PAGE 5 PAGE 4 - Cato Institute...Baseball dugouts. This is part of our communica- ... May/June 2010 Cato Policy Report † 3 Cato News Notes THE BEAUTIFUL TREEWINS FISHER ... Weaver,

May/June 2010 Vol. XXXII No. 3

P. J. O’ROURKEKeynoting theBenefactorSummit

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TERRORIZINGOURSELVESHow to thinkseriously aboutthreats

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NICK HERBERTFreedom,gay rights, andconservatives

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Stimulus by Spending Cuts: Lessons from 1946any, probably most, Americansare skeptical of the vast stimu-lus efforts the federal govern-

ment has undertaken in an effort to alle-viate the economic downturn. After all,through early 2010, employment has fall-en by 8.4 million jobs despite passage oftwo stimulus bills totaling nearly one tril-lion dollars in early 2008 and 2009, pas-sage of the $700 billion Troubled AssetRelief Program (TARP), and the extraor-dinary expansionary monetary actions bythe Federal Reserve. But now with seriousanxiety regarding the impact of thenation’s unprecedented deficits and apotential surge in inflation, a second con-cern is arising: would any nascent recov-ery be thwarted if the government was towithdraw the stimulus and return to asemblance of financial normalcy? There’sgood news on that point. Just as historytells us that stimulus packages are inef-fective in bringing about recovery, so italso tells us that “de-stimulus”—movingin the direction of monetary and fiscalcontraction—likewise need not havesevere adverse effects on employment,income, stock prices, and other macroeco-nomic variables.

The Obama administration projects a$1.6 trillion budget deficit—almost 11

percent of our GDP—for the 2010 fiscalyear. This deficit is the size of total federalspending just 13 years earlier (1997). Andthis follows a 2009 fiscal year deficit ofover $1.4 trillion. At the same time theFederal Reserve has injected another $1.5trillion in liquidity through various lend-ing programs since the Great Recessionbegan in late 2007. We might call this the“Great Stimulus,” but those words areterribly misleading. It hasn’t been muchof a stimulus, given the rise in unemploy-ment to double digits for only the second

time since the 1930s and the general lackof confidence economic agents seem tohave in the future economy (the confer-ence board’s “Present Situation Index” ofconsumer confidence hit its lowest levelin 27 years in February 2010). Nor is it allthat “great”: when compared to the sizeof the economy, the recent stimulus doesnot even begin to approach that of WorldWar II.

Between 1943 and 1945 governmentdeficits ranged between 21 and 27 per-

BY JASON E. TAYLOR AND RICHARD K. VEDDER

Continued on page 6

JASON E. TAYLOR is professor of economics at Central Michigan University. RICHARD K. VEDDERis distinguished professor of economics at Ohio University and adjunct scholar at the AmericanEnterprise Institute.

M

Cato president Edward H. Crane welcomes former congressman Joe Scarborough, now host of MSNBC’sMorning Joe, to Cato’s March 18 conference, “Escalate or Withdraw? Conservatives and the War inAfghanistan.” At the conference several Republican House members said that “everyone” now agrees thatit was a mistake to launch the war in Iraq. PAGE 13.

2 • Cato Policy Report May/June 2010

Message from the President

BY EDWARD H. CRANE

“The political classseems to turn a deaf ear toincreasinglyvocal expres-

sions of frustra-tion by theAmerican

people.

ne of the classic examples of the failure ofpoliticians to communicate with the citizenryis found in a video of Romanian tyrantNicolae Ceausescu, giving what turned out to

be his last speech to the teeming masses gathered ina square in Bucharest.

Oblivious to the mood of the people, Ceausescuis at his bombastic, self-important best until he real-izes that the chants from the crowd below are notpraise, but something rather to the contrary. Thelook on his face is, as they say in the MasterCardcommercials, priceless.

America is a democratic republic, complete withan excellent Constitution that politicians still feelcompelled to acknowledge, if not take seriously. So,the growing communications gap between the aver-age American and the average politician, while wor-risome, is not irreparable. Solving it should be a highpriority for all involved.

The communication problem involves the accel-erating realization on the part of many Americansthat the essence of America, namely, a respect for thedignity of the individual, which inherently involvesthe government leaving the individual alone, hasbeen pretty much forgotten by the politicians inWashington, D.C., the state capitals, and city coun-cils around the nation. Which explains why publicemployees now make on average 30 percent morethan their private sector counterparts—and 70 per-cent more in benefits. The political class seems tobelieve they have carte blanche to do as they please.They turn a deaf ear to increasingly vocal expressionsof frustration by the American people.

Take, for example, a town hall meeting inWashington state last summer in which a youngMarine veteran said to six-term Rep. Brian Baird,“Now I heard you say tonight about educating ourchildren, indoctrinating our children, whatever youwant to call it.” The congressman denied wanting toindoctrinate, but the young father simply respond-ed, “Stay away from my kids.” Virtually all of the 400or so people in the hall rose as one in loud applause.It was a Ceasusescu moment. The congressman hadno clue the people of his district weren’t interested inthe federal government concerning itself with theeducation of their children.

The politicians simply do not get it. The Declar-ation of Independence says governments are creat-ed to secure our rights to life, liberty, and the pur-suit of happiness. In other words, to leave us the hellalone. That is what makes for American exception-

alism, despite President Obama’s claim that allnations are exceptional. No, they are not, not in theway America is.

As I write these words, across my desk comes apress release from Bloomberg telling me that 18-term Rep. Henry Waxman wants Congress to banthe use of smokeless tobacco in Major LeagueBaseball dugouts. This is part of our communica-tions problem. Read my lips, Henry: It is none ofCongress’s business if baseball players want to usesmokeless tobacco (or any other kind of weed, forthat matter). And this is the encouraging thingabout the Tea Party movement. It is made up ofaverage Americans who are sick to death of politi-cians regulating, taxing, controlling, and limitingindividual choice.

This bipartisan communications problem is alsoexemplified by a joint press conference held justbefore the start of the lamentable 111th Congress bySenate Majority Leader Harry Reid and MinorityLeader Mitch McConnell. Said Reid, “Sen. McConnelland I believe . . . that we are going to work in a bipar-tisan basis . . . to solve the problems of the Americanpeople.” Whoa! See how simple the communica-tions problem is? They think we sent them toCongress to solve our problems when we actuallysent them there to see to it that we are left alone tosolve our own problems.

Add to that the fact that many, if not most, of ourproblems have been created by Congress in the firstplace and we have the basis for a healthy peaceful rev-olution. Some 85 percent of Americans like theirhealthcare, so Congress shoves a government-man-dated system down our throats. Taxes are way tooburdensome, so Congress is contemplating a value-added tax to add to our burden. We spend billions ofdollars on wars in the Middle East for no rationalreason. Climate change proves to be a wildly exag-gerated issue, yet Congress still plans on raising taxeson energy to solve this non-existent problem. Thelist is long, and the frustration grows daily.

Talk about a failure to communicate. Accordingto a recent Pew Research Center Poll, 78 percent ofAmericans don’t trust the federal government. AsRonald Reagan famously put it, “The nine most ter-rifying words in the English language are: ‘I’m fromthe government and I’m here to help.’”

What We Have Here Is a Failure to Communicate

”

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May/June 2010 Cato Policy Report • 3

Cato NewsNotesTHE BEAUTIFUL TREE WINS FISHERAWARDJames Tooley’s book The Beautiful Tree was awarded the2010 Fisher International Memorial Award by the Atlas

Economic ResearchFoundation. The award recognizes “think tanksthat produce outstandingpublications that enhancethe public understandingof a free society.” Tooley’sbook, which tells the sto-ries of deeply poor peoplethroughout the world band-ing together to educatetheir own children outside

of failing state schools, earned high praise. “Rather thanlament what has gone wrong in the developing world,”the award announced, “The Beautiful Tree is about doingwhat is right, and demonstrates the power of the educa-tive spirit in all corners of the world.”

OPM CHIEF BLASTS CATO“It comes straight out of the Cato Institute,” said JohnBerry, director of the Office of Personnel Management, in an interview with Federal News Radio in March. “It isbased [on] an anti-government perspective.” Berry wasreferring to the data behind a USA Today editorial criticiz-ing the exorbitant compensation of government employ-ees during this time of recession. That data, developed by Cato’s director of tax policy studies Chris Edwards,showed that federal workers take home nearly twice asmuch in compensation as their private sector peers. Ifthe nation’s economy is to turn around, perhaps the gov-ernment would do best to ignore Berry’s warnings andtake more advice “straight out of the Cato Institute.”

INNOCENT WINS ESSAY AWARDFirst place in the Infinity Journal’s IJ Awards was given to Cato foreign policy analyst Malou Innocent for heressay “The Road to Talibanistan: America’s Contribution to Pakistan’s Slow-Motion Collapse.” Praising the work,the prize announcement said that it “was not only well-written, researched, and analyzed, but also it serves as a prime policy paper that should be read by leadersaround the world.”

For three decades, Cato Institutescholars have fought to reformthe enormous entitlement that

is Social Security. This third rail ofAmerican politics faces a loomingcrisis. How to fix it—how to balancethe economic realities with politicalpracticalities—is no easy task. Yet it isa crucial one, as Social Securitythreatens to consume astaggering portion of thecountry’s GDP—a prob-lem exacerbated by ouraging population enjoy-ing longer post-retire-ment life expectancy.

What began in the firstissue of Cato Policy Reportin 1979, with the article“Social Security: Has theCrisis Passed?” by CarolynWeaver, and expanded ayear later with Cato’s firstpolicy book, Social Security:The Inherent Contradictionby Peter J. Ferrara, contin-ues today with the releaseof a new book by Cato senior fellowJagadeesh Gokhale. Social Security: AFresh Look at Reform Alternatives offersa detailed analysis of the fiscal futureof this massive entitlement, and doesso through the use of a fresh modelthat offers a considerable increase inaccuracy over what came before.

The typical models used to analyzeSocial Security’s future are inade-quate, Gokhale argues. Those built bythe government are based on broadgroup averages, whereas models usedby nongovernment researchers aremore detailed, but are limited to thefew details of interest to the particularresearcher. In Social Security, Gokhaleoffers an alternative, “a microsimula-tion of U.S. demographic and eco-nomic features” he calls DEMSIM.

The result of running the datathrough Gokhale’s more robust mod-el is grim. “DEMSIM’s baseline

assumptions suggest that Social Secu-rity’s financial condition is significant-ly worse compared to official projec-tions by the program’s trustees,”Gokhale concludes. He is also able toexamine several reform options.

His goal in writing the book,Gokhale explains, is to “convince thereader that independent checks of

official reform scoring exercises areuseful;” that his microsimulationmodel approach brings advantagesover the current practices; and thatanalysis of reform options should bebased on measures of the program’slong-term finances, as well as meas-ures of how individuals will fareunder both the current Social Secu-rity program and potential reformedprograms.

Without taking such measures,Gokhale warns, lawmakers and thepublic will remain uninformed, lack-ing the data necessary to make mean-ingful and effective adjustments towhat is otherwise a doomed system.

Gokhale’s Social Security: A FreshLook at Reform Alternatives, publishedby the University of Chicago Press,is a powerful continuation of Cato’slong-running mission to correct themistakes of Social Security.

A deep examination of Social Security

Defusing the Fiscal Time Bomb


C A T O E V E N T S

At a Capitol Hill Briefing in February,Cato Institute director of foreign policy studies CHRISTOPHER PREBLE

outlined how the United States canreform its nuclear weapons programs byabandoning the huge arsenals that are arelic of the cold war and moving towardpolicies based “not on parochial andpolitical considerations but ultimately on the strategic merit.”

Author and journalist ANDREW SULLIVAN (left, with his forehead marked for AshWednesday) engaged in a vigorous debate with MAGGIE GALLAGHER, president of theNational Organization for Marriage, after a speech by NICK HERBERT, then a member

of the British shadow cabinet, now a minister in David Cameron’s government, on thetopic “Is There a Place for Gay People in Conservatism and Conservative Politics?” at aCato Policy Forum on February 17.

Of all the negative consequences that will likely result fromPresident Obama’s health care legislation, perhaps none ismore pernicious—or less talked about—than the barriers it

erects in the path of low-wage workers trying to climb the eco-nomic ladder. At a Policy Forum in February, Cato Institute direc-tor of health policy studies MICHAEL F. CANNON showed thatimplicit tax rates would often exceed 100 percent for low-wageworkers, trapping millions of Americans in poverty.


Some 150 supporters of the CatoInstitute gathered at the FourSeasons Resort in Palm Beach,

February 25–28, for lectures by Catoscholars and outside speakers at theannual Benefactor Summit. Fromtop to bottom: “Marilyn Monroe”welcomes Cato president ED CRANE

to a reception and dinner at theRagtops Motorcars Museum inWest Palm Beach. Celebrated fundmanager SCOTT BARBEE and wifeVANESSA talk with BILL BYRD andCato senior fellow JERRY TAYLOR atthe Summit. JOSÉ PIÑERA discussesthe fiscal crisis confronting Europeand the United States. P. J. O’ROURKE

previews his forthcoming book Don’tVote, It Just Encourages the Bastards,which will be published in October.KAREN GRAY, ELIZABETH MOORE, andWILLETTE KLAUSNER at the Saturdaynight dinner reception hosted byCato Board member David Koch athis Palm Beach home. HarvardUniversity psychologist StevenPinker gave the dinner talk, “AHistory of Violence,” describing howthe world has become far less violentthrough the course of history. Thenext Benefactor Summit will be heldat the Grand Del Mar near SanDiego, February 24–27, 2011.

cent of GDP—in comparison to the size oftoday’s economy this would be the equiv-alent of annual deficits of around $3 tril-lion to $4 trillion. During these three years,the national debt rose from 50 percent ofGDP to over 120 percent. Furthermore,the United States Bureau of the Budgetestimated that at the wartime peak 45percent of the nation’s civilian labor sup-ply was supported by government spend-ing on the war effort while another 12million citizens (18 percent of the totallabor force) were employed directly by themilitary.

Of course it is often said that WorldWar II provides the empirical proof that aKeynesian-style government stimulus canbring an ailing economy back to full employ-ment. During the 1930s, the argumentgoes, government simply did not spendenough to end the Great Depression. AfterPearl Harbor, policymakers finally put thestimulus pedal to the metal with massivedeficit spending and highly expansionarymonetary policy—the money supply dou-bled between 1941 and 1945—to financewartime production. Unemployment fellfrom nearly 20 percent in the late 1930sto 3.1 percent in 1942 and 1.2 percent in1944. John Maynard Keynes himself impliedthat the return to full employment in theface of massive expansionary policy vali-dated his theory, saying that economic“good may come out of evil” if we heededthe lessons of the wartime stimulus byusing the same methods to combat down-turns during peacetime.

But the real economic lesson to comeout of the World War II era was not thatthe conscription of nearly a fifth of thelabor force into grueling and dangerousworking conditions abroad and the impo-sition of a command economy at home—complete with rationing, price controls,and government allocation of many aspectsof life—could bring unemployment down.Soviet-style command economies hadmany problems, but unemployment was

not typically one of them.Instead, the true lesson from the peri-

od can be ascertained from the events of1945–1947 when the largest economic“stimulus” in American history was dra-matically and quickly unwound, monthsbefore most people anticipated it (becausethe atomic bomb brought a sudden unex-pected end to the war). No other episodemore clearly supports the notion that thebest economic stimulus is for the govern-ment to get out of the way.

THE DEPRESSION OF 1946Historically minded readers may be

saying, “There was a Depression in 1946?I never heard about that.” You never heardof it because it never happened. However,the “Depression of 1946” may be one ofthe most widely predicted events that nev-er happened in American history. As thewar was winding down, leading Keynesianeconomists of the day argued, as AlvinHansen did, that “the government cannotjust disband the Army, close down muni-tions factories, stop building ships, andremove all economic controls.” After all,the belief was that the only thing thatfinally ended the Great Depression of the1930s was the dramatic increase in gov-ernment involvement in the economy. Infact, Hansen’s advice went unheeded. Gov-ernment canceled war contracts, and itsspending fell from $84 billion in 1945 tounder $30 billion in 1946. By 1947, thegovernment was paying back its massivewartime debts by running a budget sur-plus of close to 6 percent of GDP. Themilitary released around 10 million Amer-

icans back into civilian life. Most econom-ic controls were lifted, and all were goneless than a year after V-J Day. In short, theeconomy underwent what the historianJack Stokes Ballard refers to as the “shockof peace.” From the economy’s perspec-tive, it was the “shock of de-stimulus.”

If the wartime government stimulushad ended the Great Depression, its wind-ing down would certainly lead to its return.At least that was the consensus of almostevery economic forecaster, governmentand private. In August 1945, the Office ofWar Mobilization and Reconversion fore-cast that 8 million would be unemployedby the spring of 1946, which would haveamounted to a 12 percent unemploymentrate. In September 1945, Business Weekpredicted unemployment would peak at9 million, or around 14 percent. And thesewere the optimistic predictions. Leo Cherneof the Research Institute of America andBoris Shishkin, an economist for the Amer-ican Federation of Labor, forecast 19 and20 million unemployed respectively—rates that would have been in excess of 35percent!

What happened? Labor markets adjust-ed quickly and efficiently once they werefinally unfettered—neither the Hoover northe Roosevelt administration gave labormarkets a chance to adjust to economicshocks during the 1930s when dramaticlabor market interventions (e.g., the Nation-al Industrial Recovery Act, the NationalLabor Relations Act, the Fair Labor Stan-dards Act, among others) were pursued.Most economists today acknowledge thatthese interventionist polices extended thelength and depth of the Great Depression.After the Second World War, unemploy-ment rates, artificially low because of wartimeconscription, rose a bit, but remained under4.5 percent in the first three postwar years—below the long-run average rate of unem-ployment during the 20th century. Someworkers voluntarily withdrew from thelabor force, choosing to go to school orreturn to prewar duties as housewives.


“The ‘Depres-sion of 1946’ may be one of the most widely predicted events that never

happened in American history.”

Continued from page 1

But, more importantly to the purpose here,many who lost government-supportedjobs in the military or in munitions plantsfound employment as civilian industriesexpanded production—in fact civilian employ-ment grew, on net, by over 4 million between1945 and 1947 when so many punditswere predicting economic Armageddon.Household consumption, business invest-ment, and net exports all boomed as gov-ernment spending receded. The postwarera provides a classic illustration of howgovernment spending “crowds out” pri-vate sector spending and how the econo-my can thrive when the government’s shad-ow is dramatically reduced.

Employment is closely related to theproductivity-adjusted real wage. Whenthe labor costs of making a widget fall,employers find it profitable to make morewidgets and hire more widget-makers.Those costs fall when productivity rises(more widgets produced per hour of work),when the price of widgets rises (increasingthe margin between revenues received andcost of production), or when money wagesfall. In the immediate postwar era, pricesand productivity were generally rising,more than offsetting modest increases inmoney wages.

The data today suggest that the self-correcting and healing forces of marketsare beginning to work again. Worker pro-ductivity is generally increasing, and mon-ey wages are stagnant or rising less thanthe rate of inflation, meaning real wagesare falling. In a productivity-adjusted sense,the wage decline appears to be substan-tial. After a lag to be sure this trend is realand sustaining, this should lead to anupsurge in new hiring. In other words,unemployment will start falling not becauseof the stimulus spending, but in spite ofit. And just as the stimulus money createdfew if any new jobs, its withdrawal willdestroy few if any jobs. To be sure, somespecific jobs will be lost, but others will begained as the negative effects of govern-ment borrowing are eased somewhat.

To better illustrate the crowding outeffect of government spending, econo-mists often refer to Frédéric Bastiat’s 1848essay, “What Is Seen and What Is Not Seen.”The illusion that new employment resultsfrom the stimulus package is understand-able because the jobs created by it are visi-ble, whereas jobs lost due to the stimulusare much less transparent. When severalhundred million dollars are spent build-ing a 79-mile per hour railroad from Cleve-land to Cincinnati, we will see workersimproving railroad track, building newrail cars, and so on. In fact, we can directlycount the number of jobs supported bystimulus dollars and report them on awebsite (www.recovery.gov currently reportsthat 608,317 workers received stimulusmonies in the 4th quarter of 2009). At thesame time, however, the federal spendinginvisibly crowds out private spending.This happens regardless of how higherfederal spending is financed. Tax financ-ing (not done in this case) reduces theafter-tax return to workers and investors,leading them to reduce the resources theyprovide. Deficit-financing (borrowing)tends to push up interest rates and, moregenerally, eats up dollars that would oth-erwise have gone toward private lendingand investment. Inflationary financing(roughly the Fed printing money—a fear inthis situation) reduces investor confidence,lowers the real value of some financial

assets, and leads to falling investment. Ofcourse we do not register these “job losses”on the mainstream statistical radar becausethey are jobs that would have been created,absent the government spending, but nev-er were—hence their invisibility.

There are no free lunches in the world.Stimulus efforts of modern times, perhapsmost notably that of Japan during the 1990s,which actually led to reduced economicgrowth and long-term higher unemploy-ment, show the futility of the Obama admin-istration’s current approach. Furthermore,a recent study by Claudia Sahm, MatthewShapiro, and Joel Slemrod shows that theBush stimulus policies in 2001 and 2008had no significant impact on the economy.Other recent work by Robert Barro andCharles Redlick examines long-term macro-economic data and confirms the notionthat government spending crowds out thatof the private sector. Barro predicts that thelong-term effect of the current stimuluswill be negative.

DERAILING RECOVERYMarkets, by contrast, have marvelous

healing properties. If unemployment istoo high, declines in the productivity-adjusted real wage make it attractive tohire workers again, lessening the problem.If investors are slow in borrowing, fallinginterest rates entice them to take on cred-it. These sorts of things are happening inthe American economy today, but govern-ment-imposed shocks can derail any recov-ery. This happened in the Great Depres-sion as the economy finally began to recov-er after a major slowdown in governmentinterference in the labor market betweenmid 1935 and early 1937. However, thesegains were reversed by the Supreme Court’ssurprise ruling (which followed Roosevelt’sthreat to pack the Court) upholding theconstitutionality of the National LaborRelations Act. Real wage rates rose sharplyin the months that followed. Unemploy-ment, which had fallen to around 13 per-cent on the day of the court ruling, was


“Government spending fell

from $84 billion in 1945 to under

$30 billion in 1946. From

the economy’s perspective, it was the ‘shock of de-stimulus.’”


back above 20 percent a year later. Whenmarket processes lead us to see light at theend of the tunnel, the government some-times adds more tunnel.

Recent examples of this phenomenoncan be seen in the newly passed health carelegislation and the proposal for a cap-and-trade environmental regime. The new healthcare legislation will enormously increaselabor costs, as would cap and trade. Nerv-ous employers, wanting to avoid the possi-bility of taking on sharply rising laborexpenses, demur in hiring workers thatthey would in a more neutral policy envi-ronment. Furthermore, the multitrillion-dollar deficits to finance the stimulus aswell as government bailout money fromTARP have to be financed, and the possi-bility that the Federal Reserve would engagein inflationary financing of this new feder-al debt has clearly unnerved many investors.Since the November 2008 election, theprice of gold has risen 50 percent becauseof growing inflationary fears.

Yet another example is the government’scontinual extension of unemploymentbenefits beyond the customary maximum26 weeks (most recently at the beginningof March). While most would agree thatunemployment insurance provides short-term relief to those who must seek newwork, many studies confirm what com-mon sense says we should expect—the longerthe time frame people are eligible for suchbenefits, the longer it takes for unemploy-ment rates to fall. In 2009 the average dura-tion of unemployment nearly doubled,and today, well over 40 percent of thoseunemployed have been out of work oversix months. While the poor labor marketis to blame for much of this jump in dura-tion, there can be no doubt that incentivesto obtain new employment have been, andwill continue to be, tempered by govern-mental action which has extended unem-ployment insurance to many through theend of 2010.

Finally, it is clear that the governmentstimulus has not provided any kind of posi-tive placebo-type effect on consumer andbusiness confidence. As mentioned earlier,survey data show that such measures of

confidence continue to linger around thelowest levels seen in a generation. In fact, asimple econometric model consisting oftwo explanatory variables—governmentspending as a percent of total output andthe rate of inflation, can explain the vastmajority of the changes in stock marketprices in modern times—and stock marketvaluations are a good indicator of confi-dence. Stock prices fall with growing gov-ernment involvement in the economy orwith rising inflation. The sharp rise in thegovernment’s share of output in the lastdecade and the threat of greater inflation inthe next one are important factors behindthe 30 percent decline in the inflation-adjust-ed Dow Jones Industrial Average since 2000.Eye-popping deficits of the past year havelowered optimism about the future, keptstock prices depressed, and reduced key ele-ments in new investment spending. Thesenegative side effects of the stimulus spend-ing are certainly slowing down the recuper-ative process that market forces are attempt-ing to generate.

CONCLUSIONThe conversation has begun regarding

the nation’s exit strategy from the unsus-tainable fiscal and monetary stimulus ofthe last two years. Our soaring nationaldebt will not only punish future genera-tions but is also causing concern that ourcreditors may bring about a day of reck-oning much sooner (the Chinese haverecently become a net seller of U.S. gov-ernment securities). There are fears thatthe Fed’s policy of ultra-low interest ratesmay bring new asset bubbles and begin

the cycle of boom and bust all over again.And unless the Fed acts to withdraw someof the monetary stimulus, many fear areturn of 1970s era double-digit inflation.On the other hand, there are widespreadfears that if we remove the stimulus crutch,the feeble recovery may turn back towardthat “precipice” from which PresidentObama has said the stimulus policies res-cued us. History and economic theory tellus those fears are unfounded.

More than six decades ago, policymak-ers and, for the most part, the economicprofession as a whole, erroneously con-cluded that Keynes was right—fiscal stim-ulus works to reduce unemployment. Key-nesian-style stimulus policies became astaple of the government’s response toeconomic downturns, particularly in the1960s and 1970s. While Keynesianism fellout of style during the 1980s and 1990s—recall that Bill Clinton’s secretary of treas-ury Robert Rubin turned Keynesian eco-nomics completely on its head when heclaimed that surpluses, not deficits, stim-ulate the economy—during the recessionsof 2001 and 2007–09 Keynesianism hascome back with a vengeance. Both Presi-dents Bush and Obama, along with theGreenspan/Bernanke Federal Reserve,have instituted Keynesian-style stimuluspolicies—enhanced government spending(Obama’s $787 billion package), tax cutsto put money in people’s hands to increaseconsumption (the Bush tax “rebate” checksof 2001 and 2008), and loose monetarypolicy (the Federal Reserve’s leaving its tar-get interest rate below 2 percent for anextended period from 2001 to 2004 andcutting to near zero during the Great Reces-sion of 2007–09 and its aftermath). Whatdid all of this get us? A decade far less suc-cessful economically than the two non-Keynesian ones that preceded it, with declin-ing output growth and falling real capitalvaluations. History clearly shows the gov-ernment that stimulates the best, taxes,spends, and intrudes the least. In particu-lar, the lesson from 1945–47 is that a sharpreduction in government spending freesup assets for productive use and leads torenewed growth.

“History clearly shows

the government that stimulates thebest, taxes, spends,

and intrudes the least.”


ILYA SHAPIRO: From a legal perspective, youcan’t just say “Oh, we’ll just decide that theSecond Amendment applies to the states.”You can’t do that because none of the Bill ofRights applied to the states until after theCivil War. The Civil War and the Recon-struction era effected a fundamental changein the relationship between the federal andstate governments, and the federal and stategovernments respectively, with the individ-ual. The Fourteenth Amendment, in partic-ular, has three important sections: the EqualProtection Clause, which says that all lawsmust apply equally to all persons; the DueProcess Clause, which insists you can’t bedeprived of your life, liberty, or propertywithout the due process of law; and thePrivileges or Immunities Clause, which says“no State shall make or enforce any lawwhich shall abridge the privileges or immu-nities of citizens of the United States.”

You’d think that’s a robust protection ofour constitutional rights. No state shall denythe privileges or immunities. During theReconstruction Era, “privileges or immuni-ties” was a synonym for natural rights, as wellas certain civil and political rights. (It isimportant, in evaluating what “privileges or

immunities” means in the FourteenthAmendment, to look at what it meant duringReconstruction, not in 1791 or during theRevolution or what have you.) Unfortunate-ly, five years after the Fourteenth Amen-dment was ratified, the Supreme Court effec-tively decided, in the Slaughterhouse Cases, thatthe Privileges or Immunities Clause was anull set, protecting the very few things thatfederal citizenship protected (for example, noState shall accost you on the High Seas). Thereactionary Court at the time did not want toreconcile itself to the fundamental changethat Reconstruction wrought after the CivilWar, so they effectively read the Privileges andImmunities Clause out of the Constitution.

Instead, when certain rights started to be“incorporated” against the States, the Courthad to do so using the doctrinal contrivanceof Substantive Due Process. Now thatsounds like a misnomer. What is “substan-tive procedure”? Because the Privileges orImmunities Clause was read out, constitu-tional rights—to free speech, freedom of reli-gion, freedom from search and seizure etc.—started to be protected by the Due ProcessClause, a strange way of doing things whenyou have another clause (Privileges or

Immunities) clearly meant to protect allthese substantive rights.

Fast forward to McDonald. Gun ownersare saying that their right to keep and beararms is being infringed by Chicago. In thislitigation Alan Gura raised both DueProcess and Privileges or Immunities argu-ments. In oral argument, however, theCourt didn’t appear too interested in thePrivileges or Immunities angle. Right offthe bat, Chief Justice Roberts said thatpetitioner had a very high burden in tryingto overturn the 140 year old Slaughterhouseprecedents. And it looks like Justice Scalia,who had recently been quoted in theWashington Post as calling Substantive DueProcess “babble” and Privileges or Immu-nities “flotsam,” values babble over flot-sam; he is likely to side with SubstantiveDue Process. While there are likely fivevotes in favor of incorporating the SecondAmendment via Substantive Due Process,nobody was that favorable to Privileges orImmunities.

In short, while it was a good day for theright to keep and bear arms, it was not agood day for the Privileges or ImmunitiesClause. That’s significant not just becauselegal scholars want to get the Constitutionright, and it is more faithful to the Consti-tution to use Privileges or Immunities, butalso because, if you care about liberty ororiginalism, Privileges or Immunities isimportant. This is because the testsapplied under the Substantive DueProcess Clause—tests of how “fundamen-tal” the rights are—are easily manipulated.The Privileges or Immunities Clause, onthe other hand, is tied directly into the text,history, and structure of the Constitution.There is evidence of exactly what it is sup-posed to cover and what it is supposed notto cover. At the very least, therefore, itwould be no worse than Substantive DueProcess, and at best it would preventjudges from inventing rights, and allow forthe protection of freedom of contract, theright to earn an honest living, and otherliberties.

P O L I C Y F O R U M

n May 2, the Supreme Court heard oral argumentsin McDonald v. Chicago, a case that is likely to extend theSecond Amendment rights upheld in District of Colum-

bia v. Heller to states and localities. Libertarians were hoping formore, however, seeing this as a chance to revive the debased Privi-leges or Immunities Clause of the Fourteenth Amendment.Unfortunately, the questions asked by the Justices during argu-ments indicated they wouldn’t embrace this opportunity toexpand protections of not just the right to bear arms, but also eco-nomic liberties. At a Capitol Hill Briefing the following day, IlyaShapiro, senior fellow in constitutional studies at the Cato Insti-tute, Clark Neily, senior attorney at the Institute for Justice, andTimothy Sandefur, principal attorney at the Pacific Legal Foun-dation, offered their reactions to the case and discussed the past,present, and future of the Privileges and Immunities Clause.

Reviving Our Economic LibertiesO

CLARK NEILY: The good news first. If you lovegun rights and you think they should applyagainst the States, then you’re in luck: that’salmost certainly going to happen. But if youlove the Constitution, if you love the insti-tution of the Supreme Court, if you lovereasoned debate, then yesterday’s argu-ments were a disgrace. None of the eightJustices who spoke (Clarence Thomas kepthis customary silence) showed the slightestinterest in the history of the Constitution.This is amazing in light of the fact that ayear ago, in Heller, even the dissenting jus-tices seemed to recognize that the history ofthe Second Amendment was relevant to theCourt’s interpretation of what the SecondAmendment means.

That is an incredibly stark contrast towhat happened in the McDonald argu-ments, where, as I said, all eight justices whoasked questions showed literally no interestin the relevant constitutional text and his-tory of the Fourteenth Amendment, rati-fied in 1868, and, specifically, no interest inthe only provision in the FourteenthAmendment that plausibly protects theright to keep and bear arms: the Privilegesor Immunities Clause.

When you try to figure out what rightsare protected by any part of the Constitution,to the extent the text is at all unclear (which,in a document with as broad a scope as theConstitution, is inevitable), you get a situa-tion in which you have to bring your under-standing of the relevant historical context towhatever provision of the Constitution is atissue. In the case of the Fourteenth Amend-ment, that is not nearly as hard as the Justicesmake it seem. There is no doubt that thewhole point of the Fourteenth Amendmentwas to end Southern tyranny in the wake ofthe Civil War.

In the wake of the Civil War, blacks andwhite unionists were being systematicallydisarmed so they could be terrorized and, insome cases, lynched. The Congress that pro-posed the Fourteenth Amendment hadabundant evidence of this, and it made themvery angry. This tyranny is why we have theFourteenth Amendment, and the part of itthat was designed to put an end to that con-duct was undoubtedly the Privileges orImmunities Clause. It was therefore extraor-

dinary to sit in the Supreme Court duringMcDonald and listen to an hour-long argu-ment in which eight Justices showed not theslightest interest in any of that history, or inthe relevant text of the Fourteenth Amend-ment.

What I am supposed to talk about here isthe future of gun rights. But, to be honest, I

am at a loss. Had the Court shown someinterest in the text and history of theFourteenth Amendment, I would say thatgun control laws should be held to a veryhigh standard of constitutional review.Historically, people were being stripped oftheir arms after the Civil War, their gunswere confiscated under pretext, and this wasall to make lynching easier. In light of thishistory, were the Court to interpret theFourteenth Amendment according to therelevant historical context, gun control lawswould be held to a very high level of scrutiny.

Protection of other rights specificallyidentified as needing protection during the

Reconstruction era would also come from arehabilitation of the Privileges or ImmunitiesClause. For example, the Civil Rights Act of1866 contained protections of the right tocontract, to testify in court, to give evidence,and so forth.

One of the most important rights thatwould be protected, which the Court in theMcDonald arguments gave short shrift, isthe guarantee of economic liberty: the abili-ty to go out and earn a living so that you canbe economically self-sufficient. In theReconstruction South, States were trying tokeep newly freed black people in a state ofconstructive servitude, which they did bydepriving them of the ability to earn a livingand participate meaningfully in economiclife. For example, some states made it illegalto be off your employer’s property withouta note from your employer.

Another example is property rights.Those of you familiar with the SupremeCourt’s decision in Kelo v. New London, inwhich the Supreme Court effectively delet-ed the Public Use Clause from the FifthAmendment, giving to the government vir-tually unbounded powers of eminentdomain, should know that Kelo is incom-patible with the Fourteenth Amendment.The right to own property was anotherexample of the kind of right being inter-fered with and taken away from both freedblacks and their white supporters.

These are examples of very bright roadsigns for the modern Supreme Court todetermine what the scope of the FourteenthAmendment is. If you have doubts aboutwhat the Fourteenth Amendment protects,why not go look at the sorts of rights thatwere being violated at the time it was enact-ed, and what seems to have prompted andmotivated it, and that can help guide you.

Instead, what we’ve got is a Court thatappears determined to continue anotherhundred years looking at any proposedright and having what amounts to a Frenchsalon, in which they sit around and discusshow “fundamental” they think the right is,in complete disregard of text and history. Idon’t get that, and I’m discouraged by it.But, hopefully, people will realize howunprincipled this approach is to our rights,and demand that either this Court, or new


P O L I C Y F O R U M

Clark Neily

“All eight justices who asked questionsshowed literally no

interest in the relevantconstitutional text

and history of the FourteenthAmendment.”

Justices, use an approach more respectful ofhistory and the text enacted by the people ofthis country, not just the Justices’ personalsentiments.

TIMOTHY SANDEFUR: I want to talk abouthow this case goes beyond the right to pos-sess firearms to involve a conflict betweenthe values of individual liberty and democ-racy, which was set in place mainly by theProgressive Movement that created the NewDeal and the modern administrative state.

The first sentence of the Constitution says,unambiguously, that liberty is a blessing. Theword “democracy” is nowhere to be found inthe Constitution. The Constitution exists, infact, for the purpose of limiting democracy: itplaces all sorts of procedural and substantiverestrictions on democracy in order to protectliberty. Unfortunately, the Progressive Move-ment, which began in the 1880s and reachedits height in 1934, with Nebbia v. New York,replaced that value with democracy. Thus it isthat, today, most intellectuals regard liberty asa function of democracy. Your rights aren’trights, but privileges, or permissions, that aregiven you by the government, for the govern-ment’s own purposes.

The Privileges or Immunities Clause ofthe Fourteenth Amendment, of course, waswritten from the opposite perspective. It waswritten by the early Republican Party, whichconsisted of classical liberal opponents ofslavery who wanted to ensure that, hence-forth, there would be no question but thatthe Constitution protected liberty. Amongthe rights protected by the Privileges orImmunities Clause was, of course, the rightto possess firearms for personal protection.But another protected right was the right toearn a living: to engage in trade and supportyourself and your family free from govern-ment interference. This right had been guar-anteed in common law as long ago as 1602,when, in Darcy v. Allein, the English Court ofKing’s Bench held that a royal monopolythat gave a trade to one business only, andforbade others from competing, was a viola-tion of Magna Carta.

By the time of the Slaughterhouse Cases inthe 1870s, the idea that you had a right toearn an honest living, and that governmentcould not create monopolies and make it

illegal to compete against them, was part ofthe prevailing intellectual atmosphere. Butin 1868, the State of Louisiana passed a lawsaying that if you want to slaughter cattleyou had to do it at one, privately owned,slaughterhouse. This put hundreds ofbutchers out of business overnight. You’dhave to imagine if the California legislature

said that all cars had to be repaired atAamco—it would put all the other garagesout of business. So the competing butcherssued and the case made its way to theSupreme Court. The butchers argued thattheir right to earn a living without monop-oly interference from the government wasone of the privileges or immunities of citi-zenship, but in a 5-4 decision the SupremeCourt disagreed, limiting the number of pro-tected rights to a ridiculous degree, whilecompletely ignoring the intellectual tri-umph—creating federal protection againstabuses by state government—that accompa-nied Union victory in the Civil War.

Unfortunately, because of Slaughterhouse,the Court largely switched to using theSubstantive Due Process doctrine to protectliberty. Now, Substantive Due Process issomething conservatives attack, but let meexplain what it actually means. “SubstantiveDue Process” is a bad term because it leavesout the most important part of the phrase.The Constitution says that you can’t bedeprived of life, liberty or property withoutdue process of law.

Now, let’s say Congress was to pass a lawsaying that Scientology is the official religionof the United States, and you are required toattend its church. And you decide you don’twant to. And the policeman shows up andarrests you for disobeying the law. You mightreply, “You can’t do this because Congressdoesn’t have the power to pass this Scientol-ogy law. You can’t even call it a law, for theFirst Amendment says that ‘Congress shallmake no law’ on this subject.” It might be a“command” or a “diktat,” but it can’t be a“law.” Thus, for you to be deprived of libertypursuant to this invalid legislative enactmentis to be deprived of liberty without dueprocess of law.

If you take another step back you can seethere are certain things law simply is notallowed to do to you. For example, until theNew Deal it was widely believed that govern-ment had no power to take one person’sproperty away and give it to another, simplybecause it liked the other person or groupbetter. Now, of course, that’s primarily whatgovernment does, but in those days it washeld to be an arbitrary action of government,and arbitrariness is the opposite of law.Substantive Due Process barred governmentfrom extending economic favors to groupssimply because they exercised greater politi-cal power than others, or burdening othergroups that lacked political influence.

Although it doesn’t cover as many basesas Privileges or Immunities, SubstantiveDue Process is as valid a part of theConstitution as the dormant commerceclause or separation of powers. But, ofcourse, during the New Deal, the Courtbacked away from that and said, basically,that government can do whatever it wantswhen it comes to economic freedom and


Timothy Sandefur

“What this country needs is

a new Civil Rights Act, which makes

explicit reference toeconomic liberty and

the right to own a business.”

Continued on page 17


For someone writing about the oftenlamentable state of American trans-portation, Cato senior fellow Randal

O’Toole spends a lot of time on the road.Between January and May, he spoke atmore than 30 engagements from Anchor-age to Orlando, presenting the case againsthigh speed rail and smart growth policiesand promoting the message of greatermobility found in his new book, Gridlock:Why We’re Stuck in Traffic and What to DoAbout It.

“Congress, the administration, andothers are making very important deci-sions about transportation that will influ-ence how we travel, how we live, and howmuch we are taxed for many years tocome,” O’Toole said. “I want people to beaware of what is happening and helpmembers of the public to have an influ-ence on these decisions.”

O’Toole spoke at Cato in January andat the National Conference of State Legis-latures in April. His audiences ranged frompopulist to Ivy League. In January, hespoke at Powell’s Books in Portland, Ore-gon, the largest independent bookstore inthe world. He addressed a crowd of 250people at the Racine Tea Party in Racine,Wisconsin, in March. A few weeks later,O’Toole took part in a special panel of theJanus Lecture series at Brown University,where he provided the libertarian perspec-tive to counter co-panelist James HowardKunstler, a leader in the anti-sprawl move-ment and author of The Geography ofNowhere: The Rise and Decline of America’sMan-Made Landscape.

When he wasn’t speaking in person toaudiences across the country, O’Toole wastalking to the media and writing for news-papers. In January and again in March, hewas a featured guest on John Stossel’s FoxBusiness program.

In March, O’Toole authored a full-pageessay for the Wall Street Journal, “Taking theDriver Out of the Car.” Addressing a topicfamiliar to those who have read Gridlock,O’Toole extolled the benefits of driverlesscars. “Driverless cars and trucks will be safer,”

he wrote. “They will also be greener, first bysignificantly reducing congestion, and even-tually because vehicles will be lighter inweight due to reduced collision risks.”

For O’Toole, mobility is central to theAmerican way of life. It makes us happierand wealthier. But mobility is threatenedby calls for greater government control

over how we travel and live, often in thename of saving the environment. “Thesepolicies will prove costly and ineffective ataccomplishing environmental goals,”O’Toole said. “But most people aren’t evenaware that they are being proposed orpassed. I hope my tour will help publicizethese problems.”

On the Road withRandal O’Toole


It was a half day intended to provoke dis-cussion among conservatives regarding thecontinuing war in Afghanistan. In Decem-

ber, President Obama more than doubled thenumber of troops in the country. By doing so,he signaled strongly that the war is no longerabout hunting down al Qaeda but has insteadbecome a nation-building adventure—a goaltypically eschewed by conservatives but eager-ly embraced by George W. Bush.

The conference, “Escalate or Withdraw?Conservatives and the War in Afghanistan,”was held at the Cato Institute in March.Through two panel discussions and a keynotespeech by former representative Joe Scarbor-ough (R-FL), host of MSNBC’s Morning Joe, aseries of important questions was addressed.Will conservatives return to their traditionalroots and ultimately oppose the war inAfghanistan? Can “nation building” succeedin the midst of that country’s bloody insur-gency? What constitutes “success,” and whatprice should we be willing to pay for it?

But perhaps the most surprising andintriguing moment of the day was aboutAmerica’s other war. The opening panel,moderated by Americans for Tax Reform’sGrover Norquist, featured Reps. TomMcClintock (R-CA), Dana Rohrabacher (R-CA) and John J. Duncan Jr. (R-TN). Norquistasked the panelists to estimate the portion ofRepublicans in Congress who would nowview the Iraq invasion as a mistake.Rohrabacher responded, “Everybody I know[now] thinks it was a mistake to go in.”McClintock agreed. “I think everyone wouldagree Iraq was a mistake,” he said. He added,“And, you know, again, I think virtually every-one would agree going into Afghanistan theway we did was a mistake.”

The second panel was a freewheeling con-versation featuring Tony Blankley of theWashington Times; Donald Devine, editor ofConservative Battleline Online; Diana West ofthe Washington Examiner; and MackenzieEaglen from the Heritage Foundation. Askedto define what success would look like inAfghanistan, West objected to the term itself,saying that success implies there’s somethingto win. The more important question, then,

is what would failure look like? Here, the pan-el was almost uniformly glum. We’re on thebrink of failure, Blankley said, and we will,ultimately, fail. He expressed concern thatconservatives, who are typically opposed tosocial engineering at home, have become sowilling to attempt it—on an extraordinarilylarge scale—abroad.

Wrapping up the conference was Joe Scar-borough, who lamented the fact that, in2010, it’s nearly impossible to tell the differ-ence between Republicans and Democratswhen it comes to foreign policy. He said thatif conservatives are to regain their way, theyneed to become less radical, to show restraintat home, abroad, and in their rhetoric. Repub-licans in the 1990s understood that America

is not the world’s 911 service, Scarboroughsaid, but this crucial conservative insight waslost in the Bush years. “Dogma and rigid ide-ologies are the enemies of conservative for-eign policy,” he said.

By the time the conference ended, and thespeakers and attendees went upstairs to theWintergarden for lunch, it was clear that,while there might not be consensus withinthe conservative movement for returning to amore prudent foreign policy, there at leastexists a large contingent of conservativesready to abandon nation building and socialengineering and return America’s armedforces to agents of national defense.

Video of the event is online at www.cato. org.

“Everyone would agree Iraq was a mistake”

C lockwise: DON DEVINE makes a point to MACKENZIE EAGLEN. ED CRANE talks with JOE SCARBOROUGH before the conferenceopens. REP. TOM MCCLINTOCK and REP. DANA ROHRABACHER tell

the large crowd that their colleagues now agree that the war in Iraq was a mistake.

Conservatives Rethink Middle East Adventurism


C A T O E V E N T S

At the film premiere of 10 Rules for Dealing with Police, hosted by theCato Institute in March, Judge

WILLIAM “BILLY” MURPHY told stories ofthe law—and law enforcement—runamok. The film, narrated by Murphy,featured common police situationsand demonstrated useful techniques,phrases, and behaviors for ensuringthat the police respect our constitu-tional rights during encounters.

Author TIMOTHY FERRIS signs books after a forum in February for his newest, The Science of Liberty:Democracy, Reason, and the Laws of Nature. Ferris, an

award-winning science author, said that there is asymbiotic relationship between science and classicalliberalism, a combination that has led to dramaticallyincreased global health, wealth, and happiness.

Two recent forums looked at the current state of Russia. Left, Cato senior fellow ANDREI ILLARIONOV chats withKARINNA MOSKALENKO, Russia’s leading human rights lawyer, and OLEG KOZLOVSKY, coordinator of the Russianyouth activist organization Oborona (“Defense”). Moskalenko spoke at a Policy Forum in February about her expe-

riences fighting for the rights of victims of torture, police abuse, and assaults on freedom of association and expression.Right, Russian journalist JULIA LATYNINA exposes the truth behind Russia’s claims to superpower status at a PolicyForum in March. Outside of the construction boom in impressive presidential palaces, Latynina said, the country isbroken down and obsolete, with a total degradation of its scientific and technology base.


FEBRUARY 2: Campaign Financeafter Citizens United: What Now?

FEBRUARY 2: The Rule of Law inRussia

FEBRUARY 4: From Poverty toProsperity: Intangible Assets, HiddenLiabilities and the Lasting Triumph overScarcity

FEBRUARY 5: Greed, Irresponsibility,or Policy Mistakes: What Caused theRecession?

FEBRUARY 17: Is There a Place forGay People in Conservatism andConservative Politics?

FEBRUARY 22: Would the SenateHealth Care Bill Keep the PoorPoor?

FEBRUARY 22: Nuclear WeaponsSpending and the Future of theArsenal

FEBRUARY 24: The Science of Liberty:Democracy, Reason, and the Laws ofNature

FEBRUARY 25-28: 22nd AnnualBenefactor Summit

MARCH 1: McDonald v. Chicago: Will the Right to Keep and BearArms Apply to the States?

MARCH 3: McDonald v. Chicago: The

Fourteenth Amendment and theFuture of Gun Rights

MARCH 10: The Watchers: The Rise of America’s Surveillance State

MARCH 11: Don’t Blame The Shorts:Why Short Sellers Are Always Blamedfor Market Crashes and How History Is Repeating Itself

MARCH 16: Did a Lack ofConsumer Protection Cause theFinancial Crisis?

MARCH 17: A Superpower in What? A Look Into the Nature of Russia’s Social Order

MARCH 18: Escalate or Withdraw?Conservatives and the War inAfghanistan

MARCH 22: Health Care Reform:The Way Forward

MARCH 24: 10 Rules for Dealing with Police

MARCH 25: Would UniversalCoverage Improve Health?

MARCH 31: Are Unions Good for America?

Audio and video for all Cato events dating back to1999, and many events before that, can be found onthe Cato Institute website at www.cato.org/events. Youcan also find write-ups of Cato events in Ed Crane’sbimonthly memo for Cato Sponsors.

CatoCalendarCATO UNIVERSITY SUMMER SEMINARSan Diego l Rancho Bernardo Inn July 25--30, 2010Speakers include Tom G. Palmer, Robert Higgs,Charlotte Twight, Rob McDonald, Robert Levy,and David Boaz.

CONSTITUTION DAYWashington l Cato InstituteSeptember 16, 2010Speakers include Joan Biskupic, James BoppJr., Tom Goldstein, Harvey Silverglate, RogerPilon, and William Van Alstyne.

CATO CLUB 200 RETREATStowe, Vermont l Stowe Mountain LodgeSeptember 23--26, 2010

CATO INSTITUTE POLICYPERSPECTIVES 2010New York l Waldorf-AstoriaOctober 29, 2010

ASSET BUBBLES AND MONETARY POLICY28th Annual Monetary Policy ConferenceWashington l Cato InstituteNovember 18, 2010Speakers include Jerry L. Jordan, CharlesPlosser, Lawrence H. White, Steve Hanke,Gerald P. O’Driscoll Jr., and Carmen Reinhart.

23RD ANNUAL BENEFACTORSUMMITSan Diego l The Grand Del MarFebruary 24-27, 2011

CHRIS EDWARDS, Cato’sdirector of tax policy studies and creator of the

DownsizingGovernment.orgwebsite, tries to explain tothe Senate Finance Committeejust how much taxes may rise in 2011.

Libertarian solutions to policy problemsare often so different from the boiler-plate of liberals and conservatives that

those unfamiliar with the philosophy havea hard time understanding just what liber-tarianism is. To remedy this confusion,Cato senior fellow Jeffrey A. Miron offershis new book, Libertarianism, from A to Z.

Covering everything from “arbitraryredistribution” to “zoos,” Miron’s chaptersbring brevity and clarity to often complicat-ed topics. For example, in an entry on thesomewhat daunting subject of “asymmetricinformation and adverse selection,” Mironwrites: “If health insurers cannot tell who islikely to remain healthy and who is not, theymust charge everyone the same premium. Ifthis premium reflects the average health ofthe population, only unhealthy personsfind the insurance worth purchasing. Ineconomics lingo, the insurer ends up withan adverse selection of insurees, so the insur-ance company goes broke.”

Later, addressing a question surely famil-iar to most libertarians, Miron explains whatthe difference is between his political philos-ophy and conservatism. After saying that“conservatism and libertarianism tend tooverlap regarding economic issues but noton social or foreign policy issues,” Miron fur-ther distances himself from the conservativecamp by showing how “the conservativedesire for government intervention regard-ing a broad range of social issues suggeststhat conservatives do not believe people canmake good choices on their own and thatgovernment should intervene to improvethose choices.” Conservatism thus differsfrom libertarianism in its willingness toembrace paternalism.

Several more letters into the alphabet,Miron draws a related comparison, thistime between liberalism and libertarianism.“Roughly, liberalism and libertarianismtend to overlap regarding social and foreignpolicy issues,” Miron writes, “but not eco-

nomic issues.” Like conservatism, liberal-ism differs from libertarianism in its sup-port for paternalism, for liberals “assumegovernment knows better than the peoplebeing governed.”

The publication of Libertarianism, from Ato Z by Basic Books, a major publisher,shows a growing awareness of, and interestin, the ideas and politics of liberty. JeffreyMiron has written a concise and accessibleintroduction to many of the issues mostimportant to libertarians.

The book is available from major book-stores and online retailers.


Spring/Summer 2010 Cato Journal

Restoring Global Financial Stability

The new Spring/Summer 2010 issue ofthe Cato Journal is the first of two specialissues collecting the papers presented at

Cato’s 27th Annual Monetary Conference.Nobel Laureate James M. Buchanan opensthe issue, titled “Restoring Global FinancialStability,” with “The Constitutionalizationof Money,” in which he seeks to answer thequestion, “If anarchy in money fails alongwith politicization, how can the marketeconomy ever be expected to function effec-tively?” His answer—a rules-based approachthrough the “constitutional establishmentof a monetary authority”—is both intriguingand controversial.

Allan H. Meltzer, of Carnegie Mellon Uni-versity, author of A History of the Federal Reserve(University of Chicago Press), presents thehistory of the Federal Reserve and faults thecentral bank for not adhering to a clear rulefor guiding monetary policy. Cato senior fel-low William Poole, past president of the Fed-

eral Reserve Bank of St. Louis, answers thequestion raised in his article’s title, “Is aBenign Dollar Policy Wise?” with “a resound-ing ‘yes.’” He argues that the Federal Reserveshould stay out of setting exchange rates,instead leaving it up to private markets.

Peter J. Wallison of the American Enter-prise Institute discusses housing policy’s rolein the financial crisis, while Benn Steil, direc-tor of international economics at the Coun-cil on Foreign Relations, analyzes debt andsystemic risk. George Melloan, author of TheGreat Money Binge: Spending Our Way to Social-ism, looks at financial markets and finds that,“It is the nature of governments to first inter-fere with market forces and then make theproblem worse by addressing the resultingconfusions and dislocations by interferingstill more.”

The issue concludes with three bookreviews. Mark Calabria looks at EconomicContractions in the United States: A Failure of Gov-

ernment, by Charles Rowley and NathanaelSmith. Chris Edwards reviews Plunder: HowPublic Employee Unions are Raiding Treasuries,Controlling Our Lives, and Bankrupting theNation, by Steven Greenhut. And JasonKuznicki reviews Mind vs. Money: The Warbetween Intellectuals and Capitalism, by AlanKahan.

All of these articles, as well as subscrip-tions to the Cato Journal, are available onlineat www.cato.org.

C A T O P U B L I C A T I O N S

Bite-sized libertarianism

A Dictionary of Freedom


Terrorism’s greatest impact is the ter-ror it creates. Responding rationallyto attacks—and the threat ofattacks—demands eschewing irra-

tional fears, a feat often at odds with poli-tics. In their new book, Terrorizing Ourselves:Why U.S. Counterterrorism Policy Is Failing andHow to Fix It, editors Benjamin H.Friedman, Jim Harper, and Christopher A.Preble have assembled a dozen essays bymajor counterterrorism scholars. Takentogether, the articles are an antidote to thecommon problem that, “rather than dis-passionately addressing true threats, ournational leaders often hype implausiblethreats and jockey for political advantage inanticipation of terrorist strikes.”

Among the essays is “Don’t You KnowThere’s a War On? Assessing the Military’sRole in Counterterrorism” by Paul Pillar, a25-year veteran of the CIA, and ChristopherPreble, the Cato Institute’s director of for-eign policy studies. Pillar and Preble exam-ine the possible military responses to ter-rorism and conclude “that the risks of mili-tary action outweigh its benefits.” They alsocriticize the metaphor of “war” behind ourongoing War on Terror. “Given the need tocarefully manage public expectations, and

to calm anxiety, we conclude that it is inap-propriate to cast such efforts as synony-mous with warfare,” they write.

Benjamin H. Friedman writes that“Americans want more homeland securitythan they need” in “Managing Fear: ThePolitics of Homeland Security.” In the essay,Friedman proceeds to show why this is thecase and how more careful cost-benefitanalysis can improve the wisdom of our poli-cies. “Fear of terrorism,” Friedman writes, “isa bigger problem than terrorism.” He offersspecific policy suggestions for better han-dling the irrational fear terrorism breeds.

The book also contains a fasci-nating article from Priscilla Lewis, “TheImpact of Fear on Public Thinking about Counterterrorism Policy: Implications forCommunicators,” which uses psychologi-cal findings about the response of the brainto frightening thoughts and situations topredict how people are likely to react whenfaced with various counterterrorism poli-cies. “Morality reminders,” as she callsthem, “seem to trigger disdain for otherraces, religions, and nations; a preferencefor strong, traditional leaders and forauthoritarian rather than pragmatic leader-ship; a heightened fidelity to one’s own

group; and increased stereotyping and sus-picion of other groups.”

Also included are articles by James J. F.Forest, Mia Bloom, James A. Lewis, JohnMueller, Veronique de Rugy, MiltonLeitenberg, and William Burns.

Lewis’s article neatly summarizes why abook like Terrorizing Ourselves is so impor-tant: the threat of terrorism and the impactof terrorist attacks have effects far beyondthe violence they entail. Terrorism oftenleads to irrational responses, both by citizensand their governments, and so thoughtfuland impartial analysis is needed here athome perhaps more than anywhere else.

Visit www.catostore.org or dial 800-767-1241 toget your copy of Terrorizing Ourselves today;$24.95 hardcover.

The failure—and future—of counterterrorism policy

Not Letting Terrorism Terrify Us

private property rights. Let me give you an example of the kind

of cases that we have seen as a result of thecurrently existing judicial paradigm. I rep-resented a guy named Alan Merrifield. Hewas in the pest control business inCalifornia, putting up spikes on roofs tokeep pigeons from landing on them. Hedidn’t use pesticides, preferring, instead,structural devices like spikes and screens. InCalifornia, in order to do what he did, youhad to get a “Branch 2 Structural PestControl Operator” license. And to get sucha license requires two years of traininglearning how to handle pesticides. And thenyou have to take a 200-question multiple-choice exam testing your knowledge of pes-ticide use. This despite the fact that myclient didn’t use pesticides. And the law gets

even better, because it only applies topigeons. If you put the exact same spikes onthe exact same building to keep seagulls offit you don’t need any license at all. So wewent to court, and we lost. The state’sexpert witness even admitted under oath thatthe law was irrational, designed only as abarrier to entering the profession, and westill lost the case because the law is current-ly tilted so dramatically against businesses,economic freedom, and private propertyrights.

Fortunately, we won on appeal in theNinth Circuit. The Court of Appeals saidgovernment may not use occupationallicensing laws simply to create these kinds ofmonopolies. That’s very gratifying, butthat’s only the second court that’s ever saidthis. The Tenth Circuit, by contrast, has saidit is perfectly fine to use occupational licens-

ing laws purely for protectionist purposes.This, needless to say, is the kind of nonsensethat would not go on if the Court over-turned Slaughterhouse and enforced theFourteenth Amendment as it is written.

Whether or not the Court overturnsSlaughterhouse in McDonald, what this coun-try needs is a new Civil Rights Act, whichmakes explicit reference to economic libertyand the right to own a business. These arefundamental human rights that are ignoredand violated by state and local governmentsevery day. And the people who hurt themost are the low class, immigrants, andinner-city residents, who don’t have thepolitical power they need to defend them-selves. That’s why they rely on theConstitution. When courts refuse to upholdthe Constitution, these people are left at themercy of a capricious political process.

Continued from page 11


C A T O S T U D I E S

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CATO POLICY REPORTDavid Boaz.............................................................................EditorDavid Lampo.......................................................Managing EditorAaron Ross Powell.........................................Editorial AssistantJon Meyers..................................................................Art DirectorKelly Anne Creazzo.................................................PhotographerClaudia Ringel..............................................................Copyeditor

CATO INSTITUTEEdward H. Crane .............................................President and CEORobert A. Levy.................................................................ChairmanDavid Boaz..............................................Executive Vice PresidentLesley Albanese.....................................................Vice PresidentKhristine Brookes.......................................V.P., CommunicationsTed Galen Carpenter ......V.P., Defense & Foreign Policy StudiesJames A. Dorn ...........................................V.P., Academic AffairsWilliam Erickson......................V.P., Finance and AdministrationGene Healy..............................................................Vice PresidentBrink Lindsey ...........................................................V.P., ResearchWilliam A. Niskanen.....................................Chairman EmeritusRoger Pilon .........................................................V.P., Legal Affairs

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Michael F. Cannon........................Director, Health Policy StudiesAndrew Coulson.........Director,Center for Educational FreedomTad DeHaven .........................................................Budget AnalystChris Edwards...............................Director, Fiscal Policy StudiesBenjamin H. Friedman......................................Research Fellow Robert Garber.................................................Director, MarketingKaren Garvin.................................................................CopyeditorJagadeesh Gokhale...............................................Senior FellowDaniel T. Griswold........................Director, Trade Policy StudiesJim Harper............................Director, Information Policy StudiesNat Hentoff...............................................................Senior FellowLinda Hertzog..............................................Director, ConferencesJuan Carlos Hidalgo........Project Coordinator for Latin AmericaDaniel J. Ikenson........ Associate Director, Trade Policy StudiesAndrei Illarionov.....................................................Senior FellowMalou Innocent.........................................Foreign Policy AnalystSallie James.................................................Trade Policy AnalystJason Kuznicki...................................................Research FellowDavid Lampo.................................................Publications DirectorTrisha Line.......................................................................ControllerJustin Logan...................Assoc. Director, Foreign Policy StudiesTimothy Lynch.......................................Director, Criminal JusticeAshley March...............................Director, Foundation RelationsNeal McCluskey...Assoc. Director, Center for Educational FreedomJon Meyers..................................................................Art DirectorDaniel J. Mitchell...................................................Senior FellowJohan Norberg........................................................Senior FellowRandal O’Toole........................................................Senior FellowTom G. Palmer.........................................................Senior FellowAlan Peterson.......................................................Director of MISChristopher Preble.....................Director, Foreign Policy StudiesAlan Reynolds..........................................................Senior FellowClaudia Ringel...................................Manager, Editorial ServicesDavid Rittgers ...............................................Legal Policy Analyst

John Samples....................Director, Ctr. for Representative Govt.Adam B. Schaeffer................................Education Policy AnalystIlya Shapiro............................................................. ..Senior FellowMichael Tanner.................. .......................................Senior FellowJerry Taylor................................................................Senior FellowMarian Tupy.......................................Development Policy AnalystPeter Van Doren.................................................Editor, RegulationIan Vásquez.......Director, Ctr. for Global Liberty and ProsperityWill Wilkinson.........................................................Policy Analyst

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The first step to getting out of debt isknowing how much you’re spending.But in K-12 education, which con-sumes on average a third of each

state’s budget, accurate figures for per-pupil spending are difficult to come by.Cato policy analyst Adam B. Schaefferuncovers the truth of educational spend-ing in “They Spend WHAT? The RealCost of Public Schools” (Policy Analysisno. 662). Schaeffer calculated actual spend-ing for five of the biggest metro areas,Washington, D.C., and several other dis-tricts. “Through these examples,” he writes,“we demonstrate that the most widelyreported per-pupil spending figures give agrossly inaccurate impression of theresources that Americans devote to publiceducation.” For example, Los Angelesclaims to spend $10,000 per student. Thereal cost is 90 percent higher at $19,000.Washington D.C.’s actual spending of$22,400 is 34 percent higher than thereported $16,000. What schools actuallyspend matters greatly, Schaeffer writes,because “American citizens are being kept

in the dark on education spending, andthis imposed ignorance affects the policyand political environment.” He closes hispaper with sample legislation, the “Finan-cial Transparency in Education Act,” thatwould require school districts to make theirreal spending immediately accessible.

Measuring Globalization’sImpact The power of economic globalization toraise the standard of living of vast num-bers of people is profound. But the cur-

rent economic crisisalso shows that, in aglobal economy, cri-ses aren’t localized.A downturn in onecountry can havehuge negative reper-cussions for its trad-ing partners and anyother nation con-

nected to it through the web of globaliza-tion. Cato senior fellow Jagadeesh Gokhaleprovides a broad survey of the economic

effects of globalization in “Globalization:Curse or Cure? Policies to Harness GlobalEconomic Integration to Solve OurEconomic Challenge” (Policy Analysis no.659). He also shows the economic policyrecommendations those effects imply fordeveloped countries to achieve long-termeconomic goals. He examines the chal-lenges that globalization presents in thecontext of domestic labor markets, educa-tion, financial integration, trade policies,social insurance policies, and populationaging. Gokhale presents a nuanced pic-ture of globalization, including such sur-prising findings as “openness to trade isassociated with larger governments.”Globalization has the power to creategreat wealth, but also can bring uncer-tainty for nations taking their first stepsinto the global market.

Educational Conformity fromSea to Shining SeaThe next step in “fixing” American educa-tion—at least for those unwilling to take theobvious step toward school choice—is

Law School Costs Less than Kindergarten

national standards. If the federal govern-ment can set stan-dards high enough,the argument goes,and if schools can bemade to meet them,then the nation’sstudents will be suc-cessfully educated.But this solution isneither feasible nor

desirable, writes Neal McCluskey, associatedirector of the Cato Institute’s Center forEducational Freedom, in “Behind theCurtain: Assessing the Case for NationalCurriculum Standards” (Policy Analysisno. 661). He unearths the strong politicalpressures in the way of truly robust stan-dards. There is no reason to think theprocess will be any easier at the nationallevel. Conflicts between cultural, ethnic,and religious groups will further compli-cate the process, as will the generalAmerican aversion to the sort of hard learn-ing necessary to score well on easily testablesubjects. Even if these difficulties didn’texist, however, McCluskey shows thatnational standards are not the panaceatheir proponents claim. Instead, “the roadto successful education reform appears togo in the opposite direction of greater top-down control.” Choice, rather than mono-lithic standards constructed by bureaucratsin Washington, D.C., is the way forward forAmerica’s students and schools.

Why Science and PoliticsShouldn’t Mix The leak of internal e-mails from theClimate Research Unit at the University ofEast Anglia exposed science in the grip ofpolitical manipulation. Researchers exclud-ed data counter to their interests, colludedto prevent journals from publishing skep-tics, and otherwise tainted the quest forobjective truth that is the cornerstone of sci-ence. This ought to be deeply concerning,writes George Avery, assistant professor ofpublic health in the Department of Healthand Kinesiology and the Regenstrief Centerfor Health Care Engineering at Purdue

University, in “Scientific Misconduct:The Manipulation of Evidence forPolitical Advocacy in Health Care andClimate Policy” (Briefing Paper no. 117).“Increasingly,” he argues, “science is beingmanipulated by those who try to use it tojustify political choices based on their ethi-cal preferences, and who are willing to act tosuppress evidence of conflict between thosepreferences and the underlying reality.”Avery demonstrates this politicization’spernicious effects with two examples, theclimate policy e-mail scandal and theencroachment of federal agencies intohealth science. A bill recently passed by theSenate “would allow federal agencies topunish organizations whose researcherspublish results that conflict with what theagency feels is appropriate.” This trend ofpolitics usurping science threatens greatharm. “Democracy depends,” Avery writes,“not on the preference of elites, but ratheron a functional marketplace of ideas andvigorous debate between contending view-points.”

A Billion Here, a ConstitutionalViolation ThereIt’s quite clear in the text of the Constitution:all “legislative” powers are vested in Congress.

The Supreme Courthas allowed Con-gress to skirt this lan-guage by delegatingits authority to exec-utive agencies, pro-vided it can do sowith the guidance ofan “intelligible prin-ciple.” This is exactly

what Congress failed to do when it enactedthe Emergency Economic Stabilization Actof 2008, writes John Samples, director of theCato Institute’s Center for RepresentativeGovernment, in “Lawless Policy: TARP asCongressional Failure” (Policy Analysis no.660). Instead, the legislative branch gave thesecretary of the treasury the authority tospend $700 billion of the taxpayers’ moneyin the furtherance of 13 fuzzy and unpriori-tized goals. The result, argues Samples, is

that Congress unconstitutionally delegatedits powers to the treasury secretary and is nolonger meeting its obligation to act as acheck on the other branches of governmentor to be accountable to the American people.Samples writes that these congressional fail-ures show a deeper problem with theSupreme Court’s delegation doctrine, whichshould be revised to better protect theConstitution’s call for the rule of law andseparation of powers.

On the Fast Train to NowhereOne hundred billion dollars were spent bycities over the last 40 years in constructioncosts alone, and still there are calls forgreater spending on rail transit systems.

Before we heedthose calls, however,it might be worth-while to de-cide ifsuch systems havebeen successful.Cato senior fellowRandal O’Tooleshows, in “Defin-ing Success: The

Case against Rail Transit” (PolicyAnalysis no. 663), that, by nearly everymeasure, rail is a failure. Using the latestgovernment data to evaluate rail’s useful-ness, he concludes that more spending isthe wrong path to improving mobility.Do rail fares cover their operating costs?he asks. Do new lines significantlyincrease ridership? Are trains cost-effec-tive compared to buses? Are rail transitsystems more productive than the mostcostly land transit system in the nation,the San Francisco cable car? Do they stim-ulate economic development? And do raillines add to or place stresses upon existingtransportation networks? To the chagrinof rail advocates, no rail system passes allof these tests—and few of them pass evenone. “Instead of providing cost-effectivetransportation,” O’Toole writes, “rail tran-sit mainly transfers wealth from taxpayersto rail contractors, downtown propertyowners, and a few transit riders who prefertrains to buses.”


POT PROTECTIONISMIf California legalizes marijuana, [illegalgrowers] say, it will drive down the price oftheir crop and damage not just their liveli-hoods but the entire economy along thestate’s rugged northern coast.

“The legalization of marijuana will bethe single most devastating economicevent in the long boom-and-bust historyof Northern California,” said AnnaHamilton, 62, a Humboldt County radiohost and musician. . . .

Many agreed with the sentiment on asticker plastered on a pizza joint’s cashregister: “Save Humboldt County — keeppot illegal.”—Associated Press, March 24, 2010

SIGN UP TODAY FOR OTHER PEOPLE’S MONEY!Your response is important. Resultsfrom the 2010 Census will be used tohelp each community get its fair shareof [federal] government funds for high-ways, schools, health facilities, andmany other programs you and yourneighbors need. Without a complete,accurate census, your community maynot receive its fair share.—Letter from U.S. Census Bureau, March 2010

THE FEDERAL GOVERNMENT BOOMWalking around the District, Abel Lomaxcan’t help but look around and think:What recession?

After a stint abroad, it took the 27-year-old just four months to find a jobwith the government—not bad for theGreat Recession. And the neighborhoodswhere he spends his time sport newrestaurants crowded with patrons enjoy-ing Czech Pilseners and Wagyu beefbrisket. . . .

With thousands of new federal and

government-related jobs, Washingtonhas benefited from some of the circum-stances that have caused Main Streets togo dark elsewhere. The government hastaken a greater oversight role on thefinancial sector, and companies havebeen drawn to the area because of its eco-nomic stability.—Washington Post, February 15, 2010

EMINENT DOMAIN, CELEBRITY DOMAINIn a land dispute pitting Madonnaagainst African villagers, Malawi’s govern-ment has sided with the pop star who haspumped millions into the impoverishedSouthern African country and adoptedtwo of its children.

Villagers have been refusing to movefrom a plot of land near the capital,Lilongwe, where Madonna wants tobuild a $15-million school for girls. Thegovernment, however, says it had origi-nally planned to develop the plot, andonly allowed the villagers to live thereuntil a project was identified.

Lilongwe District CommissionerCharles Kalemba, accompanied by othergovernment officials and representativesfrom Madonna’s Raising Malawi charity,on Thursday met with about 200 villagersand told them they would have to move.The villagers have been offered other gov-ernment land.

“Government allowed you to occupythis land because there was no project yet.But now that Madonna wants to buildyou a school you have to give way,” Kal-emba told the villagers.—Associated Press, February 13, 2010

LEGISLATIVE SAUSAGE-MAKINGA major test of whether Obama’s newstrategy will yield legislative results couldcome when the Senate takes up a job-cre-

ation bill, which Senate Majority LeaderHarry M. Reid (D-Nev.) had hoped tointroduce last week but which was side-tracked by a snowstorm. . . .

The proposed package is expected tocost about $85 billion and would includea payroll tax break for companies thathire new employees, extensions of a vari-ety of expiring tax breaks, and help forsmall businesses seeking loans. The meas-ure also would extend unemploymentinsurance and COBRA health benefits bythree months and provide a temporaryadjustment in Medicare payment rates tophysicians to prevent a scheduled cut.

The bill being crafted would reautho-rize the Highway Trust Fund for one year,provide money for Build America Bondsand extend the USA Patriot Act, which isscheduled to expire at the end of February.The package also is expected to include$1.5 billion in agriculture assistancesought by Sen. Blanche Lincoln (Ark.), oneof the most endangered Democrats facingreelection in November.—Washington Post, February 10, 2010

THEY’RE IN CHARGE OF OUR HEALTH CAREAND FINANCIAL SYSTEMRep. Hank Johnson (D-Ga.) is afraid thatthe U.S. Territory of Guam is going to “tipover and capsize” due to overpopulation.

Johnson expressed his worries duringa House Armed Services Committeehearing on the defense budget Thursday.

Addressing Adm. Robert Willard, whocommands the Navy’s Pacific Fleet,Johnson made a tippy motion with hishands and said sternly, “My fear is that thewhole island will become so overly popu-lated that it will tip over and capsize.”

Willard paused and said: “We don’tanticipate that.”—The Hill, March 31, 2010

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