Economics

Why We're Losing

How free market ideas suffer from being counterintuitive

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People don't understand the private sector. They don't like it. Intuitively, it seems selfish. Most people are busy trying to run their own lives. They're grateful to politicians who want to take charge. It seems intuitive to think that a smart group of planners concerned about the collective good can accomplish more than free people pursing their own interests individually in the private sector. But history is filled with examples of how the solutions politicians propose create new problems without solving the old. Urban renewal wiped out entire neighborhoods without improving cities, mortgage subsidies created a damaging financial bubble, the war on drugs created a prison-industrial complex while barely taking a dent out of drug abuse. The list goes on and on.

The few politicians who manage, often against overwhelming odds, to successfully expand the sphere of private action rarely get rewarded for their trouble. Margaret Thatcher saved Britain—and got thrown out. Wisconsin Gov. Scott Walker (R) may get recalled for trying to cut the budget and push back against public sector unions. Hong Kong went from Third World to First World in just 50 years because it had economic freedom. But when I went to Hong Kong and interviewed people, they didn't know why they were prosperous. They just talked about their problems and how government should solve them.

In Chile, Jose Piñera created a privatized Social Security system during Augusto Pinochet's dictatorship that has helped save the country from bankruptcy. Most everyone in the country, which has since become free and democratic, has a personal savings account for retirement. But when I traveled to Chile, thinking that I would find people celebrating their financial independence, nobody was. They just said things like "My investment fund charges me too many fees for my private account."

In January, The New York Times ran a profile of a rising political star in Chile. Camila Vallejo is 23 years old, and she routinely inspires mass demonstrations. On the say-so of this young lady, thousands gathered in front of the presidential palace last June to protest educational inequalities by dressing like zombies and performing a choreographed routine to Michael Jackson's "Thriller." Vallejo is attractive and brilliant. She's also a communist. Communism appeals to people, no matter how many times it fails.

Liberty is counterintuitive. It takes hard work to overcome the brain's attraction to simple-sounding solutions. It's not easy to convince people that sometimes the best way for governments to address a problem is to do less, not more. It's easier to admire the activist or politician who talks about helping the less fortunate than it is to cheer on a hustler who wants to get rich by selling you stuff. Those of us who see expanding the private sphere as the best way to help the most people have an uphill battle in making our case. 

There Always Ought to Be a Law

Most people see a world full of problems that can best be tackled via wisely applied laws. They assume it's just the laziness, stupidity, or indifference of politicians that prevents the problems from being fixed. But government is force, and government is inefficient. The inefficient use of force creates more problems than it solves. 

The Transportation Security Administration (TSA) was created to make us safer in the air after 9/11, thanks to the supervision of an army of government employees rifling through our bags. Then-Sen. Tom Daschle (D-S.D.) said, "You can't professionalize if you don't federalize." And that just makes sense to people. Since the TSA was created, the number of people it employs has quadrupled. By the time the public grew irritated at the intrusive and inefficient new airport security system, the bureaucracy was too entrenched to roll back.

But all it takes is one government success to justify 20 (or 200) failures. The best example of this is seat belts and cars. Government enthusiasts love citing the federal requirement that carmakers install seat belts, which took effect in 1968, to ridicule objections to any new law, no matter how unrelated. Even libertarians often feel like they have to say, "Well, OK. Maybe sometimes the government is useful."

While it's true that Volvo was advertising seat belts before they were required by the government, it's also true that most people didn't buy them. Seat belt adoption happened much faster because of the government mandate, which included varying state laws requiring people to actually wear those federally mandated seat belts. Aren't the estimated 10,000 lives saved each year for the last three decades worth it? 

The hard-core libertarian position is to say: Even in that case, maybe not. We just don't know. Because the mandate to install belts came from the federal government, we ended up with just one seat belt standard, and with further innovation being blocked. If you were an auto company and you thought you had a better seat belt, you'd be an idiot to introduce it, because if one person died, trial lawyers would pounce all over you. It's more prudent to just go with the standard. If there were competition, there might be six types of seat belts, all of which might be safer and more comfortable. Maybe more of us would wear them and maybe more than 30,000 total lives would have been saved in the long run.

So even the best example of benevolent legislation is full of holes. Still, the case for freedom doesn't have anywhere near the intuitive appeal of "Click it or ticket."

Government, Uncut

When the default setting is to solve every problem with a new law, it's hardly surprising that government continues to grow. What's especially disappointing in the 21st century, however, is that fewer people in politics even talk about cutting the overall size of government. Particularly when they're in power. 

When the GOP won control of the House of Representatives in 2010, Speaker John Boehner (R-Ohio) claimed his party wanted to make big cuts. When he was sworn in, he declared, "Our spending has caught up with us.…No longer can we kick the can down the road." But when NBC anchorman Brian Williams asked him to name a single program "we could do without," Boehner said, "I don't think I have one off the top of my head." Even a Republican leader who was elected on fiscally conservative rhetoric didn't yet know what he wanted to cut? 

Eventually, Republicans said they'd start by cutting $100 billion out of the 2011 budget. The media were aghast. Liberals wailed about "draconian" cuts. They live in an alternate universe. Congress was planning to spend almost $4 trillion; $100 billion is less than 3 percent of that. Firms in the private sector make bigger cuts all the time without blinking an eye.

But not governments. All that union protest and shrieking fuss in Wisconsin happened without Gov. Scott Walker proposing to actually fire anyone; he was just changing rules governing public-sector compensation and bargaining rights. In a time of widespread fiscal crises, we need to make real decisions about which state workers are pulling their weight, and what our public-sector priorities are. If our representatives aspire to create sustainable budgets, they must ax entire programs, not just tinker with work rules.

I'm reminded of one "tough conservative," former Sen. Spencer Abraham (R-Mich.). Abraham once sponsored a bill to abolish the Department of Energy. Good for him! He was right. The department should be abolished. Transfer its nuclear-weapons responsibilities to the Defense Department and kill the corporate welfare it gives to politically favored solar panel makers. Abraham saw the waste and wanted to end it. But then President George W. Bush appointed him to head the very department he wanted to kill. Suddenly Abraham changed his mind.

"Yeah, real quick," he tells me. "I changed it shortly after being asked to serve. It was very clear to me that we weren't ever going to abolish the department. There wasn't enough support for that, and the next best thing was to be in charge of it and try to change the way it operated so that at least the American taxpayers got their money's worth."

It would be nice if they got their money's worth, but I doubt they did. On Abraham's watch, the department's budget increased by 20 percent, and he continued to indulge in the tiny, wasteful boondoggles enjoyed by his predecessors. One money-losing solar panel project he approved wound up costing $147 million. 

Puerto Rican Promise

Not every politician is hopeless. You probably already know about the budget cutting efforts of various Republican governors: in addition to Walker, New Jersey's Chris Christie, Florida's Rick Scott, Ohio's John Kasich, and Michigan's Rick Snyder. But you may not know about Luis Fortuño, governor of Puerto Rico. Two years ago, Fortuño cut spending much more than any other U.S. governor. He fired 17,000 state employees. In response, union members held noisy demonstrations outside his house. They fought with police. They called him a fascist. Fortuño stood firm.

Fortuño had to make the cuts because Puerto Rico's economy was a mess. "Not just a mess," he tells me. "We didn't have enough money to meet our first payroll." Fortuño's predecessors grew Puerto Rico's government to the point that the state employed one out of every three workers (compared to an average of about one in seven on the U.S. mainland). The island was broke. So in 2009 the new conservative majority, the first in Puerto Rico in 40 years, finally cut spending.

What was cut? "Everything." Fortuño says, "I started with my own salary." The protesters said he should raise taxes instead. "Our taxes were as high as they could be," he says, "actually much higher than most of the country. So what we've done is the opposite." Fortuño reduced corporate taxes from 35 percent to 25 percent. He reduced individual income taxes. He privatized government agencies. "Bring in the private sector," says Fortuño. "They will do a better job. They will do it cheaper." 

But even though Puerto Rico's economy began improving almost immediately, Fortuño's cuts haven't made him popular. When I was in Puerto Rico in February, I asked everybody I could what they thought of the governor. Almost no one had nice things to say. And young people just hate him.

Most voters just don't get that it's a good thing when fewer people work for the state. It's not intuitive. Former Michigan Gov. John Engler eventually came to be appreciated for the economic booms that followed his Fortuño-style spending cuts, for example. But he was harshly criticized in the moment. Maybe the Puerto Rican governor also will eventually be hailed as a hero. In the meantime, though, he suffers from the same problem that afflicts many of his ideological allies: He appeals to the head, not the heart. 

When the union heavies who man Puerto Rico's tollbooths were caught stealing money, Fortuño expressed his outrage this way: "We have revenue leakage." That's hardly a way to win converts to your cause.

Thank Goodness for the Constitution

Economics is complicated. That's one more reason to be grateful for the Constitution: With its relatively simple rules, it helps keep government within bounds. Some Tea Party activists understand that, and it's one reason they call for a return to constitutional, limited government. 

But getting the majority of America to sign on to these ideas might require an impending crisis. Looking around the world, the next flashpoint after Greece will probably come elsewhere on the periphery of Europe or in Japan. The populations of those countries are graying—young workers are shrinking relative to the retirees they'll need to support—faster than America's. Watching their problems, we will get an advance look at the financial poison we are foisting on America's young people.

But I'm not sure voters will pay attention. If Americans didn't learn the folly of central planning from the collapse of the Soviet Union and the stagnation of socialist economies around the world, they may not learn about the danger of unsustainable budgets from the catastrophes in Greece, Spain, and Japan. Maybe it will take events closer to home. That's why I have mixed feelings when I read about the stupid decisions made by legislatures in California, Illinois, and Connecticut. All three states' politicians continue pandering to public sector unions, and their citizens are suffering for it. But maybe in their misgovernance they will prove to be useful idiots. Maybe it will take the economic implosion of a major American state to wake people up.

It is depressing that the United States, a country founded on principles more libertarian than most any other, now seems incapable of admitting that government has gotten too big. One obstacle is that we've had things so good for so long that most of us simply don't believe, in our guts, that government controls can strangle the golden goose. Overseas, where people see the contrast between good and bad policies more starkly, they sometimes understand the need to make changes before we do. East Asian countries embraced markets and flourished. Sweden and Germany liberalized their labor markets and saw their economies improve. Even in the statist nations of Africa, there are growing numbers of free market activists critical of intrusive governments—and of the foreign aid that helps prop them up.

Taking Markets for Granted

Again, the enemy here is human intuition. Amid the dazzling bounty of the marketplace, it's easy to take the benefits of markets for granted. I can go check out the economic experiments in Chile or Hong Kong or Puerto Rico, stick a piece of plastic in the wall, and cash will come out. I can give that same piece of plastic to a stranger who doesn't even speak my language, and he'll rent me a car for a week. When I get home, Visa or MasterCard will send me the accounting— correct to the penny. That's capitalism! I just take it for granted.

Government, by contrast, can't even count votes accurately. Yet whenever there are problems, people turn to government. Despite the central planners' long record of failure, politicians promise that this time they will "fix" health care, education, the uncertainty of old age, etc., and people believe. Few of us like to think the government that sits atop us, taking credit for everything and taking our money under threat of imprisonment, could really be all that rotten. And look at all the good things around us! What, besides our unique government, could have brought us such plenty?

But it's not from the $3.8 trillion a year in spending, the 80,000 new pages of regulations a year, or even from democracy that we get such wonderful options as flexible contact lenses, Google, cellphones, increasing life spans, and so much food that even poor people are fat. We get those things from free markets. Government gets credit for good things even when it does little to bring them about.

All our potential achievements could be imperiled if we do not soon wake up to the fact that big government impedes rather than creates. The great 20th-century libertarian H. L. Mencken lamented, "A government at bottom is nothing more than a group of men, and as a practical matter most of them are inferior men.…Yet these nonentities, by the intellectual laziness of men in general…are generally obeyed as a matter of duty [and] assumed to have a kind of wisdom that is superior to ordinary wisdom."

There is nothing that government can do that we cannot do better as free individuals—as groups of individuals, working together voluntarily, not at the point of a gun or under threat of a fine. Without big government, our possibilities are limitless.

But it's a hard sell. Things continue to get better in a free society, but nobody is out in front of the camera saying, "Yay for the marginal improvements that come with free markets!" It's not as compelling or newsworthy as a report on someone who goes bankrupt because he got sick. If we are to foster prosperity, we must find better ways to promote the virtues of liberty. 

John Stossel is the host of Stossel, which airs Thursdays on the Fox Business Network at 9 p.m. Eastern time and is rebroadcast on Saturdays and Sundays at 9 p.m. and midnight Eastern time. He is the author, most recently, of No They Can't: Why Government Fails—but Individuals Succeed, from which this essay is adapted, with permission from Threshold Editions, a division of Simon & Schuster. © 2012 JFS Productions, Inc.