Economic Summit


Taking the Next Hill

How to regain the initiative
Daniel J. Mitchell

Supporters of freedom in the United States are on the defensive. Instead of pushing our own progrowth agenda, we must battle tax increases and resist new regulations. On issues from the environment to child care, from health care to antitrust, statists set the agenda.

Unfortunately, regaining the initiative is easier said than done. The fate of free-market policies and goals seems inextricably linked with the Republican party. When an aggressive, market-oriented Republican is in the White House, or when Republicans are an active opposition party as they were during the Carter years, supporters of limited government can work through the party to advance our goals. But when a passive Republican such as George Bush controls the White House, the free-market movement gets relegated to fringe status.

Still, libertarians and conservatives must launch a new offensive against the state. But we can't do this if we allow ourselves to be seduced by Washington policymaking and support deals that simply result in the government growing a little more slowly than the liberals want. If we must oppose both President Bush and Congress, so be it. In the immediate future, this strategy may diminish whatever limited influence free-market supporters have on the current administration. In the long run, however, a principled defense of the truth will resuscitate the movement and force politicians to heed our ideas.

If we want to fight big government, we must remind people that government is the problem, not the solution. The free-market community's strength has always been the support of ordinary Americans. The potential outrage of overtaxed and overregulated Americans is our check on the legalized theft that takes place in Washington.

Various free-market groups, for instance, have uncovered the utter waste and special-interest nature of federal farm subsidies. Without sufficient public outrage, however, Congress continues to funnel tax dollars to farmers. If we want to have an effect, we must go to the grass roots, get people upset that they pay higher taxes and higher food prices because of the farm programs, and target their anger against Congress. On another front, federal subsidies for pornographic art have incensed many taxpayers; we need to direct that anger against federal funding of art in general.

Many foreign-aid expenditures were justified as a means to keep Third World countries from falling into the Soviet orbit. With the collapse of communism, we have an excellent opportunity to renew an offensive against these odious transfers of wealth from American taxpayers to corrupt government officials overseas. On an issue dominating headlines recently, free-market supporters should explain the savings-and-loan scandal as the logical culmination of government intervention and deposit insurance.

But if George Bush has made a principled criticism of a single government program, it has not been reported. On farm subsidies, he tinkers at the edges, avoids confrontation, and puts off action in the hope that international trade negotiations will someday solve the problem. On federal funding for the arts, he has actually proposed budget increases.

Instead of seeing the Soviet empire's dissolution as a chance to reduce foreign aid, the Bush administration gives money to former Soviet client states. On the S&L issue, the president has been virtually silent, allowing liberals to blame the scandal on "greed" and "deregulation." On almost every issue, from the minimum wage to child care, from disability legislation to taxes, from the environment to racial quotas, the White House has conceded the fundamental argument over whether the government solves problems or causes them.

The average voter, having been told by both sides that government intervention is needed, will logically assume that the bigger and more expensive version of the program is more likely to solve the problem. George Bush has returned Republicans to the "dime-store New Deal" mentality that made the party so ineffective during much of the post–World War II era.

George Bush's blunders must not trap supporters of free-market policies. If we surrender on the fundamental issue of whether government is good or bad, we make the same error. We cannot simultaneously regain the initiative on policy and retreat on matters of principle. If the administration proposes a policy that is bad, we must not hold back criticism simply because the liberals in Congress have a proposal that is worse.

It would help us if the free-market movement had a strong leader to make the argument that big government is bad. For better or worse, conservatives and libertarians do not naturally attach themselves to government and related institutions. Only the presence of a Barry Goldwater or a Ronald Reagan energizes the free-market community and brings it into the political arena.

Unfortunately, we have no such leader. George Bush clearly is not that person. Housing Secretary Jack Kemp has fallen victim to the siren song of big-government conservatism, as has House Minority Whip Newt Gingrich (R–Ga.). Sen. Phil Gramm (R–Tex.) had been seen by most free-market advocates as the heir apparent to the Goldwater-Reagan legacy, but his flirtation with higher taxes, if consummated, would probably take him out of the running.

While there may not be an obvious choice to lead free-market supporters at this time, someone may emerge out of the budget chaos created by the White House. A less well-known figure, such as Sen. Bill Armstrong (R–Colo.) or former Delaware Gov. Pete DuPont, could vault into a position of prominence by taking the lead in opposition to higher taxes.

While a strong leader would help put free-market supporters back on the offensive, those of us who believe in more freedom should not wait around. If there is a battle to be fought, we should fight. A good example is the president's deplorable flip-flop on taxes. As I write, a deal has not been announced, and taxes have not yet been raised. But realistically the odds of blocking a tax increase supported by a Republican president, most of the Republican "leadership" in Congress, and almost all of the Democratic party are formidable.

Nonetheless, fighting higher taxes is the right thing to do. First of all, we may win. While the Washington establishment is unified behind the idea of fleecing the rest of the country, there is little doubt that people do not want to send more of their hard-earned dollars to Washington. Nor do most Republican elected officials wish to follow their "leaders" off the cliff. The no-tax resolution recently adopted by the House Republican Conference shows that the rank-and-file may go on the offensive. The resolution may not block higher taxes, but it will certainly make them more difficult to enact.

Even if we eventually lose, active opposition on this crucial issue will re-energize the movement and create grass-roots opposition to big government. This newly activated cadre of citizens can change the political landscape, much as the people drawn into politics by the economic malaise of the Carter years affected politics in the late 1970s and early 1980s.

The fundamental point we must remember is that our ability to affect policy is determined by how successful we are in getting people across the nation angry at Washington. We must take issues like taxes, the odious congressional pay raise, and the S&L deposit-insurance and influence-peddling scandal to the people. If we give them the facts, voters will give the politicians hell.

Daniel J. Mitchell is John M. Olin Senior Fellow in Political Economy at the Heritage Foundation.

Don't Dismiss the Democrats

Hope outside the Beltway
Joel Kotkin

On the surface, there are few reasons to look for free-market, entrepreneurial economics from the Democratic Party in the post-Reagan era. Certainly, the current trend within the party is increasingly proregulation and protectionist, most particularly from the Beltway establishment.

But outside the Beltway, there are signs of hope. One comes from a change in the class makeup of the party activists. Since the 1930s, organized labor—traditionally the most protectionist and regulation-oriented sector in our society—has been a dominant force within the Democratic party. But as unions have lost their "market share" in the work force, labor's influence has eroded across the country.

At the same time, the party has become increasingly dependent on new constituencies for whom trade protection and at least some forms of market regulation are not big priorities. These include consumers, women, gays, environmentalists, and human-rights activists. These groups are largely middle-class people, many with a private-sector orientation. They also tend to be less obsessed with the federal government, preferring solutions on the local level.

Equally important, the party is, albeit slowly, moving beyond its traditional Northeastern orientation. The regional geopolitics of the past two decades is critical to understanding the possible changes within the Democratic party's key economic policies.

In the evolving world economy of the 1990s, the Manhattan-centered corporate liberals, long a dominant force, increasingly stand outside the flow of the world economy. They manage assets often controlled from outside the region—including companies that have relocated to the South and West—or from overseas, notably Japan and Western Europe. Their influence is ebbing; their capital city, New York, is devolving. Desperate to hold onto power, their last export is their sense of malaise and American decline that they have helped make the cornerstone of the Democratic party world view.

But the 1990s will see a further erosion of the potency of the Cambridge/Manhattan/Beltway position, as the census reapportions more seats to the South and West. No longer can a coalition of Middle Atlantic, New England, and Midwestern industrial states suffice to win the White House. Meanwhile, the Western and Southern states—with their stronger industrial bases, growing population, and resources (notably energy)—will continue to gain influence. Indeed, save for Gary Hart's personal peccadilloes, these forces already might have captured the party, and maybe the nation, in 1988.

Although certainly capable of protectionism, Southern and Western Democrats tend to have a different fix on the national predicament than Easterners do. They have a hard time accepting the "end of the frontier" mentality that has dominated the Democrats since the time of FDR. If you live in places like Los Angeles, Houston, Atlanta, or Miami, you have witnessed within this generation a massive explosion of growth in international commerce, entrepreneurial activity, and culture.

This is very significant. If you live in an emerging region, your fix on problems is more toward managing free-market expansion—what some former Gary Hart people call "empowerment"—than simply redistributing wealth among fixed populations and institutions. Northeastern liberalism has its origin in a region with near-zero population growth. But the problems of that region have little resemblance to those of California, Colorado, Texas, or Florida—where population and job gains in recent decades have been in the double digits.

Equally important, Democrats from these expanding regions often regard international trade and investment with less dread than the Northeastern establishment. In states like California, Japanese or Taiwanese capital helps keep the local economies alive. Few California Democratic politicians, for instance, adopt protectionist rhetoric like that of Rep. Richard Gephardt (D–Mo.). It simply doesn't wash in a multiracial state increasingly dependent on world trade and investment.

Of course, purists will not like the policies of even the most free-market Western Democrats. These Democrats will favor an activist government—in terms of environmental protection, transit infrastructure, and education—that many traditional libertarians might abhor. Although market-oriented, they will not push for the massive privatization of public services. But their policies would prove far more acceptable than those that now characterize the current mainstream Beltway party.

If you detect my less-than-wild enthusiasm about even these changes, you're right. The Democrats—under the best of scenarios—will adopt policies at times that are too statist, too interventionist. But in this less than perfect world, there are many reasons for people of a libertarian bent to remain allied with parts of the Democratic Party.

First, as stated above, there are forces acting within the party who are better than the established leadership. There are allies worth having on economic issues, such as New Jersey's Sen. Bill Bradley. They need to know that there is a free-market constituency for them. Someday, the Democrats will have to win an election—after all, there is Dan Quayle—and it would be good to have market-oriented Democrats inside the party.

Second, the Republicans also present many problems. Many Republicans yearn for the return of the nationalist and interventionist policies of the Nixon years, following the Kevin Phillips school of authoritarian and hierarchical conservatism. A Phillips-style corporatist industrial policy—which has natural sympathy among the mostly Republican corporate aristocracy—fits what Michael Harrington used to call "socialism for the rich," essentially, using the state to protect the current distribution of assets.

More important, the Republican party also has chosen to embrace within its core the most repressive and authoritarian elements in our society. The most important political advocates of censorship, abortion bans, and the insane "drug war" are members of the GOP. The many smart Young-Republican libertarians in Washington may scoff at the notion of putting someone in jail for smoking a joint or performing an abortion, but they provide the intellectual fodder and staff work for those who do.

Often, friends with free-market orientations are shocked that I still consider myself a Democrat, allying myself to some extent with the likes of Richard Gephardt or Mario Cuomo. Yet given the choice between such alliances and ones with protofascists like Bill Bennett and Jesse Helms, I'll accept being called a donkey any day.

Joel Kotkin is the co-author of The Third Century: America's Resurgence in the Asian Era (Ivy Paperback). He is an international fellow at the Pepperdine University School of Business and a senior fellow at the Center for the New West in Denver.

Supply-Side Goes Inside

Growth is the issue
Bruce Bartlett

President Bush's recent abandonment of his "no new taxes" pledge has been widely interpreted as equivalent to abandonment of the supply-side economic policy of the Reagan administration. But the central tenet of supply-side economics is not that taxes should be abolished or cut indiscriminately. Nor is it correct to say that we always prefer deficits to higher taxes. The point which supply-side economics raised is that the impact of taxes on incentives and growth should be minimized as much as possible.

High marginal income-tax rates, taxes on entrepreneurial activity (such as the capital gains tax), and taxes on saving and investment are clearly more adverse to growth than consumption taxes. Because they discourage economic activity, the former have much higher "excess burdens" than the latter.(Excess burden is the difference between the cost of a tax and the amount of revenue it collects.)

And certain tax "cuts" might not promote growth, whereas certain tax increases might. The reason for this is that certain tax incentives may bias investment or other economic activity away from productive uses into unproductive uses. Eliminating such incentives from the tax code, while perhaps increasing taxes for those taking advantage of them, would nevertheless lead to a more productive allocation of resources, thus contributing to growth.

Last, we must note that not all tax cuts or tax increases are what they appear to be. A good example is the capital-gains tax. A reduction in the tax rate on capital gains would increase federal revenue in the short run. Obviously, the converse is true as well: An increase in the capital-gains rate would certainly lose revenue. Thus one must carefully distinguish between tax rates and tax revenue when considering changes in the tax system.

Although it is too early to say where the 1990 budget negotiations will end up regarding taxes, it appears that President Bush is holding to essentially a supply-side view:

• He continues to support a reduction in the capital gains tax as a way of stimulating risk-taking and entrepreneurship.

• He has strongly resisted the call to increase tax rates.

• He has supported only consumption-oriented taxes, such as those on alcohol, or the scale-back of tax deductions, such as that for state and local taxes, that adversely affect growth. (The federal deduction for state and local taxes essentially subsidizes state and local spending and has led to much greater spending at the state and local level than would be the case without such a deduction.)

What about the future? Where should we strive to make additional gains? Clearly, the answer depends a great deal on politics. In an atmosphere where people are obsessed with deficits, it obviously will be difficult to enact legislation that will reduce federal revenue. Moreover, it is clear that the forces of envy and income redistribution are in the ascendancy. Even Republicans like Kevin Phillips press for tax increases on the rich in the name of "equity." Still, despite such constraints, some things can be done.

First, to withstand any efforts to raise federal tax rates, we can build upon the general support that still exists for tax reform. This will put us in a better position to make gains whenever the political/fiscal environment becomes more hospitable to tax cuts. In addition, we can seek out additional trade-offs between tax preferences and tax rates in order to move toward a flat-rate tax system in a revenue-neutral manner. There are still many distortions left in the tax code, such as the deduction for mortgage interest, that we could "cash in" to finance lower marginal tax rates. Just making the argument for such a trade-off will help keep alive the issue of lower marginal tax rates.

Second, we can identify and press for reductions in taxes where a plausible case can be made that higher revenues will result. Capital gains is the obvious example, but taxes on any form of income that is particularly sensitive to the rate of return, such as business profits, might also qualify.

Third, we should encourage tax reform efforts at the state and local levels. State and local taxes are an increasingly significant element of total taxation. They are also an area where taxes have been rising rapidly. It is possible that a new round of tax revolts in states like New Jersey could lead to a new round of tax cuts in Washington in the 1990s, just as Proposition 13 in California set the stage for tax cuts in the early 1980s. A scale-back of the federal deduction for state and local taxes would greatly encourage this trend.

Fourth, we need to encourage tax reform efforts in the developing world, including Eastern Europe. Although most nations have reduced their tax rates in recent years, in response to tax cuts in the United States, many still have rates that are far too high. International organizations such as the International Monetary Fund and the Agency for International Development need to make tax-rate reduction a central element of economic reform as a condition for receiving aid.

Finally, it is not really necessary any longer to pursue an explicitly supply-side economic agenda because the central points that supply-siders made in the mid-1970s about the evils of high tax rates and the errors of Keynesian economics are now, for the most part, accepted by mainstream economists and policymakers. If supply-side economics is dead, it is due to its own success.

Bruce Bartlett is deputy assistant secretary for economic policy at the Treasury Department. The views expressed are his own and not necessarily those of the Treasury Department.

Resisting Regulation

Free-market survival guide
William A. Niskanen

Those of us who support continued deregulation face a daunting task. The trend in Washington, in both the White House and Congress, is toward greater regulation. Nevertheless, we should not give up hope. The economic case for deregulation remains as strong as ever. We just have to present that case to voters in an effective manner.

Much of the demand for greater regulation springs from the public's hostility to ever-increasing federal taxes and spending. Because of the intense focus on the budget deficit, special interests have generally abandoned their calls for new social spending. Instead, they now attempt to have government mandate that employers provide specified benefits for employees. This effectively hides the costs of new programs. Instead of showing up as a line in the federal budgets, new programs will be paid for by a multitude of employers.

Several mandated benefits have already been approved. Government increasingly mandates certain pension benefits. Legislation that requires advance warning of plant closures and major layoffs was approved in 1988. Congress approved legislation that requires assistance to disabled workers and customers this summer. And a bill to require parental leave was recently approved by Congress, only to be vetoed by President Bush. More such mandates are in the congressional mill, the most important of which would require all employers to provide a federally structured medical-insurance program.

Further, the partial deregulation of certain industries that was enacted in the late 1970s and early 1980s may ironically lead to new regulations in the 1990s. The federal government substantially reduced the regulation of several industries but failed to reform the remaining government roles in these industries. As a consequence, the developing problems in these industries are broadly (but incorrectly) perceived to be the result of deregulation, rather than of the failure to reform the remaining government roles.

The most striking example is the savings-and-loan crisis. Starting in 1980, the deposit rates at S&Ls were gradually deregulated, but the federal insurance on deposits was sharply increased. The combination of these conditions created a "moral hazard," in which owners of banks with low or zero net worth had an incentive to make high-risk loans, in effect gambling with taxpayers' money. We all know what this situation led to. But how many people place the blame on federal deposit insurance rather than deregulation?

Airline deregulation led to a large increase in the number of flights, but the capacity of the airports and airways system has hardly changed; no major new airport has been built for 15 years, the number of controllers has not increased, and the government has yet to permit a peak-load pricing system for congested airports. The combination of these conditions has led to increasing congestion and delays and some pressure for reregulation even though airline safety has continued to improve.

The long process of deregulating telecommunications services has also not been matched by complementary changes in the remaining government roles. New technologies have increased the demands on the frequency spectrum, but the government still manages the spectrum the way the Soviets run their economy. Cable television rates were deregulated in 1986 without permitting the entry of other cable services (most importantly, the local telephone companies) to challenge the local monopolies. As a consequence, cable rates among monopoly companies soared. But when Congress acted this summer, it did not open up cable television to new competitors; it reregulated cable rates.

In these three areas, one might almost suspect Congress and the bureaucracy of conspiring to discredit deregulation.

And good times produce new demands. When people are no longer concerned about the economy, it seems that they begin to look for other problems for government to solve. The demand for environmental benefits, for example, seems to be growing.

Given this outlook, what can be done to revive the case for deregulation? The first task, I suggest, is to address each of the conditions that have led to the increased demand for regulation. A different response is appropriate in each case. Mandated benefits should be opposed without qualification, to force these demands back through the federal budget. Hiding the costs of the programs ensures that they will grow out of control. Putting them on budget makes sure that people know just what the programs cost and allows them to decide whether the benefits are worth the price.

The concern about the soundness of the banking system could be used to make the case for removing the restrictions on branching and on lines of business. The rapid increases in medical-insurance premiums reinforce the case for removing state mandates on required coverage. Increasing power prices could contribute to deregulating the production of electricity. Food and Drug Administration red tape has caused much-publicized delays in getting AIDS drugs to patients. This could lead to a broader review of the efficacy standard for approving new drugs.

The free-market community should be ready to exploit these targets of opportunity. The broad, if somewhat inchoate, concern about America's competitiveness could provide the common support for a new deregulation movement, because most regulations increase the costs of American firms relative to those of their foreign competitors.

The short-term prospects for regulation are discouraging. But with effort, the long-term prospects can be much better for free-market advocates.

William A. Niskanen is chairman of the Cato Institute and editor of Regulation magazine.

Shifting the Burden of Proof

Government on the defensive
Michael Barone

Do free-market economic policies have a future in the United States? The answer, I think, is yes—a qualified yes, a yes with a considerable number of exceptions, but a yes that is qualitatively different from the qualified no that was the answer to the question just 10 or 15 years ago.

A half-generation ago, the politicians still were and the public still seemed attached to the idea that government could significantly improve on the free market through concerted action. At the macroeconomic level, that meant Keynesian demand management. At the microeconomic level, it meant price controls on oil and gas and on rental housing in big cities and university towns.

But even then, faith in government was weakening. In the Carter years—when the Democrats held a 2-to-1 margin in the House of Representatives and had solid control of the Senate—Congress rejected measures to establish a consumer protection agency and to strengthen labor unions. When the administration proposed higher taxes on the rich, the Congress passed instead a capital gains tax cut. The voters of California passed Proposition 13, and the voters of Massachusetts passed Proposition 2½. All of this before Americans elected Ronald Reagan president, and in constituencies and forums that many assumed were bastions of welfare-state liberalism.

The political marketplace reflected changes in the larger society. The historian William McNeill has a rule for understanding long-range trends: In wartime, societies want larger government. In peacetime, societies want smaller government. Applied to the United States, this helps explain how we moved from the New Deal to Reaganism. Roosevelt wanted to expand a government that was spending about 5 percent of gross national product, and a war-accustomed nation agreed. Reagan wanted to hold down the size of a government that was spending about 25 percent of GNP, and a peacetime nation agreed.

The difference of the times explains the seeming inconsistency. The policies that had worked well enough—very well indeed, I would argue—in the 1940s and 1950s, by the 1970s and 1980s were not working very well at all. And so, in a democracy, and despite the prejudices of political elites and the vested interests of bureaucrats, they were discarded.

Nor should we suppose that people easily forget the effects of major depression and total war or of stagflation and bracket creep in peacetime. These events create enduring political predispositions. The bread lines of the 1930s taught most Americans that the free market did not work very well. The gas lines of the 1970s taught most Americans that government regulation did not work very well.

The result is that the Americans of the 1990s are much less disposed to believe that government can solve problems than were the Americans of a generation or two ago. And they are more inclined to see themselves hurt by government action—or hit by government taxation.

The catastrophic health-care program of 1988–89 most vividly illustrates this effect. Congress passed it at the behest of the American Association of Retired Persons, the largest lobbying group in the country, and government experts crafted it so that the benefits would go to large numbers of recipients while the burdens were concentrated on a relatively small number of the affluent. But look what happened. The intended beneficiaries were apathetic or unconvinced that the program would help them, while those who would pay more were furious. They raised such a large political stink that a Congress which had passed the program by a wide margin proceeded to repeal it by a wide margin just a year later. The political process on this issue is clearly biased toward the market and away from government.

And so it goes on other matters. Gasoline prices may rise, but few raise the early 1970s cry that government must set prices. Threats of inflation generate no demand for the wage-and-price controls adopted by that supposed conservative Richard Nixon. The ABC child-care program—seemingly designed to provide for early-year child care all the features of a failed public school system—was rejected by Congress, rejected by liberal Democrats as well as conservative Republicans. Even on issues—farm price supports, trade restrictions—on which politicians still pass antimarket measures, they are moving away from government regulation and toward markets.

Some assert that a changing income and wealth distribution will produce a populist response from voters, but that economic shift has been going on for more than a dozen years and has produced no perceptible change in that direction in all that time: as much proof as the political process ever gives us that it won't in the future.

In legislatures, in political campaigns, on city councils, and on county boards of supervisors, the burden of proof is now increasingly on those who would propose public spending programs and government regulation. That is likely to continue to be the case, regardless of who is elected, regardless of partisan tides, so long as market-oriented policies are seen to produce good results.

Michael Barone is a senior writer at U.S. News & World Report and author of the recently released Our Country: The Shaping of America from Roosevelt to Reagan (The Free Press).

Liberty Ascendant

The global view
Paul Craig Roberts

In the postwar period a small force of champions of economic liberty avoided demoralization by university faculties and public policy. Unheralded and isolated, they stuck to their guns. In the 1980s public policy changed in their direction. The United States and the United Kingdom dramatically reduced tax rates; the United Kingdom and France privatized; regulation and socialist approaches to welfare lost their luster. The political rhetoric also changed, and speeches by Ronald Reagan and Margaret Thatcher influenced the entire world.

After this heady experience, many feel that we have lost the policy initiative. Indeed, the nihilists of the American political establishment, who believe in nothing but their own careers, are an uninspiring lot. Our enemies among the journalists do their best to demoralize us with their mendacity, lies, and attempts to convince the population that Reaganomics was all a mistake. But no one believes them. The basic policies have not been overturned, and there is no public support for going back to socialism.

Despite the journalistic hype of "the widening income gap" and "the rich get richer," there is no public support for raising marginal tax rates. Surveys show that the public has lost faith in egalitarianism to such an extent that the Washington Post, probably the nation's most important advocate of egalitarianism, ran a front-page article on April 30 reporting that Americans do not share the egalitarian social vision. Only 29 percent of Americans see redistribution of income as a government responsibility. Americans are so turned off by government that it is impossible to get a majority to vote.

Ironically, the American free-market movement has been weakened by its success, not by its failure. The postwar champions of economic liberty have personally lost the initiative because their ideas have been accepted and the initiative has moved into wider hands. Indeed, there is no other initiative today in Eastern Europe, the Soviet Union, Latin America, China, and even much of Africa. We feel less important, and are, because others have taken up our causes.

The gospel of free markets has even won converts within the Kremlin. On February 5, the Soviet foreign minister, Eduard Shevardnadze, declared that communism "has been destroyed by the will of people who wished no longer to tolerate coercion." Two days later marked a turning point in world history. The Communist Party repudiated Article Six of the Soviet Constitution and stripped itself of its monopoly of power. The same party conference endorsed the principle of private property.

Not long thereafter, Mikhail Gorbachev, with Margaret Thatcher sitting beside him nodding in approval, told a live televised news conference in Moscow that the creation of a market economy in the Soviet Union was essential. Accused of abandoning socialism, Gorbachev replied that the market economy, unlike socialism, "is an invention of civilization."

There are still battles to be fought. Advocates of big government continue to press their agenda on behalf of "the handicapped" and "the environment." But when the head of the Communist Party of the Soviet Union dismisses socialism as an ideology of intellectuals and embraces the market as the historical invention of civilization, the war is almost over.

Former Assistant Treasury Secretary Paul Craig Roberts is the William E. Simon Fellow in Political Economy at the Center for Strategic & International Studies in Washington, D.C.