40 WINTER 2017 2018 IN REVIEW - Cato Institute€¦ · 40 / Regulation / WINTER 2017–2018 IN REVIEW AlwayswithUs REVIEWBY RICHARDA.BOOTH In Fraud, Edward Balleisen recounts the

40 / Regulation / WINTER 2017–2018

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Always with Us✒ REVIEW BY RICHARD A. BOOTH

In Fraud, Edward Balleisen recounts the evolution of attitudestoward and responses to fraud from the middle of the 1800sto the present day. Needless to say, this is a big subject with

many moving parts. But Balleisen, a professor of history and publicpolicy at Duke University, has written a readable—and enjoyable—

R ICH A R D A . BOOT H holds the Martin G. McGuinn Chairin Business Law at the Villanova University School of Law.

account of how fraud as variously definedhas shaped the very idea of free enterprisein America.

As noted in the jacket blurb: “TheUnited States has always proved an invit-ing home for boosters, sharp dealers, andoutright swindlers. Worship of entrepre-neurial freedom has complicated the taskof distinguishing aggressive salesmanshipfrom unacceptable deceit, especially on thefrontiers of innovation.”

To be clear, the book focuses on fraudsperpetrated by businesses on individualsand other businesses. It does not addressfrauds perpetrated by individuals as indi-viduals. In other words, the book dealswith the business of fraud (so to speak).But its real contribution is that it traces thevariety of methods by which government,consumers, and business itself have soughtto remediate and prevent fraud. Perhapsmore intriguing, Balleisen describes howattitudes toward fraud have shifted overtime from the days of strict caveat emptor, tothe rise of the postal inspectorate after theCivil War, to the advent of the regulatorystate beginning around World War I, tothe deregulation movement beginning inthe 1970s, to the re-regulation we arguablyhave seen in the recent past.

Fraud or innovation? / Balleisen largelyresists the standard knee-jerk responseto urge that fraud be treated as a crimeand that fraudsters be jailed. To his credit,he does a good job (for a presumed non-lawyer) at explaining why it is so difficultto prove fraud. Indeed, it remains a mys-

tery to me (and others) why the FederalRules of Civil Procedure (which are alsofollowed in most states) continue to singleout fraud for special treatment. Althoughthe rules generally require only a shortand plain statement of a claim, Rule 9requires that in alleging fraud or mistake,a party must state with particularity thecircumstances constituting fraud or mis-take (although malice, intent, knowledge,and other conditions of a person’s mindmay be alleged generally).

Balleisen also does a good job explain-ing how the word “fraud” has been man-gled in popular usage to comprehend arange of abuses that often fall far short oftrue fraud. A business may be described asa “racket” or “scam,” but does that make ita fraud? On the other hand, Balleisen tendsto succumb to the idea that for a businessto fail suggests foul play of some sort.

For example, he seems to see the fail-ure of the automaker Tucker Corp. andits effort to market the Tucker 48 as notmuch better than the tactics of the dis-reputable Holland Furnace Company (ofwhich more presently). As Balleisen notes,Tucker failed because of cost overruns anda lack of capital. In an effort to save thecompany, Preston Tucker sold dealershipsto businesspeople and options to purchasecars themselves to consumers. For thishe was charged with mail fraud as wellas securities fraud, but he was ultimatelyacquitted when the judge emphasized tothe jury that to convict Tucker of fraudthey must find that he had deceived inves-tors and customers with the intent to cheatthem. Mere hyperbole was not enough.Moreover, it is not difficult to imagine that

the establishment automobile industrywas behind the prosecution of Tucker (asshould be obvious to anyone who has seenthe eponymous 1988 movie). But it is alsoclear that Tucker is a prime example of anAmerican promoter-hero, perhaps all themore so because he skated close to the edgeof the law—as did Richard Sears, who ranafoul of the Post Office for his edgy mail-order business.

It is not at all clear that Tucker Corp.should be seen as sketchy simply becauseit could not attract adequate capital. Inthe United States, we have largely elimi-nated generic capital requirements forbusiness, relegating such regulations tofinancial businesses that handle otherpeople’s money and thus assume a fidu-ciary or similar duty (even though thereis little agreement as to how much capitalis necessary even then). In contrast, theEuropean Union has struggled to retainand rationalize the general requirement oflegal capital and has suffered significantlyslower recovery and growth. Incidentally,Tucker’s business model is similar in away to crowdfunding, for which Congresscarved out an exception to the securitieslaws in 2012. Maybe Tucker was just aheadof his time.

Troubling tales / The saga of the HollandFurnace Company, which Balleisen men-tions in four separate passages, is anotherstory altogether. Its business model wasto offer a free in-home furnace inspec-tion, which required the dismantling ofthe existing furnace. When the inspectordiscovered dangerous defects, he wouldrefuse to reassemble the unit, leaving thehomeowner with little choice but to buya new furnace.

Ironically, Holland became the targetof a takeover attempt in 1957 by ArnoldMaremont, a businessman with a historyof corporate takeovers and liquidations.Maremont thought the company’s so-called direct sales method was outmodedand he acquired a substantial block ofshares presumably with a view to changingthe strategy. The board of directors avertedthe overture by repurchasing Maremont’s

WINTER 2017–2018 / Regulation / 41

stock at a premium. Stockholders objectedthat the repurchase depleted companyassets for the purpose of entrenching man-agement. But the Delaware Supreme Courtruled that the use of corporate funds toprevent a takeover was permissible becauseit was for the legitimate business purposeof protecting the business strategy. Nevermind that the strategy itself turned out tobe illegitimate, as the Federal Trade Com-mission ultimately found. Nevertheless,the Delaware case Cheff v. Mathes remainsgood law and is often cited as drawing theline between permissible and impermis-sible “greenmail”—the strategy of buyingstock in an apparent effort to take overa firm, but really to receivea premium repurchase offerfrom the firm.

The trials of Tucker arereminiscent of the 2002 fail-ure of WorldCom and the fateof its CEO, Bernie Ebbers,who remains in jail today.Although there is no questionthat WorldCom was guiltyof securities fraud by virtueof misreporting its financialsituation, one of the account-ing rules it violated was sub-sequently changed by theFinancial Accounting Stan-dards Board such that World-Com would not have been inviolation. Yet WorldCom wasconvicted under the old ruledespite the fact that the trial occurred wellafter the rule change. Moreover, althoughWorldCom was quite aggressive aboutclassifying cash outflows for fiber capac-ity as capital expenses giving rise to balancesheet assets rather than ordinary operatingexpenses that merely reduce earnings, itdid not misrepresent the fact of such out-flows. Neither the market nor WorldComknew that so much fiber would remaindark for so long because of the “last mile”problem. But when the market woke up,Ebbers went to jail.

In contrast, around the same timethat WorldCom was struggling with itsunderutilized fiber, Enron was reporting

income from transactions that never reallyoccurred. More specifically, buyers retainedan option to resell the investments theybought if they declined in value. To be sure,the repurchase might come in the formof Enron stock rather than cash, but thenet effect was to treat the issue of stockas income—a gussied up Ponzi scheme.Meanwhile, the management team of Ken-neth Lay, Jeffrey Skilling, and Andrew Fas-tow sold $800 million worth of their ownEnron stock while cajoling their employeesto invest 100% of their retirement savingsin the company.

Someone to blame / It is important toremember that most newbusinesses fail. And big ideascan fail big. But in the UnitedStates we do not subscribe tothe so-called precautionaryprinciple requiring assur-ances that new ventures willdo no harm. Indeed, sincethe late 1980s we have madelimited liability ever moreavailable (as Balleisen him-self notes with some dismay).

Few would argue todaythat limited liability isintended to subsidize busi-ness by eliminating thedownside for entrepreneurs.Rather, its function is toshift the burden to lenders toprotect themselves by exact-

ing security or a higher return. Withoutlimited liability, entrepreneurs would berequired in effect to risk all of their networth in starting a business—as in an ordi-nary partnership. With limited liability,entrepreneurs know what they must riskto do business and can decide whether itis worth the candle. Moreover, creditorscan manage risk through diversification.So limited liability arguably maximizes theavailability of credit.

Limited liability can be seen as a tax,of sorts, on the creditor class by limitingwhat they can recover if the borrowing firmfails. If creditors want more return, thenthey must take more risk. In other words,

U.S. law discourages the emergence of arentier class of lenders. Thomas Pikettywould approve. So it is not surprising thatbusiness equity, instead of bonds, is thesingle largest category of wealth for U.S.individuals. According to the Fed, as ofyear-end 2016, equity constituted 34% ofall wealth, while 25% was real estate, 24%was debt instruments, and 11% was cashor near cash.

As for involuntary creditors—the vic-tims of accidents and other torts thatare bound to happen—the irony is thatplaintiffs almost always would prefer tosue a big corporation with deep pock-ets anyway. Moreover, if the business is asmall one, the chances are that the ownerwas personally involved in the mishapand thus liable as a participant irrespec-tive of the insulation afforded by limitedliability to owners as owners. And oncea small business is big enough to hirea few employees, the owner is likely tohave most of his wealth tied up in theventure and thus much to lose becausethe business itself always remains liablefor the actions of its agents. So it is likelythat the owner will invest significantly intraining and monitoring employees whoare bound to be less careful and diligentthan would be the owner.

As Balleisen emphasizes, the generalorganizing principle for U.S. commercein the mid-1800s was one of caveat emp-tor. And as Balleisen would likely agree,this policy was at least as much a positivechoice as it was benign neglect. Considerthe following passage from Oliver Wen-dell Holmes’ The Common Law (Macmil-lan, 1881):

A man need not, it is true, do this orthat act, the term act implies a choice,—but he must act somehow. Furthermore,the public generally profits by individualactivity. As action cannot be avoided,and tends to the public good, there isobviously no policy in throwing thehazard of what is at once desirable andinevitable upon the actor. The statemight conceivably make itself a mutualinsurance company against accidents,

Fraud: An AmericanHistory from Barnumto Madoff

By Edward J. Balleisen

496 pp.; PrincetonUniversity Press, 2017


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and distribute the burden of its citizens’mishaps among all its members. Theremight be a pension for paralytics, andstate aid for those who suffered inperson or estate from tempest or wildbeasts. … Or it might throw all lossupon the actor irrespective of fault.The state does none of these things,however, and the prevailing view is thatits cumbrous and expensive machineryought not to be set in motion unlesssome clear benefit is to be derived fromdisturbing the status quo. State interfer-ence is an evil, where it cannot be shownto be a good. Universal insurance, ifdesired, can be better and more cheaplyaccomplished by private enterprise.

To be sure, Holmes was struggling herewith the fundamental question of whysomeone should not be held liable for anychain of events set in motion voluntarily.But the logic applies as much to the lawof business organizations as it does to tortlaw. Indeed, it was only in 1875 that NewJersey made the corporate form generallyavailable (although as Holmes himselfnotes it had been available for manufac-turing companies since the 1820s).

When ventures fail and folks losemoney, it is only natural to seek someoneto blame. But it is often more interestingand useful to understand how fraud hap-pens. As I have argued elsewhere, the 2008credit crisis can be traced to an array of fac-tors that would have been difficult to regu-late in advance. Perhaps the most peculiarfactor was that investment banks (as well ascommercial banks) invaded the residentialmortgage business, which as recently asthe 1980s had been the province of thethrift industry. Think Bailey Building &Loan. Many commentators pointed at therepeal of the venerable Glass–Steagall Act,which separated investment banking fromcommercial banking. Specifically, the actprohibited commercial banks from dealingin equity securities as a way of insulatingthe core banking business from the risksassociated with stocks following the Crashof 1929. But nothing in that act wouldhave prevented investment banks from

going into the residential mortgage debtbusiness as they did.

Many observers focused on creditdefault swaps (CDSs) as the culprit. To besure, CDSs led to underestimation of riskand thus probably to overinvestment inmortgage-backed securities. But the ideathat we should re-regulate the futuresmarkets by prohibiting off-exchange trad-ing—or even return to the good old dayswhen difference contracts (so-called) couldbe voided as illegal wagers—ignores thesignificant social benefit of such derivativeinstruments. Arguably, U.S. farming is asproductive as it is because the futures mar-kets have tamed the supply-demand cycleendemic in agriculture. But that is notenough to tame the moralistic objectionsof those who see such financial engineeringas inherently wasteful because it producesnothing. The real wonder is that the zero-sum game of futures trading does in factcreate value from nothing (which is notto mention its heartland pedigree). Heretoo, Justice Holmes played a significantrole by recognizing the property rights offutures exchanges to their data in his 1905Irwin decision.

In short, it is easy to rail at fraud inthe unintended (ab)use of financial prod-ucts, but it can be difficult to tell the wholestory. The one thing that seems quite cer-tain is that our attitude toward fraud isschizophrenic, as Balleisen vividly shows.We despise some fraudsters but admireothers. And we adopt regulations to pro-tect consumers while also blaming the vic-tim under the doctrine of caveat emptor. Iam reminded of the brief but brilliant TVseries Max Headroom, in which every per-son had the right to unlimited consumercredit, but credit fraud was a crime worsethan murder.

Advisers and broker-dealers / Balleisen isat his best discussing the curious conceptof self-regulation mostly in the contextof the rise and fall of the Better Busi-ness Bureau. But he also provides a use-ful history of the Investment BankersAssociation, which became the NationalAssociation of Securities Dealers and ulti-

mately the Financial Industry RegulatoryAuthority (FINRA). As Balleisen shows, aself-regulatory organization (SRO) can bean efficient response in a business wherethe danger of fraud is acute or conflictsof interest are endemic. After all, it takesone to know one. But SROs can shade intorestraint of trade or regulatory capture.

Stockbrokers (like real estate bro-kers) are paid mostly on commission.And commissions tend to be higher onriskier stocks. The result is that brokersare tempted to churn customer accountsand recommend unsuitable stocks. (AsWoody Allen said, a broker is someonewho invests your money until it’s gone.)On the other hand, FINRA provides arbi-tration services for aggrieved investors,the results of which turn out to be muchmore generous than litigating such claimsin federal court. Then again, it could bethat industry arbitrators are motivatedto punish fellow securities professionalswho get caught as a way of eliminatingsome of the competition. Indeed, whenthe New York Stock Exchange (NYSE)began to lose listings to NASDAQ becausethe latter permitted listed companies tohave shares with differing voting rights,the NYSE prevailed on the Securities andExchange Commission to mandate a uni-form rule despite the potential competi-tive benefits of exchanges with differinglisting standards.

Incidentally, the recent flap aboutwhether some brokers-dealers should bedeemed to be fiduciaries is just the lat-est installment of a controversy that goesback at least to 1933. A broker-dealer maysometimes be a broker and thus an agentfor the client. But a broker-dealer maysometimes act as a dealer in a trade—as aprincipal thereto—when the security is soldfrom inventory or added thereto. Thinkof a real estate broker, who owes a duty atleast to the owner of the listed property,as opposed to a car dealer, who has a dutyto no one. In the securities markets, bothmodes of trading are legitimate, whetheron an exchange (as broker) or over-the-counter (as dealer). Indeed, there are argu-ments for the superiority of both. But the


point is that the role of the broker-dealeris fluid.

On the other hand, investment advisers(who purport to serve the best interest oftheir clients) are quite clearly fiduciaries,while a broker-dealer may sometimes act asan investment adviser for a customer. Thatis why broker–customer disputes oftenturn on whether there was a relationshipof trust and confidence between the two—whether the broker-dealer had assumed afiduciary duty. The European Union is cur-rently in the process of rationalizing theseroles with the promulgation of the secondinstallment of the Markets in FinancialInstruments Directive, which will create abright line between the provision of invest-ment advice for a fee and execution servicesthat may no longer be bundled with sup-posed free advice. Good luck with that.

Notwithstanding the foregoing defenseof the status quo, it is not at all clear thatindividual investors should ever engagein stock-picking and active-trading. It iswell documented that it is impossible tobeat the market any more often than isconsistent with chance. Indeed, since themarket is the aggregate of trading, it isdifficult to see how things could be oth-erwise. But whether or not one believesin the efficient market, investment adviceand trading are costly and entail the riskof picking the wrong stocks. So the choiceis whether to pay 1–2% annually for activeinvestment management, or to invest inan index fund for as little as three basispoints and eliminate all of the risk thatgoes with individual stocks. To be sure,the latter strategy assumes that others willtrade and drive market prices to appropri-ate levels. But studies indicate that onlyabout 10% of all trading at current levelsis necessary to do so. Thus, one could saythat the retail securities business is a formof licensed fraud. But it is difficult to arguethat individuals should not be permittedto day-trade if they want to do so.

If there is a moral to this story—andBalleisen’s book—it is that fraud will alwaysbe with us. There is no cure. There is onlymanagement. In the end, regulation willalways be one step behind.

Origins of theEntitlement Nightmare✒ REVIEW BY DAVID R. HENDERSON

Currently, the U.S. federal government spends about $2.4 trillionper year—about 12% of GDP—on entitlement programs. Thisamounts to $7,500 per person annually. Only 48% of this spend-

ing goes to people officially classified as poor. The federal governmentprovides more than $50,000 per year in Social Security and Medicare

DAV ID R . HENDER SON is a research fellow with theHoover Institution and professor emeritus of economicsat the Graduate School of Business and Public Policy at theNaval Postgraduate School in Monterey, CA. He is the editorof The Concise Encyclopedia of Economics (Liberty Fund, 2008).He blogs at www.econlog.econlib.org.

benefits to retired middle-income couples.And this is at a time when almost half ofhouseholds headed by people under age65 have incomes less than $50,000.

How did we get to this fiscal state?When did Congress’s irresponsibility withentitlement spending begin?When the federal governmentran budget surpluses, howdid that affect Congress’sdecisions about entitlements?What president in the 20thcentury made a heroic effortto restrain entitlement spend-ing and then, later, createdthe largest and most expen-sive such program in the cen-tury? What Republican presi-dent helped increase SocialSecurity benefits by a double-digit percent? Finally, is therea way to rein in this spendingin the future without kickingup such strong oppositionthat the restraints would beundone? Hoover Institutioneconomist John F. Cogananswers these questions and more in hisfact-filled, carefully researched book, TheHigh Cost of Good Intentions. (Disclosure:John Cogan and I are colleagues at theHoover Institution.)

Paying veterans / Subtitled A History ofU.S. Federal Entitlement Programs, the book

takes readers on a tour of federal spendingprograms from 1789 to today. I thoughtmyself a sophisticated observer by know-ing that federal government entitlementshad started well before Franklin D. Roos-evelt’s 1935 Social Security program. But

I didn’t realize how early theystarted. I thought they beganwith payments to post–CivilWar union veterans, but infact they began with pay-ments to veterans of theRevolutionary War. (See “TheSordid History of Veterans’Benefits,” Fall 2017.)

Cogan tells the story ofhow the programs grew—astory that turns out to be vir-tually the same for each fed-eral program, whether in the19th or 20th century. Startwith the aforementioned pen-sions for Revolutionary Warveterans. The program startedsmall. Congress passed a tem-porary law in 1790 and madethe program permanent in

1792. It granted pensions to regular armyofficers, soldiers, and seamen, but only tothose who had suffered injuries in battleand were impoverished as a result. The lawexcluded members of the state militias.

But from 1803 to 1806, the boomingU.S. economy led to large budget surplusesfor the federal government. Writes Cogan,“Advocates argued that military veteranswere no less worthy of disability pensionsthan Continental Army veterans.” Thatargument won the day. In 1806, Congress

The High Cost of GoodIntentions: A Historyof U.S. EntitlementPrograms

By John F. Cogan

512 pp.; StanfordUniversity Press, 2017

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extended pensions to volunteers, mem-bers of the militia, and state troops. Then,in 1809, the U.S. government’s embargoon British and French ships cut federalrevenue by half. Although Congressresponded responsibly by cutting overallspending substantially, it left veterans’ pen-sions untouched. This, points out Cogan,would be a pattern for virtually all futureentitlements: (1) start small; (2) expandeligibility to those whom many consider“no less worthy,” especially when budgetsurpluses are large; and (3) protect entitle-ment spending from cuts even when bud-get deficits appear.

In 1816 and 1817, restored prosperityled once again to federal budget surpluses.With the March 1818 pension law, Presi-dent James Monroe and Congress gave alifetime pension to all veterans who hadserved in the Continental Army for at leastnine months and were “in reduced circum-stances.” Gone was the requirement thatthey had been injured.

Cogan shows that this law led to aresult that became another repeated pat-tern for future entitlements: people cameout of the woodwork to claim the ben-efits. Whereas the law’s proponents hadestimated that fewer than 2,000 veteranswould qualify for the benefits, more than28,000 people applied and over 16,000applications were approved. The numberof applicants, writes Cogan, “exceeded theentire number of Continental Army vet-erans thought to be still alive.” Pensionoutlays rose from 1% of the federal budgetfrom 1800 to 1811 to a whopping 11%after the law passed. In response to chargesof fraud and to a recession-induced budgetdeficit in 1820, a May 1820 law imposedmeans testing. Veterans had to reapply, butonly 17% of reapplicants were denied, andonce federal revenues returned to their pre-recession level Congress restored benefitsto the denied reapplicants.

One other early pension program seta precedent for how Social Security wasfunded in the 20th century: the Navy’strust fund. In 1799 and 1800, Congressestablished a separate Navy pension pro-gram to provide benefits to Navy personnel

who had suffered disabilities in the lineof duty. These benefits were financed bya trust fund that, in turn, was financedby the sale of captured enemy and pirateships and their contents. As the trust fundgrew, so did Congress’s spending. In 1813,it granted pensions to widows and childrenof seamen who were killed in action ordied from wounds received in the line ofduty. Again and again, Congress relaxedthe standards for who could get benefits,and the unsurprising result was that thetrust fund went bankrupt in 1841. Con-gress, however, bailed out the fund withgeneral revenues.

The experience with Civil War pensionsfor Union soldiers was similar to that withthe Continental Army, with two new twists.First, because the war involved such a mas-sive mobilization, the number of those whoqualified for pensions, once all the expan-sions of eligibility had occurred, was mas-sively greater than in the earlier case. Thenumber of pensioners peaked at just underone million in the early 1900s, and in themid-1890s spending on those pensionsreached over 40% of the federal budget.The second twist was that, from the 1890sto the early 1900s, the Republican Partyfigured out how to use pensions to realignthe electorate and get veterans’ votes. Later,the Democrats would use that same strategywith Social Security and Medicare.

One of the pleasant surprises in thebook is FDR—at least early in his first term.He believed that military veterans did notdeserve pensions simply by virtue of beingveterans. In his first month in office, hepersuaded Congress to pass the EconomyAct of 1933, which gave him the power toset new eligibility rules. As Cogan notes,for the first time in U.S. history, a largeentitlement had been repealed. On June 30,1933, 412,482 World War I veterans withnonservice-connected disabilities receivedpensions. Just one year later, only 29,903were on the rolls and they were all perma-nently and totally disabled.

Social Security / The bad news for thosewho dislike forced government redistri-bution is that in 1935 FDR introduced

Social Security. Cogan refers to this as“The Birth of the Modern EntitlementState.” He tells how the dominant viewbefore FDR was that the welfare of thepoor and elderly should be taken careof by private institutions or by state andlocal government. FDR rejected that view,believing instead that welfare was a federalresponsibility. The Social Security Act of1935 created the program that we’re allfamiliar with, plus three new programsthat entitled state governments to match-ing payments for state-run programs: Old-Age Assistance, Aid to Dependent Chil-dren, and Aid to the Blind. On top of that,it created a federal–state unemployment“insurance” program.

The Social Security benef it wasfinanced with a payroll tax. Whereas in1937 only 1.8 million households withincome below $3,000 ($52,500 in 2017dollars) paid any federal income taxes—theincome tax at the time was referred to asthe “class tax”—Social Security changedall that. With all employment income upto $3,000 subject to the payroll tax, SocialSecurity forced 25.8 million workers to payde facto income taxes. The 1935 law speci-fied that Social Security benefits wouldstart to be paid in 1942. But, naturally,the revenues coming in from the payrolltax led to pressures to start paying benefitsearlier. So the feds began to pay benefits in1940. Also early on, as Cogan explains infascinating detail, the program became apay-as-you-go scheme rather than one witha real trust fund containing real assets. Healso tells how a challenge to the constitu-tionality of the law led the Supreme Courtto find that Social Security and unemploy-ment insurance were constitutional, eventhough its decision rested only on dicta ina decision 14 months earlier.

As revenues built up the “trust fund,”Congress and both Democrat and Repub-lican presidents raised real benefits to retir-ees. In 1967, President Lyndon Johnsonand Congress increased benefits by 25%for retirees with low earnings and 11%for those with high earnings. The averageincrease, 13%, was twice the growth in con-sumer prices that had occurred since the


previous increase in benefits in 1965. Then,during the Nixon administration, benefitsincreased by 69% over their 1968 level. In a1972 bill, Congress and Nixon raised ben-efits another 20% and began indexing. Ben-efits were indexed to the cost of living, whilethe ceiling up to which wages and salarieswere taxed was indexed to wage growth.

Great Society / Social Security was notthe only entitlement spending that grew.LBJ, declaring the War on Poverty in 1964,persuaded Congress to fund communitygroups to work with welfare recipients. Heenvisioned these groups helping peopleget off welfare. But hundreds of thesegroups had a very different vision. Theyused federal funds to hire lawyers to suelocal, state, and federal governments forbenefits. Writes Cogan, “Armed with fed-eral funds, poverty lawyers brought law-suits in federal courts on behalf of welfarerecipients. . . . The poverty lawyers chal-lenged virtually every welfare eligibilityrule, including residence requirements,suitable home provisions, and willingness-to-work requirements.” The final result:“By 1970, the poverty lawyers had suc-ceeded in fundamentally transformingwelfare from an act of legislative charity—a government-granted gratuity—intoan entitlement that ensured all eligiblepeople a legal right to benefits.” This hap-pened, he notes, “without any accompany-ing legislation.” In a 7–2 Supreme Courtdecision in 1969 that overthrew residencerequirements for those on welfare, JusticeWilliam Brennan, who wrote the decision,argued that residence requirements forwelfare violated the right to travel. WritesCogan with wry humor, “The Court alsoconcluded that although federal involve-ment in public welfare had never enteredthe founding fathers’ writings, the found-ers had meant to prohibit state welfareresidence requirements.”

LBJ’s other contribution to entitle-ments, of course, was his initiation of bothMedicare and Medicaid. This happened in1965, after many more Democrats, ridingon Johnson’s coattails in his landslide defeatof Goldwater in 1964, had been elected.

That dramatically changed the ideologicalcomposition of Congress. Cogan tells thestory well, but could have incorporated themasterful analysis by Boise State Universityeconomist Charlotte Twight. (See “Medi-care’s Origins: The Economics and Politicsof Dependency,” Cato Journal, Winter 1997.)Medicare spending, which in 2016 was $595billion, is now second only to Social Security(at $916 billion) as the government’s largestexpenditure program.

Reagan reforms / From 1983 to 1985,Cogan was an associate director of theOffice of Management and Budget underdirector David Stockman, all under Presi-dent Reagan. Probably for that reason, hegives a lot of detail about Reagan’s suc-cess in slightly reducing the growth rateof entitlement spending. He also pointsout that in May 1981, Reagan tried to dotoo much too soon by proposing a 31-per-cent cut in Social Security’s early retire-ment benefit, which would have takeneffect in January 1982. Democratic andRepublican members of Congress almostuniformly opposed such a large almost-immediate cut, and Reagan quickly with-drew his proposal.

Instead, he and Congress kicked SocialSecurity reform to a commission headedby Alan Greenspan, which, in January1983, came out with its proposals for shor-ing up finances. Virtually none of the pro-posed changes, though, were to reduce thegrowth of spending. Instead, the commis-sion recommended bringing new federalemployees into the program, getting ridof exemptions for nonprofits, hasteningan already-legislated increase in the payrolltax rate, and taxing Social Security benefitsfor higher-income people. Congress imple-mented virtually all of those proposals.

Only one major reform occurred on thespending side: a gradual increase in theage at which one could receive full ben-efits, from 65 to 67 by the year 2027. Butthis reform was not one proposed by theGreenspan Commission. Instead it was thehandiwork of Jake Pickle, a Democraticcongressman from Texas, whose mentor,interestingly, had been LBJ. Cogan men-

tions the age increase but does not specifyPickle’s role or the fact that the GreenspanCommission had recommended no suchage increase. He does point out, though,that “remarkably, the slowly increasingretirement age since 2000 has occurredwith little or no controversy.”

Cogan also doesn’t mention that inpushing for a cut in the early retirementbenefit, Stockman had focused on short-run rather than long-run savings. Whenasked in a famous 1981 interview why hehad done so, Stockman answered, “I’m justnot going to spend a lot of political capitalsolving some other guy’s problem in 2010.”Because of his short-run thinking, Stock-man successfully killed a competing biparti-san Senate proposal that would have raisedthe age for full Social Security benefits to 68by the year 2000. My back-of-the-envelopeestimate is that this proposal would havesaved the feds, by now, well over $1 trillionmore than the current policy has saved.

Cogan does draw the right conclusionfrom the 1981 debacle: it’s very hard to cutbenefits for current recipients or for thosewho are about to become recipients. Whatthe age 67 policy shows, though, is that it’smuch easier politically to cut benefits pro-spectively with lots of lead time for peopleto adjust. And given that the even biggerproblems with entitlement spending are inthe future, cutting future benefits wouldbe responsive to what otherwise might bethe nightmare in our future. But we hadbetter start soon.

People often wonder how “the landof the free” acquired such a huge govern-ment that interferes with so many partsof our lives. Cogan has shown how thathappened with entitlement programs,which are a huge part of government. Inhis 1987 book Crisis and Leviathan, eco-nomic historian Robert Higgs showedhow three crises—World War I, the GreatDepression, and World War II—led to moreregulation, higher taxation, and highergovernment spending, including spend-ing on entitlements. Someone who wantsto understand the growth of governmentin America would do well to read Cogan’sand Higgs’s books in tandem. R


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Loving the Poor, but LovingPolitical Privileges More✒ REVIEW BY DWIGHT R. LEE

Richard Reeves is a senior fellow in economic studies at the Brook-ings Institution. Like so many intellectuals, he is concernedabout income and wealth inequality in the United States. Reeves

was born and educated in England, but always found the American ideaof a classless society a deeply attractive one. Having moved to the UnitedStates in 2012 and become a citizen in2016, he “has been disheartened to learnthat the class structure of my new home-land is, if anything, more rigid that theone [he] left behind and especially so atthe top.”

What Cheryl deserves / While Reeves hasplenty of company in his concern aboutinequality, he stands largely alone amongacademics in whom he blames for theproblem. The much-maligned top 1% ofthe income distribution is almost com-pletely ignored in his book as he focuseson those in the 81–99 income percentiles,which he calls the upper middle class.What are members of this class (in whichReeves includes himself and most of hiscolleagues and friends) guilty of? Favor-ing their children by engaging in unfair“opportunity hoarding.”

He stresses that some opportunityhoarding, such as “reading stories [to one’schildren], helping them with homework,providing good food, and supportingtheir sports and extracurricular activi-ties” is consistent with “being a good par-ent.” Yet it is clear that he sees a fine linebetween those activities and providingunfair advantages.

It doesn’t take much to cross that fineline into unfair opportunity hoarding. Hesenses that “some of us in the upper mid-dle class already feel a degree of cognitive

dissonance about the advantages we pileup for our kids, compared to the truncatedopportunities we know exist for others.”And in some cases he is convinced thatthose who take advantage of their posi-tions or friendships to obtain opportuni-ties for their children are “thoughtful andliberal enough to know, at some level, theiractions [for example, using one’s legacystatus to get a child admitted to an IvyLeague college] were morally wrong.”

He assures us that he supports marketcompetition that rewards merit, but heis always quick to qualify that support.For example, he recognizes that the “labormarket does a good job rewarding the kindof ‘merit’ that adds economic value—skills,knowledge, intelligence. The unfairnesslies not in the competition itself but in thechances to prepare for it.” In other words,he is “arguing for a meritocracy for grown-ups, but not for children.”

Butthisstatementringshollowgiventheadditional distortions and limits that wouldhave to be imposed on market competitionif Reeves’ proposals for addressing oppor-tunity hoarding are to be adopted. Con-sider his hypothetical example of Cheryl, a“highly intelligent, creative, and ambitiousperson . . . [who most likely will] end upmaking a lot of money.” Even if she getsrich by increasing market efficiency, “thisis not the same thing as saying she deservesto be rich” (Reeves’ emphasis). He continuesthat “winners have no moral claim to keepall of their winnings, especially when theirredistribution may be needed to equalizeopportunities for the next generation toprepare for the next contest.”

No one argues that winners should payno taxes in a meritocracy, but at some pointhigher taxes start seriously underminingthe personal and social benefits of com-petition that rewards economic merit, afact that Reeves acknowledges. Yet he neversuggests a limit on the cost of the additionalpublic investment necessary to equalize thenext generation’s opportunities. He does tellus, however, that if there is additional cost,“it is reasonable to raise some of [it] fromthe upper middle class. Even if we haven’tadmitted it yet, we can afford it.”

Reeves and Rawls / Reeves never gives anyindication of how much of our income isappropriate to keep. There is an obviousreason for this: neither he nor anyone elsehas any idea how much anyone “deserves”or what a fair income distribution is.

He deserves credit, however, for avoid-ing the philosophical quicksand of tryingto parse out what is a fair or unfair income.Instead he argues that opportunity hoard-ing by the wealthy is a significant reasonfor income inequality. Hoarding is a pejo-rative term, suggesting keeping somethingfor one’s self not primarily to use it, butto prevent others from doing so. Manyreaders will intuitively see any amountof opportunity hoarding as unfair, par-ticularly if it benefits wealthy hoarders byreducing opportunities for the poor.

He does appeal briefly to the ideas ofJohn Rawls, who argues for a “Fair Equalityof Opportunity” in his A Theory of Justice(Harvard University Press, 1971). Accord-ing to Reeves, “fair equality of opportunitydemands not simply an open competitionbut an equal chance to prepare for it.” So inaddition to having the emotional supportof many of his readers, he lets us know thathe is drawing on Rawls’ impressive intel-lectual capital. Taken seriously, achievingReeves’ interpretation of Rawls’ Fair Equal-ity of Opportunity would be impossible.Not surprisingly, Reeves is reluctant to takeit completely seriously.

Markets and parenthood / He makes clearthat when parents give a child opportuni-ties to develop skills that benefit him as an

DW IGHT R . LEE is a senior fellow in the William J. O’NeilCenter for Global Markets and Freedom in the Cox Schoolof Business at Southern Methodist University. He is acoauthor with James Gwartney, Richard Stroup, Tawni Fer-rarini, and Joseph Calhoun of Common Sense Economics: WhatEveryone Should Know about Wealth and Prosperity, 3rd edition(St. Martin’s Press, 2016).


adult, they do so by reducing the opportu-nities of less advantaged children to suc-ceed as adults. For example, he claims “thebest philosophical treatment” on helpingone’s children is by political philosophersAdam Swift and Harry Brighouse, whoin their 2014 book Family Values (Prince-ton University Press) write, “Whateverparents do to confer competitive advan-tage [on their children] is not neutral inits effects on other children—it does notleave untouched, but rather is detrimentalto, those other children’s prospects in the com-petition for jobs and associated rewards”(Reeves’ emphasis).

He seems to recognize that few parentswho prepare their children to be produc-tive and successful adults will be sympa-thetic to the charge that theyare hoarding opportunitiesand harming others’ chil-dren by doing so. This couldexplain his rather feeblequalification that “althoughI think Brighouse and Swiftgo too far, they are ontosomething important withtheir distinction between thekind of parental behaviorthat merely helps your ownchildren and the kind that is‘detrimental’ to others.” Healso qualifies what he meansby “detrimental” by sayingthat “in a society with finiterewards, improving the situ-ation of one child necessarilyworsens that of another, atleast in relative terms.” But once“detrimental” is consideredin relative terms, the idea ofopportunity hoarding requires that therole of the market be ignored.

It is obvious that no society can providemore than finite economic rewards. Societ-ies rely on markets to routinely motivatepeople to use their opportunities to ben-efit others by rewarding them roughly inproportion to their success in doing so.This does not result from people hoard-ing productive opportunities. Rather, it isan example of a sharing process in which

people, given the opportunities and innateabilities they have, acquire productive skillsto cooperate better with each other inmutually beneficial ways. Of course, thisis a process that inevitably results in somepeople improving their situations rela-tive to others as opportunities expand foreveryone. In markets, good parents neverhave to say, “I’m sorry.”

Loving political privilege / The idea ofopportunity hoarding has some relevancewhen it comes to politics. Some peopleroutinely acquire opportunities by reduc-ing them for others. Anger at the wealthy,not concern for the poor, often moti-vates support for enacting or expandingprograms ostensibly intended to reduce

income inequality but thatharm the poor, and Reevesrecognizes this.

He points out that “itseems to be those near thetop of the [income] distribu-tion who are most angry withthose at the very top: morethan a third of the dem-onstrators on the May Day“Occupy” march in 2011 hadannual earnings of more than$100,000.” Reeves thinksthey didn’t realize their own“privileged” status. The pointof his book is that “ratherthan looking up in envy andresentment, the upper middleclass would do well to look attheir own position comparedto those falling further andfurther behind.” But what ifupper middle class Americans

love their political privileges more thanthey love the poor?

Unfortunately, Reeves is willing togo only so far in reducing the scope andpower of government to free up the marketprocess and expand rather than limit thebenefits from opportunities. Early in hispenultimate chapter entitled “Sharing theDream,” he tells us that rather “than try-ing to rectify inequality post hoc throughheavy regulation of the labor market, our

ambition should be to narrow the gapsin the accumulation of human capital inthe first two and a half decades of life.” Hemakes and discusses several suggestions“aimed at reducing opportunity hoarding… [and] to reduce anticompetitive behav-iors.” I shall consider three of his propos-als, which would be more effective if twopolicies that currently restrict opportuni-ties for the poor were eliminated. Unfortu-nately, the two policies are sacred cows toAmerican liberals, and Reeves goes so far asto call for protecting one of them.

Lesszoningandbetterteachers/ Heopposesexclusionary zoning restrictions that place“onerous restrictions … on housing devel-opment in many parts of the country.” Hecorrectly points out that these restrictionsoften “deepen the wealth divide, worseneconomic segregation, and contribute toinequalities in schooling.”

In a previous chapter he connectsthese problems to distortions resultingprimarily from policies of the federal andlocal governments. The federal tax codeallows homeowners to deduct state andlocal property taxes and mortgage interestfrom their federal taxable income. Thesedeductions are worth far more to high-income than low-income families. Theyalso increase the amount that the wealthyare willing to pay for expensive houses,typically located in public school districtsthat contain the best schools, which fur-ther increases the houses’ price. Eliminat-ing these policies would reduce the valueof upper middle class houses.

Reeves considers ways to improve thepublic schools that the poorest studentsattend without threatening the value ofupper-middle-class housing or the qual-ity of upper middle class neighborhoods’schools. He recognizes correctly thatto improve educational outcomes, what“clearly … counts is teacher quality.” So hewants to increase the salaries of inner-cityteachers to be equal to, or greater than, thesalaries paid to those who (according toPrinceton economist Alan Krueger) “workin the fancy suburbs.” Reeves mentions thatformer “education secretary Arne Duncan

Dream Hoarders:How the AmericanUpper Middle Class IsLeaving Everyone Elsein the Dust, Why ThatIs a Problem, andWhat to Do about It

By Richard V. Reeves

240 pp.; BrookingsInstitution Press, 2017


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estimated that for $15 billion a year teachersin the poorest 20 percent of schools couldbe given more than a 50 percent pay raise.”

Yet, nowhere does Reeves mention fir-ing bad teachers, which would be neces-sary if poor students are to benefit fromeffective teachers. Allowing incompetentteachers to continue hoarding teachingjobs (with big new raises!) and destroyingthe opportunities of poor children to suc-ceed in life surely ranks near the top of anylist of social injustice.

Not only would the market competitioncreated by school choice reduce opportu-nity hoarding in public school classrooms,it would also result in positive-sum oppor-tunities to significantly improve inner-cityschools without spending another $15billion on teachers and without reducingthe quality of the schools in the suburbs.Indeed, the resulting competition betweenschools, and a strong motivation to replaceincompetent teachers (who aren’t found inonly inner-city schools) with competentones, would increase educational qualityin all school districts. The equalizationof public schools might reduce the valueof expensive houses in the suburbs a bit,but the student bodies in public schoolsmight become more diverse. Surely politi-cal progressives would consider the formera small price to pay for the latter.

Internships / Increasing internships mayseem a small step in addressing whatReeves sees as the problem of opportu-nity hoarding. He makes a strong case,however, that good internship opportuni-ties “have become more important transi-tional institutions, so their allocation hasbecome a more important issue for socialmobility.” Although he favors paid intern-ships, he accepts that “for the foreseeablefuture … unpaid internships will be withus.” The challenge he sees is to bring theseinternships “within reach of less-affluentyoung adults.”

I have good news for him. There arethousands of businesses that would pro-vide what are in effect paid “internships”to less-affluent young adults, increasingtheir opportunities for better jobs later.

All that is needed to bring many of theseinternships to fruition is to abolish theminimum wage. But Reeves doesn’t callfor this. He does mention the minimumwage, but to emphasize how importanthe thinks it is “to increase the regulatoryoversight of internships, to prevent abuse,and to ensure that minimum wage and fairemployment laws are properly enforced.”

Conclusion / Opportunity hoarding, whichReeves describes and finds so troubling,

can be thought of, at best, as a zero-sumactivity resulting commonly from politi-cally influential groups using governmentto capture privileges and protections atthe expense of less influential people.The problem with Reeves’ book is thathe largely ignores the most effective wayto expand opportunities for those in thelower-income groups, which is by elimi-nating many existing government restric-tions on the positive-sum potential ofmarket competition.

A Milestone on aLong, Bumpy Road✒ REVIEW BY PIERRE LEMIEUX

The year 2017 marks the 70th anniversary of the publica-tion of Frank Knight’s Freedom & Reform, a collection of 14essays initially published in the 1930s and 1940s. The thread

running through the book is how to realize social reforms (whenneeded) while maintaining individual freedom. This issue is atleast as important today, after sevendecades of reforms that have very oftenreduced freedom.

Frank Hyneman Knight (1885–1972)was “arguably the most important non-Keynesian American economist of hisgeneration,” according to Michigan StateUniversity political and economic his-torian Ross Emmett, a Knight scholar.Knight was also, and perhaps mainly, amoral and political philosopher; at the endof his career at the University of Chicagohe held a double appointment as profes-sor of the social sciences and professor ofphilosophy. Freedom & Reform comes fromthe philosophical Knight: only two of thearticles in the book appeared in econom-ics journals, compared to half a dozen inphilosophy journals.

What is economics? / Knight consideredeconomics to be the study of “the effective

PIER R E LEMIEUX is an economist affiliated with theUniversité du Québec en Outaouais. His forthcoming bookon free trade will be published by the Mercatus Center atGeorge Mason University.

use of means to realize ends.” Problemsarise from the fact that the means (mis-cellaneous resources) are limited, whileindividual or “social” ends seem practi-cally limitless. This conception differs inimportant ways from today’s mainstreamnotion of economics as a method of ana-lyzing all human behavior on the basis ofrational-choice assumptions, as pursuedby Gary Becker and a later generation ofChicago economists.

Knight believed in reason and truth,writing that “the obligation to believe whatis true because it is true, rather than tobelieve anything else or for any other rea-son, is the universal and supreme impera-tive for the critical consciousness.” Hecriticized the contamination of the socialsciences by “romantic ethics” and preach-ing. But he also attacked scientism—thatis, the blind application of the methodsof the natural sciences to the social sci-ences—which he thought leads to socialengineering by government experts.

Although there is no evidence that he

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not claim to know, or make its appeal ongrounds of knowledge or reason.” It citesprotectionism and nationalism as exam-ples. It criticizes “the Leader in Washing-ton” and “the ‘New Deals’ in Germany andthe United States,” which “use differentcatchwords, but are variantson the same theme. … The cryis ‘All pull together,’ meaning‘Follow me’ (and don’t askcritical questions).”

In Freedom & Reform,Knight even used the term“libertarian” once in describ-ing the “modern Westernman”: “Our ideal of life isactive, progressive, and indi-vidualistic, or libertarian, asagainst ‘community’ in anymystical sense.” He stated that“where there is any serious dif-ference of opinion as to anyrule, liberty must prevail.”The reader may be remindedof the presumption of libertydefended by Anthony de Jasay,a current philosopher in thelibertarian tradition. (See “The Valium ofthe People,” Spring 2016.)

Often, though, Knight resembledthe typical conservative, who makes somany exceptions that one wonders whatremains of freedom. In his view, the statecan intervene to fight monopolies, to com-bat externalities, to control money, to bannarcotics, “to promote the diffusion ofknowledge and the advancement of sci-ence, art, and general culture,” to alleviatepoverty, and to fight economic inequality.He argued for progressive taxation, espe-cially of inheritances. He represented theold Chicago economics tradition, not thepostwar “Chicago school” created by morelibertarian economists like Milton Fried-man, George Stigler, and Becker. (See “AGhostly Chasm,” Fall 2016).

Question everything / More than a set ofsolutions, Freedom & Reform can be read—or should be read—as raising deep questionsrelated to the foundations and workings ofthe free society. “Knight often said that his

purpose was to ask questions, rather thananswer them,” Emmett observes. Indeed,there are more serious questions than seri-ous answers in life; intellectual inquiriesmust start from there.

Knight raised intriguing questions abouthuman nature. He argued that“human nature is a functionof the nature of society, andboth are historical products.”The proof is how men havechanged from the primitivetribe to the modern, liberalman.Similarly,heclaimedthat“there really is no such thing asindividual rationality. Ratio-nality itself is social in natureand a product of stable grouplife.” Friedrich Hayek wouldnot have disagreed.

Knight also questionedthe characterization of manas a “social animal.” Accord-ing to him, man is morestrikingly an individualis-tic and antisocial animal, alawbreaker. He is a “roman-

tic fool,” “the discontented animal, theromantic, argumentative, aspiring ani-mal,” a “capricious and perverse animal.”

The challenge Knight saw was how tohave a free society in which such individu-als can cooperate peacefully. Who will denythat he was on to something?

For him, a value is any principle thatis generally accepted in a given society; ormore specifically, accepted by discussionand agreement in a free society. These val-ues are the true natural law. This meansthat natural law “properly defined is theopposite of ‘natural.’” It is created or rein-forced by human institutions, includingthe democratic state—institutions that hesaw in a voluntarist and even rationalis-tic way quite different from Hayek’s morepasséiste conception. It also means that,in the realm of values as in the scientificrealm, there is no “absolute absolute,” butonly “relative absolutes,” which are trueuntil potentially proven false. Nothing,no authority, whether religious or political(or both), is above questioning; but some

was interested in the debates on welfareeconomics, he correctly saw that any policydecision based on economics ultimatelyrequires value judgements, thus drawing ared line between economics and ethics. “Nodiscussion of policy is possible apart froma moral judgement,” he wrote. In his mind,freedom is both an instrumental value anda value in itself, and it ultimately mustbe founded in generally accepted ethicalprinciples. Coercion—the opposite of free-dom—can only be defined in terms of whatis judged to be wrong.

Liberalism and exceptions / Philosophicaland political issues form the backboneof Freedom & Reform. Knight found manyproblems in both the theory of liberalismand in the societies (including America)that had rejected it. Knight always used“liberal” in its original sense of “classi-cal liberal.” Emmett presents Knight asa disenchanted liberal who was trying topreserve the main tenets of the doctrine.Freedom & Reform contains both a defenseand a critique of liberalism.

Most (non-anarchist) libertarianswould approve Knight’s characterizationof a free society:

The essential social-ethical principleof liberalism or liberal individualismmay now be stated, for the purposeof examination. It is that all relationsbetween men ought ideally to rest on mutualfree consent, and not on coercion, either onthe part of other individuals or on the part of“society” as politically organized by the state.The function and the only ideally rightfunction of the state, according to thisethic, is to use coercion negatively, toprevent the use of coercion by individu-als or groups against other individualsor groups. (Knight’s emphasis.)

“The main emphasis,” he explained,“needs to be placed on freedom … Accord-ingly, sound policy requires restricting thepositive function of government to thingson which there is general agreement.”

Freedom & Reform often seems writtenfor today’s Americans. It laments the riseof “a new type of leadership” that “does

Freedom & Reform:Essays in Economicsand Social Philosophy

By Frank H. Knight

502 pp.; Harper &Bros., 1947


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values must be provisionally taken as rela-tive absolutes.

Relative absolutes are worth defendingand sometimes warring for. “It is surely theheight of the immoral,” Knight wrote, “tocontend that as a general principle menought to yield to wrong, or what they seri-ously believe to be such … for the sake ofagreement and pleasant personal relations.”Hence the problem with pacifism, which“would call for the abandonment by all, orat least the masses, of all rights, includinglife itself, except love and obedience, left,perhaps, to serve as ‘opium.’” He opposedboth nationalism and “dictatorship on aworld scale,” illustrating how classical-lib-eral moderation can be libertarian.

As a critical thinker, Knight wasn’talways sure of the solutions to the prob-lems he raised. “It is not part of the aim ofthis article,” he wrote in 1944, “to give asolution of the problem of world organiza-tion, free from war but without sacrificingessential human values. The writer doesnot know the solution, if any exists.”

Problems / Knight’s liberalism is not with-out problems. As we saw, the author of Free-dom & Reform envisioned a quite wide scopefor government. He tended to eschew clearprinciples. He argued that “liberal thoughthas always recognized a large range ofpositive functions for the state, to be deter-mined by expediency, but limited to matterson which there is substantial agreement.”Of course, this last restriction would seri-ously limit the scope of government.

In practice, though, it is not clear whatKnight actually wanted. Take the field ofeducation. Like many liberals, the authorof Freedom & Reform believed that themaintenance of a free society requires aliberal public opinion, which should begradually attainable through education.But he seemed to accept a rather open-ended scope of government interventionin this field. For example, he wrote that“education for freedom involves a largemoral factor.… Probably limits will haveto be set even to freedom of expression.”

A related problem is Knight’s appar-ent contradictions between his fear of

“the omnipotent state” and his frequentwillingness to trust it with wide powers.Some passing remarks are troubling, suchas his justification of “one-sided control …in the case of ‘infants’ to be educated, orthat of adults objectively determined to beantisocial or undeveloped and subject toreeducation, and of any who require overtcontrol to prevent their acting destruc-tively.” Knight was not a progressive andthis book does not argue for eugenics, buta cryptic remark may be read as suggesting

that it is not off-limits if human naturecould be changed for the better in only thatway. His prose is often obscure. DespiteKnight’s doubts about political processesin practice, he still hoped his majoritar-ian democracy would somehow work. Ofcourse, we must remember that Freedom &Reform predates public choice economics.

Modern libertarians can chargeKnight’s brand of classical liberalismwith being hopelessly middle-of-the-road.“Within limits, self-government, by theindividual and society, is to be preferred togood government, where a choice must bemade,” he wrote. “But only within limits;the liberal ideal is always one of balanceand compromise.” When a practical prob-lem appeared, he tended to compromise onthe statist side. Since he wrote the articlesreproduced in Freedom & Reform, “balanceand compromise” have most often led tomore government.

Knight’s influence / The most interestingfeature of Knight’s ideas may be the influ-ence they had on the following generationof classical liberal economists. Consider thecentral place that Freedom & Reform givesto exchange. “Since free exchange mustbenefit both parties,” he wrote, “it followsthat any arbitrary dictation of any price,against free market forces (apart from fraud

and monopoly), must injure both parties.”This had been a standard idea amongeconomists for about two centuries, butFriedman and James Buchanan—as wellas other University of Chicago economistslike Stigler—gave it potency. That Fried-man, Buchanan, and Stigler were all stu-dents of Knight and that each eventuallywon Nobels in economics testifies to theirprofessor’s talents.

One cannot read Friedman’s 1962 bookCapitalism & Freedom without recognizing

Knight’s ideas, often inimprovedform. (Andtheywere further improved asFriedman became moreradical with time.) Capi-talism & Freedom arguedfor re-appropriating thelabel “liberal.” Friedman

emphasized, again à la Knight, that freedomwas a rare occurrence and a great blessing inthe history of mankind. He better explainedhow the free market is the only way to com-bine efficiency in production and individualfreedom, and how it “permits unanimitywithout conformity.” He also drew a cleanerdistinction between freedom (as absence ofcoercion) and the power or capacity to act.He reinforced the conception of society asa collection of individuals. And he was lessconcerned than Knight about monopoliesand more suspicious of government.

Knight obviously struggled with theproblem of aggregating the preferences ofall members of society. “National interestsare not unitary,” he correctly noted. Heoften put “society” or “we” in quotationmarks. Yet, he could not resist invokingsome sort of “social will” and even the “gen-eral will,” the very expression used by Jean-Jacques Rousseau in his defense of totalitar-ian democracy in Of the Social Contract.

Buchanan also inherited many ideasfrom Knight, including those on theimportance of agreement, exchange, andequality of opportunities (an idea thatneither Knight nor Buchanan rejected,contrary to most libertarians). Moreimportantly, Buchanan devised concep-tual tools to escape the contradictionbetween the Knightian ideal of “general”

Modern libertarians can charge Knightwith being middle-of-the-road. When apractical problem appeared, he tendedto compromise on the statist side.


or “substantial” agreement and the reignof numerical majorities (or even minori-ties, when not every voter votes). Perhapswe can say that Buchanan rescued Knightfrom Rousseau. Buchanan did this byconstructing a social contract theory ofthe state in which unanimity is conceptu-ally reached at the “constitutional stage,”while ordinary electoral decisions, con-strained by the constitution, are madeat the “post-constitutional stage.” Theimplicit unanimous agreement providesthe justification for, and limits to, stateintervention under majoritarian democ-racy. The state is limited because theparties to the social contract will onlyagree on what is in the interest of each ofthem—the substantial agreement Knightwas after.

Whether one agrees or not withBuchanan’s social contract, it is a brilliantconstruction. And while developing whatcame to be known as constitutional eco-nomics, Buchanan also became the mainfounder of the public choice school of eco-nomic analysis, which provides furtherarguments for limiting the scope of thestate. Public choice theory has had a majorinfluence on the study of politics and theevaluation of public policies.

By asking deep and often challengingquestions, Freedom & Reform helps revisitthe foundations of the free society. Com-plicated topics require nuanced evalua-tions and the analyst is justified in with-holding an answer when he does not haveone. However, there is a point where toomany qualifications dilute the conclusionand the analyst looks like he is taking bothsides of an issue—a problem that, in myopinion, often affects Knight’s analysis.

Yet (let me add another of my ownqualifications!), one cannot read Freedom& Reform without many questions bounc-ing around in one’s head. This is certainlyproof that the book was worth readingand an indication of how good a profes-sor Knight was. At any rate, the book isvery interesting from the viewpoint of thehistory of philosophical and economicthought. It was a milestone on the long,bumpy road to truth and liberty.

Forecasting RegulatoryFailure✒ REVIEW BY SAM BATKINS

Can regulators carry out two separate and sometimes conflictingmissions at the same time? More importantly, should politi-cians want them to do both or leave bureaucrats dedicated to a

single mission? Scholars have written tomes about the causes and con-sequences of regulatory failure, but few have taken a novel and rigorousquantitative approach to explain howorganizational design and political pres-sure can make or break regulatory per-formance.

In Structured to Fail, George WashingtonUniversity public policy professor Christo-pher Carrigan surveys three well-knownregulatory failures: the Mineral Manage-ment Service’s (MMS) role inthe 2010 Deepwater Horizonexplosion and oil spill, theFederal Reserve’s dual man-date to fight inflation andunemployment, and Japan’sNuclear and Industrial SafetyAgency (NISA), which wastasked with both promotingand overseeing that country’snuclear power industry.

All three of those agencieshad multiple and sometimesconflicting duties, referredto as “goal ambiguity.” Howcould the Federal Reservepromote economic growth,limit inflation, and regulatefinancial institutions dur-ing the Great Recession?Many would argue it failedin at least two of those duties.How could the MMS regulate safety, pro-mote energy development, and collectrevenue effectively? After the DeepwaterHorizon spill, politicians who had onlyrecently praised the agency decided to splitit in three, concluding that its distinct andconflicting missions contributed to the

worst oil spill in U.S. history. Similar criti-cism was leveled against NISA followingthe 2011 Fukushima disaster.

Goal ambiguity already has an expan-sive literature. Carrigan brings a deep sta-tistical understanding of what drives suc-cessful agencies and the realization thatgoal ambiguity alone didn’t cause regula-

tory failure.

Quantitative approach / Thereis a general consensus that“multipurpose” agenciesperform worse and produceinferior outcomes comparedto agencies that solely regu-late or simply do not regulateat all. In the words of formerhealth and human servicessecretary Donna Shalala,“If you try to do everything,you’ll accomplish nothing.”

This might be an apt aph-orism for government, butproving this, beyond the occa-sional anecdote, is difficult.Thankfully, a legacy of theGeorge W. Bush administra-tion and Rob Portman’s ten-ure as director of the Office of

Management and Budget was the creationand use of a government-wide rating tooldesigned to measure agency performance.The Program Assessment Rating Tool(PART) studied the performance of nearlyevery federal program from 2002 to 2008.

To use the PART data, Carrigan labori-ously matched each federal program toeach agency and, using descriptive statis-

SA M BATK INS is director of strategy and research atMastercard. The views expressed in this review are his own.

Structured to Fail:Regulatory Perfor-mance underCompeting Mandates

By ChristopherCarrigan

326 pp.; CambridgeUniversity Press, 2017

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tics, tests, and regression analyses, exam-ined the performance of multipurpose reg-ulators, more traditional regulators, andagencies not responsible for regulation.Some critics might argue that a heavy-handed regulator that does an efficient jobof destroying an industry, raising prices forconsumers, or protecting industry incum-bents at the expense of competition mightperform well on PART scores. This may betrue, but it is not Carrigan’s aim to deter-mine the merit of regulatory output or thestringency of various rules. Instead, he isinterested in the relative performance ofagencies across the federal government,even if the agencies’ activities make devo-tees of limited government squeamish.

Skeptics might note that PART scoresare hardly perfect. After all, it’s the execu-tive branch rating the performance of itsown regulators and programs. Confirma-tion bias and conflicts of interest aboundin this model. Carrigan concedes thispoint, but stresses that PART scores dem-onstrate no obvious biases and were com-puted for almost all government programs,making them universal.

What’s amazing about the book is thesheer amount of information Carrigancompiled: a dataset of 144 federal agen-cies and 1,062 programs across six years.He then cleverly produced his own ratingsystem: an average PART score from 0 to100 for each agency. As previewed, multi-purpose regulators fared worse than otherregulators and nonregulators. On average,they score 32% lower than other regulatorsand 17% worse than nonregulators. Butwhy? Is goal ambiguity the sole cause? Is itsimply the fault of politicians for designingagencies with conflicting mandates?

The answers to the questions abovemight be yes, but Carrigan goes several stepsfurther to consider agency design, organi-zation, and operation. There is no perfectagency or regulatory program, as much assome politicians might like to take credit.As Brian Mannix of the George WashingtonUniversity Regulatory Studies Center hasdescribed, every program suffers from the“Planner’s Paradox.” (See “The Planner’sParadox,” Summer 2003.) That is, there

is a tendency of the regulator or agency toassume planned solutions are superior tounplanned market answers. The plannermight employ reams of data, analysis, andexpertise, but the planner also brings biasesto the decision and often cannot see beyondthe four corners of the regulation. To theplanner, the solution is elegant, maybe evenperfect. When the program fails five yearslater, the paradox is finally revealed.

For the MMS, failure took much lon-ger than five years. The agency was bornfrom the U.S. Geological Survey, primarilyfrom its failure to balance royalty collec-tions with its science mission. When then–interior secretary James Watt created theMMS through a series of orders in 1982, themove was greeted with widespread approvalfrom politicians, the Government Account-ability Office, and even Time. Leading up

to the Deepwater Horizon explosion, evenPresident Barack Obama and members ofCongress generally praised the MMS, onlyto condemn it and break it in three after theexplosion, blaming its design for the oil spill.

Explaining the failure was easy for mostpoliticians: they had tasked it with conflict-ing roles. Like many large catastrophes orcomplex problems, there is rarely one sim-ple explanation. The proffered explanationmight play well in a 30-second campaignad, but Carrigan notes there were a host ofreasons why the MMS failed and why otherregulators perform poorly.

No one cause / Beyond the obvious yetincomplete explanation of goal ambigu-ity, there are other factors that contributeto regulatory failure. Political pressure ishigh on the list. A little over a decade afterit was created, Congress almost scrappedthe MMS. Agency heads, in conjunctionwith a congressional mission to increase

domestic oil production, wanted it toassume a larger role in bringing in rev-enue for the federal government. Afterthe Deepwater Royalty Relief Act waspassed in 1995, the MMS had a missionto increase leasing and deliver tangibleresults (money) back to Congress. Bar-ring a major setback (a massive oil spill),its role as revenue generator for Congresswould help to secure its future. Revenuescontinued to increase and Congress andthe industry were satisfied—until 2010.

Many ways to fail / The two takeawaysfrom the book are that there is no rightanswer that explains all regulatory failureand there is no perfect way to design orreengineer a federal agency. Carrigan cau-tions: even after breaking up a suppos-edly deficient agency, it’s not clear that

the reorganized agencywill excel. Congressoccasionally intends forone agency to performmultiple tasks, but thereare no assurances thatmultipurpose agencieswill always fail, althoughthey do perform worse

compared to their bureaucratic brethren.Structured to Fail provides several con-

temporary examples. The ConsumerFinancial Protection Bureau (CFPB) wasestablished during a chaotic political cli-mate, given vast powers, and cut off fromthe traditional congressional appropria-tions process. During its existence, it hasbeen criticized for creating a hostile work-place, repeatedly overstepping its statutorybounds, and operating outside any politi-cal or structural checks on its authority.

As a consequence of its controversialbirth, members of Congress continue topush for fundamental reform, or even abo-lition, of the agency. In the fall of 2017,Congress took the rare step of using theCongressional Review Act to rescindthe CFPB’s arbitration rule. Despite theagency’s relative independence, it appearsCongress will continue to chip away at theCFPB’s authority until lawmakers can, atminimum, install a new director. Did Dem-

The two takeaways from the book arethat there is no right answer that explainsall regulatory failure and there is noperfect way to design a federal agency.


ocrats intend for this when they createdthe agency? Will fundamentally alteringthe CFPB remedy the defects Republicansroutinely highlight? The Planner’s Paradoxsuggests history must be the judge.

In sum, Carrigan’s book is a fascinat-ing tour of agency design, oversight, andregulatory failure. Although he discussesthe Federal Reserve and NISA, the books isalmost solely focused on the MMS and itshistory. Rather than conclude with previous

scholars that goal ambiguity was the solecause of the Deepwater Horizon tragedy,Carrigan goes several steps further, prov-ing that multipurpose agencies do sufferin performance, at least compared to theirpeers.However,goalambiguityalonedidnotcause that failure. In the future, we can onlyhope a member of Congress or an informedWhite House staffer comes across Carrigan’sresearch when contemplating the design ofyet another federal agency.

Calabresi’s Law andEconomics✒ REVIEW BY PHIL R. MURRAY

Guido Calabresi is a judge on the U.S. Court of Appeals for theSecond Circuit and the Sterling Professor Emeritus of Law andProfessorial Lecturer in Law at Yale Law School. In his recent

book The Future of Law & Economics, he combines Coasean insights,his own contributions, and extensions of his work to write a historyof thought in law and economics withrecommendations for future scholarship.

“What I call Economic Analysis of theLaw,” he explains, “uses economics to ana-lyze the legal world.” The analyst evaluateslaws “from the standpoint of economictheory” and may “argue for change inthat legal reality.” “What I call Law andEconomics,” he continues, “instead beginswith an agnostic acceptance of the worldas it is, as the lawyer describes it to be.”

The lawyer-economist also uses eco-nomics as a tool to evaluate the laws them-selves. However if the legal environmentis inconsistent with economic theory, thelawyer-economist may recommend modi-fications to economic theory. Calabresiexalts the law-and-economics approach sothat we may gain a better understanding ofboth laws and economic theory.

Merit goods / We may learn a lot by studying“merit goods,” he writes, referring to goodsthat are deemed “loathsome to price.” In

the economic way of thinking, peopleundertake projects when the expectedbenefits exceed the expected costs. But ifwe learn that, say, a construction projectincorporates the value of lives lost as simplyanother cost of the project,we may cringe.

This “commodification”of human life is only oneoffensivenotionthatconcernsCalabresi; another is “com-mandification” of humanlife. For instance, those whowould take offense at a con-struction company managerapproving a project despitethe possibility of workers los-ing life or limb would alsobe offended to know thatofficials at the OccupationalSafety and Health Adminis-tration might reason the sameway. Calabresi observes, “If wedo not want to price lives (andwe don’t), we also do not wantthe government to tell us, too

obviously, that some lives, in some circum-stances, are not worth saving.” The solutionis to find the right tradeoff between com-modification and commandification.

Tort law helps to find this tradeoff. “Ineffect,” he writes, “what we do in torts isto some extent pricing lives and safety, butwe do this in ways that do not lead to theheavy moral costs that would be imposed ifwe did that pricing obviously and directly.”These moral costs are the offense we take atpricing life or limb. We tolerate the “hugecosts” of tort law, such as litigation costs,because tort law lowers moral costs.

Other merit goods are such that “it isloathsome to allocate them through a pre-vailing wealth distribution that is highlyunequal.” For instance, human vital organsbelong in this class, Calabresi argues,because poor people may not be able toafford them, and poor people may beeager sellers of their own organs. In orderto determine how many of these goodswill be available and who will get them, herecommends “modified command struc-tures” and “modified market structures.”

Compulsory service / The distinctionbetween these structures is “nuanced,” touse one of the author’s favorite words. Con-sider “a rationing scheme” for national ser-

vice. Assuming that “service”is mandatory and that thereare multiple ways to serve,“each subject individual wouldbe free to choose where andhow to spend his or her time.”Calabresi imagines many pos-sibilities. A young adult couldserve in the armed forces, “aninternational peace corps,” or“in varied American ‘needy’zones.”

The author imagines that“service in, say, sunny Italyor rainy England would bepriced to take into accounthow much each was favoredor disfavored by those whohad to choose.” If this soundsunworkable, a “tax/subsidyscheme” is an alternative. He

The Future of Law& Economics: Essaysin Reform andRecollection

By Guido Calabresi

228 pp.; Yale UniversityPress, 2016

PHIL R . MUR R AY is a professor of economics at WebberInternational University.

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then outlines three such schemes, withthe goal of recruiting (or drafting) anequal percentage of individuals from each“wealth category.”

In one scheme, the government mightmake service mandatory, then tax those whowant to avoid service based on their wealth.In the second scheme, government mightmake military service voluntary so that“the richest would be paid greatly to serve,the poorest not much.” These different paylevels would attract wealthier citizens anddeter poorer citizens, but would hardly seemacceptable to the public. The third schemeis a combination of mandatory service andvoluntary service with taxes and subsidies.“Ineffect,”Calabresiassumes, “onecouldtaxthe richest a large amount for nonservice,while simplypayingthepoortoserve.” If thissounds like a Rube Goldberg contraption ofsocial engineering, he admits that “there areobvious problems with each of these (andany other yet more mixed schemes).”

His musings on the allocation of meritgoods provoke thought. “Just as it is worth-while to try to find ways of producing wheatmore efficiently,” he reasons, “so it is worth-while to search for less ‘costly’ ways of allo-cating merit goods!” These moral costs arethe “pain” one feels knowing that goodsare allocated through a market in whichwealth is unevenly distributed. The authorrecognizes a tradeoff between reducingmoral costs and maintaining incentives toproduce. “On the one hand,” he observes,“many people prefer equality to inequality.”“On the other hand,” he recognizes, “manyof these same people believe that a consider-able amount of inequality is inevitable if weare to have the kinds of incentives needed tomake more [goods] available for all to share(however unequally).”

The challenge is in determining whichgoods qualify as merit goods. They will bethe goods whose modified market provi-sion reduces moral costs the most withthe least damage to incentives. He illus-trates this notion using such examples aseducation, health care, vital organs, andcampaign finance.

Readers may wonder what limits thenumber of goods provided through the

many hybrids of markets and governmentthat Calabresi envisions. For example, ordi-nary citizens regard an appendectomy ashealth care that is a merit good. But wouldthey count cosmetic surgery? The authormaintains that if society allows a limitednumber of merit goods to be allocatedthrough some blend of markets and com-mand, incentives to produce will be suffi-cient to achieve prosperity and objectionsto inequality will be few.

Government-administered altruism /Readers with socialist leanings may beshocked to learn that Calabresi sees “somuch altruism” in free-market society. Hebelieves that altruism is pervasive becauseit is both a means and an end. For exam-ple, he identifies “private altruism” and“state beneficence.” Is the latter an oxymo-ron, when whatever good deeds a govern-ment may undertake are backed by coer-cive tax collections? Perhaps this is whyhe thinks a government-provided safetynet is legitimate: “But if everyone behavedaltruistically toward others in the privatesphere, people would be unhappy if theirgovernment were not also charitable andbeneficent, at least to some extent.” Gov-ernment welfare programs, if I understandhim correctly, are “state beneficence.”

The author observes many “modifiedstructures” producing altruism. One is“the legendary Minneapolis 5 percenttradition”: businesses based in that citydonate 5% of their profits to philanthropy.Another is the tax deduction for charitablegiving. Not-for-profit organizations area means to produce merit goods such aseducation and health care. According toCalabresi, they also satisfy our desire foraltruism. The author describes many dif-ferent ways that people cooperate in orderto produce altruism. Then he asks whetherwe have “the optimal amount of benefi-cence,” and “the optimal mix of differentforms of altruism.” His answer is, “I haveno idea.” He does not know because “we donot have a model that demonstrates that,under certain conditions, an optimal resultis achieved.” The building of such a modelis for future lawyer-economists.

Pricing government intervention / Lawyer-economists characterize the liability ruleas a way to orchestrate an exchange thatresembles a market transaction with “col-lectively set” terms of trade. These termsof trade are usually called a “price,” inkeeping with the terminology of markets.We may also refer to the terms as a “pen-alty,” “assessment,” or “sanction.”

The author treasures the liability rulefor its widespread application in what hecalls “social democratic societies—in whichthe reigning ideology is neither libertariannor collectivist.” Consider an applicationto tort law. If an airline loses a passenger’sluggage, the damages might be the marketprices of the lost items. But the “polity” mayadd punitive damages to reflect sentimentalvalues. Another example comes from prop-erty law. A government might use eminentdomain to take land in return for the mar-ket price. In order to discourage takings ofland with sentimental value, compensationmight be set at a multiple of the marketprice. Alternatively, if a government intendsto hasten economic development, compen-sation might be set below the market price.“In such instances,” the author claims,“the assessment that both allows and limitsentitlement shifts may be chosen to reflectthat polity’s liking for, and devotion to, itsideologically mixed foundation.” Calabresiurges us to recognize that “some people likemarkets, while others like command,” andhe endorses the liability rule “because it isan approach that a social democratic politylikes, in and of itself.”

The author argues that economistsdon’t adequately incorporate “tastes andvalues” into their analyses, and that a law-and-economics approach may be used toevaluate them. Consider this bit of hisreasoning. Calabresi assumes that peoplevalue a greater quantity of goods over asmaller quantity, a more equal distributionof goods over a less equal distribution, andcreativity. Call these primary values. Hethen searches for “subsidiary” values thatreinforce the primary values. These are “thedesire for things which are in commonsupply in that society,” such as “ordinarywater and wine,” “ordinary sport watching


and ordinary sex,” and “child rearing.” Ifprosaic is what we want, we will be able toproduce great quantities, distribute themequally, and satisfy our desire to create.In contrast, if we want fine wine, fine cui-sine, and “great athletic feats,” incentivesto produce these exceptional goods will benecessary and we will fail to achieve all theprimary values, in particular a more equaldistribution of income.

Now the author asks, “What has thisto do with laws and legal structures?”Using the law to promote values may cause“value-alteration costs.” His example ofthis is antidiscrimination laws. ThoughCalabresi doesn’t cite the Civil Rights Actof 1964, it’s safe to assume he has it inmind. Among other benefits, its passageemboldened women to enter the laborforce. But it was not a true Pareto improve-ment. To the extent that raising childrenis valuable, a tradeoff occurred. Using thelaw to combat discrimination againstwomen is commendable and effective. “Ithas,” unfortunately, “made ordinary, out-of-home, but not especially creative, jobsavailable to women and furthered legalstructures that implied that holding apaying job is worth doing, while stayinghome and rearing children is not.” In theauthor’s terminology, we failed to achievea “joint maximization” of all our values.Although we achieved what we value interms of reducing discrimination againstwomen, the unintended consequence wasa “devaluing” of the creative activity ofchild rearing. Laws exist to correct the situ-ation and support child rearing, he claims.He doesn’t explicitly mention a child taxcredit, but again it’s safe to assume he hasthat in mind. His main message is that weshould use law-and-economics analysiswhen making and evaluating laws.

Given the author’s fascination with theintersection of markets and government,libertarian readers will be wary of policyideas that expand the role of governmentat the expense of markets. Other than that,I find little in the book to criticize. Cal-abresi, “an early tiller in the field” of lawand economics, teaches much that the nextgeneration may reap.

Confucius, Autonomy,and Capitalism✒ REVIEW BY THOMAS A. FIREY

Some three decades ago (has it really been that long?), I settledinto my first Asian philosophy class at tiny St. Mary’s Collegeof Maryland. The professor made an immediate impression:

hair prematurely gray with black strands at the temples, stylishlydressed in a turtleneck and blazer, and with a voice that a classmatedescribed (with a hint of infatuation) as“like velvet over gravel.” Henry Rosemontpromised that first day that his classroomwould be the most exciting place on cam-pus—an exaggeration, but close enough totrue that the room was always full.

Henry—using his last name would beinappropriately impersonal for me—beganstudying Asian philosophy while a Marinein the Korean War. On leave and both phys-ically and spiritually exhausted, he visiteda local temple in search of solace. He soonfound himself in the lotus position (thevirtue of which, he told us with his deep-chested laugh, is that when you fall asleep,you roll around safely on the floor) and hislife’s work.

He went on to earn a doctorate in phi-losophy, specializing in Asian thought, atthe University of Washington and did post-graduate work in linguistics under NoamChomsky at MIT. His academic research,often in collaboration with the Universityof Hawaii, Manoa’s Roger Ames, focusedon translating and understanding Confu-cian texts and brought him internationalrecognition in that specialized field.

I didn’t find Asian philosophy nearlyso satisfying (I’m hopelessly Western andPlatonic), but I appreciated the professor.Fortunately, Henry also taught coursesthat I did like, including ancient politi-cal thought and logic. He welcomed stu-dents who dropped by his office to dis-cuss some difficult text or logic problem,enjoyed conversations over between-classcigarettes and after-class glasses of wine,

and kept a public list of double-entendresfor grad school recommendation letters (“Iwish I could say more about this student’spromise…”). If you were lucky, you wouldcatch a glimpse of the Bugs Bunny tattooon his arm—another product of his timein the Marines.

Henry shuffled off this mortal coil lastJuly at age 82. Before passing, Rowman &Littlefield’s Lexington Books publishedhis final book, Against Individualism, as thefirst in a series on Philosophy and Cul-tural Identity. In it, Henry challenges theconcept of the autonomous individual aswell as the Western ethical systems, liber-tarian philosophy, and capitalist economicsystem that “foundational individualism”supports.

His aren’t the arguments of a facultylounge Marxist stereotype; Henry impa-tiently dismisses collectivism in the pro-logue and elsewhere in the book. Instead,he advocates a Confucian understandingof the person as a replacement for Westernindividualist ideas and values.

As a tribute to my late teacher, let’s con-sider his critique of the ideas that many ofus readers of Regulation cherish.

Individualism and the West / Western phi-losophy, he writes, is grounded on thenotion that the person is an autonomous,rational, persistent self that has intrinsicmoral worth. According to Henry:

The idea of the individual self, basedon self-awareness that entails rational-ity, is one of the most deeply rootedconstructs in the history of Western

T HOM AS A . F IR EY is a Cato Institute senior fellow andmanaging editor of Regulation.R


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intellectual history. From its originsin ancient Greece in the tripartitenature of the soul, through the Judaic-Christian unitary version thereof, ithas played a major role in shaping oursense of who and what we are, and how,therefore, we ought to live our lives,interact with our fellows, and shape theinstitutions in which we live together.

Under this view, infringing on individualautonomy is wrong and people’s freedomis morally limited only by the obligationthat they not impose on others’ autonomy.

Any further human commitments andconstraints upon the individual must bevoluntarily accepted in order to be mor-ally acceptable. This leads to the idea thatgovernment legitimacy rests in the socialcontract, under which citizens agree tosurrender some autonomy in exchange forgovernment-provided benefits. No otherjustification for government is acceptableunder these precepts, writes Henry:

If we are indeed free, rational, andautonomous, why should we want tosurrender our freedom to a state thatwill claim a monopoly on the use ofcoercion to secure compliance with itsdictates?

He argues that all versions of Westernmoral and political thought are groundedon foundational individualism, whetherImmanuel Kant’s deontology or the variousversions of utilitarianism, or even Marxism,communitarianism, and feminist care eth-ics. The perfect form of this Western phi-losophy, he writes, is libertarianism, whichhe describes as “a coherent, consistent, andnot, by logical standards, an unreasonablemoral code and political position.”

He credits foundational individual-ism with having provided great benefit tohumanity:

Americans have long been proud of theconstraints the Bill of Rights places onthe government to interfere in the livesof its citizenry, and rightly so; wouldthat all governments the world over

were similarly constrained. … Millions ofpeople have benefited from the idea thathuman beings should be seen as free,rational, autonomous individuals, andthe resultant gains in human dignity ithas brought about are to be celebrated,and should not be lost.

However, he argues, worldconditions are changing andthe West’s individualist phi-losophy is no longer the posi-tive force it once was. Natu-ral resources are strained bypopulation growth, wealthis increasingly distributedunequally, poverty threatens agreater percentage of human-ity thaneverbefore,andpeopleare increasingly unhappy andangry. Foundational individu-alism is contributing to theseills, he claims, by advancinga false conception of humanvalue and by obstructing cor-rective “social justice.”

Challenging the self / What’sso wrong with the concept ofa morally valuable, rational, autonomousself? Henry makes two criticisms: expe-rientially its existence has little support,and morally it leaves much to be desired.

Concerning the former, he invites read-ers to investigate themselves to evaluate theself. Strip away the physical body, the soci-etal and familial roles, the various externaland internal physical and mental stimuli,and memories, and what’s left? Accordingto Western thought, Henry argues, thisshould be like peeling a peach: remove theskin and flesh, and one should be left withthe pit—or in this exercise, the self.

However, he continues, when he stripsaway those facets of himself, he finds he’sleft with nothing at all. Instead of a peach,the exercise is more like peeling an onionand finding there’s no core beneath thelayers. He writes:

We seem incapable of describing the selfwe all supposedly possess, are hard put

to describe what makes us a unique indi-vidual apart from others, or what criteriato employ in deciding whether anotheris the same individual over time; donot have strong intuitions or criteriafor how to handle seemingly anoma-lous cases (Alzheimer’s patients, split

personalities, extreme physical disfigurement, cases of self-deception, amnesia, etc.); or how to answer Hume’s logical question of what experience the experiencer can possibly have of the experiencer. All of this suggests, at the least, that the idea of autonomous indi-viduals is at best a confused one. (Henry’s emphases.)

But this problem is not his biggest concern; the “self” could be a useful fiction if it yielded a fully satisfactory morality. The deeper prob-lem for Henry is that founda-tional individualism results in an incomplete and even detrimental morality.

If individual autonomy isthe supreme moral value, then that valuedoes not motivate an obligation to helpothers. People can (and many do) vol-untarily aid the poor, injured, and otherunfortunates, but they apparently aremotivated by something other than foun-dational individualism. Further, a liber-tarian polis cannot obligate itself to helpunfortunates through compulsory redis-tribution of wealthier citizens’ property;doing so would violate those citizens’ rightto their property. As a result, the libertar-ian state has limited means to improvethe lives of the weak and poor: it cannotpursue social justice.

Henry finds this constraint unaccept-able. He writes:

Herein lies a fundamental conflict inall contemporary discourses on humanrights grounded in the concept of theautonomous individual: To whateverextent we may be seen to be morally and

Against Individualism:A Confucian Rethink-ing of the Foundationsof Morality, Politics,Family, and Religion

By Henry Rosemont Jr.

179 pp.; LexingtonBooks, 2015


thus politically responsible for assistingothers in the creation and obtaining ofthose goods which accrue to them byvirtue of having social and economicrights, to just that extent we cannot bealtogether autonomous individuals,enjoying full civil and political rights,free to rationally decide upon and pur-sue our own projects rather than havingto assist the less fortunate with theirs.

This deficiency is not merely a short-coming of libertarianism, but outrightmorally harmful, Henry claims, because itdefends selfishness on the part of the well-to-do. He goes so far as to quote rebukesfrom John Kenneth Galbraith and Huffing-ton Post columnist Ian Fletcher:

John Kenneth Galbraith put a similarpoint succinctly when he said, “Themodern conservative is engaged in oneof the oldest exercises in moral philoso-phy; that is, the search for a superiormoral justification for selfishness.”More recently, a popular critic of liber-tarianism described it as “a notoriouslyselfish philosophy.”

He reserves his sharpest criticisms forcapitalism. Like the concept of autonomy,he credits capitalism with historically ben-efiting humanity by encouraging produc-tivity and growing “the economic pie”so as to provide everyone with “a largerslice.” But there is a limit to those gains,he claims, and humanity is increasinglyexposed to the darker side of capitalism:

Based supposedly on competition, evenat its best, capitalism must generatelosers as well as winners. And as thewinners win more, they grow fewer innumber, while the losers increase.

This leads to an unfair distribution of the“rights” that libertarians cherish:

Those with a great deal of money tobuy things will have far more “rights”with reference to real property, materialgoods, and services, than those persons

living in abject poverty. “Freedom of thepress,” the journalist A.J. Liebling oncenoted, “is guaranteed only to those whoown one.”

The division between winners and losersleads to privation and violence, to the det-riment of society, he claims:

Poverty, inequality, environmentaldegradation, hatred, violence, and more… cannot even be addressed properly,much less resolved, within the confinesof a capitalist system.

And:

The growing maldistribution of wealthboth within and between nationsbecomes starker, and as the policies andactions of the United States, adamantin pressing an unfettered capitalism onthe rest of the world, are doing moreto exacerbate than alleviate the grossinequalities that contribute measur-ably to the violence in so much of thecontemporary world. Indeed, I believethe ongoing growth of poverty is notthe sole, but certainly a major, cause ofsuch violence.

And,

We all live in extant states characterizedmore or less by inequality, injustice,poverty, violence, and more, all of whichseem to be clearly on the rise today.

And—well, you get the idea.Economists reading this review are

likely already pointing out the empiricaland other problems with these claims—problems that I’ll discuss below. I was a bitdisappointed to read my former teacher lev-eling criticisms that could be cribbed fromany Bernie Bro’s blog (and more than a fewTrumpists’). Fortunately, these are only afew sentences in a book that is generallythoughtful and intellectually charitable—and more reflective of the person I knew.

So let’s take seriously Henry’s criticismof individualism and capitalism, which he

better expresses as follows:

When individual freedom is weightedmore heavily (valued more highly) thansocial justice—defined broadly as a fairallocation of resources for everyone—thepolitical, legal, and moral instrumentsemployed by the rich and powerful indefending and enhancing that freedomvirtually insure that social justice willnot be achieved, and hence poverty notalleviated.

This criticism, he believes, cannot bemade against libertarianism by other West-ern moral and ethical theories withouttheir violating their own axiom of founda-tional individualism. On this point, credithim with having greater insight into theideas of libertarianism’s Western criticsthan they do:

[Libertarianism] is simply this conceptof the free, rational individual selftaken to its logical limit, and therebyworthy of our close attention becauseall of us more or less pay allegiance to asimilar vision of human beings. … I havenot been impressed by any of the few[Western-grounded] supposed refuta-tions of libertarianism I have heard orread thus far, no matter which specificindividualist ideology is employed. Ifthe libertarian claim to a moral highground is to be denied, it will have to bedone in a non-individualist way.

Confucius / To make this non-individu-alist challenge, Henry draws on the Con-fucianism that was the focal point of hisacademic career. So who was Confuciusand what is Confucianism? Here is mythumbnail-sketch understanding:

The Chinese sage who we Westernerscall Confucius was born Kong Qiu in theyear 551 BCE in the Chinese state of Luin the district of Zou, which lay directlyacross the Yellow Sea from today’s SouthKorea. The name “Confucius” is a Latini-zation of the honorific Kong Fuzi, mean-ing “Grand Master Kong”; in the East heis more commonly called Kongzi, (or, in


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an older Westernization, Kong-Tzu) whichmeans “Master Kong.”

His father, a local military commander,died while Qiu was very young, leaving thefamily impoverished. Yet Qiu was well edu-cated in the district’s commoner schools,which taught the classic texts, arts, mar-tial skills, and mathematics in an effort tograduate “perfect gentlemen.”

Perhaps sparked by that education, hebecame a lifelong student and teacher ofChinese history, ritual, and social/moralphilosophy. In essence, Master Kong wasa conservative because he looked to tradi-tion to discern how life should be lived. Healso was a worldly, humanist sage; thoughhe observed and advocated religious rites,his studies and teachings focused on howpeople can live well in this mortal world.

Even as he pursued his studies, Mas-ter Kong also worked his way up throughpublic administration in Lu. The state wasawash in political intrigue, officially underthe jurisdiction of the ruling family of Zoubut really controlled by three local aristo-cratic families. Those families periodicallybattled each other and dealt with infight-ing. Master Kong nonetheless was broadlyrespected for providing good service to thepeople of Lu, offering sound counsel tothe rulers, and nurturing better relationsbetween the three families. He rose in rankto become a sort of prime minister, andhis reputation as both a sage and politicaladviser spread throughout Zou.

Ultimately, Master Kong broke with theflawed leader of the chief Lu family, follow-ing his own doctrine that if an adviser can’timprove the ruler’s virtue then the advisershould step aside so that someone elsemay try. He went into self-imposed exile,touring neighboring states. He returned toLu late in life, spending his final few yearsteaching. He died in 479 BCE; his vener-ated tomb is in the modern city of Qufuin Shandong Province.

From ancient times until 1949, MasterKong’s teachings and those of his followerswere widely revered in China, though theydid wax and wane in influence as politicalrule shifted from one dynasty to another.Following the Communist revolution,

Confucianism’s importance has been atan especially low ebb.

Role-bearing morality / Confucianism’steachings are rooted in ancient texts thatMaster Kong consulted for moral enlight-enment, as well as collections of his owninsights and those of his early followers.These works do not analytically define asystem of thought grounded in founda-tional axioms, Henry explains, but insteadoffer adages, short parables, and ritualsintended to nurture virtue in readers andhelp them live better, more fulfilled lives.In essence, Confucianism follows Aristo-tle’s advice: If you want to become a goodperson, start by studying and replicatingwhat good people do.

A central concept in Confucianism isthe importance of properly fulfilling recip-rocal relationship roles (shu). The mostprominent of these are between a parentand child, between spouses, between olderand younger siblings, between friends, andbetween ruler and subjects. Henry pro-poses replacing foundational individual-ism with this concept of the person as arole-bearer who should fulfill his roles welland who finds satisfaction in doing so.

Henry notes that people often switchends of these reciprocal roles at differenttimes in their lives and in different settings.For instance, the parent nurtures the child,but later in life the grown child will carefor the parent; the teacher educates thestudent, but the student can then educateothers. Importantly, for Master Kong theseroles should not be fulfilled purely out ofa sense of obligation (though the personwho is attempting to become good maystart with this sole motivation). To righ-teously fill a role, the role-bearer shouldwant to graciously provide or apprecia-tively receive the benefits of the role. Justas important, the participants in theserelationships must recognize that eachparticular relationship is distinct; a personshould fulfill his duty to his spouse, or ateacher to his student, in a manner tailoredto the specific spouse or student.

Concerning the government relation-ship, Henry explains that Master Kong

believed that good governance should beboth paternalistic and authoritarian—pro-vided that the ruler is virtuous. Accordingto Master Kong:

To govern means to make right. If youlead the people uprightly, who will darenot be upright? Employ the upright andput aside the crooked; in this way thecrooked can be made upright. Go beforethe people with your example, and spareyourself not in their affairs. He whoexercises government by means of hisvirtue may be compared with the NorthStar, which keeps its place and all thestars turn toward it.

Beyond the notion that the ruler andhis advisers should be virtuous and ben-efit the citizens, Master Kong’s teachingsoffer few specifics on government policy.To sketch out a Confucian programme,Henry turns to two prominent Confuciandisciples, Mencius (371–289 BCE) andHsun-Tzu (298–238 BCE).

Both—and Confucians generally—believed that the state should provide forthe basic welfare of people who are unableto provide for themselves. According toMaster Meng,

Old men without wives, old womenwithout husbands, old people with-out children, young children withoutfathers—these four types of people arethe most destitute and have no one toturn to for help; the good ruler will givethem first consideration.

Likewise, Master Hsun teaches:

In the case of the handicapped andhelpless, the government should gatherthem together, look after them, and givethem whatever work they are able to do.Employ them, provide them with foodand clothing, and take care to ensurethat none are left out. … The govern-ment must also look after orphans andwidows, and assist the poor.

Master Hsun also believed government


must engage in industrial policy for vitalindustries, telling rulers:

If you encourage agriculture and aremodest in expenditures, nature cannotimpoverish you. If you provide everyonewith the goods they need and demandtheir labor only at the proper time,nature will not afflict them with illness.… [But] if you neglect agriculture andspend lavishly, nature cannot enrichyou; your people will starve even whenthere are no floods or droughts, and willsuffer sickness even before great heat orcold come to afflict them.

Henry praises such ancient Chinese poli-cies as

governmental measures to accomplish[important tasks] such as rebuildingdikes and levees across long distancesafter harsh winters [and] seeing to thetransfer of goods and seeds from a bum-per crop area to one struck by flood ordrought. … Well-organized social coop-eration could lead to the recalcitrantEast Asian earth surrendering a bountysufficient to nurture the population andprovide some material embellishmentsto human life as well.

Arguably, Henry over-reads the degreeto which Confucians endorsed govern-ment intervention. Master Hsun advocatedpublic labor “only at the proper time” andinstructed government to be “modest inexpenditures” My Cato colleague JamesDorn recently told the story of Confu-cians’ opposition to government monetaryauthority during the Western Han Dynastyof 206 BCE–9CE (“Monetary Freedom:Lessons from the Western Han Dynasty,”Cato at Liberty, Oct. 17, 2017). Still, Confu-cians are more optimistic about the poten-tial good that can come from governmentintervention than the Chinese sage who isbetter known among libertarians, Lao-Tzu(7th–6th century BCE).

However, beyond welfare and socialcoordination activities, and a discussionof how truth and reconciliation commis-

sions can serve as a model for address-ing some justice issues, Henry offers littleon what government policies he desiresor what specific political system shouldimplement them. There is no descriptionof a Confucian environmental policy, or aConfucian economics to replace capital-ism, or a system of checks and balancesto control evil or incompetent rulers, or adiscussion of how virtuous rulers can beidentified and empowered.

Reclaiming the self / Henry offers a bleakappraisal of the self, libertarianism, andcapitalism. But are matters in the UnitedStates and the rest of the individualistWest as grim as he claims?

Let’s start with the self. Economistsand Westerners in general conceive of theindividual as incorporating much morethan a person’s societal roles; at the veryleast, each person has a distinct bundle ofpreferences, beliefs, values, expectations,risk tolerances, and other characteristics.These can evolve and even change entirely,but each person seemingly has a unique setof them—as underscored by the difficultyof trying to reach consensus on even themost innocuous of decisions that affectmultiple people.

These aspects of the self seem to bemore fundamental to the person than hisor her relationship roles. Indeed, it’s dif-ficult to conceive of how people can fulfilltheir shu without incorporating these partsof themselves. Nearly every role I fill resultsfrom my choosing—that is, my preferring—to accept that role, and how I fill all ofmy roles is shaped by my preferences, risktolerances, values, etc. Put differently, I amnot my relationship roles; rather, I exhibitmyself through the relationship roles Iassume and how I fulfill them, as well asmy many other activities.

Life in the libertarian West / Even if the selfexists, that doesn’t mean Henry’s criticismof foundational individualism fails. Butdo Western morality and economics pro-duce the evils and misery he claims?

Empirically, it’s difficult to make hischarges stick. Contrary to his explicit claim

otherwise, not only has the rate of peopleliving in extreme poverty fallen since thedawn of the Industrial Age according toWorld Bank data, but so has the numberof those people even as the world popula-tion has grown seven-fold. This decline hasbeen especially sharp since the 1970s, con-temporaneous with a surge in economicfreedom as measured by such organiza-tions as the Fraser Institute and the Heri-tage Foundation.

Homicide rates and other violent crimerates in the United States and other devel-oped countries (i.e., countries with devel-oped capitalistic economies) have beenfalling since at least the 1990s accordingto data presented in Harvard psycholo-gist Steven Pinker’s The Better Angels of OurNature (Penguin Group, 2014). In Europe,those declines are just the latest in a longdownward trend dating back at least tothe 15th century. Globally, war deaths,genocides, and internal displacements haveplummeted since the end of World War IIand are practically unknown in the devel-oped world, again according to Pinker’sdata. And, as has often been noted, liberal,capitalistic democracies and trading part-ners seldom go to war with each other.

Life expectancy has surged since theIndustrial Revolution, especially in theWest, according to data presented inUCLA economist Deepak Lal’s Poverty andProgress (Cato Institute, 2013). Childhoodmortality has been declining since at leastthe 1960s according to World Bank data,with the developed world having the low-est rates. The number of undernourishedpersons around the globe has fallen sincethe 1990s according to the United Nations’Food and Agriculture Organization, and inthe developed world—especially the UnitedStates—obesity is a far greater health con-cern than hunger. Air and water qualityhave been improving in the United Statessince at least the 1990s, and economistshave long noted the positive correlationbetween market-provided wealth andimproving environmental quality.

By these and many other measures,human well-being around the globe isadvancing in direct correlation with the


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expansion of economic freedom and thespread of foundational individualism.That well-being is highest in the world’smost libertarian, capitalist countries. (Acollection of these data and commen-tary can be found on the Cato Institute’sHumanProgress.org website.)

So how can Henry’s argument goso wrong? Because Against Individualismassumes a false premise that underminesthe book’s entire economic discussion andits broader worldview.

Beginning in the prologue and repeatedelsewhere in the book, Henry characterizesmarket capitalism as necessarily having“losers as well as winners. And as the win-ners win more, they grow fewer in number,while the losers increase.” But market capi-talism by definition is a system of voluntaryexchange. People seldom volunteer to lose.Rather, they search for exchanges in whichthey best benefit, and as a result both par-ticipants in an exchange “win.”

In the West’s market economies, thepursuit of better exchanges has incentiv-ized dramatic improvement in agriculturalproductivity, medical innovation, hous-ing supply, transportation efficiency, andcountless other advances. As a result, lifeexpectancy has soared in the capitalisticdeveloped world, and developing coun-tries like India and China are increasinglyturning to markets to the benefit of theirunderclasses. Even Henry, after repeatedlycharging in the book that capitalism leadsto poverty, tacitly concedes the opposite isthe case when he laments that “an increas-ingly wasteful and life-numbing material-ism [has] become ingrained in people’s lives,especially in the developed world.” (Alsoworth noting: people in developed nationstend to fare better on happiness surveys andmeasures of well-being than people in less-developed, less-capitalistic nations.)

The pursuit of better exchanges notonly yields materially better outcomes, butoften morally better ones—at least, bet-ter than some exchanges that supposedlyexhibit “social justice.” Consider just oneexample: social justice advocates’ supportof ever-stronger minimum wage laws. Theempirical literature shows that raising the

minimum wage reduces employment, and those reductions fall disproportionately on the poor and other disadvantaged groups.(See p. 8.) Further, unemployment has long-lasting negative effects on a person’s wages when he does work. Repealing mini-mum wage laws and letting the labor mar-ket operate freely would thus benefit the poor and disadvantaged, yet social justice advocates continue to defend and demand stricter minimum wage laws.

A problem for Henry, and one for us / But even if life in the capitalistic West is much better and more just—and improving—than Henry claims, that doesn’t mean his advocacy of Confucianism is misplaced. Humanity could greatly benefit from Mas-ter Kong and his followers’ teachings on the obligations of parenthood, marriage, friendship, and political leadership.

But those teachings could also help lead people astray. As Henry acknowledges in the book, Confucian morality is primar-ily a family- and tribe-centered morality, elevating duties and faithfulness to kin and kith above others. Consider this from the Analects:

The Governor of She, in conversationwith Confucius, said, “In our villagethere is someone called ‘True Person.’When his father took a sheep on thesly, he reported him to the authorities.”Confucius replied, “Those who are truein my village conduct themselves differ-ently. A father covers for his son, a soncovers for his father. And being true liesin this.”

The troubling lesson is that a son’s moralobligation to his thieving father takesprecedence over concern for the village orthe crime victim. This tribe-first belief isonly a brief leap away from the belief thatone should advance one’s tribe by harm-ing out-groups, perhaps while chant-ing “America First” or “Build the Wall”(or far more nefarious slogans from the20th century). Confucianism’s lack of afoundational principle that each personhas moral worth allows for some hor-

rid—though unintended—applications ofMaster Kong’s teachings.

That said, Henry still has the obversecriticism for us libertarians: foundationalindividualism may give each person moralworth, but that conflicts with the seeminglymeritorious idea that government shouldredistribute some wealth from the rich andpowerful to the poor and weak. We libertari-ans can respond that people are free to—andshould—help the poor privately. We can alsonote that some of the most prominent lib-ertarian theorists—e.g., John Locke, AdamSmith, Friedrich Hayek, Milton Friedman,Robert Nozick—supported some form ofpublic aid to the poor. The libertarian Westdoes have many safety-net programs—theUnited States alone spends roughly $1 tril-lion a year on various government welfareprograms—and there is no significant politi-cal movement to abandon them. (A visit toCato’s webpage finds much more attentiongiven to improving the safety net’s efficiencyand incentives, than to ending it.) But theseresponses only beg Henry’s question: iffoundational individualism is the West’sparamount value, can it be reconciled witha morality of social justice, especially in thepublic sphere?

There are, of course, libertarian philoso-phies that are not grounded in founda-tional individualism, and there are libertar-ian efforts to advance social justice usingfoundational individualist premises. (See,e.g., University of San Diego philosopherMatt Zwolinski’s “Bleeding Heart Liber-tarians” work.) And there are plenty ofdeontological, utilitarian, and other West-ern arguments for some ethic of commonprovision. But Henry can fairly argue that,as noble as these efforts are, they have notyet conclusively reconciled foundationalindividualism with social justice.

I take this as my former teacher givingus libertarians an assignment. Does foun-dational individualism require us to whollyabandon social justice? Do we relegate socialjustice to only the sphere of private moral-ity? Or can libertarianism support a publicethic of social justice? Struggling with thesequestions would be a fitting memorial toHenry’s life and work. R


This is a key insight if we are to under-stand Buchanan with reference to theintellectual and political world he inhab-ited. Buchanan the classical politicaleconomist was squarely outside the main-stream of economics but squarely insidethe mainline of economics stretchingback through Friedrich Hayek to AdamSmith, to use George Mason economistPeter Boettke’s characterization. He madeuse of equilibrium constructions, butBuchanan’s political economy was largelyclassical rather than neoclassical, empha-sizing economics as a science that stud-ies exchange and social processes rather

than resource allocation andthe efficiency properties ofequilibria. Buchanan wonthe Nobel Prize in 1986 forthis work, the most impor-tant application of which wasin the development of PublicChoice Theory, a body of the-ory and evidence that treats“politics as exchange” andthat makes the same assump-tions about political actionthat analysts typically makeabout commercial action.

Wagner goes on, then, toexplore the major themes inBuchanan’s intellectual sys-tem and the ways in whichpeople have and can applythem today. It is important tonote that while public choicecan be pithily summarized as“economics applied to poli-

tics,” public choice as Buchanan did itwas not simply neoclassical economicsapplied to politics. It was, rather, a resur-rection of classical political economy anda marriage between it and Italian publicfinance, which emphasized the politicalunderpinnings of governments’ taxingand spending choices. Buchanan’s publicchoice emphasized social processes, theinstitutions of exchange, and the incen-tives facing political and bureaucraticactors. Wagner refers to “Virginia PoliticalEconomy as Classical Political EconomyItalianized,” and writes that “The Virginia

A RT CA R DEN is professor of economics at SamfordUniversity.

Buchanan’s Big Idea✒ REVIEW BY ART CARDEN

From publishing trends in 2017, it seems like James Buchananmight be the official “recently deceased economist” of The Ageof Trump. He was the villain in Nancy MacLean’s fundamentally

flawed conspiracy tract Democracy in Chains (see “Buchanan the EvilGenius,” Fall 2017), and his misadventures with the administrationat the University of Virginia figured prom-inently in David Levy and Sandra Peart’sEscape from Democracy (see “The Discon-tented Animal,” Summer 2017).

Given the breadth, depth, volume, andmultidisciplinary importance of his contri-butions, it stands to reason, perhaps, thatthere would develop a field we might call“Buchanan Studies.” Buchanan’s studentand then longtime colleague and collabo-rator Richard Wagner is—with the possibleexception of Geoffrey Brennan—the scholarmost qualified to contribute to those stud-ies. In James M. Buchanan and Liberal PoliticalEconomy, Wagner explores some of Buchan-an’s most important ideas and how they arerelevant to 21st century political economy.

It is important to state at the outsetwhat this book is and what it is not. It isa discussion of Buchanan’s ideas and whythey might be relevant or useful to activescholars. It is not an “intellectual biogra-phy” of Buchanan in the strict sense, andWagner is clear on this. He makes muchof Buchanan’s influences, but he offersa topic-by-topic discussion of his ideasrather than a chronological account oftheir development, and his approach isfundamentally analytical. The book alsodiscusses the ideas’ place in intellectualhistory and 21st century political econ-omy. It draws from Wagner’s intimateknowledge of Buchanan the man and thescholar, as well as the collaborative workWagner and a generation of younger schol-ars have done developing what Wagnercalls “entangled political economy.” It is,as he puts it, his “interpretation of thecontemporary meaning and significance

of Buchanan’s oeuvre, as filtered throughmy 50-year association with him as a stu-dent, colleague, and coauthor.”

Political economist / Thisbook is not an exegeticalexercise, but it is still rel-evant to how we understandBuchanan as a product (ornot) of the time in which hewrote and his broader cul-tural influences. This takeson importance, even urgency,in light of MacLean’s thor-ough misunderstanding ofBuchanan’s overall program.

MacLean makes muchof Buchanan’s classical lib-eral sympathies, Tennesseeupbringing, and career spentmostly in Virginia. To her,Wagner might respond withthis passage:

Buchanan was a classi-cal political economistwho entered the schol-arly world during the heyday of theneoclassical period of economics.Consequently, he was often miscon-strued as a neoclassical economist withright-wing ideas. That view is wrong; itreflects the common tendency of peopleto interpret other people and eventsin terms of the main currents in playat the time. While Buchanan workedduring the heyday of the neoclassicalperiod in economics, he was a classicalpolitical economist in the style of FrankKnight and not a neoclassical economistof post-war Chicago vintage.

James M. Buchananand Liberal PoliticalEconomy: A RationalReconstruction

By Richard E. Wagner

220 pp.; LexingtonBooks, 2017


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theorists to a man focused on processand coordination, and not on resourceallocation.”

One big idea / Buchanan’s was funda-mentally an anti-elitist paradigm, whichis ironic given MacLean’s charge thathis system is but a thinly veiled reactionagainst racial egalitarianism as embodiedby the Brown v. Board of Education decision.Toward the end of the book, Wagner jux-taposes the egalitarianism of Buchananwith the elitism of John Maynard Keynesand notes that Buchanan’s ideas lendthemselves to a politics of “genuine liber-alism” as opposed to the “guided or con-trolled liberalism” of Keynes.

To the extent that Buchanan was “react-ing” to anything, it was “the presupposi-tions of Harvey Road”—the conceits ofKeynes and his coterie who thought them-selves intellectual aristocrats positioned tomake “the really important decisions” oneveryone’s behalf. Buchanan, by contrast,put no faith in experts and argued, forexample, that the Council of EconomicAdvisers, which had been established bythe 1946 Full Employment Act, should bedisbanded.

Wagner characterizes Buchanan as a“hedgehog,” borrowing from Isaiah Ber-lin’s The Hedgehog and the Fox (Weidenfeld& Nicolson, 1953). Hedgehogs, to Ber-lin, are thinkers with One Big Idea, whilefoxes are thinkers with lots of small ideas.He bases this characterization on the pat-tern set by Buchanan’s first paper, a 1949article in the Journal of Political Economytitled “The Pure Theory of GovernmentFinance: A Suggested Approach.” IfBuchanan was a hedgehog, though, hewas a foxy hedgehog, applying his OneBig Idea about the importance of rulesand groups to numerous settings. ToBuchanan, we cannot treat a state as anindependent unitary actor immune toincentives, and we have to peel back thelayers of the onion in order to really get atwhat is meant by a “self-governing” polity.

There are Adam Smith scholars, Fried-rich Hayek scholars, Karl Marx scholars,John Maynard Keynes scholars, Marcel

Proust scholars, and a whole host ofscholars who have dedicated their careersto exploring and understanding a singlethinker’s breakthrough insights. As aleading representative of the mainline tra-dition in the late 20th century, Buchananis as good a candidate as any to draw the

attention of specialists in intellectual his-tory, constitutional economics, politicaltheory, and social philosophy. For schol-ars seeking to acquaint themselves withhis ideas, James M. Buchanan and LiberalPolitical Economy is an indispensable start-ing point.

Occupational LicensingReform✒ REVIEW BY GEORGE LEEF

My word processing program objects: “bottlenecker” is not aword. But the authors of this book think it should be and Iagree. A “bottlenecker” is someone who tries to get govern-

ment officials to enact laws or regulations that obstruct new competi-tors from entering the market. Just as the neck of a bottle restrictsthe flow of liquid, so do such rules restrictthe flow of rivals. Occupational licensureis a favorite tactic, but not the only one.This book details the ugly tactics thatbottleneckers use to get their way andrecounts numerous legal battles that havebeen waged against them.

The book’s subtitle conveys the big mes-sage: people often try to game governmentfor power to exclude competitors, therebygaining private profit. Those efforts, whensuccessful, drive up costs for consumersand destroy entrepreneurial opportunitiesfor individuals who want to get ahead. Itis basic public choice theory that interestgroups will attempt and often succeed ingetting friendly politicians to minimizecompetition, but what Bottleneckers doesespecially well is put that theory into storiessure to hit the mark with ordinary readers.

Authors William Mellor (an attorneywho co-founded the Institute for Justice)and Dick Carpenter (director of strategicresearch there) begin with the dismayingfact that while back in the 1950s occupa-tional licensure was rare with only around5% of American workers subject to licens-ing, today roughly 33% of workers face

this requirement. Moreover, the ratchetkeeps moving upward as more and moregroups get politicians to impose licensing.Professional groups often wage multi-yearcampaigns involving top-notch lobbyistswhen they want a bottleneck in their field.Initiatives to de-license occupations arealmost unheard of.

Scare stories / Consider, for example, theinterior design profession. Most Ameri-cans would scoff at the idea that anyoneshould have to obtain a governmentlicense to be allowed to work as an inte-rior designer, but to those who are in thebusiness, keeping down the number ofnewcomers is important. The AmericanSociety of Interior Designers (ASID) hasbeen fighting for many years to get statelegislatures to enact at least “titling acts”(which prevent anyone who hasn’t passedthe required exams from advertising his orher services as “interior design”) or, betteryet, “practice acts” (which make it illegalfor an unlicensed person to do any workthat is deemed interior design). Annoyinglyenough, the ASID wheedled a $13,000grant from the National Endowment forthe Arts to develop its model legislation.

With this and many other examples,GEORGE LEEF is director of research for the James G.Martin Center for Academic Renewal.

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Mellor and Carpenter demolish the notionthat licensing stems from public demandfor protection against incompetent orunethical practitioners. The impetus forlicensing always comes from the groupitself, and one of the standard argumentsis that all the group’s members really wantto do is protect the public.

The authors tell the story of the pushfor interior design licensingin Florida, where the propo-nents argued that tragediescould ensue if unlicensedpeople were allowed to dotheir work. For instance,they said, unlicensed design-ers might use carpeting thatisn’t fire-resistant. Indeed,Florida had experienced sucha tragedy in a nursing home,but it had nothing to do withan “incompetent” designerchoosing the carpeting. Nevermind the facts, though—lob-byists won’t let a good scarestory go to waste.

Another revealing aspectof the ASID story is howstates waste resources inpolicing their laws. We learn,for instance, that the FloridaBoard of Architecture and Interior Designhired a law firm to investigate and root outthe supposed danger of unlicensed indi-viduals doing design work. The authorswrite, “Every year, the firm initiates pro-ceedings against hundreds of citizens andbusinesses both in Florida and outside thestate, in most cases for nothing more thansimply using the terms ‘interior design,’‘interior designer’ or even ‘space plan-ning’ without the board’s permission.”So it isn’t just consumers who suffer fromhigher prices when they deal with interiordesigners; taxpayers also suffer when stateresources are diverted into nothing morethan cartel protection.

Frustrating fight / In each type of bottle-necking they discuss, Mellor and Carpen-ter describe the legal challenges that havebeen brought against the laws. Some suits

have been successful; others have not. Inthe battle over interior design licensing,the most conspicuous case has been inFlorida, where designer Eva Locke, aCuban refugee, filed suit against the state’slicensure law. The Florida statute includedboth titling and practice regulations.

The district court ruled that the titlingregulation was a violation of the First

Amendment because it pro-hibited Locke from speakingto people about the natureof her work. But the courtalso ruled that the practiceaspect of the law was legal,despite strong evidence thatno public interest was servedby restricting interior designwork to those licensed by thestate. When Locke appealedthat decision to the Elev-enth Circuit, the result was adepressing instance of judi-cial deference. The judges saidthey wouldn’t “second guessthe legislature’s judgment asto the relative importance ofthe safety justifications.” Thatruling exemplifies the mainbarrier to legal action againstbottlenecking: the deeply

ingrained idea among judges that theyshould “let democracy work” rather thanintervene against patently absurd regula-tions stemming from one of democracy’sweak spots: its openness to special interestmanipulation.

Making a killing / Perhaps the most distress-ing of the stories Mellor and Carpentertell is about the funeral industry’s useof licensure to prevent competition thatwould save people money at a time whenthey’re particularly vulnerable to pressure.There is a lot of money to be made fromthe death of loved ones, and the soft-spoken, compassionate people who tellthe bereaved that they only want to bringthem solace turn into ferocious dragonswhenever someone threatens to diminishtheir profits.

The initial threat to those profits came

from the Federal Trade Commission. In1972, the FTC undertook an investiga-tion of the funeral industry and foundthat funeral directors routinely pressuredfamilies into purchasing high-cost caskets;misrepresented legal, cemetery, and crema-tory requirements; and even performedservices without permission from the fam-ily—billing them, of course.

The investigation led the FTC to pro-pound the “Funeral Rule,” meant torestrict unethical practices in the indus-try. Funeral directors fought the rule withintense lobbying in Congress and legalchallenges. Not until 1984 did the FuneralRule finally take effect. When it did, a mar-ket for lower-cost burial goods emerged. Tostifle that competitive threat, the funeralindustry turned to state regulation. Spe-cifically, they argued that only licensedfuneral directors should be permitted tosell caskets.

One man who ran into this regulatoryminefield was Pastor Nathaniel Craigmilesof Chattanooga, TN. His Baptist churchhad mostly poor and uneducated mem-bers. After his mother’s death, he discov-ered how inordinately expensive funeralswere and decided to save his parishionersfrom needing to “mortgage their homesto pay for a decent burial.” He started upa small business selling caskets at muchlower prices than what funeral homes inChattanooga were charging. Craigmilessecured the necessary local business per-mits, but he didn’t obtain a funeral direc-tor’s license because, of course, he wasn’trunning a funeral home. Then an officialfrom the state funeral board informed himthat without the license, his casket saleswere illegal. “You don’t have to buy a carfrom a mechanic. Why should you haveto buy a casket from a funeral director?”Craigmiles asked.

Obtaining the required license was fartoo costly for him to consider. Instead, hefiled suit against the state board, arguingthat its licensing rule was an unconstitu-tional deprivation of his right to earn anhonest living. In court, the funeral industrytried to defend the anticompetitive regula-tion by claiming that it was necessary to

Bottleneckers:Gaming the Govern-ment for Power andPrivate Profit

By William Mellor andDick M. Carpenter II

355 pp.; EncounterBooks, 2016


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protect public health and safety. Craig-miles countered that those arguments werebogus because it was legal for Tennesseeresidents to use homemade caskets andbodies could be buried without one. Thejudge rightly saw the funeral board’s argu-ments as utterly self-serving and ruled thatthe licensing requirement was invalid.

Astoundingly, once Craigmiles wasallowed to resume his business, he foundhimself threatened with bodily harm, hisstore windows broken, and his caskets dam-aged after being delivered to funeral homes.Even after his store mysteriously burneddown, he would not give in to the intimida-tion and instead opened two new stores.

The funeral industry wasn’t throw-ing in the towel, however. It appealed thejudge’s decision against its anticompeti-tive regulation to the Sixth Circuit. Butthe higher court was having none of theappellant’s arguments, concluding theTennessee legislature’s “measure to privi-lege certain businessmen over others at theexpense of consumers is not animated bya legitimate governmental purpose.” Thatwas an example of engaged rather thandeferential judging.

Don’t think that we have a free mar-ket in caskets nationwide. In other states,the funeral industry has prevailed, thanksto shameless lobbying to sway legislatorsand deferential judges on other courts. Forexample, Oklahoma’s identical regulationagainst casket sales by anyone other thana licensed funeral director was upheld bythe Tenth Circuit in 2004.

Conclusion / Other instances of bottle-necking that Mellor and Carpenter coverinvolve food trucks (where local politi-cians openly admit they want to protectbrick-and-mortar restaurants againstcompetition by imposing rules that pre-vent trucks from selling food nearby), hairbraiding (where stylists who do African-style hair braiding have been forced to getcosmetology licenses even though noth-ing taught in cosmetology programs isrelevant to this hair styling), and streetvending (where the interests of small ven-dors to make a modest living has been

sacrificed by politicians who prefer award-ing monopoly contracts to big business,especially around sports stadiums).

It’s worth noting that the politicianswho aid the bottleneckers include bothostensibly pro-market Republicans andpro-consumer Democrats. Don’t expectany philosophical consistency wheninterest groups say they’ll support you inexchange for keeping competition out oftheir business.

Every one of these stories will raise the

blood pressure of Americans who believe infree enterprise. As the authors say: “Break-ing open bottlenecks is about more thaneconomic growth. It is also about creatinga just society built, in part, on the right toearn an honest living free from arbitraryand unnecessary government encroach-ment.” This is an issue where free marketadvocates should be able to make commoncause with progressives, since both campspresumably dislike the abuse of govern-ment for private profit.

Patriotism as Stealing fromEach Other✒ REVIEW BY PIERRE LEMIEUX

In his new book Clashing over Commerce, Dartmouth College tradeeconomist and economic historian Douglas Irwin “explores theeconomic and political factors that have shaped the battle over

U.S. trade policy from the colonial period to the present.” The bookdivides American trade history into three periods: from the Warof Independence to the Civil War; fromthe Civil War to the Great Depression; andfrom the Depression until today.

Founding to 1865 / Irwin presents the firstbroad period as characterized by a view oftariffs as a mere tool for raising govern-ment revenue. Until the creation of theincome tax in 1913, tariffs provided thefederal government with most of its money.

The founders, writes Irwin, “favoredfree and open commerce between nationsand the abolition of all restraints and pref-erences that inhibited trade.” Like AdamSmith, they opposed the mercantilist—that is, protectionist—theories of the time.But that opposition was counterbalancedby some exceptions that Smith himselfidentified. One was concerns over nationaldefense. Another was a desire for reciproc-ity—that is, equally open and nondiscrimi-

natory trade with other countries—andpossibly to retaliate through trade barriersin order to foster reciprocity (althoughSmith himself doubted that retaliationwould work). After Independence, theBritish government discriminated againstAmerican exports. The adoption of theConstitution was due in part to the per-ceived necessity of negotiating trade reci-procity between the 13 states as a groupand the British government.

A tension between free trade and pro-tectionism appeared early in the Repub-lic. In 1791, Treasury Secretary AlexanderHamilton produced his Report on the Subjectof Manufactures, which proposed tariffs andsubsidies to foster domestic manufactur-ing given the “numerous and very injuri-ous impediments” from Europe. As timewent by, however, Hamilton’s Federalistsbecame more free-trade, while the Repub-licans became more protectionist.

At the request of President Thomas Jef-ferson after clashes with the British Navy,Congress imposed a trade embargo against

PIER R E LEMIEUX is an economist affiliated with theDepartment of Management Sciences of the Université duQuébec en Outaouais. His forthcoming book on free tradewill be published by the Mercatus Center at George MasonUniversity.

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Britain in 1808–1809. Jefferson, who hadwritten in 1787 that “a little rebellion nowand then is a good thing,” adopted anuncompromising law-and-order attituderegarding the enforcement of the embargo.At the peak of the enforcement effort,American ships could not leave port, evenfor domestic destinations, without officialclearance. “It is important,” he instructed histreasury secretary, “to crush every exampleof forcible opposition to the law.” AlthoughIrwin does not put it this way, that was anearly instance of Leviathan’s mission creep.

Figure 1 (p. 68) reproduces Irwin’sgraph showing the evolution of the aver-age tariff (or duty) on total imports (whichinclude the free-entry list) andon dutiable imports. In bothcases, the tariff increasedfrom less than 15% in 1790to about 60% in 1830, afterthe 1828 “Tariff of Abomina-tions.” Tariffs were raised onraw materials (such as wool,hemp, and flax) and, to pro-tect domestic producers ofgoods made from those mate-rials, on similar importedconsumer goods. Interven-tion begets intervention.

These tariffs sowed discordbetween the North, wheremanufacturers benefited, andthe South, which consumedprotected manufacturinggoods while exporting cottonand tobacco. Tariff tensions led to threatsof secession from South Carolina and thenullification crisis of the early 1830s.

The figure shows how tariffs werereduced from then on until the onset ofthe Civil War, “a quarter-century of gradu-ally declining tariffs” under the Demo-crats. In 1859, the average tariff was lessthan 20%. Thus, according to Irwin, theidea that tariffs were a cause of the South’ssecession is indefensible.

1865 to 1932 / The Civil War “broughtabout a major shift in U.S. trade policy,”launching a second broad period in Ameri-can trade policy. The “temporary” tariffs

imposed during the war “became the newstatus quo.” As shown in Figure 1, theperiod from the Civil War to the GreatDepression was generally characterized byhigh tariffs on dutiable imports (about40% to 50%). What pushed down the aver-age tariff on total imports is that in 1873Congress put coffee and tea on the duty-free list. The Underwood–Simmons tarifflaw of 1913, under the Democratic admin-istration of Woodrow Wilson, dramaticallyreduced tariffs, but they were pushed backup in 1922 by a Republican Congress. Asduring the 19th century, the Republicansremained the party of protection.

Many economists (perhaps most ofthem) believe that tariffsdid not contribute to therapid industrialization ofthe United States in the19th century. One promi-nent argument for this wasmade by Frank Taussig inhis renowned Tariff History ofthe United States, which wentthrough several editionsbetween 1889 and 1931. Irwinargues that the large, diversi-fied, and free internal market,with well-protected propertyrights, was sufficient to gener-ate competition and growth.Moreover, open immigrationcompensated for the highpost-bellum tariffs. Produc-tivity showed especially fast

growth rates in non-traded sectors such asservices, including transportation, utilities,and communications. Add to this plentifulnatural resources such as iron ore, copper,and petroleum, and we have more thanenough explanations for the rapid devel-opment of America.

By the early 20th century, the UnitedStates was the world’s leading manufacturerand had been a net manufacturing exporterfor a decade. By that time, America’s per-capita income quite certainly exceededBritain’s by a substantial margin. “Between1890 and 1913,” explains Irwin, “real wagesincreased roughly 30 percent because laborproductivity increased by about 30 percent.”

The Democratic administration ofWoodrow Wilson presided over tariff reduc-tions during the 1910s. But even when theycontrolled the federal government, theDemocrats were divided and, at best, luke-warm anti-protectionists. At any rate, theycould not break the Republican old guardand the interests of the protected manu-facturers it represented. The Republicansraised tariffs again in 1922. The infamous“antidumping” measures—a perfect excusefor protectionism that has survived untiltoday—appeared in the 1922 tariff law. Inthe 1928 election (which made RepublicanHerbert Hoover president), the differencebetween the two parties shrank as the Dem-ocrats became more protectionist.

The debates of the 1920s illustrateda frequent conflict among industrialinterests. Western ranchers wanted highduties on hides, while shoe manufacturersfrom Massachusetts did not. The chemi-cal industry wanted an embargo on dyeimports, while the textile industry did not.And so forth. Protectionism is always sec-tional and conflictual.

Perhaps the most infamous protection-ist measure in U.S. history was the Smoot–Hawley tariff of 1930, which took half ofits name from Rep. Reed Smoot of Utah. Acommitted protectionist, Smoot was after“internationalists who are willing to betrayAmerican interests and surrender the spiritof nationalism,” as he himself declared. Thelaw increased the average tariff by about6 percentage points, which the deflationof the Great Depression doubled (becausespecific tariffs translated into higher pro-portional tariffs as import prices decreased).

Economists broadly opposed Smoot–Hawley, with 1,028 of them signing a for-mal petition against it. According to Irwin,today’s consensus among economists isthat the Smoot–Hawley tariff played onlya small role in exacerbating the GreatDepression, although it did provoke retali-ation from many foreign countries.

1932 to today / In Irwin’s periodization,the third broad phase starts under theadministration of Franklin D. Roosevelt.FDR was less suspicious of free trade

Clashing over Com-merce: A History ofU.S. Trade Policy

By Douglas A. Irwin

832 pp.; University ofChicago Press, 2017


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than many of his precursors. He seemedto understand that solving the GreatDepression required more internationaltrade—even if, paradoxically, he tried tolimit domestic free trade.

Irwin describes the period from 1932until today as a quest for reciprocity—thatis, the reduction of American trade barriersas a bargaining chip for other countries todo the same. In a sense, it was a return tothe first period of American history.

One important pro-trade developmentearly in this period was the adoption of theReciprocal Trade Agreements Act (RTAA)in 1934, which empowered the presidentto negotiate lower duties with the gov-ernments of other countries. The RTAAreduced the capacity of special intereststo push their protectionist causes in Con-gress. Irwin also underlines the influenceof a few pro-trade individuals such asCordell Hull, a congressman from Ten-nessee who became Roosevelt’s secretaryof state. Sen. Paul Douglas of Illinois laterwrote of Hull, “Thus, the shrewd, hillbillyfree trader and militia captain from theTennessee mountains outwitted for benefi-cent ends the high-priced protectionistlawyers and lobbyists of Pittsburgh andWall Street.” Everybody, however, seemedto go out of their way to emphasize thatthey were not proposing free trade.

The same protectionist fears wereexpressedthenas today. In1945,RepublicanRep. Harold Knutson of Minnesota askedrhetorically, “Pleasetellmehowyouaregoingto provide jobs if you transfer our payrollsto Czechoslovakia, France, the United King-dom, China, Germany, Russia, and India?” Iwish we had more hillbilly free traders.

In 1941 Hull declared that, after thewar, “extreme nationalism must not againbe permitted to express itself in excessivetrade restrictions,” and promoted nego-tiations toward that goal. John MaynardKeynes, who was a trade negotiator forthe British government, thought thatfree trade would be replaced by economicplanning and balked at what he saw as theState Department’s belief in “the virtues oflaissez-faire in international trade.”

The international negotiations resulted

in the adoption of the General Agreementon Tariffs and Trade (GATT) in 1947 underPresident Harry Truman. American tariffson dutiable imports were reduced by 21%on average. Combined with the increase inimport prices caused by post-war inflation,this resulted in the average dutiable tariffdeclining from more than 30% in 1944 to13% in 1950.

As shown in Figure 1, tariff reductionscontinued with new rounds of GATT nego-tiations. Writes Irwin, “The early postwarperiod brought about the most momen-tous shift in U.S. trade policy since thenation’s founding.” Many factors contrib-uted, including a change in the Republi-cans’ protectionist absolutism, favorablepublic opinion even among trade union-ists, and foreign policy concerns.

By the mid-1960s, however, more intense

international competition—partly as a resultof the container revolution that cut the costofseashipping—ledtoprotectionist tensionsresurfacing in America. In 1970, over a pro-tectionistbill requestedbyPresidentRichardNixon and introduced by Democratic Rep.Wilbur Mills of Arkansas, Republicans andDemocrats finished switching sides, theDemocrats replacing the Republicans asthe party of protection. Democratic Partyconstituents, including organized labor, feltmore affected by import competition. TheU.S. government imposed import restric-tions to protect the apparel, shoe, and steelindustries—often against GATT rules.

The Trade Act of 1974 made antidump-ing complaints by domestic companieseasier. In 1976, by some calculations, theU.S. market was more protected by non-tariff barriers than the European Eco-nomic Community and Japan, althoughexports were less subsidized in America.

A severe double-dip U.S. recession

from 1979 to 1982 combined with thesignificant appreciation of the dollar (frommonetary policy) to squeeze domesticproducers of traded goods, particularly inmanufacturing. Despite his professed faithin “free trade”—which at least he daredcall by its name!—Ronald Reagan and hisadministration made many compromisesto protect producers of automobiles, steel,textiles, apparel, and some other goods,even invoking an “unfair surge in imports.”Japan was considered the big bad wolf ofthe times, much like China is today.

It was calculated that American con-sumers’ annual cost from textile andapparel protection amounted to more than$100,000 per job saved, several times theaverage wages in those jobs. A more activeopposition from American purchasers ofintermediate goods such as textile and steel

helped contain the pro-tectionist pressures.

The 1990s saw majorinitiatives to roll backtrade barriers, includ-ing the conclusion ofthe North AmericanFree Trade Agreement(NAFTA), the comple-

tion of the Uruguay Round of GATT, thecreation of the World Trade Organization(WTO), and the welcoming of China intothe world trade system. Despite his party’sprotectionist drift, Democratic PresidentBill Clinton opposed protectionism andcontributed much to the adoption ofNAFTA. Public opinion also seemed tomove away from protectionism but, as wewould soon see, not irrevocably so.

In the 2000s, protectionist pressuresrose up again with the so-called “Chinashock” after China joined the WTO. Par-tisanship and division started growingagain, reaching their peak (thus far) withthe election in 2016 of perhaps the mostprotectionist president in U.S. history. Fig-ure 1 suggests that the reduction in tariffshas plateaued, but note that these data donot incorporate the increasing use of so-called “trade remedies” or special dutiesto compensate for alleged dumping andforeign subsidies.

FDR seemed to understand that solvingthe Great Depression required moreinternational trade—even as he tried tolimit domestic free trade.


Interpretations / It is possible, I suppose,for a reader to finish Clashing over Com-merce with an optimistic outlook forAmerican trade policy or, at least, with amixed sentiment. After all, America hasbeen much more protectionist in the pastthan recently.

But what is surprising, at least for anamateur student of American history, isthe nearly continuous protectionist ten-dency of the U.S. government from theFounding to the present time and, whenfree trade was defended, the modestyand prudishness of its defenders. In theearly 1830s, Sen. Henry Clay, inventor ofthe “American [protectionist] system,”stated that “to be free,” trade “should befair, equal, and reciprocal.” So-called “fairtrade” is not a recent invention. More oftenthan not in the 19th century, the benefitsof international trade were understood toattach exclusively to exports, like in theold mercantilist thought. There was notmuch understanding that tariffs are a taxon domestic consumers.

There were some happy exceptions.Treasury Secretary Robert Walker wrotein 1845:

That agriculture, commerce, and navi-gation are injured by foreign restrictionsconstitutes no reason why they wouldbe subject to still severer treatment, byadditional restrictions and countervail-ing tariffs, at home. … By countervailingrestrictions, we injure our own fellow-citizens much more than the foreignnations at whom we propose to aimtheir force.

Another leader who understood, PresidentGrover Cleveland, told Congress in 1887:

Our present tariff laws—the vicious,inequitable, and illogical source ofunnecessary taxation—ought to be atonce revised and amended. These laws,as their primary and plain effect, raisethe price to consumers of all articlesimported and subject to duty by pre-cisely the sum paid for such duties.

Gerald Ford boasted on one occasion thathe was “a proponent of free trade.”

At some point in the 19th century,political battles organized around parti-san lines, even though both the Republi-can and Democratic parties were generallymildly interventionist, more or less protec-tionist, and rather devoid of philosophicalfoundations. The big difference is that theRepublicans were protectionist becausethey defended the special interests of theirelectoral clienteles, such as manufacturersin the Northeast, and that the Democratswere less protectionist because they repre-sented different electoral clienteles, suchas the exporting South. A Republican con-gressman summarized the position of thetwo parties after the Civil War by sayingthat “the Democratic doctrine is a tariff forrevenue with incidental protection, whilethe Republicans advocate a tariff protec-tion with incidental revenue.”

All of this should remind us that freetrade is free trade. The essence of protec-tionism is the state’s forbidding its owncitizens or subjects to import what theywant at conditions that they have individu-ally determined to be the best available,and to forbid them to invest in foreigncountries as they want, given the condi-tions they get there. Foreign interferenceshould not be a reason for the governmentof a free country to submit its own citizensto more coercion. In a free country, freeinternational trade should be a no-brainer,just like domestic trade.

Clashing over Commerce illustrates manyelementary economic errors made by theprotectionists. The Republicans’ 1908 presi-dential platform included the plank, “Thetrue principle of protection is best main-tained by the imposition of such duties aswill equal the difference between the cost ofproduction at home and abroad, togetherwith a reasonable profit to American indus-tries.” As Irwin notes, this idea of equalizingcosts of production ignores the fact thatdifferences in the (comparative) cost of pro-duction constitute “the very basis for inter-national trade.” If two parties can producethe same things at the same costs, thereis no benefit to be derived from exchange.

Clashing over Commerce illustrates theproblem of collective action in trade policy.

Producers’ benefits are concentrated, whileconsumers’ costs are diffuse. The cost ofthe textile and apparel protection for theaverage American household was $63 peryear from the 1970s until the early 2000s.Consequently, while producers (capital-ists and workers) lobbied the government,no consumer had a sufficient incentive toparticipate in lobbying and protests, evenif the sum of the producers’ benefits wasmuch lower than the total cost imposed tomillions of consumers. Left unconstrained,the state develops into a coalition of pro-ducers, not an association of consumers.

International trade rules and insti-tutions (like GATT and the WTO) cancompensate for this bias. Another note ofoptimism is that trade integration leadsimporters of intermediate goods andlarge retailers to counterbalance the con-centrated interests of import-competingindustries. We see this phenomenon in thecurrent debate on NAFTA, where manycorporations side with consumers.

The worst in politics / When the demandsof special interests are channeled througha welcoming political process, logrolling(that is, political horse trading) on a grandscale engulfs politicians. In 1909, TheodoreRoosevelt chose to drop his push for tariffreform in exchange for Congress allowinghim to expand the Interstate CommerceCommission. A more dramatic example:the so-called “dirty compromise” adoptedby the 1787 Constitutional Conventionsaw the Southern delegates grant the fed-eral government the right to regulate inter-national commerce in exchange for contin-uation of the slave trade (plus a prohibitionon export taxes). A common form of log-rolling was for a congressman to trade hisapproval of some tariff pushed by anothercongressman in return for the latter votingfor the former’s own preferred tariff.

During the 2005 congressional debateson the Central American Free Trade Agree-ment (CAFTA), Rep. Robin Hayes of NorthCarolina’s 8th District announced, “I amflat-out, completely, horizontally opposedto CAFTA.” But Republican Speaker of theHouse Dennis Hastert persuaded Hayes to


I N R E V I E W

switch his vote by telling him: “In returnfor your vote, we will do whatever is neces-sary to help the people in the 8th District.”Gordon Tullock, the famous public-choicetheorist, explained how this logrolling canproduce policies that few people reallywant and impose a net cost for each citizen.(See Government Failure: A Primer in PublicChoice, Cato Institute, 2002.)

David Wells, a protectionist nominatedby Congress as special commissioner of therevenue in 1866, was shocked to discoverhow private interests operated in Congress.He admitted in private correspondence, “Ihave changed my ideas respecting tariffsand protection very much since coming toWashington.” There was nothing rationalin the way that Congress treated protectiondemands; political greed was the motive.

Although Irwin may not go that far,Clashing over Commerce shows how protec-tionism brings out the worst in politics.For example, many congressmen secretlyapproved the accession of China to theWTO, but did not want to be seen vot-ing for it if they knew it would otherwisepass. U.S. Trade Representative CharleneBarshefsky remarked that “the vast major-ity of members know this is absolutely theright thing for us to do,” but that “doesn’tnecessarily mean … they will vote affirma-tively.” When Congress discussed tariffbills in detail, members tried to include

so-called “jokers,” that is, intentionally obscure formulations and convoluted definitions in order to sneak in the pro-tectionist measures they wanted.

Protectionism dresses in the clothes of nationalism. James Swank, a driving force of the American Iron and Steel Association formed in 1864, wrote that “protection in this country is only another name for Patriotism,” and that “it means our coun-try before any other country.” “I am an American, and therefore I am a protection-ist,” proclaimed Samuel Randall, a Penn-sylvania Democrat and House Speaker in the late 1870s. Donald Trump claimed that foreigners are “stealing our compa-nies,” which is a nationalist fabrication.

In the 1870s, Rep. Samuel Cox of New York identified the thieves better. He understood that protectionism favors parts of the country at the expense of other parts. He declared (in a quote that by itself is worth the price of Irwin’s book):

Let us be to each other instruments ofreciprocal rapine. Michigan steals on cop-per; Maine on lumber; Pennsylvania oniron; North Carolina on peanuts; Mas-sachusetts on cotton goods; Connecticuton hair pins; New Jersey on spool thread;Louisiana on sugar, and so on. Why notlet the gentleman from Maryland stealcoal from them? True, but a comparative

few get the benefit, and it comes out ofthe body of the people.

Protectionism leads to incoherent ifnot absurd results. In 1962, the EuropeanEconomic Community doubled its tariffon imported poultry, leading to what wasdubbed “the chicken war.” The U.S. govern-ment retaliated with higher duties on othergoods, including a 25% tariffon light trucks.The chicken war has long subsided, but thetruck tariff persists to this day. The Orga-nization of Petroleum Exporting Countries(OPEC) was formed after the U.S. govern-ment imposed an import quota on oil in thelate 1950s, and the same OPEC imposed anoil embargo on America in 1973!

Perhaps the best illustration of the con-sequences of compounding regulation isthe sugar import quotas, which led farmersin Central America and the Caribbean “tostop producing sugar and start cultivatingillegal narcotics that were smuggled intothe United States, starting a war with drugtraffickers,” Irwin explains. Or consider theU.S. government’s deficits in the 1970s andearly 1980s, which pushed up the dollar(through foreign borrowing), stimulatedimports, harmed American exporters, andfueled protectionist demands to the samegovernment.

In the 19th century as today, econo-mists who defended trade were attackedand ridiculed by populist politicians.Republicans rejected the theory of com-parative advantage, described by one ofthem as “the refinement of reasoning tocheat common sense.” Sen. Henry Hatfieldof West Virginia blasted academic econo-mists: “Cloistered in colleges as they are,hidden behind a mass of statistics, thesemen have no opportunity to view the prac-tical side of life in matters pertaining toour industrial welfare as a nation.”

Toward the future / I fear that the historyof American trade policy does not augurwell for the future of free trade. But I maybe wrong, and I hope to be.

On one hand, it is true that the integra-tion of supply chains has generated strongbusiness interests against protectionism.

1790 1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1990 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 20100

10

20

30

40

50

60

70%

Tariff

(Pre

cent

)

Dutiable importsTotal imports

Figure 1

AVERAGE TARIFF ON IMPORTS, TOTAL AND DUTIABLE,UNITED STATES, 1790–2015

Sources: U.S. Census Bureau, U.S. International Trade Commission, and Doug Irwin.


Perhaps organized interests will end upaligned with what economists have knownsince David Hume and Adam Smith: freeinternational trade is in the interest of con-sumers and the vast majority of individuals.

On the other hand, the ideal of freetrade does not seem to have become morepopular. Irwin himself rings an alarm:“What used to be called ‘trade agree-ments’ in the 1930s became ‘free-tradeagreements’ in the 1980s and then werelabeled ‘partnerships’ in the 2010s due tothe negative connotation that ‘free trade’now has in many quarters.”

And “free trade” has become less free as“partnerships” are now expected to includelabor and environmental requirements andeven provisions regarding such matters asgender issues. “Fair trade,” which is tradeaccording to the latest political fads, is notfree trade. Irwin notes a very importantpoint: the recent orientation of trade agree-ments toward regulatory harmonizationhas politicized them and rendered themmore likely to provoke political resistance.And the outlook for free trade has furtherdeteriorated with the current mercantilistadministration in the United States.

American trade history has witnessedno great debate on unilateral free trade,the idea that whatever other governmentsdo, ours should allow us the freedom toimport and invest as we want (“us” mean-ing each individual or group privately). It isnot far from the truth to say that the clos-est to trade freedom that Americans evergot was the truncated alternative betweenreciprocity and protectionism. That mostother countries have been no better ishardly a cause for optimism.

Whatever predictions one may drawfrom two and a half centuries of Americantrade history, and whatever the points onwhich one might disagree with Irwin, Clash-ing over Commerce is a very impressive book.Besides a detailed history of trade policy,it provides a general picture of Americanpolitical and economic history. It is moreimpressive a book than Taussig’s was a cen-tury or so ago. Let’s hope that like Taussig,Irwin will update this book and publishnew editions as time rolls on.

A Mixed Bag✒ REVIEW BY DAVID R. HENDERSON

In 2014, French economist Jean Tirole, chairman of the ToulouseSchool of Economics and the Institute for Advanced Study inToulouse, won the Nobel Prize in Economics. Although he is well

known within the increasingly technical economics profession, Tiroleis not well known to non-economists. This 500-plus-page tome may

DAV ID R . HENDER SON is a research fellow with theHoover Institution and professor emeritus of economicsat the Graduate School of Business and Public Policy at theNaval Postgraduate School in Monterey, CA. He is the editorof The Concise Encyclopedia of Economics (Liberty Fund, 2008).He blogs at www.econlog.econlib.org.

change that. Written for a general audi-ence, it covers a wide range of issues,including those on which he has pub-lished professionally and those on whichhe has not but still has much to say. Thetopics include the effects of free trade,French unemployment, the role of thestate, financial bubbles, the Greek eco-nomic crisis, and regulation of industries.

It’s hard to generalize about Tirole’sviews. On the one hand, he understandsthe powerful role of incentives, under-stands why free trade is good for a coun-try, thinks through the unintended con-sequences of legislation and regulation,and understands that the political systemis filled with perverse incentives. On theother hand, he favors some highly intrusiveregulations in the labor market, has toomuch confidence in the ability of econo-mists and governments to improve on freemarkets, misunderstands how to judge thetightness or looseness of monetary policy,misstates the nature of externalities, anddoesn’t seem to understand adverse selec-tion in insurance markets.

Value of markets / To illustrate how think-ing about incentives and unintended conse-quences can help inform good policy, Tiroleconsiders a hypothetical case in which anongovernmental organization (NGO)“confiscates ivory from traffickers who killendangered elephants for their tusks.” TheNGO can either destroy the ivory or sell it.Tirole points out that most people wouldadvocate destroying the ivory. But he urges

the reader to think further. Destroying theivory means that the supply of ivory is lowerthan otherwise, making the price higherthan otherwise. How does a higher priceaffect the incentives of poachers? That’sright: it encourages them to kill moreelephants. Another example, which manyeconomics professors use in class, is the per-verse effects of price ceilings. Not only dothey cause shortages, but also, as a result ofthese shortages, people line up to purchasethe scarce provisions and thus waste timein queues. The time spent in queues wipesout the financial gain to consumers fromthe lower price, while also hurting the sup-pliers. No one wins and wealth is destroyed.

Tirole, like most economists, is stronglypro–free trade. He argues that French con-sumers gain from freer trade in two ways: itexposes French monopolies and oligopo-lies to competition; and goods importedfrom low-wage countries are cheaper. Onthe former, Tirole notes, “Renault andPeugeot-Citroen sharply increased theirefficiency” in response to car imports fromJapan. He estimates that the monthly gainfrom free trade per French household isbetween 100 and 300 Euros. That trans-lates to an annual gain per householdranging from $1,400 to $4,200.

Incidentally, when economists refer toeconomics as “the dismal science,” theyalmost always get the origin of that termwrong. Tirole gets it right. He explains thatThomas Carlyle, in an 1849 publicationcalling for bringing back slavery, calledeconomics the dismal science because theeconomists of the time strongly opposedslavery. The economists who dominatedin 1849, although Tirole doesn’t mentionthis, were strongly pro–free market.R


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Economists, including Tirole, have beenvery critical of the French government’slabor policies. Their regulations make ithard for employers to fire people, and thismakes employers less likely to hire peoplein the first place. The result: unemploy-ment in France has not fallen below 7% atany time in the last 30 years. This especiallyaffects young people: the unemploymentrate for 15–24 years old was a whopping24% at the time Tirole wrote this book.Their employment rate—the percent ofthose in the age group who had jobs—wasa dismal 28.6%, compared to the OECDaverage of 39.6%, Germany’s 46.8%, andthe Netherlands’ 62.3%.

To solve this problem, Tirole advocatesgrandfathering job protection for currentemployees but getting rid of the regula-tions that protect newly hired workersfrom being fired. But he doesn’t stop there.He argues that because employees “are notresponsible for and have no control overtechnological change or demand shocksfaced by their employers,” they must “beinsured against the risk that their jobsmight become obsolete or simply unprof-itable.” So he wants to maintain the cur-rent unemployment insurance system.Nowhere in the relevant chapter does hesuggest reducing France’s duration ofunemployment benefits, which is now twoyears for people under age 50 and threeyears for people over age 50.

Tirole recognizes that the current sys-tem gives the employer an incentive to offi-cially “fire” an employee who actually quits.The employee gains and the employer losesnothing by firing. His solution is to chargeemployers who fire employees an amountreflecting the cost that the unemploymentinsurance system imposes on French taxpay-ers. This would probably work better thanthe current system, but it is awfully intrusivecompared to, say, reducing both the amountand duration of unemployment benefits.

Government intervention / Throughoutthe book, Tirole shows his understandingof basic public choice. He tells of a 1999report by French economist Jean-JacquesLaffont to an audience of “senior officials,

academics, and politicians” discussing theneed to reduce obstacles to youth employ-ment. The reaction was negative. One criticclaimed that Laffont was likely to corruptFrench youth. And what had Laffont said?Writes Tirole, “Politicians and officialsrespond to the incentives they face” and“the way government is orga-nized should take this realityinto account.”

Unfortunately, he him-self fails to follow throughconsistently on this under-standing. In the chapter onfinance, he writes, “The roleof the economist is to helpmitigate market failures.”One can accept that that isone role of economists, butis it the role? To say so is toset up economists as criticsof markets and not as criticsof government policies. For-tunately, even though he saysthat is the role of economists,he shows in much of the restof the book that he is also a critic of gov-ernment intervention.

One type of market failure that mosteconomists recognize is externalities. Atone point, though, Tirole finds an exter-nality where there isn’t one. He considersa bank that holds a risky asset whose valuefalls. When that happens, the bank’s share-holders lose, the bank’s creditors lose, and“perhaps also its employees and borrowers”lose. All potentially true. Then he writes,“This is a negative externality affecting allthe stakeholders.” But consider all these“stakeholders.” First, shareholders suffer,but they invested in the bank knowing thatthere was a risk. Creditors may suffer, butthey lent tothe bank knowingthat therewasa risk. Employees may suffer, but they knewthere was a risk when they decided to workfor the bank. As for borrowers, divide theminto current borrowers and potential futureborrowers. Current borrowers may suffer ifthe bank calls in their loans, but they knewthat was a risk when they borrowed. Futurepotential borrowers may find themselvesunable to borrow from the bank in the

future if it’s in bad enough shape, but is itreally an externality when a bank’s decisionslimit its business with future customers?

Tirole does add, “Moreover, the bankmight be able to continue borrowingdespite the risk, if lenders think the gov-ernment will bail out the bank if it gets

into difficulties.” This is theproblem and the governmentcreates the externality. But the“Moreover” is misplaced. Thegovernment here is the solesource of the externality.

Finance / In his discussion oflast decade’s financial crisis,Tirole puts part of the blameon monetary policy for cre-ating a real estate boom. Hegets it wrong, though, claim-ing that monetary policy ledto abnormally low interestrates. Monetary policy can-not keep interest rates lowfor long unless it is gearedtoward creating low inflation

or even deflation, thus reducing nominalinterest rates by reducing expected infla-tion. The cause of the low interest rates—asformer Federal Reserve chairman Ben Ber-nanke recognized and as Jeffrey Hummeland I described in “Greenspan’s MonetaryPolicy in Retrospect” (Cato Policy Report,November 2008)—was a surge of saving byAsian countries and elsewhere, resultingin more money available for lending andinvestment. Monetary policy did affect thefinancial crisis in the United States, but bynot being loose enough. As Hummel wrotein “Explanation versus Prescription” (CatoUnbound, Sept. 21, 2009):

Beginning with the Fed’s creation ofthe Term Auction Facility in December2007, nearly every dollar that Bernankeinjected into financial institutions wassterilized with the withdrawal of dollarsthrough the sale of Treasury securities.Not until September 17, 2008, did apanicked Fed finally set off a monetaryexplosion, doubling the base in lessthan four months.

Economics for theCommon Good

By Jean Tirole

576 pp.; PrincetonUniversity Press, 2017


In various places in the book, Tirolediscusses financial bubbles. There is a ques-tion, even after the fact, about whether abubble did in fact occur: was it a bubble, ordid some subtle change in fundamentalslead to a reduction in value? Even if onegrants after the fact that, yes, it was a bub-ble, can one identify a bubble in advance?That’s what really matters.

To his credit, Tirole doesn’t seem confi-dent that one can. He does cite 2013 NobelPrize winner Robert Shiller, who claimedbefore the fact that the real estate marketwas in a bubble. But he doesn’t point outthat Shiller claimed that stock prices werein a bubble in 2000, when the Dow-JonesIndex stood just below 12,000. It is nowabove 22,000. And that understates thegain from holding stocks because manyholders reinvest the dividends. Had I soldmy stocks in response to Shiller’s 2000warning, I would be a much poorer man.Tirole also mistakenly labels paintings byPicasso and Chagall as bubbles. The aes-thetic value, he argues, “could be replicatedfor a few thousand dollars using moderntechnology,” which he believes shows theoriginals are overpriced. His claim ignoresa basic fact from economics: values are sub-jective. By their willingness to pay millionsfor the original painting, people show thatthey do, indeed, value it highly. They wouldnot value a copy as much.

Industrial organization / Much of Tirole’sresearch is in the economics of indus-trial organization, and in his chapterson related topics he shows much insight.In writing about industrial policy, forexample, he questions whether smalland medium-sized enterprises need anyspecial treatment from government and,instead, suggests removing obstacles thatgovernments put in their way. He pointsout that when a French firm moves from49 to 50 employees, it faces 34 additionallegal obligations. Sure enough, in a chartin his book showing the number of enter-prises with various numbers of employees,a spike occurs at 47 to 49 employees, andthen the number of firms with 50 to 69employees is much lower.

Although Tirole believes in antitrustlaws to limit monopoly power, he points outthat regulators must be cautious in bring-ing the law to bear against firms in “two-sided markets.” An example of a two-sidedmarket is a manufacturer of videogameconsoles. On one side are game developers;on the other are game players. He notes thatit is very common, and not indicative of alack of competition, for a company in sucha market to set low prices on one side of themarket and high prices on the other. But,he writes, “A regulator who does not bear

in mind the unusual nature of a two-sidedmarket may incorrectly condemn low pric-ing as predatory or high pricing as exces-sive, even though these pricing structuresare adopted even by the smallest platformsentering the market.”

In his discussion of competition, Tirolerefers to Joseph Schumpeter’s concept of“creative destruction.” The new product orproduction method makes consumers sub-stantially better offbut, in doing so, upendsthe old order. He is nervous, though, aboutrelying only on creative destruction, seem-ing to want “vigorous competition betweencompanies at a point in time” rather thansettling for a situation in which “today’sdominant firm is replaced by another thathas made a technological or commercialleap.” But what he misses is a point that,admittedly, Schumpeter didn’t make clearbut left implicit: having vigorous competi-tion at a point in time reduces the incentivefor firms to invest in the “technological orcommercial leap.”

Risk / In his discussion of insurance, Tiroledisplays a misunderstanding of adverseselection. Adverse selection occurs wheninsurers are not able to distinguish betweendegrees of risk and, therefore, don’t set pre-

miums based on risk. When people buyinginsurance know their own risk better thanthe insurance company does, a large per-centage of low-risk people find the insur-ance unattractive, while a large percentageof high-risk people find it attractive. Theresult: the selection of buyers is adverse tothe insurance company. The straightfor-ward solution is for insurance companiesto reduce the asymmetry by getting moreinformation about potential customersand then pricing accordingly. But, writesTirole, “Information kills insurance,”

meaning that costswon’t be borne equallyby a large insurance poolof customers with differ-ent risk levels. But thisdoesn’t kill insurance;what does is governmentrequirements that insur-ance companies not be

allowed to price for risk.Tirole also seems not to understand

insurance pricing. He writes, “I can get apolicy specifying a reasonable premium toinsure my house because the chances thatmy house will burn down are about thesame as the chances that your house willburn down.” He would be surprised if hesaw the high premium I pay for insuringmy Canadian cottage, whose structure isworth under $100,000, compared to themuch lower premium I pay on my Califor-nia house, whose structure is worth overthree times as much. Clearly, those prob-abilities are not the same. One bad forestfire would wipe out my cottage; a forestfire near my California house is much lesslikely and, even if it occurred, is far lesslikely to do damage.

All of the discussion above is aboutTirole’s thinking on economic analysis.What about his views on freedom? I’ll endwith a hopeful note. While he is no liber-tarian, he does have a pro-freedom streak.He opposes the condemnation of behav-ior “that has no identifiable victim.” Pre-sumably his opposition to condemnationwould lead him to oppose governmentregulation of that behavior. It seems fromcontext that he does.

Tirole points out that when a Frenchfirm moves from 49 to 50 employees,it becomes subject to 34 additionallegal obligations.

R


Working PapersA SUMMARY OF RECENT PAPERS THAT MAY BE OF INTEREST TO REGULATION’S READERS.

Corporate Investment“Are U.S. Companies Too Short-Term Oriented? Some Thoughts,”

by Steven N. Kaplan. June 2017. NBER #23464.

Criticism of U. S. corporations for focusing on short-rather than long-term investment returns dates backto at least 1980 when Harvard Business School faculty

members Robert Hayes and William Abernathy wrote in a land-mark article, “By their preference for servicing existing marketsrather than creating new ones and by their devotion to short-term returns and management by the numbers, many of themhave effectively forsworn long-term technological superiority as acompetitive weapon” (“Managing Our Way to Economic Decline,Harvard Business Review 58 (July–August): 67–77).

In this paper, Steven Kaplan marshals evidence that, in recentdecades, firms generally have not fallen prey to corporate short-termism. First, corporate profits as a percentage of gross domesticproduct are near all-time highs and have been rising for the last 30years, suggesting they are doing well at exploiting market oppor-tunities. Second, if existing companies underinvest, then venturecapital (VC) investors would fill the gap and be very profitable. ButVC as a percentage of the total stock market has fluctuated in arelatively narrow range of 0.1 to 0.2% over time. VC returns are abit above general stock market returns, but not by much. Privateequity funds have a similar record, with a little blip for the internetboom of the late 1990s. That performance suggests firms are notpassing up on promising investment opportunities.

Kaplan concludes with other stylized facts that are also incon-sistent with the short-termism argument. The internet stockboom of the late 1990s was based on high long-term expectedcash flows, which of course did not occur, but the dot-com inves-tors were long-term oriented. Companies are increasingly lessprofitable at the time of their initial public offering. Amazonand Tesla have high values but no profits (in the case of Amazon,until recently), facts not consistent with short-termism. Some180 biotech companies went public between 2013 and 2016, andonly 4% were profitable. Finally, hydraulic fracturing technology totap into natural gas reserves—fracking—was developed over recentdecades despite long periods of negative cash flows.

—Peter Van Doren

Health Insurance“Cost of Service Regulation in U.S. Health Care: Minimum Medical

Loss Ratios,”by Steve Cicala, Ethan M.J. Lieber, and Victoria Marone.

July 2017. SSRN #3007692.

Economists have long argued that traditional rate-of-returnpublic utility regulation reduces the incentives of regu-lated firms to control costs. If a firm earns a guaranteed

rate of return on capital investment, then the firm will be inclinedto overinvest in capital because it is protected from downside risk.

In this paper, Steve Cicala and colleagues argue that the samelogic applies to a provision of the Affordable Care Act. The actrequires health insurers in the “fully insured” market (those insurerswho bear financial risk rather than just administer claims for largeself-insured employers) to spend 80% of their premium income onmedical care and mandates rebates to consumers ex post if this doesnot occur. This provision was added to the law by consumer advo-cates and their political supporters who argued that some insurersretain too much premium income, make too much profit, and arestingy in approving coverage of medically necessary procedures.

Much like traditional rate-of-return regulation, this rule cre-ates incentives for insurers to spend more on medical care ratherthan to reduce premiums. The paper estimates a difference-in-differences model in which firms that spend less than 80% of theirpremiums on medical expenditures are compared with firms thatare in compliance with the rule. In the year before the rule wasimplemented, 52% of consumers in the individual market were inplans that spent less than 80% of premiums on medical expendi-tures and thus would not have been in compliance.

The paper concludes that the average effect of the rule ontreated firms (those that previously had been spending less than80% of premiums on medical claims) was to increase their medi-cal expenditure outlays by about 7%. There was no reduction inpremiums. —P.V.

Environmental Regulation“Why Is Pollution from U.S. Manufacturing Declining? The Roles of

Environmental Regulation, Productivity, and Trade,” by Joseph S.

Shapiro and Reed Walker. August 2017. SSRN #3012564.

Between 1990 and 2000, the real value of U.S. manufac-turing output grew by a third while emissions of the sixregulated air pollutants (carbon monoxide, nitrous oxide,

particulate matter, fine particulate matter, sulfur dioxide, andvolatile organic compounds) fell by 35%. From 1990 to 2008,those emissions fell by 60%. Why did this occur?

Three possible explanations have been offered. The first is trade,i.e., the United States offshored pollution-intensive industries,while U.S.-based industry shifted toward less polluting products.The second is improvements in productivity that expand outputwhile reducing the use of polluting manufacturing inputs suchas fossil fuels. The third is environmental regulation. The paperconcludes that almost all of the reduction in emissions over timestems from changes in emission intensity within vary narrowlydefined manufacturing products. And that reduction, in turn, wasnot the result of trade-induced composition change nor produc-tivity improvements. Instead, stricter environmental regulationresulted in the reduction of emissions. —P.V.

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Employment Effects of the ACA“The Effects of the Affordable Care Act on Health Insurance Cover-

age and Labor Market Outcomes,” by Mark Duggan, Gopi Shah

Goda, and Emilie Jackson. July 2017. NBER #23607.

Health insurance coverage under the Affordable CareAct increased by 4.2 percentage points in states thatexpanded Medicaid and 2.6 percentage points in states

that did not in the first two years of the ACA’s coverage man-date (2014–2015). For households with incomes between 100%and 400% of the federal poverty level, subsidies were available ifthe households purchased coverage from the health insuranceexchanges created by the ACA. Many economists, including thosefrom the Congressional Budget Office, predicted that becausethose subsidies depended on household income rather than indi-vidual wages, second earners in households would reduce theirlabor market participation to allow their households to qualify.

The authors of this paper found no change in the level ortrend of aggregate labor market participation after the ACA. Butthis aggregate result was the product of two offsetting trends.There was an increase in labor market participation in areas of thecountry in which the share of people who were uninsured andearning under the poverty line was larger and a reduction in laborforce participation in areas in which the share of people who wereuninsured and earning between 139% and 399% of the poverty linewas larger. “These changes suggest that middle-income individualsreduced their labor supply due to the additional tax on earningswhile lower income individuals worked more in order to qualifyfor private insurance,” the authors conclude. “In the aggregate,these countervailing effects approximately balance.” —P.V.

Minimum Wage“State Minimum Wage Changes and Employment: Evidence

from 2 Million Hourly Wage Workers,” by Radhakrishnan Gopalan,

Barton Hamilton, Ankit Kalda, and David Sovich. May 2017. SSRN

#2963083.

Isummarized some of the recent papers on the effects of mini-mum wage increases in the “Working Papers” section of theFall 2015 issue and Ryan Bourne continues that discussion in

this issue (“A Seattle Game-Changer,” p. 8). An important compo-nent of those discussions was a paper by Jonathan Meer and JeremyWest. They argue that changes in minimum wages do not causean abrupt change in employment levels, but instead employersrespond by slowing their future hiring and hiring higher-skilledworkers, thereby reducing overall employment growth.

This paper analyses data on over 2 million hourly employeesfrom over 300 firms for the years 2010-2015. It uses a difference-in-differences regression to compare six states that implementeda large (at least 75¢ per hour) increase in their minimum wage(California, Massachusetts, Michigan, Nebraska, South Dakota,

and West Virginia) with states that didn’t pass such an increase.For the treatment group of states, the fraction of employees

earning less than $10 an hour declined 0.7% in the year followingthe minimum wage increase. But the fraction of workers mak-ing $10–$15 an hour increased. The overall result was that totalemployment didn’t really change. This is consistent with Meerand West in that the effect occurs in the form of slower hiring ofthe least-skilled rather than termination of existing employeesbecause firing is costly. —P.V.

Airbnb and Housing Prices“The Sharing Economy and Housing Affordability: Evidence from

Airbnb,” by Kyle Barron, Edward Kung, and Davide Proserpio. July

2017. SSRN #3006832.

Airbnb has reduced dramatically the transaction costsof renting housing on a short-term basis. Some criticshave argued that this has reduced the supply of housing

available for long-term renters, thus exacerbating the housingaffordability problem in major American cities.

In this paper, data on Airbnb listings from 2012 through 2016at the ZIP code level are regressed on Zillow housing price andrental price information. Fixed effects for ZIP code and city-leveltime trends are included. The authors control for time-varyingfactors by ZIP code with a variable that measures Google searchesfor Airbnb at the ZIP code level interacted with number of res-taurants and hotels in a ZIP code reflecting underlying touristdemand. The expectation is that landlords in more “touristy”areas will be the most likely to convert long-term rentals to Airbnband reduce long-term rental supply and increase the rents ofremaining housing.

The authors find that a 10% increase in Airbnb listings increaseshousing prices by 0.65% and rents by 0.38%. The annual rent increasein their data was 2.2% and the average ZIP code experienced a 6.5%annual increase in Airbnb listings. Thus from 2012 through 2016,only 0.25% of the 2.2% increase in annual rent was explained byAirbnb. The Airbnb effect is not zero, but it is small. —P.V.

Soda Taxes“The ‘Soda Tax’ Is Unlikely to Make Mexicans Lighter: New Evidence

on Biases in Elasticities of Demand for Soda,” by Mabel Andalon and

John Gibson. May 2017. SSRN #2971381.

The tax on soda in Mexico has been hailed as reducingconsumption with likely long-term health benefits. TheMexican soda tax is large (9% of pretax average prices).

Estimates of the reduction in consumption assume that the tax ispassed through to prices and that consumers react to prices onlyby reducing the amount consumed using the standard (elasticity)estimates of –1 to –1.3. That is, a 1% increase in the price resultsin a 1% to 1.3% decrease in consumption.

But another response of consumers to a price increase is to

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change to a cheaper soda brand and keep the quantity consumedconstant. For example, before the tax, Coca Cola was priced 15%above Pepsi. After the tax, the Coke price is still 10.8% higher. Thusa consumer could respond to the tax by reducing Coke consump-tion or simply switching to Pepsi. The authors’ estimate of thetrue elasticity for soda consumption adjusted for the substitutionof cheaper brands is much smaller (–0.2 to –0.3).

According to survey data, average soda prices increased 11.9%between 2012 and 2014. But the average price of purchased sodaincreased by half that rate, suggesting that consumers purchasedlower-priced soda. When the corrected elasticities are used, the2–4 pounds-per-person predicted weight loss advanced by someacademic papers becomes less than a pound. —P.V.

Mortgages and theFinancial Crisis“Credit Growth and the Financial Crisis: A New Narrative,” by Ste-

fania Albanesi, Giacomo De Giorgi, and Jaromir Nosal. August 2017.

NBER #23740.

The conventional explanation of last decade’s financialcrisis is that credit growth from 2001 to 2006 was con-centrated in the subprime segment of the housing mar-

ket even though there was no aggregate income growth in thatgroup. This unwise allocation of credit to people with poor prob-abilities of repayment was exacerbated by the Great Recession.The subprime holders of mortgages disproportionately lost theirjobs and couldn’t maintain their house payments, according tothis theory. The most prominent citation for this view is a 2009paper by Atif Mian and Amir Sufi (“The Consequences of Mort-gage Credit Expansion: Evidence from the U.S. Mortgage DefaultCrisis,” Quarterly Journal of Economics 124[4]).

This paper argues that Mian and Sufi’s finding is the result oftheir decision to estimate borrowers’ credit status by using a 1996ranking of ZIP codes by the fraction of residents below 660 creditscore, along with their 1997 individual credit score. Low subprimescores are found disproportionately among young people withthin or nonexistent credit histories. Credit scores grow normallyas people age and demonstrate success with paying bills on time.The research design used by Mian and Sufi conflates the normallife cycle growth in credit to those who were young before theboom with poor credit worthiness during the boom.

To avoid that problem, this paper uses individual-level creditscores calculated shortly before mortgage borrowing occurredrather than in 1996 or 1997. The more time-appropriate creditscores revealed that defaults among borrowers with low scoresactually decreased during the Great Recession. The fraction ofmortgage delinquencies accounted for by the lowest quartile ofcredit scores dropped from the normal 40% to 30% and the fractionof foreclosures from 70% to 35%.

Instead of credit growth to sketchy borrowers, this paper high-

lights the role of credit growth to “investors,” defined as those whohold two or more first mortgages. From 2004 to 2007, the shareof mortgage balances held by investors in the middle quartiles ofthe credit score distribution rose from 20% to 35%. For investors,foreclosure rates did increase four-fold for the lowest quartilecredit scores, but it increased 10-fold for the other three quar-tiles. The fraction of “investors” (those with more than one firstmortgage) who became delinquent grew 30 percentage points forthe lowest three quartiles and by 10 percentage points in the topquartile. For people with just one first mortgage, the foreclosurerate doubled in the lowest two quartiles and barely changed forthe highest two quartiles.

The paper reproduces the Mian and Sufi ranking of ZIP codesby the fraction of subprime borrowers in 1999 and finds theirresult. Borrowers who resided in the top quartile of (subprime)ZIP codes in 1999 exhibited larger growth in per-capita mortgagebalances. But the individual borrowers living in those “subprime”ZIP codes who were responsible for most of the credit growth actu-ally were prime borrowers. This result reinforces the rule to avoidmaking inferences about individuals based on characteristics ofaggregations. —P.V.

Retirement Income and Expenses“Change in Household Spending After Retirement: Results from

a Longitudinal Sample,” by Sudipto Banerjee. Employee Benefit

Research Institute Issue Brief #420, November 2015.

“Retire on the House: The Possible Use of Reverse Mortgages to

Enhance Retirement Security,” by Mark Warshawsky. Mercatus

Center Working Paper, June 23, 2017.

The “retirement funding gap”—the deficit between theamount of money needed to provide for future seniors inretirement and the public and private money actually set

aside for them—is the source of considerable angst in the policyworld. But not all analyses of this gap are gloomy. While many saythis number is large and growing, Andrew Biggs, a senior fellow atthe American Enterprise Institute, contends in a September 2017paper for the Mercatus Center that the number of seniors in pov-erty who failed to save sufficiently for retirement has been greatlyexaggerated. Penn Wharton Public Policy Initiative scholar Jaga-deesh Gokhale has noted that the living standards for seniors aregenerally higher than the rest of society.

A central question in this literature is how much income doretirees need in order to maintain their standard of living. Weknow the answer is less than 100% of their employment income:when people stop working they no longer have commuting costs,they don’t need to buy work clothes, and they no longer have to eattheir lunches out. What’s more, a significant proportion of retireeshave finished paying off their homes, leaving them with one lessexpense to worry about. However, they do have higher health care

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costs, and these costs tend to increase as they age. What’s more,about one in four people will spend significant time in a nursinghome at some point in life, an expense that can be potentiallyruinous to a family’s wealth.

In a 2015 paper for the Employee Benefit Research Institute(EBRI), research associate Sudipto Banerjee attempts to determinehow people’s spending changes after retirement. He uses data fromthe Health and Retirement Study (HRS) and the Consumptionand Activities Mail Survey—a supplement of the HRS—to estimatepatterns in retiree spending. His top-line finding is—as we expectand as is consistent with other research—that spending declines asage increases. In these data sets, annual spending fell 19% betweenages 65 and 75, and 34% between ages 65 and 85. However, thedecline slows over the latter part of that age range, and then beginsincreasing around age 85.

Banerjee offers a few explanations for this pattern. Concerningthe decrease in spending, one contributor is a decline in the numberof people in a retiree-headed household. When a spouse dies ordivorces and leaves the household, spending falls. A small but grow-ing proportion of retiree-headed households will also have childrenat home at the beginning of this span; their subsequent departurecontributes to the decline in spending. However, there is a largefixed component to household spending that’s independent of thesize of the household. Concerning the late-life rise in spending, itcorrelates with an increase in out-of-pocket medical spending andis concentrated at the top of the income distribution.

The survey breaks down consumption into seven spendingcategories: home, food, health, transportation, clothing, entertain-ment, and “other,” which includes charitable contributions andgifts. From these data Banerjee makes three broad observations.

First, there is a large variation in spending across the country.Consumption is much lower in the South, for instance, than in thewealthier northeast. But on average, spending drops 5.5% in the firsttwo years of retirement and continues to fall in the following years.

Second, housing comprises the largest component of totalspending for households, even in retirement. Banerjee notes thathouseholds that pay off their mortgage do not necessarily see animmediate reduction in home spending; a common strategy is tochannel payments that had gone to a mortgage into various homeimprovements such as a new furnace, new furniture, and the like.

Third, health expenses increase for senior citizens, although therate of increase varies quite a bit across the country. Health carespending increases are much higher in the urban Northeast thanin the South, a difference that may be driven by the relative sharesof the population on Medicaid. On the other hand, transportationcosts go down quite a bit as people retire, regardless of the locale.

Banerjee uses these data to offer a richer picture of spending inretirement. One realization: while the permanent income hypoth-esis (a manifestation of consumer rationality) would suggest thatwe should strive to keep our spending as constant as possible overour lifetime, the reality is that for most households consumptionfalls when we retire and our incomes fall, which implicitly repudi-

ates the permanent income hypothesis.This is not necessarily a troubling phenomenon. In retirement,

our expenses fall and our potential leisure time increases, so wesubstitute more home production for buying things (like meals)from the market. Besides, some people do not reduce their spendingwhen they reach age 65: fully 45% of all households see their spend-ing increase immediately following retirement, and one-third of allhouseholds report higher spending five to six years after retirement.This increase is relatively even across the income distribution, sug-gesting that the increase is attributable to health issues.

These numbers raise the question of how much money peopleneed for medical expenses in retirement. Investment firm Fidelitysuggests at least $275,000, excluding long-term care costs. EBRIestimates that savings of $127,000 for a man and $143,000 for awoman would give a retiree a 90% chance of covering all healthcare expenses in retirement. For context, Banerjee reports that46% of all senior citizens have had at least one overnight nursinghome stay. On the other hand, only 23% of retirees had an out-of-pocket nursing home expense; in other words, half of all peoplewho do have a nursing home stay manage to get out of the homebefore their 90 days of Medicare nursing home payments ran out.

Banerjee suggest that for a sizeable fraction of the elderly thereis a real possibility that an extended stay at a retirement home orconvalescent center could be financially calamitous without anylong-term care insurance. He avoids making recommendationsbut one leaps from his pages: we should worry less about retireeincome and more about health care costs.

One reason we shouldn’t worry so much about retiree incomeis that more retirees could make use of reverse mortgages, as MarkWarshawsky explains in a Mercatus working paper. Warshawsky,who earlier this year became the assistant commissioner for retire-ment and disability policy at the Social Security Administration,joins Gokhale and Biggs in believing that concerns over seniors run-ning out of money in retirement are overstated. Previous researchWarshawsky did with Gaobo Pang found a shortfall greater thanBiggs, but still one smaller than what is generally assumed.

Warshawsky observes that analysts and the public often over-look the value of retirees’ houses when considering those retirees’economic resources. This makes little sense because of the largeamount of equity that seniors typically have in their houses, andbecause homeowners can use reverse mortgages to tap this wealthwhile remaining in their homes. He suggests that, like annuities,reverse mortgages are wrongly considered to be bad deals forhomeowners. In this paper, he essentially investigates the broadestpossible use of this product under some reasonable assumptions.

Specifically he has in mind a Home Equity Conversion Mort-gage (HECM) loan, which is both issued and insured by the federalgovernment. He would like for the government to allow it to bemarketed by the private sector, which he believes would greatlyboost its popularity.

HECM became a federal program in the late 1980s. While fewpeople availed themselves of it in the 1990s, it took off at the end


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of the decade. There was no underwriting at first because theintrinsic value of the house made underwriting seem unnecessary,and the Federal Housing Administration did not worry aboutdefaults. As a result, the federal government did take losses. Thedefaults caused some of the large banks, worried about theirreputation, to stop offering the product.

HECMs are available only to seniors over age 62. They can get alump sum, line of credit, or a monthly income flow, and they cannotborrow more than $640,000 or the value of their home, whichever isless. These are non-recourse loans; borrowers never pay back morethan the value of the home when it is sold. They do not have to payuntil the surviving spouse dies or moves out of the house.

HECMs are complicated, and the FHA requires counseling (at acost of $150) prior to any purchase. The interest rate is LIBOR plusa 2.5% lender’s margin. Despite its complexity there is a marketfor this, Warshawsky has determined. There are 37 million house-holds led by people over age 62, and 80% of them own homes. Just2% of them have a reverse mortgage. Normally, Warshawsky notesin the paper, people are limited to withdrawing just half of theequity in a house with a reverse mortgage, which minimizes therisk of the lender not getting fully paid back after death.

If we exclude people in the bottom 30% of the wealth distri-bution, those with a home value under $100,000 (for whom thetransaction costs would be too great to make a reverse mortgage

worthwhile), and those in the top 20% of the wealth distribution(who won’t need such a product and would benefit more from alife annuity), we are left with approximately 14% of the populationof seniors who could potentially benefit from an HECM.

So why aren’t many of these seniors using HECMs? Warshaskynotes that a reverse mortgage is relatively expensive, but there areother forces at work. Jonathan Skinner, a Dartmouth economist,says people consider their homes to be a wealth stock of last resortand are loathe to touch home equity except in an emergency. And,of course, people have a bequest motive.

Thomas Davidoff at the University of British Columbia hitsupon something else at play in this decision, noting that the abilityof the elderly to use their home equity explains why there’s so littledemand for long-term-care insurance. Warshawsky’s solution is totighten up Medicaid eligibility rules for nursing home coverage,which would force more people to buy long-term-care insurance.Freed of that obligation, more seniors would see the advantageof tapping their home equity.

Warshawsky’s message is that the home is a valuable asset formany people and that more of them should tap some of its equity,and we should make it easier and less costly to do so. If we wereto achieve that by spurring more families to buy long-term-careinsurance, thereby lessening the burden on Medicaid, that wouldbe a win–win outcome. —Ike Brannon

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40 WINTER 2017 2018 IN REVIEW - Cato Institute€¦ · 40 / Regulation / WINTER 2017–2018 IN REVIEW AlwayswithUs REVIEWBY RICHARDA.BOOTH In Fraud, Edward Balleisen recounts the