NSA disclosures unforeseen PAGES 4,6 PAGE 11 …...BY JOHN MICKLETHWAIT AND ADRIAN WOOLDRIDGE Continued on page 8 On May 21,LESZEKBALCEROWICZ, the architect of Poland’s post-communist

The Fourth Revolutionround the globe, from San-tiago to Stockholm, thecleverer politicians andbureaucrats are scouringthe world for ideas. The

reason is simple: the main political challengeof the next decade will be fixing government.In The Federalist PapersAlexander Hamiltonurged his fellow Americans to decide “whethersocieties of men are really capable or notof establishing good government from reflec-tion and choice, or whether they are foreverdestined to depend for their political con-stitutions on accident and force.” His wordsare just as true today.

Countries that can establish “good gov-ernment” will stand a fair chance of providingtheir citizens with a decent standard of life.Countries that cannot will be condemnedto decline and dysfunction, in much the sameway the Chinese once were. For the state isabout to change. A revolution is in the air,driven partly by the necessity of diminishingresources, partly by the logic of renewed

competition among nation-states, and partlyby the opportunity to do things better. ThisFourth Revolution in government will changethe world.

Why call it a fourth revolution? Not leastas a reminder that the state can change dra-matically. Most of us in the West only know

one model—the ever-expanding democraticstate that has dominated our lives since theSecond World War. However, history beforethen tells a different story. Indeed, Europeand America surged ahead precisely becausethey kept changing: government was engaged

BY JOHN MICKLETHWAIT AND ADRIAN WOOLDRIDGE

Continued on page 8

On May 21, LESZEKBALCEROWICZ, the architect of Poland’s post-communist economic success,was awarded the Cato Institute’s 2014 Milton Friedman Prize for Advancing Liberty. “The mostimportant economic reforms are at the same time political reforms,” Balcerowicz said of his trans-formation of Poland, “because they reduce the scope of bureaucratic interventions.” PAGE 3

A

JOHN MICKLETHWAIT is the editor-in-chief ofThe Economist. ADRIAN WOOLDRIDGE is TheEconomist’s management editor and writes the maga-zine’s “Schumpeter” column. This essay is based ontheir recent book The Fourth Revolution: The GlobalRace to Reinvent the State. Published by arrangementwith The Penguin Press, a member of Penguin Group(USA), LLC. Copyright © 2014 by John Mickleth-wait and Adrian Wooldridge.

HON. PHIL GRAMMPresents theFriedman Prizeto Balcerowicz

PAGES 4,6

GLENNGREENWALDOne year afterhis explosiveNSA disclosures

PAGE 11

NEW BOOK FROM CATOPublic policyand theunforeseen

PAGE 16

CatoPolicyReportJULY/AUGUST 2014 VOL. XXXVI NO. 4

2 • CATO POLICY REPORT July/August 2014

E D I T O R I A L

BY DAVID BOAZ

“Libertarianideas are

spreading, both amongintellectuals

and morebroadly among

voters.

he defeat of House Majority Leader EricCantor by economist David Brat in aVirginia congressional primary generatedlots of headlines about grass-roots insur-

gency in the Republican Party.Former Minnesota governor Tim Pawlenty, a mild-man-

nered moderate, told journalists that “the new energy in theRepublican Party is the libertarian strain in the party. It hasmatched and in my view exceeded the power and momen-tum and volume of the tea party.” Fire-breathing SouthCarolina conservative Katon Dawson complained: “Thereis a loud libertarian faction. Libertarianism has moved intothe Republican Party and is trying to hijack it.” A strangecomplaint from a guy who was part of the Southern conser-vative influx into the Republican Party in the 1960s.

The rise of libertarianism in the political world is some-thing I’d noticed before this recent election. Throughout2012 and 2013 newspapers had run headlines such as“Rand Paul and the rise of the libertarian Republican,”“Libertarians’ rise has the GOP boiling,” “Libertarians,tech titans poke old-school GOPers,” “Americans aretilting more libertarian on foreign policy,” “LibertarianPopulism and Its Critics,” “The tide is rising forAmerica’s libertarians,” and my favorite—on page 2 of theWashington Post—“Libertarianism is hot.”

As one indication of the increasing attention paid to lib-ertarians in the media, in 2013 the Washington Post had 27headlines with the words “libertarian” or “libertarianism.”In 2003 there were two.

Not all the action is in the Republican Party. Under theheadline “Southern-Fried Freedom Lovers PropelLibertarian Candidates,” the Daily Beast reported in Juneon Libertarian Party candidates in Florida, Georgia, andNorth Carolina bumping 10 percent in early polls. Nodoubt they were inspired by Robert Sarvis’s 6.6 percent inthe 2013 Virginia gubernatorial race.

Sometimes I wonder what politicians and pundits meanwhen they talk about libertarians in the Republican grassroots. I doubt there are millions of consistent advocates ofindividual liberty, limited government, free markets, andpeace. I fear they just mean “conservatives who talk aboutprinciples,” or maybe even “angry conservatives.”

But I hope I’m wrong about that. David Kirby, whospearheaded the “libertarian vote” studies that Cato haspublished over the past decade, found the number of lib-ertarians in the Republican electorate rising from 15 per-cent in 2002 to 34 percent, based on two questions in theannual Gallup Poll Governance Survey about “govern-

ment trying to do too many things” and whether “government should promote traditional values.” AFreedomworks survey found that 78 percent ofRepublicans and GOP-leaning independents self-iden-tify as fiscally conservative and socially moderate.

I wrote a whole book on the definition of libertarian-ism. But for political purposes I’d say that what makes avoter, activist, or candidate a libertarian would be a com-mitment to economic freedom, personal freedom, civilliberties, and nonintervention. Given the exigencies ofpolitics, I might settle for three out of four. Republicancandidates and elected officials may even be perceived as“libertarian-ish” if they’re strongly committed to free mar-kets and not much interested in conservative social issues.

As I’ve written at Cato’s blog, Cato at Liberty, genuineswing voters tend to hold libertarian views. AWashington Post-ABC News poll in 2012 found that 64percent supported “smaller government with fewer serv-ices,” and 63 percent favored gay marriage (comparedwith 53 percent of the total electorate then). That’s thesort of understanding that led to another of those recentheadlines: “Libertarian swing vote in play.”

Libertarian ideas are spreading, both among intellectu-als and more broadly among voters. Voters with libertar-ian views are becoming more aware of their impact.Politicians and journalists are starting to notice the liber-tarian vote. Libertarian views are coming under moreattack, from conservative politicians, liberal magazines,and more. This is all part of what we might call the main-streaming of libertarianism.

Rep. Ron Paul and Sen. Rand Paul have helped makelibertarianism a more visible part of our politics, but weshouldn’t forget the important role played by George W.Bush, the Federal Reserve, Barack Obama, the IRS, theNSA, and the VA.

We’ll also take some credit here at Cato. One closeobserver of the Cato Institute and the national debatesaid to me recently, “Cato’s job is to describe and defendlibertarianism with credible scholarship so that policy-makers, journalists, and intelligent lay people recognizelibertarianism as a respectable intellectual position wor-thy of attention. Cato has been remarkably successful atcarrying out its core function.”

Of course, we hope that the impact of libertarian ideasis still on the rise, and we’ll continue to work to make thatthe case.

”

TMainstreaming Libertarianism

July/August 2014 CATO POLICY REPORT • 3

As an economic crisis man-

ager, Leszek Balcerowicz

has few peers,” the Wall

Street Journal declared in a

weekend interview with the Polish econo-

mist in December 2012. “When commu-

nism fell in Europe, he pioneered ‘shock

therapy’ to slay hyperinflation and build a

free market. In the late 1990s, he jammed a

debt ceiling into his country’s constitution,

handcuffing future free spenders. When he

was central-bank governor from 2001 to

2007, his hard-money policies avoided a

credit boom and likely bust.”

On May 21, in recognition of his un-

wavering leadership as the architect of

Poland’s economic transformation, Leszek

Balcerowicz was awarded the 2014 Milton

Friedman Prize for Advancing Liberty. The

67-year-old economist accepted the honor

in front of a sold-out crowd, joining more

than 700 supporters and friends of the

Institute at the historic Waldorf-Astoria

in New York City.

“


In his keynote address that night, former world chess champion

Garry Kasparov—who is currently chairman of the Human

Rights Foundation and a global advocate of individual liber-

ty—discussed the importance of American values, speaking from the

vantage point of his experience growing up in the Soviet Union. “As

someone who looked at America through the Iron Curtain, I have

strong feelings about the relationship between the importance of

freedom at home and caring about freedom globally,” he said.

Fortunately, Kasparov was by no means alone in this respect.

Like many countries around the world, Poland has been a battle-

ground for competing ideologies. In the 1980s, Polish reformers

fought for individual and economic freedom, shaking communism

to its core. By 1989, the country’s Soviet-backed regime agreed to

free elections, ushering in Eastern Europe’s first noncommunist

government since World War II. A few months later, the Berlin

Wall fell. Poland was free, but on the verge of economic collapse.


FACING: ABOVE LEFT: JOHAN NORBERG, A CATO

SENIOR FELLOW AND AUTHOR OF IN DEFENSE OF GLOBAL

CAPITALISM. BELOW LEFT: GARRY KASPAROV, CHAIRMAN OF THE HUMAN RIGHTS FOUNDATION, GAVE

THE EVENING’S KEYNOTE ADDRESS. RIGHT: HON. PHILGRAMM, AN AMERICAN ECONOMIST AND FORMER CHAIR-MAN OF THE U.S. SENATE BUDGET COMMITTEE, PRESENTED

THE FRIEDMAN PRIZE. MIDDLE RIGHT: JOHN ALLISON,CATO’S PRESIDENT, AND XIA YELIANG, A VISITING FELLOW

AT THE INSTITUTE. BELOW RIGHT: BRUCE CALDWELL,F. A. HAYEK’S BIOGRAPHER. THIS PAGE: ABOVE LEFT:LIYA PALAGASHVILI , A PHD STUDENT IN ECONOMICS

AT GEORGE MASON UNIVERSITY; TERRY KIBBE, SENIOR

ADVISOR AT FREEDOMWORKS; AND ANDREA RICH, PRES-IDENT OF THE CENTER FOR INDEPENDENT THOUGHT.MIDDLE LEFT: IKE BRANNON, PRESIDENT OF CAPITAL

POLICY ANALYTICS; WAYNE OLSON, EXECUTIVE DIREC-TOR OF THE FOUNDATION FOR ECONOMIC EDUCATION;AND JOE LEHMAN, PRESIDENT OF THE MACKINAC

CENTER. MIDDLE RIGHT: JOHN FUND, SENIOR EDITOR

AT THE AMERICAN SPECTATOR, AND GEORGE M. YEAGER, ACATO CLUB 200 MEMBER. BELOW RIGHT: VÁCLAVKLAUS, FORMER PRESIDENT OF THE CZECH REPUBLIC AND

A DISTINGUISHED SENIOR FELLOW AT THE CATO INSTITUTE.

It was during this time that Balcerowicz stood at the frontier of

economic change in Poland. From 1989 to 1991, he served as deputy

prime minister and finance minister under President Tadeusz

Mazowiecki. As chief architect of what became known as the

Balcerowicz Plan, he fundamentally transformed the Polish econo-

my in the 1990s—implementing a series of reforms that included

freeing prices, capping government wages, liberalizing trade, and

making the Polish currency convertible.

This approach has been labeled radical, but in Balcerowicz’s

assessment he was conducting a critical rescue operation. “A very

risky option is always better than a hopeless one,” he recounted at

the award dinner. The results seem to speak for themselves. Within

three days, the market responded: prices stopped rising, goods

appeared in markets, and people began buying and selling. One year

into the transition, Poland recorded a budget surplus, and shortages

and hyperinflation ended. Between 1989 and 2007 its economy


THIS PAGE: ABOVE LEFT: THE BIENNIAL DINNER WAS

HELD IN THE SPECTACULAR GRAND BALLROOM AT THE

WALDORF-ASTORIA IN NEW YORK CITY. MIDDLE

LEFT: VERNON L. SMITH, A NOBEL LAUREATE AND

SENIOR FELLOW AT THE CATO INSTITUTE. ABOVE

RIGHT: JOHN ALLISON, PRESIDENT OF THE CATO

INSTITUTE; MARK CALABRIA, DIRECTOR OF FINAN-CIAL REGULATION STUDIES AT THE INSTITUTE; FORMER

SENATOR PHIL GRAMM; AND GEOFF GRAY, AFORMER STAFFER FOR SENATOR GRAMM. BELOW

RIGHT: LESZEK BALCEROWICZ, FORMER DEPUTY

PRIME MINISTER AND FINANCE MINISTER OF POLAND,ACCEPTS THE 2014 MILTON FRIEDMAN PRIZE FROM

PHIL GRAMM. FACING: LEFT: BALCEROWICZRECOUNTED HIS ROLE AS CHIEF ARCHITECT OF

POLAND’S RADICAL STABILIZATION PLAN. ABOVE

RIGHT: ANDREI ILLARIONOV, FORMER CHIEF ECO-NOMIC ADVISER TO RUSSIAN PRESIDENT VLADIMIR

PUTIN AND A SENIOR FELLOW AT THE CATO INSTITUTE,INTRODUCED THE EVENING’S KEYNOTE SPEAKER.MIDDLE RIGHT: THE 2014 MILTON FRIEDMAN PRIZE

FOR ADVANCING LIBERTY. BELOW RIGHT: ROBERTA. LEVY, CHAIRMAN OF THE CATO INSTITUTE, WITH

MARIE AND SEAN NEWHOUSE.


doubled in size. Poland was the only country in the European Union

to avoid recession in 2009 and has been the fastest-growing EU

economy since.

It’s difficult to overstate what Balcerowicz helped achieve in a

mere generation, and the lessons he taught are still applicable to this

day. “First, be ready to move fast when a window of opportunity

appears,” he said in his acceptance speech. “Second, work hard on

public opinion to stop the spiral of state intervention.”

“In those respects, I believe, the role of Cato and other free-mar-

ket think tanks is enormous,” Balcerowicz said, capping off a celebra-

tion that highlighted his achievements as well as the legacy of Nobel

laureate Milton Friedman. The Friedman Prize, named in honor of

the great 20th century champion of liberty, is presented biennially to

an individual who has made a significant contribution to advancing

human freedom. Established in 2002, the award is given out follow-

ing a long process of deliberation by a distinguished panel of interna-

tional judges. The honoree receives a $250,000 cash prize, which is

made possible by generous earmarked donations.


FOR ADDITIONAL DETAILS AND REGISTRATION VISIT WWW.CATO-UNIVERSITY.ORG.

in a continual process of improvement. Inour book, we argue that the Western statehas been through three and a half great rev-olutions in modern times.

LEVIATHAN AND ITS DISCONTENTSThe first took place in the 17th century,

when Europe’s princes constructed centralizedstates that began to pull ahead of the rest of theworld. In the 1640s, when a middle-aged royaliston the run called Thomas Hobbes producedhis anatomy of the state against the backgroundof the English Civil War, there were goodreasons to believe that the future lay with Chinaor Turkey. Hobbes decided to name the state,which he regarded as the only answer to thenastiness, brutality, and brevity of human life,after a biblical monster, Leviathan. But whata successful monster it proved to be! Europe’snetwork of competing monsters threw up asystem of ever-improving government: nation-states became trading empires, then entre-preneurial liberal democracies. The strugglefor political and economic prowess was oftenbloody and messy—Britain has waged war onvirtually every Western European country—but that contest has also ensured that the Westleft other regions of the world behind.The second revolution took place in the

late 18th and 19th centuries. It began with theAmerican and French revolutions and eventuallyspread across Europe, as liberal reformersreplaced regal patronage systems—“Old Cor-ruption,” as it was known in England—withmore meritocratic and accountable government.English liberals took a decrepit old systemand reformed it from within by stressingefficiency and freedom. They “stole” China’sidea of a professional civil service selected byexam, attacked cronyism, opened up markets,and restricted the state’s rights to subvertliberty. The “night-watchman state,” advancedby the likes of John Stuart Mill, was bothsmaller and more competent. Even thoughthe size of the British population rose by nearly50 percent from 1816 to 1846 and the Victoriansimproved plenty of services (including setting

up the first modern police force), the state’stax revenues fell from £80 million to £60million. And later reformers like WilliamGladstone kept on looking for ways to “savecandle-ends and cheese-parings in the causeof the country.”However, as often happens, one revolution

set up another. Throughout the second halfof the 19th century, liberalism began to questionits small-government roots: What good, won-dered Mill and his followers, was liberty for aworkingman who had no schooling or healthcare? And if that man (and eventually woman)deserved the right to vote, and it would beilliberal to think otherwise, then that schoolingneeded to be broad and ambitious. And ifgovernments were in competition with oneanother—and that was increasingly the viewas Bismarck welded Prussia into a Great Pow-er—then surely those who educated theirworkers best would triumph.Thus, an improved life for every citizen

became part of the contract with Leviathan.That paved the way for the aberration of com-munism but also for the third great revolution:the invention of the modern welfare state.That too has changed a great deal from whatits founders, like Beatrice and Sidney Webb,imagined; but it is what we in the West livewith today. In Western Europe and America,it has ruled unchallenged since the SecondWorld War—except for during the 1980s,when Margaret Thatcher and Ronald Reagan,inspired by classical liberal thinkers like MiltonFriedman, temporarily halted the expansionof the state and privatized the commandingheights of the economy. We dub this a halfrevolution because, although it harked backto some of the founding ideas of the second“liberal” revolution, it failed in the end to doanything to reverse the size of the state.

TO THOSE WHO HAVE, MORE SHALL BE GIVENThe twists and turns of each revolution

have been significant. What is clear, however,is that for the past 500 years Europe andAmerica have been the font of new ideas aboutgovernment. Freedom and democracy havebeen central to that. The rise of the Westernstate was not just a matter of setting up a com-petent civil service. Even Hobbes’s monsterwas a dangerously liberal one for a royalist topropose, because Leviathan relied on thenotion of a social contract between the rulerand the ruled. The Victorian liberals saw awell-run state as a prerequisite for individualemancipation. Their Fabian successors sawa welfare state as a prerequisite for individualfulfillment. As it has expanded, the Westernstate has tended to give people more rights—the right to vote, the right to education andhealth care and welfare.Yet the Western state is now associated

with another trait: bloat. The statistics tellpart of the story. In America, governmentspending increased from 7.5 percent of GDPin 1913 to 19.7 percent in 1937, to 27 percentin 1960, to 34 percent in 2000, and to 41percent in 2011. But these figures do not fullycapture the way that government has becomepart of the fabric of our lives.America’s Leviathan claims the right to

tell you how long you need to study to becomea hairdresser in Florida (two years) and theright to monitor your emails. It also obligesAmerican hospitals to follow 140,000 codesfor ailments they treat, including one forinjuries from hitting a turtle. Governmentused to be an occasional partner in life, thecontractor on the other side of Hobbes’sdeal, the night watchman looking over us inMill’s. Today it is an omnipresent nanny.Back in 1914, “a sensible, law-abiding Eng-lishman could pass through life and hardlynotice the existence of the state, beyondthe post office and the policeman,” thehistorian A. J. P. Taylor once observed. “Hecould live where he liked and as he liked. . . .Broadly speaking, the state acted only to

The Western state has been through three and a half

great revolutionsin modern times.”

Continued from page 1 “C69479 CATO CX Q10.qxp_CPR_July-August 2014 7/18/14 9:24 PM Page 8


help those who could not help themselves.It left the adult citizen alone.” Today thesensible, law-abiding citizen cannot passthrough an hour, let alone a lifetime, withoutnoticing the existence of the state.

There have been periodic attempts tostop the supersizing of the state. In 1944, inThe Road to Serfdom, Friedrich Hayek warnedthat the state was in danger of crushing thesociety that gave it life. This provided animportant theme for conservative politiciansfrom then onward. In 1975 California’s currentgovernor, Jerry Brown, in an earlier incarnation,declared an “era of limits.” This worry about“limits” profoundly reshaped thinking aboutthe state for the next decade and a half. Inthe 1990s people on both the Left and theRight assumed that globalization would trimthe state: Bill Clinton professed the age ofbig government to be over. In fact, Leviathanhad merely paused for breath. Governmentquickly resumed its growth. George W. Bushincreased the size of the U.S government bymore than any president since LyndonJohnson, while globalization only increasedpeople’s desire for a safety net. Even allowingfor its recent setbacks, the modern Westernstate is mightier than any state in historyand mightier, by far, than any private company.Walmart may have the world’s most efficientsupply chain, but it does not have the powerto imprison or tax people—or to listen totheir phone calls. The modern state can killpeople on the other side of the world at thetouch of a button—and watch it in real time.

There are powerful demographic andeconomic reasons why many people thinkthat the state will continue to grow. Enti-tlements grow as populations age. Govern-ments dominate areas of the economy, likehealth and education, that are resistant toproductivity improvements. But the otherreason for the state’s sprawl has been political.Both the Left and the Right have indulgedits appetites, the former singing the praisesof hospitals and schools, the latter serenadingprisons, armies, and police forces, and bothcreating regulations like confetti. For all

the worries about “benefit scroungers” and“welfare queens,” most state spending issucked up by the middle classes, many ofthem conservatives. Voters have alwaysvoted for more services; some people justfeel the resentment more intensely thanother people do.

For better or worse, democracy and ele-phantiasis have gone hand in hand. Ourpoliticians have been in the business of givingus more of what we want—more education,more health care, more prisons, more pensions,more security, more entitlements. And yet—here is the paradox—we are not happy. Havingoverloaded the state with their demands,voters are furious that it works so badly. InAmerica the federal government has lesssupport than George III did at the time ofthe American Revolution: Just 17 percent ofAmericans say that they have confidence inthe federal government, less than half of the36 percent found in 1990 and a quarter of the70 percent found in the 1960s. More peoplenow identify themselves as independents thanthey do as Republicans and Democrats.

In short, the state is in trouble. The mysteryis why so many people assume that radicalchange is unlikely. The status quo in fact isthe least likely option. As an American econ-omist, Herbert Stein, once drily observed,“If something cannot go on for ever, it willstop.” Government will have to change shapedramatically over the coming decades. Inthe West, the era of more is coming to anend. It is time for the Fourth Revolution.

THE WINDS OF CHANGEBringing Leviathan under control will be

at the heart of global politics because of aconfluence of three forces: failure, competition,and opportunity. The West has to changebecause it is going broke. The emerging worldneeds to reform to keep forging ahead. Thereis a global contest, but one based on promise asmuch as fear: government can be done better.

Debt and demography mean that govern-ment in the rich world has to change. Evenbefore Lehman Brothers collapsed, Westerngovernments were spending more than theyraised. The U.S. government has run a surplusonly five times since 1960. For the foreseeablefuture the state will be in the business oftaking things away—far more things thanmost people realize. In some places, wheregovernments have managed their financesspectacularly badly, such as Greece and someAmerican cities, that taking away has alreadybeen dramatic: In San Bernardino the cityattorney advised people “to lock their doorsand load their guns” because the city couldno longer afford police.

This battle will go straight to the heart ofdemocracy. Western politicians love to boastabout the virtues of democracy and urgeerrant countries, from Egypt to Pakistan, toembrace it. They argue that “one person, onevote” holds the cure to everything from povertyto terrorism. But the practice of democracyis diverging ever more from the ideal. Theunedifying truth is that Western democracygot rather flabby and shabby when it wasmostly giving things away. Interest groups(including many people who work for thestate) have proved remarkably successful athijacking government.

If failure is the first prompt for change,competition is the second. For all its frus-trations with government, the emerging worldis beginning to produce some striking newideas, eroding the West’s competitive advantagein the process. If you are looking for the futureof health care, then India’s attempt to applymass-production techniques to hospitals ispart of the answer, just as Brazil’s system of

Margaret Thatcher and Ronald Reagan,inspired by classical liberal thinkers likeMilton Friedman, temporarily halted

the expansion of thestate. We dub this a half revolution.

”

“C69479 CATO CX Q10.qxp_CPR_July-August 2014 7/18/14 9:24 PM Page 9


conditional cash transfers is part of the futureof welfare. So far the emerging world has not seized

the opportunity to leapfrog ahead that tech-nology has presented it with. Brazil is headingtoward a pension crisis that could dwarf eventhose in Greece and Detroit. India may havea few of the most innovative hospitals in theworld, but it has some of the lousiest roadsand laziest politicians. But do not be fooledinto thinking that the emerging world is milesbehind. The days when the West had a monop-oly on clever government are long gone.This points to the third force: the oppor-

tunity to “do government” better. As withprevious revolutions, the threat is plain: bank-ruptcy, extremism, drift. But so is the oppor-tunity: the chance to modernize an institutionthat we have overloaded with responsibilities.How should the state be changed? The prag-matic answer, which people of all persuasionsshould seize upon, relies on improving man-agement and harnessing technology, par-ticularly information technology. Fifty yearsago, companies suffered from the same bloatthat government does now. Business haschanged shape dramatically since then,slimming, focusing, and de-layering. There is more to the future of government

than just better management, however. Atsome point a bigger decision has to be made.What is the state for? That question is at theheart of an old debate—a debate that disap-peared during the “all-you-can-eat” phaseof modern democracy. Now these questions

are discussed only in piecemeal form. Modernpoliticians are like architects arguing aboutthe condition of individual rooms in acrumbling house, rushing to fix a windowhere or slap on a new coat of paint there.We need to look at the design of the wholestructure—and also to think hard about theproper role of the state in a fast-changingsociety, just as the Victorians did at the dawnof the modern democratic age.

CONCLUSIONThe Fourth Revolution is about many

things. It is about harnessing the power oftechnology to provide better services. It isabout finding clever ideas from every cornerof the world. It is about getting rid of outdatedlabor practices. But at its heart it is aboutreviving the power of two great liberal ideas.It is about reviving the spirit of liberty by

putting more emphasis on individual rightsand less on social rights. And it is about revivingthe spirit of democracy by lightening the burdenof the state. If the state promises too much, itcreates distemper and dependency among itscitizens; it is only by reducing what it promisesthat democracy will be able to express its bestinstincts, of flexibility, innovation, and problem

solving. This is a fight that matters enormously.Democracy is the best safeguard for basic rightsand basic liberties. It is also the best guaranteeof innovation and problem solving. But fightingagainst its worst instincts will be tough.The three revolutions we chronicle in our

book have all been enormously hard fought.The revolutionaries had to question long-cherished assumptions and dream up a verydifferent world, often in the face of sternopposition from people at the very heart ofthe state. Yet each one of these revolutionsbrought huge rewards. Early modern Europebecame the most dynamic continent in theworld. Victorian England created a liberalstate that provided better services at lowercost than Old Corruption, oversaw thetransition to mass democracy with little dis-ruption, and ruled a vast empire very cheaply.The welfare state provided millions of peoplewith tangible securities in a world that couldbe horrifically harsh. The Fourth Revolutionwill be no easier.But reformers should push ahead, for the

rewards will be dramatic: any state that harnessesthe most powerful innovative forces in societywill pull ahead of its peers. Ultimately, thesestates have history on their side: this revolutionis about liberty and the rights of the individual.That is the tradition that propelled first Europeand then America forward. The West hasbeen the world’s most creative region becauseit has repeatedly reinvented the state. Wehave every confidence that it can do so again,even in these difficult times. n

The Fourth Revolution is

about reviving thepower of two great

liberal ideas.

”“

Are you following the Cato Institute on social media?T he Cato Institute is dedicated to the principles of individual liberty, limited government, free

markets, and peace. Are you? Follow us on our many online platforms and let us know what

YOU think about liberty, public policy, and the most important issues of the day.

@CATOINSTITUTE WWW.CATO.ORG

C69479 CATO CX Q10.qxp_CPR_July-August 2014 7/18/14 9:24 PM Page 10


CALEB BROWN: In June 2008, Gen. KeithAlexander, then-head of the NSA, askedin reference to intercepting communica-tions, “Why can’t we collect all the signalsall the time?” Is that the direction the NSAis moving in?GLENN GREENWALD: It’s important tounderstand that Gen. Alexander’s com-ment was not just an off-handed quip, as ithas sometimes been characterized. One ofthe things I try to convey in my book is justhow pervasive this motto—“all the signals allthe time”—is in terms of what the NSA seesas its mission. Their goal is not just a target-ed operation designed to monitor the com-munications of particular people. Theywant to turn the Internet into a limitless sys-tem of surveillance. And it’s not just an insti-tutional aspiration. It’s something that theyare extremely close to fulfilling.

The NSA is already collecting so muchdata that their primary problem at this pointis finding a way to store it all. Keep in mindthat enormous sums of data can be storedon thumb drives now. The amount of datathat the NSA collects is so gargantuan—bil-lions of emails, telephone calls, and otheronline activities everyday—that they’rebuilding a sprawling new facility in Utah justto be able to store it all.

In fact, the idea of collecting everythingwas something pioneered by Gen. Alexanderwhen he was deployed in Baghdad during the

Iraq war. What we really have now is a com-munications strategy that was developed foran enemy population in a time of war that hasnow been imported onto American soil andaimed at our own population. I think that’s anexpression of just how radical it is.

Is there any evidence that the nationalsecurity apparatus has been used at lowerlevels of government?Yes. One of the more revealing episodestook place when I started reporting forGloboNews in Brazil. Thomas Shannon, theU.S. ambassador to Brazil at the time, wasthe point person for tamping down the out-rage, and he assured the public that theseoperations were only used in a targeted wayto detect terrorist plots and protectAmericans. Then, in a 2009 letter, it wasrevealed that Shannon had thanked the NSAfor the outstanding surveillance they per-formed on a regional financial summit organ-ized by Brazilian president Luiz Inacio Lulada Silva—activities that, as Shannon himselfacknowledged, gave the United Statesinsight into the negotiating strategies of eachof the countries present at the conference.

In short, the same person who defendedU.S. surveillance three years earlier was noweffusively praising the NSA for its economicespionage. That’s the culture that has devel-oped: if the U.S. government is interested incertain information, it can, should, and willinfiltrate. This speaks to a broader pointabout how those in control come to justifytheir own exercise of power. At some point,the practice of encroachment becomes nor-malized. They convince themselves that it’sbeing put toward positive ends, and ulti-mately there’s no accountability or punish-ment for this sort of mission creep.

Is the NSA simply another bureaucracytrying to maximize its budget?The NSA shouldn’t be thought of in isola-tion. It is not some uniquely malevolentagency within a benevolent executive branch.It’s an appendage of the overall machine. Inthe wake of 9/11, the executive branch wentcompletely insane and, along with Congress,began ignoring the balance between basic pri-vacy rights and those measures ostensiblytaken in the name of security. There was aninstitutional inertia that allowed this machin-ery to keep growing.

I should add that you can’t underestimatehow much the profit motive has driven all ofthis. Roughly 70 percent of the NSA’s $75 bil-lion budget goes into the coffers of privatecompanies like General Dynamics or BoozAllen Hamilton. The revolving door betweenthese corporations and the Pentagon toooften becomes its own driving force. Inessence, crony capitalism encourages profi-teering off of these ever-expanding govern-ment programs.

Can the private companies that compliedwith these surveillance activities win backtheir customers’ trust?Well, those companies are suffering now.They weren’t before, because this was all

P O L I C Y F O R U M

No Place to HideI n May 2013 journalist Glenn Greenwald set out for Hong Kong to meet an

anonymous source who claimed to have evidence of pervasive government spy-ing. The source, who insisted on communicating only through heavily encrypted

channels, turned out to be 29-year-old National Security Agency (NSA) contractorEdward Snowden, and his revelations about the agency’s systemic overreach provedto be some of the most explosive and consequential news in recent history. In an exclu-sive interview with Cato, the Institute’s director of multimedia Caleb Brown sat downwith Greenwald to discuss his new book, No Place to Hide—revealing his thoughts oneverything from the response from the “establishment media” to the broader implica-tions of the current surveillance debate.

“The NSA is an appendage of the

overall machine.”


done in secret. There are great benefits tocooperating with the NSA and establishingrelationships with the U.S. government. It’sincredibly lucrative for these companies.Nevertheless, to sustain profitability, com-panies like Facebook, Google, and Yahoohave to be global in nature. And, unfortu-nately for them, you already see German andBrazilian and Japanese companies advertis-ing that customers should entrust their per-sonal data with them instead because theywon’t turn it over to the NSA. The percep-tion is that American technology is nowunsafe and that is truly threatening to someof our companies.

Yet, it’s also important to keep in mindthat American tech companies exert enor-mous influence in Washington. SiliconValley is probably the most important finan-cial backer of the Democratic party, and cer-tainly was of the Obama campaign. It’s avery powerful sector. So if they’re seriousabout imposing constraints on the surveil-lance state—even if it’s simply out of self-interest—that's probably one of the mostpromising avenues for reform.

Public outrage can be a critical force in aresponsible democracy. But when you live inwhat is essentially an oligarchy, businesstycoons exert much greater influence. Whathappens is both political parties compete forpower and almost never diverge in anymeaningful way over issues like this. Thereare certain politicians on both sides of theaisle riding the current crest of anger. But byand large the U.S. government is construct-ed to prevent fundamental reform. It’sdesigned to placate public outrage with sym-bolic gestures. Fortunately, the tech sectormay actually be able to make a difference.

Are there any lawmakers that understandthe importance of getting these surveil-lance reforms right?Sure, there are several senators who are rea-sonably good on the issue, including RonWyden, Mark Udall, Rand Paul, and a fewothers from both parties. There are also

House members—such as Justin Amash andJohn Conyers, who introduced a bill to endthe NSA’s blanket collection of Americans’telephone records—who are excellent.

One of the things that gives me the mosthope is that this is one of the few controver-sial issues that does not break down alongpartisan or ideological lines. In fact, I wouldsay it’s almost 50/50. If you look at who isleast supportive of Snowden and the report-ing we’ve done, the most vociferous criticsare probably Democrats because there’s aDemocrat in the White House. Although, Ishould add that when I was doing the samework during the Bush years, they were mygreatest supporters. To the extent that thereis a predictable metric of reaction, it’s prob-ably age group more than anything else.Younger people tend to be extremely sup-portive of the disclosures, whereas olderpeople are more wary of them. But, in gener-al, the fact that there’s this coalition of dis-parate forces is really encouraging.

The NSA has procedures in place to“minimize” the data it collects on U.S. cit-izens. But to what extent does the NSAprovide unminimized data to foreigngovernments?One story we published that got less attentionthan expected involved a memorandum ofunderstanding between the NSA and its

Israeli counterpart. Basically, the UnitedStates provides Israel with large amounts ofraw communications from American citi-zens—data that is unminimized, meaningthat it hasn’t been sifted through in order toremove personal information. The memo-randum was designed with safeguards layingout what the Israelis can and can’t do withthis data. But the United States also sharesthis data with the inner core of surveillance-sharing countries—Britain, Australia,Canada, and New Zealand, also known asthe Five Eyes.

The primary defense of the NSA hasbeen that there are rigorous controls on per-sonal data that are tightly managed. Perhapsthe leading example discrediting this claim isthe fact that over a few months EdwardSnowden downloaded tens of thousands oftheir most sensitive documents right undertheir noses. Even now, after spending tens ofmillions of dollars to investigate, they stillhave no idea what he took. This is the oppo-site of a tightly controlled system.

As Snowden has explained, he had accessto programs like XKeyscore, which literallyallowed him to enter an email address, clickon a prepopulated menu, and hit search.There’s no audit, and basically it returnsemails from the past and records ones in thefuture, allowing for real-time surveillance. “I,sitting at my desk,” Snowden said, could

P O L I C Y F O R U M


“wiretap anyone, from you or your account-ant, to a federal judge or even the president, ifI had a personal email.” Even post-searchauditing was extremely sporadic. It mostlyconsisted of getting the paperwork right.

One of the concerns that Snowdenexpressed to you was that the public wouldreact to these revelations with indif-ference. That obviously didn’t happen.Snowden’s concern was that people wouldsay they assumed this was already happen-ing and that “I’m probably not the personthe NSA is targeting, so who cares?” But asyou said, there has been sustained outragearound the world. My book tour will takeme to 11 different countries, and the bookitself is already translated into 9 or 10 lan-guages. Back when Snowden and I were sit-ting in Hong Kong anticipating the impact,we never would have expected all of this.The reaction has exceeded our wildestdreams.

But looking ahead, you don’t change theAmerican national security state overnight.One indication of the extent of this enor-mous behemoth’s power is the fact that itcan fortify itself against sustained globalpublic outrage for a good period of time.

Perhaps the most significant change thusfar is the way that people around the worldnow think about various issues, from theimportance of privacy in the digital age tothe role of journalism vis-à-vis the state.

What do you make of the criticism you’vereceived from other members of themedia?There are a lot of factors. People break bigstories all the time and they aren’t treatedwith hostility by other reporters, at least notin public. They’re not accused of being hacksor criminals who belong in prison, the waythat I was by several leading lights of the jour-nalistic world. One thing that’s going on is ageneral fear that the new order that’s repre-sented by the Internet is a threat to their wayof doing things. It’s a classic tale of the Old

Guard feeling besieged by something newand wanting to lash out and delegitimize anddiscredit it. I’ve been very harsh and vocalcritic of those who practice that kind of jour-nalism, so in some ways their hostility isunsurprising.

Simply put, I set out to break a lot of therules that traditional journalists treat assacred. I began writing about political issuesafter spontaneously creating my own blogone day. For the first year-and-a-half or so, Iwrote whatever I wanted, how I wanted,without anyone telling me different. Once Istarted generating interest, I began writingfor media outlets on the condition that Iretain that full-scale independence. I wasable to do that at Salon, then at The Guardian,and now at my own news organization,where we are grounded in that principle ofjournalistic independence.

But I think the biggest factor is that, withsome exceptions, American journalists atthese large media institutions see them-selves as part of the circle of power. Theyidentify with leading political and economicelites because it solidifies their positionwithin that circle. They look at the worldthrough that socioeconomic prism. Theybecome guardians of the status quo, andthey react to threats with as much hostilityas do those with political power. There’salmost no division between the two factionsany longer. They’ve essentially merged.

There’s another strain of critics who,despite being very vocal, have gained littleattention. And they’ve objected to the jour-nalism we’ve done on the grounds that weactually haven’t released enough of the docu-ments. They argue that we’ve been conceal-ing too much information, that we’ve beentoo slow in releasing it. I’m actually more sym-pathetic to that critique than the one thatwe’ve been reckless in releasing too much.

This idea that anything we’ve releasedwill help the terrorists or somehow under-mine legitimate espionage is just incoher-ent. We are very careful about the informa-tion that we release. Multiple people scruti-

nize it. If anything we’ve erred on the side ofexcess caution.

You’ve compared the national securitystate to Jeremy Bentham’s Panopticon. Itgoes without saying that that’s a very trou-bling paradigm to think about.The idea that the mere existence of a surveil-lance system, regardless of how it is used, willseverely limit and alter human behavior issomething that has been recognized for cen-turies. There’s a reason that insight so critical.There seems to be this prevailing sentimentthat if someone poses no threat to the gov-ernment, they have no reason to fear this typeof surveillance. But embedded within thatstatement is a certain acceptance of this bar-gain. It says that if you become sufficientlyobedient and compliant and passive, you cancontinue living your life unmolested bypower. And that is the recipe for tyranny.

Even in the worst tyrannies, those whodon’t bother tyrants are rarely targeted foroppression outright. But what Bentham rec-ognized is that if you create institutionswhere the people you’re trying to control—whether it be inmates, students, or patientsin a psychiatric ward—know that they can bewatched at any moment, they will assumethat they are being watched at everymoment. They may not know when—oreven if—they’re being watched, but they willact in compliance with the dictates ofauthority if the possibility is always there. It’sa way to keep people under control. That wasthe essence of 1984.

In fact, Michel Foucault called this thefoundational point of western democracy.We don’t have concentration camps orpolitical dissidents because we don’t needthat. We’ve effectively put prisons into peo-ple’s minds. They think they’re free, but it’sonly at the price of relinquishing their basicpolitical rights in order to be seen as non-threatening and avoid punishment. That iswhy a surveillance state is so insidious. Itremoves the essential part of what it meansto be a free individual.n

C69479 CATO CX Q10.qxp_CPR_July-August 2014 7/18/14 9:24 PM Page 13


C A T O E V E N T S

A LBERTOMINGARDI (at podium), director general of the IstitutoBruno Leoni and a Cato adjunct scholar; PETER BOETTKE (cen-

ter), University Professor of Economics and Philosophy at GeorgeMason University; and TODD J. ZYWICKI, George Mason University’sFoundation Professor of Law, highlighted Bruno Leoni’s contributionsto classical liberal thought on law and liberty.

T IMOTHYSANDEFUR, principalattorney at the Pacific Legal

Foundation and a Cato adjunct scholar,explained why the Obamacare “tax” onpeople without health insurance is stillunconstitutional.

J OHNSAMPLES (right), vice president and publisher of the Cato Institute, sat downwith a reporter from Voice of America to discuss campaign finance reform and

the political culture of limited government. The two spoke in the Institute’s MelvynJay Kushner Library, which houses a wealth of essential resources on economics, phi-losophy, and history, including the Roy A. Childs Jr. Collection.

A t a Cato Policy Forum in May, NICHOLAS

QUINN ROSENKRANZ (left), a law professor atGeorgetown University and a senior fellow at theCato Institute, joined JONATHANTURLEY, a law pro-fessor at George Washington University, to discussthe Obama administration’s abuse of executive power.

APRIL 1: High Frequency Trading:Information Tool for Efficient Marketsor Destabilizing Force?

APRIL 16: College Accreditation in theCrosshairs

APRIL 17: Libertarianism #ThroughGlass:Using Google Glass to Change Policy

APRIL 28: Everything You Know aboutInternational Trade Is Wrong: APresentation and Refutation of TenPervasive Trade Myths (Houston, TX)

APRIL 30: Is College Worth It?

MAY 1: Tumblr for Nonprofits: Findingand Engaging your Audience

MAY 6: Bruno Leoni at 101

MAY 6: The Tyranny of Experts:

Economists, Dictators, and the ForgottenRights of the Poor

MAY 7: Intellectual Privilege: Copyright,Common Law, and the Common Good

MAY 8: Beyond the Individual Mandate:The Obamacare “Tax” Is StillUnconstitutional

MAY 8: Police Misconduct: The Assaulton Civil Liberties

MAY 13: Unlucky Strike: Private Healthand the Science, Law and Politics of Smoking

MAY 19: Mugged by the State: WhenRegulators and Prosecutors BullyCitizens

MAY 20: The Investor-State DisputeSettlement Mechanism: An Examinationof Benefits and Costs

MAY 20: The Milton Friedman Prize forAdvancing Liberty Biennial Dinner (NewYork)

MAY 21: Suspending the Law: TheObama Administration’s Approach toExtending Executive Power and EvadingJudicial Review

MAY 27: The Economics of Medicaidand the Need for Reform

MAY 29: The Once and Future King: TheRise of Crown Government in America

MAY 30: A New Leaf: The End ofCannabis Prohibition

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.YOU CAN ALSO FIND WRITE-UPS OF CATO EVENTS IN JOHNALLISON’S BIMONTHLY MEMO FOR CATO SPONSORS.

CatoCalendar


A t a Cato Student Forum in April,NEALMCCLUSKEY, associate direc-

tor of the Institute’s Center forEducational Freedom, asked whether ornot getting a college degree is worth it.

CATO UNIVERSITYSAN DIEGO l RANCHO BERNARDO INNJULY 27–AUGUST 1, 2014Speakers include Tom G. Palmer, RandyBarnett, Jeffrey Miron, Gabriela Calderon deBurgos, Louise Bennetts, Rob McDonald, andBrian Doherty.

CONSTITUTION DAY CONFERENCEWASHINGTON l CATO INSTITUTESEPTEMBER 17, 2014Speakers include Nadine Strossen, NicholasQuinn Rosenkranz, David Bernstein, TomGoldstein, and Judge Diane Sykes.

CATO CLUB 200RETREATMIDDLEBURG, VASALAMANDER RESORT AND SPASEPTEMBER 18–21, 2014Speakers include Radley Balko and John Allison.

TRANSITION FROM COMMUNISM AFTER 25YEARS: LESSONS FOR NON-FREE SOCIETIESWASHINGTON l CATO INSTITUTE OCTOBER 15, 2014Speakers include Vaclav Klaus, MikheilSaakashvili, and Andrei Illarionov.

CATO INSTITUTE POLICYPERSPECTIVES 2014NEW YORK l WALDORF-ASTORIAOCTOBER 30, 2014Speakers include Jonathan Haidt.

ALTERNATIVES TO CENTRALBANKING: TOWARD FREE-MARKETMONEY32ND ANNUAL MONETARY CONFERENCEWASHINGTON l CATO INSTITUTENOVEMBER 6, 2014Speakers include James Grant, AxelLeijonhufvud, Judy Shelton, George Selgin,Steve Forbes, and Patrick Byrne.

CATO INSTITUTE POLICYPERSPECTIVES 2014CHICAGO l FOUR SEASONSDECEMBER 3, 2014

27TH ANNUAL BENEFACTOR SUMMITNAPLES, FL l RITZ-CARLTON GOLF RESORTFEBRUARY 19–22, 2015

CATO CLUB 200RETREATSEA ISLAND, GA l THE CLOISTER SEPTEMBER 24–27, 2015

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

B ack in colonial India, the Britishgovernment had a problem.There were too many venomouscobras in Delhi, officials said, and

therefore they decided to offer a bounty forevery snake that was killed. At first, the planworked and large numbers of the dead rep-tiles were turned in. But eventually the morediscerning hunters began breeding cobras tomake their jobs easier. When British officialsrealized the error of their ways, they droppedthe program—causing breeders to release thenow worthless cobras and greatly escalatingthe initial problem.

This phenomenon, known as the “cobraeffect,” has become one of the classic exam-ples of perverse incentives. But as Thomas E.Hall, a professor of economics at Miami Uni-versity in Ohio, demonstrates in his new bookAftermath: The Unintended Consequences ofPublic Policies, there is no shortage of examplescloser to home. “Policies created for one set ofpurposes almost always create an additionalset of results that were not part of the originalplan,” he writes. “Very often these unintendedconsequences are seriously adverse.” Through-out the book, Hall focuses on four case studiesof the law of unintended consequences as itapplies to government policy.

The federal income tax was put into effectin 1913, with the goal of shifting the tax bur-den away from the working class and towardthe upper class. That outcome was accom-plished. But the major unintended conse-quences were reducing the incentive to earnincome by those taxed at high rates and pro-viding “a flood of tax revenue”—to the pointthat it allowed an unprecedented expansionof government. According to Hall, not evenits creators expected this. “The income taxwas instrumental in helping create the hugefederal bureaucracy that many Americanscomplain about today,” he writes.

Cigarette taxes are collected by the feder-al government, along with all 50 states and

the District of Columbia, as well assome counties and cities. They wereoriginally imposed in the 1860s as apublic revenue source, but since the1960s they’ve relied on an additionaljustification: taxing cigarettes dis-courages smoking. Yet, the majorunintended consequence has been thecriminal activity this creates. Withlarge differences in tax rates, criminalscan purchase cigarettes where taxesare low and illegally transport them tohigh-tax areas. The fact that cigarettesare small, light, and durable makesthem ideal for this “especially briskretail trade,” and the smuggling thatresults has become a huge business,largely controlled by organized crimesyndicates.

Minimum wage laws first appearedat the state level in the early 1900s,while the original federal law was put inplace in 1933 as part of the New Deal. Thepurpose was to raise incomes of the workingpoor and to cause employers to replacefemale and child workers with adult males.Yet this policy has had mixed results. Perhapsthose most affected by the law are teenagersand high school dropouts, who often lack theskills necessary to create $7.25 of value eachhour. As such, “artificially raising wages ele-vates the incomes of some low-skilled work-ers—those employed at or slightly above theminimum— but lowers the incomes of thoseunable to find work, many of whom might bewilling to work for less than the minimum,”Hall writes.

In 1919, when the nation took the boldstep of adopting the Eighteenth Amend-ment and imposing national Prohibition,supporters were ecstatic about what was thenreferred to as “the noble experiment.” Unlikethe first three case studies, however, the unin-tended consequences of alcohol Prohibitionwere so devastating that the policy was even-

tually abandoned. “Their intent was, in fact,noble: to reduce alcohol consumption andmany of the social ills associated with it.” Thereality was very different. Criminal gangscropped up. Poisoned booze sickened andsometimes killed tens of thousands. Corrup-tion soared. After experiencing these prob-lems for several years, Americans finally said“enough” and ended Prohibition. In the end,the thread that ties these examples together isa warning of sorts. In every initiative men-tioned, the supporters genuinely believed intheir causes, arguing with conviction that theassociated policies would leave the countrybetter off than it was before. Often, the pub-lic followed suit. Yet, Hall warns with equalforce that the world is more complicatedthan that. “Be careful what you wish for,” heconcludes, “because those unintended conse-quences can undo a well-intentioned govern-ment policy.” nPLEASE VISIT WWW.CATO.ORG/STORE TOPURCHASE YOUR COPY OF AFTERMATH INCLOTH OR EBOOK TODAY.

A new book on the law of unintended consequences

The Unforeseen Side of Good Intentions


I t’s now a decade sinceUkraine’s “Orange Rev-olution” brought hopethat the country could

be liberated from its post-Sovi-et legacy and join the ranks ofthe successful transitionalcountries of Central and East-ern Europe. Those hopes weresadly disappointed. But canthe Ukrainians do better thistime around? Besides thethreat from Russia, Ukrainiansface another large challenge:how to build durable institu-tions of democratic capitalism.

For nearly a decade now,the Cato Institute’s Center forGlobal Liberty and Prosperityunder the direction of IanVásquez has worked tirelesslyto advance policies that protect human rights,extend the range of personal choice, and sup-port the central role of economic freedom inending world poverty. In March the Centercohosted a conference in Kiev with the AtlasNetwork and the Ukraine-based EuropeanBusiness Association—an event that broughttogether prominent speakers from post-communist countries who had had intimateexperience with the challenges facing theirUkrainian counterparts.

Ivan Mikloš, former deputy prime minis-ter of Slovakia and author of that country’s flattax reform, urged the Ukrainian governmentnot to delay the inevitable fiscal consolida-tion. The quicker and more radical the fiscaladjustment, he said, the sooner Ukraine’seconomy will start to grow, generating oppor-tunities for ordinary people, not just the oli-garchs. While risky, such bold reforms oftenpay off politically. Mikloš’s own party record-ed historically high levels of support in theelection in 2006, after eight years of far-reach-ing reforms in the area of tax policy, pensions,

and healthcare, as well as privatization andrestructuring of ailing banks and utilities.

Other speakers included Einars Repše, for-mer prime minister and head of the centralbank of Latvia; Kakha Bendukidze, formerminister of the economy of Georgia; andCato’s own Andrei Illarionov, a veteran of eco-nomic reform efforts in Russia. The eventattracted more than 500 attendees and signif-icant media attention. As columnist AnneApplebaum wrote in the New Republic:

One of the most positive events inKiev last week took place not at the bar-ricades, but in the gaudy conferenceroom of the Intercontinental Hotelwhere hundreds of economists,bankers, and members of parliamentgathered to hear advice from politicianswho had been through equally dramaticrevolutions. A former Georgian econo-my minister told the audience that thefight against corruption requires onecrucial element: jail, for those who breakthe law. A Slovak told his Ukrainian col-

leagues to prepare fundamental reformsand to prepare to be really unpopular.The suited Ukrainians in the room,none of whom looked remotely revolu-tionary, all asked the same kinds ofquestions: What laws do we need?What rules must we have? How can wemake sure that this time the changes arereal? That conversation won’t attractphotographers, but it holds out thepromise of something permanent.

On the heels of the Kiev conference, theCenter for Global Liberty and Prosperityheld a Latin American version of Cato Uni-versity—the Institute’s premier educationalevent—in Caracas in April. After nearly 15years of socialist rule, Venezuela is now facingan acute economic and political crisis: it hasthe highest inflation rate in the world, one ofthe highest murder rates, pervasive shortages,and widespread protests. Co-sponsored byCEDICE, Venezuela’s leading free-market

The Center for Global Liberty and Prosperity in Kiev, Caracas

Protecting Freedom Where It’s Threatened


LEFT: JUANCARLOSHIDALGO, a Cato policy analyst, visited a student protest camp in Caracas, Venezuela.RIGHT: ANDREI ILLARIONOV (fourth from left), senior fellow at the Institute, discussed the situation in Ukraineat an emergency economic summit in Kiev. He was joined by (from left) PAVLOSHEREMETA, Ukraine’s ministerof the economy; KAKHABENDUKIDZE, a Georgian statesman and businessman; SVENOTTOLITTORIN,Sweden’s former minister of labor; and TOMASFIALA, president of the European Business Association.

Continued on page 19


C A T O S T U D I E S

A round the world, most new railtransit lines are either heavyrail, which are built in exclusiverights of way, or light rail,

which often cross through city streets.What many don’t realize is that the termslight and heavy refer to people-movingcapacities, not the actual weight of theequipment. As Cato senior fellow RandalO’Toole writes in “The Worst of Both:The Rise of High-Cost, Low-CapacityRail Transit” (Policy Analysis no. 750), anumber of cities have recently built a hybridform of rail transit that combines the costdisadvantages of heavy rail with the capacitylimits of light rail. This seems to be a world-wide trend, from Honolulu to Mumbai.“Rail lines built at light-rail costs are ques-tionable enough, as in nearly every case bus-es can move more people just as comfortably(if not more so), just as fast (if not faster), and

at a far lower cost,” O’Toole writes. In fact,buses share infrastructure with cars andtrucks, reducing their cost, while the use ofhigh-occupancy vehicle or high-occupancytoll lanes would allow buses to avoid conges-tion during even the busiest times of day.

“The willingness ofmany rail advocates tosupport high-cost,low-capacity rail linescalls into question theentire rail agenda,” hecontinues. Supportersof low-capacity linesare not truly interest-

ed in transportation, nor are supporters ofhigh-cost lines truly interested in urban effi-ciencies. If they are not willing to draw theline against such projects, then there is littlereason to believe their claims about the ben-efits of other rail projects.

IMMIGRATION AND THE STATESMichigan governor Rick Snyder and Sen.Rand Paul (R-KY) recently proposed aregional visa program that would allow immi-grants to live and work exclusively in Detroitor other cities in the United States. In “State-Based Visas: A Federalist Approach toReforming U.S. Immigration Policy”(Pol-icy Analysis no. 748), Brandon Fuller, aresearch scholar at New York University, andSean Rust, a practicing attorney, argue that aregional immigration option through a state-based visa program would create a temporarywork permit that would allow participatingstates to manage the flow and regulate thequantity of temporary migrants who want tolive and work within their borders. “Ideally,law-abiding visa holders would be eligible forrenewal and free to apply for permanent resi-dency during their stay in the United States,”they add. Although overseen by the federal

The Worst of Both Worlds

CATO POLICY REPORT is a bimonthly review published by the Cato Institute and sent to all contributors. It is indexed in PAIS Bulletin.Single issues are $2.00 a copy. ISSN: 0743-605X. ©2013 by the Cato

Institute. • Correspondence should be addressed to Cato Policy Report1000 Massachusetts Ave., N.W., Washington, D.C. 20001.

www.cato.org • 202-842-0200.

CATO POLICY REPORTDavid Boaz............................................................................EditorDavid Lampo.......................................................Managing EditorDan Jackson........................................................Assistant EditorJon Meyers.................................................................Art DirectorBrendan O’Hara...................................................... PhotographerClaudia Ringel............................................................. CopyeditorMai Makled.......................................................Graphic Designer

CATO INSTITUTEJohn A. Allison................................................President and CEORobert A. Levy................................................................ChairmanDavid Boaz.............................................Executive Vice PresidentKhristine Brookes......................................V.P., CommunicationsJames A. Dorn ..........................................V.P., Monetary StudiesGene Healy............................................................. Vice PresidentDavid Kirby....................................................... V.P., DevelopmentBrink Lindsey................................... Vice President for ResearchLinda Ah-Sue..................................V.P., Events and ConferencesRoger Pilon.........................................................V.P., Legal AffairsChristopher Preble..........V.P., Defense & Foreign Policy StudiesEdward H. Crane.............................................President Emeritus

Swaminathan Aiyar..........................................Research FellowVirginia Anderson................................Chief Information OfficerDoug Bandow..........................................................Senior FellowLouise Bennetts..........Assoc. Director, Financial Regulation StudiesTrevor Burrus.......................................................Research FellowMark Calabria...................Director,Financial Regulation StudiesMichael F. Cannon........................Director, Health Policy StudiesTed Galen Carpenter..............................................Senior FellowAndrew Coulson.........Director,Center for Educational Freedom

Tad DeHaven .........................................................Budget AnalystChris Edwards...................................Director, Tax Policy StudiesBenjamin H. Friedman......................................Research Fellow Robert Garber.................................................Director, MarketingKaren Garvin.................................................................CopyeditorJagadeesh Gokhale...............................................Senior FellowJim Harper...............................................................Senior FellowNat Hentoff...............................................................Senior FellowJuan Carlos Hidalgo................Policy Analyst on Latin AmericaDaniel J. Ikenson.......................... Director, Trade Policy StudiesAndrei Illarionov.....................................................Senior FellowNicole Kaeding.....................................................Budget AnalystJason Kuznicki...................................................Research FellowDavid Lampo.................................................Publications DirectorSimon Lester.................................................Trade Policy AnalystValerie Usher..................................................................ControllerJustin Logan................................Director, Foreign Policy StudiesTimothy Lynch......................................Director, Criminal JusticeNeal McCluskey...Assoc. Director, Center for Educational FreedomJon Meyers..................................................................Art DirectorPatrick J. Michaels...Director, Center for the Study of ScienceJeffrey Miron..................................Director of Economic StudiesDaniel J. Mitchell...................................................Senior FellowJohn Mueller...........................................................Senior FellowJohan Norberg........................................................Senior FellowAlex Nowrasteh................................Immigration Policy AnalystWalter Olson............................................................Senior FellowRandal O’Toole........................................................Senior FellowTom G. Palmer.........................................................Senior FellowDaniel R. Pearson...............Senior Fellow, Trade Policy StudiesAlan Peterson.......................................................Director of MISAaron Ross Powell..............................Editor, Libertarianism.orgAlan Reynolds..........................................................Senior FellowClaudia Ringel.................................. Manager, Editorial ServicesDalibor Rohac......................................................... Policy AnalystNicholas Quinn Rosenkranz................................Senior FellowJohn Samples...................Director, Ctr. for Representative Govt.

Julian Sanchez...................................................Research FellowIlya Shapiro..............................................................Senior FellowMichael Tanner.................. .....................................Senior FellowMarian Tupy.............................................................Policy AnalystPeter Van Doren................................................Editor, RegulationIan Vásquez......Director, Ctr. for Global Liberty and ProsperityK. William Watson.......................................Trade Policy AnalystXia Yeliang.................. ............................................Visiting Fellow

Václav Klaus....................................Distinguished Senior FellowRichard Lindzen................................Distinguished Senior FellowJosé Piñera......................................Distinguished Senior Fellow

Radley Balko............................................................Media FellowRandy E. Barnett......................................................Senior FellowVladimir Bukovsky..................................................Senior FellowTucker Carlson.........................................................Senior FellowEmily Ekins...........................................................Research FellowLawrence Gasman.............Senior Fellow in TelecommunicationsSteve H. Hanke........................................................Senior FellowJohn Hasnas............................................................ Senior FellowPenn Jillette........................................Mencken Research FellowDavid B. Kopel.......................................Associate Policy AnalystDeepak Lal................................................................Senior FellowChristopher Layne...........Research Fellow, Foreign Policy StudiesGerald P. O’Driscoll Jr............................................Senior FellowP. J. O’Rourke .....................................Mencken Research FellowWilliam Poole...........................................................Senior FellowJim Powell...............................................................Senior FellowRichard W. Rahn..................................................... Senior FellowGeorge Selgin.........................................................Senior FellowVernon L. Smith.......................................................Senior FellowTeller.....................................................Mencken Research FellowCathy Young....................................................Research Associate

James M. Buchanan (1919–2013).Distinguished Senior FellowF. A. Hayek (1899–1992)..................Distinguished Senior FellowWilliam A. Niskanen (1933–2011)..............Chairman Emeritus

think tank, the event attracted more than six-ty students from all over the country to hearlectures on the impossibility of socialism,Austrian economics, Latin America’s pop-ulist tradition, and the relation between eco-nomic freedom and human progress.

Cato scholars Ian Vásquez and Juan Car-los Hidalgo also spoke at CEDICE’s 30thanniversary conference which gathered lead-

ing classical liberal intellectuals from all overLatin America, including Peruvian NobelLaureate Mario Vargas Llosa. Vásquez andHidalgo also visited the camps of the studentprotestors. Unfortunately, several weeksafter the events, the Venezuelan governmentdispersed the camps, detaining scores of stu-dents in the process.

Cato recognizes that this student move-ment is one of the driving forces behind the

struggle for freedom in Venezuela. Buildingon the Institute’s extensive work in the inter-national arena, the Center for Global Libertyand Prosperity will continue to promote abetter understanding of classical liberalideas—noting in particular that young peo-ple’s appreciation of the failure of socialism isincreasingly complemented by their desire tolive in a country that recognizes both person-al and economic liberties.n

government, a state-based visa program wouldallow state governments to craft a better-func-tioning work-visa program “that is moreadaptable to their local economic conditionsthan the present system run by the federal gov-ernment”—perhaps even supplying lessons forfuture federal work-visa programs. A state-based visa program would direct immigrationto the states that want it without forcing muchadditional immigration on those that do not.“Unlike existing employment-based visas thattie foreign workers to one firm, state-basedvisa holders would be free to move betweenemployers in the state—leading to thicker,more equitable, and more efficient local labormarkets,” the authors write. A state-based visawould increase prosperity by allowing addi-tional migration to portions of the country andeconomy that demand them. Fuller and Rustconclude that successful international experi-ences with regional visas in Australia andCanada provide some valuable policy lessonsand hint at the major economic benefits ofsuch a policy in the United States.

IDENTITY CRISISIn 2005, Congress passed a law seeking to cre-ate a national identification system by weav-ing together the states’ driver-licensing sys-tems. According to the federal government’splan, within three years state motor-vehiclebureaus would begin issuing driver’s licensesand identification cards according to federalstandards, and data about drivers would beshared among governments nationwide. In“REAL ID: State-by-State Update” (PolicyAnalysis no. 749), Cato senior fellow Jim

Harper reviews the outlook on the program,revealing that some states’ legislatures havebacktracked on their opposition to thenational ID law. Initially, states across thecountry rejected what Harper calls an“unfunded federal surveillance mandate.” Halfthe state legislatures in the country passed res-olutions objecting to the REAL ID Act or bills

outright barring theirstates from complying.Almost a decade later,there is no national ID,but Congress contin-ues to funnel moneyinto the federal govern-ment’s national IDproject. The federal

government has spent more than a quarter bil-lion dollars on REAL ID. Now the motorvehicle bureaus in certain states are quietlymoving forward with REAL ID compli-ance—contrary to state policy. This could cre-ate problems, according to Harper. “Anational ID system could be used to adminis-ter more and more intimate tracking andcontrol of all Americans’ lives,” he writes.With any luck, REAL ID seems to havedeteriorated federally. “However, the state-by-state status check reveals that it is by nomeans dead at the state level, and so oppo-nents of a U.S. national ID system mustremain vigilant,” he writes.

RUNNING BLINDThroughout history there has been a consis-tent fear of bank runs, particularly regardinglarge institutions during times of crisis. The

financial crisis of 2007–09 was no exception.The Financial Crisis Inquiry Commission,which was created after the crisis to investi-gate its causes and triggering events, high-lighted no less than 10 cases of runs at individ-ual institutions. In “Run, Run, Run: WasFinancial Crisis Panic over InstitutionRuns Justified?” (Policy Analysis no. 747),Vern McKinley, a research fellow at the Inde-pendent Institute, argues that those runswere a major consideration in the shifting pol-icy responses that authorities employed dur-ing the crisis. In the early stages of the crisis,troubled institutions facing runs were dealtwith through a scattered blend of voluntarymergers, outright closures, and bailouts. “Bylate September 2008 and thereafter, panichad descended on the Treasury and themajor financial agencies,” McKinley writes.“That resulted in the decision to backstopthe full range of large institutions, as govern-ment officials feared a collapse of the entirefinancial system.” However, serious analysisof the risks facing the financial sector wassorely lacking and outright misstatement ofthe facts was evident. “It did not have to bethat way,” he adds. Simple rules elaborated byWalter Bagehot and Anna J. Schwartzinvolving a systemic review of the conditionof the financial system, prompt intervention,and consideration of the condition of indi-vidual institutions could have prevented thenumerous ill-advised bailouts. McKinleyconcludes that application of these consider-ations could have avoided the panic by theauthorities and the strategy of bailouts forthe megabanks.n


Continued from page 17

COULDN’T SEE THAT COMINGThe construction of a massive new head-quarters for the Department of HomelandSecurity, billed as critical for national secu-rity and the revitalization of SoutheastWashington, is running more than $1.5 bil-lion over budget, is 11 years behind scheduleand may never be completed, according toplanning documents and federal officials.—WASHINGTON POST, 05/20/2014

IN MALAWI, BEEF IS THE NEW PORKMalawi’s President Joyce Banda is bettingvoters in her poor African nation will rankcows and corn flour ahead of economictumult and corruption allegations inTuesday’s elections. . . . .

To sweeten the deal for eight millionregistered voters, most of whom are poorfarmers, she spent the past few months giv-ing away hundreds of cows and thousandsof 100-pound bags of corn flour at ralliesacross the country. . . .

“This old-school electoral patronage, a-cow-for-every family, is effective withfemale voters especially,” said AnneFruhauf, vice president at the risk-analysisfirm Teneo Intelligence. “No one else iscourting that half of the electorate.”—WALL STREET JOURNAL, 05/19/2014

WALKING TO SCHOOL? YEAH,THERE’S A FEDERAL PROGRAMFOR THATFor a growing number of children in RhodeIsland, Iowa and other states, the schoolday starts and ends in the same way—theywalk with their classmates and an adult vol-

unteer to and from school. Walking schoolbuses are catching on in school districtsnationwide because they are seen as a wayto fight childhood obesity, improve atten-dance rates and ensure that kids get toschool safely. . . .

Many programs across the country arefunded by the federal Safe Routes to Schoolprogram, which pays for infrastructureimprovements and initiatives to enablechildren to walk and bike to school.—ASSOCIATED PRESS, 05/26/2014

NEXT TIME TRY RUNNING ABUSINESS BEFOREYOU STARTPASSING REGULATIONSDavid Bonior . . . former Michigan Demo-cratic congressman, liberal pit bull, aca-demic, antiwar firebrand and labor-unionBFF has . . . invested at least $1 million, bymy estimate, building two family-ownedWashington restaurants. . . . .

Bonior said if he had the power, hewould lighten up on pesky regulations.

“It took us a ridiculous amount of timeto get our permits. I understand regulationsand . . . the necessity for it. But we lost sixmonths of business because of that. It’svery frustrating.”—WASHINGTON POST, 04/27/2014

IT WOULD ACTUALLY BE AMINUTE AND A HALF, BUT WHONEEDS MATH?When Sen. Barbara A. Mikulski (D-Md.),who led the [Senate floor debate onPaycheck Fairness Act], yielded time to amale colleague, Joe Manchin III (D-W.Va.), she joked that she should really

only give him 77 percent of the two minutesthe female senators got. Or about a minuteand 45 seconds, she observed.—WASHINGTON POST, 04/09/2014

FUNNY GUYColorado legalized marijuana this year, aninteresting social experiment. I do hope itdoesn’t lead to a whole lot of paranoid peo-ple who think that the federal governmentis out to get them and listening to theirphone calls. (Laughter.)—PRESIDENT OBAMA AT THE WHITE HOUSE

CORRESPONDENTS DINNER, 05/03/2014

REGULAR GUYAs he toured a series of mansions . . . at thehome of Walt Disney Studios chief execu-tive Alan Horn . . . at an event hosted byMarissa Mayer, the chief executive ofYahoo, and Sam Altman, the president ofY Combinator. . . . At the home of IrwinJacobs, founder of the telecom giantQualcomm . . . Obama put the blame forfailing to make progress squarely on theRepublicans— “a party that has been cap-tive to an ideology, to a theory of econom-ics, that says those folks, they’re on theirown and government doesn’t have anappropriate role to play.”—WASHINGTON POST, 05/09/2014

GOOD NEWS AT LASTIn terms of actual laws or bills passed, the113th Congress is headed toward historiclevels of unproductivity.—WASHINGTON POST, 04/10/2014

CATO POLICY REPORT1000 Massachusetts Ave., N.W.Washington, D.C. 20001ADDRESS SERVICE REQUESTED

“ ”ToBeGoverned...

Documents

NSA disclosures unforeseen PAGES 4,6 PAGE 11 …...BY JOHN MICKLETHWAIT AND ADRIAN WOOLDRIDGE Continued on page 8 On May 21,LESZEKBALCEROWICZ, the architect of Poland’s post-communist