And Big Labor is to be rewarded, too—having poured tens of millions of dollars in campaign cash into the latest Democratic campaigns and seen its numbers dwindle from about one-third of the workforce in the 1950s to 12 percent today.44 Not satisfied with its part in breaking the American automobile industry (not to mention the airline and steel industries), the Statist proposes making it easier to unionize other businesses whose workers have chosen not to join their ranks. A bill with the laughable title “The Employee Free Choice Act” would replace secret-ballot elections held on a given day and supervised by the National Labor Relations Board with a process whereby employees would be pressured by union organizers to sign undated cards over a period of perhaps months. Gone will be the secret ballot. Even the 1972 Democratic presidential candidate, George McGovern, has denounced this effort: “To fail to ensure the right to vote free of intimidation and coercion from all sides would be a betrayal of what we have always championed….”45 President Obama strongly supports the bill.
For the Statist, creative destruction too often means the diminution of his own authority and opportunities to expand it. There are also those, however, with no similar agenda but who cringe nonetheless at the notion, for they are attentive only to the moment. As the Cato Institute’s Will Wilkinson observes,
The impulse to freeze the system, to try to tape all the cracks and staple all the cleavages, to ensure that nobody has to explain to their kid why Christmas this year is going to be a lousy Christmas, that is one of our greatest dangers. Our sympathy, untutored by a grasp of the larger scheme, can perversely make itself ever more necessary. When we feel compelled to act on our uncoached fellow-feeling, next year’s Christmas is likely to turn a bit worse for everybody. And then somebody has to explain to the kids that they can’t find a job at all. Businesses that would get started don’t get started, wealth that would be created isn’t. And in just a few decades, the prevailing standard of living is much, much lower than it could have been had our sympathy been more far-seeing. There is no justice, and great harm, in diminishing the whole array of future opportunity to save a few people now from a regrettable fate.46
Comprehend a future without creative destruction. It is bleak, backwards, and destitute, like most authoritarian societies. Yet the Statist has persuaded some erstwhile conservatives of its demerits. Typically the argument is formulated around protecting America’s industrial base. The question is asked: How can America allow its industries to fail and outsource its vital needs to other countries? From where will we get our steel? How will we build our tanks? This is a circular argument. The Conservative urges an economic environment stripped of debilitating regulations and taxes that hinder the performance and competition of American industry. He believes American industry is more than capable of competing against foreign industries and, in most cases, does so. However, where industries are subjected to the Statist’s heavy hand rather than the free market’s invisible hand, they are obstructed and burdened in ways that are counterintuitive and self-defeating.47 Ultimately, it is an unworkable formula, as the rest of the world is not obliged to adhere to it but rather will look for ways to exploit it. The Statist, therefore, is destructive of the very ends and the very people he professes to represent.
The Statist frequently attempts to relieve himself of responsibility for his own deeds by invoking the mantra of “outsourcing”—that is, the hiring of workers and businesses abroad to undertake tasks that might conceivably be performed in the United States. In 2004, Democratic Presidential candidate John Kerry railed against “Benedict Arnold CEOs” who send American jobs overseas.48 In 2008, Obama asserted that “we have to stop providing tax breaks for companies that are shipping jobs overseas and give those tax breaks to companies that are investing here in the United States of America.”49 The Statist urges the view that millions of jobs are lost to such practices and complains about every call center that opens in India. He creates the impression that there are no benefits to American society to hiring foreign workers and is not above instigating ethnic animosity. However, the facts do not support the hyperbole.
Jacob Funk Kirkegaard, a research associate at the Peterson Institute for International Economics, studied the official statistics for “mass layoffs” (fifty or more people) in the United States. He found about 1 million people out of a workforce of roughly 150 million were part of a mass layoff in 2004 and 2005. Only a small percentage of these layoffs were due to the exportation of jobs. Kirkegaard wrote, “the combined employment effects of offshoring and offshore outsourcing represent just 4 percent of all separations from mass layoffs in the United States in 2004–05.”50
And what of the “giant sucking sound” of jobs moving to, say, Mexico as a result of the North American Free Trade Agreement (NAFTA)—which essentially eliminated numerous trade barriers among Mexico, Canada, and the United States? Those job losses would have shown up in American unemployment statistics. Yet once NAFTA took effect in 1994, unemployment generally declined.51 In 2007, before the recent economic downturn, the average unemployment rate was 4.7 percent, below the prevailing rates in the 1970s, 1980s, and 1990s.52
The Statist ignores the benefits of free trade, because it undermines his agenda. When a computer company lowers costs by opening a call center in India, the price of the computer goes down, benefiting American consumers. Money is then freed up in the United States to spend more productively. As Indians become wealthier, they buy more goods and services from the United States. In the past several years, some of the fastest growth in American goods and services exports has been to India.53
And what of the benefits of foreign investment pouring into the United States—or “insourcing”? According to the Commerce Department, foreign investment created 447,000 new jobs in the United States between 2003 and 2007.54 In 2007, 5.3 million Americans were employed by U.S. subsidiaries of foreign companies. These companies maintained a payroll of $364.2 billion for American workers.55
Still, the mentality of which Wilkinson writes—resistance against the free market’s creative nature—has its origin in myths perpetuated about the Great Depression and the New Deal, which have fostered a tolerance, if not demand, for government intervention in a supposedly flawed and unrestrained market system.
The seeds for the Great Depression were actually sown before the stock market crash of 1929. In 1928, during a recession and struggling housing market, the Federal Reserve Board severely cut the money supply. The discount rate to banks was increased four times, from 3.5 percent to 6 percent from January 1928 to August 1929. (In fact, the money supply shrank 30 percent over the next three years.) By slashing the money supply and cutting off lines of available credit, the economy contracted. At the same time, Congress was debating the passage of the Smoot-Hawley Tariff Act, which was the most draconian protectionist bill in American history. Investors reacted. The stock market became unstable and, over a three-day period in October 1929, it crashed.56
President Herbert Hoover, who today is widely and wrongly considered a hands-off, free-market disciple, signed the Smoot-Hawley Tariff into law in June 1930. This came on top of the Fordney-McCumber Tariff of 1922, which had already dealt a terrible blow to the agricultural economy. These tariffs slammed the door on the importation of foreign produce and goods, igniting an international trade war that blocked the exportation of domestic produce and goods to foreign markets. In 1930 and 1931, federal spending soared, with hundreds of millions of dollars in subsidies paid to farmers. Congress established the Reconstruction Finance Corporation, which distributed hundreds of millions of dollars to businesses. In 1932, Hoover signed the Revenue Act—the largest tax increase in peacetime history—doubling the income tax rate. The top bracket jumped from 24 percent to 63 percent.57 Efforts by Hoover, Congress, and the Federal Reserve to limit the effects of a recession turned into a monumental disaster.
In 1932, Franklin Roosevelt ran against Hoover on a platform of cutting taxes, cutting subsidies, cutting government, and bal
ancing the budget. Upon taking office, however, Roosevelt radically changed direction. As Roosevelt advisor Rexford Guy Tugwell would later explain, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.”58
Lawrence W. Reed of the Mackinac Center for Public Policy notes that during the course of his presidency, Roosevelt raised the top income tax rate to 79 percent and then 90 percent. He instituted the National Industrial Recovery Act (NIRA) in June 1933, which forced manufacturing industries into government-mandated cartels and empowered a massive federal bureaucracy to dictate production and pricing standards covering two million employers and 22 million workers. Although the Supreme Court eventually ruled the act unconstitutional, the damage had been done. Industrial production dropped 25 percent in the six months after the law had passed. Roosevelt established the Civil Works Administration and later the Works Progress Administration, which have been hailed as putting the unemployed to work on constructing roads, bridges, and buildings. But they were rife with waste and corruption.59 And as Amity Shlaes, author of The Forgotten Man: A New History of the Great Depression, explains, “Evidence from that period suggests that government was crowding out the private sector. The Tennessee Valley Authority, for example, dealt mortal blows to a private employer that wanted to electrify the South…. For every state-relief job created, about half a private-sector job was lost.”60 They did nothing to improve the systemic unemployment problem in the country. Indeed, Roosevelt oversaw the implementation of hundreds of laws, regulations, policies, and spending programs, and the creation of numerous agencies to enforce them. And it is clear that in doing so, he prolonged the economic despair of tens of millions of Americans by exacerbating the Great Depression.
Reed recounts that Roosevelt’s treasury secretary, Henry Morgenthau, Jr., wrote in his private diary that “we have tried spending money. We are spending more than we have ever spent before and it does not work…. We have never made good on our promises…. I say after eight years of this Administration we have just as much unemployment as when we started…and an enormous debt to boot!”61 At no time during the eight years of the Great Depression under Roosevelt did the unemployment figure drop below 14 percent. And the unemployment statistics (by percentage) underscore Morgenthau’s lament:
1930—8.9
1931—15.9
1932—23.6
1933—24.9
1934—21.7
1935—20.1
1936—17.0
1937—14.3
1938—19.0
1939—17.2
1940—14.6
1941—9.9
1942—4.762
According to an extensive 2004 study by UCLA economists Harold L. Cole and Lee E. Ohanian, Roosevelt’s “ill-conceived stimulus policies” extended the Depression by seven years. Ohanian relates that “high wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns. As we’ve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market’s self-correcting forces.”63 The economists point out that the NIRA exempted more than five hundred industries—accounting for about 80 percent of private, nonagricultural employment—from antitrust prosecution as an incentive to entering into collective bargaining agreements with unions. This drove up prices and wages. They conclude that the Depression would have ended in 1936 instead of 1943. Cole explains, “The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes. Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”64
The fact is that the New Deal was, overall, a dismal failure. Yet today it serves as the Statist’s prototype for governance. In 2009, President Obama and Congress spent hundreds of billions of dollars on a new so-called stimulus bill. But it, like the New Deal, will only retard economic growth, create market dislocations, and add to the government’s existing massive debt.
The reason stimulus plans of this sort do not work is a fundamental reality of governance: The government does not add value to the economy. It removes value from the economy by imposing taxes on one citizen and providing cash to another. Or it borrows money that would otherwise be used by investors and redistributes it elsewhere. Or it prints more money and threatens the value of the dollar. Nothing is stimulated. Spending power is not increased. Moreover, politicians and bureaucrats are substituting their uninformed, largely political decisions for those of the marketplace. Their past miscalculations demonstrate that they do not and cannot possess the information, knowledge, means, and discipline to manage the economy.
Of course, the best way to stimulate the economy would be for the federal government to slash capital gains taxes, corporate income taxes, and individual income tax rates, thereby increasing liquidity available to individuals and businesses to make decisions about their own economic circumstances. Since most people do not hide their cash in cigar boxes, the additional money would either be spent or invested. The more favorable investment environment would also attract the flow of foreign investment into American markets from countries that tax their citizens and businesses at higher rates. Furthermore, the stock market would react favorably to market-oriented spending and savings and it would benefit directly from increased equity purchases resulting from increased investor confidence.
Along these lines, in 1981, when the economy was reeling from double-digit interest, unemployment, and inflation rates, President Ronald Reagan championed the passage of the Economic Recovery Tax Act (the Kemp-Roth bill). It cut individual federal income tax brackets by 25 percent, phased over three years, and indexed the rates against inflation to prevent creeping bracket increases in future years. The act also instituted the Accelerated Cost Recovery System and a 10 percent Investment Tax Credit, which led to a substantial increase in capital formation. The goal was to create incentives by removing significant government barriers to investment, productivity, and growth. The result: Inflation dropped from 13.5 percent in 1980 to 4.1 percent in 1988. Interest rates dropped from 18 percent on a thirty-year fixed mortgage in 1981 to 8 percent in 1987; and unemployment dropped from a peak near 10 percent in the recession of 1981–82 to 5.5 percent in 1989, once the full force of the tax cuts kicked in.65 The Reagan economic program, based largely on free market principles, spurred economic prosperity that created, over the next twenty-five years, forty-three million jobs and $30 trillion in wealth.66
But the Statist is committed to a different course. He is unmoved by reason, evidence, and history. The danger to the individual and the civil society from his constant assault on liberty and private property cannot be emphasized enough. The late economist Friedrich Hayek, in his classic book The Road to Serfdom, wrote:
Nobody saw more clearly than the great political thinker de Tocqueville that democracy stands in an irreconcilable conflict with socialism: “Democracy extends the sphere of individual freedom,” he said. “Democracy attaches all possible value to each man,” he said in 1848, “while socialism makes each man a mere agent, a mere number. Democracy and socialism have nothing in common but one word: equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude.”
To allay these suspicions and to harness to its cart the strongest of all political motives—the craving for freedom—socialists began increasingly to make use of the promise of a “new freedom.” Socialism was to bring “economic freedom,” without which political freedom was “not worth having.”
To make this argument sound plausible, the word “freedom” was subjected to a subtle change in meaning. The word had formerly meant freedom from coercion, from the arbitrary power of other men. Now it was made to mean freedom fro
m necessity, release from the compulsion of the circumstances which inevitably limit the range of choice of all of us. Freedom in this sense is, of course, merely another name for power or wealth. The demand for the new freedom was thus only another name for the old demand for a redistribution of wealth.67
In the free market, a man born into wealth or who has otherwise acquired great riches can lose his fortune depending on how he chooses to behave. Conversely, a man born into poverty or who has lost wealth once obtained can acquire a fortune, depending, again, on how he chooses to behave. When the individual or even a large business makes a wrong decision, its impact is limited and more easily absorbed by the free market. However, when the Statist makes a wrong decision, its impact is far-reaching, for he uses the power of government to impose his decision on as many individuals and businesses as possible, which distorts the free market itself.
The free market can never be completely suppressed even in the most repressive regimes. But in a soft tyranny, where government intervention is pervasive but not absolute, the individual and society still pay a heavy price from the government’s diversion of resources, which otherwise might have been used to develop new technologies, products, medicines, jobs, etc., that better serve both the individual and society. Economists call this lost opportunity costs. It is difficult if not impossible to quantify that which might have been had the government not intervened, because it is impossible to identify the untold number of individuals who would have been party to an untold number of interactions and transactions had they been free to choose their own course. Morever, lost opportunity costs are often concealed from the individual, since the government’s intrusion in the free market is usually incremental and often indirect.