Deficits, Debt, and DebasementDeficits, Debt, and Debasement “Those of us who manage the public’s dollars will be held to account, to spend wisely, reform bad habits, and do our

PHIL GRAMMKeynotes conference on governmentspending

PAGE 14

CATOJOURNALIncentives for virtue infree markets

PAGE 3

Deficits, Debt, and Debasement“Those of us who manage the public’s dollars will be held toaccount, to spend wisely, reform bad habits, and do our business inthe light of day, because only thencan we restore the vital trust betweena people and their government.”—BARACK OBAMAInaugural Address, January 20, 2009

n recent years policymakers havepushed the economy ever closer tothe brink of fiscal catastrophe. Fed-eral spending rose substantially underPresident George W. Bush, with the

deficit reaching $460 billion in his last fullyear. In President Barack Obama’s first twoyears in office, it soared to $1.4 trillion in2009 and $1.29 trillion in 2010. Deficits areon track to remain at unprecedented levelsin 2011, and President Obama’s promise tohalve the deficit by 2012 turned out to bethe same “politics as usual” that he denouncedduring his campaign. Even if he made goodon that promise, deficits would still betwice as high as ever before.

To be fair, the gloomy budgetary pictureis not entirely Obama’s fault. His is just the

latest administration unwilling to tackleserious fiscal challenges. While bailoutsand stimulus programs compounded theproblem, its source is the big three transferprograms—Social Security, Medicare, andMedicaid. Together, these programs con-sume approximately 10 percent of U.S.gross domestic product. By 2052 they will

reach 18.2 percent of GDP and, assumingtax collections remain at their long-termlevels, will absorb all federal tax revenue col-lected by the government. In other words,no discretionary spending and no defensespending will be possible by 2052 unlesstax revenue increases or the government

BY SCOTT A. BEAULIER AND PETER J. BOETTKE

Continued on page 6

At a Cato Institute Conference in April, SEN. MIKE LEE (R-UT) called for a balanced budget amendment toaddress the burden of federal spending in Washington. Lee also attended a private breakfast held at Cato inJune, where he talked with Cato analysts about several policy issues. PAGE 14

SCOTT A. BEAULIER is the Adams-Bibby Chair of FreeEnterprise and executive director of the Manuel H. John-son Center for Political Economy at Troy University.

PETER J. BOETTKE is university professor of econom-ics at George Mason University and BB&T Professor forthe Study of Capitalism at the Mercatus Center.

July/August 2011 Vol. XXXIII No. 4

SEN. JOE MANCHINTalks policyissues at Cato breakfast

PAGE 5

I

2 • Cato Policy Report July/August 2011

Editorial

BY DAVID BOAZ

“If you want the federal

government totax and borrow

and transfer $3.6 trillion ayear, then youhave to acceptthat such pro-grams come

with incentiveproblems,

politicization,corruption, and waste.

n The Godfather, Part II, the gangster Hyman Rothrecalls the killing of a colleague and says there’s nopoint in complaining about it because “This is thebusiness we’ve chosen.” Murders are just part of

mob business.Government has its standard practices, too.

Government programs in a mixed-economy democ-racy are typically shaped by lobbying and marked bywaste.

One recent Sunday (May 15), the entire WashingtonPost seemed to remind readers of that fact. Leadingthe paper was a big investigative story titled “Million-Dollar Wasteland.” Reporters Debbie Cenziper andJonathan Mummolo wrote:

The federal government’s largest housingconstruction program for the poor has squan-dered hundreds of millions of dollars onstalled or abandoned projects and routinelyfailed to crack down on derelict developers orthe local housing agencies that funded them. . . .The result is a trail of failed developmentsin every corner of the country. Fields whereapartment complexes were promised areempty and neglected. Houses that were sup-posed to be renovated are boarded up andcrumbling, eyesores in decaying neighbor-hoods. . . .The Post found breakdowns at everylevel.

And on and on for three full pages.Then, in the Metro section, columnist Robert

McCartney wrote about the D.C. Council hearings onthe hiring scandals in the administration of newlyelected mayor Vincent Gray:

The main thing learned in the hearings sofar is that Gray showed bad judgment in allow-ing [three close advisers] to guide so much ofthe hiring for patronage jobs just below thecabinet rank. Although all three advisers werelongtime personnel executives, they blunderedrepeatedly by overpaying people, doing inade-quate vetting and hiring children of officials[including their own].

And an article on Amtrak’s annual billion-dollardeficits included this gem: “Critics in Congress alsohave questioned Amtrak’s management, asking, forexample, how an employee with a $21,000 salaryearned $149,000 in overtime last fiscal year.”

Those articles reminded me of another investiga-tive tour de force in the Post two months earlier, ban-nered as “A D.C. lawyer and her associates secured$500 million in federal contracts to benefit Alaskanative corporations. Less than one percent made it

back to Alaska.” That article too had been promi-nently displayed in the Sunday paper but had notgenerated much online comment, and I asked at thetime on the Cato blog: “Are we so jaded that a full-page investigation of self-dealing and corruptioninvolving affirmative action, small business, defensecontracting, and complicated financial maneuversjust doesn’t get our juices flowing?” But surely I waswrong. Outrage ensued, right? Angry editorials, con-gressional hearings? No, not so much.

Newspapers are full of stories about serious peo-ple and clowns running for president, about who’sup and who’s down in political maneuvering, aboutCharlie Sheen and Lindsay Lohan. All fine topicsindeed. But if journalists spent even 10 percent oftheir time digging into how the federal governmentis spending $3,600,000,000,000 this year, who knowshow many stories of waste and deadweight loss we’dfind? If one diligent reporter could find that muchfraud by one well-connected contractor, how muchcould a hundred reporters find?

I generally don’t think that “waste, fraud, andabuse” is the key to cutting federal spending; youhave to go after the big programs, like transfer pay-ments and military spending. But as Everett Dirksenalmost said, $500 million here, $500 million there,pretty soon you’re talking real money.

There are reasons that government programs areoften characterized by waste, fraud, and abuse.Politicians tend to respond to interest groups thatstand to receive benefits from any particular pro-gram rather than to the average citizen who will payvery little for each program. Policymakers have lessincentive to control costs and improve efficiencythan do people in the private sector with their ownmoney (or their boss’s money) at risk. As governmentgets bigger, it becomes less and less possible to havemeaningful oversight and transparency—though wecan hope that new technologies may help somewhaton the transparency side.

Realistically, if you want the federal government totax and borrow and transfer $3.6 trillion a year, if youwant it to build housing for the poor and give specialbenefits to Alaska Natives, if you want it to supplyAmericans with health care and school lunches andretirement security and local bike paths, then youhave to accept that such programs come with incen-tive problems, politicization, corruption, and waste.

For those who like such expansive government:This is the business you have chosen.

”

IThis Is the Business You Have Chosen

PREBLE NAMED VICE PRESIDENTChristopher Preble has been named vicepresident for defense and foreign policystudies at the Cato Institute, succeedingTed Galen Carpenter effective July 1.Carpenter will retire from managementand from Washington but will continuewriting and lecturing as a senior fellow.

Carpenter, who joined Cato in 1985, is the author of 8 and the editor of 10

books on international affairs, including Smart Power: Toward a Prudent Foreign Policy for America, Bad Neighbor Policy:Washington’s Futile War on Drugs in Latin America, The CaptivePress: Foreign Policy Crises and the First Amendment, BeyondNATO: Staying Out of Europe’s Wars, and A Search for Enemies:America’s Alliances after the Cold War. He is currently complet-ing two new books. He has written for all the major foreign policy journals and major newspapers. Carpenter received hisPhD in U.S. diplomatic history from the University of Texas and will move back to Austin.

Preble has been Cato’s director of foreign policy studiessince 2003. He is the author of three books including ThePower Problem: How American Military Dominance Makes UsLess Safe, Less Prosperous, and Less Free (Cornell UniversityPress, 2009), which documents the enormous costs ofAmerica’s military power and proposes a new grand strategy to advance U.S. security. Preble is also the lead author ofExiting Iraq: How the U.S. Must End the Occupation and Renewthe War against Al Qaeda, and he co-edited, with Jim Harperand Benjamin Friedman, Terrorizing Ourselves: Why U.S.Counterterrorism Policy Is Failing and How to Fix It. His resume also includes a Cato internship, four years as a naval officer, and a PhD in history from Temple University.

Justin Logan, who has written studies on such topics asnation-building and grand strategy over the past seven years,has been promoted to director of foreign policy studies.

THE FIRST THING WE DO, LET’S READ ABOUT THE LAWYERSCato senior fellow Walter Olson has received significant mediaattention for his latest book, Schools for Misrule: LegalAcademia and an Overlawyered America. Law professor John O.McGinnis reviewed the book in the Wall Street Journal, calling it “Excellent . . . A fine dissection of these strangely powerful institutions.” Other favorable reviews have appeared in theWeekly Standard, Yale Alumni Magazine, and the WashingtonTimes. Olson has made eight law school appearances, and hasspoken at the Heritage Foundation, the Manhattan Institute,and the Heartland Institute, as well as the Cato Institute. Hisbook was featured on C-SPAN2’s popular “BookTV,” and theepisode can currently be found on the “BookTV” website.

July/August 2011 Cato Policy Report • 3

Cato News Notes

In the Spring/Summer 2011 issue of the Cato Journal, Mark Zupan,dean and professor of economics and public policy at the Univer-sity of Rochester, examines “The Virtues of Free Markets.” Heargues that entrepreneurs’ interest in maintaining long-run rela-

tions with their customers gives them an incentive to cooperate andhonor their word—or face the loss of business to those who are moreethical. Private property, freedom of contract, and the rule of law—theinstitutions upon which free markets rest—motivate individuals to take account of theimpact of their current deci-sions on future values, andin so doing foster coopera-tion and integrity over time.

French social philosopherAnthony de Jasay examinesseveral cases in which itappears that an individualsacrifices self-interest for thegood of the group. Upondeeper reflection, and withsome realistic assumptions,he finds that what initiallylooks like “selfless” behaviorturns out to be “selflessly self-ish.” Thus, the self-interestpostulate behind rationaleconomic man (homo econom-icus) can be broadly applied.

Economists Daniel Gropper, Robert Lawson, and Jere Thorne Jr.present evidence from more than 100 countries that economic free-dom and happiness go hand in hand. Economic freedom expandsindividual choices and increases real per capita income, making peo-ple better off and happier. Carrie Kerekes of Florida Gulf Coast Uni-versity, in a cross-country study, finds that when property rights inland and water are more secure, there is a positive impact on environ-mental quality.

Paul Rubin, professor of economics at Emory University, examinesthe role of markets, tort law, and regulation in achieving safety. Hefinds that free markets are often the most important mechanism toachieve safety and that tort law and regulation may “overreach”—doing more harm than good.

Other contributors include Jerome Stein on “The Diversity of DebtCrises in Europe,” Matthew Carr on “The Impact of Ohio’s EdChoiceon Traditional Public School Performance,” Dean Stansel on “WhySome Cities Are Growing and Others Shrinking,” Joseph Noko on“Dollarization: The Case of Zimbabwe,” and Jerry Tempelman on“Why Do Federal Funds Trade at the FOMC’s Target Rate?”

All of these articles, as well as the five book reviews in this issue of Cato Journal, areavailable online at www.cato.org.

Safety, debt crises, and altruism in the Cato Journal

The Virtues of Free Markets


C A T O E V E N T S

At a Capitol Hill Briefing in May, Cato legal policy analyst DAVID

RITTGERS (left) joined forces with ACLU senior policy counsel MIKE

GERMAN to reexamine the Patriot Act and its impending renewal.German focused on the “exceedingly broad” nature of the law, while Rittgersstressed the need for vigilance. “Terrorism, contrary to what we’ve been told,is not an existential threat to our liberty,” Rittgers said. “But our own coun-terterrorism efforts can be.”

In May, former Minnesota governor TIM PAWLENTY held a press conference outside the CatoInstitute’s headquarters on Massachusetts Avenue after his address at a Cato Policy Forum,during which he discussed his vision for reducing the size of the federal government. The

occasion marked Pawlenty’s first appearance in Washington, D.C., after announcing his presi-dential bid two days earlier.

Cato senior fellow JOHAN NORBERGintroduced his film Free or Equal: APersonal View at a private screening

in April. In the documentary, to be seenon PBS stations this summer, Norbergretraces Milton Friedman’s steps in hispath-breaking Free to Choose and offersupdated conclusions.


At a Cato Policy Forum in April, KELIANG ZHU, an attorney at Landesa, reviewedthe development institute’s recent findings from their large-scale survey onland rights in China. Zhu joined Roy Prosterman, Landesa’s founder, and

Xiaibi Zhang, senior research fellow at the International Food Policy ResearchInstitute, in exploring the conditions of Chinese farmers. Citing the importance ofland documentation, Zhu highlighted advances in the protection of these rights.

D ANIEL GRISWOLD, director of theCato Institute’s Herbert A. StiefelCenter for Trade Policy Studies,

spoke at the Carnegie Endowment forInternational Peace in May. He talkedabout the lessons learned from protec-tionism during the Great Depressionand how post-war trade institutionshelped limit protectionism in therecent crisis.

Sen. JOE MANCHIN (D-WV) visited the Cato Institute for aprivate breakfast in April. He touched on a wide range ofissues, including energy and the environment, health care,

and foreign policy. In Cato’s 2010 “Fiscal Policy Report Cardon America’s Governors,” Manchin received an A.

In April, Cato’s government affairsdepartment held a series of lecturesfor House freshmen. ROGER PILON,

vice president for legal affairs at theCato Institute, discussed constitution-al issues at one session.


slashes benefits to these three programs.

BREAD AND CIRCUSES An inevitable crisis seems the almost cer-

tain outcome of America’s deficits and debts.The massive increases in transfer spending,coupled with steady growth in discretionaryand defense spending, mean that large deficitswill haunt America for the foreseeable future.Deficits occur when government expendi-tures exceed tax revenues, leading to higherinterest rates and crowding out private invest-ment. They generate unpredictability in pol-icy, as they herald rising taxes. Since deficitscannot be left unpaid, governments normal-ly finance them by issuing bonds that prom-ise to repay the principal (with interest) overa period of time.

Most troubling, deficits add to our alreadyhigh federal debt. Publicly held debt cur-rently stands near 60 percent of GDP and,according to the Congressional Budget Office,will rise to 90 percent by 2021. As debt rises,interest rates rise, taxes on future genera-tions rise, and politicians inflate the curren-cy to hide their profligate spending. To payoff this debt, the government must run sur-pluses, which occur when tax revenues exceedspending. If the government is unable togenerate surpluses, a third and far moredangerous option can be employed to elimi-nate long-term debt: debasing the currency.

Debasement is the “pretend payment” ofdebt that occurs when governments inflatetheir currency by printing money. It’s aproblem of nearly every government, fromthe “bread and circuses” of ancient timesthrough today. In the 18th century, govern-ments debased their currencies by trimmingmetal coins and recirculating them. By mak-ing a coin worth less in real terms, govern-ments throughout Europe were able to spendbeyond their means. “The honour of a stateis surely very poorly provided for,” AdamSmith wrote in 1776, “when in order to cov-er the disgrace of real bankruptcy, it hasrecourse to a juggling trick of this kind.”

Today, paper money limits governments’ability to physically trim the edges of metalcoins. But by printing money to pay offdebts, governments debase the currency and

ultimately erode its purchasing power. Sim-ply put, they are using a slight variation ofthe same “juggling trick” to achieve theirends: by pushing the debt problem into thefuture, they hide the full cost of repaymentto the public.

As a result, the symptoms of debasementare not always easy to recognize. Yet severalrecent indicators have been revealing. TheFederal Reserve’s balance sheet, for instance,has expanded from its long-established levelof $8 trillion to $23 trillion. This expansionin the money supply helped fuel a bondmarket rally that resulted in artificially lowTreasury yields. The Fed’s direct interven-tions into the mortgage-backed securitymarket have held mortgage rates at recordlows as well. By purchasing toxic assets pri-vate investors weren’t interested in, the Fedartificially expanded the money supply. Asmore money entered the system, prices roseand each dollar lost some of its value.

Inflation is always and everywhere theresult of monetary expansions, and its per-nicious effects are becoming palpable. Com-modity prices are all nearly twice as high asthey were in 2008. Prices for education andhealth care continue to rise rapidly. Con-sumer price increases, when food and ener-gy are included, are well above levels a cen-tral bank would normally be comfortablewith. And prices for technologies like cellphones, personal computers, and televisionsare not falling as rapidly as they should be.

The distortions in these prices indicatethat debasement is already taking place—and it stems from problems that econo-mists have been warning about for decades.

Historically, the public accepted deficitsand debts only in response to major warsand huge economic crises. During World

War II, for example, public debt increased tonearly 109 percent of GDP. Yet after the war,the government made a concerted effort topay down the debt, reducing it to 50 percentof GDP by 1956 and 24 percent by 1974.The experience of the last 30 years, however,shows that deficit spending is no longer anemergency response to catastrophe. In 1980,America’s total national debt stood at $1 tril-lion. Over the next three decades, it grew 14-fold—without a major depression or worldwar. Deficit spending has become businessas usual, and we’re quickly approaching thepoint where repayment is impossible.

HOLDING A TIGER BY THE TAILPoliticians are unable to address our cur-

rent fiscal challenges in part because theyrely on flawed Keynesian arguments to justi-fy their spending. Simplistic Keynesianismargues for greater government spendingwhen the economy softens, followed by spend-ing cuts when the economy returns to growth.But this rests on the crucial assumption thatpoliticians act benevolently, in the interestof the overall economy. It assumes politi-cians will exercise fiscal restraint.

The historical record since Lyndon B.Johnson’s “Great Society” suggests other-wise: politicians, regardless of party, do notfollow Keynesian assumptions. Instead, theyspend during the bad times and during thegood times. There are, of course, good pub-lic choice reasons why politicians cling toKeynes: he offers an economic justificationfor promising everyone everything! Politi-cians therefore achieve success through asimple mantra: “Spend ’em if you got ’em,and spend ’em if you don’t.”

Government officials don’t want to losepopularity by raising taxes and cutting spend-ing. Instead, they employ juggling tricks togive the illusion of paying their bills. TheTreasury finances government expendituresby floating bonds to the public, and the Fed-eral Reserve steps in as buyer whenever theTreasury is unhappy with the market inter-est rate. The process is referred to as moneti-zation, but really it’s debasement, and itstems in part from the fact that it is difficultto keep the Fed and the Treasury separate.

In fact, some have said that the idea of a

“Debasement is the ‘pretend

payment’ of debt that occurs when

governments inflatetheir currency by printing money.”

Continued from page 1

separate Fed and Treasury is utopian, thatthe two offices within government will remainforever entangled. The 1974 Nobel Prizewinner in economics, F. A. Hayek, called themonetary and fiscal policy dance an exercisein “holding a tiger by the tail.” In 1969, whilediscussing the broad, inflation-borne pros-perity affecting Venezuela and much of theWestern world, Hayek said:

How long can this inflation continue? Ifthe tiger [of inflation] is freed, he will eatus up; yet if he runs faster and faster whilewe desperately hold on, we are still fin-ished!

Hayek’s message was that inflation leadsto a misallocation of resources. Duringinflationary periods, the structure of pro-duction gets distorted and higher-order,capital-intensive goods like housing getoverproduced. At some point during theinflationary cycle, central bankers face achoice of either inflating more or contract-ing the money supply. When the moneysupply is contracted, the capital-intensive“boom” finally “busts.” According to Hayek,any attempt by policymakers to addressthe misallocation through deficit spend-ing—letting the tiger run faster—createsfurther distortions and a greater misalloca-tion. By keeping prices and interest ratesaway from their natural levels, fiscal andmonetary interventions simply prolongthe inflationary cycle and prevent a returnto normal, long-run conditions. Two decadesafter his death, Hayek’s “tiger by the tail”critique of Keynesian policies remains asrelevant as ever.

In 1977 James Buchanan and RichardWagner warned about the political legacyof Keynesian economics. “Sober assessmentsuggests that, politically, Keynesianism mayrepresent a substantial disease,” the twowrote in Democracy in Deficit, “one that can,over the long run prove fatal for a function-ing democracy.” If economic policies arenot somehow constrained by rules and super-majorities, deficits are the predictable out-come of democracy. “The bottom line: polit-ical capitalism is not laissez faire capital-ism,” they write. “To continue down ourcurrent path is to reinforce the perverse fol-

ly of politics that has threatened the viabili-ty of the current economic system.”

TYING THE JUGGLER’S HANDSThere are several ways we can constrain

the juggler in an attempt to reverse our cur-rent course. The first involves tying the jug-gler’s hands. The federal government couldadopt a balanced-budget amendment, forinstance—one similar to those constrainingmany states. This would limit the govern-ment’s fiscal authority through constitu-tional mechanisms, with the goal of confin-ing levels of taxation and balancing thebudget. Such an amendment would be quitepopular with voters, though obviously lessso with elected officials, and it could chokeoff the fuel needed for deficits, debts, anddebasement.

To provide a further safeguard againstthis cycle, legislative steps could be taken toseparate the Fed from the Treasury. The twocurrently work as “partners,” but by anymeasure they are dangerous bedfellows.Reform that better defines the roles of theorganizations could greatly reduce the threatof debasement. One such step would be tolimit the kinds of bonds the Fed can pur-chase from the Treasury. For example, thesecond round of quantitative easing (QE2)would not have been possible had there beena rule saying the Fed cannot buy long-termbonds from the Treasury. A vast literature inmonetary economics has consistently foundthat more independent central banks out-perform ones where the fiscal and monetary

authorities are closely aligned. Other rules—along the lines of antitrust restrictions—thatlimit Fed and Treasury interaction wouldalso be worth considering.

Because it is difficult to imagine mem-bers of Congress taking actions that tie theirown hands, these steps would ideally be aug-mented with more radical fiscal reform.Reverse revenue sharing would get the feder-al government out of the business of taxa-tion and would instead allow for 50 differentexperiments in optimal taxation across thedifferent states. Unlike the Articles of Con-federation, which encouraged free-riding bystates, each state could be required to con-tribute a certain amount to the federal gov-ernment. But, rather than be hampered byone-size-fits all federal taxes, individualscould choose from different tax regimes invarious states. Reverse revenue sharing reducesmany of the problems of our current federalsystem—special-interest groups become lessrelevant and centralization declines.

LIMITING THE JUGGLER’S TRICKSWe fully recognize that we’re a long way

from a world where federal balanced budgetamendments and reverse revenue sharingprograms are the preferred policy options.But we firmly believe we are a long way downthe bankruptcy path, and any kind of turn-around requires far more drastic action thantypical policy measures. To ensure the jug-gler has fewer tricks at his disposal, goodsand services provided by government mustbe shifted to the market and privatizationmust be embarked on.

Our current entitlement programs, forinstance, are unsustainable. The plan to reformMedicare being advanced by Rep. Paul Ryanis an acknowledgement that we are on anunsustainable entitlement path, and hiscommitment to rein in spending is com-mendable. But these reforms still fall shortbecause they leave power in the hands of thejuggler. What is really needed is reform thatfully shifts medical coverage for the elderlyand the poor from the public sector to themarket. Reforms that fall short of full pri-vatization still leave the juggler with trickson hand.

Even more fundamental than privatizing

“‘The honour of a state is surely

very poorly providedfor,’ Adam Smith

wrote in 1776, ‘whenin order to cover thedisgrace of real bank-ruptcy, it has recourse

to a juggling trick of this kind.’

”



entitlements would be to strip the govern-ment of its control of the money supplythrough a return to the gold standard, amonetary rule, or “free banking.” Reform-ing the Fed and chasing after the “separateFed and Treasury” ghost has proven futile,and it may be time to acknowledge that ourcentral banking system has failed. Whilethere would certainly be transitional costs towork through and consider in the short-term with a move to free banking, a decen-tralized monetary regime would help tocheck and constrain any particular bankaiming to overexpand the money supply.

ENDING THE CYCLEMany of the policy recommendations we

are making ask politicians to fall on theirown swords for the sake of financial solven-cy. While these reforms are admittedly radi-cal, the alternative is undoubtedly moreextreme. To see why, it is worth expandingon Adam Smith’s juggling metaphor fromearlier. In the final chapter of The Wealth ofNations, Smith observed:

When national debts have once been accu-mulated to a certain degree, there is scarce,I believe, a single instance of their havingbeen fairly and completely paid. . . . Pub-

lick bankruptcy has been disguised underthe appearance of a pretend payment. . . .When it becomes necessary for a state todeclare itself bankrupt, in the same man-ner as when it becomes necessary for anindividual to do so, a fair, open, and avowedbankruptcy is always the measure which isboth least dishonorable to the debtor andleast hurtful to the creditor. The honourof a state is surely very poorly provided for,when in order to cover the disgrace of realbankruptcy, it has recourse to a jugglingtrick of this kind. . . . Almost all states,however, ancient as well as modern, whenreduced to this necessity, have upon someoccasions, played this very juggling trick.

Federal bankruptcy—whether it occursthrough debt repudiation or a more orderlyprocess of restructuring—would serve as asobering wake-up call. The municipal bank-ruptcies some cities and counties have facedin recent years, along with the state budgetcrises afflicting most states, are grim por-traits of what bankruptcy at the federal levelwould look like. People promised benefitswould see their expectations dashed. Taxesacross the board would rise. Interest rates onfuture debt issuance would soar. The long-term consequences of reneging on our prom-ises would be difficult to estimate in full. Assuch, we are currently faced with a problemof unprecedented magnitude, one that shouldjustify giving unconventional reforms a seatat the table.

After vowing “to spend wisely, reformbad habits, and do . . . business in the lightof day,” President Obama instead accelerat-ed the country down the path of overspend-ing, made unsustainable promises, and usedthe Fed to conceal the full cost of govern-ment profligacy. Perhaps our best hopenow is to consider measures that funda-mentally challenge the system, and finallybreak free from the cycle of deficits, debt,and debasement.

“We are currently faced with a problem

of unprecedentedmagnitude, one

that should justify giving unconven-tional reforms a seat at the table.”

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THEODORE B. OLSON: David Boies and I havebeen involved in this case for two years, as ofthis month. We represent two couples: twogay men who live in southern Californiaand a lesbian couple in Berkeley. They haveboth been in long-term relationships, andthey have wanted to be married. We went totrial in January of 2010 and had closingarguments in June. In August, the judgerendered a decision—a 134-page explana-tion of findings of fact and conclusions oflaw—that struck down Proposition 8.

When we tried the case, the judge decid-ed that this was an important questionaffecting hundreds of thousands ofCalifornians and millions of Americans. Itwas a constitutional challenge—going tothe very core of what the FourteenthAmendment Due Process and EqualProtection Clauses mean. The trial itselfwent 12 days, and it was a remarkable edu-cation. As many of you know, it was onceagainst the law in many places to serve alco-holic beverages in public to a person whowas gay—against the law. Both the server andthe drinker could go to jail. PresidentEisenhower once announced that someonewho was gay could not hold a federal posi-tion. In our arguments, we presented evi-dence on the history of marriage, and howrace was once used as a basis to deny peoplethe right to marry.

The district court very thoughtfully

reviewed our evidence and rendered a deci-sion that Proposition 8 denied individualsthe fundamental right to marry. Fourteentimes, the U.S. Supreme Court hasannounced that marriage is a fundamentalright under the Constitution. It is a compo-

nent of liberty, privacy, association, theright to identify oneself spiritually—and it iscurrently being denied to a large segment ofAmerican society.

If you’re going to deny people that right,what justification exists? In fact, severaltimes during the case, the judge asked,“What harm would it do to people of het-erosexual orientation if homosexuals weremarried?” Our opponents didn’t want toanswer and tried to avoid the question, butthe judge insisted. And one of our oppo-nents, who is a very good lawyer, paused,looked at the judge, and said, “I don’tknow.”

The institution of marriage and what itmeans in this country isn’t simply a legalthing. It is a social construct. The example Ilike to use is citizenship: What if you weretold by your government that because youcame from a certain country, you could beall the things that a citizen could be—youcould vote, travel, own property—but youcouldn’t call yourself a citizen? You would-n’t be a citizen, and if you can’t be married inthis country, you are being left out of a veryimportant component of what our societyreveres. We are telling people that they aredifferent—that they are not entitled to thesame respect, the same dignity, the sameequality—and they are therefore second-class. That is a state-based license to dis-criminate, and that is what the Proposition8 case is all about.

DAVID BOIES: What exactly is going on whena state like California says that they will notpermit a certain group of citizens to marry?As a thought experiment, imagine that thestate simply got out of the marriage busi-ness entirely. You wouldn’t have the prob-lems we are having, because issues of equalprotection and due process only arise withstate action.

In order to attack that state-sponsoreddiscrimination, we wanted to establish threethings. One, we wanted to establish that

P O L I C Y F O R U M

he 1967 Supreme Court case Loving v. Virginia ended state bans on inter-racial marriage in the 16 states that still had such laws. Now, 44 yearslater, the courts are once again grappling with denial of equal marriage

rights. Two California couples have filed suit against Proposition 8, the 2008 ini-tiative that limited marriage to opposite-sex couples. The plaintiffs in Perry v.Schwarzenegger won in federal district court, and the case is now on appeal. At aCato Policy Forum held in May, co-counsels Theodore B. Olson, former U.S.solicitor general, and David Boies, chairman of Boies, Schiller & Flexner, dis-cussed their progress with the case. As co-chairs of the American Foundation forEqual Rights advisory board, Robert A. Levy, chairman of the Cato Institute, andJohn Podesta, president of the Center for American Progress, also spoke on howthe principle of equality transcends the left-right divide.

T

The Case for Marriage Equality: Perry v. Schwarzenegger

Theodore B. Olson

“Fourteen times, the U.S. Supreme

Court has announcedthat marriage is a fundamental right under theConstitution.”


marriage is a fundamental right. Both theplaintiffs and the defendants agreed on this,and they could hardly have said otherwise.The U.S. Supreme Court has repeatedlyaffirmed that marriage is a fundamentalright. In fact, marriage is so important tohuman dignity—to the rights of privacy,association, and liberty—that even when asignificant interest exists, the state cannotprohibit it. Marriage is much more than anyof its individual attributes. It has such sig-nificance that you cannot even deprive peo-ple who are locked away for life from enter-ing into it. So the idea that marriage was afundamental right was taken, I think, byboth sides as a given.

The second thing we set out to prove wasthat depriving citizens of the right to marryseriously harmed them and their children.Hundreds of thousands of children arebeing raised today by gay and lesbian cou-ples. And we proved, with a wealth of statis-tical and analytical data, the harm that for-bidding marriage did. Our experts—childpsychologists, sociologists, anthropologists,statisticians, economists—proved this, andwe didn’t stop there. The other side identi-fied a number of expert witnesses, startingwith eight, just like us. Six of those expertswere dropped after we took their deposi-tions because they admitted that depriva-tion of this right seriously harmed gay andlesbian couples and their children. In fact, inan interesting argument, our opponentsobjected to our playing some of the deposi-tion tapes on the grounds that their ownwitnesses weren’t really experts. Our oppo-nents lost that argument.

The third thing we set out to prove wasthat there was no benefit to preventing gaysand lesbians from marrying. The defensestarted out by saying that they don’t reallyneed to marry—they’ve got civil unions.They lost that argument. Then they fell backon the idea that it will be dangerous—it willharm the institution of heterosexual mar-riage. Think about that for a minute. I askthose of you who are considering marriagewhether it would dissuade you if youlearned that a gay or lesbian couple downthe street was able to get married. Or forthose of you who are married, whether youwould decide to get divorced because now

gays and lesbians are able to get married.Again, we brought in a wealth of evidencethat there was no harm—and again, on thecross examination, even the defendants’own expert witnesses conceded that theyhad no evidence of any harm.

Based on that record, the court wrote adecision—which everyone should readbecause it talks about the development ofequality in this country and the important

ways in which marriage has changed overtime. It talks about the fact that slaves wereprohibited from marrying—and how onceslavery was abolished, they immediatelyrushed to get married. This was part of whatmade their relationship dignified andrespectable. It gave them a sense of belong-ing—a sense of equality. When something isthat important to people, I think we have toask ourselves, as a society, “What are wedoing in trying to prevent others fromachieving this?”

Californians had an established right tosame-sex marriage that was then taken away.They now have this crazy quilt: because theycould get married for a period of time, thereare currently 18,000 gay and lesbian mar-riages recognized by the state. So you have acouple that is legally married and, next door,a couple that wants to get married but can’t.Indeed, if the couple that is married gets adivorce, they can’t remarry. They can’t evenremarry each other. That strikes peopleinstinctively as not being rational.

The fundamental issue is one of civilrights—of individual rights. That is why yousee people on this panel who don’t necessar-ily agree on a range of other issues. We allhave an interest in protecting individualrights against government discrimination.

JOHN PODESTA: Fifteen years ago, thethought of same-sex couples being allowedto legally marry was hard for mostAmericans to contemplate. You probablyhad to work at the Cato Institute to evenwrap your head around that idea. No stateoffered this right. Barely 30 percent of thecountry thought that it should be offered—and 10 years before, that number was in thelow teens. Senators and representatives whotoday are outright supporters of marriageequality voted for the Defense of MarriageAct in 1996. And of course, the presidentwho signed it has not only changed hisviews, but is now a vocal supporter of mar-riage equality.

Yes, today the world looks very different.Just 15 years later, marriage equality forsame-sex couples is becoming a fairly main-stream idea—embraced by liberals, conser-vatives, moderates, and not surprisingly, bylibertarians alike. Five states have legalizedsame-sex marriages. Eight states offer civilunions or domestic partnerships, and threeadditional states recognize same-sex mar-riages performed legally in other jurisdic-tions.

National polls consistently show that asmall but growing majority of the countrysupports marriage rights—including two-thirds of Democrats, almost 60 percent ofindependents, and more than a third ofRepublicans. Two-thirds of people under40 now support marriage equality. The

P O L I C Y F O R U M

David Boies

“Our opponents objected to our

playing some of thedeposition tapes on the grounds that their own

witnesses weren’t really experts.”


change in public opinion is not only hap-pening, it’s happening quickly. In fact, mostof the spike in public support for marriageequality has come in the past few years. In2004, when marriage equality was a “game-changing” issue at the ballot box, supportwas only at 34 percent—not much higherthan it was in 1996. Today, 53 percent ofAmericans support marriage for same-sexcouples. Despite recent high-profile attacks,marriage equality clearly has a strong andgrowing momentum.

Yet across the political spectrum, it’s clearthat an appeal to discrimination has notcompletely lost its potency. We see a numberof candidates seeking their party’s presiden-tial nomination attacking marriage equality.But these appeals to divide America will ulti-mately be rejected. What has historicallymade America great is our promise of free-dom and equal opportunity to all of our cit-izens. We have failed to live up to that prom-ise in times past. But our country is con-stantly evolving for the better, expanding thecircle of opportunity, deepening the mean-ing of freedom. We’re evolving becausecountless policymakers, activists, andlawyers—including those in this room—keepworking tirelessly to root out injustice andexpand America’s promise to every citizen.

This is another step in our journey toform a more perfect union, and it is some-thing even the Center for American Progressand Cato can agree on. Our partnershipshows that we can transcend political labelsto focus on basic rights and smart publicpolicy—policy that is rooted in our mostenduring founding principles of equality,fairness, and liberty. We both recognize that,at its heart, marriage equality is about treat-ing our fellow citizens with dignity andrespect, whether they’re gay or straight.

ROBERT A. LEVY: Why do libertarians arguethere ought to be a right to same-sex mar-riage? The purpose of government is tosecure individual rights and prevent somepersons from harming others. The thresh-old question, therefore, is this: Whoserights are being violated when two gay peo-ple get married? The answer, of course, isnobody’s.

In fact, why should government be

involved at all in the marriage business? Formost of Western history, marriage was amatter of private contract between two par-ties. Marriage today could follow that tradi-tion, with little or no government interven-tion. Some institutions would recognizegay marriages; others would not. Still oth-ers would call them “domestic partner-ships.” No one would have to join anygroup, and no group would have to adopt a

definition that its members found offen-sive. The rights and responsibilities of thepartners would be governed by personallytailored contracts, like those that controlmost of the interactions among people in afree society.

That’s the ideal. Regrettably, however,government has interceded, enacting morethan a thousand federal laws dealing withissues like taxes, child custody, and inheri-tance. Whenever government imposes obli-gations or dispenses benefits, the Consti-tution is implicated. The Equal Protection

Clause of the Fourteenth Amendment saysthat no state may “deny to any personwithin its jurisdiction the equal protectionof the laws.” That provision is the relevantconstitutional issue here, and that is whereconservatives and libertarians sometimespart company. I want to explore that part-ing of company by looking at two topics:federalism and fundamental rights.

With respect to federalism: Why don’twe simply leave the same-sex marriage ques-tion up to each state? At the time of theframing, the Constitution only applied tothe federal government. But we laterlearned that the states can be every bit astyrannical as the Feds, slavery being the casein point. After the Civil War, however, theFourteenth Amendment effectively madethe Bill of Rights and other provisions ofthe Constitution applicable against thestates. For the first time, the federal govern-ment could intervene if the states violatedour rights. That significantly altered thebalance between the national and state gov-ernments. Federalism surely allows somestates to recognize heterosexual and gaymarriages on an equal basis while otherstates opt to privatize all marriages. Stillothers can call all marriages “domestic part-nerships.” But the states may not discrimi-nate between same-sex and opposite-sexunions, without justification, and none hasbeen shown.

Next, consider the issue of fundamen-tal rights. Since the New Deal, the courtshave rigorously reviewed government reg-ulations only if they infringe on a funda-mental right—meaning one that is eitherimplicit in the concept of ordered liberty,or deeply rooted in our nation’s traditionsand culture. How that right is defined—narrowly or broadly—makes all the differ-ence, and can even dictate the outcome ofa case. Some conservatives argue that theright to same-sex marriage doesn’t meetthe criteria for a fundamental right andtherefore the courts should defer to thelegislature.

Consider the case of Gonzales v. Raich. Asick person with a doctor’s note claimed afundamental right to use medical marijua-na in California, where it is legal. The courtof appeals characterized the right as “the

John Podesta

“National polls consistently show that a small but

growing majority of the country

supports marriagerights.”


use of narcotics for medical purposes.”Ms. Raich lost because medical marijuana,said the court, is not required for orderedliberty, nor is it deeply rooted in ournation’s traditions. If the court had adopt-ed Ms. Raich’s characterization of theright—the liberty to pursue a less painfullife without infringing on the rights ofanyone else—she would have won thatcase. Which characterization is correct?Both of them are correct.

Raich was indeed trying to live with lesspain; she was also using medical marijuana.Similarly, Kristin Perry’s right in Perry v.Schwarzenegger could be characterized as“the right to marry another woman,” whichmight not be considered deeply rooted inour traditions. Or it could be characterizedas “choosing a spouse and forming a house-hold,” which would be deeply rooted. Sosometimes courts can rule on the basis ofhow they describe the right, and that is thefoolishness of bifurcating our rights. Allrights—enumerated, unenumerated, funda-mental, nonfundamental—should be rigor-ously protected by the courts. That’s theview of most libertarians. Too often, it is notthe view of many conservatives.

From liberals, with all due respect to Mr.Podesta, we sometimes get too much gov-ernment—an enlargement of state power.From conservatives, with all due respect toMr. Olson, we sometimes get too few free-doms—protection of some, but not all, ofour constitutionally secured rights. The leftand the right are selectively indignant aboutthe proper role of government. Libertarians,

by contrast, have a consistent, minimalistview. We want government out of our wal-lets and out of our bedrooms. We view the

powers of government very narrowly andthe rights of individuals very broadly—andthat was precisely the vision of the Framers.

THEODORE B. OLSON: Next month is the

44th anniversary of Loving v. Virginia,which struck down as unconstitutionalVirginia’s law prohibiting interracial mar-riage. The Supreme Court decided itunanimously—but that case, if it had beendecided the other way, would have pre-vented our president’s mother and fatherfrom getting married. These days, it’sinconceivable that such a law could existin the United States.

The polling numbers confirm this: theswing in public opinion has been 10 per-cent in most polls in favor of recognizingthe rights of individuals to marry, irrespec-tive of their sexual orientation. That’s intwo years, since Perry v. Schwarzenegger wasfiled. That matters, because court decisionsare made in the atmosphere of public opin-ion. When we win this case, if we do, wewant people to react and say, “It’s abouttime.”

The American Foundation for EqualRights has supported us very strongly, andput us out there—this so-called odd couple,which we’ve heard a thousand times now(but at least no one’s said “strange bedfel-lows” here). It helps us attract attention sothat people will say, “How did you two gettogether?” It gives us a chance to talk to theAmerican people—on radio, on television,in newspapers. We’re finding that it res-onates. Little by little—actually it’s reallyquite fast—the American public is chang-ing. So when this case comes out the way itshould, we believe the American people aregoing to say, “Thank God that terrible ves-tige of discrimination is gone.”

Robert A. Levy

“From liberals, we sometimes get too much govern-

ment. From conser-vatives, we some-

times get too few freedoms.”

I N C E L E B R A T I O N O F C O N S T I T U T I O N D A Y 2 0 1 1

THE CATO INSTITUTE’S CENTER FOR CONSTITUTIONAL STUDIESpresents the 10th Annual Constitution Day Conference

THE SUPREME COURT: PAST AND PROLOGUE—A LOOK AT

THE OCTOBER 2010 AND OCTOBER 2011 TERMS

Thursday, September 15 • 10:30 a.m.–7:00 p.m.

One of the premier programs we present each year, Cato’s Constitution Day Conference is a comprehensive critique of the Supreme Court’s just-concluded term, plus a look at the term ahead.

For details, plus information on the Cato Supreme Court Review: 2010-2011, available after September 15, go to www.cato.org/constitutionday.

My upbringing did not offer a hint that Iwould become a committed libertarian. Myparents were staunch liberal Democratswho admired the socialist heritage of Mil-waukee, where I grew up. My father believedthat the greatest U.S. president was notGeorge Washington or Abraham Lincoln,but Franklin Delano Roosevelt. It was anunpleasant shock to him that his youngestchild became an enthusiastic high schoolvolunteer for Barry Goldwater’s presidentialcampaign.

My political apostasy was not just a caseof youthful rebellion, though. I had readGoldwater’s Conscience of a Conservative, andit bothered me how large and intrusive gov-ernment had become. But I was not a con-ventional conservative on every issue. Itseemed to me that conservatives were hyp-ocritical when they criticized oppressivegovernment but were enthusiastic advo-cates of censorship laws and statutes thatprohibited drug use or certain types of sex-ual behavior.

Meeting my future wife, Barbara, at theUniversity of Wisconsin–Milwaukee deci-sively shaped my ideological education. Sheintroduced me to Atlas Shrugged and the oth-er writings of Ayn Rand, which intensifiedboth my suspicion of government and mycommitment to individual liberty.

I started out as a foreign policy hawk, buttwo developments transformed my outlook.

One was the increasingly evident failure of the Vietnam War and the lies from mili-tary and civilian leaders that accompaniedthat debacle. The other was my expo-sure to the writings ofthe founders, especial-ly Washington and Jef-ferson, regarding for-eign policy. I began toconclude that promis-cuous military inter-ventions were inher-ently destructive oflimited governmentand individual liberty.

Those views werereinforced during thepursuit of my PhD inhistory at the Universi-ty of Texas during themid and late 1970s. AsI read the works of real-ist writers such asGeorge Kennan andWalter Lippmann, and so-called isolationistfigures such as William Henry Chamberlinand Charles Callan Tansill, it became appar-ent to me that U.S. foreign policy was badlyoff course.

As I became more active in the libertari-an movement at the end of the decade,including joining the Texas Libertarian Par-ty and working on Ed Clark’s presidential

campaign, I decided to focus even more onforeign policy issues. There was already animpressive array of libertarian scholars andpundits on most domestic policy issues, butwith the exception of Earl Ravenal and oneor two others, the ranks of good libertarianforeign policy experts seemed rather thin.

Since my three-year post-doctoralresearch post with Lyndon Johnson’snational security adviser, Walt W. Rostow(an interesting adventure), was coming toan end, I approached the Cato Instituteabout future plans, including a grant towrite a book on how an interventionist for-eign policy erodes domestic liberty. It issomewhat ironic that although I’ve pub-lished 18 books as a Cato scholar, I have yetto write the book that I originally proposed.It is a project to which I hope to return inthe next few years.

The bulk of mywork now focuses onsuch topics as policytoward Iran and NorthKorea, relations withChina, and the dis-astrous consequencesof the internationalwar on drugs. My lat-est book, which willappear in 2012, exam-ines the alarming drug-related violence nextdoor in Mexico.

My proudest achie-vement during the 26years that I’ve workedfor Cato is building adefense and foreign po-licy department that

achieves the highest standards for bothquantity and quality of scholarship. Cato isnow a major and highly respected partici-pant in the debate about America’s role inthe world. Our Institute is also the bright-est hope to create a foreign policy for the21st century that is consistent with a con-stitutional system based on limited govern-ment and individual liberty.

Scholar Profile

Ted Galen Carpenter


ed Galen Carpenter is a senior fellow in defense and foreign policystudies at the Cato Institute. He is the author of 8 and the editor of 10books on international affairs, including, most recently, Smart Power:

Toward a Prudent Foreign Policy for America.Carpenter is contributing editor to the National Interest and serves on the edi-

torial boards of Mediterranean Quarterly and the Journal of Strategic Studies. He isthe author of more than 400 policy studies and articles, which have appeared inthe New York Times, the Washington Post, the Wall Street Journal, the Los AngelesTimes, the Financial Times, Foreign Affairs, Foreign Policy, the National Interest, WorldPolicy Journal, and many other publications. He is a frequent guest on radio andtelevision programs in the United States, Latin America, Europe, East Asia, andother regions.

Carpenter joined Cato in 1985. He has just stepped down from his longtimeposition as vice president for defense and foreign policy studies at the Institute.

T


C A T O E V E N T S

A t a May 5 Cato Policy Forum ZAINAB

AL-SUWAIJ, executive director of theAmerican Islamic Congress, offered

observations from her recent visit to theMiddle East in the wake of that region’suprisings. “The wall of fear has been bro-ken,” she said. “But the challenge is how to make sure it stays broken.”

At a Cato Institute conference in April, “The Economic Impact of Government Spending,”PHIL GRAMM (left), former senator from Texas and author of Gramm-Rudman-Hollings,was part of a distinguished lineup of legislators and policy experts. Gramm predicted a

stalemate on budget talks, citing the fact that neither party is willing to deal with the problem.Sen. BOB CORKER (R-TN) (center) joined Cato senior fellow DANIEL MITCHELL (right) in diag-nosing the looming fiscal crisis in more detail.

Following the publication of Climate Coup: Global Warming’sInvasion of Our Government and Our Lives, Cato hosted aforum moderated by PATRICK J. MICHAELS (left), senior fellow

at the Institute and editor of the book. BOB RYAN (center), mete-orologist for WJLA/ABC 7 News and former president of theAmerican Meteorological Society, and RICHARD LINDZEN (right),professor of meteorology at MIT, examined how climate scien-tists communicate with the public.


CatoCalendar

APRIL 5: The War in Libya: What Is the Role of Congress?

APRIL 7: The Economic Impact of Government Spending

APRIL 8: Cato Institute PolicyPerspectives 2011 (New York)

APRIL 13: Cato Club Naples—ObamaCare: What a Difference a Year Makes

APRIL 14: ObamaCare: What aDifference a Year Makes (Palm Beach)

APRIL 15: America’s Transportation Future

APRIL 18: Civil Resistance andRevolution in the Arab World

APRIL 21: The False Promise of Green Energy

APRIL 28: The Constitution of Liberty: The Definitive Edition

APRIL 29: The Future of Chinese Land Rights

APRIL 29: Free or Equal: A Personal View

MAY 2: Rehabilitating Lochner:Defending Individual Rights against Progressive Reform

MAY 4: Climate Coup: GlobalWarming’s Invasion of Our Government and Our Lives

MAY 5: The Arab Awakening and Its Implications

MAY 9: The Moral Implications of Deficits, Debt, and the Budget Battles Ahead

MAY 10: America’s Allies and War:Kosovo, Afghanistan, and Iraq

MAY 13: Why Are We at War in Libya?

MAY 16: Leashing the SurveillanceState: How to Renew and ReformPatriot Act Surveillance Authorities

MAY 17: Peddling Protectionism:Smoot-Hawley and the Great Depression

MAY 18: The Case for MarriageEquality: Perry v. Schwarzenegger

MAY 20: Answering the Critics of Comprehensive ImmigrationReform

MAY 25: Limiting Government:What Washington Can Learn from Minnesota

MAY 25: Selfish Reasons to Have More Kids

Audio and video for all Cato events dating back to1999, and many events before that, can be found onthe Cato Institute website at www.cato.org/events. Youcan also find write-ups of Cato events in Ed Crane’sbimonthly memo for Cato Sponsors.

During a three-day conference for students in April, elcato.org hosted morethan 60 participants from 12 Latin American countries. Held in BuenosAires, the event was co-organized with Argentina’s Fundación Libertad.

Among the high-profile speakers were Peruvian scholar ALVARO VARGAS LLOSA

(left); Cato adjunct scholar ALBERTO BENEGAS LYNCH, JR., from Argentina (aboveright); and El Salvador’s former finance minister MANUEL HINDS (below right).

CATO UNIVERSITY SUMMER SEMINARAnnapolis, Md. Loews Hotel July 24–29, 2011Speakers include Rob McDonald, Don Boudreaux, Robert Levy,Edward H. Crane, David Boaz, Tom G. Palmer, and Lynne Kiesling.

CONSTITUTION DAYWashington Undercroft Theatre September 15, 2011Speakers include Alex Kozinski, Gregory G. Garre, Tom Goldstein,Adam Liptak, David Post, Orin S. Kerr, and Roger Pilon.

CATO CLUB 200 RETREATNewberg, Ore. Allison Inn and Spa September 22–25, 2011

MONETARY REFORM IN THE WAKE OF CRISIS29th Annual Monetary ConferenceWashington National Housing CenterNovember 16, 2011Speakers include Allan H. Meltzer, James Grant, John A. Allison,Lawrence H. White, Roger Garrison, Richard H. Timberlake, JudyShelton, and Jeffrey Lacker.

24TH ANNUAL BENEFACTOR SUMMITPalm Beach The Breakers February 23–26, 2012

MILTON FRIEDMAN PRIZE PRESENTATIONDINNER AND GRAND OPENING WEEKENDWashington May 4, 2012


Robust debates on neoconservatism, corporations vs. the market, and more

This spring the Pew Research Centerreleased its eighth annual report onthe state of American journalism. “Insome ways, new media and old, slow-

ly and sometimes grudgingly, are comingto resemble each other,” the study says. Thetraditional platforms of the Fourth Estateare changing, and last year, online newsconsumption outstripped print media forthe first time in terms of both advertisingrevenue and readership. The tipping pointhas arrived. The trend line is clear. And theCato Institute, it seems, has been ahead ofthe curve.

Since 2005 Cato Unbound has givenreaders access to a state-of-the-art virtualtrading floor in the intellectual market-place. A unique online magazine, it reflectsan appreciation of the way ideas areexchanged in the digital age. Every monthone of the world’s leading thinkers presentsan essay on a topical issue. A panel of dis-tinguished experts responds, each offeringhis case before challenging and refining thearguments in an ongoing conversation.Readers are then encouraged to join the dia-logue by offering their own thoughtsthrough websites, blogs, and letters to theeditor. These contributions are pulledtogether into an easily accessible forum, cre-ating a media product that is virtually dis-tinct within the digital realm.

Yet Cato Unbound is also designed toavoid the pitfalls of its platform. Forstarters, the site revolves around the valueof debate. All too often, the sheer availabili-ty of personalized news today allows read-ers to give in to confirmation bias—to seekout only the information that reinforcestheir existing beliefs. The internet, by anymeasure, caters to the obstinate. At CatoUnbound, however, contributors are forcedto confront their critics, and the tendencyto selectively ignore the opposition is miti-gated.

The site also hinges on the importanceof perspective. The current news climate issubject to certain kinds of pressure: readersincreasingly look for minute-by-minuteupdates. Many sites therefore suffer from alack of depth by becoming preoccupied

with instantaneous delivery.Cato Unbound is different.“We try to step back, take adeep breath, and focus on thelarger picture,” Jason Kuznicki,the site’s editor, explains.

In the latest issue, “TargetedKilling and the Rule of Law,”the editors ask whether theexecutive branch can lawfullykill. Lead essayist Ryan Alford,assistant professor at the AveMaria School of Law, arguesthat it cannot. In fact, the “pres-idential death warrant” is sorepugnant to our constitution-al tradition, he says, that theFounders didn’t even think itnecessary to make an explicitstatement about the practice.At the time of the Revolution,British kings hadn’t enjoyedsuch a power for centuries, andit was thought to be the veryantithesis of the rule of law. Thedistinguished panel of legal andhistorical experts responding toAlford includes John C. Dehn of the U.S.Military Academy at West Point, GregoryMcNeal of Pepperdine University, and Carl-ton Larson of the University of Californiaat Davis.

Other past issues have included

•• “The Digital Surveillance State”:After September 11, the growth of thesurveillance state was perhaps in-evitable. In his lead essay, though,lawyer and columnist Glenn Green-wald argues that it has spiraled out ofcontrol. Respondents include law pro-fessor John Eastman, Heritage visitingfellow Paul Rosenzweig, and Catoresearch fellow Julian Sanchez.

• “When Corporations Hate Mar-kets”: The idea that corporations andmarkets are synonymous is a gravemisconception. In his lead essay,philosopher Roderick Long examinesthe often tangled relationship betweenbusiness and government. Respon-

dents include political analyst MatthewYglesias, economist Steven Horwitz,and economist Dean Baker.

These monthly conversations havereceived attention from publications likethe New York Times, the Washington Post, andThe Economist. The site has featured a lineupof prominent contributors, includingJames M. Buchanan, the Nobel laureate andfounder of the public choice school of polit-ical economy; Richard H. Thaler, professorof economics and behavioral science at theUniversity of Chicago; James R. Flynn, a pio-neer in the study of IQ; Clay Shirky, therenowned social media theorist; and JorgeCastañeda, former foreign minister of Mex-ico. Over the years, this forum has shown adepth of exchange and an accessible formatthat few other outlets offer.

An idea can be bound between covers,bound by convention, or bound for the dust-bin of history. The ideas of Cato Unbound,we hope, are none of the above.

C A T O P U B L I C A T I O N S

Since 2005 Cato Unbound has tackled a variety of issues, fromthe policy implications of population, to the state of neoconser-vatism, to the high cost of free parking.

Online Magazine Cato Unbound Features Leading Scholars

“He’s like Marx, only right.”

In 1960, F. A. Hayekpublished an impor-tant book that actedas the positive coun-

terpart to his morefamous The Road to Serf-dom. Whereas the latterfiercely critiqued the veryidea of a centrally plannedeconomy, the former pro-vided his view of whatshould take its place. Thisspring, a distinguishedpanel convened in theCato Institute’s F. A.Hayek Auditorium to dis-cuss the new, definitiveedition of that work, TheConstitution of Liberty, edit-ed by Ronald Hamowy.The panel included BruceCaldwell, Hayek’s intellec-tual biographer; RichardEpstein, the brilliant legal scholar; andGeorge Soros, the hedge-fund billionaireand founder of the Open Society Founda-tions.

Soros opened his talk with his owninterpretation of the great economist.“Hayek is generally regarded as the apostleof a brand of economics which holds thatthe market will assure the optimal alloca-tion of resources as long as the governmentdoesn’t interfere,” Soros said. He went onto describe what he considers the two mainpillars of this brand—the efficient markethypothesis and the theory of rationalexpectations—which, he insisted, placeHayek firmly in the dominant strain ofAmerican economics. Most label this breedthe Chicago School. “I refer to it as marketfundamentalism,” Soros said.

Richard Epstein did not concur. “Insome sense, I’m taking exactly the oppositeside of George Soros,” he said. While Sorospraised Hayek’s warning “against the slav-ish imitation of natural science” in thesocial sciences, Epstein thought his ideasweren’t systematic enough. In acknowledg-ing that they were “enormously instruc-tive,” he ultimately concluded that those

ideas were “incomplete.” Epstein arguedfurthermore that Hayek’s work points notto unfettered markets but to a “presump-tion against regulation.”

Giving voice to some of the raised eye-brows in the audience, Bruce Caldwellresponded to Soros. “I think that George hasa handle on some parts of Hayek, but mis-understands other parts,” he said. With a bet-ter grasp of the miss-ing pieces, Caldwellwas convinced thatSoros “would identi-fy himself, I’ll say itprovocatively, as aHayekian.” He thencountered some ofthe billionaire’s spe-cific claims. Hayekactually rejected theusefulness of the so-called twin pillars in“capturing the work-ings of the marketprocess,” Caldwelltold Soros, demon-strating that “he’snot the sort of mar-

ket fundamentalist that you’re describing. Ithink a pithy way of putting this is thatthere’s definitely a difference . . . betweenChicago and Vienna.”

Continuing his earlier call for all sides toacknowledge that they only have half of thetruth, Soros made some concessions. “Maybewe can find common ground,” he said. “I


A Cato Book Forum on April 28 for the new and definitive edition of The Constitution of Liberty by F. A. Hayek featured spirited debateamong financier GEORGE SOROS, legal scholar RICHARD EPSTEIN, and Hayek Collected Works editor BRUCE CALDWELL. The newedition, edited by Cato fellow Ronald Hamowy, is published by the University of Chicago Press.

Continued on page 19

At the Constitution of Liberty event Cato senior fellow RICHARD RAHN (right)talked with former Virginia governor JIM GILMORE, now president of the FreeCongress Foundation.

Soros, Epstein, and Caldwell Debate the Meaning of Hayek


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“The primary argumentsemployed against comprehen-sive immigration reform donot stand up to a review of

recent history and predictable social andeconomic behavior,” writes Stuart Ander-son in “Answering the Critics of Compre-hensive Immigration Reform” (TradeBriefing Paper no. 32). Still, “the bestapproach for supporters of comprehensiveimmigration reform is to take seriously thearguments of critics, explain why thesearguments are incorrect and, if necessary,adapt legislation to address the concernsraised.” Anderson, an adjunct scholar at theCato Institute, executive director of theNational Foundation for American Policy,and the author of Immigration (2010), pres-ents the five main arguments against liber-alizing immigration policy and shows thatthey simply don’t work. Will immigrationreform harm taxpayers? No, Andersonwrites. Instead, it will raise the wages ofonce-illegal workers and, thus, tax receipts.Will it burden welfare rolls? Again, no. “Thedata indicate that immigrants are not over-

whelming users of welfare programs.” Willan amnesty program lead to more like it?Not at all, because legalization is not thesame as amnesty. Will more immigrantsundermine the English language? No.Anderson notes that “91 percent of second-generation children from Latino immigrantfamilies and 97 percent from the third gen-eration said they speak English very well orpretty well.” Finally, will increased immigra-tion hurt American workers? Andersonaddresses this concern by pointing out that“an important reason why immigration isbeneficial is that it encourages a more pro-ductive use of human capital in the U.S.economy.” He argues that the status quo isnot acceptable. Instead, “the best approachis to harness the power of the market toallow workers to fill jobs legally, rather thanto rely on human smuggling operations forworkers to enter the United States.”

The Sun Never Sets on the Patriot Act“It has become commonplace over the lastdecade to speak of the need to balance pri-

vacy and security interests,” Cato researchfellow Julian Sanchez observes. In the yearssince the USA Patriot Act was approved,the debate surrounding this tradeoff hasbeen contentious to say the least. However,in “Leashing the Surveillance State:How to Reform Patriot Act SurveillanceAuthorities” (Policy Analysis no. 675),

Sanchez argues thatthese interests arenot inherently inconflict. In fact, theprovisions of thePatriot Act he con-siders “impose heav-ier burdens on coreprivacy, speech, andassociation interests

than is necessary to the protection ofnational security.” In a broad analysis,Sanchez considers several parts of the act—namely, the roving wiretap authority, the“Section 215” orders, and the Lone Wolfprovision—exploring their historical prece-dents and deviations therefrom. He arguesfor relatively minor adjustments, from

Immigration Reform: Answering the Objections

enforcing sunsets to pressing for addi-tional scrutiny. Most importantly, he callsfor the scope of National Security Lettersto be narrowed. “There is no legitimatereason to indefinitely retain detailedinformation about tens of thousands ofAmericans who are not suspected ofinvolvement in terror or espionage,” hewrites. Sanchez acknowledges the climateof fear and uncertainty that vindicatedthese expanded powers in the first place.“Now, with the benefit of a decade’s expe-rience,” he concludes, “we have the oppor-tunity to do better.”

Development Tax ScamsPoliticians often find creative ways tofinance their spending habits. In “CronyCapitalism and Social Engineering:The Case against Tax-Increment Fin-ancing” (Policy Analysis no. 676), CatoInstitute senior fellow Randal O’Tooledetails one increasingly popular method.Tax-increment financing (TIF) is a mecha-nism that uses taxes generated from newdevelopments to subsidize those samedevelopments. Yet, far from achieving itsstated purpose of economic improve-ment, TIF is often employed to capturescarce tax dollars otherwise intended forschools, libraries, fire departments, andvarious urban services. Indeed, “mostcities can use TIF to increase their rev-

enues at little political cost,” O’Toolewrites. Often, this money is then funneledinto favored projects, which range fromshopping malls to sports stadiums to the

latest fads in urbanplanning. “No mat-ter how well-inten-tioned, city officialswill always be tempt-ed to use TIF as avehicle for cronycapitalism, provid-ing subsidies todevelopers who in

turn provide campaign funds to politi-cians,” he writes. O’Toole examines themechanisms of TIF, tracing the circum-stances of its origin and the politicsbehind its abuse. Ultimately, he con-cludes, it is little more than an instrumentof collusion between market players andan increasingly powerful government—one that should be repealed rather thanreformed.

Dumping on Exports“The president exhorts U.S. exporters to‘win’ a global race,” writes Daniel Ikenson,associate director of trade policy studies atthe Cato Institute, “yet he ignores the factthat the government’s hodgepodge ofrules and regulations has tied their shoestogether.” In “Economic Self-Flagella-

tion: How U.S. Antidumping PolicySubverts the National Export Initia-tive” (Trade Policy Analysis no. 46),Ikenson identifies a glaring oversight inthe centerpiece of this administration’strade agenda. The National ExportInitiative (NEI), which seeks to doubleexports by 2014, fails to include sensiblereforms to the 90-year-old antidumpinglaw. This omission “erodes the competi-tiveness of U.S. firms.” By restricting accessto imports, the law raises the cost of rawmaterials for many downstream compa-nies, thereby squeezing their profits andelevating foreign competition. The admin-istration, in other words, is underminingits own initiative. “In countless ways, theantidumping status quo subverts thegoals of the NEI and is an albatrossaround the neck of the U.S. economy,” hewrites. Ikenson proposes several modestbut meaningful reforms, which includegranting legal standing for the consumingindustries, requiring a public-interest test,and applying a lesser-duty rule. In the end,he raises the curtain on the antidumpingregime, revealing how the idealizedimagery surrounding the law conceals thereal story. Antidumping is often miscon-strued as a dispute between patrioticAmerican producers and predatory for-eign traders. “The battle is better charac-terized as ‘we against us,’” he writes.


think that we would all agree that govern-ment regulation is a necessary evil . . . so if youcan avoid regulations, you should.” Manyobservers picked up on Soros’s criticisms ofthe less-than-savory political and legislativeprocesses that produced the recent healthcare and financial-reform bills. In the end, thediscussion was both provocative and civil.

The event mirrored a long-standingdebate over the great economist’s influ-ence. Last year, Kate Zernike wrote in theNew York Times that Tea Party activists wereresurrecting “long-dormant ideas [foundin] once-obscure texts by dead writers.” Shewas referring, of course, to writers likeHayek. But she may have sold him short.

This is the same man, after all, who wonthe Nobel Prize in Economics in 1974.Years later, he met with President Reaganat the White House. He also met with Mar-garet Thatcher, who, in reference to TheConstitution of Liberty, declared: “This iswhat we believe.” Hayek was described byMilton Friedman as “the most importantsocial thinker of the 20th century” and byWhite House economic adviser LawrenceH. Summers as the author of “the singlemost important thing to learn from an eco-nomics course today.” He was the mindbehind The Road to Serfdom, a book that hasnever gone out of print and, in fact, soldover 100,000 copies last year alone. Cato isproud to note that, in the last years of his

life, Hayek became a distinguished seniorfellow at the Institute.

But even that doesn’t do him justice. “Onthe biggest issue of all, the vitality of capital-ism, he was vindicated to such an extent thatit is hardly an exaggeration to refer to the20th century as the Hayek century,” JohnCassidy once wrote in the New Yorker. Hayek,however, was much more than an econo-mist. He also published impressive works onpolitical theory and psychology. He embod-ied the type of intellect that influenced dis-ciplines across the spectrum, remaining rel-evant long after his own lifetime.

As executive vice president David Boazwrote on Cato@Liberty, “He’s like Marx,only right.”

Continued from page 17

A22 • Cato Policy Report January/February 2006

THOSE WHO CAN’T, TEACHFinancial Literacy: The Federal Govern-ment’s Role in Empowering Americansto Make Sound Financial Choices—GAO Report, April 12, 2011

ANOTHER BRIGHT IDEA“The government has no business tellingan individual what kind of light bulb tobuy,” [Rep. Michele] Bachmann said in astatement last week.

Consumers Union respectfully dis-agrees, a point we made formally today ina letter to the U.S. Energy and NaturalResources Committee.—ConsumerReports.org, March 9, 2011

JUST ANOTHER DAY IN THE WASHINGTONNEWSCritics in Congress also have questionedAmtrak’s management, asking, forexample, how an employee with a$21,000 salary earned $149,000 in over-time last fiscal year.—Washington Post, May 15, 2011

The federal government’s largest hous-ing construction program for the poorhas squandered hundreds of millions ofdollars on stalled or abandoned projectsand routinely failed to crack down onderelict developers or the local housingagencies that funded them.—Washington Post, May 15, 2011

The main thing learned in the hearingsso far is that [D.C. mayor Vincent] Grayshowed bad judgment in allowing[three close aides] to guide so much ofthe hiring for patronage jobs just belowthe cabinet rank. Although all threeadvisers were longtime personnel execu-

tives, they blundered repeatedly by over-paying people, doing inadequate vettingand hiring children of officials.—Robert McCartney, Washington Post,May 15, 2011

HIS ROYAL HIGHNESS PRINCE CHARLES, TO HIS FORMER SUBJECTS WHO ARE EATING TOO WELLNobody wants food prices to go up, but ifit is the case that the present low price ofintensively produced food in developedcountries is actually an illusion, onlymade possible by transferring the cost ofcleaning up pollution or dealing withhuman health problems onto other agen-cies, then could correcting these anom-alies result in a more beneficial arena?. . .

Critically, such a new Washingtonconsensus might embrace the willing-ness of all aspects of society—the public,private and NGO [nongovernmentalorganizations] sectors, large corpora-tions and small organizations—to worktogether to build an economic modelbuilt upon resilience and diversity.—Washington Post, May 10, 2011

POLITICIANS: YOU’VE GOT TO KEEP AN EYEON THEM EVERY MINUTEOhio has launched what appears to bethe biggest intervention in the privateeconomy by a state government since atleast the Great Depression, according to aUSA TODAY review of historical data.The state is preparing new industrialparks and high-tech office buildings;loaning money and giving grants to busi-nesses; and subsidizing clean energy, web-sites, nanotechnology and warehouses,among other things.—USA Today, April 26, 2011

EXCEPT MAYBE FOR THOSE SOCIAL CONSERVATIVES WHO GOT A “D” ON CATO’S FISCAL POLICY REPORT CARDAll social conservatives I know are alsofiscal conservatives. Not necessarily theother way around.—Gov. Mike Huckabee, Fox News,May 15, 2011

DEATH BY DECORATORFlorida is one of only three states thatrequire commercial interior designers tobecome licensed before they hang a sin-gle painting in an office building, schoolor restaurant. A bill making its waythrough the state legislature, however,would deregulate the occupation, alongwith more than a dozen others, includ-ing yacht brokers and hair braiders.

That possibility has the state’slicensed interior designers ruffled.They’ve hired Ron Book, one of thestate’s most influential lobbyists, tofight the bill. And they’ve stormed leg-islative hearings to warn of the mayhemthat would ensue if the measure passes.

Among the scenarios they’ve con-jured: flammable carpets sparking infer-nos; porous countertops spreading bac-teria; jail furnishings being turned intoweapons.—Wall Street Journal, April 15, 2011

USING TAXPAYERS’ MONEY TO LOBBY FORMORE OF ITNational Public Radio (NPR) is payingthe lobbying firm Bracy, Tucker, Brown& Valanzano to defend its taxpayerfunding stream in Congress, accordingto lobbying disclosure forms filed withthe Secretary of the Senate.—Daily Caller, May 5, 2011

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