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.

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?"

Stores [getting subsidies] promise that if we build a store, they will come [promising tourist and business benefit beyond the store itself]. They promise people will come driving a whole day to buy a fishing reel or hunting rifle—which you can buy out of a catalog. So an analyst for Gander Mountain and a reporter went and counted cars in parking lots for the Cabela's that put Jim Weaknecht out of business. To have as much business as Cabela's said [they'd attract] they'd need to be bringing in 4,100 cars a day. They found just 308 cars, and only 68 with out-of-state plates. These subsidy deals are premised on promises of all this business and money they will attract to town, but the information is not real, and there's no follow up and in many cases no disclosure. It's government money being given away in secret with no one checking to see if the promised performance is made.

reason: There are times in the book where you use language in a way that some libertarians might find misleading: you don't often distinguish, for example, between a tax break and a pure giveaway when discussing subsidies.

Johnston: I'm not an ideologue; I'm a practical reporter. I don't think in those terms. Money is money is money. In some of the subsidies that I explain, no dollars change hands, but value changes hands. If government is taking from you to give someone else money that's very clear, like if the government is forcing you to pay a tax and then gives that money to a rich person. But when the government says to a rich person, you don't have to pay taxes, and you're in business [competing with them], then that business gets to compete with an advantage against others who do pay taxes. And it's not fair, it's not level.

reason: Barron Hilton, Paris' grandfather, was in the news today for something related to a story in your book which discussed how he gained much of his fortune—in your reading, because of unconscionable appeals court decisions in California.

Johnston: Barron Hilton announced that he's giving 97 percent of his fortune to charity, and it got mostly uncritical press about his generosity, and poor Paris being shortchanged. Now, the Hiltons knew my book was coming and that its official publication date was [Thursday]. I can't prove it, but I think the timing of this announcement is connected with [my book]. I asked in Free Lunch, what kind of family produces a young woman as brazen and shameless as Paris Hilton?

The answer is, a family that derived its fortune not from hotels but by snatching it from poor children. [Paris' great-grandfather Conrad Hilton] left his fortune to the poor [via a foundation]. He left his son Barron a tiny, itsy bitsy sliver of fortune. Barron started scheming, and set in motion within days of [Conrad's] death to deny all that money to the poor and to take it from the charity through a complicated legal argument [having to do with the percentage of the hotel chain that could legally be owned by the Hilton family and the Hilton Family Foundation that Conrad wanted to leave most of the hotel stock to] and lost at every turn. Finally one set of judges gave him a favorable ruling not in accord with 400 years of common law. He negotiated a deal to get 60 percent of his father's fortune. He may be turning that money back over to charity when he dies, but he diverted hundreds of million to his own pocket in the meantime.

reason: At times you go out of your way to traduce unfettered markets, but aren't all the practices you condemn in Free Lunch the result of government actions or decisions?

Johnston: Markets are the very best mechanism to determine the price of things, but all markets have rules. I show in many of these market established under the guise of deregulation, particularly energy, the new rules are rigged in favor of one group or another. See for example just this month big manufacturing companies, chemical firms, and industrial firms including automakers joined together with their nemesis Ralph Nader to file a petition with the Federal Electric Regulatory Commission (FERC) that said excuse me, electricity markets are not real markets. [The petition Johnston refers to urges FERC to open a nationwide probe into whether wholesale electricity prices are "unjust and unreasonable."] Enron got the laws written the way they wanted them written; Enron's gone but those rules are still costing people enormous sums every month.

So, I don't think of myself as a progressive, a liberal, or anything else. In addition to being a reporter I also run a business--I'm chair of a small hotel management company that my son and I own. I've had plenty of practical experience. I've been an investigative reporter since I was 18. What investigative reporters have in common is we become interested when things are not as they appear to be.

reason: It seems to me Free Lunch goes beyond an investigative reporter "just the facts" attitude. You do seem guided by a principle more or less like, if something seems to benefit the rich, you're against it….

Johnston: There is definitely a moral tone to the book. I cite Adam Smith, Andrew Mellon, and the Bible at length on the proposition that one of the most morally offensive things is to take from those with less to enrich those already rich. The Bible again and again tells us that is a road to ruin. But I have no objection to people getting wealthy. Just get wealthy off hard work and enterprise, not getting government to pass rules no one knows about that reach into my pocket and take money out of it.

reason: You present a variation on campaign finance reform in your conclusion, something you think can address the problems of government being overly solicitous of the wealthy and well-connected, that I hadn't heard before.

Johnston: For 35 years we tried to reform the government through campaign finance reform, and it hasn't worked, and the Supreme Court is hostile to it. So I suggest we try something new—politician finance reform. I was inspired by the franking privilege. Have all the costs and expenses of being a member of Congress be publicly funded—an unlimited expense account essentially, but with complete disclosure including who they met with and the substance of the conversation—not every detail but generally what they were talking about.

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. If we approach this idea of paying the full real cost of Congress then I think perhaps we can get closer to a system where members of Congress are not thinking about what donors want.

reason: I'm curious if you ever get to the point, studying example after example of how government works to prop up the powerful, where you just throw up your hands and decide that it's government itself that is inherently the problem here…

Johnston: When people say a problem is intractable, I think that's the most un-American thing you can say. The whole idea of America is that we will solve our own problems. We recognize people abuse power, so we limit it—put in checks and balances. We will solve these problems when people decide they care enough to solve them. 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.

Senior Editor Brian Doherty ([e-mail]) is author of This is Burning Man and Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement.