The Road to Freedom (15 page)

The Eastern approach is useful when it comes to how we see our government.

America is a work of art, an expression of the vision of our Founders. The vision was audacious, creative, and revolutionary. But our Founders intended the work as an ongoing project. Benjamin Franklin famously promised us a republic, “If you can keep it.” Every generation, the Founders knew, must work to preserve what they left us, and make it beautiful for our current generation.

For many years we have been pursuing something like the Western artistic strategy for government. We build our system up to attain what citizens and politicians demand in the moment. Every generation, we slosh more paint onto the canvas. We search for a better system by adding laws, regulations, taxes, and social engineering. The result today is garish and ugly; it bears little resemblance to the work of our Founders.

We need the art of taking things away to reveal the American Experiment within: the constitutionally limited government that allows America to be its best self. The project we need today is not a destructive one, simply tearing down the state. It is a creative one, to chisel away the statist dross that obscures our system of liberty, individual opportunity, entrepreneurship, and self-reliance.

This chapter is a description of what I think the sculpture inside the block looks like.

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•
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LEFT ON THEIR OWN
, governments tend to grow. Politicians get attention—and applause—for
doing
things. When things are going poorly, people never call their congressman and scream, “Don't just do something, sit there!”

As we have seen, both Democrats and Republicans have contributed, over the decades, to the explosive expansion of the U.S. government. In order to reverse this trend, Americans need to lay out clear principles describing what the proper role of government is, and isn't. Advocating limited, constitutional government requires nerves of steel, a willingness to weather knee-jerk resistance (“You are cutting my Medicare!”), and—above all—an actual philosophy. It requires a way to answer the question of what exactly needs to be limited, reformed, and cut—and
why
.

So, as believers in the free enterprise system, what kind of government should we work toward? What does a government look like that is fair, allows people to earn success, and lifts up the downtrodden?

In his first inaugural address, Thomas Jefferson laid out his vision of “a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.”
¹

President Obama's vision of government is, to understate the point, a bit more expansive than Jefferson's. The U.S. government, in his view, should be judged on whether or not “it helps families find jobs at a decent wage, health care they can afford, a retirement that is dignified.”
²
In a bit over 200 years, we have moved from a president who believes the purpose of government is to leave you free to live your life as you see fit, to a president who thinks
that the state is included in finding you a job, getting you a doctor, ensuring you save for your retirement, and a long list of other things.

What philosophy of government preserves Jefferson's ethos, while recognizing that the world has changed in dramatic ways? In my view, America would do well to turn to the wisdom of German-born economist and Nobel laureate Friedrich Hayek. Hayek's classic book
The Road to Serfdom
, written in 1944, is obligatory reading for all advocates of free enterprise—and still provides an excellent guide to the role of government.

Conservatives admire and quote Hayek incessantly. What's surprising to some is that he taught that the government, for moral as well as efficiency reasons, can and should provide a minimum basic safety net for citizens. And like most other economists, he also believed it should address “market failures.” But that's all—and that is dramatically less than what the government currently does.

LET
'
S BEGIN WITH
the idea of the minimum safety net, since the easiest—and most frequently cited—criticism of the free enterprise movement is that its proponents want to instate a purely Darwinian society, in which the weakest members are left on their own, without any support from the government. In 2011, President Obama said this of his political opponents: “Their philosophy is simple: we are better off when everyone is left to fend for themselves and play by their own rules.”
³

I have almost never heard conservatives and free enterprise advocates make such a preposterous claim. Most believe that it is appropriate for the government to provide
some
safety net for its citizens. Most are very comfortable providing some minimal standard of living in terms of food, shelter, and medical care.
Even hardline conservatives don't object to minimum basic protections for poor people, provided publicly, in some cases (and, in others, by private charities). Demagogues who accuse the political right of wanting to throw the poor out into the snow are not just exaggerating: they're simply wrong.

Still, most free enterprise advocates—and most Americans in general—believe that the government has gone too far and is mollycoddling the citizenry. A February 2009 Fox News poll shows that 76 percent of Americans believe that we now rely too much on the government and not enough on ourselves. Only 20 percent disagree with that sentiment.
⁴

The basic problem is that America's minimum “safety net” has become appallingly broad. It has little to do with helping the poor, and a lot to do with passing out favors to voters and smoothing the risks out of ordinary life. For example, we often hear that Social Security is part of a basic safety net. But as currently configured, the program is in large part a benefit to middle-class people, especially the majorities that have taken more out of the system than they ever put into it. Similarly, Medicare Part D (subsidizing prescription drugs to seniors) is not part of the safety net for the poor per se; it is a $62 billion benefit that is consumed by a group that is made up primarily of middle-class Americans.
⁵

The job of a social safety net starts with an answer to this question: What is an unacceptable standard of living in America? In my view, it is unacceptable for someone in America's wealthy society to go without access to basic medical care, sufficient food, and basic shelter. Pretty uncontroversial, I think.

But the safety net is
not
a means to increase material equality, a way to take any but the most grievous risks out of life, a way to pass out rewards to groups based on demographics or political clout, or a source of benefits to the middle class.

So Medicaid for people below poverty is an appropriate function of the safety net: We can and should find a way to cap its costs and preserve it, as the next chapter will detail. But the government subsidizing prescription drugs for all seniors (not just the poorest) is simply a favor to a key voting bloc, and European-style health coverage is a move toward social democracy. Food aid programs for the indigent are part of the safety net, but agricultural subsidies to prop up farmers' incomes are not. Homeless shelters are part of the safety net, but housing programs that serve the middle class like rent control and government flood insurance are not. A guaranteed minimum Social Security benefit that lifts seniors to the poverty line is part of the safety net, but paying anyone who is not poor any more than they paid in (plus a reasonable rate of return) is not.

The true safety net includes programs like food stamps so the poor can eat, Temporary Assistance for Needy Families (TANF) for low-income families with small children, Medicaid, and Supplemental Security Income (SSI) for the indigent and disabled. These federal programs are not cheap—together, family support, food assistance, Medicaid, and SSI totaled $432 billion in 2010 (a bit less than 3 percent of the GDP and 8.5 percent of the 2010 federal budget)—but they are a defensible safety net for the disadvantaged.
⁶

The government could eliminate waste from these programs and spend less than it currently does. Moreover, welfare reform in the 1990s showed that these programs should never be designed as a permanent source of support, because that hurts the poor and their children. But few people, including few conservatives and free marketeers, really want to kill these programs and substitute nothing for them. The safety net—continuously improved and reformed—should continue to be there for the neediest of citizens.

Clearly, reasonable people can disagree on what “poor” means and what an “acceptable standard” for them is. But I believe that is the debate we should have, not a debate about whether the current out-of-control entitlement system—which largely benefits the nonpoor—should continue.

THE SECOND AREA
of legitimate government activity is “market failure”—specific cases in which free markets don't function on their own to create efficient outcomes. Since Adam Smith published
The Wealth of Nations
, nearly all economists have agreed that such circumstances
can
justify some degree of state intervention in the system—not to weaken free enterprise, but to strengthen it.

There are four sources of market failure: monopolies, externalities, public goods, and information asymmetries.

A monopoly is, literally, “one seller.” Monopolies are all around us. The corner bakery is technically one, as the only seller of bread on that corner, but its monopoly status poses no problem because there are other bakers on other blocks. A more worrisome monopoly is the only seller of an entire product. For example, until 1983, the phone company in America, AT&T—known back then as “Ma Bell”—was the only provider of long-distance phone service. It was horrendously expensive. (When I was a child, I remember my father sweating bullets because my mother was on a long-distance call to my aunt who lived in the next state
for nearly an hour
. Today, my kids don't even know what a “longdistance call” is.)

There are several problems with monopolies. In general, the lack of competition means prices tend to be high, service tends to be poor, entrepreneurs are unable to deliver innovation to consumers, and companies spend an inordinate amount of money lobbying government to maintain the one-seller privilege.

Monopolies like Ma Bell are a threat to economic prosperity and the good of citizens. When a company can establish a monopoly by forming barriers to competition, the company may prosper, but the citizenry won't; thus the government's interest in this market failure. The famous case of Standard Oil's monopoly pricing schemes of the 1880s led to the Sherman Antitrust Act of 1890, which most economists still today regard as beneficial and prudent regulation.

A related phenomenon is price fixing through the collusion of competitors, which makes an effective joint monopoly. Adam Smith wryly explained: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
⁷
Manipulating a competitive market through collusion is a legitimate area of attention for government regulators. That is why it is illegal for the CEO of United Airlines to call his counterpart at Delta to talk about the prices they should charge.

These rules are not absolute, however. There are times when a monopoly makes sense—for instance, when it protects intellectual property. If you invent something, you get a patent or trademark that protects you from others who might steal your idea. If Amgen develops a new drug that cures a disease, the government says Amgen has several years to sell it without competition from generic substitutes. Microsoft has the legal right to be the only company that can use its brand and logo. Lady Gaga owns the legal rights to her songs and gets paid if you want to perform
them professionally. In these cases, the government is correct in protecting monopoly power. If it did not, few would have an incentive to innovate.

Unfortunately, we should not assume that when it comes to monopoly policies, the government will sort out the “good” from the “bad” monopolies and make policy accordingly. Governments have been known to leave intellectual property unprotected, protect predatory monopolies, and even set them up in order to make money at the expense of the general public.

Remember the last time you tried to find a New York City taxi in the rain? It took twenty minutes because the city government, which sells exclusive licenses (“medallions”), limits the number of taxis to below competitive levels. Currently, the price of an individual taxi medallion—the license for one taxicab—in New York is $696,000 on the open market.
⁸
That's to buy the right to sell a product where competition is legally restricted in what is truly a conspiracy against the consumer.

Sometimes, the government itself operates a monopoly. In many countries, for instance, the government is the sole provider of landline telephone service. Inevitably, it is an expensive and ghastly service—maybe even worse than Ma Bell. I lived in Spain when the government still owned the Spanish phone monopoly,
Telefónica
. Everything about it was a nightmare—people waited for months to get a new phone line, the service was miserable, and it was expensive. Why did the Spanish government own
Telefónica
? Because it was a huge cash cow and, basically, just another tax on citizens.