make for great TV. But in reality, when Americans shut off the TV and sit around the kitchen table to talk, they aren’t mostly concerned with these issues. Over many years, polls have repeatedly revealed that when it comes to domestic policy, Americans are primarily concerned with a core set of topics, almost all of which revolve around economics.

  A June 2011 CNN poll listed a large number of policy issues and asked people to evaluate how important each would be to their vote for president.1 The most important issues were, in order: the economy, unemployment, health care, the deficit, gas prices, terrorism, taxes, and the Medicare entitlement. Five of the top eight issues focus directly on economics, and two of the other three are closely related. To be relevant to American voters, these are the issues advocates of free enterprise must be ready to address, morally and practically.

  In the following sections, I will focus on most of these important issues with structured arguments on the subjects of economic growth, jobs and unemployment, deficits and debt, entitlements, and taxes. Obviously, in just a few pages, I won’t pretend to give readers a truly comprehensive policy treatment. Whole books have been written on each topic. Nonetheless, each section serves as an example of how to build a policy argument in a way that will arm those sympathetic to the free enterprise viewpoint and persuade (or at least gently confront) those who are not.

  Each argument follows a specific outline: First, I start with the brief moral case for policy reform. This is not a long treatise on the morality of every issue, but rather the “elevator speech” for the why of each policy, highlighting the basic moral points I believe are essential to address before moving on to the what.

  Second, I present salient evidence that makes the case that policy change or reform is necessary. This evidence is generally quite counterintuitive, not because I am searching for surprises per se, but because if the facts were intuitive, reform would already have taken place.

  Third, I offer what I believe are the basic principles for better policy. I have found these to be the guideposts to improvement in each policy area. As circumstances change, these principles will not.

  Finally, I lay out the actual policies I think are currently most necessary and constructive. The policies I propose are some of those my AEI colleagues and I have worked on most intensively, have offered to presidential candidates and in congressional testimony, and which we believe should be part of any broader set of policy solutions.2

  ISSUE 1: GETTING THE U.S. ECONOMY GROWING AGAIN

  First off, we have to make the moral case for economic growth. But economic growth isn’t “moral,” right? Wrong. In the words of Harvard economist Benjamin Friedman, “Economic growth . . . fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy.”3 All of these things have deep moral implications.

  Weak economic growth means the end of the opportunity society in America. Your grandparents believed your parents could do better than the
y did; your parents wanted the same for you. That’s how the American Dream works, and it is not fair to steal that legacy from our children by consuming tomorrow’s growth today in the form of exploding government and lavish entitlements we can’t afford.

  Furthermore, weak growth disproportionately hurts those who most need new economic opportunities: the poor. The world experienced effectively no economic growth for millennia, and then saw explosive growth due to capitalism. This has literally saved billions of people from brutish poverty. But there is more to do, here in America and around the world. To fulfill the moral promises of the pursuit of happiness, basic fairness, and help for the less fortunate, America’s economy must continue to grow.

  Here are some essential facts to help people understand why better policies are needed to stimulate growth:

  •America’s growth is spiraling downward, just like growth in the European countries. From 1950 to 2000, the U.S. averaged 3.6 percent real annual GDP growth. For the last ten years, GDP has grown at an annual rate of 1.7 percent. Since the recession began in 2007, U.S. growth has fallen to 0.1 percent.4

  •Many economists believe our natural growth rate is now too low to pull the U.S. out of its economic malaise and solve its fiscal crisis. Even to lower the budget deficit to 5 percent of GDP, America would need to achieve a year-on-year growth rate of at least 4 percent.5