The Cost of a Free Lunch

New York Times reporter David Cay Johnston surveys a world of government interference in the market to privilege the privileged.

Brian Doherty | December 28, 2007

David Cay Johnston is a Pulitzer-winning New York Times reporter. His latest book, just out this week, is called Free Lunch: How The Wealthiest Americans Enrich Themselves At Government Expense (and Stick you With the Bill).It’s valuable from a small government perspective because of its detailed stories of government attempts to manipulate or adjust the market, leading—predictably, a libertarian might say—to benefits for the well-off and well-connected rather than the disadvantaged or the masses.

Free Lunch is full of sharp, heavily reported takedowns on eminent domain, expensive special favors for sports teams, legislative deals that put taxpayers on the hook for private train company’s crimes and errors, giveaways from small towns to attract big-box stores, and how heavily government-managed markets in areas such as power and health care can enrich some at everyone’s expense.

While almost every depredation recorded in Free Lunch can be traced back to government actions or decisions (generally combined with some individual or company’s decision to act like a bit of a creep), Johnston engages in a fair amount of rhetoric along the lines of how “the ideology of blind faith in markets” is somehow implicated in this or that crime or ripoff.

Still, he often uses sound free market arguments to make his case—for example, noting how some government action places on everyone an often-unnoticeable little burden in order to give a big special benefit to a few. Unfortunately, he’s apt to forget that sort of argument when he, say, condemns outsourcing of jobs overseas, or trucking deregulation.

As Johnston tells me, he’s not selling any consistent ideology about government. He sees himself as an investigative reporter, looking for interesting untold stories. In this interview, conducted by phone on Thursday, Johnston is nonetheless aware his book has a distinct moral message.

reason: What is the theme of Free Lunch, and what made you write it?

David Cay Johnston: Ronald Reagan famously asked Americans if we were better off than we were four year ago; Americans said “no” and elected him. This empowered a great change, supposedly, in government. It was supposed to lead to less government, more market solutions, and lower taxes.

What I’m asking in Free Lunch is: Are you better off than you were a generation ago when Reagan was elected? Government is just as big, there are vastly more regulations, and as I show, we have many new rules and regulations that handcuff the invisible hand of the market and instead, in subtle, sometimes hidden, ways, extract money from the pockets of the many and funnel it to the politically connected few. It’s the very thing that Adam Smith said would ruin the benefits of markets. I would think libertarians would like everything in the book, except for the parts about health care [where he calls for nationalized health care, European-style].

reason: Which of the many stories you tell sums up your book’s message best?

Johnston: I tell in detail the story of a little merchant [Jim Weaknecht] with lower prices than his bigger competitors, like Cabela’s, in the business of selling fishing and outdoor gear, who was run out of business in his little town [of Hamburg, Pennsylvania] because of $32 million in subsidies [provided by local government] to Cabela’s. That’s $8,000 for every man, woman, and child in town, equal to the entire budget of the little town for a decade. Imagine that you are that competitor, with some big outside competitor getting a huge leg up, one that’s essentially worth doubling their profits as a practical matter, so they can run you out of business.

On the brighter side, I do tell a story about Gander Mountain [another big company in the hunting/camping/fishing business] that actually employs a lobbying firm to fight against [special favors and subsidies] for [their competitors] Cabela’s and Bass Pro. Cabela’s was actually praised by Bush and Cheney as models of enterprise.

It’s not surprising Bush would praise a company like Cabela’s though. His own fortune, as I show from the public record and from interviewing his friends and from his own tax returns, derives from a subsidy that was derived from a tax increase! There’s an irony—George Bush got rich from a tax increase [a sales tax passed by voters in Arlington, Texas] that was funneled into his pocket inefficiently. The people who had to pay the tax got no benefit—most of them were not baseball fans—from this subsidy to build a stadium for the Texas Rangers [baseball team Bush owned].

You might think that companies that get subsidies would make bigger profits than normal. But Adam Smith told us that subsidies bring in brash adventurers who often end up making no profit, and the evidence is that Cabela’s doesn’t appear to be particularly profitable. Cabela’s in fact, in its first three years as a publicly traded company, had $223 million in profit, and subsidy deals worth $293 million. I argue that they are not in the business of selling sporting goods; they are in the business of reeling in subsidies.

reason: Why do you think these practices continue if the towns and cities that agree to them are getting reamed?

Johnston: When I ask town burghers why they indulge in this practice, they generally say, “Excuse me, if we don’t they’ll build in the next town over and we lose that business; we have to do this.” I think, “Excuse me, what happened to the notion that it’s part of your duty to protect the pockets of the people you represent?”

Comments

Sam Grove|12.28.07 @ 12:49PM|#

Those bastards!

TLB|12.28.07 @ 1:24PM|#

I don't think we have to look too very far to find Reason repeatedly supporting corporatism, given the dozens of posts at this site promoting allowing crooked companies to import cheap (to them) foreign labor and pass all the costs on to everyone else.

I did just spend a few minutes looking for Reason supporting this handily covered-up scandal without luck, but I'll bet if I looked through all their articles about that I could find something indicating they supported that while it was happening.

Brandybuck|12.28.07 @ 1:42PM|#

TLB: "Corporatism" is corporate collusion with government. In your example, corporations were taking advantage of an absence of clear property rights, engaged in no-bid contracts, and outright fraud.

The problem with handing tax monies out to shady corporations, is not the shady corporations, but the handing out of the tax monies! As long as we accept that it is legitimate for government to take money from one person and give it to another, we will continue to see individuals and corporations maneuvering towards the receiving end of the dole.

|12.28.07 @ 1:44PM|#

What bothers me about this sort of coverage is that we are to pretend that such activity isn't a direct result of democratic processes functioning as we would expect them to function.

When a municipality grants tax breaks to a big company, why to they do it? Because they want the jerbs. Their constitutents respond to more jobs in the area better than to almost any other lever a politician can pull. Politicians don't make these deals because Big Business (tm) wants them to, they make them because VOTERS want them to.

jp|12.28.07 @ 1:54PM|#

Good interview.

One problem I have with the rhetoric used by Johnston and others is the equation of "the rich" with business enterprises. Now, I'm as much agin corporate welfare as the next guy, but corporate welfare benefits large corporations -- business entities -- which are typically owned (indirectly) by a lot of middle- and upper-middle-class people, not Mr. Potter.

TLB|12.28.07 @ 2:38PM|#

Apparently Brandybuck missed the part about "ConnectedContractors", if not at that link then at many other posts at that site. One of the major ones was connected to the Dems, the rest to the GOP. And, the fact that the original population was moved out and a new population of lower-wage, less-safety-restricted workers was brought in was done by our government (GOP and Dem) for some reason, and I'm going to guess it was to help those ConnectedContractors.

And, if Reason didn't explicitly support that arrangement at the time, it's probably just because they were too busy and would have if they'd turned their attention to it.

thoreau|12.28.07 @ 2:44PM|#

The issue that he raises of tax breaks to lure companies is perhaps a complicated one for us. In general, we don't object to tax cuts, but highly selective tax cuts are equivalent in effect to highly selective tax imposition. It would seem to me that whatever taxes are imposed should be kept simple so as to avoid interfering in the competitive process.

|12.28.07 @ 2:47PM|#

I think a big problem is many Americans are giving up on democracy. I never throw my hands up about these problems, and if I did, that would be saying that I don't think this ingenious idea, the Constitution, can work, and I do.

I'd say most of the people posting here would like to try actually following the Constitution, and feel that democracy is preventing that from happening.

TLB -- Allowing people who were born in different countries to meet in the U.S. and voluntarily contract with each other isn't corporatism, and arguing that we should allow these voluntary exchanges to happen isn't support of corporatism -- using the welfare state to hand out goodies to said immigrants and corporations is corporatism, and I don't recall a lot of articles by Reason staffers arguing that the welfare state is a good thing (though some of the lefties posting on those threads have defended one or more aspects of the welfare state.)

|12.28.07 @ 2:47PM|#

The rich getting richer and the poor getting poorer is no surprise...it has occured in nearly every country in the past 30 years because of the so called 'free market' reforms that have been made. The two go together and have been inseperable...wheras the greatest expansion of shared prospertiy in this country occured when taxes were very high on the higest earners and we did not have such a ridiculous trade policy.

|12.28.07 @ 2:50PM|#

"I think a big problem is many Americans are giving up on democracy. I never throw my hands up about these problems, and if I did, that would be saying that I don't think this ingenious idea, the Constitution, can work, and I do."

I will agree with you here and add that the media in this country (contrary to what some Republicans at the FCC would have you believe) has become much WORSE since ownership regulations have been dropped and this has added to the malaise. The problem is not too much democracy, it is that we do not have enough democracy.

|12.28.07 @ 2:53PM|#

James -- the rich have been getting richer, many of the previously poor have become the rich, and the poor have been getting richer, too. Genuine free market reforms help the poor, and everyone else. I recall that we've had a massive expansion of prosperity lately during a period of relatively lower taxes, though the main driver of that was better technology, more trade via more efficient companies like Wal-Mart or Costco, etc.

So, other than being wrong in virtually every aspect of your 2:47 post, good post.

|12.28.07 @ 2:57PM|#

The problem is not too much democracy, it is that we do not have enough democracy.

James, we don't really have a democracy in anything but name -- what we have is a representative kleptocracy with an overlay of alternating monarchism at the executive level. I hardly think that more of this system is what we need. What we need is the minarchy laid out in the Constitution that is given lip service and then ignored.

|12.28.07 @ 3:05PM|#

"James, we don't really have a democracy in anything but name -- what we have is a representative kleptocracy with an overlay of alternating monarchism at the executive level"

I would call what we have a 'managed democracy' or polyarchy where the few hold power and work to deceive the many through fear tactics, misdirection, playing upon religious and social prejudice and manipulation of media and institutions.

Il Duce|12.28.07 @ 3:08PM|#

corporatism =/= corporate welfare

Corporatism is (to oversimplify) the organization of an economy through quasi-governmental bodies that determine pricing, wages, output, etc. within each branch of industry.

|12.28.07 @ 3:09PM|#

"the rich have been getting richer, many of the previously poor have become the rich, and the poor have been getting richer, too. Genuine free market reforms help the poor, and everyone else."

I disagree on most respects...the income of the bottom 90 or so percent when ajusted for inflation for the past 35 years has either been level or declined, while the income of the exceptionally wealthy (top 1 hundredth of one percent) has skyrocketed...meanwhile taxes have become more regressive and new vehicles to pass massive wealth from generation to generation tax-free(Old Europe-style) have thrived.

|12.28.07 @ 3:12PM|#

I saw that HiltonFortune story yesterday; good laugh. I suspect PoorParis has shysters lined up around the block waiting to tell her (for a not insubstantial fee) how she can do a little trust-busting. Just like DearOldDad did.

The whole "tax breaks for jobs" scam really aggravates me; small businesses should not be forced to subsidze large ones. And any mayor or governor who signs off on a deal which goes sour should wind up in jail.

|12.28.07 @ 3:18PM|#

"The whole "tax breaks for jobs" scam really aggravates me; small businesses should not be forced to subsidze large ones. And any mayor or governor who signs off on a deal which goes sour should wind up in jail."

Yeah, but you're not getting the whole joke. This is a logical extension of the idea that providers of jobs are performing public services. It is a distinctly democratic idea that the government has to 'do something' to bring jobs home - just as it is the government's job to keep local jobs local or protect us from unfair competition. It isn't anything less than the flowering of democracy that elected officials bargain with bulk providers of jobs. All hail democracy.

Sam Grove|12.28.07 @ 3:19PM|#

And, if Reason didn't explicitly support that arrangement at the time

This is how collective thought operates, as if REASON magazine were some kind of corporeal body with a unified opinion.

Libertarians DO NOT support corporatism.
Libertarians support freedom and minimal government.

After all, the federal government is the mother corporation and those who support progressive government actually support corporate rule.

The major differences between the federal corporation and business corporations, is that the federal one is authorized with police and military powers and is regarded as non-profit.

Marx attack business for the profit motive but no one attacks the government for the political motive.

Why would anyone consider the political motive beyond reproach?

Is it because they are vicarious rulers?

|12.28.07 @ 3:22PM|#

"It isn't anything less than the flowering of democracy that elected officials bargain with bulk providers of jobs."

This I think is just nonsense...there are not mass rallies of people demanding tax-free zones for corporate deveolopment. From working at a state capitol my experience has been that it is usually the company that shops itself around trying to exploit desparation(the same way they will move their production from one poor country to another even poorer and more desperate one)

The IRS|12.28.07 @ 3:23PM|#

the income of the bottom 90 or so percent when ajusted for inflation for the past 35 years has either been level or declined, while the income of the exceptionally wealthy (top 1 hundredth of one percent) has skyrocketed

1. That "90 or so percent" figure doesn't pass the laugh test.

2. The individuals who make up each income quintile are continually changing. I suggest looking at the chart provided here and at the IRS data (linked therein) from which it is drawn.

|12.28.07 @ 3:25PM|#

"This I think is just nonsense...there are not mass rallies of people demanding tax-free zones for corporate deveolopment."

You are wrong in focusing on rallies instead of ballot boxes. Governors believe they are going to get more votes by having their name on a big bunch of jobs in the local area. Mom and pop, or any other dispicable self starter, didn't come about as a result of government action, and so no government official can claim the jobs they create. It is intrinsic to the strong democratic position that emergent benefits of capitalism don't count, only 'guaranteed' government ones do.

|12.28.07 @ 3:25PM|#

"The major differences between the federal corporation and business corporations, is that the federal one is authorized with police and military powers and is regarded as non-profit."

Ummm...try checking out oil/copper/diamond/etc. industries in Africa and elsewhere, most of them have a rather extensive police/military force.

|12.28.07 @ 3:35PM|#

The share of all income going to the bottom 90% of Americans shrank from 67.1% in 1970 to 52% in 2000 while the share of all income going to the top one 13,360 households(about one thousanth of one percent) went from 1.0 of all income to 5.1 percent...a growth of 412%.(Source Piketty & Saez)

The IRS|12.28.07 @ 3:37PM|#

The share of all income going to the bottom 90% of Americans shrank from 67.1% in 1970 to 52% in 2000 while the share of all income going to the top one 13,360 households(about one thousanth of one percent) went from 1.0 of all income to 5.1 percent...a growth of 412%.(Source Piketty & Saez)

"share of all income" =/= income

|12.28.07 @ 3:46PM|#

The average income for the bottom 90% ajusted for inflation actually fell by .1 % between 1970 and 2000(from 27,060 to 27,035) while the average income for the top 10% rose by 88.6%(from 119,249 to 224,877).(Piketty & Saez)

The IRS|12.28.07 @ 4:15PM|#

Horse hockey. Bad analysis explained here by the senior economist at the Minneapolis Fed. In brief:

Microeconomic statistics showing stagnation, and macroeconomic statistics exhibiting growth, measure "wages" quite differently. When the data are adjusted so that they more closely measure the same conceptual object, the disparity between the microeconomic and macroeconomic statistics largely evaporates, and I find that labor income per hour for middle America has not stagnated. Rather, the economic compensation for work for middle Americans has risen significantly over the past 30 years.

|12.28.07 @ 4:18PM|#

The average income for the bottom 90% ajusted for inflation actually fell by .1 % between 1970 and 2000(from 27,060 to 27,035) while the average income for the top 10% rose by 88.6%(from 119,249 to 224,877).(Piketty & Saez)

What, exactly, is your point?

Are you agreeing with the premise of the book, which is that politicians and lobbyists have for decades been conspiring to perpetrate a vast transfer of wealth from the divided many to the organized few?
If so, good on ya; if not, WTF?

Click \'n\' Learn|12.28.07 @ 4:31PM|#

prolefeed doesn't seem able to think things through. Under our current system - not the libertarian alternative universe fantasy system - we have various programs in place, and unless you live full time in that alternative universe I suggest including them in your calculations.

For an example, at least one report described how IllegalAliens were working without the proper SafetyGear. Their choice, right? Unfortunately, when they get sick sooner or later, that cost is passed on to the rest of us. So, their employer saved money, and stuck the rest of us with the bill. That's only libertarian in the Reason sense.

(Needless to say, getting away with that without IllegalAliens would have been more difficult for their employer).

Do, join us in our universe. The sky's a nice blue color over here.

|12.28.07 @ 5:00PM|#

James:

"Since most of the taxes are paid by people earning above-average incomes and most of the income of people in the lowest income bracket comes from government transfers, income statistics exaggerate the differences in actual standards of living." (Sowell, Thomas (2008). Economic Facts and Fallacies. p.133)

Also relevant:

Effective Tax Rate
2005 (1979)

All households: 20.5 (21.6)

Lowest quintile: 4.3 (7.2)
Second quintile: 9.9 (13.2)
Middle quintile: 14.2 (17.1)
Fourth quintile: 17.4 (20.1)
Highest quintile: 25.5 (26.1)

Top 10 percent: 27.4 (27.6)
Top 5 percent: 28.9 (29.0)
Top 1 percent: 31.2 (31.7)

Source: Congressional Budget Office (2007). Historical Effective Federal Tax Rates: 1979 to 2005. (From N.G. Mankiw's blog.)

herodotus|12.29.07 @ 1:52AM|#

There is something that is just so sad about far left type people coming to the blog of a magazine representing such a tiny political constituency and trolling.

I mean, how useless can a human activity be?

libertreee|12.29.07 @ 10:24AM|#

Just want to mention that the author of the book in question on this blog is the same David Cay Johnson who has done a better than average job (not perfect at all, but better than most journalists) of covering the "tax honesty " movement in the USA.

Ventifact|12.29.07 @ 2:52PM|#

The rich getting richer and the poor getting poorer is no surprise...it has occured in nearly every country in the past 30 years because of the so called 'free market' reforms that have been made.

So you must not be including in your claim such trivial examples as the most populous nation on Earth.

Ventifact|12.29.07 @ 2:56PM|#

Click --

An H&R poster a little while back noted that libertarian policies usually succeed only as package deals. Currently we are in an uncomfortable in-between with regards to a lot of policies, as you note in your example about worker "protection" and healthcare. The only (KEY) issue you fail to address in your otherwise thoughtful post is why the solution to your presented dilemma is to establish greater government control over work practices, instead of reducing government contribution to healthcare.

TGGP|12.30.07 @ 3:53AM|#

Dean Baker's The Conservative Nanny State is a good read but disappointing in that it is not actually advocating eliminating a great many of the policies it points out (as Milton Friedman did with licensing) but just trying to justify other policies favored by progressives.

Ebeneezer Scrooge|12.30.07 @ 5:52AM|#

I think a big problem is many Americans are giving up on democracy.

Aww, c'mon, there's no reason for this. Look at what we've got to choose from in the next presidential election. Ron Paul will probably not get nominated to run, much as I'd like him too.

Instead I'll probably have to choose between The Billary Clintons (a family run presidency to be sure, with THREE GENERATIONS of CLINTON WOMEN on the road at all times), or else whatever mealy-mouthed jerk the Republicans put on stage to "compete" with the three generations of Clinton women (backed by Billy Boy when he isn't busy with stand-in Clinton women).

Democracy actually sucks.

Unfortunately, every other option sucks even worse.

Democracy might work if "the people" had nothing to do with their time but watch what the government is doing. And the fact that it needs watching is a big reason why the ancient Greeks said it should be a city-state, not a nation-state. A nation-state is way too big for any one person to get a real overall grip on, even if they had nothing else to do with their time.

Instead most people busy themselves with the mundane business of making a living. And then we sit around and say "well if the people aren't going to fight this crap then they deserve what they get."

Or better yet, we say "the people deserve it" because they don't don't "vote GWB" (or whoever) out of office. Which makes perfect sense and the people should be beaten bloody for it (see comments above about voting choices).


John, you really should try and find someone who's in the market for socialism. Hint: you won't be selling much lemonade around here to anybody but joe, and he's just not around today.

Now, if you want to sell "democracy sucks" around here you might find some buyers. But you aren't selling that either, are you?

Democracy is the latest fad in socialism. The biggest fraction of the population is always the poorer fraction, so you can always get them to vote for a free lunch.

|12.30.07 @ 12:47PM|#

"Then there would be a rule that says, now that we paid all costs, including for keeping up two households, if you take so much as a free shot of whisky, you go to prison. Zero tolerance for politicians."

Zero tolerance for politicians, now that's something I could be on board with. Now if we could only institute;

If you lie, you fry.

Let's go to the instant replay Mr. Politician...

Whatever|12.31.07 @ 1:21AM|#

David Cay Johnston is no "neutral" reporter. He's a left-wing partisan hack who's been advocating more steeply progressive taxation on the pages of the NYT for years.

Also, he's been essentially lying about his credentials, claiming that he "studied" economics at the University of Chicago when he in fact doesn't have any college degree at all:

http://davidcayjohnstonwatch.blogspot.com/

|1.3.08 @ 12:50PM|#

Gee I wish Mr. Johnston's employer, the NYT, would read his book. Maybe then they wouldn't be so hostile to a John Edwards candidacy. Obvously both Johnston & Edwards are on the same page.